Energy Industry

Trends Review
Issue 25: 2013
Editorial
Economic outlook

Editorial

Companies navigating the energy landscape in 2013

are finding it as uncertain as 2012 but more volatile.
The upstream up-cycle is arguably not being fully
translated into growth by many companies that
experience continued cost and efficiency challenges.

Further downstream, refining and retail

profits continue to be tested. For the
majors and some national oil companies
(NOCs), the focus continues to shift to
gas, while for other NOCs managing
growth versus national development
continues to be a priority.

For the oilfield service companies (OFS)

and independent-sector players, trying to
navigate the positive and negative effects
of the North American supply revolution
is the overriding concern.
This paper looks at the latest International
Energy Agency (IEA) advice and provides
commentary on the trends shaping the
industry in 2013 and beyond.

Energy trends headline summary

Economic

Global GDP is forecasted to be approximately 3.25% in 2013 and 4% in 2014. US GDP growth: 1.9% (2013) and 3.0%
(2014); Eurozone GDP growth: 0.3% (2013) and 1.1% (2014); China GDP growth: 8% (2013) and 8.2% (2014); and India
GDP growth: 5.7% (2013) and 6.2% (2014).

Oil supply

Global supply is expected to have increased by 0.57 mb/d month-on-month in July, to 91.85 mb/d, led by higher
non-OPEC production. Strong growth in North America is expected to lift 2H13 total non-OPEC supply by an average 1.4
mb/d year-over-year, to reach 55.4 mb/d in 4Q13.

Oil demand

Global oil demand growth is expected to accelerate in 2014 to 1.1 mb/d, compared with 0.9 mb/d in 2013. The forecast
for 2014 has been revised downward by 0.1 mb/d due to lower expected GDP growth.

Oil price

Gas supply

Brent crude oil prices are expected to be lower, averaging $108/bbl in 2013 and $101/bbl in 2014. In July, Brent was
trading at $107.43/bbl while WTI rose to $104.70/bbl. The Brent/WTI differential continues to narrow on a better
economic and transportation outlook in North America. We are also seeing rising prices for heavier sour crude grades like
Urals as new refining capacity comes on stream and increasing feedstock demand for heavier/sour crudes.
The United States is still driving the increase in the global gas supply. The increases so far in 2013 have occurred despite
a drop in the number of new wells. A tightening of liquefied natural gas (LNG) is expected until the next tranche of new
LNG supply comes on stream.

Gas demand

Global gas demand continues to grow, driven by Asian consumption. So far in 2013, demand growth has been below
average in all regions except North America, with annual gas demand continuing to fall in Europe.

Gas price

The US Energy Information Administration (EIA) expects the Henry Hub price will increase from an average of $2.75 per
mmbtu in 2012 to $3.71 per mmbtu in 2013 and $3.95 per mmbtu in 2014.

Refining

Global refining throughput for 2013 has been revised upward, causing a probable sharp increase in product inventories
and possibly a downturn in refining margins due to oversupply as new capacity comes on stream. Global throughputs
were pegged at 74.8 mb/d for 2Q13, rising to 77.3 mb/d in 3Q13.

Mergers and
acquisitions

Overall merger and acquisition (M&A) activities continue to slow, driven by commodity price volatility and economic
uncertainty. However, the midstream sector is witnessing a surge driven by demand for US shale play infrastructure and
LNG assets.

Rigs

The overall number of rigs under operation is steadily increasing as upstream activity offshore remains buoyant, but with
a slight slowdown in North America due to a weaker pricing environment for gas in particular.

Companies

All major international oil companies (IOCs) reported a fall in Q2 earnings due to lower crude prices, lower production
and weak refining margins. Some of the national oil companies (NOCs) are struggling with domestic challenges; most
of the midtier/independent and oilfield service (OFS) companies witnessed lower profits driven by natural gas prices
and lower upstream activity in North America.

Economic
outlook

Key trend
The forecast for global gross domestic product (GDP)
growth has been lowered to approximately 3.25 percent in
2013 and 4 percent in 2014. For most economies the GDP
outlook has improved, particularly for 2014, with US GDP
growth forecasted at 1.9 percent (2013) and 3.0 percent
(2014), Chinas GDP growth estimated at 8 percent (2013)
and 8.2 percent (2014) and Indias GDP growth estimated
at 5.7 percent (2013) and 6.2 percent (2014). The outlook
for Brazil also improves from 3 percent GDP growth in
2013 to 4 percent in 2014. The outlook for the Eurozone
remains negative, however, at minus 0.3 percent (2013) and
1.1 percent (2014).1
The general view from many analysts
midway through 2013 is that there are
some signs of recovery in the global
economy, but the outlook continues to
remain uncertain. In its latest update,
the Organisation for Economic Cooperation and Development (OECD)
stated that it saw the global economy
strengthening gradually, but the upturn
remained weak and uneven.
Central to the recovery continues to be
monetary policy that is serving to restore
pockets of confidence. For example, in
Japan, where the countrys President Abe
is following an economic policy designed
to boost growth, first quarter 2013 GDP
growth has been revealed at 4.1 percent.

