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March 2016

Issue 118

Western Europe
Oil and Gas
BMIs monthly market intelligence, trend analysis and forecasts for the oil and gas industry across Western Europe
EUROPE

ISSN: 1750-7723

CONTENTS

Lower Gas Prices Required To

Stimulate Demand
BMI View: Increased LNG imports into Europe over 2015 are more a
result of pricing dynamics rather than fundamental demand growth for
gas. Natural gas prices in Europe will need to fall further in order to
stimulate demand, lowering the floor for Asian LNG prices and challenging the economics of US LNG exports.

Europe............................................................................................. 1
Lower Gas Prices Required To Stimulate Demand.................................................... 1
Exploration Downturn Dampens Upstream Outlook.................................................. 2

Global.............................................................................................. 7
2016 Capex: High Risk Of Further Cuts................................................................... 7

United Kingdom............................................................................... 8
Premier Deal An Industry Bellwether...................................................................... 8

Norway............................................................................................ 9
Castberg Cost Cuts Boost Long-Term Oil Outlook..................................................... 9

Spain, UK And Italy Lead Net Additions

Difference In Net Imports Of LNG, 2014-2015 (mntpa)

Source: Cedigaz, GIIGNL, BMI

According to data from Cedigaz, LNG imports into Europe (excluding

Turkey) rose 16.6% in 2015, a net gain of 4.47mn tonnes or 6bn cubic
metres. While this may be seen as an indication of a pick-up in natural
gas consumption in Europe due to lower prices, it appears the largest
gains in net imports were a result of reduced reloads.
The UK was one of the few countries that increased imports due
to stronger gas demand. This was mainly a factor of coal power plant
closures supporting greater use of gas for power generation, while lower
than average temperatures resulted in increased heating demand (see 'Gas
And Affordability To Drive Power Policy', August 13 2015). Italy saw
imports rise by 1mn tonnes, though this was more a factor of Edison
meeting its contractual obligations. The company has a 4.6mn tonne
per annum oil-linked contract with Rasgas to 2030; all LNG imports to
Italy totalled just 4.2mn tonnes in 2015.
Spain saw the largest increase in net imports over 2015 as a result
of the lost arbitrage opportunity from re-exporting LNG into Asia. According to Cedigaz, LNG reloads from Spain fell from 3.99mn tonnes
in 2014 to just 1.05mn tonnes in 2015, as lower Asia LNG prices over
much of 2015 made re-exports uneconomic. This forced long-term
contracted volumes to remain in Spain.
The influx of LNG significantly pushed out pipeline gas supplies

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Europe

Western Europe

delivered via France, which was particularly noticeable from April

2015. This helped to keep European hub prices subdued to the extent
that prices fell harder in the latter part of the year.

Oil & Gas

pushing more US cargos into Asia.

Net LNG Imports Still Well Below Capacity
Net LNG Imports (bcm) Key European Importers

Converging NBP & JKM Curb Arbitrage In 2015

Front-Month Henry Hub, NBP & JKM (USD/mnBTU)

e/f = BMI estimate/forecast. Source: EIA, BMI

Source: Bloomberg

Other than in the UK, the increased imports of LNG in 2015

were largely as a result of factors not pertaining to a fundamental
increase in natural gas demand, indicating average LNG prices to
Europe remain too high for the region soak up the growing global
supply. Front-month National Balancing Point (NBP) hub prices
a proxy for European gas prices averaged USD6.51 per million
British thermal units (mnBTU) in 2015, substantially lower than the
USD8-11/mnBTU average over the previous four years.
Lost Arbitrage Adds Downward Pressure To
European Hubs
Gas Pipeline Deliveries France To Spain Jan-Oct 2014 & 2015 (mn cu m)

Substantial new capacity starting up in Australia over 2016 (AP

LNG, Gorgon and Wheatstone) and a backdrop of weak macroeconomic growth in emerging markets, further supports our view
that LNG pricing will come under significant pressure in 2016 (see
'LNG Next In Line For Commodities Crunch', September 18 2015).

