special presentation market watch presentation for ief · 2018-05-14 · demand the past two years...

Market Watch Presentation

For IEF

10 May 2018

Alexander Pögl

Special Presentation

Disclaimer

All statements other than statements of historical fact are, or may be deemed to be, forward-lookingstatements. Forward-looking statements (including those depicted in graphical form) are statements offuture expectations that are based on JBC Energy’s current expectations and assumptions and involve knownand unknown risks and uncertainties that could cause actual results, performance or events to differmaterially from those expressed or implied in these statements. Forward-looking statements include, amongother things statements expressing JBC Energy’s expectations, beliefs, estimates, forecasts, projections andassumptions. These forward-looking statements are identified by their use of terms and phrases such as‘‘anticipate’’, ‘‘believe’’, ‘‘could’’, ‘‘estimate’’, ‘‘expect’’, ‘‘intend’’, ‘‘may’’, ‘‘plan’’, ‘‘objectives’’, ‘‘outlook’’,‘‘probably’’, ‘‘project’’, ‘‘will’’, “forecast”, “predict”, “think”, ‘‘seek’’, ‘‘target’’, ‘‘risks’’, ‘‘goals’’, ‘‘should’’ andsimilar terms and phrases. All forward-looking statements contained in this speech/presentation areexpressly qualified in their entirety by the cautionary statements contained or referred to in this section.Readers/audience should not place undue reliance on forward-looking statements. Each forward-lookingstatement speaks only as of the date of this presentation. Neither JBC Energy nor any of its subsidiariesundertake any obligation to publicly update or revise any forward-looking statement as a result of newinformation, future events or other information. In light of these risks, results could differ materially fromthose stated, implied or inferred from the forward-looking statements contained in this speech/presentation.Any persons acting on information contained in this presentation does so solely at their own risk.JBC Energy is not responsible for the accuracy of data collected from external sources and will not be heldliable for any errors or omissions in facts or analysis contained in this presentation. JBC’s third party sourcesprovide data to JBC on an “as-is” basis and accept no responsibility and disclaim any liability relating toreliance on or use of their data by any party. Data sourced as SuDeP (JBC’s in-house Supply-Demand-Priceforecasting model) or JBC Derived Data may be partly based on EIA and various national statistical entities;JODI; the MODS, ADS or MGDS (http://data.iea.org) services developed by the IEA, © OECD/IEA 2017; OPEC;and other industry sources, but the resulting work has been prepared by JBC Energy and does notnecessarily reflect the views of the original data providers. To the extent that JBC Energy comments or opineson data obtained from third party sources, these comments or opinions shall be understood as JBC Energy’sown comments or opinions unless a third party is quoted as their source.

Thursday, 10 May 2018 www.jbcenergy.com Slide 2

StudiesClient Initiated ● Expert Led ● Fundamental Driven

● Commercially Focused ● Powered by SuDeP & JBC’s Extensive Databases

Training ServicesOil Market Fundamentals ● Pricing & Risk

Management ● Oil Trading ● Public Courses & Single Client Options

www.jbcenergy.com/studies

www.jbcasia.com/consulting

www.jbcasia.com/training

Energy ConsultingAudits ● Benchmarking ● Documentation ●

Optimization Pricing ● Processes ● Risk Management ● Strategy

Analytics19 Market Publications ● Oil, Natural Gas & Alternatives ● Global Focus ● Daily, Weekly,

Monthly, Quarterly & Bi-Annually

www.jbcenergy.com/analytics

ModellingIn-House Supply, Demand, Pricing (SuDeP) Model ●Data by Country, by Region, by Sector ● Bottom Up Approach ● Standardised or Customised Modules

www.jbcenergy.com/modelling

Products & Services


http://www.jbcenergy.com/studies/

http://www.jbcasia.com/consulting

http://www.jbcasia.com/training-2/

http://www.jbcenergy.com/analytics

http://www.jbcenergy.com/modelling

Topics

• Demand

• Supply & OPEC Strategy

• Repercussions of Crude Quality Change

• 2018: Tight Product Supply

• IMO – Status & Scenario


Intro


Crude settling at their highest levels since 2014, thanks to a mixture of bullish factors such as direction of fundamentals (inventories close to 5-year average), dollar weakness and thus incentives for commodities, backwardated markets pay long oil futures, and geopolitical factors, strong OPEC solidarity and bullish refining trends.

-15.0

-10.0

-5.0

0.0

5.0

40.0

50.0

60.0

70.0

80.0

May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18

Nymex WTI 2nd vs ICE Brent FL - right scale

ICE Brent Frontline

Nymex WTI 2nd Month

Nymex WTI 2nd Mth vs ICE Brent Frontline [$/bbl]

Source: CME, The ICE

Intro

We see an extension of the agreement through 2019 as necessary to maintain price support and stop Brent from testing the $50 mark. We will make this our new base case from here onwards. Otherwise, we see a 1.8 million b/d surplus for 2019. Russian support is likely, but not a given.


-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Q1 15 Q3 15 Q1 16 Q3 16 Q1 17 Q3 17 Q1 18 Q3 18 Q1 19 Q3 19

Cut until Dec 2019No cut after Dec 2018No cut after Dec 2018, downside supply scenarioAnnual average - cut until Dec 2019Annual average - no cut after Dec 2018Annual average - no cut after Dec 2018, downside supply scenario

Total Liquids Implied Stockchange Scenarios [million b/d]

SuDeP

Downside supply scenario (base case):US shale grows by 400,000 b/d y-o-y (+600,000 b/d) due to price fall to 45 $/bblCanada grows by 60,000 b/d (+140,000 b/d) due to infrastructure limitationsBrazil stable (+140,000 b/d) due to project delaysVenezuela declines another 20% y-o-y or 190,000 b/d (stable)Iran declines 130,000 b/d (+30,000 b/d) due to new sanctionsNigeria declines 40,000 b/d (+90,000 b/d) due to outages

Demand

Clean and dirty product demand outlook is diverging, with gasoline demand growth having weakened noticeably recently due to higher prices. Global gasoline demand growth averaged some 200,000 b/d y-o-y over Q1, the slowest quarterly pace since Q3-2014.


-2,000

-1,000

0

1,000

2,000

3,000

4,000

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

LPG Naphtha Gasoline

Jet/Kero Gas Oil/Diesel Fuel Oil

Other products Total

World: Y-o-y Change in Oil Demand (3-Month Moving Average) ['000 b/d]World: Y-o-y Change in Oil Demand (3-Month Moving Average) ['000 b/d]

Source: JBC Derived Data

Forecast

Based on observed monthly statistics, as available. Missing data estimated, extrapolated, or derived from annual assessments.

All data from March 2018 onwards is estimated.

