Edition Thirty Five February 2015

Oil price view for 2015

Free is the Way!
Oil and the global asset crunch

Adam Marmaras
Manager, Technical Director
Issue 35 February 2015

OilVoice
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Hello and welcome to the 35th edition of

the OilVoice Magazine.
2015 is set to be a year like no other for
OilVoice. For starters, we have completely
redesigned the site from the ground up. This
was to service our growing user base of
mobile and tablet users. The new design is
responsive which means it works beautifully
on all devices. A mammoth task, but well
worth the end result.
We have also introduced training to
OilVoice - which we took over from our
sister company Finding Petroleum. We're
lucky to have some of the best trainers in
the business working for us. Take a look at
our upcoming courses.

Google+
Linked In
Read on your iPad
You can open PDF documents, such
as a PDF attached to an email, with
iBooks.

This month is another great edition of the

magazine. We received a lot of excellent
content in January, and Im sure youll enjoy
reading it.
Hope you have a prosperous 2015!
Adam Marmaras
Managing Director
OilVoice

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Table of Contents
Tech Talk - Projections 2
by David Summers

Hey Bo Didley, do you know this RIF?

by David Bamford

Whither Oil Prices?

by Stephen A. Brown

Bernstein Energy: up or down? An oil price view for 2015 highlights

by Oswald Clint

11

Free is the Way!

by David Bamford

13

Oil price volatility - take the long term view and ride out the storm 15
by Henry Hawkins
Here for Deeper Knowledge
by David Bamford

17

Must do better, can do better!!

by David Bamford

19

Oil and the global asset crunch

by Andrew McKillop

21

European Oil & Gas 2015: why the majors remain attractive highlights
by Oswald Clint

25

Where to do better!
by David Bamford

27

OilVoice Magazine

Tech Talk - Projections 2

Written by David Summers from Bit Tooth Energy
It is the end of another year, or more optimistically the start of a new one. Last year I
was tempted to make a couple of predictions for the future. And while I can make the
case that they were not too wrong, they did not include the drop in oil prices, which
has now taken the price of our local gas to below $1.85 a gallon. China has, in
recent months, seemed less belligerent about claiming large sections of the China
Seas. Whether this has anything to do with the relative success of rigs that have
drilled in those waters is something that still remains an unknown.
But it is the changing price of gasoline, itself reflective of the drop in oil prices that is
the big news. WTI closed at $53.56 today, and Brent at $57.50 a barrel. Predictions
include some who would suggest that the price will continue to fall, until it reaches
$20 a barrel, and there it may stay for some time. Well it certainly grabs a headline,
but that is about all the value that particular forecast contains. The futures prices
suggest that the price has yet to bottom out, though it may be getting close to that
value.

Figure 1. Crude oil futures prices (EIA TWIP)

None of the recent news suggests that there will be a further increase in supply to
sustain the current imbalance between available supply and demand. Libya is
descending even further into a mess, with the oil facilities at the port of Es Sider
now being destroyed.

OilVoice Magazine

The likelihood of significant increases in production and the return to export levels
achieved earlier this summer seems increasingly nonexistent. Neither Russia nor
Saudi Arabia are likely to increase production, although the latter are continuing to
produce the increased volume that they originally put on the market to replace
Libyan losses. And so this leaves Iraq and the United States as the key producers
who can significantly change the current supply:demand balance in any significant
way.
It is probable that, with the agreement between the Kurds and the Central
Government now having generated a second payment of $500 million to the KRG
that the agreement may be sustained and grow. At present the Kurds are to supply
about 550 kbd, of which 300 kbd will travel through the new pipeline to Turkey and
thence onto the world market. The rest will be supplied to Baghdad. Meanwhile
production in the south (which gets exported through Basra) has seen some
increase.
Whether the Kurdish production can increase to over 1 mbd by the end of next
year remains open to some doubt, given the ongoing conflict, and the target 6 mbd
by the end of the decade for the entire country will likely require changes that the
current conflict, which shows no signs of ending, will inhibit.
One of my responses, when the drop in price first started, was to note that the oil
supply system has a certain inertia to it. And here I am not talking about the
fluctuations in price that one sees in the stock market, and in the price of the crude,
but rather in the time that it takes to stop current drilling, postpone future plans and
to reduce the production from existing and new developments.
Thus the drop in investment in new production, whether in Russia, Iraq or the United
States takes some time to have an impact. Unfortunately for those expecting the
price to continue to fall, in the face of the overabundant supply, the situation has
changed since historic times, where well production was relatively stable and the
oversupply situation was corrected by shutting in production (mainly by Saudi
Arabia). Even then it was the perception of the response that drove price rebounds,
rather than the immediate reality of the changes.

OilVoice Magazine

The system this time is different. The increase in production in the United States has
been sustained, and over the last two years has produced more than 2 mbd more
than at the start of that period.

