ENERGY PRICES How High and How Long??? ISM Chemicals Group February 28 Presented By Ron Gist
What a difference a year makes Jan. 27 Jan. 28 Jan. 2 WTI Crude Oil ($/bbl) $54.14 $92.98 $27.26 USGC Reg. Gasoline (c/gal) 14 231 69.5 USGC Diesel (c/gal) 155 251 73.5 Henry Hub Gas ($/MMBtu) $6.34 $7.87 $2.37 WHY? 2
Topics for Today Global Crude Oil Market Global Refining Industry U.S. Natural Gas Market and LNG Energy Act of 27 3
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
Strong demand growth in 24/25 surprised the market, and pushed up crude oil prices 3. 2.5 2. Year-to-Year Change, Million B/D Asia US Middle East Europe Other 1.5 1..5. -.5 2 21 22 23 24 25 26 27 5
However, petroleum demand growth in the U.S. has started to slow 8 7 6 5 4 Demand Growth Year-to-Year (MBPD) Other Products Residual Fuel Distillate Jet/Kero Gasoline 3 2 1-1 -2-3 -4 2 21 22 23 24 25 26 27 28 29 6
Conversely, demand growth by non-oecd nations has remained fairly strong 24 Demand Growth Year-to-Year (Barrels per Day) 22 2 18 16 14 12 1 8 6 4 2 Africa Middle East Latin America Other Asia China Europe FSU -2 23 24 25 26 27 28 29 7
World petroleum demand growth should increase if prices begin to moderate 3. Year-to-Year Change, Million Barrels per Day 2.5 Naphtha 2. 2-25 Average 25-21 Average Other Light Products 1.5 1. 1.69% 1.51% 1.51% 1.63%.5. -.5 2 21 22 23 24 25 26 27 28 29 21 5/1 1/15 8
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
OPEC s spare capacity was reduced to inadequate levels by the demand surge in 24/25 5 4 Million Barrels per Day Other OPEC Venezuela Angola Saudi Arabia Iraq Capacity Spare Capacity 3 2 1 199 1995 2 25 21 1
Non-OPEC production is increasing, but only slowly 18 14 1 6 2-2 -6-1 -14-18 -22 Supply Growth Year-to-Year (Barrels per Day) 23 24 25 26 27 28 29 Others China FSU Angola Africa (ex Angola) Ecuador Latin America (ex Ecuador) North Sea Mexico Canada United States 11
Increasing amounts of Canadian crude oil will be derived from bitumen 6 5 4 3 2 Million Barrels per Day East Coast SCO Bitumen Conventional Heavy Conv. Light Sweet Total Western Canada 1 199 1995 2 25 21 215 12
Call on OPEC was very strong in 23 25 and will continue at high rates near-term 4. Year-to-Year Change, Million B/D 3. 2. 1.. -1. -2. Non-OPEC OPEC -3. 2 22 24 26 28 21 13
Pledges (quotas) by the OPEC-1 are often disregarded 3 Supply (MMBD) Slippage (MMBD) 5 Slippage Production Pledge 28 4 26 3 24 2 22 1 2 18 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9-1 14
Crude oil prices should ease modestly after 29 as spare production capacity increases 1 Brent fob, Current Dollars per Barrel (Annual Average) 8 6 4 2 First Gulf War Asian Boom Asian Bust OPEC Production Cuts US Hurricanes & Nigerian Civil Unrest Venezuela Crisis & Iraq War 1985 199 1995 2 25 21 215 15
WTI prices are not necessarily a good barometer of the global crude oil market 2 Differential for WTI - LLS ($/Bbl) 1-1 -2-3 -4-5 -6-7 -8 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
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
Any questions about crude oil? Questions? 18
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
A strong global economy pushed up demand for refined products Annual Demand Change, 5 Million B/D GDP Growth, Percent 5 4 4.22 Demand Delta GDP Growth 3.93 3.41 3.9 3.48 4 3 2.58 3 2 1.66 1.94 2 1 2.8 1.3 1.5 1.7 1.2.5.7.6 1999-2-1 21-2 22-3 23-4 24-5 25-6 26-7 1 2
Economically viable refining capacity is effectively full worldwide, including secondary feedstocks 25 2 15 Crude Distillation Capacity, Million B/D 1996 26 87% 9% 82% With feedstocks, Europe now at 93% utilization 83% 89% 87% 1 5 96% 87% 66% 81% Middle East U.S./ Canada Europe Asia excl. China China 21
Project activity is high with significant completions expected in the 29-211 time period 7 6 5 4 Announced Crude Distillation Projects -Million Barrels per Day Speculative Probable Likely 3 2 1 27 28 29 21 211 212 213 214 215 22
6% of announced capacity is in Asia / Middle East 1 9 8 7 6 5 4 3 2 1 Announced Crude Distillation Projects 27-215 - 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 25,486 9.8% Latin America 4.3% Europe 5.8% CIS 23
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 15 1 23 24 25 26 'May 27 24
World light product supply/demand balance should ease with capacity additions 3. 2.5 2. Annual Growth, MM B/D Demand Capacity Net 1.5 1..5. -.5-1. 1996 1998 2 22 24 26 28 21 Note: Forecast includes capacity creep and announced projects 25
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 % 22 23 24 25 26 27.%.%.1% 2 21 22 23 24 25 26 27 YTD 26
U.S. gasoline demand growth began to slow in response to fuel price pressures 13 U.S. Gasoline Demand, Million Barrels per Day 12 11 1 1.6%/yr growth 9 8 7 6 199 1995 2 25 21 215 27
USGC refining margins should remain at record rates near term, and stay relatively high thereafter 2 16 12 Forecast in Constant 26 Dollars per Barrel Refinery Configurations Heavy Sour Coking Light Sour Coking Light Sour Cat Cracking 8 4-4 199 1995 2 25 21 215 28