Demand

The past two years have also been spectacularly strong also for growth in transportation fuels in Europe


-500

-400

-300

-200

-100

0

100

200

300

400

500

600

Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18

Gasoline

Gasoil

Jet/Kero

OECD Europe Y-o-y Demand Growth (12 MMA) ['000 b/d]

Source: Based on IEA data from Monthly Oil Data Service © OECD/IEA 2018, www.iea.org/statistics, Licence:

www.iea.org/t&c; as modified by JBC Energy

Demand

Strong economic growth, but question on how long to last and whether a recession in the next 1-2 years is a possible scenario.


45

47

49

51

53

55

57

59

61

63

Jan-2015 May-2015 Sep-2015 Jan-2016 May-2016 Sep-2016 Jan-2017 May-2017 Sep-2017 Jan-2018

Eurozone

US

Russia

China

Selected Manufacturing PMI [index points]

Improvement

Source: Various

Deterioration

Demand - LD

Meanwhile, gasoline demand is at risk from higher retail prices – in a higher oil price scenario we see about 100,000 b/d of potential demand growth dropping away. China and US have seen a 10% increase of retail prices y-o-y

Thursday, 10 May 2018 www.jbcenergy.com

-200

0

200

400

600

800

1000

2011 2012 2013 2014 2015 2016 2017 2018

Global Gasoline Demand Growth

Y-o-y Change in Global Gasoline Demand: Price Related Downside Risk of 2018 ['000 b/d]

Price-related downside (assuming Dated Brent

averaging $70/barrel from now on)

SuDeP

Dated Brent dropped by almost 50% y-o-y

Demand - LD

Gasoline demand growth in Asia is currently at its lowest point, and retail prices are at their highest in years in key countries.


-400

-200

0

200

400

600

800

1000

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

China India

Japan South Korea

Other OECD Asia Other Non-OECD Asia

Total Asia

Total Asia: Y-o-y Change in Gasoline Demand vs. Price ['000 b/d, Rupee/L, '000 Yn/t]


50

60

70

80

90

100


Source: IOCL

6

7

8

9

10

11


Source: Argus, Xinhua

China

India

3-Month Moving Average

Demand

The current six years of strong demand growth are unprecedented in terms of consistency of above average demand growth year after year


-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

y-o-y change

5-year moving average

Average 1980-2018

World Demand Growth [million b/d]

SuDeP

Demand

We see demand growth to slow down in the next decade, mainly coming form gasoil/diesel and a decline in fuel oil due to the IMO implementation.


-400

-200

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2017 2018 2019 2020 2021 2022 2023

LPG Naphtha Gasoline Jet/KeroGas Oil/Diesel Fuel Oil Other Products Total Products

World Product Demand Y-o-y Growth ['000 b/d]

SuDeP

Demand

Long-Term: Transportation fuel demand is forecast to remain the strongest force in demand dynamics, closely followed by light ends for petchem.

www.jbcenergy.com Slide 14

-4,000

-2,000

0

2,000

4,000

6,000

LPG Naphtha Gasoline Kero/Jet Gas Oil Residual/Fuel Oil Other

Global Oil Demand Growth by Product, Sector, and Region per Decade ['000 b/d]

-2,000

0

2,000

4,000

6,000

8,000

10,000

Transport Bunker Petchem Res/Comm Agriculture Power RefFuel Industry Other

-2,000

0

2,000

4,000

6,000

China India Non-OECDAsia (excl.

China & India)

Middle East Central &South

America

Africa FSU East NorthAmerica

Europe OECD Asia

SuDeP

2010 vs 20002020 vs 20102030 vs 2020

Transportation Fuel Developments

In our base case, pure gasoline car sales will be in the 60-70% range over the coming decade while gasoline hybrid and full electric will only pick up significantly after 2020


0

2

4

6

8

10

12

14

16

18

20

2010 2015 2020 2025 2030

Diesel Gasoline Gasoline Hybrid Diesel Hybrid LPG CNG Full Electric

EU28 New Car Sales Scenarios [million units]

SuDeP

Base Case

2010 2015 2020 2025 2030

Low Gasoline Case

37%

53%

22%

35%

3%

11%

13%

5%

14%

66%

30%

6%

2010 2015 2020 2025 2030

High Gasoline Case

20%

74%

2%

84%

3% 8%

0%

72%

12%

15%4%

2%

33%

60%

15%

69%

4%10%

8%

61%

15%

15%4%

52%

45%

2%


It takes time for changes in sales patterns to filter through to the fleet level. The difference between the scenarios is up to 400,000 b/d, which would have an impact on refining operations


0

50

100

150

200

250

300

350

2010 2015 2020 2025 2030

Diesel Gasoline Gasoline Hybrid Diesel Hybrid LPG CNG Full Electric

EU28 Car Fleet Composition Scenarios [million units]

SuDeP

Base Case

2010 2015 2020 2025 2030

Low Gasoline Case

2010 2015 2020 2025 2030

High Gasoline Case

46%

51%49% 55%

59%

47%39%

29%

48%42%

33%

48% 47%

38%

46%

33%

20%

51% 61%69%

0.8%

3%7%

0.4%

1.3%

4%

0.7% 3%

7%

0.9% 6% 21%

0.7%

2.4%5%

0.4%

1.3%

4%


Largely diverging assumptions on car sales lead to a variability of close to 400,000 b/d in European gasoline demand by 2025, but this decade the impact is pretty limited.


1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2010 2015 2020 2025

Low Gasoline Case

High Gasoline Case

Gasoline Base Case

Europe Gasoline and Diesel Demand Scenario Analysis ['000 b/d]

SuDeP

Scenario InformationLow Gasoline case = High Diesel Case:Strong BEV market penetration with slow shift away from Diesel

High Gasoline Demand Case = Low Diesel Case:Low BEV market penetration with strong shift away from Diesel

3,400

3,600

3,800

4,000

4,200

4,400

4,600

4,800

2010 2015 2020 2025

High Diesel Case

Low Diesel Case

Diesel Base Case


A huge shift in sales in France has led to growth of about 20,000 b/d for gasoline relative to the 5-year average.


