Energy & Resources If not BRICs, then what? Comparing BRICs and G6 nations in fossil fuels
Contents If not BRICs, then what? 1 Oil 3 Natural Gas 6 Coal 8 Conclusion 9 Contacts 9 b
If not BRICs, then what? It has long been acknowledged by industry experts, commentators and the media, that commercial opportunities in the BRIC nations,, and remain significant. First coined by Goldman Sachs in November, 21, the acronym has come to represent a set of countries that at the time were projected to drive global economic growth and spending power for the foreseeable future 1. Recently, John Authers, writing in the Financial Times 2 and Peter Coclanis, in the Wall Street Journal 3 have elaborated further on the usefulness of acronyms. Since that projection was made, the BRIC and G6 nations the United States,, Germany,, Britain, and suffered through some of the highest oil prices ever during 28; only to find themselves engulfed first in the financial crisis and then the worst global recession ever during 29. This would appear to be a good opportunity to revisit the BRIC designation, not in terms of economic growth and consumer spending but in fossil fuels. This report seeks answers to the central question: Is the BRIC designation accurate when describing the current and future status of global energy markets? When Goldman Sachs first published its report on BRIC nations, the countries were thought to have the best economic prospects for future growth and consuming power, outpacing the G6. These conclusions encompassed a wide range of economic data where BRIC nations were likely to close the gap and perhaps overtake the G6 by 25. Summarizing the findings from the Goldman Sachs report: Economic size. In less than 4 years, the BRIC economies, when aggregated, could be larger than the G6 in U.S. dollar terms. could overtake Germany by 214, by 215 and the U.S. by 239. Economic growth. According to Goldman Sach s projections, has the potential to show the fastest economic growth over the next 3 to 5 years, likely brought about by an increase in population and improvements in basic infrastructure including energy. Incomes and demographics. While incomes are likely to increase, individuals from the BRICs are likely to remain somewhat poorer on average than are individuals in the G6 by 25. may be able to catch up to the poorer of the G6 by 25 in terms of income per capita. Within the next 2 years, s per capita income could be roughly what Korea s is now about US$3, while only the U.S. reaches a per capita income level of US$8,. Global demand. By 225 the annual increase in U.S. dollar spending from BRIC nations could be two times that of the G6 and potentially four times higher by 25. Currency movements. BRICs real exchange rates could appreciate by up to 3 percent over the next 4 years. s currency could double in value within 1 years time if growth rates continued uninterrupted and the exchange rate were allowed to freely float. While economic and consumption data provide much input for discussion and debate, it doesn t present the whole picture. For example, in terms of population size and growth, whilst and are the top two largest populations by 25 (respectively 1.6 and 1.4 billion people), is hardly part of the top pack, having suffered from a severe population decline from 14 million in 21 to around 1 million people by 25, when or the UK alone will count around 7 million people on the same year. Moreover, while the Human Development Index (HDI) of the G6 varies between.85 and.9, comes on top of the BRIC countries with.71 and is last with.51 on the same index. A quick look at the military expenditure also gives a contrasted picture of the BRIC countries in relation to the G6. Whilst the top 4 military budgets in the world include the U.S. (US$ 66 bn), (US$ 1 bn), (US$ 64 bn) and the UK (US$ 58 bn), the remaining 3 BRIC countries stand relatively far from these figures, with in particular at US$ 26 bn or even at US$ 53 bn only, although still holds the second largest nuclear arsenal globally. These figures show that the BRIC countries are not all of them in a position to play a global security role that is commensurate to their market power and that it will take them more time to assume a global presence of power. 1 Dominic Wilson and Roopa Purushothaman, Dreaming with BRICs: The Path to 25, Global Economics Paper No. 99, Goldman Sachs, October 1, 23, p. 2. 2 John Authers, BRIC-like Branding is a Dangerous Path to Take. Financial Times January 22, 211. 3 Peter A. Coclanis, Beyond BRICs and PIGs. Wall Street Journal February 1, 211. 4 Leslie Elliott Armijo, The BRICs Countries as Analytical Category: Mirage or Insight? Asian Perspective, Vol. 31, No. 4, 27, pp. 7-42. 5 Ibid. If not BRICs, then what? Comparing BRICs and G6 nations in fossil fuels 1