Observation

The economic recovery, which until

recently was a two-speed recovery with
strong growth in emerging markets but
weaker growth in advanced economies, is
now increasingly becoming a three-speed
recovery with some signs of improvement
in the US, according to the International
Monetary Fund (IMF). Despite the fact
that the overall outlook seems to be
stabilizing, growth projections for the
global economy have declined by 0.2
percent for 2013. Economic prospects are
generally expected to improve in 2014.2

Oil supply

Key trend
Global supply is estimated to have increased by 0.57 million
barrels per day (mb/d) month-on-month in July, to 91.85
mb/d, led by higher non-OPEC (Organization of Petroleum
Exporting Countries) production. Strong growth in North
America is expected to lift 2H13 total non-OPEC supply by
an average 1.4 mb/d year-over-year, to reach 55.4 mb/d in
4Q13. Maintenance is expected to cut North Sea supplies
from 3 mb/d in the first quarter of 2013 to 2.6 mb/d in the
third quarter of 2013. Production in Brazil is also declining
due to maintenance, which is adding to the challenges of
aging fields and delays in new offshore reserves coming
on stream. OPEC crude oil production fell by 0.37 mb/d to
30.61 mb/d in June amid worsening supply disruptions in
Libya, Nigeria and Iraq. Production in Nigeria continues to
be affected by disruption to pipelines, with the Trans Niger
150,000 b/d capacity pipeline offline since June 2013.
Despite some disruption to non-OPEC oil
supplies through maintenance and project
delays, the outlook for non-OPEC supply
growth looks very robust on the back
of increases in North American output.
The IEA now forecasts North America oil
supply to grow by 3.9 mb/d from 2012 to
2018, accounting for more than half of
the increase in non-OPEC supply growth.3
Tight oil production in the US is now
running at approximately 2 mb/d and
accounts for nearly one-third of the
total US oil output, with combined
tight oil production from both the
US and Canada forecasted to reach
6 mb/d by 2020. The potential of the
Bakken field in the US in particular is
driving the increase in production.

The Bakken is already the second-largest

oil production region in the US after
Texas, and some analysts see the field
producing 1 mb/d (from approximately
700,000 b/d) by 2012, rising to 1.6 mb/d
by 2017.4 Elsewhere, the news that the
Kashagan field has started production will
see this field boost non-OPEC production
going forward. Kashagan is expected to
produce at its initial capacity of 180,000
b/d during 2013 and 2014, with full
production of 370,000 b/d in the second
stage of its development.5

Observation

The changing dynamics of the upstream

supply market is having an impact
on strategic decisions being made
by oil companies. North American
unconventional oil and gas assets have
been driving a great deal of upstream
mergers and acquisitions (M&A) over the
past couple of years, with the majors
and some of the Asian NOCs moving into
the market via acquisitions. In addition,
there has been a considerable shift by
some North American independents back
to North America, and their core market
away from more international portfolios.

The latest shift in this respect is by

Occidental Petroleum, who is expected to
announce the sale of some of its Middle
Eastern assets to focus on the North
American market. EnCana, Devon Energy,
Hess and Apache Oil are now following
similar strategies with a focus on the
North American market, all having sold
considerable amounts of international
assets. Occidental has seen increasingly
negative effects from its Middle Eastern
business, with geopolitical instability
and tougher terms affecting profitability.
Its new CEO has stated that he now
sees future capital more profitably
deployed in the booming US market and
is considering splitting the company into
three businesses: one focused on the
overseas assets; another focused on oil
production in California, Colorado and the
Bakken oil fields; and a third focused on
the companys 1.7 million acres in Texas
and New Mexicos Permian Basin.6

Oil demand

Key trend
Emerging markets continue to provide the majority of
the worlds demand growth, with the oil demand for the
first quarter of 2013 up 1.4 mb/d on the previous year.
The EIA forecasted non-OECD oil demand exceeding
that of OECD nations for the first time in April 2013. A
slightly weaker demand trend is forecasted generally for
2013, with annual growth now forecasted at 795,000 b/d
(0.9 percent) down to 90.6 mb/d (45,000 b/d below the
previous forecast) on the back of a still weak economic
growth outlook in the majority of OECD nations.7
The EIA reported that in April 2013, oil
demand in non-OECD nations increased
by almost 50 percent over the last
decade, hitting 44.5 mb/d in April, and
exceeding that of OECD nations for
the first time in history (OECD April oil
demand was 44.3 mb/d with Chinese and
Brazilian oil demand helping to push fuel
consumption by emerging economies
above the combined consumption
from developed nations such as the US
and Japan. More recently, the EIA has
forecast that OECD demand will come
back later in 2013, as demand in the
US picked up for the summer driving
season, which traditionally sees growth
in gasoline consumption in the US.8
Despite the positive outlook for non-OECD
oil demand, as 2013 progresses there
are signs that Chinas oil consumption,
like its economy, is slowing. Chinese
GDP growth was 7.7 percent in the
first quarter of 2013, and the IMF

has now cut its forecast for Chinese

economic growth from 8 percent to
7.75 percent for 2013. The IEA now
sees Chinese oil demand growing by 3.8
percent this year, slightly lower than
previous forecasts (at 9.96 mb/d).
Global oil demand growth overall is
expected to remain relatively flat for
2013, with growth expected to gain
momentum through the end of the
year as the underlying macro-economy
strengthens. Forecasts by the IEA that
oil demand growth and the underlying
economic expansion were expected
to show their weakest growth in the
second quarter of 2013 look valid as
Brent spot prices have fallen under $100/
bbl at numerous times in the second
quarter of 2013 on the back of weaker
oil demand, but are now rising again
on the back of increasing uncertainty
due to the situation in Syria.9

Observation

Data from the EIA shows that oil demand

in developing nations exceeded that of
the developed world for the first time
in April 2013, and while this might be a
seasonal analogy (as oil demand in the
European Union and the US generally
falls in the spring), there is now an
expectation in oil markets globally
that the developing world will be the
bigger consumer of oil generally.
This trend is being supported by signs
that many Asian countries continue to
be concerned about their security of oil
supply. In June 2013, Russia signed a
significant deal with China whereby the
Russian national oil company, Rosneft,
will double its crude exports to China
over the next 25 years. The deal, valued
at $25 billion, will see Russia sending
an additional 300,000 b/d to China
National Petroleum Corporation (CNPC).

