Oil Markets Kevin Lindemer Executive Managing Director, Energy Markets Group
2008 Outlook Downside risks in demand are increasing due to weaker economic outlook Upside supply risks still present but balance should improve with substantial new production additions Current high prices helped sew the seeds of weaker demand and higher production Prices expected to ease in the 2 nd quarter and fall to the $80 - $85/bbl range by the end of the year OPEC production policy and financial markets will be key The value of the dollar and other commodities will play role in setting oil price Copyright 2008 Global Insight, Inc. 2
OPEC Spare Capacity and Price 25.0% $80 OPEC Spare Capacity/Demand OPEC Spare Capacity/Demand 20.0% 15.0% 10.0% WTI Price 2002 Commodity Cycle Begins; Value of the Dollar Begins to Decline; OPEC Spare Capacity Falls Below 5% of Demand $70 $60 $50 $40 $30 $20 WTI Price 2006 $ 5.0% 0.0% 1979 1985 5.5 mbd demand decrease 5.5 mbd non-opec increase 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 $10 $- Copyright 2008 Global Insight, Inc. 3
Demand Demand only now beginning to show signs of responding to price Non-OECD the main engine of demand growth Seasonal demand variations becoming less pronounced? Just how high does the oil price need to go to provoke a demand response? Copyright 2008 Global Insight, Inc. 4
Demand/Risk Growth 2.0 Total Demand (mb/d) 0.35 1.22 1.01 1.08 1.60 1.11 1.16 1.37 1.5 1.0 Million B/D 0.5 0.0-0.5 Demand continues strong growth, but downside risks are also increasing Total Non-OECD Total OECD -1.0 2007:1 2007:2 2007:3 2007:4 2008:1 2008:2 2008:3 2008:4 Copyright 2008 Global Insight, Inc. 5
Supply: Growing Spare Capacity This Year A supply cushion will re-emerge this year and grow further next year Above and below ground factors mean that more incremental supply is coming from other liquids Decline rates are an uncertainty in the market and increasingly significant Worst-case economic scenario will cause spare capacity to accumulate Copyright 2008 Global Insight, Inc. 6
Net Global Oil Capacity Changes: Spare Capacity Increase Coming non-opec Supply Growth (MBOPD) OPEC Supply Growth (MBOPD) non-opec Decline (MBOPD) OPEC Decline (MBOPD) Demand Growth (MBOPD) Net Capacity Change (MBOPD) 5000 4000 3000 2000 1000 0-1000 -2000-3000 -4000??? 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Data Sources: IEA, EIA, OPEC, Company Reports, Trade Press, The Energy Consulting Group Copyright 2008 Global Insight, Inc. 7
Global Insight Oil Price Outlook March 2, 2008 Financial or Physical Fundamentals? 120.00 100.00 Financial Fundamentals Dominate Firm demand growth conctrated in Asia while non-opec increases build up only slowly. OPEC adopt an aggressive stance on supporting prices. Weak dollar drives financial sector support for oil futures. Geo-politcal tensions resurface. Commodity market driven spike above $105 is possible in the short-term Dollars per Barrel 80.00 60.00 40.00 20.00 Strong OPEC Position and Geopolitics Global Recession Oil Supply/Demand Dominates China hard economic landing after the 2008 Olympic Games combined with strong increases in OPEC and non-opec supply. OPEC cannot reduce output fast enough to keep prices in their desired range. Spare capacity increases and is sustained. 0.00 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Copyright 2008 Global Insight, Inc. 8
Long-Term Oil Prices Weakening Ahead, But a Sustained High Price Range? Global Insight s view is that long-term oil prices will fall from the current level to the mid $80 range by end fourth quarter. Prices will trend in a higher range than the past due to: Continued strong demand Tighter production capacity Continued weak dollar Significantly weaker prices will require both supply and demand developments Signposts continue to point to an even higher price range as the alternative to the current Global Insight view Oil is behaving like other commodities Is demand at or near an inflection points? The resource base is not the issue, access to it is Continued relatively high production costs More restrictive access and fiscal regimes Copyright 2008 Global Insight, Inc. 9
