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China National Petroleum Corporation: Zhen WANG September 17, 2015
Oil Companies’ Capital Expenditure : Business Cycle
Perspective
15th U.S. · China Oil & Gas Industry Forum
2 15th U.S. · China Oil & Gas Industry Forum
Outline
Business Cycle, Oil Price and Capital Expenditure
New Business Cycle and Trends in Oil and Gas Industry
Business Cycle and Strategies of Oil and Gas Companies
3 15th U.S. · China Oil & Gas Industry Forum
-3
-2
-1
0
1
2
3
4
5
6
0
20
40
60
80
100
120
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Oil Price GDP growth (annual %)
Iraq’s Invasion of Kuwait
Asian Financial Crisis
Iraq War
Saudi Arabia Fought for its Market Share
current US$ annual %
The Iran-Iraq war,The 2nd
Oil Crisis
Tension in the Middle East Strong global economy Depreciation of the $US
Financial Crisis
Conflicts in the Middle East European debt crisis US Quantitative Easing
Business Cycle, Oil Price and Capital Expenditure
Global Economy Cycle and Oil Price
Note:the numbers of 2015 and 2016 are forecasted,data comes from the world bank and BP Statistics Review.
The global economics has gone through several business cycles and is gradually recovering , which sustains the world’s energy demand to continue to grow
Oil prices are subject to special issues, such as geopolitical events, thus cycle of oil price is not entirely consistent with that of global business cycle
Increase in Shale Oil Production, Weak
demand, oil producers fight for market share,
Strong US dollar
1975
1982
1991
2001
2009
4 15th U.S. · China Oil & Gas Industry Forum
Global Business Cycle and Commodity Price
Note:the numbers of 2015 are forecasted,data comes from the world bank and Reuters.
1975
1982
1991
2001
2009
Business Cycle, Oil Price and Capital Expenditure
Commodity price entered into a long business cycle since 2001
5 15th U.S. · China Oil & Gas Industry Forum Note:the numbers of 2015 and 2016 are forecasted,data comes from Wood Mackenzie
Global Business Cycle and Development Cost of Oil Majors
Capital expenditure of oil company has a certain stability Capital expenditure is more affected by volatility of oil price, and less affected by the business cycle
39 33 33
37
48
66
76 83
107
68
86
117 115 110
99
62 72
Oil Price
2001 2009
US$M
Business Cycle, Oil Price and Capital Expenditure
6 15th U.S. · China Oil & Gas Industry Forum
Summary
1. Statistic Analysis shows that the economic development itself is cyclical, and
commodity prices are also featured by cyclical characteristics. But oil is also
subject to geopolitical and other special events, in the context of demand
dominated environment, oil prices almost consist with the business cycle,
whereas in the context of supply driven, oil prices and business cycle is not
entirely consistent.
2. Taking into account oil project lasting long, even if current world economy
is bottoming stabilized and oil price remains low, capital expenditure made
by oil companies is relatively stable, expenditure cuts are far less than the
rates of decline in oil prices.
7 15th U.S. · China Oil & Gas Industry Forum
Outline
Business Cycle, Oil Price and Capital Expenditure
New Business Cycle and Trends in Oil and Gas Industry
Business Cycle and Strategies of Oil and Gas Companies
8 15th U.S. · China Oil & Gas Industry Forum
New Business Cycle and Trends in O&G Industry
正文 Situation Prediction for Future O&G Industry Based on Current Business Cycle Overview
On the whole, the world economy is recovering from the financial crisis. The population and economic growth can further push up the demand for energy.
Commodity prices are in a period of adjustment, and the more sharply oil prices declines, the larger rebound can be expected.
In the short term, investment scale of oil companies will be reduced, but the cut is relatively mild and smooth.
