Dallas, TX March 1, 2017 Scoping 21 st Century Energy Geopolitics Thomas A. Petrie, CFA Petrie Partners, Chairman
Topics Today s Realities Global Perspective on New Production Sources Opportunities vs Challenges Saudi Aramco IPO Implications for American Petroleum Strategy U.S. LNG Exports Concluding Observations 1
Today s Realities World Events and Oil Volatility Nominal per Barrel Pricing (1972 2017) $160 $160 $140 $140 $120 $120 Fiscal Cliff fallout concerns Syrian civil war escalates ISIS on rise Russia challenges Ukraine $100 $100 $80 $60 $40 Iranian Revolution Shah deposed Iran-Iraq War begins; oil prices peak Saudis abandon swing producer role; oil prices collapse Gulf War ends Iranian oil in production precipitates the decline Prices spike on Iraq war, rapid demand increases, constrained OPEC capacity, low inventories, etc. Prices rise sharply on OPEC cutbacks, increased demand Back from the abyss Saudis decline to play a swing producer role again Saudis to abandon market share competition? $20 1973 Arab Oil Embargo OPEC agrees to quotas Iraq invades Kuwait Prices fall sharply on 9/11 attacks, economy weakness Fear of global economic meltdown Saudis considering partial sale of Saudi Aramco? $0 1972 1987 1982 1987 1992 1997 2002 2007 2012 2017 1977 Source: EIA. Major oil price inflection points typically coincide with Middle East geopolitical events 2
Today s Realities The 2011 Arab Spring Skipped Summer and Morphed Into Winter Tunisia Iraq Iran Algeria Libya Egypt Kuwait Qatar Saudi Arabia UAE Mauritania Mali Niger Sudan Chad Three failed states Iran-Iraq virtual merger possible post Sistani? Saudi-Iran still in a Cold War state An especially flawed misread by Western press and policymakers 3
Today s Realities Evolving Power Triangles Russia Historical view: To US and West Turkey Saudi Arabia Iran New view to east India? China These realignments dwarf the experiences of the second half of the 20 th Century 4
Global Perspective on New Production Sources Country Potential for Production Increases Observations U.S. Possibly Significant Will involve lead times and sound Trump policy decisions Saudi Arabia Quite Possibly Limited Growing domestic demand challenges export capability (i.e. oil consumption to generate electricity) Iraq Very Significant Very subject to improved domestic security of reduced ethnic tensions Iran Russia Potentially Meaningful Potentially Significant However, very dependent on ability to attract foreign investment and subject to development lead times Rosneft has identified projects with potential to add 600 MBblpd of new production in 2 3 years Venezuela Likely Very Limited Issues involve domestic social instability, resource maturity Nigeria Argentina Colombia Notionally Significant But Challenged Meaningful to Domestic Supply Needs Meaningful to Domestic Supply Needs Subject to domestic instability, corruption and lead time challenges for new investment Unlikely to be a global game changer Upside is with the margin of error in global supply 5
Opportunities vs Challenges Opportunities Challenges Sustainable Saudi/Iranian cooperation on oil pricing Global oil demand growth could disappoint (possibly down to or below 1.0 million b/d)? Ongoing Russian Support of OPEC cuts A looming peak in China s and India s inventory build? Determined Saudi Aramco IPO progress Will a stronger dollar derail oil supply/demand rebalancing? 6
Saudi Aramco IPO The Basis for a Tailwind Aramco IPO is on Track as Saudi Arabia Weighs Best Road Ahead Minister Says Saudi Aramco IPO to Offer Shares in Whole Company Valuation remains an open issue JP Morgan to lead with Moelis, Morgan Stanley, HSBC and Citi as co-managers Nabors Signs Joint-Venture Pact with Saudi Aramco 7
MMBopd Implications for American Petroleum Strategy U.S. Oil Production by Type in New Policies Scenario 12 10 Peak Concerns re: Peak Oil! Thanksgiving Surprise of 14??? 8 6 Light Tight Oil Other Unconventional Oil NGLS 4 2 Crude Oil: Fields yet-to-be found Fields yet-to-be developed Currently producing 0 1980 1990 2000 2010 2020 2030 2035 Note: The World Energy Model supply model starts producing yet-to-find oil after it has put all yet-to-develop fields into production. In reality, some yet-to-find fields would start production earlier than shown in the figure. Source: IEA, World Energy Outlook 2012. 8
Implications for American Petroleum Strategy U.S. Legacy Infrastructure for Oil Exports Puget Sound, WA Bakken Eastern Canada San Francisco, CA DJ Basin Cushing, OK Europe Los Angeles, CA SCOOP/STACK Permian Houston, TX Eagle Ford Asia via expanded Panama Canal Elimination of the ban on U.S. oil exports potentially a price-capping development 9
U.S. LNG Exports U.S. A Possible Top 3 LNG Supplier LNG demand expected to grow significantly from 2015 to 2030 Supply-demand gap projected to open shortly after 2020 as trade grows and existing production declines in certain regions ~42 new LNG trains needed to take FID by 2025 to meet forecasted demand through 2030 Source: Cheniere Energy investor presentations and Wood Mackenzie estimates. 10
Concluding Observations Following Oil Lessons That are Time and Cycle Tested While actions are now speaking louder than words, there remains an ongoing motivation for OPEC to periodically remind us of oil price downside risks. The evolving plan for a 2018 Saudi Aramco IPO is gathering increased market attention. Only a decade ago it appeared that the U.S. was on a path to be the largest LNG import market; barring flawed policy direction post the 2016 election it is now poised to become a top three LNG exporter. Growing LNG volumes represent many opportunities to reduce carbon emissions and improve energy security in the U.S., Asia, and Europe. 11