Market Update: Oil & Gas - May 2017

Market Update: Oil & Gas - May 2017

OPEC set to extend output cuts amid weak impact on prices.

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OPEC set to extend output cuts amid weak impact on prices

Some of OPEC’s most prominent members, including Saudi Arabia, have indicated in early May that they may extend the current production cuts agreement  by six months to include some non-members, like Russia,. These statements come amid renewed weakness in crude oil prices, as production cuts failed to reduce inventories as rapidly as had been expected. The steep rise in US production since it bottomed out in September 2016 has added to stubbornly high inventories. Forward hedging by US producers, however, may help to sustain the growth from the second and third quarters of 2016, based on the earlier surge in prices from December to February on the initial optimism about the OPEC cuts. Extension into the second half of 2017 will see a sustained drawdown in inventories as refiner demand rises seasonally, and should bring global inventories back close to the normal range by the end of 2017, even with the strong US production growth. This should result in a gradual rise in prices toward the mid-US$50s for WTI, though market sentiment will be restrained by the US growth and concerns about a potential return to oversupply when the cuts unwind.

Despite some speculation about deeper cuts, the leading members of OPEC are unlikely to undertake such a shortsighted move, which could result in short-term price increases but stimulate further US growth, producing a lasting loss of market share. Compliance may also begin to decline, as some participants, including Russia, will have a lesser incentive once a Saudi signoff on an extension is secured.

 

– Greg Priddy, Director, O&G, Eurasia Group*

 

* Guest contributor to May edition

Vocal support for LNG in the US

Towards the end of April, the Trump administration expressed the intent to make the United States the world’s leading exporter of natural gas as a central component of the administration’s energy and trade policy. The White House’s top Economic advisor, Gary Cohen, showed support for further approvals of LNG projects and unambiguously emphasized the Jordan Cove LNG terminal located in the Pacific Northwest that would guide liquefied natural gas to Asia. Furthermore, U.S. Energy Secretary Rick Perry approved the Golden Pass LNG export terminal in South Texas, an ExxonMobil and Qatar Petroleum project. By 2021, the Golden Pass LNG terminal is predicted to export up to 2.21 billion cubic feet of gas per day. The administration’s position was again reinforced on Thursday 11 May when the Department of Commerce delivered a "100 Day Action Plan" off the back of recent discussions Chinese President Xi Jinping and President Donald Trump at Mar-a-Largo. Additionally, the Commerce Department signaled an openness to export US liquefied natural gas to China and guaranteed that China would get treatment not unlike other non-FTA trade partners.

The vocal support of LNG is a vital part of a broader energy policy of the Trump administration. Though Trump may have concentrated his campaign on promising the restoration of the coal industry, it is LNG that has the greatest potential to solve his other focuses – job creation, US energy independence, and a free market injection. Currently, there are more than two dozen applications to raise LNG export terminals that are currently being reviewed. According to Energy Secretary, Rick Perry, the building of the Golden Pass LNG terminal alone would generate around 45,000 jobs and more than US$2.4 billion in federal tax revenue. While the most recent Department of Commerce statements around China and LNG is not necessarily a deviation from recent U.S. energy policy, the Trump administration’s statements come at a time where customer competition is expected. On the whole, the LNG industry is getting ready for a new era under buyer power and powered by a new set of non-traditional buyers and buyer potentials. As countries like Russia, Qatar, the US, and Australia battle for the competition of the Asia market, Trump’s supportive policies for the LNG industry and the firm endorsement of trade with China will make the US a key contributor in the race for the customer.

 

– Angie Gildea, Partner, Americas Oil & Gas Lead, KPMG in the US

Norway – a quiet revolution

As the US shale is up and down, OPEC machinations and corporate consolidations which are reforming the oil services sector have been well documented recently, while an overall less overt revolution has been progressing on the Norwegian Continental Shelf, in the yards along Norway's coast and at the technological hubs like Oslo's 'Subsea Valley', for example.

The changes have been huge and frequently painful for those companies and individuals who have been involved, but the focus has been consistent: make the Norwegian oil & gas industry - traditionally differentiated by innovation, quality and reliability – cost competitive too.  Results are being seen, such as the reduction of the estimated Johan Sverdrup phase two development by 50% and an entire project breakeven oil price of less than US$25.

As well as the game changing in reaction to a lower price outlook, the players are as well.  State backed Statoil is still the dominant E&P force in Norway, though the number and influence of players that are not so large is rising as they can take advantage of the opportunities offered by disposal programs, such as the recently announced acquisition of Exxon's Norwegian portfolio by private equity backed Point Resources.

Backed and encouraged by a fiscal regime which essentially refunds 78% of exploration expenditure, this leaner, more agile Norwegian industry is taking on the tests and opportunities of the Barents Sea and it is predicted that 9 billion barrel of oil equivalent (boe) of recoverable undiscovered resources will be generated.*

 

– Ole Schmidt, Managing Partner, Corporate Tax, KPMG in Denmark

 

*Norwegian Petroleum Directorate 2016 resource report 

Analyst estimates: oil

  2017 2018 2019 2020
Min 53.1 55.0 60.0 65.0
Average 58.0 64.5 70.6 75.8
Median 58.0 65.0 70.0 77.5
Max 64.9 80.0 85.0 85.0
         
  2017 2018 2019 2020
March Avg 58.7 65.4 71.3 75.8
April Avg 58.0 64.5 70.6 75.8
March Median 57.5 65.0 70.0 75.0
April Median 58.0 65.0 70.0 77.5

Analyst estimates: gas

  2017 2018 2019 2020
Min 2.8 2.9 2.9 3.2
Average 3.2 3.2 3.3 3.5
Median 3.3 3.1 3.2 3.3
Max 3.5 4.0 4.0
4.0
         
  2017 2018 2019 2020
March Avg 3.2 3.2 3.3 3.5
April Avg 3.2 3.2 3.3 3.5
March Median 3.3 3.1 3.2 3.4
April Median 3.3 3.1 3.2 3.3
3.1

Note: The forecasts/analyst estimates identified are an indication based on third party sources and information. They do not represent the views of KPMG.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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