17.11.2015
Norwegian oil and gas Market and industry outlook Klaus Mohn, Professor University of Stavanger Business School http://www.uis.no/Mohn Twitter: @Mohnitor
Lunch presentation for Swedbank Stavanger, 24 August 2015 1
Four decades of development Substantial revenues for industry, households – and politicians Government Pension Fund - Global
NCS oil and gas production
Total capital (NOK trn; nominal)
MMBoepd 5
14
???
12 4 10 3
8
Cumulated returns Cumulated transfers
6
2
4 1 2 0 1970
1980
1990
2000
2010
2020
2030
0 1970
1980
1990
2000
2010
2020
2030 2
Source: Norwegian Petroleum Directorate, Norges Bank Investment Management, author’s calculations (GPF projections).
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Oil and the Norwegian economy Big fish in a small pond Macroeconomic key figures 2013
Three special characteristics
Oil and gas share in…
Norway is a small economy… …with a large petroleum sector,… … and high domestic deliveries
GDP 22 per cent Total export 49 per cent
High attention on spending effects
Government revenue 29 per cent
Fund mechanism and fiscal policy rule
Less concern for resource movement effects
Total fixed capex 31 per cent
Re-direction of Norwegian industries
3 Source: Mohn (2015). Resource revenue management and wealth neutrality. Working Paper. University of Stavanger. January 2015.
Oil and the Norwegian economy Will Norway escape the Dutch Disease? Resource revenues appreciate the real exchange rate Erosion of competitiveness Crowd-out of manufacturing
Aggravates the cost of (structural) re-adjustment Two channels of transmission Spending effect Resource movement effect 4 Source: Mohn (2015). Resource revenue management and wealth neutrality. Working Paper. University of Stavanger. January 2015.
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Spending effects well managed Budget deficit, policy rule, and investment returns Budget deficit and fiscal policy rule
Oil revenues and investment returns
NOK bn (@2013 prices)
Ratios to GDP (%) 25
240 Non-oil budget deficit 4 % returns (3% returns)
Non-oil budget deficit Govt net cash flow Investment returns
20
180 15 10
120
5 60 0 0 2001
2003
2005
2007
2009
2011
2013
-5 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 5
Source: Norwegian Ministry of Finance.
Less focus on resource movement effects From re-positioning to real appreciation Demand from the petroleum sector
Competitive position under pressure
Ratio to mainland GDP (%) 15
200
Goods input Investment Labour cost
Wages per hour, manufacturing industries
150
10 100
50 5
1990
2000
2010
Poland
UK
Czech R
Italy
Spain
Ireland
Austria
Finland
France
Germany
Sweden
Netherland
1980
Denmark
Norway
0 1970
Belgium
0
6 Source: Norwegian Ministry of Finance, Statistics Norway.
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This region is particularly exposed… …to oil-related adverse shocks Regional exposure to oil employment Per cent Whole country Northern Norway SSB (2010) Konkraft (2009) Vatne (2007)
Mid Norway Eastern Norway Southern Norway Western Norway 0
5
10
15
20
25 7
Source: Statistics Norway, Konkraft-rapport nr. 7 (http://www.konkraft.no), Rystad Energy (2013).
The oil price matters… … for investment Global oil investment…
Oil price review
… and the oil price (USD bn; USD bbl (2010))
Brent blend, USD/bbl (@2012 prices) 150
120
90
60
30
0 1970
1976
1982
1988
1994
2000
2006
2012 8
Source: International Monetary Fund. World Economic Outlook. April 2015.
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The oil price matters… … for investment NCS oil and gas investments…
Oil price review
…and the oil price (NOK bn (nom); USD/bbl)
Brent blend, USD/bbl (@2012 prices) 150
250 Pipeline transport De-commisioning
120
200
90
150
Onshore processing Producing fields Field development Exploration Oil price (USD/bbl)
60
100
30
50
0 1970
0 1976
1982
1988
1994
2000
2006
2012
1985
1990
1995
2000
2005
2010
2015 9
Source: International Monetary Fund. World Economic Outlook. April 2015. Statistics Norway.