20%

30%

40%

50%

60%

70%

80%


Europe* Diesel Share

France Diesel Share

France Gasoline Share

Diesel and Gasoline Share in Car Sales and its Effect on Demand [% 3MMA, %]

Source: JBC Energy calculations based on Statistik Austria, CCFA, KBA, SMMT, UNRAE, BIL, DGT

Dieselgate

*based on monthly sales data from certain European

countries, representing roughly 80% of European market

17%

18%

19%

20%

21%

22%

23%

24%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2018 20172016 Avg 2012-2016

Data from Jan-2017 onwards are JBC Energy

estimates


FranceShare of Gasoline

in Transportation Fuel Demand

Outright 2017 difference to 5-year average: 20,000 b/d


Our base case for gasoline demand sees a decline of 300,000 b/d from 2015 to 2030


0.0

0.5

1.0

1.5

2.0

2.5

3.0

Components of EU-28 Transport Gasoline Demand 2015-2030 [million b/d]

SuDeP

2015 demand1,796,000 b/d

Additional use for ethanol (energy

adjusted):-25,000 b/d

Increase in passenger travelling:

+815,000 b/d

Efficiency gains in Gasoline engines:

-960,000 b/d

Shift to PHEV/BEV vehicle sales:-130,000 b/d

2030 demand1,496,000 b/d


Diesel demand overall drop by 10-15% over the 15 year period. Changes in the freight sector can have the most impact on diesel demand given that it accounts for more than 50% of diesel demand in Europe.


3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

4.8

2015 2030

Components of EU-28 Transport Diesel Demand 2015-2030 [million b/d]

SuDeP

Additional use for

biodiesel (energy

adjusted)-30,000 b/d

Increase in passenger travelling:

+190,000 b/d

Efficiency gains in Diesel

engines: 140,000 b/d

Efficiency gains in

Freight and Busses:

490,000 b/d

Increased tonne-km in

Freight: +350,000 b/d

Shift to gasoline and PHEV/BEV

vehicle sales: 370,000 b/d

-12%

Efficiency gains in Freight and Busses includes electrification

assumptions



reasonable 1

some issues 2

problematic 3

Comparison of FuelsEn

erg

y e

ffic

ienc

y

Syst

em

dim

ensi

on

Mo

del

ava

ilab

ility

Syst

em

Pri

ce

Fuel

Pri

ce

Ran

ge

Infr

astr

uct

ure

Re

-fu

elli

ng

Ma

inte

nan

ce

cost

s

Emis

sio

ns

Comments

Gasoline 3 1 1 1 2 1 1 1 3 3low energy efficiency;

supercharged engines emit PM

Diesel 3 1 1 1 2 1 1 1 3 3 exhaust gas treatment needed

LPG 3 1 2 1 2 1 1 1 3 3 emissions slightly better; energy

efficiency a bit worse

LNG 2 1 3 2 1 1 3 2 3 2 feasable only for trucks

CNG 2 2 2 2 1 2 2 1 3 2basically a gasoline car - biggest

problem is tank size and range

Hydrogen 2 2 3 3 3 2 3 1 2 1700 bar tanks; losses due to energy

conversion

Electricity 1 3 2 2 1 3 2 3 1 1heavy batteries needed; range

highly dependent on conditions

So urce: JB C Energy

Supply & OPEC Strategy


0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

0

2

4

6

8

10

12

14

16

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

US Supply (7m b/d)

Other non-OPEC Supply (25m b/d)

Russia Supply (9m b/d)

Other OPEC Supply (22m b/d)

KSA Supply (9m b/d)

JBC Energy Price Forecast - The View

Avg. monthly ICE Brent Settlement

OPEC/Non-OPEC Supply above Baseline and ICE Brent Price [million b/d; $/bbl]

Crude supply from OPEC/non-OPEC countries and the two leading nations from the two blocks,

shown minus production baseline (in brackets).

Source: JBC Derived Data, The ICE


Looking only at changes to the marginal barrel and how closely prices have tracked them, it is clear that there will be downsidepressure to come. Note the OPEC pressure over 2015/16 – could there be a re-run of this in the future?



Everything continues to point at a looming surge in US crude production. Expect pressure on crudes in producing areas (e.g. Permian) and a wider WTI/Brent spread. However, US exports and higher US intake may yet keep the spread from blowing out


8.00

8.50

9.00

9.50

10.00

10.50

11.00

11.50

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18

Reported Weekly Production

Implied Weekly Production (4-Week Mavg)

Reported Monthly Production

Average

US Crude Production [million b/d]

Source: EIA, JBC Energy

Implied production = residual from weekly crude runs, net crude imports, and crude

stock changes


Based on massive supply additions, we forecast prices to ease over the next year, with the Q4-2017 price spike to yield more US shale production. The chart also shows potential future production paths based on prices between $35 and $100.


0.00

20.00

40.00

60.00

80.00

100.00

120.00

0

2

4

6

8

10

12

2012 2013 2014 2015 2016 2017 2018 2019 2020

Range shale supply

Base case shale supply

Scenario based on forward curve

previous forecast

WTI incl. forecast - rs

WTI forward curve - rs

WTI low - rs

WTI high - rs

US: Shale Oil Outlook vs WTI Outlook [million b/d; $/bbl]

Source: JBC, CME

2017 2018 2019Shale oil 4,687 5,839 6,530

Other crude & condensate 4,651 4,722 4,817

NGLs 3,736 4,124 4,433

Other liquids 1,138 1,160 1,167

Total liquids 14,212 15,845 16,948


The oversupplied US market is now venting itself into the int’l market; VLCCs were recently again tested on the Texas gulf, while they are now operating out of LOOP


0

200

400

600

800

1000

1200

1400

1600

1800

2000

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

US Crude Exports ['000 b/d]

Source: EIA

Supply – United States

The significant draws at Cushing have been enabled by the Midland-Sealy and Diamond pipelines start-ups


LOOP

Houston / Port Arthur/ Nederland / Freeport

Patoka & Wood River

Corpus Christi

US: Major Crude Pipelines in Southern Hubs ['000 b/d]

This map highlights only the major crude pipelines from

transport hubs with capacity above 100,000 b/d - lines do not

follow pipeline paths

Dashed lines indicate new pipelines or expansions planned for 2018; dotted line is a planned

reversal

Source: JBC Energy, various

Cushing

St James

Midland & Wider Permian

Eagle Ford

Memphis

Out of Cushing to:Houston Area 700 Keystone Market Link

850 Seaway Twin (reversed)

Memphis 200 Diamond

Patoka & Wood River 345 Ozark

Out of Patoka and Wood River Region to:Houston Area 520 ETCO

Out of Louisiana to:Patoka 1200 Capline

Out of Midland to:Cushing 140 Centurion

450 Basin

Louisiana 100 Louisiana Extension

Corpus Christi 440 EPIC

Houston Area 100 Bridgetex

450 Permian Express

225 Longhorn

450 Midland to Sealy

Eagle Ford 200 West Texas Gulf

100 Longview

390 Cactus

Out of Houston Area to:Louisiana 375 Zydeco

480 Bayou Bridge

Corpus Christi 660 Eagle Ford JV

100 Double Eagle

250 Pettus-to-Corpus

130 Victoria Express

100 Rio Bravo

Out of Eagle Ford to:

Diamond pipeline

Midland-to-Sealypipeline

0

1

2

3

4

5

6

Jan-16 Jan-17 Jan-18 Jan-19

Cactus II

EPIC

Permian Express 3

Midland-to-Sealy

Cactus Expansion

BridgeTex Expansion 1

Permian Longview & LouisianaExtensionPermian Express 2

Cactus

Longhorn Expansion

BridgeTex

Permian Express 1

West Texas - Nederland Access

Longhorn

West Texas Gulf

Centurion

Basin

Refining Capacity

Permian Production

WTI Midland Price vs Other Locations and Pipeline Offtake Capacity Overview [$/bbl; million b/d]

Source: Various industry sources & JBC -10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

Jan-16 Jan-17 Jan-18

vs. Cushing

vs. Houston

Source: Platts, JBC Energy, various sources

Supply & United States

Increased offtake capacity has temporarily supported local Permian crude prices and reduced the marginal cost of delivery to the USGC, but we have already entered a period of constraints again. A renewed dislocation of WTI Midland, which is likely to eventually spread to the wider WTI complex and beyond amid rising US crude exports.