Russia is now exporting more than

1 mb/d each month to Asia, comprising
approximately 22 percent of its
total exports with a corresponding
decline in exports to Europe.10 While
such deals might mean more supply
security for China, analysts see that
they might affect the amount of
Russian crude traded on spot markets
in Asia. This would limit the ability
of the price of Russian crude flowing
through the East Siberian Pacific
Ocean Pipeline to become a valid
benchmark, as well as impact the
volume of oil available to refiners in
markets like Japan and South Korea.11

The deal is a sign of growing cooperation

between Russia and China in the oil
and gas sector. For Rosneft, it also
involves a certain amount of prepayment. President Putin has indicated
that the pre-payment number could
amount to $70 billion, which would
help service the debt Rosneft has taken
on as part of the TNK-BP company
takeover last year. For China, the
300,000 b/d of crude is in addition to
300,000 b/d already being supplied by
Russia under a deal signed in 2009.

Oil price

Key trend
The Brent crude oil price is slightly weaker and more
volatile in 2013 than it was in 2012 and has traded under
$100 per barrel several times so far this year. However,
now in September 2013, the Brent price is rising again
due to the situation in Syria, which has the potential
to develop into a wider conflict affecting other Middle
Eastern nations. The EIA expects that the Brent crude oil
spot price will average $102 per barrel over the second
half of 2013 and $100 per barrel in 2014. After averaging
$94 per barrel in 2012, the West Texas Intermediate
(WTI) crude oil spot price is expected to average $93
per barrel in 2013 and $92 per barrel in 2014.12

The Brent/WTI differential continues

to narrow on a better economic and
transportation outlook in North America.
By 2014, several pipeline projects from
the midcontinent to the Gulf Coast
refining centers are expected to come
online, reducing the cost of transporting
crude oil to refiners, which is reflected
in a narrowing in the price discount of
WTI to Brent.
After the oil prices falling to levels under
$100/bbl at times in the first six months of
2013, the situation in Syria is now seeing
the Brent spot price above $115/bbl as the
market reacts to concerns of the conflict
potentially spreading and affecting key
producing nations like Iran and Iraq.

Observation

What is evident in 2013 is more volatility

in oil prices than in 2012. The differential
between Brent and WTI has been
extremely volatile throughout 2013
and the premium continues to narrow.
Brents premium to WTI fell to less than
$5 in early July 2013, the lowest since
November 2011.13 This is a factor of some
downward pressure on the Brent price
from production outagessuch as those
at the Buzzard field in the UK North Sea,
which has ongoing technical problems
and the strengthening dollar, which is
being counterbalanced by a rising WTI oil
price as the bottleneck between supplies
at Cushing, Oklahoma and the Gulf Coast
starts to disappear. WTI was also being
supported by Junes flooding in Canada,
which saw some supply disruption.
The overriding concern regarding the oil
price is now the impact of a widening
conflict out of Syria, which is already
pushing prices up to $115/bbl (Brent) with
some analysts predicting Brent spot prices
up to $150/bbl if production in the region
is affected.

10

In general, the Brent oil price is also

more volatile. This volatility is largely
a reflection of market conditions with
continued supply disruptions, the
strengthening of the US dollar, but
also continued geopolitical upsetsfor
example, the EUs boycott of oil supplies
from Iran, which has drastically reduced
exportsthat have been compounded by
wider political instability in the Middle
East, including the crises in Syria and
Egypt. Global instability, with increasing
operational security issues in North and
West Africa in particular, is also weighing
heavily on price movements. The volatility
of the oil price environment generally
helped support major oil companys
earnings for the first quarter of 2013,
with some oil companies reporting betterthan-expected earnings on the back
of good trading profits, but this effect
largely disappeared with the second
quarter results.

11

Gas supply

Key trend
The US continues to drive the increase in the global gas
supply. The rise in US natural gas production seen thus
far in 2013 has occurred despite a drop in the number of
new wells started during the yearthe result of wells that
were drilled in 2012 waiting for infrastructure to come on
stream. Global LNG supply is looking temporarily tighter
on the back of some production concerns and increasing
Asian demand. In 2012, LNG trade fell for the first time
in 30 years as supplies were hit by some project delays
and maintenance, with growing Asian and Latin American
LNG demand failing to offset weak underlying European
gas demand.14

In the US natural gas production

is projected to increase from 69.2
billion cubic feet per day (bcf/d) in
2012 to 69.9 bcf/d in 2013 and 70.1
bcf/d in 2014. Onshore gas production
continues to increase, while the Gulf of
Mexico production has been declining.
Despite the fall in gas drilling due to
the weak price environment, onshore
production continues to rise as already
drilled wells are brought on stream,
as infrastructure capacity frees up
or as new infrastructure is built.

