DRONING ON WILL RECENT BRENT OIL PRICE VOLATILITY IMPACT LONG TERM FORECASTS? - 15 FEBRUARY 2019 - PWC UK
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Droning on… Will recent Brent oil price volatility impact long term forecasts? 15 February 2019
Contents Droning on… 2 Constructive use of drones… in the oil industry 3 1. Brent Oil – Benchmarking 5 2. WTI – Benchmarking 8 3. Henry Hub – Benchmarking 11 4. NBP – Benchmarking 14 Contributors 17 2 | Will recent Brent oil price volatility impact long term forecasts?
Important notice
• The following market benchmarking exercise has been performed as at 31 December 2018.
• Due care should be taken when using our conclusions and the market data points. Given
the rapidly evolving views by market participants, certain views can become quickly
outdated.
• Our market benchmarking data and conclusions should thus not be applied
mechanistically. Instead, careful consideration should be given to the purpose of the
valuation and to the price forecasts and sensitivity analysis used.
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Will recent Brent oil price volatility impact long term forecasts? | 1
Droning on…
Will recent Brent oil price volatility impact long term prices?
First, we consider which factors, at a high Demand and supply
Whilst the Brent oil price rallied to level, have impacted the Brent oil forecast. The market verdict
Weakening oil demand and supply factors are
c.US$85/bbl in early October 2018, expected to contribute to global oversupply in Our analysis indicates that in the shorter
Usual suspects term, the median Brent oil price has
this was short lived as prices eased the near term as follows:
The usual suspects have impacted the Brent oil increased by $3/bbl from $60 to $63 in
by c.35% to $63/bbl by year end. • Signs of an economic slowdown in China.
price including OPEC strategy, US production, 2019 and by $4/bbl from $66/bbl to $70/bbl
concerns about the outlook for global growth, • The European Commission predicts that in 2021.
At the risk of ‘droning on about this’
potential increase in Libya production and the GDP in Europe to rise 1.3% (vs previous
– how has recent volatility impacted forecast of 1.9%). From 2022, the medium to longer forecasts
US-China trade war, amongst others.
long term Brent oil forecasts? are largely similar to a year ago despite the
• The economic outlook for the UK has been
OPEC strategy cut by the Bank of England given the volatility in the Brent price experienced
Additionally, against this volatile price since June 2018.
From 1 January 2019, OPEC agreed to cut oil uncertainty of Brexit.
and capital restraint environment,
production by 1.2m bbl/d for 6 months of • US shale production is expected to be
corporates have been considering
which 0.8m bbl/d will apply to OPEC members strong at 11.7m b/d in 2018.
which technologies to adopt in oil and 0.4m bbl/d will apply to countries outside • American sanctions on Iran export have
and gas. Mechanical intelligence, the cartel that have allied with OPEC. As part taken around 1m bbl/d off the market.
adaptive anchoring, string based of this strategy OPEC is seeking a floor price Jacqueline Chow
perching are examples of exciting of c. US$ 70/bbl. (Director – Natural Resources
Geopolitical instability
developments. Whilst drones have Valuations)
Iran, Nigeria, Libya and Venezuela are
had a ‘bad rap of late’ (as unwanted experiencing ongoing geopolitical instability
guests at airports), they offer a causing disruptions in production.
practical solution to saving costs for
Uncertainty over Iranian sanctions (and waivers)
offshore inspections and other
and the resolution of the trade war between
applications. We explore this further US-China has also caused an overhang on the
in this edition. Brent oil price.
The recent US sanctions on Petróleos de
Venezuela, S.A. (PDVSA), Venezuela’s state-run
oil company, are likely to have a further impact
on oil production in the country. Under the
sanctions US will halt all oil imports from
Venezuela which could potentially lead to a
overall reduction in oil production that is greater
than the 1.2m bbl/d agreed by OPEC.
2 | Will recent Brent oil price volatility impact long term forecasts?
Constructive use of drones… in the oil industry (1/2)
Addressing visual line of sight
Proof of concept for inspection Challenges to overcome
Adrian Del Maestro and Craig Stevens services Operators using drones still typically need to
have prepared an interesting thought Demand for drones is growing rapidly. A review maintain ‘visual line of sight’. As a result,
piece on the practical solutions of industry forecasts suggests the market for deployment of drones offshore require two
drones offer in the oil & gas sector. drones with applications in oil and gas could operators, to be launched from a vessel for
reach between US$1 and US$4bn by the early example, and with extra accommodation to
2020s and much larger if considering broader ensure bed space in case of bad weather. This
energy applications. increases costs and reduces the flexibility of
deployment.
