construction in a world of high energy prices
TRANSCRIPT
Construction in a World of High Energy Prices
Kevin LindemerExecutive Managing Director, Energy Markets Group
Copyright © 2008 Global Insight, Inc. 2
Two Competing Future Worldviews
• Oil is running out • Natural gas is running out• Prices will keep rising
• Oil and natural gas follow commodity cycles
• Commodity prices follow boom-bust cycles
• Technology reinforces cyclical trends:
Reduces costs of finding & producing resourcesCreates supply alternativesDevelops consumption efficiencies
• Capital choices lead to boom-bust resource availability
• Demand responds
Resource Shortage is Coming
Innovation and Capital Creates Change
Copyright © 2008 Global Insight, Inc. 3
Oil and Energy Prices: Are They Near the Peak? What Comes Next?
• Energy and oil prices are likely at or near peak and could begin to decline over the next several months
Assuming no significant further political and market disruptionsCapacity margins for all energy production are at or near historic low levels but gradual improvements are expectedThe dollar is expected to weaken further which may add short-term price support to prices
• Long lasting impacts on demand and supply from high energy prices should be expected
Past price ‘peaks’ have resulted in significant fundamental changes in energy production and usePast views of the future often underestimated the magnitude of the changes
• Negative impacts on demand growth from non-price factors are already in place
Carbon limits, biofuels, and vehicle efficiency standards
• Price impacts are emerging slowly
Copyright © 2008 Global Insight, Inc. 4
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Historical Price Financical Fundamentals DominatePhysical Fundamentals Dominate Physical Fundamentals Do Not DevelopGlobal Recession
Global Crude Prices:
Driven by Supply, Demand, and Financial Fundamentals
Copyright © 2008 Global Insight, Inc. 5
Henry Hub Natural Gas Price Outlook
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Hen
ry H
ub G
as P
rice
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MB
tu)
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EU Gas: Impact of $100 Oil (Nominal)
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EUR
/MW
h
Belgium (Troll - Zeebruge)UK - NBPBelgium Troll (Base Case)NBP (Base Case)
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US
Dol
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/t ba
sis
6000
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l/kg
net a
s re
ceiv
ed Nominal History 2007 Real History
Nominal Forecast 2007 Real Forecast
Coal Price Forecast C&F ARA — Annually to 2012
Copyright © 2008 Global Insight, Inc. 8
The Fundamentals will Improve in the Short Term
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0.81.01.2
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Q1 08 Q2 08 Q3 08 Q4 08
mill
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b/d
Demand GrowthSupply GrowthBalance
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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
MB
OPD
non-OPEC Supply OPEC Supplynon-OPEC Decline OPEC DeclineDemand Growth Net Capacity Change
??????
Data Sources: IEA, EIA, OPEC, Company Reports, Trade Press, The Energy Consulting Group
Net Global Oil Effective Capacity Changes, 5% Decline
Copyright © 2008 Global Insight, Inc. 10
OPEC Spare Capacity and Price
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5.0%
10.0%
15.0%
20.0%
25.0%
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OPE
C S
pare
Cap
acity
/Dem
and
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WTI
Pric
e 20
06 $
OPEC Spare Capacity/Demand
WTI Price2002
Commodity Cycle Begins;Value of the Dollar Begins to
Decline; OPEC Spare Capacity Falls Below 5% of Demand
1979–19855.5 mbd demand decrease
5.5 mbd non-OPEC increase
Copyright © 2008 Global Insight, Inc. 11
Oil Prices and Inflation: Still Related, But Less So
• Oil prices have a smaller effect on inflation than 25 years ago
Economy is less oil intensiveMarkets are more efficient
• Oil prices have impacted economies differentlyUnited States and Europe experienced a smaller percent increase in the cost of imported crude oil than India and China
• The cost to China’s economy for imported oil is 10 times the level of 1995 and India is up by 5 times
– These economies have a greater incentive to change their oil consumption patterns than developed economies
• United States and Germany cost of imported crude oil has increased only three times from the 1995 level
Copyright © 2008 Global Insight, Inc. 12
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95 =
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and
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ate
Adj
uste
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USA
China
India
Germany
Emerging Markets Are Paying Proportionately More
Oil Net Import Costs as a Share of GDP
Copyright © 2008 Global Insight, Inc. 13
Oil Net Import Costs Share of GDP
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0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
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t Dol
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Exc
hang
e R
ate
Adj
uste
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USAChinaIndiaGermany
Copyright © 2008 Global Insight, Inc. 14
Prices at the ‘Top of the Mountain’…
• Consensus view of future prices has historically often been an extrapolation of the past
• Today’s energy production and consumption patterns are largely the result of two decades of low prices combined with the expectation of future low prices—the 1980s and 1990s
• High prices are changing market fundamentals and price expectations, which are moving to a higher future price playing field
Demand is slowingCapacity is being addedExpectations for future prices are higher than anytime in over 20 years
• Companies and governments are changing their budget prices and planning prices
• Consumers in some countries are changing their expectations about future price and consequently are changing their consumption patterns
Copyright © 2008 Global Insight, Inc. 15
…But What is on the Other Side?
