Oil & Gas Forecast Methodologies
How We Generate Our Industry Forecasts
BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The precise form of time-series model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. For example, data for some industries may be particularly prone to seasonality, i.e. seasonal trends. In other industries, there may be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than cyclical booms.
Our approach varies from industry to industry. Common to our analysis of every industry, however, is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable’s own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity.
When forecasting for some of our industry sub-component variables, however, using a variable’s own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA).
In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting.
It must be remembered that human intervention plays a necessary and desirable part in all our industry forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not.
Energy Industry
There are a number of principal criteria that drive our forecasts for each energy indicator.
Energy Supply
Supply of crude oil, natural gas, refined oil products and electrical power is determined largely by investment levels, available capacity, plant utilisation rates and national policy. We therefore examine:
- National energy policy, stated output goals and investment levels;
- Company-specific capacity data, output targets and capital expenditures, using national, regional and multinational company sources;
- International quotas, guidelines and projections, such as OPEC, IEA, US Energy Information Administration (EIA).
Energy Consumption
A mixture of methods is used to generate demand forecasts, applied as appropriate to each individual country:
- Underlying economic (GDP) growth for individual countries/regions, sourced from BMI's published estimates. Historic relationships between GDP growth and energy demand growth at an individual country are analysed and used as the basis for predicting levels of consumption;
- Government projections for oil, gas and electricity demand;
- Third party agency projections for regional demand, such as IEA; EIA and OPEC;
- Extrapolation of capacity expansion forecasts, based on company- or state-specific investment levels.
Cross checks
Whenever possible, we compare government and/or third party agency projections with the declared spending and capacity expansion plans of the companies operating in each individual country. Where there are discrepancies, we use company-specific data as physical spending patterns to ultimately determine capacity and supply capability. Similarly, we compare capacity expansion plans and demand projections to check the energy balance of each country. Where the data suggest imports or exports, we check that necessary capacity exists or that the required investment in infrastructure is taking place.
Sources
Sources include those international bodies mentioned above, such as OPEC, IEA and EIA, as well as local energy ministries, official company information and international and national news agencies.
Oil & Gas Business Environment Ratings Methodology
Ratings Overview
Conceptually, BMI’s Mining Business Environment Ratings system provides a globally-comparative, numerically-based assessment of the Risk/Return trade-off for the industry in each state covered in BMI Reports. In order to provide clients with a detailed assessment of this trade-off, the overall rating is comprised of two distinct sub-ratings:
Limits of Potential Returns: Evaluates the industry’s current size and growth potential, and also assesses broader industry/state characteristics that may enable/inhibit the industry’s development.
Risks to Realisation of Potential Returns: Evaluates issues within (a) the Mining sector, and (b) the broader political/economic/business environment, that indicate the level of uncertainty surrounding the realisation of potential returns.
Ratings Overview
Conceptually, the new ratings system is organised in a manner that enables us to clearly present the comparative strengths and weaknesses of each state. As before, the headline Oil & Gas BER is the principal rating. However, the clear differentiation of Upstream/Downstream and the articulation of the elements that comprise each segment enable more sophisticated conclusions to be drawn, and also facilitate the use of the ratings by clients, who will have varying levels of exposure and risk appetite for their operations.
Oil & Gas Business Environment Rating: This is the overall rating, which comprises 50% Upstream BER and 50% Downstream BER.
- Upstream Oil & Gas Business Environment Rating: This is the overall Upstream rating which is composed of limits/risks (see below)
- Downstream Oil & Gas Business Environment Rating: This is the overall Downstream rating which comprises limits/risks (see below)
Both the Upstream BER and Downstream BER are composed of Limits/Risks sub-ratings, which themselves comprise industry-specific and broader Country Risk components:
-- Limits of Potential Returns: Evaluates the sector’s size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development.
-- Risks to Realisation of those Returns: Evaluates both Industry-specific dangers and those emanating from the state’s political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period.
Component |
Details |
Oil & Gas Business Environment Rating |
Overall rating |
- Upstream BER |
50% of O&G BER |
- Limits of Potential Returns |
-70% of Upstream BER |
- Upstream Market |
-75% of Limits |
- Country Structure |
-25% of Limits |
- Risks to Realisation of Potential Returns |
-30% of Upstream BER |
- Industry Risks |
-65% of Risks |
- Country Risks |
-35% of Risks |
|
|
- Downstream BER |
50% of O&G BER |
- Limits of Potential Returns |
-70% of Downstream BER |
- Upstream Market |
-75% of Limits |
- Country Structure |
-25% of Limits |
- Risks to Realisation of Potential Returns |
-30% of Downstream BER |
- Industry Risks |
-60% of Risks |
- Country Risks |
-40% of Risks |
Indicators
The following indicators have been used. Overall, the rating uses three subjectively-measured indicators, and 41separate indicators/datasets.
