BP, Shell, Total, Equinor, Repsol and ENI have all recently cut their oil and gas price expectations for the next 30 years, to 2050. Others, including Chevron, have done so too, but have not specified exactly what that means in practice, and Occidental has provided guidance through 2034.
Further, for the most part these outlooks are all expressed in real (2020) terms, whereas most people tend to think in nominal (money-of-the-day) terms, and so assumptions or expectations about inflation are also important. Further, while prices are often specified for 2020 - 2023 (2025 perhaps), they are then addressed mostly in terms of a long run price without further specifying how this might evolve. BP, Equinor, Total and Repsol all specify an "average" over the period to 2050 which, combined with commentary or price assumptions in the next few years, leads to the assumption of real price growth in the near term before a real decline out into the future.
The net result of all this is that the range of 2050 Brent oil prices (in 2020 real terms) lies between US$50-60 per barrel (Note 1).
Translating this into the companies' nominal (money-of-the-day) prices, while mathematically easy, is less so as they do not provide expected inflation guidance in the same way. Thus, at an assumed average 1% inflation over the next thirty years this would translate into a 2050 Brent nominal price of around US$70-80 per barrel. While restoring some of the short-term losses arising out of COVID-19 and collateral issues, this inflation assumption is close to holding flat from the mid 2020s.
However, a 2% average inflation rate, an assumption that is often used, would increase the nominal 2050 price to US$90-100 per barrel, or higher, seemingly at odds with the underlying assumption of shrinking demand.
The exception to this is Occidental who has, or appears to have, expressed its view on the nominal 2034 price, necessitating the estimating of a real (2020) price.
All that said, one wonders how much attention is really paid to the prices implied by real-nominal assumptions. Observing the changes in outlook of companies over the period since 2015 often seems to be the case that the headline real price stays flat; the real baseline year is though gradually moved out in time.
I will look at disclosures on WTI and Henry Hub, as well as the downward trajectory of assumptions by companies since about 2014, in other posts in due course.
Notes
1. In plotting up these corporate announcements I have had to interpret some of the statements which are often specific for the first 2-3 years, followed by a long term "headline" number. The change in slope from time to time may reflect other comments, including an average price over a 25 or 30 year period which my assumptions try to match (in round terms). As a result my interpretation may differ in annual detail from that intended by the company, although I hope I have honoured the key assumptions they are making.
2. All prices referenced below are real 2020 dollars, unless specified otherwise.
3. BP (Press Release, 15 June 2020). Long term assumption averaging around US$ 55 per barrel between 2021 and 2050.
4. Shell (Second Quarter Update Note, 30 June 2020). Specify prices for 2020-2023 increasing to US$60 per barrel (not clear if real or nominal for these years), then long-term US$60 thereafter.
5. Total (Second Quarter Results, 30 June 2020). 2050 price of US$50 per barrel in 2018 terms (in line with IEA SDS scenario). Reduced short term forecast rising to US$60 in 2023 (basis not explicit). 2019 adjustments had prices rising to US$70 per barrel (2018 real) by 2025, then flat for 5 years before declining to US$50 per barrel (2018 real) by 2050.
6. Repsol (First Half Results, 23 July 2020). Average US$60 per barrel through 2050, while rising to US$67 per barrel by 2025.
7. ENI (Second Quarter Results, 24 July 2020). Reduced long-term price to US$60 per barrel (2023 real terms). Shown in chart in real 2020 terms, adjusted at 2% per annum (US$56.54 per barrel).
8. Occidental (Second Quarter 10-Q, 10 August 2020). Refers to oil price of approximately US$ 40 per barrel in 2020 rising to approximately US$ 70 per barrel in 2034. Not clear if references are to Brent or WTI, but assumed this was WTO and set Brent to US$43 per barrel in 2020. Occidental refers to an average US$62.42 per barrel for Brent for period 2020-2034, assumed to be nominal but not stated. Converted to profile using strip through 2023 (an assumption), and to real using 0% inflation to US$50 per barrel, then 1% to US$60 per barrel, then 2% per Occidental comments.
9. Chevron (Second Quarter Earnings Call, 31 July 2020). Say they have lowered outlook, primarily die to pandemic impacts, but state they do not make public as it is commercially sensitive. Also say they will provide revised updated guidance following completion of planning process.
10. ExxonMobil (Second Quarter Earnings Call, 31 July 2020). Have not taken any impairments seen in other Majors. Do not disclose pricing assumptions but state that prices are generally within the range of third-party assessments. IEA estimates referenced but only for next 18 months.
11. Equinor (Third Quarter Review, 29 October 2020). Cut forecast by US$10-15 per barrel compared to the year before, even though their forecast appears to remain at the high end of (European, at least) peers. Now assuming US$65 per barrel in 2025, with a further increase towards 2030 before declining gradually to US$64 in 2040 and below US$60 by 2050. Average for 2020-2050 is about US$64 per barrel, and all prices are 2020 real.
12. ConocoPhillips (Second Quarter 10-Q, 4 August 2020). Does not specify a long term outlook beyond stating an expectation that commodity prices will remain cyclical and volatile.
If you would like to discuss further the underlying assumptions, please email me at bob.george@ulysses-pm.com.
Updated 10 November 2020 with Equinor Q3 adjustments.
Updated 12 August 2020 to include Occidental and ConocoPhillips.
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