Covid-19’s Effect on the Energy Market and Industry

Presentation to the Payne Institute for Public PolicyColorado School of Mines

Michael CohenHead of Oil Analysis & Chief US Economist9 June 2020

Unprecedented 20-30% shock to oil demand

Source: BP (history), IEA (forecast)

Over 4 billion people under lockdown measures in April.

IEA estimates a 20 Mb/d shock in Q2, and a 9 Mb/d shock for 2020.

2Q20, 79.29

2020, 91.23

-

20

40

60

80

100

1996 2000 2004 2008 2012 2016

Oil Demand (1996-Present), Mb/d

Now, the market is gradually rebalancing

Source: Apple, EIA.

People are driving more… …But jet fuel consumption lagging

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400

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

kb/d Product Supplied Kero Type Jet Fuel

Min Max 2020 Avg

12

13

14

15

16

17

18

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Mb/d US Refinery Runs

Min Max 2020 5yr Avg

0

50

100

150

200

250

1/13/2020 2/13/2020 3/13/2020 4/13/2020 5/13/2020

Apple Mobility Trends

United States Mumbai

Germany UK

Jakarta Japan

United Arab Emirates Vietnam

As storage begins to decline again, prices to react

Inventories are beginning to draw, avoiding fears of reaching max storage capacity. Expect volatility from mismatch of demand and supply return speeds

Source: Kayrros, MarketView

2.6

2.7

2.8

2.9

3

3.1

3.2

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Bil

lio

ns o

f b

arr

els

Global Inventories (Kayrros)

2017 2018 2019 2020

-7

-6

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-2

-1

0

1

2

32.7

2.8

2.9

3.0

3.1

3.2

Apr-18 Jan-19 Oct-19

Crude Stock Levels and Brent Curve

Total Stocks (LHS)Brent 1-3 (RHS)

Supply was quicker to react than many expectedRig decline sharper than the past And frac crews are slowly restarting

But either way, the US will become a net importer again by EIA forecasts

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51Weeks

Chg. in US Rigs from Beginning of Decline

2001 2008 2014 2020

-4

-2

0

2

4

6

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21

EIA: US Net Petroleum Balance (mb/d)

Jan-20 Current

NET EXPORTER

NET IMPORTER

Sources: Baker Hughes, Primary Vision, EIA

0

100

200

300

400

500

-1000

-500

0

500

1000

1500

2000

Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20

Production Growth

and Frac Spread Count

Onshore Production Growth, 2wk MA (LHS) Frac Spread Count (RHS)

US tight oil producers will focus on returns, free cash flow

Capex as % of FCF

Producers no longer spending in excess of FCF

100

150

200

250

300

350

400

2014 2015 2016 2017 2018 2019

Ave. peak production per new well completed by vintage (b/d)

0

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12,000

14,000

$0

$20

$40

$60

$80

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$120

$140

2014 2015 2016 2017 2018 2019 2020

Bln

US

D

US tight oil spending and Completions

Spending, LHS Completions/Yr (RHS)

Source for both above: Rystad Energy ShaleWell Cube

Source: Rystad Energy ShaleWell Cube

Source: BP calculations

Productivity gains already slowing

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3500

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0

500

1000

1500

2000

1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19

Completions vs Production Growth

Production Growth (LHS) Completions (RHS)

Thousands of completions required for growth

As spending contracts, so too will completions…

Sharp economic growth slowdown

Many factors will potentially restrain global economic growth.

Source: IHS Markit

Cyclical forces

• Limited scope for policy stimulus

•Government restrictions on activity during the COVID-19 pandemic

• Investor risk aversion

Structural forces

• Slowdown in labor-force growth

•Trade protectionism

•High public and private debt burdens

• Low productivity growth

-10

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0

2

4

6

NorthAmerica

OtherAmericas

WesternEurope

EmergingEurope

Mideast-N. Africa

Sub-Saharan

Africa

Japan OtherAsia-

Pacific

An

nu

al p

erc

en

t ch

an

ge

2019 2020 2021

2022 2023–27

Most regions will experience a severe recession in 2020

The oil shock compounds economic challenges

Source: IMF Regional Economic Outlook: Middle East – April 2020

The oil price at which Saudi Arabia’s fiscal balance is zero exceeds $70/b in 2020 and remains sharply disconnected with current and 2021 oil price levels of $38/b and $42/b, respectively.