Then, when it comes to nations that can be considered democratic, and can be described as wellinstitutionalized democracies. While is consolidating its oil and gas and electric utilities sectors to become more market oriented, the country appears to be returning to a period of state control both in the political and economic arenas while is described as a Marxist people s republic. Each of the four countries embodies distinct languages and cultures and taken as a whole they possess varying degrees of industrial capabilities. All four nations have embraced modern capitalist ideals. and are significantly globalized while and less so, the latter being the most vocal critic of free market mechanisms and globalization. In the big picture, and are energy producers while and are energy consumers. BRICs and fossil fuels To gauge whether the BRIC designation is accurate for the fossil fuels industry, the authors reviewed and analyzed data from the BP Statistical Review of World Energy, June 21 edition (based on 29 year-end data) Based on the data, nine categories were developed for review and analysis: Oil reserves, oil production, oil consumption Refinery capacities Natural gas reserves, gas production, gas consumption Coal reserves and coal production Based on the analysis of the raw data, each of the nine categories was assigned a winner, either the BRICs or G6. and are significantly globalized while and less so, the latter being the most vocal critic of free market mechanisms and globalization. 2
Oil Oil Reserves The structure of the global oil industry has been undergoing drastic change for the last several decades. The prime driver of this change has been more production moving to countries dominated by national oil companies that continue to hold the majority share of proved reserves. When comparisons are made between the BRICs and G6, we find that and the U.S. lead their respective groups in proved, conventional oil reserves, but the one country showing the most promise is. Not factored in to s reserves data are the estimates from recent developments in the Santos Basin area. 's oil regulator the ANP recently announced that the Libra prospect in the pre-salt layer of the Santos Basin could hold up to 15 billion barrels of recoverable reserves, making it potentially larger than the country s massive Tupi field with an estimated 5-8 billion barrels of oil equivalent (boe) in recoverable reserves. 6 If confirmed, Libra could also more than double the country's proven oil reserves which stood at roughly 13 billion barrels at the end of 29. 7 The ANP also estimated that the volume of recoverable oil reserves at the Libra prospect could range between 3.7 billion barrels and 15 billion barrels. If these conventional oil reserves estimates come close to being accurate, one likely scenario is that makes the leap into major oil producer, and even likely exporter, status within the next ten years. Proved oil reserves (billion barrrels) 8 7 6 5 4 3 2 1 U.S. Britain Germany Of the four BRIC nations holds the most proved oil reserves at slightly over 74 billion barrels. Of the four BRIC nations holds the most proved, conventional oil reserves at slightly over 74 billion barrels, which, although the largest in the group, pales in comparison to Saudi Arabia, Venezuela, Iran, Iraq and Kuwait. and have measurable reserves, but their reserves-to-production ratios stand at 21 years and 11 years respectively at current usage rates. Reserves winner: BRICs 6 Juliette Kerr, 's Oil Regulator Claims New Find Could Hold Up to 15 Billion Barrels. IHS Global Insight Daily Analysis November 1, 21. 7 Ibid. If not BRICs, then what? Comparing BRICs and G6 nations in fossil fuels 3
Oil production (thousand barrels per day) 12, 1, 8, 6, 4, Production While estimates vary from 75 to 9 percent of the world s oil reserves owned by national oil companies, it comes as no surprise that oil production has continued to move to where the reserves are located. Based on their respective categories, leads both the G6 and BRIC nations with 1 million barrels a day (mb/d) of oil production, while the United States comes in a close third at almost 7.2 mb/d (just behind Saudi Arabia). Not reflected in these figures are s aggressive moves to acquire additional reserves abroad and s estimated production in the future. 2, Production winner: BRICs Oil consumption (thousand barrels per day) 2, 15, 1, 5, U.S. Germany U.S. Britain Britain Germany Consumption Oil consumption has traditionally been strongest in the west, led by the U.S. at 18.7 mb/d; but the BRIC nations are slowly closing the gap, led by (8.7 mb/d) and (3.1mb/d). Declining consumption in the west is due to lower gross domestic product (GDP) economic growth and policies to curb the use of transportation fuels. Alternatively, oil consumption growth in and is due to robust economic growth in both countries, leading to increases in the middle class with disposable income. Although Chinese GDP is forecast to slow somewhat over the next five years, it is nonetheless likely to remain impressive. A recent publication by the Economist estimates Chinese GDP growth at 8.4 percent; follows closely behind with 8.2 percent. 8 In comparison, annual growth rates are predicted to be significantly lower in the west, at no more than 1.5 percent in the United States and 1.3 percent in the United Kingdom. 9 The key distinction is that BRIC nations are currently experiencing their own industrial era requiring more energy consumption. Consumption winner: G6 8 The World in 211, The Economist pp. 115-123. 9 Ibid. 4