Overview Market size 2017 – 2023 To overcome some of these issues there are
US$bn Energy CAGR%
With so much talk about digital solutions, currently trials taking place in the industry
8 40 around BVLOS (Beyond Visual Line of Site)
ranging from 3D printing and big data to
automation and the Internet of Things (IoT), 7 35 flights. These on-land trials are part of a large
there is a vast choice over which technologies 6 30 scale UK government project, working
should be adopted in oil and gas. Faced with a 2014 – 2020 alongside the Civil Aviation Authority to help
5 25
wide array of options, operators must keep Oil & Gas utility companies with the inspection and
4 20 maintenance of their infrastructure networks.
asking themselves the simple question – ‘what
is the business problem to solve and which 3 15 The project is working to create an operational
technology can best help address the solution?’ 2
2016 – 2020
10
framework for BVLOS flights to become
Oil & Gas
Against a backdrop of oil price volatility and the business as usual and drive efficiencies in
1 5
need to maintain capital discipline, drones offer ongoing asset management and maintenance.
0 0
a practical solution to saving costs for offshore Analyst A Analyst B Analyst C
inspections with the potential to evolve new
Source: PwC Strategy& research
capabilities in the not too distant future.
In the UK we already are seeing a number of
operators deploying drones for visual
inspection in niche areas such as flare towers.
This application helps improve health and
safety standards by replacing the need for
more hazardous human intervention using
ropes and scaffolding.
Will recent Brent oil price volatility impact long term forecasts? | 3
Constructive use of drones… in the oil industry (2/2)
Inspection and intervention roles
What the future holds Prepare for change
Supported by the Oil & Gas Technology Centre, In light of all these changes and developments, Adrian Del Maestro
Air Control Entech (ACE) has developed three how should oil and gas operators prepare for (Director – Director of Research,
drones to assess offshore sites and confined drone adoption? Strategy&)
spaces more efficiently. The drones use live
video streaming, ultrasonic testing and 3D laser Clearly those companies most directly
scanning respectively to gather and relay data impacted by the evolution of drones and
in real time. broader technologies will need to consider how
they transform their business. Offshore Craig Stevens
The benefits of this approach include live video helicopter services is a case in point. Bristow (Senior Business Manager –
stream (reducing the size of the inspection provides helicopter transportation and search Energy, Utilities & Resources)
team) and greater mobility through and rescue to a number of sectors including the
electromagnets to clamp onto a structure to offshore oil and gas sector. In 2016 they
take ultrasonic readings (also reducing power invested some US$4m in Sky-Futures, a
consumption and thereby increasing flight time). provider of drone inspection data services.
This partnership now gives Bristow access to
In the future, as well as inspection and the fast growing UAV market and as the sector
monitoring, drones could be used in areas such evolves Bristow will be well placed to adapt its
as exploration and ongoing operations. Drones business model.
for transporting goods and materials from
vessel to platform and from land to platform As the industry pursues greater automation,
also offer advantages in logistics. There is also such as that found on Equinor’s Valemon
the potential of combining robotics with drone platform – the first in the Norwegian Continental
technology to develop new capabilities. Shelf to be operated remotely from land, and
the proliferation of smaller unmanned
platforms, drones will need to play a greater
role in inspection and eventually intervention.
And what of the implications for employment
as the use of drones proliferates? Clearly some
inspection roles based on scaffolding and ropes
will be disrupted by drones. But how much more
efficient can these inspectors be when they can
view engineering grade imagery from anywhere
in the world? The growth of drone technology
will generate new jobs and will certainly require
parts of the workforce to upskill.
4 | Will recent Brent oil price volatility impact long term forecasts?
1 Brent Oil
Benchmarking
Will recent Brent oil price volatility impact long term forecasts? | 5
Broker and consultant Brent oil price forecasts
(31 December 2018)
We have collated 19 Brent crude oil price Brent price forecast – nominal
forecasts of market participants and
consultants as at 31 December 2018. 100
The graph on the right illustrates the brokers and
consultants views against the Capital IQ Brent 90
(ICE) forward curve as at 31 December 2018.
The values shown are in nominal terms.
80
In the shorter term, the median Brent oil price
has increased by $3/bbl from $60/bbl to $63/ $/bbl
bbl in 2019 and by $4/bbl from $66/bbl to $70/ 70
bbl in 2021.
From 2022 the medium to longer forecasts 60
are largely similar to a year ago despite the
volatility in the Brent oil price experienced
50
since June 2018.
40
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Broker 50% interquartile range Brokers median Consensus economics
CapIQ futures curve Consultants median
Source: Consensus economics, various broker reports, Capital IQ
6 | Will recent Brent oil price volatility impact long term forecasts?
