the gcc and global energy trends
TRANSCRIPT
28th January 2013
Chatham HouseMENA Energy Conference
The GCC and Global Energy Trends
The GCC can no longer rely on rising energy export volumes and prices to boost the economy, it must concentrate instead on efficiency and competitiveness
2 Source: IMF World Economic Outlook October 2012
0
20
40
60
80
100
120
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2004 2005 2006 2007 2008 2009 2010 2011 2012
Oil
pri
ce (
US
$/b
bl)
GD
P (
US
$ B
ln)
Government total expenditure Government surplus revenue
All other GDP Average Oil Price
MENA region GDP and government expenditure
Russia
19% Turkmen.
2%
Iran
5%Algeria
2%LatAm Left,
China,
other ME
13%
Other FSU
3%Nigeria
1%Qatar
4%
Other
15%
OECD
36%
The US shale revolution is remarkable in itself but also signals a step change in gas’s potential worldwide
3 Source: IEA, BP Statistical Review of World Energy, EIA Annual Energy Outlook 2013
Middle East
+ Africa
27%
Former
Soviet Union
26%Asia Pacific
18%
North
America
16%
Latin
America
8%
Europe
5%
250+ years of resources at
current global demand levels
Global gas resources are
very large and spread around
the world
Global gas industry is much more open to Western capital investment than oil, especially shale gas and LNG. No Gas OPEC
State Control Partnerships
% of 2011 gas production
(53 mln boe pd)OPEC
43%
Mexico
4%
Russia
12%China
5%
Other
FSU
4%
Other
10%
OECD
22%
% of 2011 oil production
(84 mln boe pd)
VS
0
100
200
300
400
500
600
700
800
900
1,000
Ga
s F
low
s (b
cm p
a)
ForecastHistoric
Conventional Gas
Tight Gas
CBM
Shale GasNet Imports
Historic and projected US natural gas supplies
4
Exxon
24%
Shell
17%
Total
10%
Petronas
10%
Woodside
7% Sonatrach
7%
BG
7% BP
5% Conoco
4%
Gazprom
3%Eni
2% Hunt Oil
2%Statoil
1%Marathon
1%
NOC
0%
Wave of new LNG projects and new operators, driven by the US, could transform the global LNG market and its pricing structures
New LNG Operators
• Noble/Delek (Israel)• Apache (Canada)• Inpex (Ichthys)• EnCana? (Canada)• Novatek (Yamal)• Statoil (Snohvit expansion)• Gazprom (Vostok/ Sak III)• KOGAS (Canada/US LNG)*• GAIL (US LNG)*• PetroChina (Canada LNG)• Mitsubishi (Canada/US LNG* and Donggi)• Mitsui (US LNG)*• Anadarko (Mozambique) – risk of control by Shell/Eni
LNG Operators in 2011*
*For joint LNG operating companies the lead
company is assumed
* Offtakers of Henry Hub-linked LNG
90% of the market
controlled by 9 companies
Yet to be FIDed LNG Projects that could come on-stream by the end of this decade
0
12
24
36
48
60
72
84
96
108
120
132
144
156
0
2
4
6
8
10
12
14
16
18
20
22
24
26
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Oil P
ric
e (
US
D p
er B
BL)
Gas P
ric
e (
US
D p
er m
ln B
TU
)
NBP Historic NBP Futures
German Historic Imports Henry Hub Historic
Henry Hub Futures Japan LNG Historic
Oil Oil futures
Futures as at 19th April 2012
£/$ forecast = 59€/$ forecast = 1.32
16/01/2013
1.61
1.32
5 Source: CME, ICE
Japan
Germany
UK
USA
Gas Prices in the Three Hubs – Unregulated Free Markets
Shale gas revolution has pushed down N. American gas prices, helped break oil-linkage for gas in Europe, could it now lead to break of oil-price linked gas contracts in Asia?
?
0
50
100
150
200
250
300
350
Qa
tar
LNG
Exp
ort
s (m
ln m
^3
pd
)
Middle East
Americas
Other Europe
U.K.
