ENERGY PRICES How High and How Long???

Transcription

1 ENERGY PRICES How High and How Long??? ISM Chemicals Group February 28 Presented By Ron Gist

2 What a difference a year makes Jan. 27 Jan. 28 Jan. 2 WTI Crude Oil ($/bbl) $54.14 $92.98 $27.26 USGC Reg. Gasoline (c/gal) USGC Diesel (c/gal) Henry Hub Gas ($/MMBtu) $6.34 $7.87 $2.37 WHY? 2

3 Topics for Today Global Crude Oil Market Global Refining Industry U.S. Natural Gas Market and LNG Energy Act of 27 3

4 The Global Crude Oil Market Is Changing Global Crude Oil Market Demand Supply Prices Global Refining Market U.S. Natural Gas Market & LNG Energy Act of 27 4

5 Strong demand growth in 24/25 surprised the market, and pushed up crude oil prices Year-to-Year Change, Million B/D Asia US Middle East Europe Other

6 However, petroleum demand growth in the U.S. has started to slow Demand Growth Year-to-Year (MBPD) Other Products Residual Fuel Distillate Jet/Kero Gasoline

7 Conversely, demand growth by non-oecd nations has remained fairly strong 24 Demand Growth Year-to-Year (Barrels per Day) Africa Middle East Latin America Other Asia China Europe FSU

8 World petroleum demand growth should increase if prices begin to moderate 3. Year-to-Year Change, Million Barrels per Day 2.5 Naphtha Average Average Other Light Products % 1.51% 1.51% 1.63% /1 1/15 8

9 Global demand issues are very diverse How will global demand growth be effected by high energy prices long-term? Will the current trend toward globalization continue? Will the current economic slowdown in the U.S. be mild or will a recession result? How will the 27 U.S. Energy Act be implemented and how will the auto industry respond? How will Atlantic Basin refiners deal with the potential reduction in U.S. gasoline imports? 9

10 OPEC s spare capacity was reduced to inadequate levels by the demand surge in 24/ Million Barrels per Day Other OPEC Venezuela Angola Saudi Arabia Iraq Capacity Spare Capacity

11 Non-OPEC production is increasing, but only slowly Supply Growth Year-to-Year (Barrels per Day) Others China FSU Angola Africa (ex Angola) Ecuador Latin America (ex Ecuador) North Sea Mexico Canada United States 11

12 Increasing amounts of Canadian crude oil will be derived from bitumen Million Barrels per Day East Coast SCO Bitumen Conventional Heavy Conv. Light Sweet Total Western Canada

13 Call on OPEC was very strong in and will continue at high rates near-term 4. Year-to-Year Change, Million B/D Non-OPEC OPEC

14 Pledges (quotas) by the OPEC-1 are often disregarded 3 Supply (MMBD) Slippage (MMBD) 5 Slippage Production Pledge Jan-5 Jan-6 Jan-7 Jan-8 Jan

15 Crude oil prices should ease modestly after 29 as spare production capacity increases 1 Brent fob, Current Dollars per Barrel (Annual Average) First Gulf War Asian Boom Asian Bust OPEC Production Cuts US Hurricanes & Nigerian Civil Unrest Venezuela Crisis & Iraq War

16 WTI prices are not necessarily a good barometer of the global crude oil market 2 Differential for WTI - LLS ($/Bbl) Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 16

17 Supply issues will affect all regions of the world, some positively and some negatively Will crude oil production from key non-opec countries grow to expected rates? Canada, West Africa, Russia, Brazil How will growing requirements for biofuels in the U.S. and Europe be met? As new refining capacity begins operation, how will the refined products markets rebalance? ISM- Global Chemical Supply Group Overview 17

18 Any questions about crude oil? Questions? 18

19 The Refining Industry Is Changing Too Global Crude Oil Market Global Refining Industry Demand Capacity Prices U.S. Natural Gas Market & LNG Energy Act of 27 19