12

The production of shale gas continues

to increase and now makes up
approximately 40 percent of total US
gas production. In the first six months
of 2013, relevant pipeline expansions
have helped the Marcellus shale play
reach a production rate above 7 bcf/d,
surpassing the Haynesville shale to
become the largest gas-producing play
in the US. LNG imports into the US are
expected to remain at minimal levels
of less than 0.5 bcf/d as the country
continues to gear up for LNG exports.15

Observation

The increase in domestic gas production

in the US means that there are now 19
LNG export projects representing 26 bcf/d
of total capacity for exports in planning.
Two (Sabine Pass and Freeport LNG) have
recently received approval for exports
to non-free trade agreement countries,
meaning that exports can find their way
to the largest Asian demand centers.
More export projects are expected to
receive this approval going forward.
Canadas gas producers also have a
firm eye on the Asian gas market.
As both of these countries enter the LNG
export market, there is an increasing
focus on what the impact of LNG exports
will mean for domestic gas prices.
There has been a slight recovery in US
natural gas prices so far in 2013 due to
increased demand with Canadian exports,
which is also important for some price
recovery in that market. Some analysts
are concerned about the impact of US
LNG exports on global gas prices in
that they will accelerate a potential
disconnect of LNG from oil prices,
noting that if global LNG prices were
to truly disconnect from oil, investment
in LNG capacity would be reduced at a
time when both capital and operating
costs are climbing to record levels and
global demand for gas is increasing.16

13

Gas price

14

Key trend
US natural gas prices were at two-year highs early in
2013, while spot European prices were supported by colder
weather. In Asia, strong demand continues to see high LNG
prices. US gas prices are recovering slightly on the back
of better demand by industry and power generation. Gas
prices in Europe and Asia have been high due to a severe
winter and gas prices in indexed contracts continue to be
considerably higher than spot gas prices, adding to pressure
from buyers looking for more spot flexibility in contracts and
lower prices generally.
Natural gas spot prices averaged $3.62/
mmbtu at the Henry Hub in July 2013.
The EIA expects the Henry Hub price will
increase from an average of $2.75/mmbtu
in 2012 to $3.71/mmbtu in 2013 and
$3.95/mmbtu in 2014. Despite declines in
prices over the past few months, prices
still remain substantially above their yearago levels. (Henry Hub prices last July
averaged $2.95/mmbtu, and the average
spot prices at most other major trading
hubs over the first six months of 2013
increased by 40 percent to 60 percent
from the same period last year.)17

maintenance, following an unscheduled

disruption to the Interconnector in March
2013. As a result, UK spot gas prices
reached a seven-year high of 1.50/
therm when an eight-hour unscheduled
disruption to flows through the
Interconnector on March 22 coincided
with a drop in UK gas storage to
approximately 10 percent.18 Prices at the
Belgium hub at Zeebrugge were trading at
approximately $10/mmbtu in June 2013
(26.11 euros/megawatt hour (mwh)), with
prices at the German NCG hub at $10.09/
mmbtu or 26.29 euros/mwh.19

In Europe, spot gas prices were higher

over the winter period of 20122013
as short-term gas demand increased.
Gas prices in some countries reached
record highs as cold weather and pipeline
outages saw spikes in demand. In June, UK
spot prices were up at approximately 63
pence/therm because the Interconnector
pipeline was out of use for two weeks of

In Asia, LNG prices were strong over

the winter period, also due to an
unseasonably cold winter in north Asia.
Heading into the summer of 2013, spot
LNG prices in Northeast Asia were again
increasing (reaching over $15.15/mmbtu)
as buyers firmed up supplies as summer
demand increased.

Observation

In the US, the slight recovery in natural

gas prices has come on the back of some
demand improvements as well as a decline
in gas drilling from some of the more
mature shale formations. According to
the EIA, natural gas usage in the industry
(excluding power generation) was more
than 3 percent higher in the first five
months of 2013 compared to the same
period in 2012. In recent years, the power
generation sector has overtaken the
industrial sector as the largest natural
gas-consuming sector, though there
has been modest but consistent annual
growth in industrial gas use following the
sharp economic decline during 2008 and
2009. Higher gas demand is a reflection
of the improving economic outlook in the
US and prevalent low natural gas prices
are allowing both power generators and
industrial gas users a substantial cost
advantage relative to competitors who
rely on higher-cost energy sources.20
In Europe, despite the general trend of
falling gas demand, long-term contracted
natural gas prices continue to rise as oil
prices remain high, with many major gas
and utilities users actively challenging
the indexation used in these contracts.
There continues to be a substantial gap
with index-linked, long-term contracted
gas prices and European spot prices as
the debt crisis in Europe continues to see
demand for energy decline.

LNG suppliers to Europe are coming under

pressure as buyers and, having witnessed
the decline in North American gas prices,
are looking for substantial changes to the
indexation in their LNG contracts with
more spot price indexation generally.
The influence of lower spot gas prices is
also finding its way into the Asian gas
market, where the large buyers of gas
in Japan, South Korea and Taiwan are
looking for more flexibility and spot gas
indexation in their long-term contracts.
As this trend continues, a number
of developments are driving a more
structural change in the Asian gas market.
Not only are Asian buyers securing more
gas on a spot basis, but the opening of
the new LNG import terminal in Singapore
will also provide great liquidity for spot
trades and thus develop a benchmark spot
gas price, with trading hubs expected
to develop in other locations. Many of
the new LNG export terminals in the
US and Canada are signing deals with
Asian gas buyers on contracts linked to
Henry Hub gas prices, with some Asian
NOCs now taking equity stakes in these
North American LNG export projects in
a process that provides more security in
receiving the gas at the other end.

15

Gas demand

Key trend
Global gas demand continues to increase, driven by
growing Asian consumption. However, so far in 2013,
demand growth has been below average in all regions
except the Americas, with gas demand falling in Europe
significantly due to the poor economic conditions and debt
crisis. Gas demand in Europe is expected to continue its
struggle to recover to pre-financial crisis levels until the
latter half of this decade, which is affecting investment
in new projects. In North America, low natural gas
prices continue to stimulate the economy and drive
manufacturing growth. Latin America also continues
to see very strong natural gas demand growth.

