Home' Trinidad and Tobago Guardian : June 6th 2013 Contents BG10 NEWS
BUSINESS GUARDIAN www.guardian.co.tt JUNE 2013 • WEEK ONE
The price of oil has stayed with-
in a US$14 per barrel range for
most of the past two years,
said Morgan Stanley on its
May 30 outlook paper.
Robert Pulleyn, Jessica Alderson and Martijn
Rats said in their report: "We expect oil prices
to most likely be range bound going forward."
Oil has largely traded within a range of
US$14 per barrel (bbl) around an average of
US$111/bbl since February 2011, the analysts
"We expect a largely range-bound environ-
ment for crude prices. Morgan Stanley's com-
modities team forecast a near-term rebound
to US$110-115. However, we do not see a multi-
year trend of more than ten per cent average
growth as likely," the analysts said.
"In an environment of range-bound prices,
limited volume growth and constraints to fur-
ther borrowing, the final lever to increase
upstream cash flow is the mix of projects.
However, we do not expect a significant
improvement in the cash generation of the
projects we follow and types of production
"As discussed above, the cost of oilfield
developments has risen dramatically over the
past ten years due to cost inflation and the
move towards ever larger, more complex proj-
ects, such as deepwater, natural gas liquids
(NGLs), oil sands, heavy oil, and other uncon-
ventionals, like shale," Morgan Stanley said.
The analysts noted that "oil prices have
not experienced the same declines as other
Given the strong relationship between the
oil price and industry's operating cash flow,
to fund investment, the analysts say they
see the contrast between oil prices and com-
modity prices "as key to the difference
between the oil and mining sectors. Exhibit
11 illustrates the respective price movements
(in US$) among Brent crude, copper, gold,
nickel, zinc, coking coal, thermal coal, and
iron ore since January 2011."
"As highlighted above (in the graph), oil
has been largely range bound over this period,
as has gold. However, the other commodities
have fallen over this period by around 30
per cent, with half of this fall occurring in
the last six months. We see this as key to
understanding the reduction in mining
investment, given the deteriorating economics
and lower-than-expected cash flows available
for further investment," the analysts said.
Looking ahead, they said: "Offshore seg-
ments are expected to have the strongest
investment growth. In addition, we note that
European oil services are primarily exposed
to the offshore market."
"Deepwater and ultra-deepwater, where
barriers to entry are highest, are forecast to
deliver more oil and gas volumes," the Morgan
Stanley analysts said.
Morgan Stanley said its "offshore outlook
(is) underpinned by planned production addi-
tions, and enhanced recovery."
The analysts said: "We continue to see
strong offshore investment growth, though
below the last decade's pace, given the
expected gross production additions from
offshore, attractive offshore economics at
current prices and the increase we expect in
subsea processing technology to improve
existing reservoir recovery rates in mature
We see expectations for a three-fold
increase in oil & gas production from ultra-
deepwater fields (over 1,500 metres deep)
by 2020, as well as a 30 per cent increase
in deepwater (125-1,500 metres) production,
with these 2 segments increasing from 7 per
cent of global oil production in 2000 to 12
per cent by 2020 and 18 per cent by 2035."
The authors highlighted that "this offshore
market segment has the highest barriers to
entry, given technical challenges, (and the)
the tightness we see in (the) capacity for the
top-end of the market, and the
experience/track-record required to win con-
tracts in this space. We acknowledge that
the oil services industry has added significant
capacity since 2003, including in the offshore
"Consequently, we do expect a more mod-
est growth outlook for the sector to lead to
a similar moderation in pricing power, margin
expansion and returns. However, we would
argue that commoditised segments of the
services supply chain.
"Furthermore, we believe deepwater engi-
neering, equipment and installation remain
amongst the most specialised sub segments
and therefore are more protected from these
Within the offshore outlook, Morgan Stan-
ley said it remained "upbeat on the outlook
for projects utilising subsea processing to
either maximise recovery from existing
mature fields, tieback satellite fields or enable
production in ever deeper water."
They said: "In addition to deepwater off-
shore, we continue to see an encouraging
outlook for gas developments, given our view
on liquefied natural gas (LNG) and potential
uses of gas in transportation."
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