Exploration Downturn Dampens

Upstream Outlook
BMI View: Prospects in the upstream and downstream sectors for
North America remain brighter than those in Europe. In the US and
Canada, unconventional and offshore production will continue to
generate substantial volumes despite weaker oil prices. While Western European oil and gas production will stabilise after years of
steep decline, the lower oil prices and the mature nature of the plays
means a resurgence in Western European hydrocarbon production
is unlikely within our forecast period.
Falling Prices Lead To Falling Growth
US Oil Production Growth & Front-Month WTI Price Forecasts

Source: IEA

Some 40bcm of LNG has been squeezed out of the European

market since in 2011, and given cheaper coal prices and the proliferation of renewable energy, gas import prices will have to be
substantially lower than historically to compete.
We forecast NBP prices to average lower in 2016 at GBP0.38/
therm or USD5.78/mnBTU (see 'NBP Forecast: Global Gas Oversupply Points To Lower Prices', November 9 2015); year to date,
NBP prices have averaged USD4.79/mnBTU, lowering the floor
for Asian LNG prices. US LNG exports, due to start up from the
Sabine Pass terminal in February 2016, will also face challenging
economics given the narrower spread between Henry Hub, NBP
and Japan Korea Market. Low prices required to stimulate demand
in Europe may not be sufficient to meet export costs, potentially

f = BMI forecast. Source: EIA, BMI

Oil Production North America

Oil production in North America will continue to grow over the next
decade at an average annual rate of 1.3%, despite moderation as oil
prices remain subdued. This growth is mostly attributed to US oil
production. We expect a contraction in US crude output growth in

www.oilandgasinsight.com

Europe

Western Europe

2016 as falling oil prices weaken the profitability of shale plays in

the US, notably within peripheral shale acreage.

Oil & Gas

NGLs production in 2016, representing a contraction of 1.8%.

Oil Production Will Strengthen, But Not Recover

Growth Slows, But Volumes Remain Substantial

Western Europe Oil Production, 000b/d (RHS) & y-o-y % chg (LHS)

US & Canada Total Liquids Production

e/f = BMI estimate/forecast. Source: EIA, BMI

f = BMI forecast. Source: EIA, BMI

Canadian crude output will increase through 2017 as post-final

investment decision (FID) oil sands projects are brought online.
However, lower oil prices and continued midstream infrastructure
bottlenecks will weigh on the profitability of greenfield pre-FID projects. From 2018 onwards, we expect growth to slow, as greenfield

Nevertheless, continued gains in the vast Permian play as well as

offshore developments will maintain a relatively steady level of
output over the course of our 10-year forecast period. We forecast
a net decline of approximately 250,000b/d in US crude oil and
NORTH AMERICA, KEY REGIONAL INDICATORS
2013
North America oil
production, 000b/d
North America oil
production, % y-o-y
North America oil
consumption, 000b/d
North America oil
consumption, 000b/d,
% y-o-y
North America oil net
exports, 000b/d
North America oil net
exports, 000b/d, % y-o-y
North America oil refinery
capacity, 000b/d
North America oil refinery
capacity, 000b/d, % y-o-y

2014

2015e

2016f

2017f

2018f

2019f

2020f

2021f

2022f

2023f

2024f

15,257.1 17,199.0 18,176.5 18,818.4 19,377.2 19,776.3 20,138.6 20,450.9 20,699.6 20,930.2 21,152.9 21,367.4
10.2

12.7

5.7

3.5

3.0

2.1

1.8

1.6

1.2

1.1

1.1

1.0

21,392.1 21,642.8 21,893.8 22,164.3 22,413.7 22,556.4 22,706.1 22,830.6 22,961.7 23,099.3 23,243.3 23,393.9
2.6