20 A strong global economy pushed up demand for refined products Annual Demand Change, 5 Million B/D GDP Growth, Percent Demand Delta GDP Growth

21 Economically viable refining capacity is effectively full worldwide, including secondary feedstocks Crude Distillation Capacity, Million B/D % 9% 82% With feedstocks, Europe now at 93% utilization 83% 89% 87% % 87% 66% 81% Middle East U.S./ Canada Europe Asia excl. China China 21

22 Project activity is high with significant completions expected in the time period Announced Crude Distillation Projects -Million Barrels per Day Speculative Probable Likely

23 6% of announced capacity is in Asia / Middle East Announced Crude Distillation Projects Million Barrels per Day 8.3% 35.2% 24.6% 11.9% Africa Asia MidEast North America Likely Probable Speculative Total Global Crude Capacity Additions (27-215) Thousand Barrels Per Day Likely 3,926 Probable 3,81 Speculative 18,48 Total 25, % Latin America 4.3% Europe 5.8% CIS 23

24 Project costs have increased significantly since 23 resulting in project delays and some cancellations 25 Nelson Farrar Material Costs (23 = 1) CS Pipe Concrete 2 SS Exchanger Alloy Plate 'May 27 24

25 World light product supply/demand balance should ease with capacity additions Annual Growth, MM B/D Demand Capacity Net Note: Forecast includes capacity creep and announced projects 25

26 U.S. consumers are adapting to higher gasoline prices by reducing travel and other expenditures Share of Personal Expenditures vs. Gasoline Price Growth in Light Duty Vehicle Miles Traveled 7% Cents per Gallon US Avg Retail Gasoline Price 7 2.5% 2.4% 6% Fuel Motor Vehicles Clothing and Shoes 6 2.% 2.2% 1.9% 2.1% 5% 5 4% 4 1.5% 1.2% 3% 3 1.%.9% 2% 2.5% 1% 1 % %.%.1% YTD 26

27 U.S. gasoline demand growth began to slow in response to fuel price pressures 13 U.S. Gasoline Demand, Million Barrels per Day %/yr growth

28 USGC refining margins should remain at record rates near term, and stay relatively high thereafter Forecast in Constant 26 Dollars per Barrel Refinery Configurations Heavy Sour Coking Light Sour Coking Light Sour Cat Cracking

29 Prices for refined products in the U.S. rose steeply during USGC Price, $/Bbl ULR No. 2 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 29

30 Prices for refined products should begin to decline as supply/demand come into balance 1 8 USGC Price, $/Bbl ULS No

31 U.S. refining margins (and product prices) should decline eventually Near-term margins should remain strong Conversion capacity will remain relatively tight Disruptions from product spec changes still evident Project construction will not have a dramatic influence Long-term margins will fall from recent peaks Impacts of high energy prices on demand growth are becoming more evident, moderating growth Capacity additions will catch up with demand growth by about as large projects start up Continuing conversion capacity growth is needed 31

32 Any questions about refined products? Questions? 32

33 Recent Changes in the Natural Gas Market Should Accelerate Global Crude Oil Market Global Refining Industry U.S. Natural Gas Market & LNG U.S. Domestic Supply/Demand Global LNG Energy Act of 27 33

34 Drilling rig activity roughly tripled in response to high natural gas prices Number of Gas-Oriented 16 Henry Hub Price, $/MMBTU Drilling Rigs in the U.S Rigs Price

35 U.S. domestic production is in an irreversible decline conventional supplies will fall 25 Gross Gas Withdrawals by Sub-region, TCF Conventional Deepwater GOM Rocky Mountain CBM

36 U.S. gas consumption has not increased since 2; we trimmed our growth projections Gross Natural Gas Withdrawals, TCF Residential demand fell in 26 due to mild winter Industrial gas demand has shrunk Electric power is the key market driver accounting for nearly 6% of total future demand growth Residential Commercial Industrial Electric Power Other 36

