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EY Price Point: global oil and gas market outlook, Q319

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The theme for this quarter is consistency: in the significant trends impacting prices, at least. The forces that impacted oil prices in the second quarter were the same as those that have impacted prices quarter after quarter for the past several years. Surging North American production counterbalanced by OPEC+ production cuts has kept prices in a fairly narrow range. The market has become remarkably resilient. For some time now, long-dated oil futures have traded at a price very close to the market’s view of the break-even price of unconventional oil in North America.

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EY Price Point: global oil and gas market outlook, Q319

  1. 1. EY Price Point: global oil and gas market outlook Q3 | July 2019
  2. 2. Q3 overview Oil prices have roughly ended the second quarter where they started. However, that doesn’t tell the full story. It has been a seesaw. Prices in the early part of the quarter continued their upward run as a result of OPEC and Russia (OPEC+) production cut compliance, the impact of increasingly effective sanctions on Iran and Venezuela’s near-disappearance from the oil market. That upward run was reversed in June by growing concerns around the outlook for demand amid escalating trade tensions between the US and China. More recently, military conflict in the Middle East caused a price spike, albeit muted when compared to the impact similar events have had on prices in previous periods. OPEC+ also announced a nine-month extension to its existing agreement to limit oil production in July. Again, North America can claim credit for the calm. In previous quarters, cash flow and takeaway constraints have created doubts about the sustainability of North America’s output growth. Those doubts have all but evaporated. Gary Donald EY Global Oil & Gas Assurance Leader gdonald@uk.ey.com Andy Brogan EY Global Oil & Gas Leader abrogan@uk.ey.com Q3 | July 2019 EY Price Point: global oil and gas market outlookPage 2
  3. 3. Q3 theme The theme for this quarter is consistency: in the significant trends impacting prices, at least. The forces that impacted oil prices in the second quarter were the same as those that have impacted prices quarter after quarter for the past several years. Surging North American production counterbalanced by OPEC+ production cuts has kept prices in a fairly narrow range. The market has become remarkably resilient. For some time now, long-dated oil futures have traded at a price very close to the market’s view of the break-even price of unconventional oil in North America. Short-term supply interruptions have been managed by production increases elsewhere or draw of stocks. Complying with agreed OPEC+ production cuts has been relatively easy. The impact of US sanctions on Iran and political turmoil in Venezuela has reduced the burden of foregone revenue on other OPEC+ members. There are signs of future disruption. Someday, Venezuelan and Iranian oil will come back to market and cause uncertainty. There are hints that the traditionally strong relationship between economic growth and oil demand is beginning to drift. LNG spreads have also faltered as demand in Asia has grown less than expected whilst new supply arrives to market. • When Venezuelan and Iranian oil returns to the market, will other OPEC+ members be willing to curtail production? • If they can’t and prices fall, can IOCs deliver efficiency gains that can sustain profitability in North America? • How will trade tensions between the US and China play out and what will be the resulting impact on global oil demand?? Q3 | July 2019 EY Price Point: global oil and gas market outlookPage 3