Indicator |
Rationale |
|
Upstream BER: Limits to potential returns |
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Upstream Market |
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Resource base |
|
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- Proven oil reserves (mn bbl) |
Indicators used to denote total market potential. High values are accorded better scores |
|
- Proven gas reserves (bcm) |
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Growth outlook |
|
|
- Oil production growth (2006-2012) |
Indicators used as proxies for BMI’s market assumptions, with strong growth accorded higher scores |
|
- Gas production growth (2006-2012) |
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Market maturity |
|
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- Oil reserves/prodn |
Indicator used to denote whether industries are frontier/emerging/developed or mature markets. Low existing exploitation in relation to potential is accorded higher scores. |
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- Gas reserves/prodn |
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- Current oil prodn vs. peak |
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- Current gas prodn vs. peak |
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Country structure |
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State ownership of assets, % |
Indicator used to denote opportunity for foreign NOCs/IOCs/Independents. Low state ownership scores higher |
|
Number of non-state companies |
Indicator used to denote market competitiveness. Presence (and large number) of non-state companies scores higher |
|
Upstream BER: Risks to potential returns |
||
Industry Risks |
||
Licensing terms |
Subjective evaluation of government policy towards sector against BMI-defined criteria. Protectionist states are marked down |
|
Privatisation trend |
Subjective evaluation of government industry orientation. Protectionist states are marked down |
|
Country Risk |
||
Physical Infrastructure |
Rating from BMI’s CRR. It evaluates the constraints imposed by power/transport/communications infrastructure |
|
Long Term Policy Continuity Risk |
Rating from BMI’s CRR It evaluates the risk of a sharp change in the broad direction of government policy |
|
Rule of Law |
Rating from BMI’s CRR. It evaluates the govt’s ability to enforce its will within the state |
|
Corruption |
Rating from BMI’s CRR, to denote risk of additional illegal costs/possibility of opacity in tendering/business operations affecting companies’ ability to compete |
|
Indicator |
Rationale |
|
Downstream BER: Limits to potential returns |
||
Downstream Market |
||
Market |
|
|
- Refining capacity (000b/d) |
Indicator denotes existing domestic oil processing capacity. High capacity is considered beneficial |
|
- Oil demand (000bd/) |
Indicators denote size of domestic oil/gas market. High values are accorded better scores |
|
- Gas demand (bcm) |
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- Retail outlets/1,000 people |
Indicator denotes fuels retail market penetration; low penetration scores highly |
|
Growth outlook |
|
|
- Oil demand growth (2006-2012) |
Indicators used as proxies for BMI’s market assumptions, with strong growth accorded higher scores |
|
- Gas demand growth (2006-2012) |
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- Refining capacity growth (2006-2012) |
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Import dependence |
|
|
- Refining capacity vs. oil demand, % (2006-2012) |
Indicators denote reliance on imported oil products and natural gas. Greater self-sufficiency is accorded higher scores |
|
- Gas demand vs gas supply, % (2006-2012) |
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Country structure |
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State ownership of assets, % |
Indicator used to denote opportunity for foreign NOCs/IOCs/Independents. Low state ownership scores higher |
|
No. of non-state companies |
Indicator used to denote market competitiveness. Presence (and large number) of non-state companies scores higher |
|
Population, mn |
Data from BMI’s CR team. Indicators used as proxies for overall market size and future potential |
|
Nominal GDP, US$bn |
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GDP per capita, US$ |
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Downstream BER: Risks to potential returns |
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Industry Risks |
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Regulation |
Subjective evaluation of government policy towards sector against BMI-defined criteria. Bureaucratic/intrusive states are marked down |
|
Privatisation trend |
Subjective evaluation of government industry orientation. Protectionist states are marked down |
|
Country Risk |
||
Short Term Policy Continuity Risk |
Rating from BMI’s CRR. It evaluates the risk of a sharp change in the broad direction of government policy |
|
Short Term Economic External Risk |
Rating from BMI’s CRR. It evaluates the vulnerability to external economic shock, the typical trigger of recession in Emerging Markets |
|
Short Term Economic Growth Risk |
Rating from BMI’s CRR. It evaluates the current trajectory of growth and the state’s position in the economic cycle |
|
Rule of Law |
Rating from BMI’s CRR. It evaluates the govt’s ability to enforce its will within the state |
|
Legal Framework |
Rating from BMI’s CRR, to denote risk of additional illegal costs/possibility of opacity in tendering/business operations affecting companies’ ability to compete |
|
Physical Infrastructure |
Rating from BMI’s CRR. It evaluates the constraints imposed by power/transport/communications infrastructure |
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