37 Large amounts of LNG will be needed to meet even slow growth in U.S. natural gas demand Natural Gas Supply by Source, TCF Canadian Exports to U.S. Alaska (?) LNG 15 1 Lower 48 Production

38 Gas is in short supply in the U.S. every winter, so the amount of gas in storage is important 3. TCF per Month Total Consumption Dry Gas Production Imports + Production. Jan Jan 1 Jan 2 Jan 3 Jan 4 Jan 5 Jan 6 Jan 7 38

39 Gas storage levels in the U.S. are currently near record highs 4, Billion Cubic Feet 3,5 3, 2,5 2, 1,5 1, 5 Maximum Minimum Weeks 39

40 Natural gas should remain heavily discounted relative to residual fuel New York Cost, $/MMBTU Gas Premium Burner Tip Gas.3% S Resid New York Premium, $/MMBTU

41 Long-term, natural gas should remain higher than resid (New York burner tip) $/MMBTU (Constant 27 $) Resid (.3% S) Natural Gas No. 2 Fuel Oil Forecast

42 Natural gas prices should also strengthen relative to crude oil prices Price, $/MM Btu Henry Hub Price Crude/Gas Ratio Ratio to WTI

43 The natural gas market in North America is undergoing significant changes Drilling rates responded to higher prices, but production is barely keeping up with demand Canada is also struggling with supply issues Unusual weather (hurricanes and record warm winters) impacted prices LNG will be needed to support fairly slow demand growth Natural gas prices should slowly strengthen relative to crude oil 43

44 Any questions about natural gas or LNG? Questions? 44

45 The Energy Act of 27 Will Change the U.S. Energy Market Global Crude Oil Market Global Refining Industry U.S. Natural Gas Market & LNG Energy Act of 27 Vehicle Fuel Efficiency Biofuels Mandate 45

46 The 27 U.S. Energy Act consists of two main components Increased new vehicle efficiency standards Current U.S. fleet mileage for new vehicles is about 27.5 mpg for cars and 22.5 mpg for light trucks New CAFE standards take effect in 211 Gradual increase to 35 mpg by the year 22 Substantial increase in the use of biofuels Corn ethanol requirement rises to 15 BGY by 215 A target of 36 BGY of all renewable fuels by 222 EPA Administrator can reduce overall requirement if cellulosic ethanol does not develop commercially 46

47 Energy Act of 27 significantly increases corporate average fuel economy requirements 35 3 Miles per Gallon New Vehicles (27 est.) New Vehicles (Energy Act) Total Fleet (27 est.) Total Fleet (Energy Act)

48 U.S. gasoline demand growth will slow noticeably past 21 as new vehicle population increases U.S. Gasoline Demand, Million Barrels per Day Trend Line 27 Forecast Forecast with Energy Act 1.6%/yr growth

49 Fuel ethanol consumption is poised for large increase after the passage of the 27 Energy Act 1,4 1,2 1, Thousand B/D Fuel Ethanol Consumption 25 Energy Act Requirement 27 Energy Act Requirement (corn ethanol) 27 Energy Act Requirement (cellulosic ethanol) Energy Act increased the use of renewable fuels Increased corn ethanol mandate: 28 requirement to remain unchanged at 5.4 BGY U.S. likely to exceed the 28 mandate in 27 Big jump in the 29 requirement to 1.5 BGY, but another 5-6 BGY of capacity expected by 29 The standard increases further to 15 BGY by 215 Target of 36 BGY of all renewable fuels by 222 EPA Administrator can reduce overall requirement based on viability of cellulosic ethanol 49

50 Ethanol content in conventional gasoline will need to increase in all regions to accommodate requirements Ethanol content in conventional gasoline, % 12% 1% 8% 6% PADD I 4% PADD II PADD III 2% PADD IV PADD V US TOTAL % Reformulated gasoline (RFG) already at 1% in PADD s I-III and going to 1% by 211 in PADD V Ethanol will need to be blended into all conv. gasoline at 1% by 215 E-85 use will also likely increase but market penetration will be limited for the next 1 years by availability of vehicles and distribution infrastructure 5

