2025 2030 OPEC MARKET SHARE 60% 50% 40% 30% 20% 10% 0% 22 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 ACTUAL DOE IEA PEL PIRA DBAB DRI-WEFA
PRICE OUTLOOK $60 $50 $40 1999$/BBL $30 $20 $10 $0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 ACTUAL DOE IEA PEL GRI DRI-WEFA 23
OPEC MARKET SHARE DEMAND LEVEL MACROECONOMY LEVEL OF GROWTH POTENTIAL FOR NEW SHOCKS NON-OPEC SUPPLY PRICE/MNOC INVESTMENT DEEPWATER, FSU GTL, TAR SANDS OPEC INVESTMENT POLITICAL REGIME (VENEZUELA OR ALGERIA?) APPLIES TO NON-OPEC TOO 24
IMPORTANCE OF POLITICS there is no guarantee that the current freemarket orientation of economic ideology will not swing back towards the left and greater governmental interference in markets or ownership of industry.also, though, continuing economic problems due to international debt, the recession, bank failures, etc., may cause...policymakers in many developing countries to abandon efforts at market reform. Lynch 1991 25
SHORT-TERM MARKET OUTLOOK FEARS OF TIGHTENING LATE IN 2002 GOOD OPEC DISCIPLINE ECONOMIC RECOVERY (?) POSSIBLE NEW COLLAPSE? VENEZUELA, ALGERIA, NIGERIA CHEATING RUSSIA, OTHER NON-OPEC SOARING PRICE IMPACT ON DEMAND 26
USABLE COMMERCIAL INVENTORIES 18 16 14 12 10 8 6 27 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 DAYS SUPPLY Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Monthly 12-Mo. Avg.
PRODUCTION OVER QUOTA 1400 1200 1000 800 TB/D 600 400 200 0 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 SAUDI IRAN IRAQ KUWAIT UAE QATAR VENEZUELA NIGERIA INDONESIA LIBYA ALGERIA 28
OPEC MARKET SHARE 60% 55% 50% 45% 40% 35% 30% 25% 29 1960 1965 1970 1975 1980 1985 1990 1995 2000
PAST AS PROLOGUE? VENEZUELAN BEHAVIOR UNDER GIUSTI 3600 3400 3200 3000 2800 2600 2400 2200 2000 30 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 TB/D PRODUCTION QUOTA
OPEC SURPLUS CAPACITY 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 31 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 TB/D Jan-02
WTI Base and High Case Scenarios (Dollars per barrel) 33 31 29 27 25 23 21 19 17 Jan 01 Mar 01 May 01 Jul 01 Sep 01 Nov 01 Jan 02 Mar 02 May 02 Jul 02 Sep 02 Nov 02 Jan 03 Mar 03 Bas e Case High Case 32
US GAS MARKET IN TRANSITION? 9 8 7 6 5 $/MCF 4 3 2 1 0 Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 33
The evidence of serious supply constraints have been strong since 1996. US Decline Rates Have Increased US Deliverability and Utilization 30% 25% 20% 60 58 56 54 52 100% 95% 90% 15% 10% 5% Bcfd 50 48 46 44 42 40 Deliverability Deliverability Utilization 85% 80% 75% 70% 0% 90 91 92 93 94 95 97 98 99 00 01 14% 15% 17% 17% 18% 20% 23% 23% 26% 27% 28% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 34
Supply costs are rising. Will prices support LNG and Alaska? Average Wellhead Prices (1960-2001) Marginal Supply Cost ($2000/MMBtu) 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Nominal $/Mcf 2000$/Mcf 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Coal Be d Me t ha ne North Texas Tight Gas Mid- Contine nt De e p GOM GOM (Jack PlatformUp <150' WD South Te x a s LNG (East) GOM (Jack Up >150'WD) West Texas Tig ht Ga s Alaska Lo w Ea s t Te x a s Tig ht Ga s LN G (Wes t) Alaska Hig h 35
