1. Financial challenges of oil industry development
Ivica Krešić, Director, Financial Advisory Services
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2. Low oil prices to squeeze margins and drive down production in higher-cost fields
Why a sudden fall in oil prices?
Weaker demand in Europe and Asia
China grew at its slowest pace in 5 years in Q32014 due to weak real estate market, low domestic demand and industrial production
Europe’s, total petroleum consumption fell by one million bbl/d from 2009 to 2013 and has dropped further in 2014.
Technological advancements have supported the emergence of unconventional resources in North America and also allowed exploring challenging reservoirs such as deep-water and ultra deep-water
U.S. oil production has increased 77% since 2008 to almost nine million b/d.
Canada has added an additional 1.5 million b/d from tar sands and Russia has increased crude oil production too.
OPEC’s Stance
Price decline implications
Crude oil daily spot price
OPEC decides against reducing production
After a meeting in November 2014, 12 OPEC nations that produce 40% of the global oil supply decided to maintain an output ceiling of 30 mil b/d, despite falling prices
The decision of major OPEC nations such as Saudi Arabia and Iran have since triggered a free fall in the crude oil prices
Exporting economies such as Russia Venezuela and Middle East are facing the brunt of price decline as oil export is a major contributor to their economy
Major oil producers are already facing serious challenges as crude oil price has fallen below the break even price for majority of the oil fields globally
Oil companies have already delayed their investment plans and have started to reduce workforce in order to mitigate the crude crash
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3. Oil dependent economies feel pressured as the demand centers set to gain While all major oil producing economies are witnessing economic slowdown and budget cuts due to fall in oil prices, the decline has provided an economic boom to largest net oil importers such as China and India. Oil dependent economies such as Nigeria and Venezuela are projected to lose the most.
Nigeria
Crude oil exports account for 95 percent of Nigeria’s foreign exchange receipts.
The finance minister announced they would adopt new austerity measures to counter the challenges posed by the fall in oil prices.
Russia
Oil revenues constitute around 45 percent of Russia’s government budget.
According to estimates, Russia’s GDP will shrink at least 4.5 percent in 2015 if oil prices remain below USD 60 per barrel.
United States
The fall in oil prices brings mixed bag of impact on the U.S. Drivers would spend USD 550 lesser in 2015 on gasoline compared to 2014.
Whereas, states such as Texas, North Dakota, and Alaska which are dependent on oil revenues would be hit hard.
China
China spent USD billion on oil imports in A 30 percent fall in oil prices would boost the country’s GDP by one percent.
If oil prices on an average are lesser than 20 percent in 2015 compared to 2014 China could save ~USD 50 billion.
India
India imports close to 190 million tonnes of crude oil per year - costing USD 145 billion per annum.
The fall in oil price will help India to manage its fuel subsidies and reduce its annual fiscal deficit which is budgeted at 4.1 percent of GDP for FY15.
Venezuela
The economy heavily dependent on oil and needs oil prices to be at least USD 121 per barrel to break-even.
With the fall in price, the nation’s economy is projected to decline by 3 percent.
Iran
The country needs oil prices to stay up at USD 100 per barrel to break-even.
Is expected to witness further economic slowdown due to falling oil prices.
Saudi Arabia
If oil stays below USD 60 per barrel, the country is expected to run into a deficit of around 14 percent of its GDP.
Currently, the country is in no hurry to fight off the fall in prices as it has built a strong USD 740 billion foreign exchange reserve. It plans to use this reserve to fund the deficit.
Countries loosing due to oil price decline
Countries gaining due to oil price decline
Source(s): Reuters; Wall Street Journal; Vox.com; The Economist
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4. Oil consumption in million b/d
Looking forward it is expected that oil consumption will continue to rise averaging 1.5% per annum from Recovery in global oil consumption is expected in 2015, after its slowest pace of expansion since 2009 of just 630,000 barrels/day in The broadly strengthening global economic picture should support higher oil usage, but it is uncertain whether higher oil usage will have any immediate impact on demand.
Oil consumption in million b/d
Oil demand forecasts
In absolute terms, it is expected that global oil consumption will reach million b/d, with emerging economies in Asia, Latin America, the Middle East and North Africa countries are expected to account for almost all of the forecast oil demand growth.
Divergence is expected between OECD and non-OECD growth, mainly due to the following factors:
Faster economic growth;
Rise in living standards and greater potential for vehicle sales increase;
Fuel efficiency of industrialized economies is improving, encouraged by taxation of transport fuels, legislation to encourage fuel efficiency and elevated global oil prices.