Figure 2. US crude oil production over the past two years. (EIA TWIP)
The rig count in North Dakota has already fallen to 170 rigs compared with 187 at
this time last year. Concern about the oil price has led companies to cut their
investment plans for next years, in some case by 20% so that the rig count is likely to
continue to fall. And with the short life at high production values for most wells that
will soon affect production. The North Dakota Oil and Gas Division of DMR shows
the consequences of this:

Figure 3. Future production estimates from the ND DMR Oil and Gas Division.
The blue line requires about 225 rigs in continuous action, so that wont happen. By
the same token the black line is with no more drilling, and that wont happen either.

OilVoice Magazine

The result will be somewhere in between, probably moving the peak out beyond the
current projection, but also lowering it as the existing baseline drops with less wells
significantly contributing. (Bear in mind it is taking 11,892 wells to sustain current
production levels.) But in the short term the line will likely dip down until the price
rebounds.
The question now becomes how soon that drop in US production will become
evident, and have some impact. I doubt that it will be before June of 2015.
On which note may I wish all readers a Happy, Healthy, Successful and Prosperous
2015.

View more quality content from

Bit Tooth Energy

Hey Bo Didley, do you

know this RIF?
Written by David Bamford from PetroMall
"Those who fail to learn from history are doomed to repeat it." -Sir Winston Churchill
Once again, there is a lot of excited chatter about cost cutting in our industry.
Oftentimes in the past, this has meant cutting great swathes of people (also known in
better times as 'our most valuable resource') out of the team. Of course now it's
happening again - RIFs are in progress at, for example, Schlumberger and Genel
Energy to highlight just two.
Here's something to think about: perhaps the only person you can trust to manage
your career to your expectations is yourself, unless companies change their
behaviour significantly!

OilVoice Magazine

A brief history of RIF-ing

So what is a RIF?
Please note I am not talking about a riff which I understand in music is a repeated
chord progression, pattern, or melody, often played by rhythmic instruments.
No, I am talking about the tendency of folk in our industry (let's blame HR, it's easier
that way!) to hide redundancies under a veneer of verbiage.
After all, 'job cuts' is too blatant and incomplete, 'manpower reductions' only slightly
less so: so we get to terminology like 'rightsizing the organisation' and my favourite
(which I learnt in the USA in the mid-1980's) which is 'RIF-ing'. RIF = Reduction in
Force, you see.
And it was accompanied by such delights as folks' swipe cards not functioning when
they arrived at work; Town Hall meetings in which everybody received an envelope
on arrival, to be opened on command, those with a green slip being told to return to
their desks etc etc.
All this was the part of the cost cutting wave of the second half of the 1980's; there
was another one in the second half of the 1990's. The latter especially 'benefitted'
from the synergies available from the various mergers of the time.
With the extreme benefit of hindsight, we can see that this bloodletting has had two
profound effects on our industry, driven by the fact that:

Many experienced people were let go.

Graduate recruitment dried up to a trickle.

By 2005+, when our industry was back in better times, the realisation had dawned
that this RIF-ing had resulted in:
1. An 'underweight' generation of folk approaching 50, who were going to retire
fairly soon, taking their knowledge with them. This was sometimes referred to
as 'The Great Crew Change'
2. A real shortfall in the absolute number of petrotechnical staff available to fill
the mushrooming number of jobs. CERA foresaw a 10% global shortage by
2010.

OilVoice Magazine

There was some wailing and gnashing of teeth, with various industry luminaries
going so far as to blame the shortage of decent staff for the widespread failure of
development projects to be delivered on time (though our Finding Petroleum Forums
have revealed that there is in fact a different root cause). This presentation is a good
example of the genre.
So as oil prices rose - with optimistic forecasts of their remaining permanently above
$100/barrel, perhaps even reaching $200 - the industry set about hiring, hiring, hiring
and you could read of this sort of thing!
In view of the history and precedents of the last 30 years in our industry, you would
be perhaps unwise to manage your career by taking too much notice of what
companies say at high price times and rely on managing your own career!

View more quality content from

PetroMall

Whither Oil Prices?

Written by Stephen A. Brown from
The Steam Oil Production Company Ltd
The recent collapse in oil prices has taken pundits and oil producers by surprise. It
was only six months ago that prices were over $100/bbl and at that time they had
been above $100/bbl for three and a half years. In fact the stability had become
uncanny, so perhaps we should have seen the collapse coming. I would like to claim
I had been prescient but sadly I wasn't.
There are lots of conspiracy theories on offer, but it seems to me the root of Saudi
Arabia's refusal to defend the oil price lies in its fear of a repetition of the loss of
market share that OPEC suffered in the early eighties. But there are good reasons
why the 2010's are not the 1980's.