Prices for refined products in the U.S. rose steeply during 27 115 11 15 1 95 9 85 8 75 7 65 6 55 5 45 4 USGC Price, $/Bbl ULR No. 2 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 29
Prices for refined products should begin to decline as supply/demand come into balance 1 8 USGC Price, $/Bbl ULS No. 2 6 4 2 199 1995 2 25 21 215 3
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 29-212 as large projects start up Continuing conversion capacity growth is needed 31
Any questions about refined products? Questions? 32
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
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. 16 14 12 Rigs 14 12 1 1 8 8 6 6 4 2 Price 4 2 2 21 22 23 24 25 26 27 28 34
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 2 15 1 5 199 1995 2 25 21 215 35
U.S. gas consumption has not increased since 2; we trimmed our growth projections 3 25 2 15 1 5 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 199 1995 2 25 21 215 Residential Commercial Industrial Electric Power Other 36
Large amounts of LNG will be needed to meet even slow growth in U.S. natural gas demand 3 25 2 Natural Gas Supply by Source, TCF Canadian Exports to U.S. Alaska (?) LNG 15 1 Lower 48 Production 5 199 1995 2 25 21 215 37
Gas is in short supply in the U.S. every winter, so the amount of gas in storage is important 3. TCF per Month 2.5 2. 1.5 1..5 Total Consumption Dry Gas Production Imports + Production. Jan Jan 1 Jan 2 Jan 3 Jan 4 Jan 5 Jan 6 Jan 7 38
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 28 27 26 25 Minimum 1 5 9 13 17 21 25 29 33 37 41 45 49 Weeks 39
Natural gas should remain heavily discounted relative to residual fuel 18 16 14 12 1 8 6 4 2 New York Cost, $/MMBTU Gas Premium Burner Tip Gas.3% S Resid New York Premium, $/MMBTU 1999 2 21 22 23 24 25 26 27 28 12 1 8 6 4 2-2 -4-6 -8 4
Long-term, natural gas should remain higher than resid (New York burner tip) 18 16 14 12 1 8 6 4 2 $/MMBTU (Constant 27 $) Resid (.3% S) Natural Gas No. 2 Fuel Oil Forecast 199 1995 2 25 21 215 41
Natural gas prices should also strengthen relative to crude oil prices 1 8 6 4 2 Price, $/MM Btu Henry Hub Price Crude/Gas Ratio Ratio to WTI 1995 2 25 21 215 15 14 13 12 11 1 9 8 7 6 5 4 3 2 1 42
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
Any questions about natural gas or LNG? Questions? 44
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
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
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) 25 2 15 2 25 21 215 22 47
U.S. gasoline demand growth will slow noticeably past 21 as new vehicle population increases 13 12 11 1 U.S. Gasoline Demand, Million Barrels per Day Trend Line 27 Forecast Forecast with Energy Act 1.6%/yr growth 9 8 7 6 199 1995 2 25 21 215 22 48
Fuel ethanol consumption is poised for large increase after the passage of the 27 Energy Act 1,4 1,2 1, 8 6 4 2 Thousand B/D Fuel Ethanol Consumption 25 Energy Act Requirement 27 Energy Act Requirement (corn ethanol) 27 Energy Act Requirement (cellulosic ethanol) 2 25 21 215 27 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
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 % 2 25 21 215 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
Ethanol will be a significant contributor to future U.S. gasoline supply growth by 21 1. Million bpd U.S. Gasoline Supply and Demand Changes 2-27 28-21 1. Million bpd.9.9.8.7.6.8.7.6 Downward pressure on gasoline imports.5.5.4.3 MTBE ban.4.3.2.2.1.1. Refinery Production EtOH Blended Supply Adjustments Net Imports Consumption. Refinery Production EtOH Blended Supply Adjustments Net Imports Consumption Supply Changes Supply Changes 51
Significant ethanol plant capacity is being added which should make 29 levels achievable 1 9 8 7 Thousand B/D Potential New Capacity New Capacity by Major Players Current Plant Capacity Ethanol Production 6 5 4 3 2 1 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 27 28 29 52
Ethanol imports will likely need to increase to help meet the increased blending requirements 12 1 8 6 4 2 Thousand B/D Imports Production from Corn Fuel Ethanol Consumption 2 25 21 215 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
Corn production must increase significantly to support new and expanding ethanol production 16 14 12 1 8 6 4 2 U.S. Corn Consumption (Billion Bu) Net Exports Fuel Ethanol Food, Industrial and Seed Feed & Residual 1 9 8 7 6 5 4 3 2 1 US Corn Plantings and Yields (MM Acres) (Bu/Acre) Area Planted (Million Acres) Area Harvested (Million Acres) Yield (Bushels/Acre) 25 225 2 175 15 125 1 75 5 25 197 198 199 2 21 Source: USDA and Purvin & Gertz 197 198 199 2 21 Source: USDA 54
Rising corn prices reduced ethanol production margins in 27 from the highs of 25 26 9 Iowa Crush Spread $/Bushel Iowa Corn, $/Bushel 4.5 8 Crush Spread Corn 4. 7 3.5 6 3. 5 2.5 4 2. 3 1.5 2 1. 1 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-7.5. 55
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
Any questions about anything? Questions? 57
THANK YOU FOR YOUR ATTENTION 58
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
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