|
Wood Mackenzie looks ahead to 2015 Report from consultancy says many IOCs will struggle with Brent less than $70 per barrel; possibility of mergers, buyers’ market Kristen Nelson Petroleum News
In mid-December, with oil prices in the $70 per barrel range, Wood Mackenzie’s Paul McConnell said concerns about the oil market “will be inescapable in 2015.” McConnell, Wood Mackenzie principal analyst for global trends, was introducing a report by the consultancy, Horizons: What to look for in 2015.
In early January, with the U.S. Energy Information Administration reporting a December average price of $59 a barrel and January prices below $50, that statement rings even more true.
McConnell said there is no sign that the Organization of the Petroleum Exporting Countries will limit supply, and if economic growth is weaker than expected, that “could put even more pressure on prices,” with oil companies forced to adapt and the possibility of a buyers’ market emerging in 2015.
China is another focus, he said. “There are signs that this critical driver of energy and metals markets over the last decade or more is beginning to mature, with far-reaching implications for commodity demand.”
Over the longer term, “deep-seated geopolitical, economical and technological trends may point to a new era of weak hydrocarbon demand growth,” McConnell said, with that scenario representing a risk to energy companies in the future.
Oil markets The economic outlook is “flat to negative” for Europe and Japan, Wood Mackenzie said in the report, making the strength of oil demand growth in 2015 a major concern. Demand growth is expected to be the same as in 2014, “markedly slower than that seen in 2013,” putting “oil prices under renewed pressure in the first few months of 2015.”
The report said oil demand growth in 2015 will not be enough to absorb new supply that could come into the market, and “the nature and scale of the response to low oil prices from non-OPEC producers will be a theme from the very start of the year.” If non-OPEC response is not adequate to bring the market back into balance, then attention will shift to OPEC, whose next meeting is scheduled for June.
Wood Mackenzie said its view is that Saudi Arabia is not reconsidering its November decision to keep production at present levels. If OPEC leaves production unchanged it will suffer the consequences of a period of “very weak prices”; alternatively, it could cut production, triggering a price increase but also allowing non-OPEC producers back into the market.
On the natural gas side, while Chinese demand has slowed, the report said “long-term growth prospects remain compelling.”
But Wood Mackenzie said there are concerns “that China will struggle to absorb contracted LNG, which will double over the next three years.” The report said suppliers are hoping for a cold winter, “but the background of a low oil price environment will place pressure on LNG prices.”
Buyers’ market could emerge The report said corporate valuations are heavily discounted as investors digest low oil prices with companies weighing options leading to the potential that “distressed sales could precipitate the emergence of a buyers’ market in 2015.”
“Those with the financial strength to withstand weak prices will be well positioned for the next cycle,” which a survey of operators expects to be in 2016-18, a timeframe Wood Mackenzie said was in line with its view.
The reports said two-thirds of the international oil companies in its corporate service coverage group require Brent prices of more than $90 a barrel to break even through 2015-16.
“At US$70 per barrel Brent, companies under financial pressure are weighing up their options: cut discretionary spend, cut dividends/buybacks, or sell assets. We have already seen a trickle of announcements on the first two themes and we expect that to become a torrent into the new year,” the report said.
A combination of distressed asset sales and distressed corporate sales could result in a buyers’ market, the report said. There could also be large-scale corporate consolidations, the report said, with unconventional players and highly leveraged international E&Ps “with big spending commitments” forced to merge.
Falling hydrocarbon demand? With the agreement on emission targets between China and the U.S., “suggesting that efforts to reduce CO2 output may now come more easily than expected,” and Europe seeking to solve its problem of reliance on Russian natural gas by moving toward greater energy efficiency and more renewables, “could the world already be on a path towards falling hydrocarbon demand?” the report asked.
The United Nations Climate Change Conference scheduled for Paris in December 2015 could mean something more than movement toward agreement to reduce CO2, the report said, it could be a signal “that we are already moving to a less energy and carbon-intensive world,” something which would have great impact on energy companies.
| 