Oil Producer Apache To Shed 5% of Workers – WSJ 15 January 2015
Energy giant cuts jobs; Oil prices fall hard on some Halliburton workers here – Houston Chronicle 14 January 2015
Source(s): EIU
© 2015 Deloitte Central Europe

5. Oil consumption in b/d million
Looking forward it is expected that non-OECD Europe consumption will grow at CAGR 2.7% between Recovery in global oil consumption is expected in 2015, after its slowest pace of expansion since 2009 of just 630,000 barrels/day in The broadly strengthening global economic picture should support higher oil usage, but it is uncertain whether higher oil usage will have any immediate impact on demand.
Oil consumption in b/d million
Oil supply forecasts
Global oil production in will be a contest between members of OPEC and unconventional producers, mostly in North America, over who can endure low prices the longest. We still expect global supplies to expand in , al
Lower-cost producers of conventional onshore oil should be able to endure the price fall; any major slowdown in output growth is unlikely to be felt in the short term. New and challenging projects will be scrapped; shale and oil sand producers are cutting capital expenditure plans, and this will start to be felt toward the end of 2015 and into 2016
Oil Producer Apache To Shed 5% of Workers – WSJ 15 January 2015
Energy giant cuts jobs; Oil prices fall hard on some Halliburton workers here – Houston Chronicle 14 January 2015
Source(s): EIU
© 2015 Deloitte Central Europe

6. Oil price forecast in $US/b
Crude oil prices potentially found a floor in late January, but are not expected to recover to mid-2014 levels in the mid-term
2015 is expected to be characterized by intense price volatility, as the market is largely discounting fundamentals, including costs of production.
Oil price forecast in $US/b
Oil price forecasts
Years prior to the crude crash have been marked by stable but high oil price environment. In the following years, crude oil prices are not expected to recover to mid-2014 levels, unless there is a strong rebound in oil consumption or a major disruption to supply caused by geopolitical crisis. This prompts the question of how a sustained lower oil price environment will affect global oils supply.
In the following years EIU expects Brent to begin to edge up towards the end of the year owing to some unofficial production adjustments from OPEC members, to average US$54/b for We expect some production cuts from OPEC members to start to be felt from mid-2015, but for the first half of the year a heavy market surplus and a strong US dollar will keep the price low. Furthermore, any rallies could quickly turn into selling opportunities and push the market down again. Prices for WTI will follow a similar trend
EIU envisages that lower oil prices will slow rate of production growth in countries that have been primarily responsible for recent supply increases, namely the Americas. But low prices will not force the growth of unconventional sources of oil (shale/light tight oil and oil sands) to grind to a halt.
In the longer term, however, the world will need more oil which implies increase in the prices from their current lows as supply races to meet fast-growing demand in the emerging world.
Source(s): EIU
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7. Oilfield services companies come first to lay off employees Oil companies across the spectrum of size and value chain have taken up job layoffs to contain costs against the plunging crude oil prices. While the majority of layoffs till now have come from oil field services companies, other companies are likely to follow in the future to maintain margins.
Layoffs
Project delays
Budget cuts
British Petroleum and ConocoPhillips respectively, decided to cutoff 300 and 230 jobs in its North Sea operations. BP announced laying off 200 onshore workers and 100 contractor roles from a total of 3,500 employees in the regional operations.
Oil fields major Schlumberger announced laying off approximately 9,000 employees. The reduction begun in the last quarter of 2014 is expected to finish by the later half of The company said in a statement it is looking to cut jobs across geographies where it operates, but the exact numbers per geography were not revealed.
Apache Corp. announced removal of its 5 percent workforce amounting to close to 250 employees. This came as an implication of decline in crude oil prices, which resulted in pressures on the company’s margins.
Oil field service providers Halliburton and Baker Hughes declared job cuts. While Halliburton does not announce the scale of layoffs, Baker Hughes which is on the verge of being acquired by the former said it would reduce its headcount by approximately 7,000.
Suncor Energy Inc. announced it shall lay off close to 1,000 employees and contractors. According to a statement by the company executive, contract employees shall be the ones hardest hit by the planned layoffs.
