Global oil market -

What’s beyond lower for longer?

September 12, 2017

Harry Liu (刘海全), Director

Oil Markets, Midstream & Downstream
harry.liu@ihsmarkit.com

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

 2

OPEC compliance is high so far despite slight deterioration in July; Still the US
crude inventory unlikely to come close to 5-year average
OPEC-12 monthly crude production minus agreed target level US commercial crude inventories (MMbbl)
Algeria 0.02 550
0.03
Angola -0.07
-0.03
Ecuador 0.01
0.01
Production Production above 500
Equatorial Guinea 0.00
0.01
below target 0.01 target
Gabon 0.01
Iran 0.01
-0.01 450
Iraq 0.13
0.10
Kuwait 0.00
0.00
Qatar -0.01
0.00 400
Saudi Arabia 0.04
-0.11
UAE 0.03
0.04
-0.02
350
Venezuela 0.05
Total 0.16
0.08

-0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 0.20 300

Million barrels per day J F M A M J J A S O N D
July 2017 January-July 2017 average
Notes: OPEC-12 refers to the 12 OPEC members that are party to the organization's current production
agreement. Libya and Nigeria, the other two OPEC members, are not included in this chart because they are 2014 2015 2016 2017
exempted from OPEC production targets.
Source: IHS Markit © 2017 IHS Markit Source: IHS Markit ,EIA © 2017 IHS Markit

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 3

Non-OPEC supply growth neutralizing OPEC cut impact

Annual change in crude oil production for selected non-OPEC countries,

Annual change in crude oil production
2016–18
2.0 1.0
0.8
1.5 0.6
Million barrels per day

Million barrels per day

0.4
1.0
0.2

0.5 0.0
-0.2
0.0 -0.4
-0.6
-0.5
-0.8
-1.0
-1.0

Canada

Oman
United States

Norway

Colombia

Mexico
Brazil

Kazakhstan

China
Russia

India

Argentina
Azerbaijan
United Kingdom
-1.5
2014 2015 2016 2017 2018
OPEC United States Rest of non-OPEC
2016 2017 2018
Source: IHS Markit © 2017 IHS Markit Source: IHS Markit © 2017 IHS

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 4

Permian Basin: the engine of US output growth

US horizontal oil rig count by play United States tight oil production outlook

1,400
4.5
1,200
4.0
Permian Plays
Rig count has doubled
Rig count

1,000 3.5
since May 2016

Million barrels per day

800 3.0

2.5
600
2.0
400 Eagle Ford
1.5
200 Bakken
1.0

0 0.5 Other Plays Niobrara

Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17

0.0
2005 2010 2015 2020 2025 2030
Other Bakken Permian Eagle Ford Niobrara

Source: Baker Hughes, IHS Markit © 2017 IHS Markit Source: IHS Markit © 2017 IHS Markit

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 5

US crude production to register strong growth through 2018—even with 50$/bbl

WTI
Monthly US crude oil production
10.5

10.0
Million barrels per day

9.5
Production falls by 0.1 MMb/d
between December 2017 and
9.0 December 2018
Production rises by 1.1 MMb/d
between December 2016 and
8.5
December 2017

8.0

7.5

7.0
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

History Outlook

Source: US Energy Information Administration (history); IHS Markit (outlook) © 2017 IHS Markit

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 World liquids demand growth on pace to reach 1.8 MMb/d in 2017
Changes in oil (liquids) demand by region (volume change from previous year in million barrels per day)

Europe Eurasia
North America China
0.50 0.50
0.50 0.50 0.40 0.40
• Demand 0.40 0.40
0.30
0.30 0.30
0.30 0.20
0.20 0.20
0.20 0.10
0.10 0.10
0.10
0.00 0.00
0.00 0.00
(0.10) (0.10)
(0.10) (0.10)
(0.20) (0.20)
(0.20) 2016 2017 2018 2016 2017 2018 (0.20)
2016 2017 2018 2016 2017 2018