OilVoice Magazine

I like to analyse the numbers, therein lies the explanation for OPEC and more
particularly Saudi Arabia's stance. Lets look back to the early eighties and see what
happened to OPEC's market share after the oil price shocks of the seventies.

Oil prices since 1965, in 2015 dollars with both total world oil supply and OPEC
market share capacity up until 1990 shown in the background.
OPEC hiked prices twice in the seventies; the first jump in prices slowed down the
growth in oil consumption and OPEC's market share slowly eroded, but the move
was essentially a triumph for the organisation. Their revenue tripled and while their
exports were no longer growing that was a small price to pay.
The second jump in the oil price did not turn out so well for OPEC; this time their
market share was not just eroded, it collapsed; and on top of that ignominy global
consumption fell for four years in succession. By 1984 OPEC's market share had
dipped below 30%. The organisation went from being the masters of the oil market to
its victims. By the end of the eighties the price was back down to $30/bbl (in 2015
money) and oil companies everywhere had embarked on the endless rounds of
redundancies, rationalisations, mergers and cutbacks that has characterised the
industry ever since.
It took until 1996 before OPEC's could regain a market share of more than 40%.
OPEC, and the Saudi's in particular, learned the lesson that you can price yourself

OilVoice Magazine

out of the market. High oil prices encourage energy savings and unconventional
production techniques. If you charge too much for your product buyers find
alternatives and other smart people find new ways to take your market share away. It
is easy to lose your customers and damned hard work to get them back.
So what has happened recently?

Well it took a long time, but eventually world oil demand grew to the point where
OPEC no longer had a lot of spare capacity unused. It seems pretty obvious now
that we can actually chart all the data, but once OPEC spare capacity fell to around
2% of world oil consumption, the oil price was on a hair trigger. From 2004 onwards
the price marched upwards, breaching $100/bbl with ease and briefly touching
$147/bbl (in 2008 money) before that high price tipped the world into recession.
The ascent in prices wasn't really OPEC's work, speculators and traders got the
blame, but the oil producers basked in the revenues and the pundits and bankers
predicted ever higher prices. But as the saying goes "what goes up must come
down" and, just as it has done recently, the oil price collapsed at an alarming pace.
That price collapse, along with a massive injection of cash in the euphemistically
labelled "Quantitative Easing Programme", took the nasty edge off the 2008
recession and it wasn't long before oil consumption restarted its modest march
upwards. Prices recovered from their lows, and OPEC was once again able to

OilVoice Magazine

rebuild its market share. But what is really interesting is that this time round OPEC
was able to increase its market share, while the oil price averaged $80/bbl. There
was no need to endure a prolonged period of $30/bbl oil to recover the ground lost in
the price exuberance of 2008.
So it turns out that the early years of the twenty-first century are indeed different from
the eighties. In the eighties $100/bbl oil destroyed OPEC's market share; $40/bbl to
$60/bbl oil eroded OPEC's share and it took prices as low as $20/bbl to $30/bbl to
grow OPEC's market share. Nowadays, $100/bbl to $120/bbl oil slowly erodes
OPEC market share, and OPEC can grow exports and market share with an oil price
of $80/bbl oil. Why? Well, "Peak Oil" might be an unfashionable theory but the world
is slowly marching up the supply cost curve.
The futures market sees this too. Two years ago when the oil price was $115/bbl the
futures market predicted that the price would correct back to $90/bbl. Last Monday
with Brent trading at $51/bbl the futures market thought that the price will correct
back to $77/bbl.

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10

So what is an oil producer to do? Well, for sure the stability of the past few years has
gone, the notion that oil would stay steady at $100/bbl for a long time was tempting,
but only a chimera. For what its worth, it seems to me, that a sensible oilman or wise
oil investor can plan for $80/bbl prices, they might hope for $100/bbl prices and for
prudence they should stress test their projects, business and investments at $60/bbl,
but $80/bbl seems the price that we will oscillate around for some time to come.
For traders I have no advice, the price tomorrow could go down just as easily as it
could rise, but the longer the price stays below $60/bbl the more dramatically the
price will spike when events eventually turn the tide.

View more quality content from

The Steam Oil Production Company Ltd

Bernstein Energy: up
or down? An oil price
view for 2015 highlights
Written by Oswald Clint from Sanford Bernstein
In 2014 we had the strongest non-OPEC supply in over 30 years followed by one of
the largest intra-year (negative) demand revisions (Europe, Russia, Ukraine, Syria,
Iraq, Japan). We also had the warmest weather on record across Europe, the
second lowest Chinese oil demand since 1990, and an unusual OPEC decision not
seen for 30 years (1986). A 50% price correction ensued from this string of unusual
events. We've updated our supply and demand model to help form a view on prices
from here.
Global Oil Demand should rise by at least 1Mbpd in 2015 up from a weak
0.7Mbpd in 2014.