Oil Producer Apache To Shed 5% of Workers – WSJ 15 January 2015
Energy giant cuts jobs; Oil prices fall hard on some Halliburton workers here – Houston Chronicle 14 January 2015
Source(s): Fuelfix; Wall Street Journal; Houston Chronicle; The Globe and Mail
© 2015 Deloitte Central Europe

8. Upstream projects halts likely to surge with decline in oil prices Companies which have planned investments in new and more expensive technologies have pushed their projects for future dates. If the oil prices continue to decline further, other major IOCs and NOCs are expected to follow the suit of upstream project delays.
Layoffs
Project delays
Budget cuts
Upstream
Husky Energy in December 2014 declared that it might delay its investments in its White Rose project by a year. The delay by a year in investment shall result in three year delay in extraction of first oil from the reserve pushing it to 2020.
Total S.A. has decided to delay its Bulgarian exploration plan. It is the operator of the 1-21 Han Asparuh block located Bulgaria’s Black Sea with 40 percent interest and the rest being held by OMV and Reposl with 30 percent share each.
Suncor Energy Inc. announced delay in two of its long-term projects, namely, the MacKay River Project in Alberta and the White Rose Extension Project in Newfoundland. The later was expected to come as the partner for the White Rose project Husky Energy has already announced plans to delay.
Companies which have invested in Canadian oil sands resources have started backing out from their investments as the needs oil prices to be at least USD 95/barrel to generate decent returns. A group of international oil companies including Royal Dutch Shell, Total and Statoil have shelved their oil sands projects in citing poor economic conditions and plunging crude oil prices.
Source(s): Reuters; Wall Street Journal; The Globe and Mail; Zacks.com
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9. LNG projects hit hard by oil price decline in midstream segment As oil prices share a negative correlation with natural gas demand, the plunge in crude oil prices has led to halting several LNG projects. Though the initial count of project halts is low, further decline or continuation of low prices is likely to increase the number of project halts in the future.
Layoffs
Project delays
Budget cuts
Midstream
The declining oil prices have cast its shadow on upcoming LNG projects in Australia worth USD 70 billion. Projects include, Browse LNG project by Woodside Petroleum, which is estimated to cost USD 35 billion and list Shell, BP and PetroChina as partners.
Houston-based Excelerate Energy has put its Lavaca Bay project in Texas on hold. The LNG terminal was expected to export 8 million tonnes per annum starting from The company in its regulatory filing said the steep fall in oil prices have forced the company to conduct a strategic reconsideration of the economic value of the project.
Rapid drop in the oil prices has raised concerns about the viability Keystone XL oil pipeline project. With oil getting cheaper, refineries will have more margin to transport the crude oil using higher priced transport mode, including rail or road rather than building a pipeline.
Source(s): Reuters; Wall Street Journal; Huffingtonpost
© 2015 Deloitte Central Europe

10. Low oil prices force O&G companies to scrap investment plans In the wake of falling oil prices, largest budget cut came from Shell, which decided to scrap the plan to build a petrochemical plant in Qatar. Oil companies are considering capital spending cuts along with reduction in operational expenditure to navigate through turbulent times of falling oil prices.
Layoffs
Project delays
Budget cuts
Royal Dutch Shell Plc announced its cost-cutting measures to scrap an investment plan worth USD 6.5 billion for a petrochemical plant in Qatar. The project was a 80 – 20 joint venture between Qatar government and Shell, respectively.
Premier Oil Plc decided to cut spending from its USD 2 billion project located in Sea Lion oilfield off the Argentinian Coast. The company is also cutting pay rates for contractors working on several projects across the North Sea and Southeast Asia to reduce operating costs.
In January 2015, Suncor Energy Inc. announced capex reduction by USD 1 billion from its 2015 budget. The company is also trimming between USD 600 million to USD 800 million from its operating expenses over the next two years.
Swift Energy Company plans to cut its 2015 capital spending by almost 75 percent. With the revised spending plans the company is looking forward to spending range of USD 100 – USD 125 million for the year.
Source(s): Reuters; Wall Street Journal; The Globe and Mail
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11. Saudi Arabia and Kuwait Upstream Capital Spending, USD Billion
E&P spending expected to decline as upstream activity slows Global exploration and production spending is expected to decline at least 8.8% in 2015 vs to reach USD619 billion in the wake of low priced oil environment. According to Barclays E&P Spending Outlook, North American budgets, are expected to fall at least 14.1% in 2015.
