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The Financial Crisis and its Impact on the Oil & Gas Industry

Prepared for World Bank Energy Week by Lew Watts

March 2009

World Bank Energy Week 2009 |

The “Oil Century” was said to be ending A new demand scenario?

Constrained Growth Higher prices promote reduced demand and

modest substitution

Demand Destruction High prices and pinched supply curtail

demand

Energy Transition Pinched supply and technological innovation lead to abandoning of the internal combustion

engine

Economic Shock reduces demand temporarily, slows development and defers solutions


But the Oil and Gas industry has been hit with a triple whammy ...

§ A massive deleveraging by financial institutions contributed to a collapse in the price of oil.

§ A global economic slowdown is creating a real decline in the demand for oil which will persist for some years.

§ The drying up of new credit availability and more restrictive terms will hamper the normal business financing of some players.

… and perhaps a fourth whammy ... § Accelerating momentum towards carbon regulation.


Oil Prices and Structural Trends

Oil became a financial / investment vehicle as well as a physical commodity

Oil became a financial / investment vehicle as well as a physical commodity

WTI Prompt Month Price

$0

$20

$40

$60

$80

$100

$120

$140

$160

Jan99

Jan

00 Jan

01 Jan

02 Jan

03 Jan

04 Jan

05 Jan

06 Jan

07 Jan

08

"Traditional" Price Structure

Oil as a Financial Asset

Demand Shock, Lack of Spare Capacity


8%

6%

4%

2%

0%

2%

4%

6%

2002

2003

2004

2005

2006

2007

2008

YOY change in US monthly gasoline demand

Signs of significant demand destruction

Source: PFC Energy Downstream Monitoring Service

Oil price

Income effect/ recession


Massive value destruction in value

BP

Chevron

Encana

BHP ExxonMobil

HAL Lukoil

Repsol

INPEX

RD Shell

Surgutneftegaz

Husky

Formosa

Transocean

Tokyo Gas Apache

Devon

COP

Centrica

PTT

Reliance

BG

TOTAL ENI

StatoilHydro

Occidental

XTO Petrobras

Hess

Gazprom

CNOOC

Ecopetrol

Schlumberger

ONGC

Rosneft

3‐Ye

ar Growth in

Marke

t Cap

italization

1‐Year Growth in Market Capitalization

EOG

IOCs

NOCs

E&P

R&M

Service Companies

Gas Companies

Other

Sinopec

Petrochina

CNQ

From PFC Energy 50


Implications to Oil & Gas Companies

1. Some exploration programs and development projects will not be economic at the lower prices and will be deferred or cancelled.

2. Some companies – IOCs, NOCs, Independents and Service Companies – will not be able to find funding, resulting in delays, defaults and consolidation. Cash is King—but so is Paper…

3. Irrespective of demand destruction, a supply crunch still looms in the next decade.

4. Huge uncertainty on potential carbon legislative frameworks, timing and exposure.


Cuts, Delays, Consolidation ... and Opportunities


IOCs may have limited access—but control bulk of investment

NOC reserves (limited equity access)

Reserves held by Russian companies

Full IOC access

NOC reserves (equity access) Others

Top 10 IOCs

Top 10 NOCS

Source: PFC Energy NOC Strategy Service, Upstream Competition Service


Oil & Gas sector investment cuts accelerating

§ The credit crisis caught independents off guard and the oil price fall weakened all players’ finances

§ Upstream cuts: Independents, and some IOCs (and NOCs) – Some IOCs postponing projects to negotiate lower EPC costs – Many other players unable to find financing

§ Most affected: new source developments in OECD

Source: PFC Energy Market Intelligence Service


Downstream project delays in Middle East (by end 2008)

§ Middle East had enormous plans for petrochemical and other downstream projects by 2015

§ These plans increasingly in doubt as project sponsors retrench from significant investment activity during a period of uncertainty

§ Most Downstream projects in pipeline threatened with cancelation or delay



Fewer LNG trains will be added in the future…

0

2

4

6

8

10

12

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

# trains Liquefaction Trains Added

3year avg

Source: PFC Energy Global LNG Service


Lessons from 1998 – more consolidation?

§ Of 74 larger E&P Independents that produced a combined 6.5 mmboe/d in 1995, only 32 still existed in 2007

§ Most mergers were between independents and occurred in 1999 to 2002, when oil price was ~$1125

41 Independents Acquired, by Type of Acquirer

0 1 2 3 4 5 6 7 8

1998 2000 2002 2004 2006 Independent Major Other

Source: PFC Energy Upstream Competition Service


But Producing Countries also exposed ...

Price Needed to Balance External Accounts WTI $ per Barrel



Cracks in NOC landscape combined with financial stress also create opportunities

Cap

acity

Time 2002 2010

Low

High

Saudi Aramco, Petrobras, CNPC, CNOOC, StatoilHydro

Rosneft, Sinopec, Gazprom, Petronas, LNOC, Sonatrach, QP, NIOC, Pemex, Sonangol, ONGC, KMG

Capacity is a function of: • Government mandate & support • Ability to manage rising costs • Money • People • Technology • Project management

Pertamina, NNPC, KPC, PDVSA

Source: PFC Energy NOC Competition Service


0

100

200

300

400

500

600

700

800

900

0 5 10 15 20 25 30 35 40

US 803 cars

S. Korea 230 cars

China 26 cars

UK 457 cars

PPP GDP 000/Capita

Cars/Capita (000)

India 9 cars

Meanwhile, oil demand will continue to increase ...

Japan 450 cars

Cars per 1000 People vs. GDP/capita Historical Data 1970 2007

Source: PFC Energy

Without major technological change—Pickens’ gasification and/or electrification of fleet—transportation drives oil demand growth


Production crunch delayed, but still in our future

Source: PFC Energy Global Liquids Supply Forecast

2020 call on OPEC ~50–70 mmb/d, given 1.1% 2.4% growth

OPEC liquids

NonOPEC crude and NGLs


1980 1985 1990 1995 2000 2005 4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

8,500

9,000

0 1980 1985 1990 1995 2000 2005

million metric

tons

C

0

200

400

600

800

1000

1200

1400

1980

Num

ber o

f articles on

carbo

n em

ission

s And then there is climate change ...

Montreal Protocol

Earth Summit

Kyoto

CA AB 32

An Inconvenient Truth Oscar

IPCC/Gore Nobel Prize

Bali Conference

The Hague

New Delhi

Milan


Value of emissions: 2007 2012


The cost of Carbon – threat or opportunity?

base case 2012



Oil Sands CCS


The Cost of Carbon – threat or opportunity?

Oil Sands CCS

Additional 10% in energy efficiency



Flaring

Additional 10% in energy efficiency

Oil Sands CCS


In conclusion

§ At least 3 major issues threaten the oil and gas industry

§ Except for a few IOCs, major cuts and project deferrals

§ But short term, three sets of opportunities: – Potential increased access to NOC reserves – Reduced contractor prices – Acquisitions by stronger players among Independents and ServCos

§ Carbon regulation will force action

§ Longer term, a major oil supply crunch looms


Thank You

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Strategic Advisors in Global Energy

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