OilVoice Magazine

11

GDP is the greatest cyclical driver of oil demand growth and set to accelerate, from
3.3% in 2014 to 3.8% in 2015. In our models we forecast oil demand as a product of
population growth, GDP per capita growth and long-term average oil intensity; hence
this year's global oil demand growth should exceed last year's (all non-OECD).
Structurally, the world's oil intensity (i.e., oil consumption per $1000 of GDP) has
been declining at a 2.4% 10-year CAGR, and the 2014 average was in line at 2.3%.
Non-OPEC supply should rise by 0.9Mbpd in 2015 down from the 1.9Mbpd in
2014.
Last year's non-OPEC supply was monumental as it was the highest in 30 years and
the first time growth was greater than 1.5Mbpd. Within this 1.47Mbpd was US. In
2015, the main sources of supply in our model are the US (0.6Mbpd) and Brazil
(0.3Mbpd) as other regions net out to zero. Downside surprise to non-OPEC supply
is more likely in 2015 due to the impending 20-30% capex reductions we expect.
IOC's had already deferred $300Bn of capex and 2Mbpd of future oil production
during 2013 and 2014.
Increases in global spare capacity have added additional price concerns.
Specifically, spare capacity rose to 3.2Mbpd in 2014 up from 3.1Mbpd in 2013 but
reached 3.45Mbpd by November. If we look back over the last 45 years, then spare
capacity remains low at 4.4% of global demand in 2014 including ineffective spare
capacity. Only in the demand surprise period of 2004-2008 did it average lower
around 3%. Up to 2004 and throughout the 1990's it was 6%, and 14% on average
before the 1990's. For the next five years our model suggests 4-5% which means
prices should be at marginal cost.
Increases in global inventories in the short term could dampen price recovery
until mid-2015.
We expect supply reductions from the impending 2015 capex collapse though have
not yet factored them into our estimates. While they may take 6-12 months to filter
through, our quarterly global supply and demand balances suggest inventory
building in 1H 2015, which could prevent rapid price recovery until mid-2015. As
demand and supply are revised positively and negatively (respectively) through

OilVoice Magazine

12

2015, we wouldn't expect the inventory builds to continue into 2H 2015.

Updating oil price estimates and still seeing undeniable upside for long term
investors.
Rolling forward from the 2014 supply strength, lower than expected demand together
with spare capacity and inventory increases, we cut our Brent forecasts to $80/bbl
(from $104/bbl) in 2015 and $90/bbl (from $109/bbl) in 2016. Our estimates are 5%
ahead of consensus in both years and 13% ahead over the medium term, while
falling substantially ahead of the forward curve (30% on average in 2015 and 2016).

View more quality content from

Sanford Bernstein

Free is the Way!

Written by David Bamford from PetroMall

To everybody who went to the 2014 EAGE in Amsterdam, I hope you enjoyed
yourselves, especially considering how much it cost you and your company:
So, you took what, 4 days away from the office? Call that a week and let's divide the
typical built up cost of a FTE of 200-250,000 Euros (do we still have them?) by 50 to
get a cost of 4-5,000 plus your hotel and travel - hmm, another 1000 at least - plus
registration, somewhere between 500 and 750 depending on your timing. So let's
agree on ~ 7000 in total?

OilVoice Magazine

13

Of course if your company wanted to exhibit; well, my brain isn't agile enough to
work it all out but I did hear that one well-known oil field services contractor figured
that all-up it was going to spend ~$800,000 on the EAGE in Barcelona, and decided
to give it a miss!
And, apart from having a 'good time', what do you expect to get out of it that you
couldn't find by browsing companies' web-sites where all their papers, products and
services appear anyway, and for free?
For example, most seismic companies do a really good job of showing you their
multi-client data on their website.
You can browse all of this in an hour or so, and you don't have to go to any of those
unnecessary parties or eat any 'cake'..
Before I go any further, I should say that I don't mean this as an attack on the EAGE,
or the SPE or the AAPG or the SEG. It's just that some things' time has passed.
There are plenty of other entities, noticeably commercial companies, that charge
amounts getting well into four figures - in , or $ - to attend one of their events. Of
course there are some that CEOs and CFOs go to that cost big wedges of
money.but that's OK? Or maybe not!
My point is, to repeat:
We are increasing living in a world where you can download more or less anything,
certainly more or less anything that conference presenters and exhibitors are willing
to stand up and talk about and put on a slide, for free, more or less instantly - well, if
you have decent broadband that is. And from the comfort of your own desk or study
at home - without having to fight your way through LHR, ABZ or IAH!
As the author of this article in the Telegraph pointed out 'All sorts of things we used
to pay large sums of money for are now nearly or completely free.'