Americas liquids supply growth easily outweighed the OPEC/non-OPEC cuts in 2017, and with slightly higher prices there does not seem an end to it anytime soon.


-2

-1

0

1

2

3

4

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Europe FSU East

Asia Middle East

Africa North America

C&S America

World Total Liquids Supply Change By Region [million b/d]

SuDeP

assumes OPEC/non-OPEC cut agreement

ends by end-2018

Americas are set to provide the lion's share of liquids supply

growth over the next two years


According to our assessments, US shale oil and US NGLs supply make up 2.1 million b/d of growth over the next three years


-1000 -500 0 500 1000 1500 2000 2500 3000 3500

Venezuela

US other

Brazil other

Mexico

Colombia

Other Americas NGLs

Argentina

Other C&S America

Canada other

Other liquids

US Gulf of Mexico

Canada oil sands

Brazil pre-salt

US NGLs

US shale oil 2017

2018

2019

2020

Americas Liquids Supply Change by Source ['000 b/d]

SuDeP

Guyana (Liza) start-up in 2020

First fields from new international offshore licences not before 2020

declines on legacy offhsore fields to continue

We do not see big shale developments anytime soon

Hebron start-up (offshore East Canada)

slow growth w/o new mandates in the US, Brazil is the main driver

continuous development of deepwater blocks

Strong declines, investment needed to maintain production

continuing problems expected

declines from conventional production

slower growth after 2018

no big developments seen outside US

long project list

US shale oil & gas

0

1

2

3

4

5

6

7

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Europe FSU East

Asia Middle East


Central & South America Onstream

Under development Planned

excl. Canada oilsands, OPEC Middle East, Russia Needed additions*

Capacity Additions of Major Projects by Region excluding Shale Oil [million b/d]

Source: SuDeP, JBC Energy based on industry sources

* additional flows needed to compensate for demand growth and assumed global

declines of 4.5% y-o-y (excluding Canada oil sands, OPEC Middle East, Russia, US shale,

and NGLs & other liquids)


We are sceptical about how much upside support there can be when considering the full supply picture – 2018 (and potentially 2019) will see as much new supply – excluding shale oil - coming online as there was in 2014, when the price fall was triggered. (Detailed expansion list in Appendix.)


Impact of Technology

Historic decline rates have apparently been much lower than expected – also a factor of technology


-5%

-4%

-3%

-2%

-1%

0%

1%

2%

2015 2020 2025 2030 2035 2040

Annual decline rate (WEO 2013)

Annual decline rate (WEO 2017)

IEA WEO Decline Rates [%]

Source: © OECD/IEA 2013 & 2017 World Energy Outlook, IEA Publishing. Licence: www.iea.org/t&c

interpolated

IEA substantially decreased annual global decline rates from existing conventional

fields, while leaving the long term declines at around 4%


A large proportion of fields are already in their ‘late life’ stage, so only small additions to supply would be enough to offset declines from those mature fields. Technology has also improved substantially over the last decade(s) and low oil prices do force oil companies to employ them.


20

30

40

50

60

70

80

2000 2002 2004 2006 2008 2010 2012 2014 2016

Number of countries increasing supply*

Increase/Decline Indicator [count]

* number of countries in the respective year that show an increase vs three years in the past

0

400

800

1200

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Pro

du

ctio

n

Time

Typical Field Production Profile

ramp-up phase

plateau

decline phase

late life

Source: JBC Energy


One area which highlights this is the North Sea, where we are entering a phase of net growth, reversing long term declines – even though decline rates are assumed to stage a massive comeback after a period where the focus was on maximising current output.


0

100

200

300

400

500

600

700

800

Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

Other UK

Schiehallion

Clair Ridge

Other Norway

Johan Sverdrup

Njord Future

Source: JBC Energy, OGA, NPD -6.9%

-3.8%-0.2%

-2.3%-5.0%

-8.3%-6.4% -6.6% -4.8%

-400

-300

-200

-100

0

100

200

300

400

500

600

2013 2014 2015 2016 2017 2018 2019 2020 2021

Declines

North Sea maintenance& outagesUK new streams

Norway new streams

North Sea supplychange

Average annual decline rate: -5.1%

North Sea: Crude & Condensate Production Outlook Y-o-y ['000 b/d]

New fields crude & condensate y-o-y

supply change

Due to the ramp up of 2017 start-ups of:

BP's Quad204 (120,000 b/d), EnQuest's Kraken (50,000 b/d), Repsol-

Sinopec's MAR (35,000 b/d), Dana's Western Isles (30,000 b/d), and

others.



Standardisation & Other Improvements:

Push for efficiency in the upstream sector due to the price fall

• Streamline logistics and supply chain

– Standardisation (e.g.: joint programme by BP, Chevron, Shell to standardise production equipment)

– Unified well design (e.g.: Statoil success at Snorre B: 3 wells drilled in a row with costs for additional capacity put below 10$/bbl)

– Investment into subsea boosting systems to maximize utilisation of offshore installations and debottleneck processing capacities

– Increased rig efficiency: rigs drill about 50% more wells per months compared to 2012 thanks to pad drilling and multi-laterals

– Slimmer designs that are closer to reality: Use of “lower” production capacity FPSOs, platforms etc lead to cost capex cuts of 30-40%, but do not have an impact on future production. Examples: Shell’s Bonga SW, Statoil’s Johan Castberg

– Recent example: EnQuest was able to reduce costs for the offshore UK Kraken heavy oil project (50,000 b/d, first oil achieved in June) by over $800 million from originally $3.2 billion (-25%)

• Well performance optimization

– Longer laterals (e.g. Pioneer increased lateral lengths by 1,000 m over the last two years)

– Improved well stimulation methods (fracking) and optimization of well placement through geo-steering

• Portfolio optimization – different strategies

– Focus on sweet spots

– But also: focus on existing assets/unlock additional volumes through Enhanced Oil Recovery (EOR)

• Efficiency gains facilitated through better “more costly” technology

– E.g.: unified well design needs more general casing design, but cost savings on logistics make up for higher cost

• Additional costs are counterbalanced by improved output and hence lower costs per barrel

– E.g.: geo-steering needs advanced measurement while drilling (MWD), such tools are very expensive

– EOR: the costs of the process of e.g. polymer injection and recapturing must be seen in context of additional flows

More “expensive” technology might lead to lower costs per barrel!