Other Asia
S. Korea
India
Japan
6
0
100
200
300
400
500
600
LNG
pro
du
ctio
n v
olu
me
s (m
tpa
)
Speculative Supply
Proposed Supply
Qatar firm
Firm Supply
LNG demand projection
New LNG competitors and lower LNG prices could mean an end to Qatar’s LNG export bonanza
Source: LEA estimates
LEA Global LNG Supply and Demand Forecast
Qatar’s LNG market share is set to decline as Qatar has ceased building capacity while global supply is set to
keep increasing this decade
29%
20%
Speculative Supply (N. America, E. Africa)
Proposed New Supply (primarily Australia)
1.6 1.8 1.9 2.3 2.6
3.0
4.2
5.6
6.7
9.3
11.9
0
2
4
6
8
10
12
14
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Qa
tar
gas
ex
po
rts
20
01
-20
11
(b
cf/d
)
Gas exports
Qatar Gas Exports 2001-2011 (bcf pd)
Qatar Gas Exports By Market
Asian sales at oil-linked prices
0
1
2
3
4
5
6
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
Ga
s P
rice
(U
SD
pe
r m
ln B
TU
)
US
Un
em
plo
ym
en
t R
ate
(#
)
US Unemployment Rate (LHS)
US Henry Hub Gas Price (RHS)
8.0
8.2
8.4
8.6
8.8
9.0
2008 2015 2020 2025 2030 2035US
In
du
stri
al G
as
Co
nsu
mp
tio
n
(Qu
ad
rill
ion
btu
)
2012 forecast
2009 forecast
Economic threat to GCC extends beyond direct gas exports: cheap gas making US industry very competitive. It is even displacing some Gulf petrochemical production on the cost curve
7
Demand for natural gas in US Industrial Sector
‘Energy costs in North America
are one-third the cost of European
steel plants’
Cleveland Federal Reserve President,
Sandra Pianalto
Global production cost curve of Ethylene
Source: CMAI, Chemical Week, EIA
US stock market has risen strongly as US gas prices have fallen
US unemployment falling, as reshoringoccurs due to lower gas prices
0
1
2
3
4
5
6
7
8
9
US
He
nry
Hu
b G
as P
rice
(USD
pe
r m
ln B
TU)
US Henry Hub Gas Price -37%
Dow Jones Industrial Index +32%
Most critically for the GCC’s economic well being gas may start to eat into liquids demand, reducing demand for the region’s core export
8 Source: IEA
Power, CHP
7%
Cars
28%
Road freight
19%
Ships, planes,
trains
15%
Commercial
6%
Residential
6%
Industry
8%
Petrochemicals
9%
Other, losses
2%
Oil uses by sector and long term substitution potential
Possible to substitute significant portion of hub-
based road freight fleet with gas vehicles; US now leading
in this direction
Non-oil cars (electric/natural gas fuelled) will take a
long time to develop as new infrastructure
and habits needed but not a great
technical challenge
Natural gas a far superior option in power sector, only countries
with subsidies, like Saudi Arabia, continue to use oil in power at all
Broadly the only sector where oil demand is safe
(though trains can be electrified and ships
can run on LNG)
Oil used for heat based processes in residential, commercial and industry
could be replaced by natural gas. This would be
lower cost and cleaner
Natural gas can be used as feedstock for various
petrochemical processes
Passenger
Vehicles
60%
Heavy
Vehicles
19%
Air
9%
Other
12%
0
50
100
150
200
250
2008 2009 2010 2011 2012
Pro
du
ct P
irce
($
/bb
l) US Gasoline US Diesel Henry Hub
The switch from oil to gas is already underway in the US. There is now an 8 fold price difference between natural gas and diesel in the US. The US heavy vehicle transportation sector is now exploring how to switch to gas
9
Relative price of natural gas vs. diesel and gasoline
Heavy Vehicles energy consumption by fuel type
There are currently 54 LNG fuelling stations, but this
may increase dramatically over the next two years
Total consumption:
2.4 mln b/d
Currently starting to use natural gas as
and US recently introduced tax incentives for
NGVs
Energy Consumption in the US transportation sector by vehicle type
Gas is currently
8x cheaper
than diesel
Total consumption:12.4 mln b/d
0
1
2
3
4
5
6
Oil
+N
GL
Pro
du
ctio
n (
mln
bo
e p
d)
Nov-12
Nov-10
0
2
4
6
8
10
12
Oil
+N
GL
Pro
du
ctio
n (
mln
bo
e p
d)
Nov-12
Nov-10
GCC oil industry faces a double hit from supply and demand:Aside from oil switching to gas, shale gas revolution has led to a tight oil revolution transforming the global oil supply picture
10 Source: IEA
USA Crude+NGL Production IEA WEO 2009 Forecast vs WEO 2012
Canada Crude+NGL Production IEA WEO 2009 Forecast vs WEO 2012
