What s Driving OPEC? Stockholm 4 March 215 Network Oil & Gas Sweden Stephen George, Chief Economist KBC Advanced Technologies plc Contents copyright KBC Advanced Technologies plc, 215
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The Illusory Need for Higher Prices 14 US$ / bbl Dated Brent Crude Oil, 211-215 12 1 8 6 4 2 What was driving this $11 world?
Some Historical Perspective 14 US$ / bbl Dated Brent Crude Oil, 1998-215 Brent peaks at $147 intraday Iran Sanctions 12 Lehman Brothers collapse Libya briefly returns 8, bpd 1 OPEC intervention to support oil price Hurricanes Katrina & Rita in US 8 Start of Arab Spring 6 September 11 attacks Start of US LTO surge OPEC declines to cut output 4 2 Invasion of Iraq Oil demand rises 2.4 mbpd in 24 US starts QE Global Demand Bounceback +3.4 mbpd in 21
Some Historical Perspective 14 US$ / bbl Dated Brent Crude Oil, 1998-215 Brent peaks at $147 intraday Iran Sanctions 12 Lehman Brothers collapse Libya briefly returns 8, bpd 1 OPEC intervention to support oil price Hurricanes Katrina & Rita in US 8 Start of Arab Spring 6 September 11 attacks Start of US LTO surge OPEC declines to cut output 4 2 Invasion of Iraq Oil demand rises 2.4 mbpd in 24 US starts QE Global Demand Bounceback +3.4 mbpd in 21
Geopolitics: The World is a Dangerous Place 5 Important Production Outages vs Expectations, 21-215 ' bpd 4 5 4 3 5 3 2 5 2 1 5 1 5 21 211 212 213 214 215* *215 estimated Iraq Yemen S Sudan/Sudan Kashagan Syria Nigeria Iran Libya
But US LTO steps in to fill the void 5 ' bpd Supply Outages vs US LTO Output 21-215 4 5 4 3 5 3 2 5 2 1 5 1 5 21 211 212 213 214 215* *215 estimated Iraq Yemen S Sudan/Sudan Kashagan Syria Nigeria Iran Libya US shale oil production
But US LTO steps in to fill the void 5 ' bpd Supply Outages vs US LTO Output 21-215 4 5 4 3 5 3 2 5 2 1 5 1 5 21 211 212 213 214 215* *215 estimated Iraq Yemen S Sudan/Sudan Kashagan Syria Nigeria Iran Libya US shale oil production
But US LTO steps in to fill the void 5 ' bpd Supply Outages vs US LTO Output 21-215 4 5 4 3 5 3 2 5 2 1 5 1 5 21 211 212 213 214 215* *215 estimated Iraq Yemen S Sudan/Sudan Kashagan Syria Nigeria Iran Libya US shale oil production
and then some 5 ' bpd Supply Outages vs US LTO Output 21-215 4 5 4 3 5 3 2 5 2 1 5 Iraq Yemen S Sudan/Sudan Kashagan Syria Nigeria 1 5 21 211 212 213 214 215* *215 estimated Iran Libya US shale oil production
Two More Factors: Demand Growth 5 4 5 4 3 5 3 2 5 2 1 5 1 ' bpd Supply Outages, US LTO Output and Oil Demand 21-215 Iraq Yemen S Sudan/Sudan Kashagan Syria Nigeria Iran Libya US shale oil production Global Oil Demand Growth 5 21 211 212 213 214 215* *215 estimated At one level, it looks like strong demand growth should help power through this surplus, but...