Refinery capacities The great refining continental shift from west to east is now a reality. 1 This shift is being driven not only by economic growth but a growing demand for automobiles in the east. During 29 and 21, five new refineries were brought online, all in the Middle East and Asia. Accordingly, refining capacity in Asia increased by more than 1 million barrels per day (mb/d). For the years 211 through 215, an additional 3 mb/d of refining capacity will likely be added in Asia. This suggests a longer-lasting scenario: long-term demand for petrol and distillates will stabilize and decline in western economies, while demand increases in Asia. Asia has often been described as a future one billion car market and most of this growth is coming from. The Chinese government is looking to re-educate its people in the manners of consumerism. By providing for targeted tax incentives, rebates and price concessions, the government hopes to increase consumption by for both imported luxury products as well as for locally manufactured products. With millions of Asian consumers expected to enter the middle class by 224, there will likely be close to 25 million cars in alone. Cars allow easier travel and enable the population to develop and get used to the new concepts of leisure time, all of which contribute to increase consumption and consequently demand for refined products. Although future refining capacity will continue to grow in the BRIC nations, the west has historically had a more highly developed refining industry, which in Europe in particular, is now reverting back to the olden days of significant overcapacity. Refinery capacities (thousand barrels per day) 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, U.S. Germany Britain Asia has often been described as a future one billion car market and most of this growth is coming from. Refining capacity winner: G6 1 Travelling east: The great energy continental shift. Adi Karev speech to the Australian Petroleum Production & Exploration Association, May 16-19, 21, Brisbane, Queensland, Australia. http://www.deloitte.com/ assets/dcom-global/ Local%2Assets/ Documents/Energy_ Resources/Travelling% 2East_Karev_3973A.pdf If not BRICs, then what? Comparing BRICs and G6 nations in fossil fuels 5
Natural Gas Natural Gas Although unconventional sources of natural gas gained widespread media attention during 21, traditional sources of natural gas continue to be an important part of the energy mix for electric utilities. Increased use of gas for power plants is seen by many government policy makers and utilities alike as a cleaner fuel than coal for power generation and a way to reduce carbon emissions. Natural gas proved reserves (trillion cubic feet) 1,8 1,6 1,4 1,2 1, 8 6 4 2 U.S. Britain Germany Reserves The reserves category is dominated by one nation:. s traditionally large natural gas reserves easily dominate both the G6 and the other BRIC nations and over the last several years, intense political and media attention has been devoted to the balance of market power between mainly through Gazprom as a major supplier and the European Union (EU) nations as major buyers. The debate about EU energy security issues has been fuelled as many to European Union pipeline projects have been perceived to increase the energy dependence of EU member states on. 11North American Natural Gas Supply Assessment, American Clean Skies Foundation, July 28. 12CICS: Unconventional Resources Altering Global Gas Outlook, Oil & Gas Journal, November 9, 29. Unconventional gas has been called a game changing event. Production potential from tight gas and other unconventional resources has already altered the world s natural gas outlook. With the profusion of unconventional supplies, the U.S. now has 2,247 trillion cubic feet (tcf) of proved gas reserves, enough to last roughly 118 years at 27 demand levels according to a recent study from the American Clean Skies Foundation. 11 These new found sources place the U.S. slightly ahead of in terms of gas production. One scenario has the United States becoming a gas exporter within the next five years. This abundance of new supply isn t just a U.S. phenomenon. By 235, shale gas could represent 62 percent of the total gas produced in and 5 percent in Australia. 12 Canada, too, is looking to shale gas to boost its supply. There is also shale gas in Europe but it faces greater obstacles to development because few of the resources are located on private property, the environmental concern is high among the population and the capacities of the oilfield service industry have been stretched in this region as they were deployed in priority in areas with more potential like the U.S. Yet some still see the potential of European shale gas resources as sufficiently robust to further alter the energy supply picture. Conventional natural gas reserves winner: BRICs 6