51 Ethanol will be a significant contributor to future U.S. gasoline supply growth by Million bpd U.S. Gasoline Supply and Demand Changes Million bpd Downward pressure on gasoline imports MTBE ban Refinery Production EtOH Blended Supply Adjustments Net Imports Consumption. Refinery Production EtOH Blended Supply Adjustments Net Imports Consumption Supply Changes Supply Changes 51

52 Significant ethanol plant capacity is being added which should make 29 levels achievable Thousand B/D Potential New Capacity New Capacity by Major Players Current Plant Capacity Ethanol Production Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q

53 Ethanol imports will likely need to increase to help meet the increased blending requirements Thousand B/D Imports Production from Corn Fuel Ethanol Consumption Long-term ethanol production from corn will be limited: Corn prices will rise Food prices will rise Occasional drought conditions will cause ethanol plants to compete for corn inventories Increasing ethanol imports are needed to meet the 27 Energy Act requirements Brazil is expected to be the primary import source Atlantic imports can readily access large U.S. coastal gasoline markets (PADD I) 53

54 Corn production must increase significantly to support new and expanding ethanol production U.S. Corn Consumption (Billion Bu) Net Exports Fuel Ethanol Food, Industrial and Seed Feed & Residual US Corn Plantings and Yields (MM Acres) (Bu/Acre) Area Planted (Million Acres) Area Harvested (Million Acres) Yield (Bushels/Acre) Source: USDA and Purvin & Gertz Source: USDA 54

55 Rising corn prices reduced ethanol production margins in 27 from the highs of Iowa Crush Spread $/Bushel Iowa Corn, $/Bushel Crush Spread Corn Crush Spread = (Ethanol Price x 2.8) Corn Price Estimated Gross Margin Per Bushel Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul

56 Cellulosic ethanol not expected to be a significant contributor to supply in the forecast period Cellulosic ethanol produced would have a lower feedstock cost than production from corn Cellulosic materials include low-value waste products (rice hulls, corn stover) or dedicated fuel crops (switchgrass) Primary challenge in using these feedstocks is the need to break down the fiber so that it can be fermented to ethanol Cellulase Enzyme cost reduction is primary R&D focus Commercial enzyme cost reported to be on the order of $5/gallon of ethanol only acceptable for higher value products Looking for 5-fold cost reduction to be economically viable Several companies have reported progress, but no commercial progress to date The potential is large, but the technology does not yet appear to be at the point of commercialization 56

57 Any questions about anything? Questions? 57

58 THANK YOU FOR YOUR ATTENTION 58

59 About this Presentation This presentation has been prepared for the sole benefit of the ISM-Chemical Group. Neither the analysis nor any part of the analysis shall be provided to third parties without the written consent of Purvin & Gertz. Any third party in possession of the analysis may not rely upon its conclusions without the written consent of Purvin & Gertz. Possession of the analysis does not carry with it the right of publication. Purvin & Gertz conducted this analysis utilizing reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are based on information available at the time of review. Changes in factors upon which the review is based could affect the results. Forecasts are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen including the actions of government, individuals, third parties and competitors. NO IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY. Some of the information on which this analysis is based has been provided by others. Purvin & Gertz has utilized such information without verification unless specifically noted otherwise. Purvin & Gertz accepts no liability for errors or inaccuracies in information provided by others. 59

60 Purvin & Gertz - Background Founded in 1947 in business for 6 years Independent firm owned by active consultants Wide variety of industries served Crude Oil Market Analysis and Pricing Petroleum Products Refining and Marketing Natural Gas Gas Processing and Marketing NGLs Production, Marketing, and Pricing Consulting staff of Chemical Engineers/MBAs Join with 1-15 years industry prior experience Average of 22 years of technical, commercial and financial experience 6

61 A Global Network Serves Our Clients Worldwide Calgary Los Angeles Houston London Dubai Moscow Singapore Buenos Aires 61