Market Update: Oil & Gas - November 2017 | KPMG | GLOBAL

Market Update: Oil & Gas - November 2017

Market Update: Oil & Gas - November 2017

A closer look at the revision of the global consumption forecast, OPEC's extended cuts in 2018 and climate change liability risks.

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Revising the global consumption forecast

While Tesla unveils its first electric truck and Norway, Western Europe's biggest oil and gas producer, considers getting rid of its investments in the oil-and-gas assets in the Sovereign wealth fund, OPEC has just revised its global consumption forecast up 360,000 bpd from its previous forecast.

The increased confidence in the short-term demand coupled with continuing uncertainty in the long-term demand makes it tougher for oil companies to come up with convincing investment cases in additional supply. This again begs the question as to whether the current business model of oil-and-gas majors is adequate.

Anton Oussov, Global Head of Oil & Gas and Head of Oil & Gas in Russia and the CIS, KPMG in Russia

Climate change liability risks

While the oil and gas industry is still recovering from the dramatic drop in oil price in 2014, a new type of lawsuits are emerging in the courtrooms around the globe. In the US, the cities of San Francisco and Oakland are suing four of the world's largest oil companies for costs of damages as a consequence of climate change. In Norway, a group of environmental NGOs, including Greenpeace, is suing the Norwegian government for violating the country's constitution by opening up the arctic for oil and gas exploration.1

Richard Milne, Nordic and Baltic Correspondent at the financial times describes the situation as follows;

"It is a warning to oil companies that drilling in environmentally sensitive areas such as the Arctic is likely to become more and more controversial. That in turn may intensify questions about the desirability and profitability of drilling in the far north." 2

Climate lawsuits, as we are seeing in the USA today, consists of counties, cities and large corporations that are affected negatively by climate change and have the economic capability to fight prolonged legal battles.

There are also clear signs that other climate lawsuits, where smaller entities such as municipalities, SMBs and even individual citizens will engage major polluters for their contributions to climate change.

The liability risk related to climate change is real, and it is increasingly apparent that this trend will continue to gain momentum.

Anette Rønnov, Director of Sustainability Services, KPMG Norway

OPEC and Russia will extend cuts through 2018, but compliance will weaken over time

Eurasia Group expects OPEC and the non-OPEC countries which have joined it in production cuts this year will agree on 30 November to extend production targets at current levels through the end of 2018. However, that does not necessarily imply genuine consensus or continued strong compliance with those targets. Saudi policy has become very preoccupied with the short-term - promoting Crown Prince Muhammad bin Salman's consolidation of power. This will probably mean an uncompromising insistence that the cuts not be phased out in 2018. But other important players, most notably Russia, have voiced caution. Commercial crude oil inventories will be at the 5-year average by the end of Q3 2018 if supply and demand evolve in line with OPEC's own forecast, which could leave a more bullish than desirable price trajectory, from the standpoint of stimulating competing US shale oil to grow at a faster pace and potentially resulting in a pullback in prices later. Those concerns would argue in favor of an exit strategy built around either tapering the cuts, or a more frequent review of production targets based on market fundamentals with the goal of gradually taking back market share once the inventory overhang is removed. But with the Saudis insisting on a full extension, and none of the participants wanting the deal to end abruptly at the end of Q1 2018, the `headline' outcome of the meeting is likely to be a 9-month extension at the same production targets. That said, the participants which desire to take back market share will probably start cheating to a greater degree in 2018, liming any price increases, and leaving the Saudis with less burden sharing in the second half of the year.

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

* Guest contributor for the November Edition

Analyst estimates: oil

 

  2017
2018
2019
2020
Minimum
51.5
49.3 55.0 58.0
Average 52.9 54.8 58.4 63.3
Median 53.2 55.0 58.9 63.3
Maximum 54.0 65.0 63.0 70.0

 

  2017 2018 2019 2020
September Average 52.8 55.0 58.4 62.8
October Average 52.9 54.8 58.4 63.3
September Median 52.7 54.7 58.9 63.3
October Median 53.2 55.0 58.9 63.3

Analysts estimate: gas

  2017 2018 2019 2020
Minimum 2.9 2.9 2.9 2.9
Average 3.1 3.1 3.2 3.2
Median 3.0 3.0 3.2 3.1
Maximum 3.3 3.8 3.5 3.5

 

  2017 2018 2019 2020
September Average 3.1 3.1 3.2 3.2
October Average 3.1 3.1 3.2 3.2
September Median 3.1 3.0 3.2 3.1
October Median 3.0 3.0 3.2 3.1


Note: The forecasts/analyst estimates above from Brent & Henry Hub are an indication based on third party sources and information. They do not represent the views of KPMG.

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