Production Production of natural gas continues to be driven by two countries: the U.S. and. Both countries are mature producers in that both have extensive gas pipeline networks and large consuming populations. Within the next five-year period, the U.S. will increase its gas production based on unconventional sources and could become a net gas exporter, effectively altering the economics of future liquefied natural gas (LNG) projects. Alternatively, is expected to become a significant gas supplier to Asia, providing a much needed economic boost to the East Siberian region. Natural gas production (billion cubic metres) 7 6 5 4 3 2 currently exports only LNG to Asia but Gazprom envisions Asian exports matching Europe in the not-toodistant-future. Estimates are that Asia imports just 1/2th of the gas that sends to Europe. Other Asian nations (including, and South Korea), are estimated to receive just 8 billion cubic meters of LNG between them from by tanker. Depending on s decision to make the appropriate investment towards developing more gas reserves, this indicates a potential upside for to supply booming Asian economies in the short and long term. The increase in gas supplies from eastern comes as the decline of gas production in west Siberian fields is becoming more apparent. One of the key success factors for in winning the Asian market is Sakhalin Island, which holds vast amounts of fossil fuel reserves. Gazprom is accelerating the Sakhalin-3 gas project to come onstream during 211. 1 U.S. Britain Germany Natural gas consumption (billion cubic metres) 7 6 5 4 3 2 Production winner: G6 1 Consumption Based on the recent additions in supply from unconventional sources, natural gas consumption is being driven by the U.S. and to a lesser extent by the other G6 nations. However, as BRIC economies shake off the effects of the economic crisis, gas consumption is likely to increase. This increase in gas consumption will most likely be led by as its gas demand grows the fastest at an average rate of 6 percent a year according to the International Energy Agency. n gas demand, however, is still expected to dominate the BRIC cluster of countries, especially as gas consumption in will remain largely subsidized, according to most international agencies. If coal usage becomes an environmental issue in and is restrained in future use, gas becomes the obvious next choice. U.S. Britain Germany Based on the recent additions in supply from unconventional sources, natural gas consumption is being driven by the U.S. Consumption winner: G6 If not BRICs, then what? Comparing BRICs and G6 nations in fossil fuels 7
Coal (*) Coal represents a major part of many countries energy mix, mainly for electric utilities. Coal proved reserves (million tonnes) 3, 25, 2, 15, 1, Coal* Reserves Coal represents a major part of many countries energy mix, mainly for electric utilities. Coal reserves are led by the U.S. which is sometimes referred to as the Saudi Arabia of coal. and both have large coal reserves, while the remainder of G6 and BRIC nations possess small reserves. The continued use of coal in G6 countries is likely to be constrained by nothing more than carbon emissions. In terms of production, leads both groups of countries. The U.S. hold the largest coal reserves in the world. But the introduction of a carbon pricing mechanism in the U.S., whether through a carbon tax or a Europeanstyle cap-and-trade system, may restrict the economic benefit of using coal as a fuel for power generation, at least in the existing, coal-fired power plants in the U.S. The incremental coal demand will come from the non-oecd countries, essentially the BRIC countries, over the next two decades. 5, U.S. Germany Britain Coal production (million tonnes of oil equivalent) 1,8 1,6 1,4 1,2 1, 8 6 4 2 U.S. Germany Britain Category winner: BRICs * Anthracite, bituminous and lignite 8
Conclusion BRIC countries are increasingly becoming the major hubs of hydrocarbon reserves, production and consumption. They will further attract large amount of capital for the development and financing of new energy supply infrastructure. Over the next decade, it is likely that will become a major oil producer and exporter based on its new found reserves., in addition to being the largest gas reseve and production globally, will continue to be a dominant oil producer as its oil companies locate and exploit new reserves in order to thwart the decline of currently producing fields. As Chinese NOCs remain on the hunt for new reserves, they will add to an already increasing amount of oil production. Oil consumption and refining capacity will continue to head to Asia as emerging economies add to a growing middle class consumer base. New natural gas finds in the form of shale gas will transform the U.S. economy energy industry first as a gas exporter and then as a new transportation fuel. Coal use will likely remain as the dominant fuel of choice for many emerging economies but renewable energy and natural gas will increasingly gain on coal use. As major importers of fossil fuels, both and will be wary about their energy bills. As major producers and exporters, and potentially will want to ensure that international energy commodities prices support the development of their resources. The notion of BRIC countries as a homogenous group of leading energy countries appears to fail the test for now. Contacts Jean-Michel Gauthier Deloitte Touche Tohmatsu Limited Global Leader, Financial Advisory Services +33 1 55 61 69 11 jgauthier@deloitte.fr Mark L Robinson Deloitte Touche Tohmatsu Limited Marketing Leader, Global Energy & Resources +1 73 251 457 mlrobinson@deloitte.com If not BRICs, then what? Comparing BRICs and G6 nations in fossil fuels 9
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