Oil prices under pressure from slow growth

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Singapore, 15 May 2013 — The latest EY Global Oil & Gas quarterly outlook released today highlights that the uncertainty over oil demand combined with some strong non-OPEC supply growth is putting downward pressure on oil prices, which could impact investment decisions in the short-term. The release of some weaker than expected economic indicators is also negatively impacting sentiment and eroding some of the investor confidence that we saw earlier this year.

Dale Nijoka, EY’s Global Oil & Gas Leader comments: “In the absence of any supply or geopolitical shocks, oil prices will continue to rise and fall in response to the release of new economic data. The lack of strong economic signals means that Brent oil prices will likely fluctuate within a US$105 to US$115 per barrel range in the second quarter.”

The outlook contrasts the continued flat energy demand in the eurozone with no significant uptick expected until 2015, with the strong appetite for oil and gas in many Asian economies although slowing economic growth in export markets may curtail this demand. Globally, consumer sentiment remains weak and is undermined by record levels of unemployment in the eurozone and a squeeze on household incomes. However, if oil prices come under sustained downward pressure, OPEC would likely respond by reducing output in an attempt to hold prices above US$100 per barrel.

Nijoka comments: “Relatively strong commodity prices are supporting industry investment for the time being. Fields that were previously assessed as being uneconomic in some regions, such as the Falkland Islands, are commercially viable again at current oil prices. Investment in deepwater projects in countries like Brazil and Angola will probably hold up well and will be less susceptible to short-term price deviations. Higher oil prices helped accelerate investment and activity related to tight oil production in the US during 2012. However, investment and output levels in these plays can be modified in response to price shifts.”

Sanjeev Gupta, EY’s Asia-Pacific Oil & Gas Leader comments: “Global economic growth is largely being driven by emerging or developing economies, particularly the BRIC (Brazil, Russia, India and China) block. Only Russia was hit hard by the global recession, while growth in India and China has stayed relatively strong notwithstanding a slight slowdown in 2012. Emerging markets in ASEAN are also seeing growth. Overall, we expect consumption and growth in Asia to continue to increase and fuel the expected higher oil prices.”

Longer-term outlook for gas is more promising

The outlook highlights the more positive longer-term supply and investment outlook for gas markets given the largest discoveries in the last few years have been natural gas. The disparity in gas prices between the US and both Europe and Asia also creates opportunities for investors.

Nijoka says: “Gas-intensive industries have gained competitive international advantage from low US gas prices brought about by shale gas discoveries. Manufacturers in other countries are now pressing their governments to expedite the exploration of their own shale resources. However, outside North America, shale gas will not prove to be a quick-fix for industrial competitiveness or energy import dependency. It will be a number of years before the investment currently being made in shale exploration delivers any meaningful volumes of shale gas.”

Gupta says: “Regional differences in natural gas prices can be substantial and underpin the desirability of having ‘flexible’ LNG supply and the ability to shift cargoes to the most advantageous market. Despite high gas prices, which are typically linked to relatively strong oil prices, Asian gas demand has remain relatively strong, particularly boosted by the nuclear outages in Japan in the wake of the earthquake and tsunami.”

Impact of US shale revolution

The outlook discusses the global impact of the changing global oil and gas supply dynamics brought about by the US shale revolution. US policy-makers are currently weighing the arguments for and against allowing for the export of additional domestic gas supplies.

Nijoka comments: “We think that the volume of gas export permitted will be restricted to minimize any upward pressure on domestic gas prices. While oil and gas companies wait for a decision in the US, developers in Canada are moving ahead with plans for gas exports from its Pacific coast. However, as most of the proposed schemes are greenfield projects, they will take longer to develop and will be at a cost disadvantage compared with projects to reconfigure existing facilities in the US.”

Gas exports from North America also will face competition from proposed LNG export projects in Mozambique and Tanzania. Operators of the large discoveries in eastern Africa will continue to look to farm-out stakes to partners that can carry development costs or bring technology expertise.

Gupta comments: “The Chinese shale drive has received the most attention, with several of the industry’s big names signing up to help the Chinese. Notably however, Chinese shale development is likely to face significant challenges including complex geology; water availability issues; lack of infrastructure; unclear or conflicting mineral rights in many regions; and most importantly, state-controlled prices.”

Nijoka concludes: “The smaller independent players that led the way in making the giant discoveries in eastern Africa will now be looking to deliver shareholder value through the farm-down of stakes or through a sale of the company. The former management teams of these companies may form new ventures to leverage their exploration expertise in other regions. These new independents could be instrumental in making future discoveries of similar scale to those in eastern Africa and opening up new frontiers.”


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