we still have NGL Supply 5 ' bpd Supply Outages, LTO Supply and Demand 4 5 4 3 5 3 2 5 2 1 5 1 5 Iraq Yemen S Sudan/Sudan Kashagan Syria Nigeria Iran Libya US shale oil production Global Oil Demand Growth Demand Growth Net of NGLs 21 211 212 213 214 215* *215 estimated If we net off NGL supply, actual demand for crude oil over this period only grows by about 1.5 million bpd, which is about the size of US marginal market contribution
Oversupply: The Reasons are Here 14 US$ / bbl Dated Brent Crude Oil, 211-215 12 1 8 6 4 2
And Here In a nutshell, the high price of oil has made it possible for many producers to ramp up production at a rate far faster than net demand, leading to market oversupply
OPEC s Historic Inaction = Action on Prices OPEC acts by consensus if the ministers don t agree, there is no change to the last policy direction OPEC s current direction (since Dec 211) has been to target 3 million bpd, without individual country quotas January 215 OPEC output at 3.15 mbpd, versus call on OPEC crude at 29.2 mbpd Not much point to an emergency meeting while Saudi is happy with the status quo
The Crude Market Today A strong contango structure has emerged in the market, which means that crude can profitably be stored today and sold on the futures market for delivery 3-12 months ahead Oil stored on land and sea will act as an overhang on an upward price trajectory because it will be released with preference before higher cost future production will be required due to market tightness
Crude Oil: Price Response to OPEC Inaction By opening the taps and talking down the market, OPEC is attempting to reset the price curve below the current marginal cost of oil With further short-term risks to the downside, we expect the price of crude oil to stabilize at around $6 at end-215 and to rise to about $65 by end-216 We expect LTO production to continue to rise in the US in 215 before stabilizing in 216 After that, it will take rising net demand for crude oil to tighten up the market and resume an upward price trajectory
OPEC Annual Capacity Change 4 OPEC Annual Capacity Change (million bpd) 3 2 1-1 Venezuela UAE Saudi Arabia Qatar Nigeria Libya Kuwait Iraq Iran Ecuador Angola Algeria -2 21 211 212 213 214 215 216 217 218 219 22 225 23 235 24
OPEC Annual Capacity vs. Production Forecast
And the Economic Impact Cheap energy will have a differential impact on the global economy, depending on a country s export balance and the diversity of its economy (!) Big Winners: India, Eurozone, Japan, Israel Middle Ground: USA, China, UK, Mexico Struggling: Norway, GCC, Iraq Losers: Russia, Smaller OPEC, Iran Some countries are taking this opportunity to unwind costly subsidies; this will tend to benefit governments rather than the population There will be a net positive demand response starting in 215 that should help to soak up the surplus
Global Oil Demand: The World Keeps Turning World demand is set to rise by 6.8 million bpd 215-22 US expected to see a demand response on lower pump prices Still the usual suspects in terms of strong demand growth (China/India about 1/3 of total growth) Trends in Global Oil Demand, 21-22, ' bpd Absolute Demand Change in Demand CAGR 21 215 22 21-15 215-2 21-15 215-2 EU 1426 12624 12741 (1582) 117-2.3%.2% US 1918 1919 19841 1 651.%.7% Japan 4394 4215 3977 (179) (238) -.8% -1.2% Brazil 2892 38 3534 188 455 1.3% 2.8% Russia 3115 3612 385 498 237 3.% 1.3% India 3429 3992 4793 564 8 3.1% 3.7% China 992 11224 12687 2133 1463 4.3% 2.5% BRICs 18527 2199 24864 3382 2955 3.4% 2.6% Mexico 268 1992 2131 (77) 139 -.8% 1.4% Indonesi a 1527 1791 287 263 296 3.2% 3.1% Nigeria 292 39 3 17 (9) 1.2% -.6% Turkey 682 75 847 68 97 1.9% 2.5% MINTs 457 4842 5364 272 523 1.2% 2.1% OPEC 8431 153 11617 299 187 4.5% 2.% WORLD 88931 943 1789 599 6759 1.1% 1.4% OECD 46782 45262 4623 (152) 941 -.7%.4%
Refinery Capacity Growth to 222 bpd 2,5 Net World Refining Capacity Additions (including Condensate Splitters) End-Year Basis, Likely and Forecast Possible Projects 2, 1,5 1, 5-5 -1, Atlantic Basin Middle East Asia-Pacific Atlantic Forecast Possible Middle East Forecast Possible Asia-Pacific Forecast Possible Condensate Splitters
Capacity Closures Are Balancing New Start-ups 1.6 million bpd of capacity has come on-stream since 29, while 5.6 million bpd has closed New announced closures this year in Japan, Taiwan, Italy, France, UK and probably Croatia The market is oversupplied with capacity and utilization rates have been under pressure, especially in Europe Closures reflect the broader market and are not geographically limited to Europe (Japan, Caribbean, isolated US, Australia)