The cost of planned projects fell dramatically over the last couple of years. A number of previously shelved projects have been revisited and lower price tags have been achieved. Some prominent examples:

• Mad Dog 2 (BP, Gulf of Mexico, 140,000 b/d)– Original breakeven: $100/bbl– Current breakeven estimates: $50/bbl

• Johan Castberg (Statoil, Barents Sea, 190,000 b/d)– Original breakeven: $80/bbl– Current breakeven estimates: $35/bbl

• Tengiz Expansion (Chevron, Kazakhstan, 260,000 b/d)– Current breakeven estimates: $50/bbl

• Peregrino Phase 2 (Statoil, Brazil, 100,000 b/d)– Original breakeven: $70/bbl– Current breakeven estimates: $45/bbl

• Kraken (EnQuest, UKCS, 50,000 b/d)– Original breakeven: $75/bbl– Current breakeven estimates: $35/bbl

• Veslefrikk (Statoil, North Sea, online since 1989, current output: 6,500 b/d)– Was planned to be shut down in 2018 due to costs– Extension project: first until 2020, now until 2025



We expect OPEC a) OPEC to continue the cut also beyond 2018 and b) compliance to remain high over the course of 2018 at least. Additions are expected from Libya and Nigeria, while we see Venezuela declining further.


-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19

Equatorial Guinea Gabon Ecuador QatarAlgeria Angola Libya IraqNigeria Venezuela Kuwait UAEIran Saudi Arabia Total

OPEC Crude Production Change Y-o-y [million b/d]


Sanctions regime against Iran is back in discussion. For the time being it seemsunlikely that the EU will follow the US policy. The US itself does not importcrude from Iran anyway, but it could put indirect pressure. However, Iran doeshave other options to export its crude, even more so at a likely discountedprice. Besides, like last time, Iran would again look towards blending lesscondensate into the crude stream and to boost domestic refinery intake (evenbeyond what we estimate at present)


The downside revisions to OPEC supply made as a result of the cut agreement have been largely counterbalanced by revisions elsewhere, even with the help of lower-than-expected Venezuelan and Angolan supply. From here on US shale might make the difference.


-4

-3

-2

-1

0

1

2

3

4

5

6

7

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18

United States Libya CanadaIran Kazakhstan UKBrazil Brunei BoliviaIraq Colombia AustraliaUAE Mexico AngolaKuwait China VenezuelaNigeria Saudi Arabia OtherWorld

Top 20 Crude & Condensate Supply Revisions vs June 2016 [million b/d]

Source: JBC Energy

2017 average used for ranking


In contrast to OPEC, non-OPEC compliance is lacking.


Q1 2018

average

Original cut

pledge*Reference*

Current target

production level

Change

compared to

reference

Compliance

Algeria 1,007 -50 1,091 1,041 -84 169%

Angola 1,525 -78 1,745 1,667 -220 282%

Ecuador 512 -26 543 541 -31 121%

Equatorial Guinea 130 -12 140 128 -10 83%

Gabon 200 -9 203 194 -3 33%

Iran 3,817 90 3,707 3,797 110 82%

Iraq 4,467 -210 4,571 4,361 -104 50%

Kuwait 2,702 -131 2,848 2,717 -146 112%

Qatar 590 -30 645 615 -55 183%

Saudi Arabia 9,945 -486 10,566 10,080 -621 128%

UAE 2,842 -139 3,068 2,929 -226 163%

Venezuela 1,623 -95 2,072 1,977 -449 472%

OPEC-12 29,358 -1,176 31,199 30,023 -1,841 157%

Azerbaijan 805 -35 832 797 -27 78%

Bahrain 207 -10 211 201 -4 37%

Brunei 91 -4 108 104 -17 415%

Kazakhstan 1,894 -20 1,766 1,746 128 -639%

Malaysia 628 -20 638 618 -11 53%

Mexico 1,901 -100 2,105 2,005 -204 204%

Oman 966 -45 1,012 967 -46 101%

Russia 10,960 -300 11,215 10,915 -255 85%

Sudan 80 -4 78 74 3 -64%

South Sudan 116 -8 113 105 4 -47%

Non-OPEC-10 17,649 -546 18,077 17,531 -428 78%

Total OPEC / non-OPEC 47,007 -1,722 49,276 47,554 -2,269 132%

Source: JBC Energy

OPEC/non-OPEC - Compliance ['000 b/d; %]

*OPEC cut pledge and references according to "Vienna agreement" from 30-Nov-16; Iran is allowed to increase output by 90,000 b/d compared to

reference; total non-OPEC cut pledge according to ministerial meeting on 10-Dec-16; non-OPEC cut allocations according to individual reported

statements, which do not add up to total; non-OPEC reference is JBC Energy crude and condensate production assessment for Oct-16 (Kazakhstan:

Nov-16; Azerbaijan Jan-16 to Nov-16 average); Equatorial Guinea part of OPEC since Jun-17; Ecuador changed target production to 541,000 b/d in

August.


Particularly in Russia – with new streams coming online – compliance is becoming increasingly difficult.


-262 -261-242 -249 -249 -239 -303 -262 -244 -230 -190

-144

-1024

-824

-624

-424

-224

-24

176

376

576

10.2

10.4

10.6

10.8

11.0

11.2

11.4

11.6


Assumed cuts from Oct-16 level Av. 2013-2017

2018 2017

2016 2015

2014 2019

Russia: Crude & Condensate Output [million b/d]

Source: JBC Energy assessment based on modified* Russian Ministry data

*main data adjustments:-individual conversion factors by company-separate Gazprom production estimates-correction factor for gas plant liquids


Global stock levels are getting close to were OPEC has set its target to…


-200

0

200

400

600

800

1,000

Q4-13 Q2-14 Q4-14 Q2-15 Q4-15 Q2-16 Q4-16 Q2-17 Q4-17 Q2-18 Q4-18

SPR China and IndiaOECD GovernmentInfrastructure fillChina CommercialOECD IndustryMiddle EastOther countries

Global Stocks Surplus to Q1 2014 [million barrels]

Stockbuild of 370 millionbarrels is

needed to keep a forward cover of Q3 14 stable,

given rising demand


Global Stocks Surplus to Q4 2013 [million barrels]

1 million b/d deficit

0.5 million b/d deficit


…but OPEC is not yet fully satisfied with the market tightening observed so far, considering adjusted measures (e.g. 7-year average). Meanwhile, excluding China from our inventory calculations, forward cover is already massively below the 5-year average.