1.2

1.2

1.2

1.1

0.6

0.7

0.5

0.6

0.6

0.6

0.6

-6,135.0

-4,443.8

-3,717.3

-3,345.9

-3,036.5

-2,780.2

-2,567.5

-2,379.7

-2,262.1

-2,169.1

-2,090.4

-2,026.4

-12.3

-27.6

-16.3

-10.0

-9.2

-8.4

-7.6

-7.3

-4.9

-4.1

-3.6

-3.1

19,753.7 19,794.7 20,149.7 20,219.7 20,299.7 20,394.7 20,444.7 20,444.7 20,444.7 20,444.7 20,444.7 20,444.7
0.5

0.2

1.8

0.3

0.4

0.5

0.2

0.0

0.0

0.0

0.0

0.0

832.6

870.4

887.9

913.8

946.2

984.4

1,017.3

1,042.7

1,070.2

1,098.5

1,129.0

1,161.6

1.1

4.5

2.0

2.9

3.5

4.0

3.3

2.5

2.6

2.6

2.8

2.9

844.3

854.8

874.0

895.3

918.3

941.8

962.4

984.2

999.6

1,008.9

1,018.4

1,027.9

2.6

1.2

2.2

2.4

2.6

2.6

2.2

2.3

1.6

0.9

0.9

0.9

North America gas net

exports, bcm

-11.7

15.6

13.9

18.5

28.0

42.5

54.9

58.5

70.6

89.6

110.6

133.7

North America gas net

exports, bcm, % y-o-y

-1,786.4

-233.5

-10.6

32.7

51.2

52.2

28.9

6.7

20.7

26.9

23.4

20.9

North America LNG net

exports, bcm

-2.8

-2.1

4.0

4.2

34.0

73.3

107.4

107.4

107.9

107.9

107.9

107.9

North America LNG net

exports, bcm, % y-o-y

-58.0

-25.0

-292.1

5.0

703.2

115.5

46.5

0.0

0.5

0.0

0.0

0.0

North America gas

production, bcm
North America gas
production, bcm, % y-o-y
North America gas
consumption, bcm
North America gas consumption, bcm, % y-o-y

e/f = BMI estimate/forecast. Source: EIA, BMI

www.oilandgasinsight.com

Europe

Western Europe

oil sands projects are cancelled or suspended.

Oil & Gas

and highly leveraged ones, are coming under increasing financial

pressure. As such, we see a rising risk of consolidation within the
oil sands market over the next several quarters.

Stronger Demand Will Boost Prices

BMI Henry Hub Price Forecast, USDmn/BTU

Oil Production Western Europe

e/f = BMI estimate/forecast. Source: Bloomberg, BMI

With Western Canadian Select currently trading at a USD10-15/

bbl discount to WTI, the commercial breakeven of new oil sands
projects is deeply overshot. Existing producers, especially smaller

After years of strong production decline, Western European oil production increased in 2014 and will remain positive until 2021. Over
the past three years, Norway and the UK have benefitted from investment in the North Sea, which will see several projects come online
over the next five years. In H115, for the first time in 15 years, the
UK's oil production grew. We expect oil production will recover over
2016-2018 as projects under development progressively come online.
Nevertheless, oil production growth will remain modest in
absolute terms, peaking at production levels below those of 2011
and returning to decline thereafter. The North Sea remains a mature
and high-cost region with limited opportunities relative to others.
Risks to oil production lie to the upside from further fiscal reform in the UK and from higher sustained oil prices. In Norway, a
substantial recovery in oil prices would pose upside risk to longterm oil production, with several redevelopment projects such as
Snorre 2040 that could be sanctioned and greenfield projects such
as Castberg in the Barents Sea.