In the US, the EIA expects natural gas

consumption, which averaged 69.7 bcf/d
in 2012, will average 70 bcf/d and 69.6
bcf/d in 2013 and 2014, respectively.
Colder winter temperatures forecasted
for 2013 and 2014 are expected to
increase the amount of natural gas used
for residential and commercial space
heating. However, the projected yearover-year increases in natural gas prices
contribute to declines in natural gas used
for power generation, from 25.0 bcf/d in
2012 to 22.5 bcf/d in 2013 and 22.1 bcf/d
in 2014. 21
Gas demand growth remains strong
in Latin America at 160 bcm in 2012
(up 7.5 percent over 2011), with Brazil
recording the largest demand increases
(32 bcm in 2012, up from 5 bcm in 2011)
due to a drought, meaning higher LNG
imports. Bolivian LNG imports have
also been increasing. In Argentina, the
production drop led to higher imports

16

due to a much higher gas demand,

especially in the residential and
commercial sectors where consumption
increased by 2.5 bcm. Gas consumption
also increased in most other countries
and was supported by higher LNG
imports in Puerto Rico and by higher
production in Colombia and Venezuela. 22
The demand for LNG in Asia is likely
to continue increasing in 2013, with
Japans nuclear reactors not yet
back in operation and South Korea
warning of rolling blackouts due to
the challenges in its nuclear power
industry. Korea Gas Corporation said in
June that it would need to raise stock
levels of natural gas to 70 percent
of its capacity of 3.96 million tonnes
(up from approximately 60 percent),
indicating an additional requirement
of 396,000 tonnes of LNG in 2013. 23

Observation

The development of the global gas market

is continuing to see both LNG and shale
gas supply meet the rising demand for
gas. In Asia, both Japan and South Korea
(the worlds largest LNG importers) are
replacing nuclear power generation with
gas-powered generation and increasing
their demand for new LNG supplies
coming on stream. In Japan, this is the
result of the continued impact of the
Fukushima earthquake that has kept
most of Japans nuclear power plants
offline, though new safety regulations
being introduced in July 2013 should see
some plants restarting by 2014. In South
Korea, a scandal that broke out earlier
this year involving falsified certifications
for parts being used by nuclear power
plants has resulted in two more of South
Koreas nuclear reactors being taken
offline, bringing the total number of
offline reactors to 10 out of 23. The other
reactors are offline due to a combination
of maintenance issues and malfunctions.24
China continues to increase its demand for
gas, from approximately 149 bcm in 2012
to a forecasted 295 bcm over the next five
years. Gas is still only a small share of the
primary energy mix in China (less than 6
percent), with the government aiming to
increase the share of gas to 7.5 percent
by 2015 and 10 percent by 2020.25 Part
of Chinas ability to increase its gas use
will depend on how quickly it can secure
gas imports and develop the necessary
infrastructure to support imports as
well as its own shale resources. China
already has five LNG import terminals
along its east coast and is planning to add
another dozen, including one involving
Shell. In June 2013, the company signed
a letter of intent with Guanghui for a
new LNG import terminal in Qidong.26

The continuation of the shale gas boom in

North America is now seeing the shift of
gas demand into other areas such as gas
transportation, with an indication that
many oil companies are now developing
integrated gas strategies in the same way
that they developed strategies to become
integrated oil companies, investing in gas
processing, LNG exports, petrochemicals,
gas-to-liquids and gas transportation
infrastructure. Investor interest in natural
gas as a transport fuel is particularly
strong in the US, where a network of retail
stations for trucks and public vehicles is
developing. To date, the use of natural gas
in road transport represents approximately
1.4 percent of global gas demand, but
this share is expected to increase to
2.5 percent by 2018 as consumption
grows to approximately 50 bcm, or
9.4 percent of additional gas demand.
Currently, gas use for transportation
is most common in countries like Iran,
Pakistan and China.27 Europe is also
starting to develop infrastructure for LNG
use in shipping as regulations around
bunker fuel emissions change, which is
thought by some analysts to be economic
only when combined with gas retail
infrastructure for heavy road vehicles.

17

Refining

Key trend
Global refining throughput for 2013 has been revised upward,
causing a probable sharp increase in product inventories and
possibly a downturn in refining margins due to increased runs
and stockpiling. The IEA expects the amount of oil processed
by refineries to rise by 2.2 mb/d between Q2 and Q3 of 2013
to average 77 mb/d. Global refinery maintenance peaked
in April, when a total of 6.8 mb/d of capacity was offline,
including about one third of Asian refining capacity.28
Refining margins, which have been
weaker in the first quarter of 2013 despite
seasonal plant maintenance, are expected
to come back due to heavy refinery
maintenance. Robust margins in the US
(particularly in the Midwest) and, to a
lesser extent, in Europe, are supporting
higher runs post maintenance. However, as
new capacity comes on stream toward the
end of 2013, global refining margins are
expected to be under pressure again. The
IEA expects global crude throughputs for
the second quarter of 2013 to average 74.7
mb/d, an increase of 400,000 b/d from the
same quarter in 2012.29

18

Observation

The rise in new refining capacity is being

driven by Asia and the Middle East, with
other regional markets continuing their
structural adjustments. In the US, the
refining sector is restructuring to benefit
both its light domestic crude oil slate and
imported heavy crude oils. Throughput is
being supported by the recovery of normal
operations at the Port Arthur refinery
as well as the Trainer refinery, which
was offline for most of 2012. However,
closures still continue, with the latest
closure being Tesoros 94,000 b/d Kapolei
refinery in Hawaii, which leaves only one
refinery in that market and Hawaii more
reliant on Asian imports. In Europe, the
rationalization of refining capacity caused
the closures earlier this year of Petropluss
16,000 b/d Petite Couronne refinery in
France (after it failed to find a buyer),
Shells 110,000 b/d Hamburg refinery in
Germany and ERGs 89,000 b/d Rome
refinery in Italy. Japan also continues to
close refining capacity, with a total of
approximately 800,000 b/d of refinery
capacity expected to be offline by 2014,
in line with government regulations aimed
at increasing conversion yields.30