OilVoice Magazine

14

SUPPORTING THE DEVELOPMENT

OF NATURAL RESOURCES

Operations Support | Technical Studies | Advisory Services

Project HSE & Risk Management | Training

rpsgroup.com/energyenergy@rpsgroup.com

So if you are thinking of going to the 2015 EAGE in Madrid, here's a simple question:
WHY?
And if you agree you shouldn't go when the oil price is less than $60 a barrel, why
would you go when it's $120?

View more quality content from

PetroMall

Oil price volatility take the long term view

and ride out the storm
Written by Henry Hawkins from Palantir
The press suggests that oil companies are cancelling field development projects in
the current low price environment. This made me question these decisions since oil
companies should be long-term thinkers. Cash flow constraints aside, are they really
making decisions based on 45 $/bbl oil?
Much is made of the volatility of oil prices. One of the great challenges of oil and gas
companies is managing the uncertainty around future oil prices when making
investment decisions. Indeed, 2014 has been a prime example with major indices
such as Brent and WTI tumbling from 110 $/bbl down to 45 $/bbl recently. Many
projects are simply not viable at such prices and this affects investment decisions. In
addition it can lead to project termination of late-life projects, even if they might
remain viable at slightly higher prices.
How do oil companies make decisions about viability and how do they select a longterm price forecast? The truth is that most companies take a slightly simplistic

OilVoice Magazine

15

approach which is very heavily oriented towards using the current prices with bands
either side. Many argue that they are notoriously bad at even considering extreme
price events. The truth is that 9 $/bbl and 180 $/bbl are within the realms of
possibility.
Certainly extreme price volatility affects the day-to-day operations of E&P
companies. When prices are low, costs must be cut and it can be hard to gain
approval for new fields. However, a typical field will produce for 20 years or more so
really the investment decision should be based on a twenty year view of prices. In
that context the month-on-month or year-on-year volatility is of little consequence.
Perhaps the secret is to take a long view and ride out the storm.
The graphic below shows West Texas Intermediate (WTI) from 1946 to the present.
It has been converted to 2014 real terms in order to present a trend that it is easier to
interpret. The grey dotted line shows the monthly spot price with all the volatility. This
could have been shown as daily prices which would have shown a little more
volatility along with a few more extreme events. The orange curve shows a twenty
year point-forward rolling average. There if a project had been sanctioned in 1985 it
would have experienced an average price of 38 $/bbl over its producing life.

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16

Viewing this from the perspective of a life-time price paints a very different picture.
Perhaps E&P companies are not so flawed when they fail to consider the extremes.
This analysis does nothing to help answer the all-important question of what the
forecast should be for 2015 and beyond, except perhaps to suggest that a long-term
forecast of 45 $/bbl might be an extreme view.

View more quality content from

Palantir

Here for Deeper

Knowledge
Written by David Bamford from PetroMall
and Wider Opportunities?

If we do not act quickly, the UKCS and NOCS will soon be on 'life support'
Naturally, first reactions have been 'Give us a Tax break!' and 'How do we
get Costs way down?'
Yes, these are important because they finish up in the Numerator of the crude
economic equation that describes profitability.
But there is also a Denominator which is, or are, barrels of oil or cubic feet of gas.
How do we input more of these into the equation?
I have two thoughts:
Firstly, and beginning with a 'story'. Many years ago I had a minor role in BP's
takeover of Britoil (previously of course BNOC, the government's national oil & gas
company). This takeover was underpinned by profound understanding of North Sea
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17

geology, of Yet-to-Find volumes, of undeveloped discoveries, of upcoming

development projects, of producing fields. In point of fact, BP probably understood
Britoil's acreage and fields better than Britoil did itself.
Today it is difficult, impossible actually, to see such a profound underpinning
anywhere, perhaps because lots of key individuals have 'moved on', perhaps
because of lazy assumptions that the North Sea's best days are somehow behind it.

And yet the significant Johan Sverdup discovery in the NOCS, in a well-explored
area, was as I understand it, the result of deep geological knowledge and innovative
thinking.
We know perfectly well how to do these things - see for example this summary of
how work on Nova Scotia revitalised exploration there.
Something similar, of similar scope and imagination, is needed for the North Sea
and, arguably, NW Europe as a whole. Somehow this has to be a 'multi-client' study,
driven and delivered by oil & gas industry folk, not some academic or research
exercise.
Secondly, we geoscientists have developed a lazy dependence on 'yet-anothertowed-streamer-3D-seismic-survey' which we need to move beyond. There are all
sorts of new technologies 'out there' - from seismic nodes, passive seismic, fibre
optics, full tensor gravimetry, electro-magnetics - that can tell us much more about
the sub-surface, bringing better predictions, and higher volume successes.
Deeper knowledge and wider opportunities indeed!