Middle East India

0.50
Non-OECD Asia ex. China
Latin America 0.50
& India
0.50
0.50 0.40 0.40
0.40
0.40 0.30 0.30
0.30
0.30 0.20 0.20
0.20
0.20 0.10 0.10
0.10
0.10 0.00 0.00
0.00 (0.10) 0.00
(0.10)
(0.10) (0.20) (0.10)
(0.20)
(0.20) 2016 2017 2018 2016 2017 2018 (0.20)
2016 2017 2018 2016 2017 2018

Africa OECD Asia Pacific

Global liquids demand growth (MMb/d) 0.50 0.50
0.40 0.40
2016 2017 2018 0.30 0.30
OECD 0.4 0.4 0.3 0.20 0.20
Non-OECD 0.9 1.4 1.4 0.10 0.10
Total world 1.3 1.8 1.7 0.00 0.00

(0.10) (0.10)
Notes: Mexico is included in Latin America. (0.20) (0.20)
Data in table may not add up due to rounding. 2016 2017 2018 2016 2017 2018
Source: IHS Markit © 2017 IHS Markit

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After a global production deficit in 2Q 2017 and expected rough balance in 3Q
2017, a surplus is set to reemerge unless OPEC cuts deeper
World oil (liquids) demand and production by quarter
102 Outlook
Million barrels per day

101
100
99
98
97
96
95
94
93
92
91
1Q 2014

2Q 2014

3Q 2014

4Q 2014

1Q 2015

2Q 2015

3Q 2015

4Q 2015

1Q 2016

2Q 2016

3Q 2016

4Q 2016

1Q 2017

2Q 2017

3Q 2017

4Q 2017

1Q 2018

2Q 2018

3Q 2018

4Q 2018
Source: IHS Markit Demand Production © 2017 IHS Markit

Implied change in global liquids inventories

3.0
2.0
MMb/d

1.0
0.0
-1.0
1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 3Q 17 4Q 17 1Q 18 2Q 18 3Q 18 4Q 18
Notes: A positive number for implied change in global liquids inventories indicates an implied stock build. A negative number indicates an implied stock draw.
Source: IHS Markit © 2017 IHS Markit

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 8

But low prices will come with volatility that is reinforced by the thin spare capacity
of OPEC - any major supply disruptions could cause prices to spike
World oil demand and OPEC spare capacity, 2013-18 (projected)

OPEC spare capacity - Million barrels per day

102 14
Oil demand - Million barrels per day

100 12

98 10

96 8

94 6

92 4

90 2

88 0
2013 2014 2015 2016 2017 2018
Spare capacity World oil demand

Source: IHS Markit © 2017 IHS Markit

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 9

A more-or-less balanced oil market points to relatively steady prices in 2017-18

Dated Brent and other benchmark crude price outlook to 2018

$120
Outlook

$100
Quarterly average price per barrel

$80

$60

$40

$20

$0
1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18
Notes: LLS = Louisiana Light Sweet. WTI = West Texas Intermediate.
Source: IHS Markit, Argus Media Limited (historical) © 2017 IHS Markit

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 10

Demand growth is steady through 2020 before declining as GDP moderates and
efficiency gains take hold
GDP growth vs product demand growth
10% 650
9% 600
8% 550

Thousand barrels per billion 2010$

7% 500
6% 450
Percent

5% 400

GDP
4% 350
3% 300
2% 250
1% 200
0% 150
-1% 100
-2% 50
-3% 0
1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

Source: IHS Markit

Refined Product Demand Growth GDP Growth Product Intensity (Right axis) © 2017 IHS Markit

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 11

More than 40 MMb/d of new crude needs to be produced by 2040 despite long-term
plateau in oil demand

Global crude oil and condensate outlook balance in 2040

100

90
Million barrels per day

YTF, 13
80
Unconventional, 4
70
34 91
60 82 Unsanctioned, 24

50 Sanctioned, 2

40
Crude oil and Field declines to 2040 New capacity Crude oil and
condensate additions to 2040 condensate production
production in 2016 in 2040

Source: IHS Markit © 2017 IHS Markit

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 12

Longer term global supply requirements will need contributions from sources with a
broad spectrum of costs
Indicative cost curve of global crude oil supply from new projects in select areas to 2030