9 15th U.S. · China Oil & Gas Industry Forum
New Business Cycle and Trends in O&G Industry
正文 The Oil Market Will Return to a New Normal State Crude Oil
The gap of supply exceeding demand will gradually narrow down, and the oil market will return to a new normal state
On one hand, supply gives its way to demand to drive oil price
On the other hand, the recovery of the world economy will gradually restore demand
Current Oversupply and Sluggish Demand
10 15th U.S. · China Oil & Gas Industry Forum
正文 The “Golden Age” is coming but with outstanding structural contradictions
Natural Gas
New Business Cycle and Trends in O&G Industry
The short-term growth in natural gas demand is lower than expected, but the long-term high growth trend will not change.
The flexibility of LNG trade will be further strengthened, and the proportion of LNG trading amount in global natural gas
transaction will continue to rise.
The pricing mechanism of regional gas transaction is changing, and the price linkage of each region will be enhanced.
11 15th U.S. · China Oil & Gas Industry Forum
正文 Unconventional energy and deep-water resources
will contribute most of the incremental output Annual proved resource in the world
Unconventionals
Onshore Continental shelf
Deep-water
MMtoe
New Business Cycle and Trends in O&G Industry
The global O&G development is going towards the unconventional and deep-water resources, thus will affect the investment scale of oil companies
12 15th U.S. · China Oil & Gas Industry Forum
International oil and gas M&A is affected by oil prices, and a low oil price environment often brews mergers and acquisitions climax
Low oil price will promote a new tide of O&G merger and acquisition M&A
New Business Cycle and Trends in O&G Industry
GDP growth
Oil Price
13 15th U.S. · China Oil & Gas Industry Forum
Summary
1. Oil and gas will continue to be the main source of the global energy supply,
and the golden age of natural gas is coming.
2. The growth rate of supply will drop as a consequence of low oil prices on
high cost investment, so supply stability will confront some threats; while the
low oil prices will stimulate demand, thus will ease the dilemma of oversupply
and sluggish demand.
3. The oil industry is facing a new round of mergers and acquisitions based on
our retrospect on past business cycles.
14 15th U.S. · China Oil & Gas Industry Forum
Outline
Business Cycle, Oil Price and Capital Expenditure
New Business Cycle and Trends in Oil and Gas Industry
Business Cycle and Strategies of Oil and Gas Companies
15 15th U.S. · China Oil & Gas Industry Forum
Three long-term strategies of oil majors
Business Cycle and Strategies of O&G Companies
Portfolio optimization
Innovation driven
Cost control
16 15th U.S. · China Oil & Gas Industry Forum
Business Cycle and Strategies of O&G Companies
• The upstream activities aim to pursue high efficiency and more profits instead of large scale. Pay more attention to their oil and gas asset portfolios and optimize them according to the international market price. Keep dynamic adjustment of the proportion of resources to avoid the risk of a crash in oil or gas price.
• Adhere to the diversification strategy, making reasonable allocation of conventional and unconventional assets ratio. Balance the company's current interests and future sustainability: in the period of low oil price, focus on low-cost and good-performance conventional oil and gas assets; in the period of high oil price, expand unconventional oil and gas production.
Portfolios Optimization
17 15th U.S. · China Oil & Gas Industry Forum
Business Cycle and Strategies of O&G Companies
• Since the financial crisis, the investment of oil companies have been characterized by rising expenditure, low return and capital-strapped.
• As the international oil prices go down, companies start to review their investment plans, looking for reasonable room to adjust or even cut down expenditures. Stick more firmly and more strictly to enforce investment plan.
• Streamline administration agencies and cut jobs to lower the cost especially operating cost.
Cost Control
18 15th U.S. · China Oil & Gas Industry Forum
Business Cycle and Strategies of O&G Companies
• Investment in technology innovation should be a long-term strategy to meet the engineering and technical challenges of today’s oil and gas business.
• For the exploration and exploitation of unconventional, deep-water, polar and other resources, research of complex oil and gas reservoir and complicated geographical environment need to be further strengthened.
• With the revolution of energy use driven by the idea of “Energy Internet”, management innovation will become a competitive advantage for oil companies.
Innovation Driven