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Market Update: Oil & Gas - May 2017

Market Update: Oil & Gas - May 2017

OPEC set to extend output cuts amid weak impact on prices.


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OPEC set to extend output cuts amid weak impact on prices

Leading members of OPEC including Saudi Arabia have indicated in early May that they are likely to extend the current production cuts agreement at their May meeting, including some non-members like Russia, by six months. These statements come amid renewed weakness in crude oil prices, as production cuts failed to reduce inventories as rapidly as had been expected. The sharp rise in US production since it bottomed out in September 2016 has contributed to stubbornly high inventories, even as forward hedging by US producers will help to sustain the growth in the second half of 2017, based on the earlier surge in prices from December to February on the initial optimism about the OPEC cuts. Extension into the second half of 2017 will see a sustained drawdown in inventories as refiner demand rises seasonally, and should bring global inventories back close to the normal range by the end of 2017, even with the strong US production growth. This should result in a gradual rise in prices toward the mid-US$50s for WTI, though market sentiment will be restrained by the US growth and concerns about a potential return to oversupply when the cuts unwind.

Despite some speculation about deeper cuts, the leading members of OPEC are not likely to undertake such a shortsighted move, which would raise short-term prices but stimulate even more US growth and produce a lasting loss of market share. Compliance may also begin to weaken, as some participants including Russia will have less of an incentive once they secure a Saudi signoff on an extension.

– Greg Priddy, Director, O&G, Eurasia Group*


* Guest contributor to May edition

Vocal support for LNG in the US

In late April, the Trump administration expressed the intent to make the United States the world’s leading exporter of natural gas as a central component of the administration’s energy and trade policy. Gary Cohen, the White House’s top Economic advisor, voiced support for additional approvals of LNG projects and specifically highlighted the Jordan Cove LNG terminal located in the Pacific Northwest that would send liquefied natural gas to Asia. In addition, U.S. Energy Secretary Rick Perry approved the Golden Pass LNG export terminal in South Texas, an ExxonMobil and Qatar Petroleum project. The Golden Pass LNG terminal is estimated to export as much as 2.21 billion cubic feet of gas per day by 2021. The administration’s position was again reinforced on May 11th when the Department of Commerce issued a "100 Day Action Plan" stemming from recent discussions between President Trump and Chinese President Xi Jinping at Mar-a-Largo. Among other things, the Commerce Department signaled a willingness to export US liquefied natural gas to China and guaranteed that China would receive treatment similar to other non-FTA trade partners.

The vocal support of LNG is an important component of a broader energy policy of the Trump administration. While Trump may have focused his campaign messages promising the revival of the coal industry, it is LNG that has the most significant potential to solve his other themes – creation of jobs, US energy independence, and a focus on free markets. Currently, there are over two dozen applications to build LNG export terminals under review. The construction of the Golden Pass LNG terminal alone would create approximately 45,000 jobs and over US$2.4 billion in federal tax revenue according to Energy Secretary Rick Perry. While the most recent Department of Commerce statements around China and LNG is not necessarily a deviation from prior U.S. energy policy, the Trump administration’s statements come at a time where competition for customers is becoming the norm. Overall, the LNG industry is bracing itself for a new era under buyer power and fueled by a new set of non-traditional buyers and buyer expectations. As countries such as Russia, Qatar, the US, and Australia battle for the competition of the Asia market, Trump’s supportive policies for the LNG industry and the firm endorsement of trade with China will make the US a key contributor in the race for the customer.

– Angie Gildea, Partner, Americas Oil & Gas Lead, KPMG in the US

Norway – a quiet revolution

While the US shale booms and busts, OPEC machinations and corporate consolidations which are reshaping the oil services sector have been well documented in recent years, an altogether quieter revolution has been taking place on the Norwegian Continental Shelf, in the yards along Norway's coast and at the technological hubs such as Oslo's 'Subsea Valley'.

The changes have been far reaching and often painful for the companies and individuals involved, but the focus has been consistent: make the Norwegian oil & gas industry - traditionally differentiated by innovation, quality and reliability – cost competitive too.  Results are being seen, such as the reduction of the estimated Johan Sverdrup phase two development by 50% and a full project breakeven oil price of less than US$25.

Not only is the game changing in response to a lower price outlook, but the players are too.  State backed Statoil remains the dominant E&P force in Norway, though the number and influence of smaller players is increasing as they take advantage of the opportunities presented by disposal programs, such as the recently announced acquisition of Exxon's Norwegian portfolio by private equity backed Point Resources.

Supported and encouraged by a fiscal regime which effectively refunds 78% of exploration expenditure, it is a leaner and more agile Norwegian industry which takes on the challenges and opportunities of the Barents Sea and its estimated 9 billion barrel of oil equivalent (boe) of recoverable undiscovered resources*.

Mona Irene Larsen, Partner, Audit, KPMG in Norway

Patrick Sweeney, Director, Audit, KPMG in Norway 

– Ole Schmidt, Managing Partner, Corporate Tax, KPMG in Denmark


*Norwegian Petroleum Directorate 2016 resource report 

Analyst estimates: oil

  2017 2018 2019 2020
Min 53.1 55.0 60.0 65.0
Average 58.0 64.5 70.6 75.8
Median 58.0 65.0 70.0 77.5
Max 64.9 80.0 85.0 85.0
  2017 2018 2019 2020
March Avg 58.7 65.4 71.3 75.8
April Avg 58.0 64.5 70.6 75.8
March Median 57.5 65.0 70.0 75.0
April Median 58.0 65.0 70.0 77.5

Analyst estimates: gas

  2017 2018 2019 2020
Min 2.8 2.9 2.9 3.2
Average 3.2 3.2 3.3 3.5
Median 3.3 3.1 3.2 3.3
Max 3.5 4.0 4.0
  2017 2018 2019 2020
March Avg 3.2 3.2 3.3 3.5
April Avg 3.2 3.2 3.3 3.5
March Median 3.3 3.1 3.2 3.4
April Median 3.3 3.1 3.2 3.3

Note: The forecasts/analyst estimates identified are an indication based on third party sources and information. They do not represent the views of KPMG.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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