5.0

5.2

5.4

5.6

5.8

6.0

6.2

Jan Mar May Jul Sep Nov

2018 2017

2016 2015

2014 Avg '13-'17


Total Global Observed Oil Stocks, Excluding China: Level vs. Forward Demand Cover [billion barrels,

64

65

66

67

68

69

70

71

72

Jan Mar May Jul Sep Nov

Forward demand coverStocks


Even though the upwards path of prices is in line with a fundamental improvement, the market has also been pretty reactive toOPEC talk. The price target appears to now be $80+ instead of the initial $40-60.


0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18

ICE Brent Reaction to Selected Market News [$/bbl]

OPEC/non-OPEC deal announced - 1.8mb/d until December 2017

Source: JBC Derived Data, The ICE

Forties pipeline outage helps

price surge to $70

Up to May: IEA reports called the market "almost balanced" and later "basically balanced"

Deal extended to end-2018, after months of

speculation (Russia review option)

25 May 2017: Extension announced until end of

Strong fundamentals (gasoildemand, high runs unless

affected by hurricans; IEA talks "de facto balanced" market.

First talks of a Saudi-Russia led

agreement to cut production

Khalid Al Falih suggests to meet in Algiers to discuss a

freeze of production

OPEC & Russia talk about long-term cooperation

& April 10 (Bloomberg): Saudis targeting $80

IEA June report turns more bearish

- rebalancing to take longer

OPEC talks about the needto lenghten/deepen cuts

"Ritz Charlton Hospitality" worsens investment outlook in

Saudi Arabia, potentially supporting higher target prices

April/May 2017: JMMC, Khalid Al Falih and Novak all speak about extension of cuts through Q1-2018

Weakening in financial markets affects the

crude price


Partly there are significant differences between our total liquids balance and the crude/condensate balance.


-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19

Total Liquids BalanceCrude Balance

Total Liquids Balance and Crude Balance [million b/d]

Source: JBC Energy

For 2017: Total liquids balance: -150,000 b/d

Crude balance: -300,000 b/d

For 2018: Total liquids balance: 370,000 b/d

Crude balance: 70,000 b/d

For 2019: Total liquids balance: 760,000 b/d

Crude balance: 350,000 b/d


By now the crude balance picture looks pretty supportive and also starts to feed through slowly into physical crude markets, which most support expected from next month onwards.


-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000


5-Year Range 5-Year Avg 2016 2017 2018

World: Crude Balance ['000 b/d]


Figures from Jan-18 onwards are JBC Energy forecasts


By now this also starts to feed through slowly into physical crude markets, which most support expected from next month onwards.


-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Trading Balance unadjusted crude balance

Implied Global Crude Trading Balance & Key Physical Crude Indicators ['000 b/d]

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18

Dated Brent vs.M3

Urals Rotterdamdiff.

WTI HoustonM1/M2

Dubai M1/M3

Source: JBC Energy, Platts

The implied trading balance is intended to incorporate time adjustments done to more accurately reflect the fact that in any given month crude already produced is traded against demand in the future (based on shipping times and factors influencing crude runs).

Repercussions of Crude Quality Change



Global crude qualities are changing strongly, based on OPEC action, Venezuela disappointments and the US shale boom


-500

-250

0

250

500

750

1,000

1,250

1,500

sweet sour sweet sour sweet sour

Light Medium Heavy

Europe FSU East

Asia Middle East


C&S America Total

Development of Crude Qualities by Region 2018 vs 2017 ['000 b/d]

Light > 33 °API (incl. condensate)Medium 28-33 °API

Heavy < 28 °APIsweet/sour cutoff: 0.5%

Source: JBC Energy

Heavy sour, 11%

Heavy sweet, 3%

Medium sour, 44%

Medium sweet, 10%

Light sour, 8%

Light sweet, 24%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Global crude slate 2018


This is exposing the high-conversion US Gulf Coast particularly to swift change.


-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18

Canada (heavy)Persian Gulf (mostly medium)Venezuela (heavy)Mexico (heavy)COL+BRZ+ECU (medium/heavy)Other

3 month moving averagesSource: JBC Energy, EIA

Surging shale production has reduced USGC import needs. The loss of medium

and heavy barrels, however, is boosting the

pull on VGO and SRFO

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2015 2016 2017 2018 2019 2020 2021 2022

EuropeFSU EastAsiaMiddle EastAfrica

Y-o-y Change in US Gulf Coast (PADD-3) Crude Imports & Sweet Crude Supply by Region [million b/d]


A lightening crude slate on the back of soaring production hints at a overall decline in conversion gains and make it more difficult to fill conversion units given their low residue yields, hence enhanced need for secondary feedstock => more LD output, less MD output


31.0

31.2

31.4

31.6

31.8

32.0

32.2

32.4

32.6

32.8


5-yr Avg

2016

2015

2014

2017

2018

US API Gravity of Crude Intake [API degrees]

Source: EIA

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

MDs LDs Fuel Oil Core Refined Products

Global Crude Yields vs Max Observed (6MMA) [pp]

Max Observed = maximum average yield in any 6-month period between Jan-14 & Feb-2018

Source: JBC Derived Data Forecast


At the same time globally a lot of conversion capacity has been added, largely eliminating an international market for straight-run fuel oil as a feedstock. This (higher coke & bitumen supply) as well as a lightening crude slate ( fewer conversion gains) lead to lower core refined product yields.



It might well be that something we expected for 2020 (IMO) is already happening now: the increased use of cracked fuel oils (HSFO) as coker feedstock (as more suitable feeds move towards other conversion units) – resulting in higher LPG, naphtha and coke yields, but less gasoil.


0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Gas Naphtha Gasoil Coke

0.5 % Atmospheric Residue (CCR 5)

0.5 % Atmospheric Residue (CCR 10)

HSFO (CCR 20)

Vacuum Residue (Arab Medium)

Typical Coking Yields by Feedstock Type [wt %]

Source: JBC Energy Estimate


US heavy gas oil imports surged since last summer (heavy crude imports falling strongly) to make up for the lack of secondary feeds. By now this has led to much higher pricing illustrating the limitations. Ultimately atmospheric gasoil will land more frequently in conversion units, weighing on diesel yields.


