3. Demand disruption
'When is peak oil demand?' is the question dominating the industry. Our base case outlook suggests demand growth will continue, albeit at a slower rate, until at least 2035, sustained in part by growth in petrochemicals.
Solar power has enjoyed a vibrant 2016 and growth should extend into the foreseeable future. But projects that achieved record low prices last year will begin to come online across the world, demonstrating whether they can be profitable without subsidy.
Alongside renewables, electric vehicles (EVs) are the disruptive threat to hydrocarbon demand most often cited. However, even if 'mass-market' offerings do take off, oil demand in transport could still grow.
In the US, increased efficiency is driven less by economic decisions of consumers than the federally-mandated Corporate Average Fuel Efficiency (CAFE) standards. With environmental regulation now in question, a rollback on CAFE standards could mean a return to demand growth, pushing global peak oil demand far into the future.
4. Corporate strategies — a muted recovery
We expect upstream investment to increase by 3% in 2017, ending two successive years of decline. US Lower 48 unconventional plays, tight oil and shale gas are highly price sensitive and the nascent recovery at the end of 2016 should accelerate, emboldened by a Trump administration committed to exploiting domestic oil and gas resources.
More conventional projects should achieve final investment decision (FID) — we expect 20 to 25 FIDs in 2017, a marked increase from 2014 and 2015. However, much of the actual spend on these greenfield projects may not come through until 2018.
Many of this year's FIDs will be relatively small, short lead-time projects, reflecting the industry's focus on value over volume but there is need for further cost reduction if investment in conventional resources is to restart in earnest.
Exploration success rates and full-cycle returns will continue to improve in 2017, as the industry does more with less capital. The Majors should continue to re-establish their exploration credentials after a long period playing second fiddle to the Independents.
Financing M&A will again be a challenge for many E&P companies, particularly outside North America. But a degree of optimism for oil markets after OPEC's u-turn may spur on those looking to do deals while asset prices are relatively subdued.
5. The cartel formerly known as OPEC
OPEC's decision to restrain production had an immediate impact on oil markets, with Brent lifting to well above US$50/bbl. Whether prices can be sustained above the 2016 average of US$45/bbl, depends on OPEC and its non-OPEC partners, as well as the pace of underlying market tightening.
Our fundamental view is that oil markets would rebalance and prices recover in the latter part of 2017 — without production cuts. Demand is robust, whereas non-OPEC supply, mainly US Lower 48, has been suppressed by a lack of investment post-2014. Even with partial compliance, OPEC's production cuts of 1.2 million b/d, supplemented by 0.6 million b/d from non-OPEC producers, will accelerate the tightening process.
The uplift in prices after the deal is a boost for the upstream industry, especially tight oil producers. Drilling is likely to accelerate, with output expected to return to positive growth after Q1.
OPEC's decision is a gift to the very competitor it sought to kill off in 2014 and, by abandoning the market share strategy, it has painted itself into a corner. The group may still be able to control oil prices to a limited degree, but the benefits of that control will accrue to parties outside the cartel.
If OPEC remains a functional entity by the end of 2017, its greatest hits will surely be in the past.