LNG growth will add about 2.5 to 3 Bcfd over the next decade (15+MT LNGe) Existing Sendout Cap. 2.8 Bcfd East Coast $3.25 - $3.50 West Coast $3.50 - Chevron, Irving $4.25 Everett,MA (Tractebel) West Coast (BP) Radio Island,NC (EL Paso) Cove Point, MD (Williams) East Coast (BP) Baja, Mexico (Chevron, El Paso) (Sempra, CMS) Existing Terminals Proposed Terminals Lazaro Cardenas, Mexico (El Paso) Lake Charles,LA (CMS Energy) Gulf Coast Dynegy, Texaco, Others Altamira, Mexico (El Paso) Elba Island,GA (EL Paso) Bahamas (,El Paso, Enron) (AES) Puerto Rico, Dominican Republic 36
Demand side response will limit gas price increases Conventional Coal $3.80 delivered. Delivered Gas Prices that Make Coal Competitive New Source Review 4.00 3.80 3.80 Refurbished coal capacity is competitive at $2.70 per MMBtu delivered (10% capacity increase). $/MMBtu 3.60 3.40 3.20 3.00 2.80 2.60 3.20 2.70 Transport reactor is being tested using oil cracking technology to gasify coal. 2.40 2.20 2.00 Conventional Coal Transport Reactor Refurbished Coal 37
US Natural Gas Use in Ammonia Production Decreases With High Gas Prices in 2000 and 2001 (Bcf/day) 2 1.5 1 0.5 0 1994 1995 1996 1997 1998 1999 2000 2001 38
Gas consumption for power generation is a major source of growth and uncertainty 2010 Gas Consumpton Gas consumption for power generation is the major source of growth (60% of total). Since gas is the marginal fuel, slight changes in generation from other fuels or changes in the electric power growth rate has a major impact. Projected growth rates for power generation range from 1.8% to 2.8% per year. Scenarios range from optimism to pessimism about coal, nuclear, and power growth rates. Trillion Btu MMcfd 30 29 28 27 26 25 24 2000 1500 1000 500 0 Shakeout Reference Crunch Annual Growth 2000-10 Shakeout Reference Crunch Power Total 39
Both supply and demand side uncertainties create a great deal of uncertainty Prices in 2010 ($1.90 to $3.65 per MMBtu) Need to develop deep wells offshore and onshore, LNG terminals will have to be built Growth in supply depends on new discoveries Demand response Coal fired plants are likely to play a larger role than many project Increased efficiency in industrial sector Environmental Regulations Average Wellhead Prices $2000/MMBtu 2000 (Actual) 2005 2010 2015 2020 AEO 3.69 2.48 2.67 2.81 3.11 AGA 3.69 2.39 2.46 2.55 DRI*WEFA 3.69 2.91 2.95 3.07 3.16 GRI 3.69 2.12 2.09 2.00 NPC (Ref) 3.69 2.64 3.13 3.67 NPC (High) 3.69 2.90 3.65 4.37 NPC (Low) 3.69 2.26 2.28 3.07 NRCan* 3.69 2.12 2.12 Average 2.53 2.94 3.08 2.80 Deflator 1.00 1.14 1.26 1.41 1.57 * Forecast were developed in 1999. 40
CONCLUSION (1): THINGS HAVE CHANGED MARKETS TIGHTER THAN BEFORE CAPACITY UTILIZATION VERY HIGH COMPARED TO 1980S, EARLY 1990S OPEC MORE COHESIVE POLITICAL TREND REVERBERATING TOWARDS INTERVENTION IN MARKETS 41
CONCLUSION (2): THE MORE THEY ARE THE SAME PRICE EFFECTS STILL POWERFUL AND UNDERESTIMATED GOVERNMENTS NOT AS BAD AS BEFORE UNCERTAINTIES ENORMOUS POLICY, PRICE, TECHNOLOGY, EVEN GDP GROWTH ANALYSIS IS THE ANSWER (RELATIVELY) 42