100.0

200.0

300.0

400.0

500.0

600.0

700.0

Jan Apr Jul Oct

5-yr Avg20142015201620172018

US Imports of Heavy Gas Oils & Regional VGO Spreads ['000 b/d; $/bbl]

Source: EIA, JBC Energy based on Platts-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

Jan Apr Jul Oct

5-Year Range5-Year Average20182017

VGO USGC vs NWE (low sulphur)US HGO Imports

2018: Tight Product Supply


2018: Tight Clean Product Supply

We should be slowly moving out of a tight refining environment, which in our base case sticks up to and including 2020. Post-2020, there is considerable refining capacity to come onstream while the long-term demand outlook is weakening. This implies pressure on margins.


-1

1

3

5

7

9

11

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 Jan-25

Europe

FSU East

Asia

Middle East

Africa

North America

C&S America

World

Annual Needed Additions (Cumulative)

Cumulative Global Primary Capacity Additions Since Jan-14 [million b/d]

Primary Capacity = CDU and Condensate Splitting


Needed additions = coreproduct demand growth, a

fraction of LPG demand and minus biofuels

1,800

1,850

1,900

1,950

2,000

2,050

2,100

2,150

2,200

2,250

2,300

87.0%

87.5%

88.0%

88.5%

89.0%

89.5%

90.0%

90.5%

91.0%

91.5%

92.0%

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

Global refinery utilisationAnnual average utilisationGlobal core product stocksCore product stocks - scenario (2017 utilisation)

Global Refinery Utilisation & Core Product Stocks (3MMA) [%; million barrels]


Scenario assumes same utilisation as 2017 for the remainder of 2018


If we don’t see any y-o-y growth in utilisation, refined product stocks will again fall strongly. But is another rise in utilisation feasible? It would result in the highest outright utilisation level in a decade.


68,000

70,000

72,000

74,000

76,000

78,000

80,000

82,000

84,000

86,000


5-Year Range 5-Year Avg 2016 2017 2018

World: Crude Intake ['000 b/d]


Figures from Apr-18 onwards are JBC Energy forecasts


If we begin to see strong crude runs in May once maintenance eases, we may see cracks dampened a bit for the summer. However, any disappointment or outage could spell a strong few months as early inventory draws have lowered FWDC.


?


Both the US and China have rapidly expanded core refined product exports on the back of high runs. However, this has been easily digested by regions such as Latin America. Chinese exports may be at risk from new tax regimes, but the market is likely to need marginal barrels from these two places.


-1000

-500

0

500

1000

1500

2000

2500

3000

3500

4000


US product net-exports (exl LPG)

China product net-exports (exl LPG)

US & China Crude Intake and Product Net-Exports ['000 b/d]

6000

7000

8000

9000

10000

11000

12000

13000

14000

15000

16000

17000

18000


US crude runs 12MMA

China crude runs 12MMA

Source: JBC Energy based on EIA, Customs Data


Quotas granted for 2018 should allow Shandong refiners to maintain last year’s levels, but increased difficulties for refiners without licenses/quotas to source crude should weigh on the potential upside to refinery runs. Chinese data should now be much better than in the past.


0

500

1000

1500

2000

2500

3000

3500

Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18

Petcoke BitumenFuel Oil Gas Oil/DieselJet/Kero GasolineNaphtha Sinopec IntakeIndependent Crude Refining Licenses Reported Regional Crude Intake

China: Shandong Crude Intake and Product Supply ['000 b/d]

Source:NBS, Argus, JBC Energy Calculations


While the US has been able to increase refinery runs so far ytd, we question how much room there is to run higher vs last year in the key summer months. Overall it is striking to see that all US crude run upside over recent years has been “consumed” by LatAm markets.


14500

15000

15500

16000

16500

17000

17500

18000

Jan Apr Jul Oct

5-yr Avg

2016

2017

2018

Americas Crude Intake ['000 b/d]

Source: JBC EnergyDerived Data

5000

5500

6000

6500

7000

7500

8000

8500

Jan Apr Jul Oct

Data from March 2018 onwards is

JBC Energy forecast

US Rest of Americas

-1200

-1000

-800

-600

-400

-200

0

200

400

600

800

Total Americas crude intake vs 2014

average (3MMA)

?

IMO – Status & Scenario


IMO Update



The 2020 bunker fuel legislation (fuel or emissions from ships around the world are limited to 0.5% sulphur) will pose a huge challenge to the market, with various options for the shipping industry and no need for the refining industry to react (unlike national spec changes).


Post-2020 Options for Ship Operators

IMO Sulphur Cap 0.5%

Compliance

Non-compliance

Compliant Gas Oil Compliant Fuel OilEmission Abatement

TechnologiesAlternative fuels (LNG, methane)

Source: JBC Energy

May still be watered down?

only long-term optionslow pick-up likelyKey uncertainty


We are convinced that fuel oil will remain the solution in the short-term (primarily LSFO) and also in the long run with a significant contribution from scrubbers (return to increasing volumes of HSFO).


0%

5%

9%

14%

18%

23%

27%

32%

36%

41%

45%

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

LNGGas Oil0.5% Fuel Oil3.5% Fuel OilScrubbers ShareLNG Share

Bunker Fuel Mix [million b/d, %]

Source: JBC Energy Estimates

IMO Update

• Fuel oil/bunker operations are not business-essential for mostrefiners

• The refining industry is operating close to (realistic) capacity limits– Unlikely to change by 2020 as project pipeline is relatively thin and delays

are frequent– It is impossible to build new conversion units between now and 2020

IMO challenge to be handled with existing system (incl.2018/19 additions)– New bunker fuel requirement to be met by adjusting product yields or

qualities to demand pattern, requiring a fuel oil solution due to the lack ofspare conversion capacity

– The alternative of adding bunker gas oil on top of current product slate isnot viable because:• What happens to the unused HSFO?• Hiking crude runs substantially is not feasible due to capacity

limitations• Even if so: what happens with 50%+ share of other product supply

additions?

www.jbcenergy.com Slide 66Thursday, 10 May 2018


We should be slowly moving out of a tight refining environment, which in our base case sticks up to and including 2020. Post-2020, there is considerable refining capacity to come onstream while the long-term demand outlook is weakening. This implies pressure on margins.


-1

1

3

5

7

9

11

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 Jan-25

Europe

FSU East

Asia

Middle East

Africa

North America

C&S America

World

Annual Needed Additions (Cumulative)

Cumulative Global Primary Capacity Additions Since Jan-14 [million b/d]

Primary Capacity = CDU and Condensate Splitting


Needed additions = coreproduct demand growth, a

fraction of LPG demand and minus biofuels


While our view on a fuel oil-based solution is becoming the consensus view, there is still a chance that markets develop differently. We have built a scenario highlighting risks to the global core product demand outlook which could leave more room for gasoil in bunkering.