$77 $76$73

$78

$69

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2017 2018 2019 2020 2021

MENA Oil Exporter Fiscal Breakeven Oil Prices ($/b)

Kuwait Saudi Arabia United Arab Emirates Other Avg (ex. Yemen, Iran)

0

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40

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100

120

140

2010 2020 2030 2040

Power Buildings

Industry Non-combusted

Non-road Trucks

Liquids demand Liquids demand growth

Transportation plays a prominent yet diminishing role

Mb/d

Mb/d, average annual growth

Cars include 2- and 3-wheelers. Trucks includes most SUVs in North America. Non-road includes aviation, marine and rail

-0.5

0.0

0.5

1.0

1.5

2.0

2005-2010

2010-2015

2015-2020

2020-2025

2025-2030

2030-2035

2035-2040

PowerBuildingsIndustryNon-combustedTransportTotal

9

Transport

60% of liquids consumption from transportation fuels

But the growth comes from non-combusted fuels

Short/Medium/Long term effects on transportationUS vehicle miles travelled (VMT): significant risk of lower fuel demand

Low fuel price, wealth shock to act as headwind to fuel economy improvement

30

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-4%

-2%

0%

2%

4%

6%

8%

1999 2003 2007 2011 2015 2019

Real Oil Price ($/bbl)

Fuel economy chg of new cars sold

Aggregate Sales (mpg) Real Oil Price (1yr Lag)

Source: TSE, EPA, MarketView

Home based, 36%

Work related, 21%

School/Daycare/Religious activity, 3%

Medical/Dental services, 2%

Shopping/Errands, 15%

Social/Recreational, 11%

Transport someone, 7% Meals,

5%

Something else, 2%

2017 NHTSA: Share of VMT

Source: NHTSA, ORNL

Covid-19: A non-linear catalyst for the energy system

Short term(pre-vaccine)

Medium term(post-vaccine)Which ST trends linger?

Long term:Which ST&MT trends linger?

Load factorMode shiftMore single use plasticsInfrastructure spendingGovernment stimulusFuel price elasticity

Fuel economy gains sufferLower scrappage ratePent up demandMode shift

Wealth shock/EmploymentSocial distancingLower PKM: business, leisure, work from homeE-commerce

Different leisure travelHigher scrappage rateAutomationConsumer preference changesLabor intensity‘Build back better’

Urban flightDeglobalization - reshoring

Consumer preference changesBusiness travelSlower economic growth

Multiple questions concerning duration/magnitude of behavioral shifts, the speed of energy transition, and the level of supply/demand destruction

+

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Demand impact

Wide variability in oil demand scenarios raises stranded asset concerns

Source: BP Energy Outlook 2019

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1970 1980 1990 2000 2010 2020 2030 2040

Greater reformSingle-use plastics banRapid transitionMore energyLess globalizationETSupply with no new approvals

Mb/d

New demand bypasses the refining system

Covid-19 will require review of transportation efficiency, technology and policy assumptions

13

10 aimsBP Aiming for zero

4 Reducing methaneAim

9 Transparency leaderAim

5 More money for new energiesAim

10Clean citiesAim

Five aims to become a net zero company Five aims to help the world meet net zero

6 AdvocatingAim1 Net Zero operations

Aim

Net zero on an absolute basis across our entire operations by 2050 or sooner

7 Incentivizing employeesAim

2 Net Zero oil and gasAim

Net zero on an absolute basis across our upstream production by 2050 or sooner

8 Aligning associationsAim

3 Halving intensityAim

50% reduction in the carbon intensity of the products we sell by 2050 or sooner

14

2Aim

Portfoliomanagement

CCUS Blue hydrogen(natural gas + CCUS)

Natural climate

solutions

Net Zero oil and gas

H2

Net zero on an absolute basis across the carbon in ourupstream oil and gas production by 2050 or sooner