The upturn in global refinery capacity

expected over the next few years will
be driven largely by Saudi Arabia, which
is bringing on three new refineries. The
addition of these new refineries will
increase the Kingdoms refinery capacity
from approximately 2 mb/d to nearly
3.5 mb/d by 2018. The Jubail 400,000
b/d refinery (Total and Saudi Aramco) is
expected on stream at the end of 2013
and will be followed by Saudi Aramcos
Jazan refinery in 20142015. The third
project is the Yasref 400-thousand barrels
per day (kb/d) refinery at Yanbu, by
Sinopec and Saudi Aramco. This refinery
is expected on stream in 20172018,
and like Jubail, has been specifically
designed to run on heavy crude oil from
the newly developed Manifa oil field.
The new Saudi Arabian refining capacity
coming on stream is expected to have a
more dramatic impact on global refining
markets, which alongside other market
trends like increasing US product exports
and lower US naphtha demand, is changing
refining market dynamics. The IEA sees
that Jubail alone could increase Saudi
Arabias high-quality diesel production
by 175 kb/d once it is fully operational.
By 2018, this figure could reach 460 kb/d
with the start-up of the other projects,
meaning that these new refineries will
see Saudi Arabian product imports of
diesel and gasoline declineaffecting
European refiners in particularas
well as increase the exports of these
products into other markets, notably
Asia, where they will be competing
with other refiners for this demand.

19

Merger and
acquisitions

Key trend
Overall energy mergers and acquisitions (M&A) activity
continues to slow, driven by commodity price, volatility
and economic uncertainty, but has started to recover in
the second half of 2013. However, the midstream sector
is witnessing more deal activity driven by demand for
US shale play infrastructure and LNG assets. For the first
quarter of 2013, the upstream deal count (37) and value
($119 billion) was down compared to the same quarter last
year, when 116 deals were done valued at $132 billon.31
By July 2013, the upstream deal count and transaction
value had reached monthly highs for 2013, driven by
increased deal flow in both North America and overseas.
The total global deal value was boosted by KazMunaiGass
preemption of KazMunaiGas ONGCs $5-billion
agreement to acquire ConocoPhillipss 8.4 percent stake
in Kazakhstans Kashagan project and large asset deals in
Russia, Latin America and the US Gulf of Mexico.
According to industry analysts at IHS,
the month of January saw the lowest
number of transactions for upstream
reserves in four years.32 One of the most
significant changes was the fall in the
number of corporate deals compared to
asset deals. The US continues to drive a
significant number of deals done where
buyers continue to seek assets in the
unconventional plays, with new plays
increasingly coming into focus such as the
Mississippi Lime in Oklahoma and Kansas.
North American M&A capital continues
to shift to liquids-rich unconventional
basins, particularly the Rockies, the
Bakken Shale and south Texas Eagle Ford

20

Shale including the emerging Eaglebine

and Woodbine formations. In Canada,
the M&A focus is also moving to deal
for light tight oil assets and gas assets
with LNG potential.33 Elsewhere, Brazils
first license round since 2008 attracted
a record of more than $1.4 billion in
signature bonuses. Brazil has two more
license rounds planned for 2013, including
one focused on shale gas acreage. In May
2013, Petrobras announced the sale of its
20 percent stake in six deepwater Gulf of
Mexico exploration blocks in the US as
it continues to rationalize its portfolio to
focus on the challenges of developing the
pre-salt fields at home.

Observation

The slowdown in upstream deal activity

in early 2013 comes after a record
quarter at the end of 2012, which was
driven by companies accelerating deals
ahead of the impact of the so-called
US fiscal cliff in early 2013. However,
the focus for the M&A market generally
continues to be North America, with
Asian NOCs concentrating more on
asset deals, which are less politically
controversial than corporate takeovers.
There continues to be much activity
in the oilfield services sector from
companies that are not yet part of
the shale and tight gas revolution.

10 percent interest in Progress Energy

Canadas natural gas assets in northeast
British Columbia and in the same project
(Pacific North West LNG). As part of the
transaction, JAPEX has agreed to buy
a 10 percent share of the LNG facilitys
production for a minimum of 20 years for
domestic use in Japan, thus becoming the
projects first LNG buyer.34

Elsewhere, focus on shale asset outside

North America continues with Centrica
announcing the first significant shale
M&A deal in the United Kingdom with
the Bowland Shale deal in June. In
Argentina, Chevron has entered in a joint
venture deal with YPF to develop shale
resources from the Vaca Muerta play
with Chevron paying around $1.24 billion
for the first phase of the development.
In addition to US unconventional assets,
deals for shares in Canadian LNG projects
are very much in focus, as Asian NOCs
look to acquire equity upstream in
addition to securing the gas from the
planned projects to meet demand in their
home markets. Petronas has acquired
interests in a Canadian West Coast
project called Pacific North West LNG,
as part of its acquisition of Progress
Energy last year, and is now emerging
as one of the biggest champions of
Western Canada, preparing to invest up
to $20 billion in this new LNG project.
In April this year, JAPEX Montney
Ltd., the Canadian subsidiary of Japan
Petroleum Exploration Co., acquired a

