Rebalancing Global Crude Flows John Mayes Director of Special Studies AFPM Annual Meeting San Antonio, Texas March 24, 2015
TM&C North American Crude & Condensate Outlook TM&C publishes North American and Worldwide Crude & Condensate Outlooks Issues of North American production gains on worldwide balance became evident in the past two years Hypothetical projection of a global supply and demand balance was a topic in 2014 edition Page 2
North American Production Gains Millions of BPD 14 12 10 8 6 4 2 0 2005 2007 2009 2011 2013 U.S. crude oil production grew by 3.6 million BPD between 2008 and 2014 The U.S. had its greatest oil growth in 2014 at 1.2 million BPD Canadian production grew by 1.1 million BPD between 2008 and 2014 U.S. Canada Source: EIA Page 3
Global Crude Production Growth from 2008 2014 4.0 3.0 Millions of BPD 2.0 1.0 0.0 1.0 2.0 U.S. World Canada Iraq Russia Saudi Arabia Source: EIA, JODI, TM&C China Mexico U.K. Norway World (excl. U.S.) Libya Iran Page 4
Initial U.S. and Canadian Crude Projections U.S. production to peak 2022 at 12.1 million BPD Canadian production to grow to 5.7 million BPD in 2025 Millions of BPD 20 18 16 14 12 10 8 6 4 2 0 2014 2016 2018 2020 2022 2024 U.S. Canada Page 5
Initial Global Crude Supply and Demand Implications Millions of BPD 90 88 86 84 82 80 78 76 74 4.7 million BPD 2014 2016 2018 2020 2022 2024 Supply overhang peaks at 4.7 million BPD around 2019 Crude production growth flattens after 2020 Assumes Saudi production at 9.7 million BPD Supply Demand Page 6
Saudi Production as Traditional Global Balancer Output declines from 9.7 million BPD to low of 5 million BPD Output rises after 2020 due to flattening of global supply growth Millions of BPD 10 9 8 7 6 5 4 2014 2016 2018 2020 2022 2024 Page 7
Conclusions from Initial Global Balance Global crude supply grows faster than demand in the near term Required Saudi output to balance are unrealistically low A new crude supply/demand/price equilibrium point was calculated Page 8
Recent Saudi Production Levels Saudi Production, Million BPD 10.5 10.0 9.5 9.0 8.5 8.0 7.5 2000 2003 2006 2009 2012 Saudi Production Percent of OPEC Source: EIA 32 31 30 29 28 27 26 Saudi Percent of OPEC Low of 7.6 million BPD in 2002 Saudi market share of OPEC at low in 2009 at 26.8% Page 9
Rebalance Assuming Saudi Arabia Will Defend Stated Price Range Minimum Saudi production of 8.25 million BPD Maximum Saudi production at 11.0 million BPD Minimum Saudi OPEC share at 25% Focus on high production cost regions Re evaluate global product demand at lower prices Re evaluate alternate fuels growth Objective new crude supply/demand balance Page 10
Revised Global Supply/Demand Equilibrium Later This Decade MMBPD Increased product demand 1.3 Alternate Fuels 0.4 Other OPEC 1.0 Non OPEC 0.7 Saudi Arabia 1.3 Total 4.7 Page 11
Cumulative Product Demand Response to Lower Price Regime Incremental demand rises to 1.3 million BPD in 2019 Petroleum Demand, Million BPD 110 105 100 95 90 85 1.3 million BPD 2014 2016 2018 2020 2022 2024 Base Adjusted Change 2.5 2.0 1.5 1.0 0.5 0.0 Change in Demand, Million BPD Page 12
Cumulative Product Demand Response to Lower Price Regime Incremental demand peaks at 2.0 million BPD Adjustment declines after 2023 Incremental demand occurs mostly in developed economies Petroleum Demand, Million BPD 110 105 100 95 90 85 2014 2016 2018 2020 2022 2024 Base Adjusted Change 2.5 2.0 1.5 1.0 0.5 0.0 Change in Demand, Million BPD Page 13
Revised Alternate Fuels Demand Million BPD 12 10 8 6 4 2 Most alternate fuels production is mandate driven Greatest reduction will be seen in NGL output 0 2014 2016 2018 2020 2022 2024 Refinery Gain Alternate Fuels NGLs Page 14
Revised Global Production Growth: 2014 to 2025 6 5 4 Million BPD 3 2 1 0 1 2 North America South America Europe Middle East Africa FSU Asia Pacific Page 15
Revised Hypothetical Saudi Forecast 11.5 32 Saudi Production, Million BPD 11.0 10.5 10.0 9.5 9.0 8.5 31 30 29 28 27 26 Saudi Percent of OPEC 8.0 2014 2016 2018 2020 2022 2024 25 Saudi Production Percent of OPEC Page 16
OPEC Crude Production 1980 1985 Production MBPD Decline MBPD 1980 1985 MBPD Percent Saudi Arabia 9,900 3,388 6,512 66 Other OPEC 15,483 11,979 3,504 23 25,383 15,367 10,016 Source: EIA Page 17
Why OPEC Can Make It Work This Time Over supply volume is less than 1980s Third party verification of production volumes - JODI Hybrid approach compared to only quota reductions to maintain price Saudi Arabia has demonstrated willingness to allow price declines Page 18
What Really Happened Oil price fell as Saudi Arabia defended its global market share November 2014 OPEC meeting declined to set production quotas Next OPEC meeting scheduled for June 5, 2015 Early U.S. demand response looks encouraging Prices have fallen, but have production rates? Page 19
Cushing Crude Inventory Million Barrels 70 60 50 40 30 20 10 Logistic Constraints Stocks have been building at 300 MBPD since Nov. EIA states working capacity at 70 million barrels Cushing predicted to be full by early May 0 Jan 12 Jan 13 Jan 14 Jan 15 Source: EIA Page 20
Recent NYMEX WTI Forward Curve 65 Dollars per Barrel 60 55 50 45 40 Apr 14 May Jun Jul Aug Sep Oct Nov Dec Jan 15 Feb Mar Apr May Jun Page 21
U.S. Crude Inventory (Excluding SPR) Crude inventories are building across U.S. Inventories are building in other regions Vessel time charters for floating storage are increasing Million Barrels 480 460 440 420 400 380 360 340 320 Jan 12 Jan 13 Jan 14 Jan 15 Source: EIA Page 22
U.S. Crude Production Forecast BPD Years Forecast Before Price Decline Current Forecast U.S. production will have a lower peak with reduced pricing level Revised production will plateau longer Long term output will be about the same as previously forecast Page 23
Conclusions U.S. has been the overwhelming contributor to international over supply environment Theoretical international supply surplus would steadily grow and peak around 2019 at up to 5 million BPD Saudi Arabia and OPEC are likely to adopt a dual strategy of output and pricing reductions OPEC is expected to have more cohesion than in 1980s The supply overhang is likely to persist for a protracted period Page 24
Conclusions (cont.) World is shifting (painstakingly) to a new supply/demand equilibrium Current global oil supply still exceeds demand 2015 crude prices likely to be very volatile U.S. oil production through 2030 will likely be comparable to forecasts prior to price collapse Supply and demand responses will determine actual equilibrium points Page 25
Presenter John M. Mayes jmayes@turnermason.com Director of Special Studies Turner, Mason & Company 2100 Ross Ave., Suite 2920 Dallas, Texas 75201 turnermason.com 214 754 0898 Page 26