Oil Supply/Demand Outlook & The Implications for Price A Discussion Graham Loveland Associate Principal Consultant

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1 EU RO PEA N FU EL PRI CE CO N FEREN CE 12 Oil Supply/Demand Outlook & The Implications for Price A Discussion Graham Loveland Associate Principal Consultant

3 EU RO PEA N FU EL PRI CE CO N FEREN CE 12 Elements of the Base Case

4 Drivers of Oil Demand Wealth levels (expressed as GDP) Rising living standards Comfort levels Personal mobility Material possessions Size of population Growing globally, especially in LDCs Efficiency of use Increasing but offset by lower use Availability and price of substitutes Transport vs. other sectors Copyright 2005 Global Insight, Inc. 4

5 GDP growth is greatest in developing areas GDP Growth Rates 7.0% 6.0% 5.0% Global average : 3.1% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% N. America W. Europe E. Europe C/S America Asia Pac. Mid East Africa FSU -8.8% Copyright 2005 Global Insight, Inc. 5

6 But so, Although Slowing, Is Population Growth Population Growth Rates 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% N. America W. Europe E. Europe C/S America Asia Pac. Mid East Africa FSU Copyright 2005 Global Insight, Inc. 6

9 Sectoral Growth: Transport Dominates million b/d N America C/S America Europe Asia Pacific Middle East Africa FSU Transportation Petrochemical Feedstock Domestic Sector Industrial Sector Power Generation Others Copyright 2005 Global Insight, Inc. 9

10 North American Transport Sector Growth Slower improvement than historically in fuel efficiency Real terms prices not that much lower than historically Diesel grows with rising merchandise imports Much stronger economic growth in Mexico than historically increases transport use Copyright 2005 Global Insight, Inc. 10

13 Non-OPEC Assumptions Long-term production projections are assumptions not forecasts A peak and sharp decline are not imminent but Scope for further growth is limited as depletion rates are rising Proven reserves estimates will rise and more discoveries will be made, but No major new basins are assumed Production will not be unduly constrained by the plethora of potential problems Copyright 2005 Global Insight, Inc. 13

17 OGJ: 69% of Proven Reserves are in OPEC bn barrels Middle East OPEC Other OPEC Canada incl. oil sands Europe incl FSU Non- OPEC W. Hem Non- OPEC Asia Non- OPEC Africa Non- OPEC ME Source: OGJ Copyright 2005 Global Insight, Inc. 17

19 Potential OPEC Production million b/d Currently producing MENA fields Reserve additions and new discoveries Fields awaiting development Total from non-mena countries Source: IEA, WEO 2005 Copyright 2005 Global Insight, Inc. 19

20 Why Might OPEC Investment not be Forthcoming? Deliberate choice to develop more slowly To restrict supply and maximise revenues To preserve resources for futures generations External factors prevent investment E.g. lack of finance Nationalistic considerations bar foreign involvement Rising needs from other sectors NOCs starved of funds Lower taxes on IOCs discourage investment Inadequate infrastructure After IEA, WEO 2005, Deferred Investment Scenario Copyright 2005 Global Insight, Inc. 20

21 Issues for Refining Spare capacity has been declining and is now virtually zero Increased supply of light/sweet crudes would ease capacity constraints The next few years look very tight But for the long term Heavier/sourer crude slate vs. lighter/sweeter demand slate means New distillation capacity is required More upgrading capacity is required Lead time for a new refinery 3 10 years Copyright 2005 Global Insight, Inc. 21

22 EU RO PEA N FU EL PRI CE CO N FEREN CE 12 Issues Arising High and Low Prices Cases Supply and Demand The Big Questions Sustainability of Business as Usual

23 Prices Sustainability of Higher/Lower Prices For short periods exceptional demand/supply conditions may make prices vary from LRMC But prices evoke demand/supply responses Eventually prices return to close to LRMC Therefore A sustained high or low price requires either Changes in the build up of LRMC Supply or demand does not respond to price What factors might cause these? Copyright 2005 Global Insight, Inc. 23

24 Prices and the Build Up of the LRMC Higher Prices Higher F&D Costs Higher Operating Costs Higher Taxes/Royalties Higher DD&A (= F&D) Higher Capital Return Aspirations of oilcos or Requirements of banks Lower Prices Lower F&D Costs Lower Operating Costs Lower Taxes/Royalties Lower DD&A (= F&D) Lower Capital Return Aspirations of oilcos or Requirements of banks F&D Finding & Development DD&A Depletion, Depreciation & Amortization Copyright 2005 Global Insight, Inc. 24

25 Supply or Demand Not Responsive to Price Non-OPEC supply constrained OPEC output does not rise fast enough Changed elasticity of demand Exogenous factors affect consumption behaviour Local price regimes do not reflect international prices Copyright 2005 Global Insight, Inc. 25

26 Supply Outlook Issues Reserves proven and probable Converting proven reserves into production Converting probable reserves into proven IOC access to reserves Depletion rates Need to move from development-led to exploration-led projects Oil company behaviour and priorities Costs Copyright 2005 Global Insight, Inc. 26

27 Oil Supply/Demand Questions and Key Issues Demand Is business as usual sustainable? If so, for how long? What would it take to change behaviour? Supply How big is the reserve base? Is a peak (or plateau) imminent? Will IOCs get access to reserves? Will OPEC be able/willing to fill the gap? Will refinery capacity match demand? Copyright 2005 Global Insight, Inc. 27

28 Sustainability of Business as Usual?..the Outlook has presented systematically the projections of energy demand and supply that result from the Reference and Deferred Investment Scenarios. In no sense, however, can either vision of the future be considered sustainable IEA World Energy Outlook 2005 Middle East and North Africa Insights page 268 Copyright 2005 Global Insight, Inc. 28

29 EU RO PEA N FU EL PRI CE CO N FEREN CE 12 Thank you! Thank You Name Title first.last@globalinsight.com Graham Loveland Associate Principal Consultant graham.loveland@globalinsight.com Copyright 2005 Global Insight, Inc. 29

WORLD ENERGY OUTLOOK 2005 Middle East & North Africa Insights

WORLD ENERGY OUTLOOK 2005 Middle East & North Africa Insights Nicola Pochettino Senior Energy Analyst Global Energy Trends: Reference Scenario International Energy Price Assumptions The assumed oil-price