21

Rig activity

Key trend
The number of rigs under operation in the North American
market is generally down (according to May data) from
the high activity levels seen in the middle of 2012. Drilling
activity in the US is expected to progressively pick up
from current levels while indicators for the global oil and
gas markets continue to be very positive, with analysts
projecting upstream expenditure to increase to a record
high of $678 billion in 2013, up 10 percent from 2012. In
the US, exploration drilling continues to shift from natural
gas to oil due to weak gas prices, leading to a fall in the
drilling rig count for gas in particular. Elsewhere, offshore
rig activity remains strong in many international markets
like Australia, Brazil, the North Sea and Africa. Africas rig
activity is strong, with demand on both the West and East
coasts in countries like Tanzania, Mozambique and Kenya.
In the Middle East, a strong upturn is expected in the
Saudi Arabian rig market as spending increases on more
unconventional gas drilling.
In North America, Baker Hughess rig
count data for August 2013 showed that
the average US rig count was 1,778,
down 4 from the previous recent count
and down 153 from the 1,931 counted
in August 2012. The average Canadian
rig count for August 2013 is 358, up 17
from the previous recent count and up 59
from the 299 counted in August 2012. The
international rig count for July 2013 was
1,305, down 28 from the 1,333 counted
in June 2013 and up 41 from the 1,264
counted in July 2012. In addition, the
offshore international rig count for July
2013 was 320, down 17 from the 337
counted in June 2013, but up 34 from the
286 counted July 2012.35

22

Despite the slight fall in US activity

levels in 2013, the increase in activity
particularly offshore is expected to
continue to drive record levels of
expenditure in the upstream generally.
According to their latest update, analysts
at Barclays are predicting that global
exploration and production (E&P)
spending is now forecasted to reach a
new record of $678 billion in 2013, up 10
percent from 2012. Most of the increase
is driven by international E&P spending,
which is forecasted by Barclays to rise
13.2 percent, whereas spending in North
America is expected to increase by only
by 2 percent.36

The rise in international spending is

focused on an increase in activity in
the Middle East and Asia. In the Middle
East, both Iraq and Saudi Arabia are
expected to see upstream spending and
activity levels increasing. In Iraq, a new
round of awards is forecasted to lead to
more upstream activity, with estimates
that the oilfield service market could
double in size from approximately $4
billion today over the next few years. In
Saudi Arabia, expenditure increases are
focused on unconventional drilling in the
deepwater Red Sea, tight gas offshore
and some shale gas activity in northern
Saudi Arabia. The Saudi rig count is
currently at 150 (as of June 2013 and
up from 134 at year-end 2012), with
plans to increase the number of rigs in
operation to 173 by the end of 2013 and
to approximately 200 rigs in 2014.37

Observation

The North American region is expected to

witness lower drilling activity in 2013 due
to some uncertainty around oil and gas
prices, with some operators continuing to
reduce gas drilling in Canada and parts
of the United States. US onshore areas,
which are seeing a decline in drilling
so far in 2013, include North Louisiana,
Arkansas, eastern and western districts of
East Texas and Pennsylvania. In contrast,
drilling in fields like the Bakken is booming
despite infrastructure challenges. The
Bakken, along with the Eagle Ford and
Permian Shales, are contributing to the
rapid increase in US tight oil production,
with tight and shale oil now contributing
to approximately one-third of total US
oil production. Significant amounts of
Bakken crude continue to move out
of North Dakota by rail, but this does
not seem to be impacting production
growth from the field currently.38

Rig activity in the Gulf of Mexico also

continues to recover post-Macondo,
with the deepwater rig count in the
gulf forecasted to be the highest in five
years for 2013. In the first half of this
year, the Gulf of Mexico is expected
to have 46 competitive deepwater
rigs, and this number is projected to
increase by mid-2014 to more than
50 competitive deepwater units.39
China continues to be focused on
increasing its reserves base, with
offshore and shale drilling particularly in
focus. Outside the acreage operated by
Chinese energy majors, the government
has opened two shale gas auctions.
Sixteen Chinese companies won 19
blocks in the second tender that
concluded in December 2012. All of the
companies were non-oil firms, which
means they will need support from OFS
companies. Many of the international
oil companies (IOCs), including Chevron,
ConocoPhillips, ExxonMobil, Hess and
Shell, are involved in joint studies
of shale gas acreage in China.40

23

Companies

Key trend
Following a set of first quarter 2013 IOC results that
were largely flat, with Shell and ExxonMobil the only
major oil companies to post positive year-over-year
earnings growth, the second quarter IOC results were
more disappointing. For most of the IOCs, the continued
struggle to increase production (despite higher oil prices)
in a high-cost environment was coupled with a range of
challenges from production outages through to refineries
issues that severely impacted downstream returns for
several IOCs. Disappointing IOC second-quarter results
were offset by a more buoyant quarter for the larger
oilfield services companies who are seeing solid demand
for services in North America and the deepwater and
growing demand elsewhere, particularly in the Middle
East. Some NOCs also posted improved second-quarter
results, with some more focused on cost cutting, asset
divestment and ways to offset the impact of the higher
dollar, enabling them to avoid a decline in profits.
Lower oil prices and lower production
realization saw the earnings of most oil
companies fall in the first three months
of 2013. At the same time in the US,
some oil majors and refiners recorded
stronger earnings from a year earlier as
a result of higher refining margins and
reduced costs. Increased price volatility
in 2013 also supported returns from
trading operations for some IOCs.
These gains were largely wiped out
in the second quarter, where despite
higher oil prices, most of the IOCs
struggled with operational issues,
the impact of write-downs and
continued portfolio rebalancing. In
contrast many of the oilfield services
companies and NOCs seem to be
driving profits from growing regional
demand and an increasing asset base.

24

Observation

The two overriding strategic concerns

of many of the IOCs arguably continue
to be how to replace their reserves fast
enough to offset declining production
and how to produce those reserves most
efficiently. The consensus is that we are
currently seeing an upstream oil industry
that is in a remarkable up cycle and is
not opportunity constrained. For some
of the majors, the continued divestment
of assets is also adding to production
challenges, as well as regional declines in
production due to problems in countries
like Egypt and Nigeria. In contrast
many of the oilfield services companies
and NOCs seem to be driving profits
from growing regional demand and an
increasing asset base.