WESTERN EUROPE, KEY REGIONAL INDICATORS

2013

2014

2015f

2016f

2017f

2018f

2019f

2020f

2021f

2022f

2023f

2024f

Western Europe oil

production, 000b/d

3,128.3

3,153.7

3,181.6

3,229.4

3,309.4

3,397.7

3,425.3

3,494.2

3,380.4

3,303.7

3,271.3

3,183.5

Western Europe oil

production, % y-o-y

-5.7

0.8

0.9

1.5

2.5

2.7

0.8

2.0

-3.3

-2.3

-1.0

-2.7

Western Europe oil

consumption, 000b/d

10,282.6

10,179.4

10,152.4

10,117.6

10,078.4

10,012.8

9,966.4

9,939.9

9,902.9

9,857.8

9,808.7

9,756.4

Western Europe oil

consumption, 000b/d,
% y-o-y

-1.5

-1.0

-0.3

-0.3

-0.4

-0.7

-0.5

-0.3

-0.4

-0.5

-0.5

-0.5

Western Europe oil net

exports, 000b/d

-7,154.2

-7,025.7

-6,970.7

-6,888.2

-6,769.0

-6,615.1

-6,541.1

-6,445.7

-6,522.4

-6,554.1

-6,537.4

-6,572.9

Western Europe oil net

exports, 000b/d, % y-o-y

0.5

-1.8

-0.8

-1.2

-1.7

-2.3

-1.1

-1.5

1.2

0.5

-0.3

0.5

Western Europe oil refinery capacity, 000b/d

11,392.2

11,110.2

11,009.2

10,899.2

10,547.2

10,547.2

10,547.2

10,547.2

10,547.2

10,547.2

10,547.2

10,547.2

-2.3

-2.5

-0.9

-1.0

-3.2

0.0

0.0

0.0

0.0

0.0

0.0

0.0

252.4

236.2

221.4

222.4

224.0

225.0

222.8

217.4

212.6

208.4

204.7

201.1

0.3

-6.4

-6.3

0.4

0.7

0.4

-1.0

-2.4

-2.2

-2.0

-1.8

-1.7

385.0

362.3

365.4

367.8

370.5

374.4

377.8

378.3

381.4

384.3

387.3

390.5

-2.0

-5.9

0.9

0.7

0.7

1.1

0.9

0.1

0.8

0.8

0.8

0.8

Western Europe gas net

exports, bcm

-132.6

-126.0

-144.0

-145.4

-146.4

-149.4

-155.1

-160.9

-168.8

-175.9

-182.6

-189.3

Western Europe gas net

exports, bcm, % y-o-y

-6.1

-5.0

14.2

1.0

0.7

2.0

3.8

3.8

4.9

4.2

3.8

3.7

Western Europe LNG net

exports, bcm

-41.4

-39.9

-48.3

-50.9

-55.7

-61.4

-65.8

-70.6

-74.7

-77.1

-81.5

-84.9

Western Europe LNG net

exports, bcm, % y-o-y

-24.5

-3.4

20.9

5.4

9.4

10.3

7.1

7.3

5.8

3.2

5.7

4.2

Western Europe oil refinery capacity, 000b/d,

% y-o-y
Western Europe gas
production, bcm
Western Europe gas production, bcm, % y-o-y
Western Europe gas
consumption, bcm
Western Europe gas
consumption, bcm, %
y-o-y

e/f = BMI estimate/forecast. Source: EIA, BMI

www.oilandgasinsight.com

Europe

Western Europe

The prospects for an increase in oil production within our forecast

period from onshore Western Europe or from the Mediterranean
are limited. Above-ground regulatory and environmental hurdles,
rather than an absence of below-ground potential, remain the largest
obstacles to further production gains.
Limited Consumption Growth Ahead
North America & Western Europe Oil Consumption

f = BMI forecast. Source: EIA, BMI

Oil Consumption
Our revised outlook for lower oil prices has seen us revise our oil
consumption outlook slightly to the upside, notably in the US. However, the overall trend for oil consumption in developed states remains
one of stagnation. This is on the back of moderated industrial growth,
energy efficiency drives, stronger fuel regulations and a general switch
towards cleaner fuels such as gas and renewables for power generation.
This trend of stagnation will be exacerbated by the start of the
Environmental Protection Agency (EPA)'s more rigorous 2017-2025
emission standards, as reflected by our increasingly small consumption growth forecast beyond 2017. Western European oil consumption will decline continuously throughout our forecast period, with
an overall drop of about 280,000b/d between 2015 and 2025.