The oil price matters… … for investment – and for production Oil investment response to an oil price drop Impulse response in per cent (elasticity)
Oil production response… … to a 1% drop in investment (elasticity)
10 Source: International Monetary Fund. World Economic Outlook. April 2015.
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The oil price matters… … for production Oil and gas investments…
…feed into the production outlook
…and the oil price… (NOK bn; USD/bbl)
MM boepd; USD/bbl (rhs) 140
5
250 Pipeline transport De-commisioning 200
120 4
Onshore processing
100
Producing fields Field development
150
3
80
Exploration Oil price (USD/bbl) 100
2
50
1
60 40 20
0 1985
1990
1995
2000
2005
2010
0 2015 1970
1980
1990
2000
2010
2020
0 2030 11
Source: Statistics Norway, Norwegian Petroleum Directorate.
The oil price matters… … for revenues Oil price review Brent blend, USD/bbl (@2012 prices) 150
30
Net cash-flow, budget deficit, and expected GPF return Ratios to non-oil GDP (%)
120 20 90 10 60 0
30
0 1970
Net cash flow from oil and gas Structural deficit Expected GPF return
1976
1982
1988
1994
2000
2006
2012
-10 1970 1980 1990 2000 2010 2020 2030 2040 2050 12
Source: International Monetary Fund. World Economic Outlook. April 2015.
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The great plunge in oil prices Causes, consequences, and policy responses
Developments in demand and supply Changes in OPEC objectives Geopolitical developments Appreciation of the USD Speculative demand and investory management 13 Source: World Bank (2015). The great plunge in oil prices. Causes, consequences, and policy responses. Policy Research Note 15/01. March.
The great plunge in oil prices The nature of the oil price shock is decisive for its impact Oil price review Brent blend, USD/bbl (@2012 prices) 150
The source of the shock
120
Demand Supply
90
Persistence 60
Temporary shock (cyclical) Permanent shock (structural)
30
0 1970
1976
1982
1988
1994
2000
2006
2012 14
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The great plunge in oil prices The nature of the oil price shock is decisive for its impact Oil price review
Classification of oil price shocks
Brent blend, USD/bbl (@2012 prices)
by shock origin and persistence
150
Positive shocks
Negative shocks 120
Persistence
2004-2008 Demand surge
90
60
2014 Shale shock 1999 Recovery
30
0 1970
1990 Gulf crisis 1976
1982
1988
1994
2000
2006
2012
2002 Mini recession 2008 Financial crisis
Relative importance of demand 15
The great plunge in oil prices Largely supply-driven, but not entirely… The recent oil price shock Supply and demand factors
16 Source: World Bank (2015). The great plunge in oil prices. Causes, consequences, and policy responses. Policy Research Note 15/01. March.
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Oil industry in distress Unimpressive shareholder returns
17 Source: http://www.statoil.com/IR.
Oil industry in distress Pressures were building ahead of the oil price plunge November 2013
April 2014
18 Sources: Mohn, K. 2014. Kva skjer med oljeinvesteringane? Samfunnsøkonomen 2/2014, 10-14.
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Oil industry in distress Market developments fall short of IOC planning assumptions Planning price and futures price
Comfort spread
2004-2014, USD/bbl
Planning price minus futures price, USD/bbl
140
60
120 Avg oil futures
40
100 20
80 60
Avg planning price
0
40 -20 20 0 2004
-40 2006
2008
2010
2012
2014
2004
2006
2008
2010
2012
2014 19
Source: Oil Companies’ E&P Budgets, SEB Equity Research, 15 August 2014.