  4. 4. Q3 trends Q3 | July 2019 EY Price Point: global oil and gas market outlookPage 4 A hint of demand risk Except in times of recession, oil and natural gas demand growth has been reliable. Long term forecasts account for some slippage due to decarbonization initiatives, efficiency improvements and vehicle electrification. The impact of those events is not, as yet, pronounced but there are some signs that the time may be near. Crude supply outages on the rise In 2Q19, crude supply outages reached highs of 3mbd due to OPEC+ production cuts and the impact of US sanctions on Iran. Despite a significant rise in supply outages, crude prices fell in June and the impact of geopolitical shocks were muted. North American M&A is not over North American oil production continues to surge and has come to define the market landscape. Production is not only increasing, it is increasing at a growing rate and there is no end to that trend in sight. The shale production profile, with its short cycle time and rapid payback, is an ideal complement to traditional IOC developments. New LNG output coming online at a time of weak global demand growth has caused LNG prices to fall to record-low levels. Investment in new LNG supply continues with new projects recently sanctioned in the US and Africa, supported by long-term supply deals with buyers. New supply and weak demand impacts LNG prices
  5. 5. Market fundamentals Q3 | July 2019 EY Price Point: global oil and gas market outlookPage 5 Source: Thomson Reuters Datastream Source: IEA • Brent and WTI averaged US$69.10 and US$59.96 per bbl, respectively, during the second quarter. Average prices in 2Q19 represented a 10% increase for both benchmarks when compared with the previous quarter. However, recent prices tell a different story. • Brent and WTI prices continued to climb throughout most of the second quarter, supported by strong OPEC+ production cut compliance and the impact of US sanctions on both Iran and Venezuela. • In June, Brent and WTI prices fell rapidly reaching lows of $61.66 and $51.13 per bbl, respectively as a result of demand concerns driven by escalating trade tensions between the US and China. • Significant geopolitical events were in abundance during the second quarter with tanker and drone attacks occurring in the Middle East. However, the impact of such events on crude prices has been muted. • The global supply-demand dynamic remains relatively consistent with that of recent years with OPEC+ supply restraint and steady demand growth working to offset growth in North American output. However, the outlook for demand growth is a concern. • Year on year, production cuts from Iran and Venezuela (1.7 mbpd) have accounted for the majority of OPEC’s overall curtailment. Adding that oil (or even a relatively small portion of it) to the market without additional cuts from other OPEC members, would certainly stress prices. • As always, the biggest questions relate to North America. Although there are pockets of distress, there is no indication that capital constraints will dampen production growth. In fact, there is only indication of heightened interest from IOCs. Demand concerns drive down prices in June North American growth continues to drive oversupply 40 45 50 55 60 65 70 75 80 1/1/2019 2/1/2019 3/1/2019 4/1/2019 5/1/2019 6/1/2019 $/bbl Brent WTI Movement to undersupply Movement to oversupply (3.50) (3.00) (2.50) (2.00) (1.50) (1.00) (0.50) - Starting balance Demand growth OPEC North America Other End balance Millionbarrelsperday
  6. 6. Market fundamentals Q3 | July 2019 EY Price Point: global oil and gas market outlookPage 6 Source: EIA and EY analysis • The relationship between economic growth and oil demand is well understood, consistent and reliable. Forecasters have come to depend on the stability of that relationship when assessing the outlook for oil prices. • Long term oil demand growth has been a question mark for some time now. When electric vehicles reach cost and performance parity with combustion engines, there will be an inevitable peaking of oil demand. Only the timing is uncertain. • The developing world has led economic growth and oil demand growth for the last two decades. Between 1998 and 2018, developing countries accounted for almost all of oil demand growth worldwide. • In the last two years, oil demand