View more quality content from

PetroMall

OilVoice Magazine

18

Must do better, can do

better!!
Written by David Bamford from PetroMall
Our industry finds itself at a bit of a watershed moment. No, not because of the oil
price!!
We are perceived - by the owners of our companies, the shareholders - as having
failed to deliver:

Exploration

Field Development Projects on time, on budget and as promised

Reliable Reservoir Management
IOR/EOR schemes as promised.

We need to up our game! We need to do better!

I believe that our problems stem mainly from our failure to perceive and describe
more complex targets, more difficult reservoirs, properly. What is to be done?

Way back in the early 1990's, the twin 'disruptive' technologies of inexpensive 3D
seismicand powerful interpretation workstations - the latter pioneered by Geoquest
and Landmark - transformed the quality of our sub-surface insights. Hasn't little
happened since then!
We need to move beyond the tired remedy of "yet-another-towed-streamer-3D
seismic-survey", and start applying new "disruptive" technologies such as seismic
nodes, fibre optics, non-seismic geophysics, permanent reservoir monitoring.
And then.....
Integrating, analysing, visualising and correctly interpreting these multimeasurements goes way beyond the 'lowest common denominator' desktop
applications available today where the world of innovation has been replaced by 'one
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19

size fits all'.

I have always believed that the best insights are found when everybody - for
example, geologists, geophysicists, petrophysicists, reservoir engineers, commercial
folk - are looking at the same thing, and working on the problem at hand as a team.
Working in an integrated way................................preferably looking at a big screen
together.
On a lighter note.
Sometimes, maybe after too many mince pies and red wine, I mull over a collective
name for the disciplines I just mentioned - in a way, we are always explorers but that
strikes the wrong note, I think.....much too restrictive.
And then, watching The Bridge (Series 2), Lewis, Wallander, The Killing,
Montalbano, Homicide Hunter.....you get the genre!!......, I realised that we are really
detectives, taking scraps of evidence, all sorts of expert insights, and coming up with
a story.
So, how about:
Sub-surface Detectives!!

View more quality content from

PetroMall

OilVoice Magazine

20

Oil and the global asset

crunch
Written by Andrew McKillop from AMK CONSULT
Canary in the Coalmine

Huge attention given by world media to the collapse of oil prices has diverted
attention from similar falls in market prices for a range of other traded financial
assets. These range from other commodities are called "bellwether" for their
predictive role in major financial and economic change, such as copper. Others
include the other base metals, food and non-food agrocommodities - and "pure
financial" assets such as a range of national currencies, interest rate futures,
government and corporate debt, and others. Often these "pure financial" assets are
treated as if they were separate from the commodities, as two unrelated asset
classes, but this is an illusion.
In some cases the existence of a seamless asset space is easy to prove. Starting
with oil, the well-known ratio of "paper-to-physical" asset trading is itself a bellwether
using the ratio of futures contracts traded daily, versus the actual number of
physical barrels of oil finally settled and cleared by futures trading. Taking some
approximate figures, about 51 million barrels daily of the world's total 90 Mbd of oil
production and consumption is market-priced and traded, but world total traded oil
can exceed 5000 Mbd, for a 100-to-1 ratio of paper to physical oil. With oil-related
derivatives creation and trading, the ratio climbs even higher. Although little
remarked by the financial and other media covering the present and ongoing "oil
price crisis", the crisis has created a probable long-term several-year trend of low
prices and low-volatility of price, similar to the previous context of slow and small
changes of high oil prices in both cases resulting in less investor interest in
"playing the market".
This tends to lock-in either high or low prices, after a period of major volatility, and
provides us another bellwether. Using data from, for example, the US CFTC
(Commodity Futures Trading Commission), the US "financial watchdog" for
commodities trading, any major decline in daily purchases and trade of futures
options will tend to indicate a lock-in of prices, whether they are high or low.
Conversely during periods of major volatility, speculators and traders will be more