Oil industry in distress Short-term challenge: Profitability and investment returns Mixed success Growth and profitability among major oils (%) 20
Disappointed shareholders Returns eroded by spending, cost escalation, and oil price stagnation
10
Diverging market views… … and valuations
Disputed business model
0
RoACE
Annual production growth
Scarcity and access Stranded assets
-10 1990 1993 1996 1999 2002 2005 2008 2011 2014 20 *Sources: Deutsche Bank, UBS Warburg.
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Oil industry in distress Longer term challenge: Growth Constraints on access and supply
Constraints on demand
Proven oil and gas reserves by global region Middle East 48 %
Africa 8%
Policies, preferences, and prices
Latin America 19 %
Asia 3% EE/Eurasia 8%
Asia Oceania 0%
Europe 1%
Americas 13 %
21 Source: IEA (2014). World Energy Outlook.
Oil industry in distress Will the world turn its back on fossil fuels?
Energy and climate policies Role of oil in transport Eastward bound energy Shale gale globalisation Emerging technologies Access, returns, and risk Changes in OPEC behaviour 22
Source: Mitchell, John, Marcel, Valerie and Beth Mitchell. 2012. «What next for the oil and gas industry?». Chatham House. October 2012.
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A case for cash as an investment driver Market imperfection: Agency costs of free cash-flow
Jensen, M. (1986) Agency cost of FCF... AER 76(2)
Jensen, M. (1988) Takeovers: … JEP 2(1)
Mohn and Misund (2011) Shifting sentiments… AFE 21
Mohn, K. (2015) Dagens Næringsliv 7 January
23
A case for cash as an investment driver Statoil’s cash disposal 2014 (NOK bn)
24 Source: http://www.statoil.com/IR.
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A case for cash as an investment driver Lower investment will dampen activities – and costs European oil majors
“Prepared to use material flexibility”
Capex plans 2014-2015 (USD bn)
Statoil, 6 February 2015
40 2014
35
2015
30 25 20 15 10 5 0 Shell
BP
Total
Statoil
ENI BG Group 25
Sources: http://www.statoil.com/IR, Platts, Company reports.
NCS investment outlook Point of departure: Norges Bank March 2015 forecast (adjusted) NCS investment by category
NCS investment and the oil price
2003-2014, NOK bn (2014 prices) 250
2020 outlook (NOK bn; USD/bbl) 250
125
200
100
150
75
100
100
50
50
50
200
150
0 2003
Decommisioning Pipelines and onshore Producing fields Field development Exploration
Investment Oil price
25
0
0 2005
2007
2009
2011
2013
2003
2007
2011
2015
2019 26
Source: Norges Bank. 2013. Pengepolitisk rapport no 1. March 2015 (historical figures). Author’s calculations (outlook).
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NCS investment outlook A scenario exercise Oil price scenarios
NCS investment scenarios
2011-2020 (USD/bbl, 2014 prices)
2011-2020 (NOK bn, 2014 prices) 250
120 100
200
80 150 60 100 40 20
Reference Rapid recovery Sluggish slowdown
Reference 100 USD/fat 60 USD/fat
50
0
0 2003 2005 2007 2009 2011 2013 2015 2017 2019
2003 2005 2007 2009 2011 2013 2015 2017 2019 27
Source: Norges Bank. 2013. Pengepolitisk rapport no 1. March 2015 (historical figures). Author’s calculations (outlook).
Reflections on policy response … depends on the nature of the oil price shock Return scenarios for GPFG1) Ratios to mainland GDP (%)
The degree of aggressiveness Optimal policy mix Monetary policies Fiscal policies Industrial policies
Stabilisation vs re-adjustment
28
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Key takeaways Forget anything, but bear in mind that…
The oil price matters The nature of the oil shock matters Market imperfections matter Resource scarcity matters
29
Norwegian oil and gas Market and industry outlook Klaus Mohn, Professor University of Stavanger Business School http://www.uis.no/Mohn Twitter: @Mohnitor
Lunch presentation for Swedbank Stavanger, 24 August 2015 30
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