KPMG: Market Update: Oil & Gas - April 2017 - eng

Среда, 17 мая 2017 17:04

Energy efficiency initiatives in China

With Chinese industrial production growth for February reaching 6.3% year-on-year, it appears that demand is rebounding (up from 6% in December) and exceeding the market’s expectations (of 6.2%).  This is in the face of an overall bearish GDP growth outlook of 6.5% for 2017 (down 0.2% from last year) from Chinese Premier Li Keqiang.  Li indicated a slower growth trajectory on the back of energy efficiency initiatives and 2020-targets, including reduction in coal consumption by 6 percentage points to 58% of total energy consumption, and a re-emphasis on renewable energy, for it to comprise 15% of the overall energy mix by 2020 (up 3 percentage points from 2015).

"As China looks to change gears from that of a resource-hungry energy-intensive manufacturing centre, to an economy centered on services and technology, many of the axioms of old will need to be re-written.  Watching this structural evolution in productivity, it will be interesting to see how the Chinese energy efficiency focus plays out in terms of actual output figures and the impact to demand.  With energy markets looking to be in a low-to-medium price environment, and over-supplied state in the short-to-medium term, the push toward energy efficiency in China may be driven by environmental sustainability (its local air quality and population levels) and energy security factors (its heightened dependence on oil and gas)."

Oliver Hsieh, Director, Commodity & Energy Risk Management, KPMG in Singapore

US perspective on the market

If the last few months of 2016 were characterized by cautious optimism, then the first few months of 2017 can be characterized as a small sigh of relief as all signals point toward a slow but steady recovery for the US oil and gas industry. Forecasted capital spending is on the rise for 2017. According to a recent report released by IHS, US E&P Independents’ 2017 planned capital spending is forecasted to increase by 45% for this year. For the E&P companies analyzed in the report, all have reported plans to reverse last year production declines. The increased capital spending is resulting in higher rig counts. For the thirteenth consecutive week, the US rig count increased yet again – reaching its highest level in two years. We also continue to see robust merger and acquisition activity as companies continue to rationalize and optimize their portfolio. In the Permian basin alone, upstream deal flow continued to accelerate during the first quarter of 2017. Over $18B in transactions have already been announced in the Permian – representing over 70% of the full year of 2016. Still, the S&P Energy Sector ETF (XLE) is down more than 6% 2017, while the S&P 500 is up 5% - potentially representing a great bargain for long-term investors.

While the above factors are all positive indications towards a continued industry recovery, two questions remain. What will 2017 bring for oil prices and how will this recovery (assuming we are trending towards a recovery) translate into jobs for the industry? While the most certain aspect of oil price is the uncertainty, there are some signposts that might give an indication of where prices may be headed. The US Energy Information Administration (EIA) recently lowered the outlook on its crude-price forecast with WTI crude of $54.24/bbl but raised 2017 forecasted production output to 9.22 million barrels a day. However, the IEA indicated that global oil supply and demand appear to be rebalancing after more than two years of oversupply. One key question that remains is if OPEC members will be willing to extend production cuts beyond the June expiration. With Saudi Aramco scheduled to IPO in 2018, the Saudi royals are certainly incentivized to continue to curb output that will ultimately draw down inventories and drive higher prices in the market. Finally, although Syria’s contribution to the global oil supply is relatively small at an average of 30,000 barrels per day, any military actions involving the Middle East are bound to cause some uncertainty in commodity market.

As for the impact on the oil and gas job market, it is still too soon to predict. Bloomberg estimates that the oil price collapse eliminated 440,000 jobs, and anywhere from one-third to one-half of those jobs may never come back. The reasons for this are multifaceted – companies were forced to find ways to operate much more efficiently during the downturn, and these efficiencies will carry over into the "new normal." Asset portfolios have been optimized and many companies are now operating with a smaller, more synergized footprint. Last but not least, emerging technologies such as robotic process automation, cognitive, and cloud computing are being rapidly adopted and providing significant efficiency and cost benefits eliminating the need to scale the new organization in a "one-for-one" model compared to years prior to the downturn.

By and large, a swift recovery in oil prices remains unlikely but there are positive signs that things may be headed in the right direction. Just don’t call it a comeback … yet.

Angie Gildea, Partner, Americas Oil & Gas Lead, KPMG in the US

Trump administration creates a smoother path for pipeline permitting

President Trump is moving swiftly to remove obstacles blocking pipeline construction projects, though his support for the industry will still leave permitting hurdles at the state level and will fail to meet some of his trade protectionist campaign promises. The Trump administration rescinded an order issued under President Obama by the Army Corps of Engineers withholding an easement for the pipeline crossing under Lake Oahe in North Dakota, allowing it to be completed in early April. Even though the presidential permit has been issued for the Keystone XL pipeline, however, there is still significant uncertainty about the timing of construction due to state level issues in Nebraska. TransCanada refiled with the Nebraska Public Services Commission (PSC) in February, and it theoretically should decide within seven months, but it can extend that deadline by an additional five months. In a best-case scenario, the final decision would come in late 2017 and the pipeline could commence operation in 2019, but legal challenges could delay the project further. The Trump administration also backed off on its campaign promise to require the use of US-made pipeline materials, because Trans Canada had already procured most of the pipeline segments.

"Looking forward, Trump’s executive orders streamlining the environmental review process for pipelines and other infrastructure projects will remove most of the federal delays in pipeline permitting, though statutory requirements still must be satisfied to avoid legal challenges. Environmental activist groups will shift their focus to state level permitting processes."

Greg Priddy, Director, O&G, Eurasia Group*

*Guest contributor to April edition

* Guest contributor to April edition
* Guest contributor to April edition
* Guest contributor to April edition

Investment Framework Agreement for North Sea Infrastructure

In late March, the Danish Ministry of Finance announced that a political agreement has been reached concerning the framework agreement on investment incentives for the North Sea hydrocarbon activities. So far, no bill has been introduced, so our comments below are based only on the information published today by the Ministry of Finance. To motivate investments in infrastructure assets in the North Sea, a tax incentive window from 2017 to 2025 has been introduced.

The investment window introduces a number of items that will benefit investors considering re-entering the market.  These measures include: an increase in the annual depreciation rate (from 15% to 20%), and a balancing tax-mechanism between producers and the Danish State.

As part of the framework agreement, it is the intention to improve the third-party access to the central HC infrastructure. This will means a number of modifications are required: including rules to make it easier to access the flexibility of reserve capacity of the oil pipelines; tariffs so that the OpEx reflects the actual usage and capital costs are allocated according to reserved capacity; greater powers for the Energy Agency, among other conditions.

– Ole Schmidt, Managing Partner, Corporate Tax, KPMG in Denmark

Analyst estimates: oil

  2017 2018 2019 2020
February Avg 58.0 64.4 70.6 75.8
March Avg 58.7 65.4 71.3 75.8
February Median 57.5 65.0 67.5 75.0
March Median 57.5 65.0 70.0 75.0

Analyst estimates: gas

  2017 2018 2019 2020
Min 2.9 2.9 3.0 3.2
Max 3.2 3.2 3.3 3.5
Median 3.3 3.1 3.2 3.4
Max 3.5 4.0 4.0 4.0
  2017 2018 2019 2020
February Avg 3.3 3.3 3.4 3.5
March Avg 3.2 3.2 3.3 3.5
February Median 3.3 3.2 3.2 3.4
March Median 3.3 3.1 3.2 3.4

Note: The forecasts/analyst estimates identified are an indication based on third party sources and information. They do not represent the views of KPMG.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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