$100 ● New supply is gross additions—with the exception of tight oil outside the United States and Canadian oil sands supply, which are net additions.
● Supply depicted in this figure represents more than 80% of total global supply from new projects.
$90 ● $70 - $80/ bbl price range needed to meet future demand in today’s cost structure ($2017)

$80
$70
2017 full-cycle costs in terms
of Dated Brent (US$/bbl)

$60
$50 High

$40
$30
$20
New crude oil production (thousand barrels per day)
$10
Low
$0
0 3,000 6,000 9,000 12,000 15,000 18,000 21,000 24,000 27,000 30,000
Middle East Algeria North America - tight oil Brazil West Africa Norway and United Kingdom
Kazakhstan Russia US - Gulf of Mexico Canada oil sands - In situ China Venezuela
Notes: This cost of oil is expressed by the Dated Brent price necessary for projects to break even, assuming a 10% internal rate of return. The average, low, and high values for each supply source are estimated by analyzing the economics new projects in the IHS Markit Vantage
database. For North America tight oil, the cost estimates are for subplays. The supply outlook is consistent with the IHS Markit 2017 Global Crude Oil Markets Annual Strategic Workbook, released in April 2017. For each area, the supply additions are gross additions in 2017–30
from new projects, which are calculated by summing the maximum annual production of sanctioned projects, of unsanctioned projects, and of yet-to-find categories for the areas. Exceptions to our use of gross additions are the tight oil components of producing areas besides the
United States and the Canadian oil sands, which are net additions from 2016, using the maximum annual value. The global supply shown represents more than 80% of all global supply from new projects, as calculated by the method explained above. Global supply from new
projects in all producing areas is not shown, in part so as not to reduce clarity of the figure. The break-even cost estimate for in-situ Canadian oil sands is based on a steam-assisted gravity drainage project. The Middle East includes Saudi Arabia, Kuwait, United Arab Emirates, Iraq,
Iran, Oman, Qatar, and Bahrain. West Africa includes Nigeria and Angola. Break-even costs for groups of countries are weighted by volume.
Source: IHS Markit © 2017 IHS Markit

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 13

But cost is dynamic, and the oil industry is cutting cost to make up for lower prices

Break-even prices for representative new projects, 2014 and 2016 Median well break-even prices of several US tight oil wells
$100 $80
2014 2016

Break-even price in WTI terms (US dollars per bbl)

$90
Full-cycle costs in Dated Brent terms (US

$70
$80
$60
$70
$60 $50
dollars per bbl)

$50 $40
$40
$30
$30
$20 $20

$10 $10
$0
$0
Middle East Global US tight oil Russia onshore Canadian oil

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Q1 2015

Q2 2015

Q3 2015

Q4 2015

Q1 2016

Q2 2016

Q3 2016

Q4 2016
onshore deepwater sands (SAGD)

Notes: Full-cycle costs are expressed in terms of the Dated Brent price necessary for a project to break even, assuming a 10% internal rate of return. The
2014 and 2016 break-even estimates for these supply sources are intended to broadly depict the change from the start of the oil price collapse in mid-2014
to the latter part of 2016. For details on how break-even prices of representative new projects for each supply source are estimated, please see the box "How Notes: The break-even price is the WTI price required for the project to cover all of its estimated capital and operating costs and generate a 10% rate of
we estimated the break-even prices in this report." return. The plays are the Bakken, Bone Spring, Eagle Ford, Niobrara/Wattenberg, Scoop, Stack, Wolfcamp Delaware, and Wolfcamp Midland.
Source: IHS Markit © 2017 IHS Markit Source: IHS Markit © 2017 IHS Markit

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 14

Long-term Dated Brent price will be at $80/Bbl crude price by 2030, which has
been brought forward from our previous outlook of mid 2020s

Crude Oil Dated Brent pricing (3Q2017 vs 2Q2017)

160

140

120
Dollars per barrel

100

80

60

40

20

0
2005 2010 2015 2020 2025 2030 2035 2040

Brent (constant 2016 dollar) Brent (constant 2016 dollar) (Previous Quarter)
Brent (nominal dollar) Brent (nominal dollar) (Previous Quarter)

Source: IHS Markit © 2017 IHS Markit

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 15

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