Demand Growth: Asia and the Transport Sector Dominate Global Oil Demand by Region Oil Demand Growth (2005 25) Million Barrels a Day 120 100 80 60 40 FSU Africa Middle East Asia/Pacific S. Am erica E. Europe W. Europe N. Am erica Million Barrels per Day 12 10 8 6 4 2 Others Power Generation Transportation Petrochem ical Feedstock Industrial Sector Domestic Sector 20 0-2 0 1990 1995 2000 2005 2010 2015 2020 2025 North America West Europe Eas te rn Europe South America Asia/ Pacific Middle Eas t Africa FSU Copyright 2008 Global Insight, Inc. 10
Oil Demand in Emerging Markets: How High Will They Go? 4.5 4.0 Energy Demand Per Capita Tonnes/Yr 3.5 3.0 2.5 2.0 1.5 1.0 0.5 - World India South Korea FSU China Turkey Hungary Poland Canada Germany UK Scandi Copyright 2008 Global Insight, Inc. 11 Japan 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 Per Capita GDP 2006 PPP U.S. Price Environment Technology Energy Security Growth
Oil Volumes and Technology: Resource Base Is Not a Constraint Dollars per Barrel Source: IEA, EIA, Company Websites, O&G Journal, World Oil, Rand Corporation, ECG Copyright 2008 Global Insight, Inc. 12
Light/Sweet Crude Oil Price Scenarios: 2006 Dollars Supply Shock Can Occur Anytime 140 120 100 Market Remanaged Supply Constrained Demand Constrained Shock Stronger Rates of Decline Continued Strong Demand Further Access Restrictions Further Weakening of the Dollar 80 60 40 20 0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2006 $/bbl 2028 2030 2032 2034 Slower GDP China Hard Landing Return of Iraq and Nigeria Shut-in Capacity Stronger Dollar Copyright 2008 Global Insight, Inc. 13
North American Natural Gas
Short-Term Outlook Henry Hub ranges between $7 and $10 in the next two years New England remains a premium market when winter temperatures fall U.S. production remains stable as long as drilling continues 2008 economic slowdown reduces demand only slightly 2009 demand rebounds, rising 0.3 TCF above 2007 demand Copyright 2008 Global Insight, Inc. 15
U.S. E&P Drilling Productivity Well/Rig and Footage/Rig 1600 16 U.S. Natural Gas Rig Count 1400 1200 1000 800 600 400 200 14 12 10 8 6 4 2 Thousands 0 5/8/2005 4/28/2007 5/29/2001 5/19/2003 6/19/1997 6/9/1999 7/10/1993 6/30/1995 7/31/1989 7/21/1991 0 4/17/2009 8/11/1987 Year Wells/Rig Footage Drilled/Rig Rigs Drilling for Natural Gas Copyright 2008 Global Insight, Inc. 16
By 2024, U.S. LNG Demand Will Grow to 80% of European LNG Demand Supply (Trillion Cubic Feet) 26 24 22 20 18 16 14 12 10 8 6 4 2 0 1990 1992 1994 1996 U.S. Natural Gas Supply 4.3 TCF or 120 BCM of LNG deliveries in 2024 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 L-48 Production Canada Net Imports LNG Imports Alaska Copyright 2008 Global Insight, Inc. 17
Gas Prices to Stabilize at $7 (Real) Henry Hub Spot Natural Gas Price 10.00 9.00 8.00 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 7.00 6.00 5.00 4.00 3.00 2.00 Real Price (2006$/MMBTU) 1.00 0.00 Copyright 2008 Global Insight, Inc. 18
Downstream Oil Gasoline supply will be well in excess of market requirements by 2015 Long-haul imports (particularly EU) will decline and could force major refinery changes there By 2030, the market will need less gasoline from U.S. refineries than today with no imports Distillates demand will continue to pull supply through the end of the period giving refiners incentive to shift yields from gasoline Total gasoline and distillate refinery production in 2030 is expected to be less than 2007 Copyright 2008 Global Insight, Inc. 19