Oil & Gas

capex to higher-margin liquids-rich plays, resulting in a fall in associated gas production. However, we believe US gas production
will continue to grow over the next decade, driven by increasingly
cost-competitive developments within non-associated shale plays
and rising international demand for LNG exports.
Falling Fortunes Despite New Projects
Western Europe Gas Production, bcm (RHS) & y-o-y % chg (LHS)

e/f = BMI estimate/forecast. Source: EIA, BMI

In addition, we expect a rise in Henry Hub (HH) natural gas

prices over the coming years will further increase the profitability of
future natural gas developments in the US. Rising domestic demand,
increased pipeline exports to Mexico and the start of LNG exports
will sustain upward pressure on HH prices.
Canadian gas production however is projected to decline over
our forecast period as sustained lower oil prices and continued
midstream deficits encourage hydrocarbon producers to reassess
costly LNG projects. We believe Canadian LNG projects will remain
uncompetitive for the foreseeable future.
Despite Increase, Weak Outlook For Stronger
Growth
European Natural Gas Consumption (bcm)

Production Boosted By Recovering HH Prices

Past 2015
US & Canada Gas Production, bcm (LHS), y-o-y % chg (RHS)

e/f = BMI estimate/forecast. Source: EIA, BMI

f = BMI forecast. Source: EIA, BMI

Gas Production
Within a lower oil and gas price environment, we expect less robust
US natural gas output than in previous years as producers reallocate

www.oilandgasinsight.com

The outlook for Western European gas production is mixed.

Stricter gas production targets for the giant Groningen field in the
Netherlands will see regional output fall by about 2bcm in 2016.
Beyond 2016, slightly higher Norwegian and UK output over a
five-year period will largely counterbalance depleting production
in Italy, Germany and the Netherlands. This should lead Western
European gas production as a whole to roughly stabilise over 20152019, before returning on a downward-sloping trend over the second
half of our forecast period.

Europe

Western Europe

There is potential upside from unconventional exploration,

though we see little impact of this on our production forecasts to
2025: technical, cost, environmental, regulatory and political obstacles preclude us from including shale gas production within our
forecast period across Western Europe.

Oil & Gas

Europe will see its net crude import needs fall.

Rising Production And Shrinking Refinery Capacity
Mean Steeper Import Bill
Western Europe Refining Capacity & Net Oil Exports

Gas Consumption
Gas-based energy policies and a switch to cleaner fuels will see gas
consumption trend upwards in both North America and Western
Europe. However, we believe gas consumption growth will prove
significantly stronger in North America.
While gas demand in Western Europe will grow, this growth
will remain weak due to tepid industrial demand and subsidies for
renewables in major consuming nations such as Germany. Moreover,
unfavourable margins continue to erode the competitiveness of gasfired power generation relative to coal, resulting in a weak outlook
for gas demand from the power sector over the next several years.
Our forecast highlights that despite small y-o-y increases, European
gas consumption will be lower in 2025 than it was in 2001.
In North America, gas consumption will continue to make gains.
New regulations on carbon emissions will disincentivise the use of
coal in favour of gas for power generation. Gas will also be increasingly utilised within the transport sector particularly marine and
by large-scale industrial customers (such as petrochemicals), with
major investment commitments made by firms seeking to take advantage of lower-priced feedstock. We forecast natural gas consumption
will increase at an average rate of 1.7% y-o-y through 2025, reaching
1.05tcm from an estimated 905.6bcm in 2016.
Weak European Demand, US Demand Picks Up

f = BMI forecast. Source: EIA, BMI

We continue to expect a small increase in North America's

refining capacity, with small-scale expansion projects, condensate
stabilisation units (notably in the Gulf of Mexico area) and the
construction of smaller facilities around the Bakken play in North
Dakota. Despite their size, these new investments highlight the
dynamics at play in the North American energy market: the availability of cheaper domestic crude feedstock from the country's oil
boom, cheap supply of Canadian heavy crude grades and easy access to the rapidly expanding Latin American market are helping
to boost margins.

