15 th U.S. China Oil & Gas Industry Forum Oil Companies Capital Expenditure : Business Cycle Perspective China National Petroleum Corporation: Zhen WANG September 17, 2015
Outline Business Cycle, Oil Price and Capital Expenditure New Business Cycle and Trends in Oil and Gas Industry Business Cycle and Strategies of Oil and Gas Companies 2
Business Cycle, Oil Price and Capital Expenditure current US$ 120 100 Global Economy Cycle and Oil Price Financial Crisis Conflicts in the Middle East European debt crisis US Quantitative Easing annual % 6 5 4 80 60 40 20 0 The Iran- Iraq war,the 2 nd Oil Crisis Saudi Arabia Fought for its Market Share Iraq s Invasion of Kuwait Asian Financial Crisis Tension in the Middle East Strong global economy Depreciation of the $US Iraq War 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1975 1982 1991 2001 Oil Price GDP growth (annual %) 2009 Increase in Shale Oil Production, Weak demand, oil producers fight for market share, Strong US dollar 3 2 1 0-1 -2-3 The global economics has gone through several business cycles and is gradually recovering, which sustains the world s energy demand to continue to grow Oil prices are subject to special issues, such as geopolitical events, thus cycle of oil price is not entirely consistent with that of global business cycle Note:the numbers of 2015 and 2016 are forecasted,data comes from the world bank and BP Statistics Review. 3
Business Cycle, Oil Price and Capital Expenditure Global Business Cycle and Commodity Price 1975 1982 1991 2001 2009 Commodity price entered into a long business cycle since 2001 Note:the numbers of 2015 are forecasted,data comes from the world bank and Reuters. 4
Business Cycle, Oil Price and Capital Expenditure US$M Global Business Cycle and Development Cost of Oil Majors 107 117 115 110 99 Oil Price 66 76 83 68 86 62 72 39 33 33 37 48 2001 2009 Capital expenditure of oil company has a certain stability Capital expenditure is more affected by volatility of oil price, and less affected by the business cycle Note:the numbers of 2015 and 2016 are forecasted,data comes from Wood Mackenzie 5
Summary 1. Statistic Analysis shows that the economic development itself is cyclical, and commodity prices are also featured by cyclical characteristics. But oil is also subject to geopolitical and other special events, in the context of demand dominated environment, oil prices almost consist with the business cycle, whereas in the context of supply driven, oil prices and business cycle is not entirely consistent. 2. Taking into account oil project lasting long, even if current world economy is bottoming stabilized and oil price remains low, capital expenditure made by oil companies is relatively stable, expenditure cuts are far less than the rates of decline in oil prices. 6
Outline Business Cycle, Oil Price and Capital Expenditure New Business Cycle and Trends in Oil and Gas Industry Business Cycle and Strategies of Oil and Gas Companies 7
New Business Cycle and Trends in O&G Industry Overview 正 文 Situation Prediction for Future O&G Industry Based on Current Business Cycle On the whole, the world economy is recovering from the financial crisis. The population and economic growth can further push up the demand for energy. Commodity prices are in a period of adjustment, and the more sharply oil prices declines, the larger rebound can be expected. In the short term, investment scale of oil companies will be reduced, but the cut is relatively mild and smooth. 8
New Business Cycle and Trends in O&G Industry Crude Oil 正 文 The Oil Market Will Return to a New Normal State Current Oversupply and Sluggish Demand On one hand, supply gives its way to demand to drive oil price On the other hand, the recovery of the world economy will gradually restore demand The gap of supply exceeding demand will gradually narrow down, and the oil market will return to a new normal state 9
New Business Cycle and Trends in O&G Industry Natural 正 文 Gas The Golden Age is coming but with outstanding structural contradictions The short-term growth in natural gas demand is lower than expected, but the long-term high growth trend will not change. The flexibility of LNG trade will be further strengthened, and the proportion of LNG trading amount in global natural gas transaction will continue to rise. The pricing mechanism of regional gas transaction is changing, and the price linkage of each region will be enhanced. 10
New Business Cycle and Trends in O&G Industry Unconventionals 正 文 Unconventional energy and deep-water resources will contribute most of the incremental output Annual proved resource in the world MMtoe Onshore Continental shelf Deep-water The global O&G development is going towards the unconventional and deep-water resources, thus will affect the investment scale of oil companies 11
New Business Cycle and Trends in O&G Industry M&A Low oil price will promote a new tide of O&G merger and acquisition GDP growth Oil Price International oil and gas M&A is affected by oil prices, and a low oil price environment often brews mergers and acquisitions climax 12
Summary 1. Oil and gas will continue to be the main source of the global energy supply, and the golden age of natural gas is coming. 2. The growth rate of supply will drop as a consequence of low oil prices on high cost investment, so supply stability will confront some threats; while the low oil prices will stimulate demand, thus will ease the dilemma of oversupply and sluggish demand. 3. The oil industry is facing a new round of mergers and acquisitions based on our retrospect on past business cycles. 13
Outline Business Cycle, Oil Price and Capital Expenditure New Business Cycle and Trends in Oil and Gas Industry Business Cycle and Strategies of Oil and Gas Companies 14
Business Cycle and Strategies of O&G Companies Three long-term strategies of oil majors Portfolio optimization Innovation driven Cost control 15
Business Cycle and Strategies of O&G Companies Portfolios Optimization The upstream activities aim to pursue high efficiency and more profits instead of large scale. Pay more attention to their oil and gas asset portfolios and optimize them according to the international market price. Keep dynamic adjustment of the proportion of resources to avoid the risk of a crash in oil or gas price. Adhere to the diversification strategy, making reasonable allocation of conventional and unconventional assets ratio. Balance the company's current interests and future sustainability: in the period of low oil price, focus on low-cost and good-performance conventional oil and gas assets; in the period of high oil price, expand unconventional oil and gas production. 16
Business Cycle and Strategies of O&G Companies Cost Control Since the financial crisis, the investment of oil companies have been characterized by rising expenditure, low return and capital-strapped. As the international oil prices go down, companies start to review their investment plans, looking for reasonable room to adjust or even cut down expenditures. Stick more firmly and more strictly to enforce investment plan. Streamline administration agencies and cut jobs to lower the cost especially operating cost. 17
Business Cycle and Strategies of O&G Companies Innovation Driven Investment in technology innovation should be a long-term strategy to meet the engineering and technical challenges of today s oil and gas business. For the exploration and exploitation of unconventional, deep-water, polar and other resources, research of complex oil and gas reservoir and complicated geographical environment need to be further strengthened. With the revolution of energy use driven by the idea of Energy Internet, management innovation will become a competitive advantage for oil companies. 18
Any Comments Are Welcome! 19