growth in non-OECD countries has been below what would be expected based on GDP growth in those countries. The most recent data point is enlarged on the graph above. Are we beginning to see the de-coupling of this longstanding relationship? • In 2Q19, the impact of supply outages reached levels not witnessed since OPEC’s decision to cut supplies by 4.2 mbpd in 2009 following the financial crisis. Recent highs have been driven by OPEC+ production cuts as well as the impact of US sanctions on Iran. • Despite a significant increase in supply outages, crude prices fell in June. Events that have historically led to a significant spike in prices had a muted impact. Drone and tanker attacks in the Middle East led to spikes of less than 5%. Our research shows that similar events have historically resulted in price spikes of around 10%. • We believe the muted impact of such events could be due to a structural shift in oil markets. The market has confidence in the ability of US shale to offset the impact of supply outages and there is evidence to support the decoupling of oil demand and economic growth. Signs of long-term weakness in oil demand growth Crude supply outages on the rise 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Millionbarrelsperday Non-OPEC OPEC (excluding Iran) Iran 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% Oildemandgrowthfromdevelopingcountries GDP growth in developing countries Source: OPEC, IMF and EY analysis
  7. 7. Market fundamentals Q3 | July 2019 EY Price Point: global oil and gas market outlookPage 7 Source: Thomson Reuters Datastream • Supply growth in North America will continue to dominate the market landscape for the foreseeable future. In each of the last two years, the number of new barrels brought to market by North America has met or exceeded the growth in global oil demand. • Returns in North American shale are adequate, sustainable and likely to improve. Easily scalable investments with a short payback period, such as those in North America, are a natural hedge against the risk of demand erosion from efficiency, vehicle electrification and structural oil price shifts. • The first wave of North American consolidation has been successfully completed. Further consolidation is likely to occur and, with it, better access to capital and technology is expected. • Takeaway constraints appear to have had little effect on production growth. Approximately 2mpbd of new capacity will come online shortly, eliminating that issue for the foreseeable future. M&A activity in North America is likely to continue Gas and LNG prices fall globally • Record gas production and mild weather in the US has caused gas prices to decline despite low storage and growing exports. Henry Hub gas prices have fallen to their lowest point since 2017. The EIA estimates an average price of $2.77/mmbtu in 2019, 12% lower than in 2018. • Ample global gas supply coupled with weak demand growth in Asia and Europe has depressed regional spot prices. UK NBP and Asian LNG spot prices declined by more that 45% year on year and sit at their lowest level since 2017. • Recently, Europe has acted as the market of last resort, absorbing excess LNG supply. In the absence of a revival in global LNG demand in upcoming winters, European demand will be key in balancing the market and preventing production shut-ins. 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2017 2018 2019 mbpd US Land Production Growth Global Demand GrowthUS land production growth Global demand growth 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 10/1/2018 12/1/2018 2/1/2019 4/1/2019 6/1/2019 $/mmbtu Henry Hub LNG Asia UK NBP - right hand axis Source: EIA and IEA p/therm
  8. 8. Brent futures Q3 | July 2019 EY Price Point: global oil and gas market outlookPage 8 Brent futures declined in June for similar reasons to those impacting spot prices. The angle of backwardation has steepened, potentially due to near-term supply concerns caused by US sanctions on Iran and continued decline in Venezuelan output. Futures data is effective as of 26 June 2019. Source: Thomson Reuters Datastream 50 55 60 65 70 75 80 85 Jan-2018 Jan-2019 Jan-2020 Jan-2021 Jan-2022 Jan-2023 Jan-2024 $/bbl Historical Brent Brent futures - December 2018 Brent futures - March 2019 Brent futures - June 2019