Western Europe Gas Consumption

f = BMI forecast. Source: EIA, BMI

Refining Capacity
European refiners are experiencing stronger marginsas a result of
lower crude oil prices, masking persistent structural overcapacity in
the sector. Weak demand and global overcapacity point to a bleak
outlook for Europe's downstream sector. Ageing European refineries
have also lost much of the US gasoline export market and will remain
unable to compete with the scale and efficiency of new facilities in
the Middle East and Asia.
Western Europe's refining capacity has already fallen from
12.8mn b/d in 2010 to 11.5mn b/d in 2015, with notable capacity
reductions in France, Germany, Italy and the UK. We forecast this
to fall further to 11.0mn b/d by 2017. This is a conservative forecast, and risks to this outlook weigh heavily to the downside. With
rocovering oil production and shrinking refining capacity, Western

www.oilandgasinsight.com

Global

Western Europe

GLOBAL

2016 Capex: High Risk Of

Further Cuts
BMI View: Oil companies have announced aggressive capex
reductions in 2016. Given acute price weakness, we note a high
risk of further cutbacks yet to be announced. Exploration will see
significant investment pulled; however, cuts will increasingly extend
to production maintenance, putting downside pressure on output in
the back end of the year.
Slump In Prices Crippling Spending
Front-Month Brent Price Forecast

f = BMI forecast. Source: BMI, Bloomberg

The majority of the major upstream oil companies have revised down
their capex for 2015 from the initial target level. Further reductions
have been announced for 2016, averaging -17.1% y-o-y for the
basket of majors analysed by BMI. The reductions have been made
in response to sharply lowered oil prices. As of December 23 2015,
global benchmark Brent was trading at USD36.5/bbl, averaging
USD53.9/bbl for the year.

Oil & Gas

While a 17.1% cut in capex is aggressive, we believe there

remains scope for further downward revisions to the 2016 spending plans. Oil companies do not tend to publish their price decks,
but references made during analyst calls and investor presentations suggest that many of the majors rely on an average price
of USD60.0-65.0/bbl to balance their books. Given our annual
average forecast for Brent of USD51.0/bbl, we believe revenues
will disappoint many companies' expectations. The fall in prices
will be felt more acutely in 2016, due to the rolling off of higherpriced hedges.

Cuts Extend To Core Spending

It is our belief that the cuts made in 2016 will create more of an
impact on the sector compared to 2015. In 2015, reduced spending
was buffered by cost cutting measures and broader industry cost
deflation. However, the gains here have by and large been made
and core spending will have to be pulled from 2016.
Exploration spending will be a key target for the cuts and we
expect companies to pare down their exploration programmes towards minimum work commitments. Development spending will
also fall, as final investment decisions (FID) are delayed and capital
investment cycles roll off, with projects under development brought
on stream. However, companies will struggle to cut spending on
projects that are post-FID. Contracts in place limit the scope for cost
base reductions. Pushing back on project timelines is an option, but
may incur cost overruns.
An area that was often ring-fenced by companies in 2015 was
spending to maintain production, such as maintenance works
or infill drilling. In 2016, we expect spending in this area to
be increasingly scaled down. This will have a direct impact on
production and will, in our view, help support a strengthening in
Brent in H216.

Global OFS, US E&Ps Heavily Exposed

The size of the capex reductions is indicative of the heavy financial
strains facing oil companies. For the major companies, these strains
are bearable. Typically, majors:

OIL COMPANIES' CAPEX REDUCTIONS

Company

Original 2015 Capex (USDbn)

Revised 2015 Capex (USDbn)

