## Take 10—Are You Ready for 2019?

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There is cautious optimism in the air across the oil and gas landscape as oil prices have risen back into the mid-$50s in the past month after the collapse from the mid-$70s to the low-$40s reminiscent of the Thanksgiving of 2014. Even so, a month is but a blip in any industry and more so in oil and gas where any number of factors can impact commodity prices and the industry's fortunes. So, as we think about 2019, here are some oil and gas industry themes that our team at ADI Analytics is thinking about. In upstream and oil and gas supply, what is the outlook for the disciplined production cuts seen over the past 2 years from OPEC, led mainly by Saudi Aramco? Canada is a new and successful adoptee of supplyside management of commodity prices with its production curtailment that has diminished the light-heavy crude oil price differential. Finally, will geopolitical issues—sanctions on Iran and Venezuelan constraining their supply—continue to provide additional support to oil price? Where does all this leave US onshore oil production? Wellhead breakevens for most shale producers are below mid-$50s but, like the rig count, they are no longer a good metric for the health of the industry. Breakevens at Cushing accounting for pipeline and transportation costs are a better way to assess the outlook for North American production reflecting pipeline constraints in key plays.

That, along with investor calls for capital discipline seem to have moderated supply growth across the US, but will private equity financing for new drilling continue to be widely available?

What short-term opportunities are midstream constraints creating? Pipeline constraints, notably in the Permian, was the key theme in midstream oil and gas for 2018. A number of new pipeline projects have been announced along with significant infrastructure investments to support crude oil, gas, LNG, ethane, and ethylene exports to overseas markets. Tracking this infrastructure buildout and bases in commodity prices across key pipeline interconnects around the US are important to understand short-term trends and opportunities.

Is midstream oil and gas at the risk of overbuilding? In the medium to long term, understanding what is happening to overseas demand for hydrocarbons—for example, who truly wants to buy superlight crude oil?—and translating that into risks of an infrastructure overbuild are key strategic themes in midstream oil and gas markets.

Global (and domestic) demand is more important in the broader midstream markets of liquefied natural gas (LNG) and natural gas liquids (NGLs). China, which has emerged as the second-largest importer of LNG after Japan, continues to dominate growth in the global LNG market thanks to its environmental policies. Also, broader demand optimism is driving final investment decisions on new LNG export projects. In contrast, global liquefied petroleum gas markets are at risk of oversupply potentially impacting NGL exports from North America.

Refined product and transportation fuel demand is slowing in mature economies but growing rapidly in emerging markets. Exploiting this opportunity will, however, require stable economic and GDP growth globally, which is most likely slowing in the near term. IMO 2020 regulations, however, will likely support refining margins in the near future although compliance risks need to be assessed.

How does all this translate into capital spending in the oil field, midstream, refining, and petrochemical markets? Capital spending declined dramatically and although it has picked up, we are far away from the cycle peak in 2014. Further, the oil and gas industry is trying to improve its capital efficiency and effectiveness  creating winners and losers in oilfield services, EPC companies, equipment suppliers, service providers, and digital technologies.

Are renewables and energy storage at their tipping point yet? Renewable power generation capacity continues to grow and the technology including energy storage is making rapid progress in terms of performance and cost competitiveness. Renewable power projects are winning a number of auctions from mature to emerging markets often without government subsidies or incentives, and this may limit the growth cycle for natural gas.

Low-carbon policies are being implemented in a fragmented manner but several large energy companies are shaping investment, business, and technology strategies to prepare for a carbon-constrained world. On the other hand, many oil and gas majors are preferring to focus on their core and pursue best-cost strategies that render them competitive in a demand-constrained environment. These strategies will affect innovation and technology choices in the years to come.

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