U.S. Gasoline Supply/Demand Outlook: Supply Surplus by 2012 16,000 14,000 The issue is declining demand 12,000 Thousands of bpd 10,000 8,000 6,000 4,000 2,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Refinery Production Ref Cap Creep 1%/yr Ethanol Mandate Conv. Ethanol Mandate Cell. Ethanol Corn High Tech Canada Carribean South America Europe Other Base Case Demand Warner/Lieberman Demand Call on Refineries W/L Copyright 2008 Global Insight, Inc. 20
U.S. Distillate Supply/Demand Outlook: Supply Shortfall by 2017 8,000 7,000 The issue is how fast yields are shifted 6,000 5,000 Thousands of bpd 4,000 3,000 2,000 1,000 0-1,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Refinery Production Ref Cap Creep 1%/yr Biodiesel Canada Carribean South America Europe Other Base Case Demand Warner Lieberman Demand Call on Refineries W/L Copyright 2008 Global Insight, Inc. 21
U.S. Gasoline and Distillate Supply/Demand Outlook: Little Room for Refinery Expansions or Imports, But Yields Must Shift 25,000 20,000 Thousands of bpd 15,000 10,000 5,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Refinery Production Ref Cap Creep 1%/yr Biofuels Canada Carribean South America Europe Other Base Case Demand Warner/Lieberman Demand Call on Refineries W/L Copyright 2008 Global Insight, Inc. 22
Biofuels Breakeven Prices First Generation Ethanol Favored Corn: continued yield increases Sugar: continued increases in area harvested Second Generation Biodiesel Favored Jatropha and algae Edible oils are only transitional and too expensive Inherent policy conflict Copyright 2008 Global Insight, Inc. 23
Supply/Demand Forecasts: U.S. Biofuels U.S. Bioethanol Supply/Demand U.S. Biodiesel Supply/Demand 80 70 Market Remanaged 10 U.S. Biodiesel 60 8 Billions of gallons 50 40 30 20 10 Demand Forecast Billions of gallons 6 4 2 Demand Forecast Supply 0 2005 2010 2015 2020 2025 2030 Potential Production U.S. growth in bioethanol projected to reach 15 billion gallons by 2015 (about 1 mmb/d) 0 2005 2010 2015 2020 2025 2030 Potential Production Biodiesel demand and potential supply can be based on nonedible oils such as jatropha, algae, wood waste, and other non-food products Copyright 2008 Global Insight, Inc. 24
Supply/Demand Forecasts: Europe Biofuels EU Bioethanol Supply/Demand EU Biodiesel Supply/Demand 4 Market Remanaged 8 EU Biodiesel Billions of gallons 3 2 1 Demand Forecast Billions of gallons 6 4 2 Demand Forecast 0 2005 2010 2015 2020 2025 2030 Potential Production EU growth to be limited by local supply and must rely on imports from Africa and South America 0 2005 2010 2015 2020 2025 2030 Potential Production New refinery-based technologies employing biomass conversion into liquids look promising Copyright 2008 Global Insight, Inc. 25
Crude Oil Price Needed for Ethanol to Breakeven $90.00 $80.00 $70.00 2006 Dollars per Barrel $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $- 2006 2007 2008 2009 2010 Corn Based Ethanol US Wheat Based Ethanol EU 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Thermochemical Ethanol Papermill Sugar Cane Based Ethanol Brazil Biochemical Ethanol Corn Stover WTI Crude Oil 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Copyright 2008 Global Insight, Inc. 26
Crude Oil Price Needed for Bio-Based Diesel to Breakeven $180.00 $160.00 $140.00 $120.00 $100.00 $80.00 $60.00 2006 Dollars per Barrel $40.00 $20.00 $- 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Soybean Biodiesel US Palm Biodiesel EU Paper Mill FT BTL EU Jatropha US Algae US WTI Crude Oil Copyright 2008 Global Insight, Inc. 27
Thank You Kevin Lindemer Executive Managing Director, Energy Services E-mail: kevin.lindemer@globalinsight.com