US Liquids Production in IEA World Energy
Outlook 2012 Shale revolution, via NGLs from liquids rich shale gas and tight oil (“shale oil”), account for all of revival in US liquids
production prospects
Similar trends play out in Canada as well
Additional 3.6 mln bpd expected from North America by 2015 vs forecast two years ago
0
20
40
60
80
100
120
140
160
Bre
nt
Oil
Pri
ce (
US
D p
er
bb
l)
Jan-13
The combination of softening oil demand and rising ex-OPEC oil production is likely to put downward pressure on oil prices and pressure the GCC-OPEC member states to curtail oil exports to manage the market
11 Source: Bloomberg
The oil price has remained relatively steady in the last two
years but it may increasingly come under downward pressure
BP Energy Outlook forecasts that OPEC production will have to be curtailed as
tight oil from North America comes onto the market in the 2010s
GCC oil export revenues are likely to drop either via price or volume falls
The GCC needs to respond to the negative energy trends its faces by improving its own energy competitiveness. The GCC does not use its energy efficiently, nor does it incentivise development effectively
12
0
20
40
60
80
100
120
140
USA EU Japan Qatar Kuwait UAE S. Arabia
Pri
ma
ry E
ne
rgy
Co
nsu
mp
tio
n p
er
Ca
pit
a
(bo
e p
er
an
nu
m p
er
cap
ita
)Primary Energy Consumption per Capita
0
2
4
6
8
10
12
14
16
18
20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Liq
uid
s F
low
s (m
ln b
pd
)
Exports Qatar
Exports Kuwait
Exports UAE
Exports Saudi Arabia
Demand Qatar
Demand Kuwait
Demand UAE
Demand Saudi Arabia
-50
0
50
100
150
200
250
300
350
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Ga
s F
low
s (b
cm p
a) Exports Kuwait
Exports Qatar
Exports UAE
Exports Saudi Arabia
Demand Kuwait
Demand Qatar
Demand UAE
Demand Saudi Arabia
Given already inefficient use the GCC cannot allow growing domestic energy demand in the region to constrain the potential for high value oil exports and prevent further gas exports
Source: Jadwa Investment
Saudi Arabia oil exports versus domestic demand forecast
Exports may decline as domestic demand rises faster than production
by late 2010s
Growth of domestic oil demand vsoil production in GCC 2000-2010
Growth of domestic gas demand vsgas production in GCC 2000-2010
13
Reducing the subsidies which distort incentives across the energy sector in the GCC could be the most essential step to maintaining the region’s competitiveness and stopping runaway energy demand growth
14 Source: IEA, World Energy Outlook 2012
Economic cost of fossil-fuel consumption subsidies by fuel for top twenty-five economies, 2011
The region has huge untapped gas potential and an the urgent need for more gas to meet demand and diversify the economy away from oil. Yet the region has not been able to convert this effectively into production
15 Source: BP Statistical Review 2012
0
20
40
60
80
100
120
140
MENA Other Africa Europe &
Eurasia
Central &
South
America
Asia Pacific North
America
Pro
ve
d r
ese
rve
s /
pro
du
ctio
n (
ye
ars
)
Gas reserves /
production
Oil reserves /
production
MENA proved reserves / production (years) vs. other regions of the world
0
20
40
60
80
100
Om
an
Oil
PS
C
Occ
ide
nta
l (P
SC
)
Exx
on
(C
on
c.)
Mu
ba
da
la (
PS
C)
Exx
on
(P
SC
)
Occ
ide
nta
l (P
SC
)
To
tal
(PS
C)
Qa
tar
Pe
t. P
SC
Qa
tar
Pe
t. C
on
c.
Ba
pco
PS
C
Mu
ba
da
la (
PS
C)
Occ
ide
nta
l (P
SC
)
Ku
fpe
c C
on
c. 1
Ku
fpe
c C
on
c. 2
Sa
ud
i A
ram
co C
on
c.
Sin
och
em
(C
on
c.)
Da
na
Ga
s (C
on
c.)
Ad
no
c (C
on
c.)
1
Ad
no
c (C
on
c.)
2
Occ
ide
nta
l (C
on
c.)
Oman Qatar Bahrain Kuwait Saudi A. UAE
Tota
l g
ov
ern
me
nt
take
(%
)
0
1
2
3
4
5
6
7
8
9
Saudi Domestic
Industry
Qatar Dolphin
Pipe to UAE
New
unnassociated
gas
Shah sour gas
Sales price Breakeven cost
Ga
s P
rice
(U
SD
pe
r m
ln B
TU
Current gas pricing and fiscal terms deter investment in gas and encourage inefficient demand. A more market based approach could unlock the region’s gas resource potential and maintain economic competitiveness
16 Source: Press reports, WoodMackenzie
The cost of new gas supplies is much higher than the gas sales price
The fiscal take for gas projects in the GCC is often prohibitive given their marginal economics due to low sales prices
Gap between economic breakeven
and allowed cost