In the wake of low prices environment for crude oil, E&P companies are adhering to capital discipline through
Reducing rig counts
Negotiating new contracts
Postponing projects
Workforce reduction
North America
North America is expected to face the highest capital cuts, by 14.1% in This may rise to almost 30% if the prices stay around USD50/barrel for a prolonged period.
The U.S. land rig count is expected to fall by around 500 rigs over the course of 2015, which is equivalent of approximately 25% of the current count.
Barclays expects the Bakken Shale and Permian Basin to receive the maximum reductions, likely begin in Q
IOCs Vs. NOCs
Barclays projects that NOCs will continue to maintain their upstream expenditures in 2015 with a decline of only 1%. On the other hand, independent companies in both the U.S. and Europe are expected to trim costs by more than 12%.
Saudi Arabia and Kuwait
Saudi Arabia and Kuwait, on the other hand, are projected to increase spending by more than 15% in 2015, for the second straight year.
Rig count in Saudi Arabia is the highest in decades, and plans on ramping up production to higher levels.
Upstream Capital Spending, USD Billion
Estimated numbers
Source(s): Oil and Gas 360; Oil and Gas Journal
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12. Falling oil prices are eating into the profits of producers, and forcing oil majors to cut exploration and machinery spending
With oil prices falling below USD50/bbl, shale explorers and producers are struggling to make business economically viable. The first line of defense has been to cut costs, trim expansion plans and seek alternative sponsors and lenders.
Small oil producers
Supermajors
More than 20,000 small and midsize firms drive the "hydrocarbon revolution" that has helped the industry thrive in recent years. These players have experienced the worst hit due to lack of hedging against price volatility, high debt levels and low cash availability.
The smaller players which have primarily relied on debt to fund business and with oil prices below USD50/bbl, more than 80% of the shale oil producers in the U.S. would operate below the breakeven point.
Firms with high costs and low cash on their balance sheets could potentially reach the brink of bankruptcy or become acquisition targets if oil price doesn’t rise for a prolonged period.
Moreover, majority of the small and midsize firms lack adequate hedging against the oil price drop and in the face of a prolonged slump in oil prices, unhedged companies with less diversified assets may be forced to scale back expansion plans, leave acreage unproductive or even sell some assets.
To combat the low price challenge, small and midsize firms are cancelling on their projects and IPOs
Supermajors have enjoyed a more favorable position in combating the crude price crash, performing better than the S&P Oil and Gas index during the period when crude prices have tanked.
While the upstream business takes a hit, refining segment has provided a cushion to the Supermajors via low cost of feedstock
Supermajors are also focused on reducing expenses efficient operations and capital discipline
Source(s): energyglobal.com; Fortune; USfunds; NYtimes; ibtimes; BBC; WSJ; Reuters
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13. Upstream Deal Value, USD Billion
Crude crash threatens to sabotage oil and gas upstream M&A The upstream oil and gas M&A deals increased by 23% in However, had it not been for Repsol’s acquisition of Talisman energy (for USD 13 billion) in December 2014, the M&A deal value in Q42014 would have declined by almost 35% as compared to Q32014.
M&A Performance in 2014
Unconventionals drive M&A activity in North America
The U.S. represented nearly 50% of global upstream oil and gas transaction value in 2014.
4 of the top 5 largest U.S. deals targeted unconventionals, led by Encana’s USD7.8 billion acquisition of Athlon Energy.
Canadian M&A were highlighted by Talisman’s portion of Canadian assets and Devon Energy’s USD2.9 billion sale of conventional, gas-weighted reserves.
Plunge in acquisitions by Asian and Caspian NOCs
Asian and Caspian regional NOCs were buyers in half of the 10 largest deals in 2013, but none appeared buyers in the 10 largest deals in 2014.
7 of the 10 largest worldwide deals involved North American E&Ps as either buyer or seller in transactions that exceeded USD2 billion.
Acquisitions by Chinese NOCs fell steeply in 2014
Acquisitions by Chinese NOCs in 2014 amounted to less than USD3 billion as compared to USD20 billion in 2013.
IOCs amongst most active asset sellers in 2014
Western integrated oil companies, such as Royal Dutch Shell, which divested approximately USD15 billion in worldwide upstream assets in 2014, were among the most active global market sellers during the year.
Upstream Deal Value, USD Billion
Estimated numbers
M&A Performance in Q4 2014
Source(s): CapitalIQ; Bloomberg; WSJ; Reuters; HIS; Rigzone
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