  9. 9. Oil price outlook Q3 | July 2019 EY Price Point: global oil and gas market outlookPage 9 For both benchmarks, consultants (on average) forecast higher oil prices throughout the period. Consultants focus primarily on the analysis of a long- term sustainable oil price, while the banks/brokers balance their views on the basis of current market conditions. Downside forces including North American production growth and demand concerns have weighed on the outlook for prices, in particular those forecasted by banks/brokers. In the long term, we note high relative forecasting uncertainty given the proven ability of identified risk factors to move the price significantly in a short period of time. Consultants’ forecasts result in averages of US$75.7/bbl and US$71.2/bbl vs. banks’/brokers’ averages of US$67.7/bbl and US$61.3/bbl for Brent and WTI, respectively in 2023. This data is effective as of 26 June 2019. Brent: Brokers’ and consultants’ price estimates, ranges and averages WTI: Brokers’ and consultants’ price estimates, ranges and averages Source: Bloomberg, banks’/brokers’ reports, consensus economics, consultants’ website US$67.7 US$75.7 US$61.3 US$71.2Brent: Average price forecast in 2023 WTI: Average price forecast in 2023 Bank/broker Bank/brokerConsultants Consultants 45 50 55 60 65 70 75 80 85 90 2019 2020 2021 2022 2023 $perbarrel Bank/Broker range Consultants range Bank/Broker average Consultants average 45 50 55 60 65 70 75 80 85 90 2019 2020 2021 2022 2023 $perbarrel Bank/Broker range Consultants range Bank/Broker average Consultants average
  10. 10. Gas price outlook Q3 | July 2019 EY Price Point: global oil and gas market outlookPage 10 Consultants predominantly forecast (on average) higher Henry Hub gas prices than banks/brokers. The trend is reversed for NBP. Consultants focus primarily on the analysis of a long- term sustainable gas price, while the banks/brokers balance their views on the basis of current market conditions. The views of both banks/brokers and consultants have been adversely impacted by the reduction in gas prices noted in 2Q19. Estimates for UK NBP are scarce with only seven and three data points available from banks/brokers and consultants, respectively. This data is effective as of 26 June 2019. Henry Hub: Brokers’ and consultants’ price estimates, ranges and averages UK NBP: Brokers’ and consultants’ price estimates, ranges and averages US$2.9 US$3.3 £50.5 £51.7Henry Hub: Average price forecast in 2023 UK NBP: Average price forecast in 2023 Bank/broker Consultants Bank/broker Consultants Source: Bloomberg, banks’/brokers’ reports, consensus economics, consultants’ website 2.0 2.5 3.0 3.5 4.0 4.5 2019 2020 2021 2022 2023 $permmbtu Bank/Broker range Consultants range Bank/Broker average Consultants average 35 40 45 50 55 60 65 70 2019 2020 2021 2022 2023 GBppertherm Bank/Broker range Consultants range Bank/Broker average Consultants average
  11. 11. Appendix Q3 | July 2019 EY Price Point: global oil and gas market outlookPage 11 Brent oil price estimates This data is effective as of 26 June 2019 Source: Bloomberg, banks’/brokers’ reports Source: Consultants’ websites, Oxford Economics Bank/broker 2019 (US$/bbl) 2020 (US$/bbl) 2021 (US$/bbl) 2022 (US$/bbl) 2023 (US$/bbl) High 74.1 78.0 80.0 80.0 74.0 Average 67.9 68.2 69.1 69.1 67.7 Median 67.3 68.0 70.0 69.8 67.5 Low 62.1 60.4 61.1 60.0 60.0 Consultant 2019 (US$/bbl) 2020 (US$/bbl) 2021 (US$/bbl) 2022 (US$/bbl) 2023 (US$/bbl) High 75.1 77.1 80.5 82.5 86.6 Average 69.7 69.9 71.5 73.3 75.7 Median 69.0 68.5 71.0 73.7 75.9 Low 66.5 63.8 62.2 63.0 64.8