• Future market drivers will be determined by higher prices
• Oil and energy markets by mid- 1980s were significantly different compared to the early- and mid-1970s
Current price environment has set the stage for possible dramatic changes in the next few years
Copyright © 2008 Global Insight, Inc. 16
Capital, Technology, and Policy Come Together for Change
• Capital: Venture Capital rushing into CleanTech; Utilities want to invest in clean coal, nuclear, wind, and energy efficiency
• Policy: Governments are forcing Energy Efficiency, Renewable Energy Adoption, and Clean Fuels
U.S. EPAct 2005: Nuclear Push, Energy EfficiencyU.S. EISA 2007: Biofuels Push, Lighting & Appliance, CAFEU.S. States: Renewable Portfolio StandardsU.S. States: Greenhouse Gas Emission RestrictionsComing: U.S. Federal GHG Emission Limits, Carbon capture & sequestration
• Technology: States are funding Cleantech Clusters around universities to spur economic development
Copyright © 2008 Global Insight, Inc. 17
Massive Fuel Switching Possible with Capital, Policy, & Technology
Copyright © 2008 Global Insight, Inc. 18
Has the Long-Term Mindset of Energy Prices Changed?
CIBC
BoonePickens
Copyright © 2008 Global Insight, Inc. 19
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$
Market RemanagedSupply ConstrainedDemand Constrained
Spikes don't last… But is this one ‘Special'?
Oil Price History and Global Insight Scenarios
Copyright © 2008 Global Insight, Inc. 20
Per Capita Energy Demand and GDP
U.S.
Mexico
Brazil
FranceGermany
UK
Russian Federation
China
India
JapanSouth Korea
Canada
Hungary
Scandanavia
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Per Capita GDP 2006 PPP
Ener
gy D
eman
d Pe
r Cap
ita T
onne
s/Yr
What growth path will Emerging Markets follow?
What growth path will Emerging Markets follow?
PriceEnvironmentTechnology
GrowthEnergy Security
Poland
Copyright © 2008 Global Insight, Inc. 21
World Energy Consumption: Are We Near an Inflection Point?
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MTO
Es/T
hous
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Dol
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MTO
Es/c
apita
Demand /GDP
Demand/Capita
?
?
Copyright © 2008 Global Insight, Inc. 22
U.S.
UK
Scandi
Germany
Japan
South Korea
ChinaIndia
Turkey
World FSU
PolandHungary
Canada
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Per Capita GDP 2006 PPP
Ener
gy D
eman
d Pe
r Cap
ita T
onne
s/Yr
PriceEnvironmentTechnology
Energy Security
Growth
Oil Demand in Emerging Markets: How High Will They Go?
Copyright © 2008 Global Insight, Inc. 23
World Oil Consumption: Will High Prices Make a Difference?
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Es/T
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MTO
Es/c
apita
Demand/GDP
Demand/Capita
?
?