Key Trends: US Becoming a Product Export Hub US Gasoil/Diesel Exports by Region, 25-Nov 214 16 US crude oil export ban has resulted in US refineries filling with LTO 14 12 Cheap natural gas gives US refiners a durable margin advantage of around $2-2.5 per barrel relative to other markets 1 ' bpd Other 8 Europe Latin America 6 Mexico Canada 4 US Exports of LPG, 25 - Nov 214 8 7 6 Other Asia-Pacific 4 Europe 3 Latin America Mexico 2 Canada Aug-214 Oct-213 Mar-214 Dec-212 May-213 Jul-212 Feb-212 Sep-211 Apr-211 Nov-21 Jun-21 Jan-21 Aug-29 Oct-28 Mar-29 May-28 Jul-27 Dec-27 Feb-27 Sep-26 Apr-26 Jun-25 Nov-25 1 Jan-25 Rise in NGL exports as well, with propane and ethane exports set to soar in 215 and 216; impact on EU and Indian petrochemicals markets ' bpd 5 Sep-214 Jan-214 May-214 Sep-213 Jan-213 May-213 Sep-212 Jan-212 May-212 Sep-211 Jan-211 May-211 Sep-21 Jan-21 May-21 Sep-29 Jan-29 May-29 Sep-28 Jan-28 May-28 Sep-27 Jan-27 May-27 Sep-26 Jan-26 Condensate splitters / toppers planned and under construction, though US also now apparently exporting stabilized condensate May-26 Sep-25 US refineries are running full Jan-25 May-25 2
Key Trends: ME Refineries Swing East and West Three major refineries are starting between 2Q14 and 2Q15 Each has nameplate capacity around 4, bpd Net output around 1.1 million bpd of fuels, plus some petrochemicals Importantly, these refineries buy crude at prices depending on where the products are shipped We expect them to balance between European and Asian markets, dampening margin differentials Output From New Middle East Refineries SATORP YASREF RUWAIS COMBINED COMBINED ktpa ktpa ktpa ktpa kbpd Olefins 25 124 1445 LPG 25 25 8 Aromatics 9 14 14 Gasoline 425 3888 7 1593 349 Jet / Kero 26 445 651 139 Diesel 936 12868 55 27728 567 Petroleum Coke 2145 2263 448 Fuel Oil 45 45 8 18875 19159 1844 56474 171 Sources: SATORP, YASREF, Takreer SATORP at full capacity from October 214 YASREF and Ruwais both expected full by mid-215
Key Trends: Russian Upgrades Coming to Market Russian refining has been obliged to upgrade by changes to fiscal policy that favour the export of refined products especially distillates over lightly refined products like mazut fuel oil This has led to a build-out of upgrading unit capacity around 8, bpd of hydrocracking capacity, 35, of FCC capacity and around 5, bpd of coking capacity Sanctions and the fall in the crude oil price may delay some of this; the government is managing the process by varying the rates of duty to ensure its refiners don t close down Russian Gasoil/Diesel Exports, 21-214 1,2 1, 8 ' bpd Overland to FSU Pacific Volga-Don 6 Black Sea Volga - Baltic 4 Baltic / Northern 2 21 211 212 213 214
Key Trends: European Refining Closures continue Total at Lindsey & La Mede (reported); ENI; others rumoured $/bbl 35. 3. 25. 2. 15. Medium Term Projection of NW Europe Crack Spreads Investment in Core Areas ExxonMobil investing at Antwerp (coker) and at Rotterdam (HC upgrades); Total investing at Antwerp (SDA); Neste upgrading Porvoo (but incorporating feedstocks from Naantali) Emergence of a Two-Speed Europe (HC vs FCC-based refineries, distillate vs gasoline yield oriented) 1. 5.. -5. -1. -15. -2. -25. $/bbl 24. 2. 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 Gasoline - Brent Diesel - Brent HGO - Brent 1%S Fuel Oil - Brent Jet - Brent Naphtha - Brent 3.5% - Brent 28 International Refining Margins 29 21 211 212 213 214 215 216 217 218 219 22 Real Refinery / Petrochemical Integration 16. 12. 8. Better integration and exploitation of multi-refinery circuits 4.. Continued focus on operational excellence: cost-savings, energy efficiency, emissions reduction, health checks -4. USGC 3-2-1 LLS NW Europe FCC+VB Brent Singapore HCU/FCC+VB Dubai
Outlook for Global Refining Margins 16 Medium Term International Refining Margins Gross Refininfg Margins (US$/bbl) 14 12 1 8 6 4 2 FCC Coking Maya/Mars Margin Dubai HCU/FCC+VB Margin Brent FCC/VB Margin 3-2-1 LLS Margin
Key OPEC Impact Points from KBC Perspective Rebasing the price of crude oil it will suit OPEC to have the price of crude oil below its long run marginal cost (LRMC) for some time It will allow the market to better assess the marginal cost of new supplies (e.g., not all LTO economic at the same level, but probably most of it economic at $11/bbl) It will slow investment in more expensive non-conventional supply sources such as the Arctic, ultra-deepwater and new investment in Canadian oil sands It will allow lower price OPEC resources more time to come to market, thus moderating the marginal oil price for longer This is important when Iran and Libya return to the market, and when Iraq ramps up its production Saudi Arabia would like to boost its capacity to 12.5 million bpd by 23 to give it more flexibility in rehabilitating its oilfields ME OPEC as product exporters as well as crude exporters The need for diversification in OPEC economies beyond the oil patch Fiscal regimes (social development, subsidies) will have to moderate to cope with a lower price world
Invest. Optimize. Sustain. KBC GLOBAL ENERGY OUTLOOK Stephen George, Chief Economist KBC Advanced Technologies plc