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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17.11.2015

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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