Conclusion

The energy industry moved into 2013 on a less optimistic

note than the end of 2012, largely due to growing
downward pressure on oil prices driven by concerns that
the global economy was still struggling. Some confidence
has returned to the market, however, with improved growth
prospects, stronger policy actions and oil prices on the up.
How the industry enters 2014 is still playing out.

25

Endnotes
1. Hopes, Realities, and Risks, IMF World
Economic Outlook Update, April 2013, 2013
International Monetary Fund.

13. Oil extends fall to biggest two-day drop since

June 2012, Reuters, 21 June 2013, Thomsons
Reuters, http://global.factiva.com.

2. Ibid.

14. BP Statistical Review of World Energy 2013,

BP, www.bp.com/en/global/corporate/about-bp/
statistical-review-of-world-energy-2013.html.

3. Medium-Term Oil Market Report 2013,

International Energy Agency, OECD/IEA.
4. U.S. Tight Oil Output Could Rise By One
Million-2.5 Million Bbls A Day By 2017, The Daily
Oil Bulletin, 30 April 2013, Junewarren-Nickles
Energy Group, http://global.factiva.com.
5. Kashagan Oil Field Production Facilities Start
Up, The Wall Street Journal Online, 1 July 2013,
Dow Jones & Company, http://global.factiva.com.
6. Occidental CEO Discussed Potential Sale of
Assets, The Wall Street Journal, 23 May 2013,
Dow Jones & Company, http://global.factiva.com.
7. U.S. Energy Information Administration, June
2013; Oil Market Report, International Energy
Agency, June 2013, OECD/IEA.
8. U.S. Energy Information Administration, ShortTerm Energy Outlook, April 2013.

15. Short-Term Energy Outlook, U.S. Energy

Information Administration, June 2013.
16. Raymond James: US LNG Exports Will Soon
Become the New Norm, LNG Intelligence, 11 June
2013, Energy Intelligence Group, http://global.
factiva.com.
17. Short-Term Energy Outlook, U.S. Energy
Information Administration, June 2013.
18. UK Spot Prices Hit Seven-Year High, World Gas
Intelligence, 27 March 2013, Energy Intelligence
Group, http://global.factiva.com.
19. World Gas Intelligence, 26 June 2013, Energy
Intelligence Group, http://global.factiva.com.
20. Today in Energy, 20 June 2013, U.S. Energy
Information Administration, www.eia.gov/
todayinenergy/detail.cfm?id=11771.

9. IEA Oil Market Report, June 2013 OECD/IEA.

10. Rosneft to double oil flows to China in $270
billion deal, Reuters, 21 June 2013, Dow Jones,
http://global.factiva.com.
11. Putin Pipeline to Send 25% of Russias Oil
Exports East, Bloomberg, 7 March 2013,
Bloomberg L.P., http://global.factiva.com.
12. Short-Term Energy Outlook, U.S. Energy
Information Administration, June 2013.

26

21. Short-Term Energy Outlook, U.S. Energy

Information Administration, June 2013.
22. Medium-Term Gas Report 2013, International
Energy Agency, OECD/IEA.
23. South Korea nuclear closures to heat up Asian
LNG demand, Reuters News, 29 May 2013,
Reuters Limited, http://global.factiva.com.
24. A huge LNG energy boom has begun,
Stockhouse blog, 6 June 2013,
http://global.factiva.com.

25. Medium-Term Gas Report 2013, International

Energy Agency, OECD/IEA.
26. Shell signs letter of intent for Chinese LNG
terminal, Reuters, 11 June 2013, Reuters,
http://global.factiva.com.
27. Medium-Term Gas Report 2013, International
Energy Agency, OECD/IEA.
28. Oil Market Report, International Energy Agency,
June 2013, OECD/IEA.
29. Ibid.
30. Medium-Term Gas Report 2013, International
Energy Agency, OECD/IEA.
31. Upstream M&A Activity Tumbles in First
Quarter, The Oil Daily, 10 April 2013, Energy
Intelligence Group, http://global.factiva.com.
32. Quarterly Transaction Review, Q1 Upstream,
includes content supplied by IHS, Inc., 2013 IHS,
Inc.
33. Ibid.
34. Progress Energy Canada and PETRONAS close
LNG investment transaction with Japan Petroleum
Exploration Co. Ltd. and secure first LNG Buyer,
Canada NewsWire, 29 April 2013, Canada
NewsWire Ltd., http://global.factiva.com.
35. Baker Hughes: International Offshore Rig
Count for July Up Year-on-Year, Offshore Energy
Today, 7 June 2013, http://global.factiva.com.
36. Barclays Raises 2013 North American E&P
Spending Forecast, The Oil Daily, 5 June 2013,
Energy Intelligence Group, http://global.factiva.com.

37. Global E&P spending sets record in 2013,

Platts Oilgram News, 5 June 2013, McGraw-Hill,
Inc., http://global.factiva.com.
38. US Tight Oil Output Could Rise by One
Million2.5 Million Bbls a Day By 2017, The Daily
Oil Bulletin, 30 April 2013, Junewarren-Nickles
Energy Group, http://global.factiva.com.
39. Gulf Drilling Rebounds to PreMacondo Levels,
Offshore Magazine, 6 June 2013, Pennwell,
http://global.factiva.com.
40. Foreign firms in Chinas shale gas sector,
Reuters News, 4 July 2013, Reuters Limited,
http://global.factiva.com.

27

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