Oil Prices: ‘Collaring’ Prices in the near term Robert K. Kaufmann Project Link October 3, 2017

Prices since we last met

The Forecast.. $51.80: 2018 $51.75 $50.17 $43.41

The Issues… Collar on short-run prices Downside OPEC NonOPEC cooperation Saudi oil policy Equity markets Upside US tight oil production Hedging Political uncertainty Long-run demand constraints Peak demand

short-run: Inventories

Limits for Iraq and Iran Nigeria & Libya exempt Non-Opec (0.6 mbd) The Deal: November 30, 2016 Goal (OECD inventories March 2018) 214 million barrels Supply deficit 0.875 mbd OPEC (1.2mbd) Saudi Arabia 10.6 to 10.2 Limits for Iraq and Iran Nigeria & Libya exempt Non-Opec (0.6 mbd) Russia

Production drop below 32 mbd rebalancing Difficulties Libya (0.5 mbd) Nigeria (0.3 mbd) Non-Opec (1.45) China SPR Compliance OECD stocks 243 above (285) Production drop below 32 mbd

Middle East Spare capacity First call on putting new oil into the market Accept lower spare capacity Use money elsewhere

Cannot thrive as oil exporter Aramco IPO ($50 oil $2 trillion) New Saudi Strategy Mohammed bin Salman (Vision 2030) Cannot thrive as oil exporter Aramco IPO ($50 oil $2 trillion) Leaning against NYSE Aramco Defend market share Competition from arbitrage crudes Supply Asian refiners No need for large spare capacity

Majors: “More opportunities that we can actually pursue going forward” $50 oil is here to stay Lower cost fewer megaprojects Liza development (Guyana) Gulf of Mexico Growth vs Cost Lower capital investment Dump high cost assets Pushing down break-even Private equity (not a typo!)

Blackstone, Carlyle, Warburg Pincus Chrysoar, Neptune, Siccar Point Private equity Buying $10 billion Blackstone, Carlyle, Warburg Pincus Chrysoar, Neptune, Siccar Point BP Shell Royal Dutch Shell Mature basins late life potential North Sea New strategy Hold Longer horizon (3-4 years) Management incumbent operator

Top of the Range: Tight Oil

Tight Oil Pioneer Natural Resources

Tight Oil: Low oil environment Technology Longer more accurate lateral wells Improved well spacing & management Service costs (rising 10-15%) Capital markets 2016 $39 billion S & P E&P index down 25% Break even points Growth vs margins Balance cash flows $43-$47 drop 60 rigs $40 drop 200 rigs

Forward Curve http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html

Flattening farther out Hedged against As prices rise, sell forward Hedging Forward supply curve Flattening farther out Hedged against As prices rise, sell forward Highly protected production 47% of 2017 production 13% of 2018 production

Political uncertainties Venezuela (domestic turmoil) Dropping revenues; loan deal with China International debt ($0.31 on the dollar) US ban imports? Russia New sanctions (33% Russian stake) Offshore developments China Delays in SPR Goal 90 days (current 36 days)

Long-Term: Demand Constraint Supply Constraints Efficiency Low hanging fruit depleted 10 year lifespan Battery prices 2010 $1000 kwhr 2016 $227 kwhr 2020’s $100 kwhr (EV cheaper) Capacity vs. oil price Gasoline prices vs investment in capacity Split ownership