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active, and will buy and play a larger number of futures and options contracts. Even
the cost of buying and holding these options and related assets will weigh on the
decision to abandon any speculative moves, such as bear raidson the daily price
when volatility declines.
The Bigger Picture
To be sure, oil is the single largest traded commodity - but all commodities only
represent a small percentage of total traded financial assets. Commodities trading is
dwarfed by equities, foreign exchange, national and corporate debt, interest rate
futures and other non-commodity asset trading, by a very approximate multiple of
about 8 to 1, and the ratio is tending to grow...
Separating the "hard and soft asset" classes is always difficult - as already
mentioned we have the general class of assets termed "derivatives" which mix and
mingle all kinds of tradable assets on a daily basis. What counts is that today's major
macroeconomic trends - dominated by debt and deflation causing slow growth can
add derivatives proliferation to make it a "3D crisis". Any pullback of investor interest
affecting these three factors will have a major knock-on to global, regional and
national macroeconomic trends.
Taking oil as the global macro bellwether and ignoring the geopolitics (such as the
need for high revenues from oil for Iraq to be able to fight ISIS), the price collapse
can be explained as a "classic supply-demand" process, due to rising output
featuring US shale oil and rising output by new small producers, especially in Africa,
and what is politely termed "sluggish global demand".
This demand growth constraint on oil price recovery in fact hides a picture where
major regions and countries featuring the OECD group (taking about 48% of global
oil output), and particularly Europe, Japan and South Korea are continuing and
deepening their energy transition away from oil. In some cases this is already a
decadal or 10-year-long trend of annual declines in national oil demand. For the EU,
Eurostat data shows decline trends, for some countries, that have continued from
well before the year 2000. These pre-existing decline trends have been intensified by
post-2008, post-crisis economic conditions. Similar long-term trends are almost
certain for the US and Canada, although short-term economic recovery may raise
demand on a few-years basis.

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Simple and basic energy economics, rather than ecology, lifestyle change, economic
policy and structure changes featuring de-industrialization helps explain this longterm trend for oil, firstly bringing demand growth to zero, and then installing longterm decline, which on a worldwide basis using the metric of oil's role in primary
energy, has been declining for 30 years! The energy economics of oil are negative,
due to oil being overpriced relative to coal, and to natural gas in a growing number of
regions and countries. In addition, in a growing number of "niches" the renewables
can deliver cheaper energy than oil. Adding national energy security and
environment policies, the negative long-term outlook for oil demand recovery is
rather clear, even in the emerging and developing economies, starting with China
and India, both of which have oil-saving policies and programs in place.
When we add the bigger financial-economic dimension of debt restructuring and
reduction, which is a global problem and global necessity, we can see why the
"bellwether commodities", including oil, are performing as they are!
The Post-2008 World
Oil and energy economists are obliged by facts to accept that the so-called "short
term correction" of prices on 2008-2009 when oil prices hit a low of around $40 a
barrel was in fact the long-term trend towards lower prices for global oil pricing and
natural gas prices in Europe and Asia, driven by major macroeconomic change.
Capacity growth in almost all domains and sectors - including global manufacturing,
not just commodities - was phenomenal in the decade 1998-2008 following the
bellwether Asian and Russian financial-economic crises.
Highly related to this, in the energy sector, the shorter-running asset spiral and
decline in the renewable energy domain through the period of about 2005-2012 was
a bellwether sub-sector crisis, including classic "boom-busts" such as global solar
PV and wind turbine capacity growth, and the attempted lift-off for electric cars and
vehicles.
Upstream of this we find what can be called the "general financial crisis",
fundamentally based on debt, with a typical profile of fast growth and fast decline. To
be sure, oil was a big winner for a long time, but past energy economic history shows
us what can happen.

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The 1973-1986 oil boom, driven by an approximate 400% growth of oil prices in
1974-1981, was followed firstly by the 1986-1987 oil price crash, in which prices fell
about two-thirds, and then followed by over 15 years of low or very low oil prices
during whhich $18 a barrel was the new normal.
Whether or not this can happen again is certainly open to debate. Reasons why it
might not happen, apart from geopolitical strains and pressures will surely include
corporate debt restructuring which will be severe in the energy sector. Other factors
that may intensify the pain of low oil prices will include national debt dilution by socalled debt monetization or QE, by competitive national currency devaluation, or by
pure and simple debt abandonment, of course implying new and additional debt
crises for a global financial-economic system that is still trying to work its way out of
the 2008 crisis!
Arguments that for oil, this will shake-out high cost producers and speed oil price
recovery also aided by cheap oil spurring oil demand - can be set against the
experience of the previous 15-year trough in oil prices through 1987-2002. The 67%
fall of oil prices in 1986-1987 was not followed by instant price elastic recovery of
global oil demand. However, as in previous oil price crises and in general terms the
present crisis, is a bellwether. How it is responded and reacted to will concern us all.

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AMK CONSULT

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European Oil & Gas

2015: why the majors
remain attractive highlights
Written by Oswald Clint from Sanford Bernstein
2014 was the roller coaster year for European Oil & Gas stocks.
Overall, the Oil & Gas sector swung 26% intra year from +11% at the end of June to
-15% by year end. Against the European SXXP which climbed 4%, this left the
energy sector worst relative performer. Across the individual sub-sectors then the
European SuperMajors did best falling only 8%, then the Refiners -9%, Integrateds 14%, Services -30%, E&P's -31% and Russian's -38%.
In 2015, we still like the Majors and they remain our favourite positioning
ahead of E&P's due to:

More constructive oil supply & demand balance than 2014. While we didn't
expect it, during 2014 the industry managed to add the most non-OPEC
supply in over 30 years just as demand growth was cut in half from mid-year.
Our companion note today finds it difficult to envisage such a scenario in 2015
especially when industry capex will fall 20-30% and demand upside surprises
are now more likely. Our $80/bbl 2015 and $90/bbl 2016 Brent estimates
thereby offer earnings support.

