2013 Closure and the Outlook of the Market; $70-$90/b oil by 2017?!

We are about to close 2013 and open the chapter to 2014. There are few hot discussions in the energy industry and in particular in upstream sector that worth pointing out.

Oil Price: With steep ramp up of unconventional volumes in US, serious discussions about utilizing fracking technology in other locations (e.g. China, SA, AUS), LNG export terminal in US and probability of as-planned ramp up in Iraq, Lybia and now Iran (still at early stage but moving fast) the general sentiment of the market is that 2014 average WTI ($95-$100/b) and Brent ($100-$105/b) will be lower than in 2013. See an update from OPEC , EIA and CIBC here. However the outlook of the oil price can be as low as $70-$90 over next 3-5 years when all the upstream projects are completed and on stream (read more in this article).

Upstream Focus: The upstream will be under close watch for improving the profitability. Few of the majors and independents have already changed the gear and have shifted their strategic focus on Value versus VolumesThe aim is to improve the short-term free-cashflow. In line with 2013 Q3/Q4 budgeting exercise many have optimized their portfolios to prioritize the development projects and identify candidates to promote (divest). Due to the market pressure the consolidation (M&A) is expected to stay high over 2014-2016. 

Long Range Strategy – The development of unconventional plays has created a new shaping factor to the strategic map of the global energy. In conjunction with the renewables and political risks (MENA) there are possibility of several scenarios for oil and gas price over next 5-7 years. I came across a fairly good read by Bain and Co. I liked the report as it demonstrates a strong analytical approach to support strategic scenarios. A summary of the report is as follows (read full report here.)

 

Bain’s extensive research and analysis on shocks to supply and demand in energy markets reveal some surprising but plausible possibilities over the next three to five years. (Note that these outcomes may be from different—and in some cases, contradictory—scenarios.)

Oil falls below $60 per barrel

If optimistic or aspirational goals are achieved in North America, Brazil and Iraq, the oversupply situation could precipitate a 30% to 70% price drop.

Natural gas prices rest at $4 in the US

Experience curve effects coupled to more optimistic estimates of recoverable reserves could yield attractive producer economics and spur huge demand as sectors switch from other fuel sources.

China may have a shale boom—or a natural gas shortfall—with global repercussions

If China can produce its huge shale resources economically, it could see a boom in gas production. If not, it will see a shortage, which could jeopardize its stated goal of increasing gas to 10% of its energy mix by 2020. Either way, the impact will be felt globally.

Batteries could unleash solar and wind power—but not yet

There are upper limits on how much of the power mix can come from solar and wind power, because they can generate power only some of the time (in daylight and when the wind blows). Utility-scale storage is the key, but battery technology will need to improve. It will take more than five years to develop batteries that can solve this problem at scale.

Electric vehicles may be cheaper than gasoline cars by 2020

Batteries for electric cars are getting better, solving the problem of limited range. Within seven years, electric cars may be less expensive to own than gasoline-powered vehicles (assuming today’s oil prices).

Significant switching to natural gas vehicles likely in the near term

The low cost of gas in North America is already making it economical to run some light trucks and fleet vehicles in cities on compressed natural gas. As the infrastructure to supply these vehicles in – creases and gas producers continue to descend the experience curve, ownership of natural-gas-powered cars is likely to climb.

 

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