Pareto World Wide Offshore AS - Pareto Project Finance

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Markedskommentar Offshore Kilde: The upturn in oil service markets that we predicted a year ago appears well underway and according to expectations. The rising oil price and E&P budgets with 15 % growth this year have set the tone, and we now see the underlying markets responding accordingly. Last year was characterized by utilization and day rate stabilization, with really only one segment showing upwards movement (modern jack-ups). This year, there is upwards movement in the utilization and dayrates in nearly all segments with asset values following suit. In short, the upturn is both broadening and strengthening. The question is how long this will continue, as it is in stark contrast to the past quarter’s unrest in global financial markets. These markets are now telling us that we’re likely to face significantly lower economic growth in the coming years. This will surely have a dampening effect on the growth pace in the oil industry and in oil service markets. On an absolute basis, therefore, things are looking less positive than some months ago and in the short to medium term, we are less convinced that we will continue to see large upticks in dayrates and valuations. The most immediate effect is already there, through debt financing becoming less available and more expensive. For a capital intensive industry like oil & gas, this has significant negative impact. On a relative basis, though, the oil & gas industry stands out as a winner. There can be no clearer evidence than the difference between the performance of the oil Pareto Project Finance AS price and the world’s stock markets (as measured by MSCI World Index) this year. The oil price is up 19 % YTD, while the stock markets are down 9 %. This outperformance of 28 %-points is even more intriguing given the “risk-off” sentiment that has characterized global financial markets in recent months, something that typically has a very negative impact on commodity prices. If the oil price had followed global stock markets south, it would have traded at USD 87/b, and in a risk-averse environment like now, probably even lower. Why is this not the case now The oil price vs MSCI World Index Source: Bloomberg, Digital Look Our answer is that the oil price is fundamentally driven and primarily so by the long term energy challenges that
the world is facing. Oil is simply a scarce resource, with growing demand. Going forward, it will become scarcer and demand will continue to grow. Perhaps slower in the coming few years, but the supply / demand equation for oil will continue to worsen (seen from the consumer’s perspective), driving a rising need to discover and develop new resources. That is why the oil price is as robust as it is, and that is why the activity levels in the oil & gas industry are continuing to rise, particularly offshore. Hence, we are still convinced that offshore oil services is the place to be for the long term investor. Slower growth is better than no growth and positive returns are better than no returns, which is what risk free interest rates are yielding now. We believe the real upward driver of the oil price will be rising finding and developing costs. In turn, this will be driven by an accelerating need to replace the existing reserve base, which has been shrinking for more than 30 years. The future reserves will be hard and costly to find, develop and produce. And much more so than the reserves we’re currently producing from. We beg investors to consider some staggering numbers: During the 1990s, the global oil industry spent USD 1.1 trillion and managed to find approximately 137 bn barrels of new oil reserves. In the period 2000–09, the oil industry spent USD 2.8 trillion (2.5 times more) and only managed to discover 143 bn barrels of oil – a mere 4 % increase over the previous decade. The gap between consumed oil and new discoveries widened from 112 bn barrels to 137 bn barrels – an increase of 22 %. What will happen during the coming decade Firstly, oil consumption looks set to be 10 % higher than the previous decade, adding further pressure. For new discoveries to keep pace with demand, the global discovery rate would need to double. That seems an impossible feat. Most likely, the world will struggle even maintaining the past decade’s discovery rate, meaning that the decline in existing reserves will accelerate. A steadily increasing proportion of global production will have to come from new and more expensive oil. For this production to come into the market, oil prices must rise. It is really as simple as that. Of equal interest is the global expansion of natural gas demand, which is the world’s fastest growing source of energy. Nearly all of the demand growth is outside of the OECD, and is following the early demand patterns seen for oil in the main emerging economies of the world. What adds to the demand growth is increased use of electricity. Bear in mind that ¼ of the world’s households still has no access to electricity. Natural gas is an abundant and cheap source of electricity and this is now showing up in demand numbers in key economies across the globe. Chinese natural gas demand and relative pricing Source: Pareto Securities, BP, IEA Overall, offshore production of oil and gas is forecast to grow by 74 % in the coming 20 years. This will constitute 100 % of the total growth in global oil and gas production. In short, the oil industry will be spending an awful lot of money in the coming decades and the bulk of it will be spent offshore. That is excellent news for the offshore oil services industry. Global oil & gas production 2010–30 Source: Rystad Energy The new discoveries in Norway are also relevant for our outlook, as they rank as the most significant discovery of
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