LNG cashflows and increasing chance of further capacity reductions in

European refining. Most of the Majors have material LNG portfolios which
offer stable production and contracted sales reaching 10-30% of earnings.
Price floors in these contracts will mitigate against some of the recent Brent
decline. In Downstream, capital rationing means less for Refining and more
shuttering of underperforming European assets should be expected in 2015
while margins are up 100% as oil fell.

Twins drivers of volume growth and capex flattening off. Industry capex will
fall >20% in 2015 but the Majors capex had already peaked in 2013. This

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hasn't changed and will drive FCF improvement. Volume growth should be
strong in 2015 around 5% on average for the Majors and 13% including the
Integrateds BG, GALP and Repsol. We had capex falling 5% naturally in 2015
but it will be more.

Valuation remains attractive. The Majors PCF multiples expanded 25% by

June 2014 on expectations of this better FCF sustainability. While the sector
gave this back in 2H 2014 relative yields at 1.92x, which have only occurred
once over the last 30 years, now appears to indicate dividend risk. We see
dividends (6% yields) as safe and to be confirmed in the strategy days.

We have not changed our preference for Brazil exposure and therefore BG and
Galp.
Both stocks still offer peer leading volume growth of 10% and 50% CAGR
respectively to 2018. Both companies also moved forward with the Iara development
last week. Brazil is volume growth but the Santos Basin barrels are also 24% net
margin barrels versus 12% for peers. For BG, the start-up of QCLNG in Australia,
also last week, marks the end of a major capex phase and a new long life volume
project.
We have updated our earnings, cashflow and price target estimates for the oil
price correction of 2H 2014 and our new Brent estimates.
Our 2015 Brent estimate of $80/bbl is now 23% lower than before. Hence our EPS
estimates fall 23% on average leaving us 6% ahead of current consensus while our
price targets fall 16% on average. We still see undeniable upside for long term
investors.

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26

Where to do better!
Written by David Bamford from PetroMall
One of the benefits of being involved in an events business such as Finding
Petroleum is that I get to meet lots of people and hear the opinions of all sorts of folk
in our industry - from Majors, Independents, Oilfield Service Companies,
Consultants, Investors, Analysts, Journalists etc etc.
I thought it might be worthwhile laying out some of the things I have heard over the
last 12 months; obviously the current oil price implosion has added some 'colour'
and, in some cases, invective! I have already touched on some of these inputs in
my article from earlier this week.
Today I am asking, where - and how - do we 'do better'?
'Performance' issues:
First of all, we have to admit that we need to 'do better' because:
1. Exploration has been very unsuccessful over the last 2-3 years, both in
success rate and in the discovery of 'giants'. This prompts two questions where should we explore and how should we explore?
o

Can we find 'New Geographies' (see below), new provinces where

'giant' fields remain to be discovered?
Have we reached the 'end of the road' with regional towed streamer 3D
as our main offshore exploration tool?
And how do explore efficiently and effectively onshore?

2. 'Reservoir Risk' is a key contributor to the failure of Development projects; too

much uncertainty is carried beyond Appraisal and FEED into project design
and execution.
o Can any new technologies help reduce uncertainties?

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3. Poor understanding of reservoir dynamics has led to expensive Reservoir

Management and unsatisfactory IOR/EOR projects.
o

Can we improve our understanding of reservoir dynamics with 'richer'

surveillance?

4. We have no control over oil or gas prices; can we get Costs (way) down? Is it
time for CRITE (Cost Reduction In This Era)?
o Are there new, better cost/barrel, development technologies?
o Can Standardisation deliver 10's of % cost reductions?
o What about Automation/Remote Control?
'Geography' issues:
5. Shouldn't Deep Water and the Arctic be avoided?
The former is too just expensive - both to explore and to develop - at
any imminent oil price, given the outrageous costs of drilling. The latter
has this problem too but also incorporates unmanageable
environmental risk.
o In general, onshore anywhere - for conventional and unconventional
resources - looks like a better bet.
6. Are there 'New Geographies' with Cost-of-Supply advantages?
o

Perhaps we should focus on Mexico which will open in 2015. Iran is a

possibility but one that depends on the major political issues being
resolved. Libya is probably not for just now, given the security situation.
7. Can we re-charge Mature Provinces?
o

How do we re-invigorate the UKCS and NOCS; and much of South

East Asia? Using some new 'disruptive' technologies perhaps. And
driving Costs down, down, down..

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PetroMall

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