  12. 12. Appendix Q3 | July 2019 EY Price Point: global oil and gas market outlookPage 12 WTI oil price estimates This data is effective as of 26 June 2019 Bank/broker 2019 (US$/bbl) 2020 (US$/bbl) 2021 (US$/bbl) 2022 (US$/bbl) 2023 (US$/bbl) High 69.8 72.0 76.0 73.7 69.0 Average 60.5 61.9 63.5 63.0 61.3 Median 61.0 61.1 63.0 64.0 61.0 Low 52.2 55.0 54.0 53.0 53.0 Source: Bloomberg, banks’/brokers’ reports Consultant 2019 (US$/bbl) 2020 (US$/bbl) 2021 (US$/bbl) 2022 (US$/bbl) 2023 (US$/bbl) High 69.6 73.4 77.0 78.2 81.9 Average 62.3 64.4 66.9 69.0 71.2 Median 61.0 63.8 67.6 71.4 72.8 Low 57.8 55.4 54.0 54.7 56.3 Source: Consultants’ websites, Oxford Economics
  13. 13. Appendix Q3 | July 2019 EY Price Point: global oil and gas market outlookPage 13 Henry Hub gas price estimates This data is effective as of 26 June 2019 Source: Bloomberg, banks’/brokers’ reports * Brokers have reported figures in $/mcf. We have used a conversion ratio of 1.037 for mcf conversion to MMBtu. Source: Consultants’ websites, Oxford Economics Bank/broker 2019 (US$/MMBtu) 2020 (US$/MMBtu) 2021 (US$/MMBtu) 2022 (US$/MMBtu) 2023 (US$/MMBtu) High 3.1 3.5 3.7 3.3 3.3 Average 2.9 3.0 3.0 2.9 2.9 Median 2.9 3.0 3.0 2.9 3.0 Low 2.7 2.6 2.7 2.6 2.7 Consultant 2019 (US$/MMBtu) 2020 (US$/MMBtu) 2021 (US$/MMBtu) 2022 (US$/MMBtu) 2023 (US$/MMBtu) High 3.0 3.1 3.3 3.5 3.6 Average 2.9 3.0 3.1 3.2 3.3 Median 2.8 3.0 3.2 3.3 3.4 Low 2.8 2.8 2.9 3.0 3.1
  14. 14. Appendix Q3 | July 2019 EY Price Point: global oil and gas market outlookPage 14 NBP gas price estimates This data is effective as of 26 June 2019 Bank/broker 2019 (GBp/therm) 2020 (GBp/therm) 2021 (GBp/therm) 2022 (GBp/therm) 2023 (GBp/therm) High 55.0 60.0 60.0 60.0 54.0 Average 47.9 51.2 53.3 53.9 50.5 Median 46.9 50.0 53.6 54.0 50.5 Low 42.0 44.5 47.0 47.0 47.0 Consultant 2019 (GBp/therm) 2020 (GBp/therm) 2021 (GBp/therm) 2022 (GBp/therm) 2023 (GBp/therm) High 50.0 53.8 56.2 58.5 58.5 Average 46.4 49.7 50.2 51.2 51.7 Median 45.5 50.0 50.0 51.0 52.0 Low 43.7 45.2 44.4 44.2 44.7 Source: Bloomberg, banks’/brokers’ reports * A bank/broker has reported figures in $/mcf. We have used the particular bank/broker’s rate forecast and an mcf to mmbtu conversion ratio of 1.037 to convert the estimate. Source: Consultants’ websites, Oxford Economics * Oxford Economics has reported figures in US$/MMBtu. We have used exchange rate forecast by Oxford Economics from US$ to GBP conversion. ** GLJ has reported figures in US$/MMBtu. We have used exchange rate forecast by GLJ for USD to GBP conversion.
  15. 15. Key contacts Q3 | July 2019 EY Price Point: global oil and gas market outlookPage 15 Important notice Price outlook data included in this publication is effective as of 26 June 2019. Given the rapidly evolving nature of the market and views of market participants, analysis can become quickly outdated. It should be noted that our analysis is not for the purpose of providing an independent view of the outlook for oil and gas prices. Instead, we are collating the views of market participants. Price outlook data should not be applied mechanistically. Instead, careful consideration should be given to the purpose of any value assessment with price forecasts assessed in the context of the other key assumptions, such as resources/reserves classification, production rates, discount rates and cost escalation rates together with an appreciation of the key sensitivities in any such analysis. Jeff Williams EY Global Oil & Gas Advisory Leader +1 713 750 5916 Gary Donald EY Global Oil & Gas Assurance Leader +44 20 7951 751 Derek Leith EY Global Oil & Gas Tax Leader +44 12 2465 3246 Andy Brogan EY Global Oil & Gas Leader +44 20 7951 7009 John Hartung EY Global Oil & Gas TAS Leader +1 713 751 2114
  16. 16. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. For more information about our organization, please visit ey.com. How EY’s Global Oil & Gas Sector can help your business The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Sector supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oil field subsectors. The Sector team works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively. © 2019 EYGM Limited. All Rights Reserved. EYG no. 003258-19Gbl BMC Agency GA 1010725 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com

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