ExxonMobil

2016 Capex (USDbn)

% Change

34

34

34

0.0

33.3

30

27.2

-9.3

BP

20

19

18

-5.3

Chevron

35

35

26.6

-24.0

Total

23.4

23.4

21.4

-8.5

Petrobras

35.4

25

19

-24.0

18

16.5

n/a*

10.3

10.3

7.7

-25.2

5.8

5.6

-28.6

Shell

Statoil
ConocoPhillips
Occidental
BG Group
Hess
CNOOC

Sum

6.5

5.8

-10.8

4.7

4.7

-36.2

12.8

11

n/a*

239.7

221

-17.2

*Both have indicated that further reductions will be made. Sources: Company sources, BMI

www.oilandgasinsight.com

United Kingdom

Boast strong balance sheets with large cash buffers

Have greater flexibility in their projects pipelines and larger
scope to negotiate cost concessions with their suppliers
Hold large asset bases which can be farmed down or divested
to buffer revenue loss
Run large dividend and share buyback programmes which can
be pared down or, in the case of dividends, switched to non-cash
alternatives such as scrip dividends

Small companies have lesser cash liquidity and lower optionality

in their portfolios. For a number of these companies, the targeted
reductions in capex will prove insufficient to preserve solvency and
with limited other options bankruptcies will increase.
US exploration and production companies (E&Ps) are among
the most exposed. The sector is highly leveraged and a number of
companies are struggling to meet interest repayments out of cash
flow, leading to an increased incidence of default. Bankruptcies in
the US E&P sector have accelerated rapidly in recent months. As
of December 2015, the number of bankruptcies was nearing 40,
compared to fewer than 10 at the beginning of Q415.
A slowdown in capex will also put additional strain on oilfield
services (OFS) providers. In 2015, broad industry cost deflation has significantly undercut services companies' revenues. A
number of OFS providers including Dolphin Group, Vantage
Deepwater Drilling and Hercules Offshore have been pushed
into bankruptcy. Other companies have coped through a wave of
consolidation, with the Cameron-Schlumberger, Baker HughesHalliburton and FMC-Technip deals offering notable examples.
As lower spending increases slack in the services market, we expect
these trends to continue into 2016.

UNITED KINGDOM

Premier Deal An Industry

Bellwether
BMI View: Premier Oil's acquisition of E.ON's UK oil and gas assets offers strong operational synergies and an expanded low-cost
production base. The deal is indicative of the type of M&A we expect
in the sector over the coming quarters.
In 2016, we expect an uptick in mergers and acquisitions (M&A)
activity in the oil and gas space. However, upstream M&A will
remain limited compared with previous downturns. Companies will
look to strengthen rather than expand their portfolios and alongside
reserves and production growth optionality, operational synergy
and cost base reduction will all become key considerations.

Western Europe

Oil & Gas

in the UK North Sea. Operatorship at Huntingdon and the potential

for further operational synergies in the area may bring added cost
base reductions.
The USD120.0mn deal has done little to dent the company's
balance sheet, offset by the USD120.0mn divestment of its assets
in Norway. Arguably, its financial position is stronger, due to the
added cash flow and potentially softer debt-to-ebitdax ratio (currently forecast by Bloomberg at 4.33 for 2016). Given its high debt
load, deleveraging has been a key priority for the company, which
alongside its assets in Norway sold a 15.0% royalty interest in
its UK Solan field to pay down debt.
Lower Prices Shape Course Of M&A
Front-Month Brent Price Forecast

f = BMI forecast. Source: BMI, Bloomberg

Buying Activity To Remain Highly Targeted

In general, the pace of M&A disappointed our expectations in 2015,
with uncertainty over future oil prices driving a wide divergence
between buyer and seller expectations. As a consensus forms
around the lower-for-longer narrative, we believe expectations
will begin to converge, supporting increased activity in the sector.
Mounting financial pressures should also see a growing pool of
high value but distressed assets entering the marketplace in 2016.
We believe that the pattern in M&A will remain similar to that
seen in Premier. Buyers will target investment towards the most
prospective assets and those which complement the company's own
portfolio. This will, in our view, drive increasing consolidation in
the oil and gas sector, as companies look to profit from potential
operational or financial synergisms. The rationalisation of existing
portfolios will also be key, with asset divestment helping to raise
cash and lower cost bases.