Copyright © 2008 Global Insight, Inc. 24
Resources, Refining, and OPEC
• Global oil resource base is not a constraint but access to it is becoming more difficult and costly, and will require longer lead times
The low-cost ‘layer’ of oil has largely been developed and is being depleted
• Refining capacity constraints expected to ease over the next few years and be less important to overall price movements
Refiners adding capacity in response to high margins of the past few years
• OPEC’s market share is increasing and unmanageable levels of spare capacity are not expected to develop without significant demand developments
OPEC spare capacity through the 1980s and 1990s was a legacy of the rapid market shifts in the early 1980sOPEC has been raising its target price. Will it continue to rise?
Copyright © 2008 Global Insight, Inc. 25
Dol
lars
per
Bar
rel
Billions of Barrels
Oil Volumes & Technology: Resource Base is Not a Constraint
Source: IEA, EIA, Company Websites, O&G Journal, World Oil, Rand Corporation, ECG
Copyright © 2008 Global Insight, Inc. 26
What Do High Prices Mean for the Demand Forecast?
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Cons
umpt
ion
(Tri
llion
Cub
ic F
eet)
Industrial Electric Generators Residential Commercial
2Tcf Industrial demand
destructio n already occurred
2Tcf Industrial demand
destructio n already occurred
Natural Gas ConsumptionNatural Gas Consumption
Power Market Gas Demand Growth Slows
Power Market Gas Demand Growth Slows
Copyright © 2008 Global Insight, Inc. 27
0
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Trill
ion
BTU
Coal Nuclear Gas Renewables Hydro Petroleum
Renewable energy grows quickly under mandated “Renewable Portfolio Standards”
Renewable energy grows quickly under mandated “Renewable Portfolio Standards”
Technology, Policies, and Investments Favor Renewables…
Electric Generator Fuel DemandElectric Generator Fuel Demand
Copyright © 2008 Global Insight, Inc. 28
02468
101214161820222426
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Supp
ly (T
rillio
n Cu
bic
Feet
)
L-48 Production Canada Net Imports LNG Imports Alaska
Outlook Assumes LNG is Priced to Fill the Supply Gap
LNG fills the gap until,
with Alaska joining after
2024
LNG fills the gap until,
with Alaska joining after
2024
Copyright © 2008 Global Insight, Inc. 29
Stabilizing Henry Hub at a New $7.00/MMBTU
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Pric
e ($
/MM
BTU
)
Henry Hub (nominal) Henry Hub (real, 2006$)
Henry Hub Price ForecastHenry Hub Price Forecast
Copyright © 2008 Global Insight, Inc. 30
LNG Prices Track Henry Hub in the Gulf Coast, Not Oil
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710
/28/20
0711
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/27/20
07P
rice
($/M
MB
TU)
Henry Hub Trinidad Nigeria EqyptAlgeria Qatar Eq Guinea
Egypt Closest to Henry HubAlgeria, Nigeria, and Qatar Lowest Price
Outliers are Excelerate Energy
Egypt Closest to Henry HubAlgeria, Nigeria, and Qatar Lowest Price
Outliers are Excelerate Energy
Gulf Coast LNG Cargo Price 2007Gulf Coast LNG Cargo Price 2007
Copyright © 2008 Global Insight, Inc. 31
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2007 2008 2009 2010 2011 2012
Mill
ion
b/d
Demand growth
Capacity Creep at 0.5%Biofuels
Requirement for new refining capacityPutative additons to capacity
Implied surplus
Requirement for New Refining Capacity vs. Proposed AdditionsRequirement for New Refining Capacity vs. Proposed Additions
Capacity Tightness is Expected to Ease
Copyright © 2008 Global Insight, Inc. 32
OPEC Price Floors: Past, Present, and Future?
2007 Reference Price
2005 OPEC Reference Price
‘Old’ OPEC Reference Prices
…but why not target here?
2008 OPEC Reference Price
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lars
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Bar
rel
Thank YouKevin Lindemer
Energy Markets Group, Global Insight
Presentations are available for download at www.globalinsight.com/events/2008ConstructionChicago