Broker and consultant Brent oil price forecasts (contd.)
(31 December 2018)
Source: Consensus economics, various broker reports, Capital IQ
Will recent Brent oil price volatility impact long term forecasts? | 7
2 WTI
Benchmarking
8 | Will recent Brent oil price volatility impact long term forecasts?Broker and consultant WTI oil price forecasts
(31 December 2018)
We have collated 16 WTI oil price forecasts WTI price forecast – nominal
from brokers and consultants.
100
The graph on the right illustrates the low,
median, high and inter-quartile views against 90
the Capital IQ WTI (ICE) forward curve as at
31 December 2018. The values shown are in 80
nominal terms.
$/bbl
70
In the shorter term, the median WTI price has
increased by $3/bbl from $58/bbl to $61/bbl in
60
2019 and decreased by $3/bbl from $72/bbl to
$69/bbl in the medium term when compared to
50
a year ago.
40
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Broker 50% interquartile range Brokers median Consensus economics
CapIQ futures curve Consultants median
Source: Consensus economics, various broker reports, Capital IQ
Will recent Brent oil price volatility impact long term forecasts? | 9Broker and consultant WTI oil price forecasts (contd.) (31 December 2018) Source: Consensus economics, various broker reports, Capital IQ 10 | Will recent Brent oil price volatility impact long term forecasts?
3 Henry Hub
Benchmarking
Will recent Brent oil price volatility impact long term forecasts? | 11Broker and consultant Henry Hub gas price forecasts
(31 December 2018)
We have collated 16 Henry Hub gas price Henry Hub price forecast – nominal
forecasts from brokers and consultants.
5.00
The graph on the right illustrates the low,
median, high and inter-quartile views against
the Capital IQ Henry Hub (NYMEX) forward 4.50
curve as at 31 December 2018. The values
shown are in nominal terms.
4.00
In the shorter term, the median Henry Hub gas
price is largely the same as a year ago at $3/
$/mmbtu
mmbtu and slightly down in 2024 at $3.47/ 3.50
mmbtu from $3.50/mmbtu when compared to
a year ago.
3.00
2.50
2.00
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Broker 50% interquartile range Brokers median Consensus economics
CapIQ futures curve Consultants median
Source: Consensus economics, various broker reports, Capital IQ
12 | Will recent Brent oil price volatility impact long term forecasts?Broker and consultant Henry Hub gas price forecasts (contd.)
(31 December 2018)
Source: Consensus economics, various broker reports, Capital IQ
Will recent Brent oil price volatility impact long term forecasts? | 134 NBP
Benchmarking
14 | Will recent Brent oil price volatility impact long term forecasts?Broker and consultant NBP gas price forecasts
(31 December 2018)
We have collated 12 NBP gas price forecasts NBP price forecast – nominal
from brokers and consultants.
75
The graph on the right illustrates the low,
median, high and inter-quartile views against 70
the Capital IQ NBP (ICE) forward curve as at
31 December 2018. The values shown are in 65
p/therm
nominal terms.
60
Market participant forecasts are generally in
line with the liquid period of the futures curve. 55
In the shorter term, the median NBP gas price
50
has increased by 15 p/therm from 45 p/therm to
60 p/therm in 2019 and in the medium term by 5
45
p/therm from 54 p/therm to 59 p/therm when 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
compared to a year ago.
Broker 50% interquartile range Brokers median
CapIQ futures curve Consultants median
Source: Consensus economics, various broker reports, Capital IQ
Will recent Brent oil price volatility impact long term forecasts? | 15Broker and consultant NBP gas price forecasts (contd.) (31 December 2018) Source: Consensus economics, various broker reports, Capital IQ 16 | Will recent Brent oil price volatility impact long term forecasts?
Contributors
Jacqueline Chow Matthew Williams
Director – Valuations E: matthew.x.williams@pwc.com
Energy, Utilities, Mining & Infrastructure
T: +44 (0)7818 427307 Chris Baller
E: jacqueline.chow@pwc.com E: baller.chris@pwc.com
Adrian Del Maestro Adrian Kwan
Director of Research and Head of Global E: kwan.adrian@pwc.com
Thought Leadership in Energy
T: +44 (0)7900 163558
Stuart Hughes
E: adrian.delmaestro@pwc.com
E: stuart.hughes@pwc.com
Craig Stevens
Senior Business Manager
Energy, Utilities & Resources
T: +44 (0)7738 844839
E: craig.w.stevens@pwc.com
Will recent Brent oil price volatility impact long term forecasts? | 17pwc.co.uk/valuations This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. © 2019 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. 190219-144332-AG-OS 18 | Will recent Brent oil price volatility impact long term forecasts?
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