Premier Indicative Of Deals To Come

Premier Oil's acquisition of E.ON's North Sea assets is exemplary of
this trend. Premier has an existing foothold in the region; the acquisition from E.ON will expand its holding and consolidate its position in
the central North Sea. In particular, the deal will see Premier increase
its stake in the Huntingdon field from 25.0% to 100.0%, bringing
15,000 barrels of oil equivalent per day (boe/d) in incremental output.
The company will also acquire interests in the Elgin-Franklin (5.2%)
and Babbage (47.0%) fields and the Tolmount (47.0%) discovery.
According to Premier, the company's UK operating costs stood
at USD28.8/bbl as of H115, down from USD34.9/bbl in 2014. This
implies a comparatively low-cost base, compared to other projects

www.oilandgasinsight.com

Norway

Western Europe

NORWAY

Castberg Cost Cuts Boost LongTerm Oil Outlook

BMI View: Extensive cost cutting and concept optimisation has
brought project costs at the Johan Castberg field to a more palatable level. We are increasingly bullish that this will be sufficient
to take FID in 2017, presenting upside risk to our Norwegian oil
production forecast from 2022.
Castberg And Sverdrup Central To Norway's Future
Norway Field By Field Crude & Condensate Production (000b/d)

Note: Dotted projects not yet factored into forecast. f = BMI forecast. Source: NPD, BMI

Statoil has been a major benefactor of service cost deflation on its

Norwegian projects. This is a result of both increased competition
for contracts as severe cuts in capex reduce offshore work and the
company's major project portfolio.
Statoil is in the enviable position of having two major projects Johan Sverdrup and Johan Castberg in the midst of an

Oil & Gas

industry downturn. The company was able to extract large service

cost reductions as providers became increasingly desperate to win
contracts in an environment where investmenthas been falling
substantially. The Johan Sverdrup project, which was able to take
final investment decision (FID) in February 2015 while oil prices
were in freefall, is still benefitting from this, though the decision
was straightforward given the size, location and very attractive
breakeven cost of the project.
Moving forward with the Johan Castberg field has been more
challenging due to the high costs associated with its remote location.
Initially, the development was due to cost almost as much as the
Johan Sverdrup project, but with almost half the production volume.
As we highlighted last year, further cost reductions would need
to be made to the Castberg development (see 'Castberg Cost Cuts
Insufficient But Outlook Improving', October 21 2015). By selecting a floating production solution and optimising the vessel design,
Statoil now reports planned capex for the project is just USD6bn, a
47% cost reduction. While we believe a simplified vessel solution
may compromise on production levels, it will bring the project to a
suitable cost structure to support an FID in 2017 as planned.
At initial prices, we estimated the breakeven oil price for the
Castberg project to be around USD86/bbl. With the cost improvements, and taking into account slightly lower production from the
streamlined production concept, we now estimate the breakeven
to be closer to USD56/bbl. This is around the same cost as Shell's
Appomattox project in the Gulf of Mexico, which received FID in
July 2015.
We have not yet included the Johan Castberg field in our forecast but are increasingly bullish that an FID will be taken in 2017
due to the improved cost structure and expected improvement in
oil price. We estimate this would add around 95,000b/d at peak
production. Along with the successful completion of the first and
subsequent phases of the Johan Sverdrup, these two projects will be
crucial to sustaining Norway's long-term oil production at around
current levels.

MAJOR PROJECT COST REVISIONS

Field
Johan Sverdrup (Ph 1)
Johan Castberg

Concept

Water Depth (m)

Production (boe/d)

Initial Cost Estimate (NOK)

Revised Cost Estimate (NOK)

Fixed Platform

115

315,000-380-000

123bn (USD16.4bn)

108.5bn (USD12.2bn)

FPSO

370

100,000-200,000

100bn (USD11.3bn)

50-60bn (6bn)

Source: Statoil

Analysts: Marina Petroleka, Christopher Haines, Emma

2016 Business Monitor International Ltd. All rights reserved.

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