-200

0

200

400

600

800

1000

1200

1400

1600

2018 2019 2020

Total Products

Total Products - Scenario

Diesel

Diesel - Scenario

Scenario Analysis - Demand Growth and Diesel Availability ['000 b/d]

Demand Growth

Source: JBC Energy estimates0

200

400

600

800

1000

1200

1400

2018 2019 2020

Cumulative Impact onGasoil/Diesel

Gasoil Output from New Ref.Capacity

Low Diesel Demand Growth

Scenario Impact on Gasoil/diesel

Scenario Assumptions:-Lower global demand due to recession ("trade war", etc)-Diesel hit disproportionately (45-50% in 2019-20)-New grassroots refineries come onstream in 2019/2020(Nigeria: Dangote; Kuwait: Al Zour; and China: Rongshan)-Cumulative impact on gasoil/diesel is +1.3 milllion b/d


Theoretically there are abundant low-sulphur fuel oil streams in refining. It is a question of what prices are required to adjust operations and how to handle changed feedstock flows and higher sulphur levels technically.


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Suitable FOcomponents

Redirected SRFO(ARES)

Residualdesulphurisation

Higher refineryintake

Optimised crudeslate

Implied decline incutterstock use

Total

Approximate Contributing Factors to 0.5% Fuel Oil Production in 2020 [million b/d]

Cutter stock factor illustrates lower requirements for such

blending components due to the relative increased use of straight

run fuel oil streams for CBFO supply

Source: JBC Energy estimates

Total 0.5% fuel oil demand of some 3.18 million b/d in 2020 will be met by drawing stocks of approximately 150,000 b/d (from builds in

previous years)

Thursday, 10 May 2018


The necessary price incentives to cope with the 2020 bunker challenge include deep discounts for HSFO and initially strong premiums for low-sulphur fuel oil, which nonetheless still prices significantly below marine gas oil.


0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

2017 2018 2019 2020 2021 2022 2023 2024 2025

Dtd. Brent

MGO

0.5% CBFO

HSFO

LS SRFO

JBC Energy Price Forecast - NWE [$/bbl]

Source: JBC Energy


We are already seeing the effects of the upcoming IMO regulations in forward pricing in various differentials, largely in line with the findings of our IMO study.


12

13

14

15

16

17

18

19

20

Apr-18 Apr-19 Apr-20

06 Apr 18

20 Sep 17

Diesel - Forward Crack (NWE) [$/bbl]

-25

-20

-15

-10

-5

0


06 Apr 1820 Sep 17

HSFO - Forward Crack (NWE) [$/bbl]

0

1

2

3

4

5

6


06 Apr 18

20 Sep 17

Brent vs Dubai

[$/bbl]

0

2

4

6

8

10

12

14

16

18


06 Apr 18

20 Sep 17

LSFO vs HSFO (NWE) [$/bbl]

Source: PVM Dataservices (Vienna)

Evolution of Forward Cracks [$/bbl]


We have had to revise up our estimates for European utilisation in light of delays to expansions in recent years. But substantial pressure should come to reduce runs in the post-2020 period.


2.00

3.00

4.00

5.00

6.00

7.00

8.00

2015 2017 2019 2021 2023 2025

NW Europe - Brent Cracking

Spore - Dubai Cracking

Selected Cracking Margins & European Utilisation Forecasts [$/bbl, %]

Upside from IMO

Source: SuDeP, JBC Energy calculations based on Platts50%

55%

60%

65%

70%

75%

80%

85%

90%

2015 2017 2019 2021 2023 2025

mid-09 mid-11 mid-13

mid-15 mid-16 Current


JBC Energy study view so far solidly confirmed:

• The refining industry is able to supply compliant fuel

– It is also the most likely candidate to take care of the majority of the HSFO problem

– But it will be a huge challenge

• Diesel cracks and refining margins in general will benefit from the IMO shift

• Ultimately, the compliant bunker fuel will be a 0.5% fuel oil (blend)

– It should not be possible to sell both a gasoil-based and a largely fuel oil-based bunker fuel in the same location at different prices.

…But challenges remain– Scrubber uncertainty

– Implementation uncertainty

– Compliance

www.jbcenergy.com Slide 73Thursday, 10 May 2018


• Scrubber Viability

– High Adoption (according to our economic calculations)

• HSFO demand comeback and long-term stability in price

• Refining industry normalises over time with lower incentives to install conversion capacity

– Low Adoption

• What is the actual viability of open-loop & closed-loop systems?

• Concerns about long-term HSFO quality and further specification changes coming up

• The post-2020 refining path is one of high conversion and residue desulphurisation. HSFO largely disappears

• Implementation

– Delays to IMO regulations?

• Some precedent – Ballast Water Management Systems (delayed by 2 years, 2 months before implementation)

– Are too many parties not subject to regulation?

• Ability to bunker HSFO in non-party states. But IMO may ban all ships from carrying HSFO unless they have an scrubber installed

• Compliance

– Costs/benefits:

• Benefit: short-term fuel cost savings

• Costs (potential): reputational damage, ship banning, penalties (minor), reputational interest of ports, bunkering insurance companies, captains are personally liable

– Ship tracking easily available and can spot bunkering in non-party states

– Overall relevance of a few non-compliant market participants is probably marginal



The necessary liquidation of stocks will offset any tightness in the market, keeping FO cracks depressed


120

140

160

180

200

220

240

260

Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19

Global Fuel Oil StocksFO stock level after steady monthly draws of 3.75 million barrels

Required Global Fuel Oil Stock Drawdown and Actual [million barrels]

Source: JBC Energy calculations using derived data

Required drawdown of FO stocks assuming:1. HSFO demand falls 2.5 million b/d from 2020 andforward demand cover at 32.1 days (= 80.3 million bbl draw)2. Massive backwardation draws an additional 21 million bbls(figure calculated as 3 days of forward cover)3. Absence of LSFO contango prevents build-up of 0.5% S fuel oil ==> Min. monthly draw over 27-month period: (80.3+21)/27= 3.75

Required 101 million barrel stockdraw

Seminar: JBC Energy Matters - VIENNA


• The 2018 JBC Energy Matters Seminar will be held inVienna on 6th – 7th September 2018

• Enjoy two full days delving into JBC’s fundamentalanalysis, with in-depth coverage of oil supply,demand, refining, crude and product balances

• Take advantage of networking with industry peersand the JBC team

• Take home our latest research material, featuring400+ comprehensive JBC slides

• Closed Doors - No Media - No PromotionalPresentations

• Price discounts for existing clients.

• Early-bird discounts available until 15th June 2018

Analytics. Studies. Modelling. The Oil and Gas Market’s Independent Research Centre.

JBC Energy MattersMarket Views from Vienna

6-7 September 2018

For registration & more information, please visit www.jbcenergy.com/seminar or contact us at [email protected]

Thank you!

special presentation market watch presentation for ief · 2018-05-14 · demand the past two years...

Documents