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Use of international energy Use of international energy statistic in research. statistic in research.

Presentation of an oil market modelPresentation of an oil market model

Presentation by Knut Einar Rosendahl

Research Department in Statistics Norway

1st meeting in the Oslo City group on energy statistics6-8. February 2006

Statistics Norway

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Introduction

• International energy markets are important to understand– Particularly the oil market– Affects global economy in general and national economies in

particular– Improved understanding of energy markets helps decision makers

wrt. investments, policies, planning etc.

• Construction of energy market models may help to understand the markets

– Put together central relationships like demand functions for different consumers and supply behaviour for different producers into a consistent framework

Taking into account available reserves and costs of production

– Models will never be completely correct, e.g. due to unpredictable behaviour

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• Numerical models need a quantitative basis– Based on energy statistics

• A decent model requires decent statistics– The value of a numerical model depends on the quality of its

data basis Some statistics are more vital than others A numerical model may give valuable insight even if (some of) the

data are of poor quality

• International energy statistics of good quality are not easily accessible and applicable

– Different definitions– Lack of statistics for several countries

• Rest of presentation:– Brief presentation of oil market model and analysis– Presentation of energy statistics used and problems

encountered

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• FRISBEE is a partial equilibrium model of the international energy markets

– Developed in Statistics Norway over the last 3 years Partly financed by Norwegian Research Council

– Emphasis on the oil and gas markets

• Applications:– Analysis of OPEC’s optimal oil price level– Analysis of globalisation of gas markets– Analysis of various energy and climate policies on energy markets

• Users:– Mainly own use for research

Incl. presentations for e.g. Ministry of Energy, Oil companies etc.

– Several analyses for Statoil

FRISBEE – a global energy market model

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FRISBEE – regional classification

Canada

USA

Latin America

Western Europe Eastern

Europe

Russia, Ukraine Belarus

China

Rest-Asia OECD-

Pacific

Caspian region

OPEC-coreAfrica

OPEC-rest

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Important aspects of the FRISBEE model

• Production & consumption of energy goods in each region– Free trade on the world market– Global equilibrium in each period (exogenous stock changes)

• Time periods: 1 year– Base year: 2000– Time horizon: Normally 2030– More flexibility in the long run

• Consumption of oil products in each region:– Three end-users: Power production, Industry, Others– Two oil products: Transport oil and Oil for stationary purposes– Depends on end-user prices of different energy goods; GDP per

capita; Population; Energy efficiency (exogenous); Demand in previous period

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• Transformation from primary to final energy goods is not modelled (fixed add-on in unit costs)

• Oil production in each region:– Four field groups (e.g., onshore/offshore)– Distinguishes between fields in production, undeveloped fields and

fields to be discovered Both investment and production decisions are treated explicitly Costs are divided into capital costs and operating costs

– Developed fields go through four phases: Investment phase; pre-peak phase; peak phase; decline phase

• Oil investments and discoveries:– At the end of each year oil companies and OPEC invest in new

fields and improved oil recovery (IOR), and discover new fields

Important aspects of the FRISBEE model (cont.)

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• Oil production outside OPEC:– Production is set so that marginal costs equal regional crude oil

price (minus gross taxes)– Higher costs in the decline phase (before shut-in)

• Oil production in OPEC:– OPEC supplies residual demand for a pre-specified oil price target

• Investments outside OPEC:– Oil companies consider undeveloped oil fields and IOR projects

outside OPEC Maximises net present value at discount rate set to 10% p.a. Adaptive price expectations based on recent years price levels

– Investments in new fields take time to get on stream; IOR-investments increase production the next year

Important aspects of the FRISBEE model (cont.)

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• Investments in OPEC:– OPEC invests to maintain a certain excess capacity

• Investment costs:– Vary across regions and field groups

High risk acts as actual costs

– Costs increase when remaining reserves decline Technological progress may compensate

– Short-term costs may increase due to high activity level

Important aspects of the FRISBEE model (cont.)

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OPEC’s optimal oil price level –analysis of the FRISBEE model

• What is OPEC’s optimal oil price level in the long run?– Discounted income over the period 2005-2030– High prices: High initial income; lower market share in the medium

term (high Non-OPEC supply and low demand)– Low prices: Low initial income; higher market share in the medium

term– Constraint: Consider only constant oil prices from 2010-2030– Implicitly assume that OPEC is a profit maximising cartel

Ignore internal conflicts or coordination problems Ignore other considerations for OPEC (e.g., geopolitical issues)

– OPEC’s optimal oil price is not a prediction of the actual oil price level in 2010-2030

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OPEC’s market share over time for different oil price levels

2000

2005

2010

2015

2020

2025

2030

1525

35

45

5510 %15 %20 %25 %30 %35 %40 %45 %50 %55 %60 %65 %70 %75 %80 %85 %90 %

Per cent

Year

OPEC oil price

85 %-90 %

80 %-85 %

75 %-80 %

70 %-75 %

65 %-70 %

60 %-65 %

55 %-60 %

50 %-55 %

45 %-50 %

40 %-45 %

35 %-40 %

30 %-35 %

25 %-30 %

20 %-25 %

15 %-20 %

10 %-15 %

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OPEC’s net cash flow over time

1520

2530

3540

4550

5560

20002005

20102015

202020252030

0

100

200

300

400

500

600

700

800

900

Billion USD

OPEC oil price

Year

800-900

700-800

600-700

500-600

400-500

300-400

200-300

100-200

0-100

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OPEC’s optimal oil price level for different discount rates (2000-$)

30

35

40

45

50

55

60

0 2 4 6 8 10 12 14 16 18 20

Discount rate

OP

EC

oil

pric

e

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Energy statistics used to calibrate the FRISBEE model

• Mostly international statistics– IEA; EIA (US DoE); BP; USGS

• Energy demand and production in base year 2000– Mainly IEA statistics– Good coverage for most countries (incl. Non-OECD)

• Energy prices in base year– Mainly IEA statistics– End-user prices of energy goods in households/industry/power prod.

OECD countries: Large variation! Non-OECD countries: More or less absent Forced to search elsewhere (research literature etc.), and make rough

assumptions

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Energy statistics used to calibrate the FRISBEE model (cont.)• Energy prices in base year (cont.)

– Wholesale prices OECD: Mostly OK Non-OECD: Little information

• Taxes on energy demand:– Not focused in this study (so far), but in other studies– Difficult to obtain for several countries and energy goods

• Oil field information (resources, reserves, geology, start-up):– Access to extensive database with detailed information– Helped to sort oil reserves into developed/undeveloped fields;

onshore/offshore; large/small etc. Different opinions exist, especially wrt. size of reserves

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Energy statistics used to calibrate the FRISBEE model (cont.)• Production costs:

– Access to information about operating and investment costs in different types of fields in important countries

– Used to calibrated cost functions in different phases Investment, peak phase, decline phase

• Undiscovered oil resources:– US Geological Survey (2000) – Potential discoveries next 30 years

Country specific Different opinions exist of course!

– Used to calibrate deterministic discovery function

• Projections of future economic growth and energy demand:– Mainly based on EIA– Used to calibrate income elasticities– Projections of energy demand vary a lot

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Energy statistics – important needs

• More statistics for Non-OECD countries– More and more important for the international energy markets (e.g.

China, Russia)– Very limited statistics, especially on prices

• More available statistics for fossil fuel resources– Important in order to understand the development of the energy

markets (cf. e.g. the peak oil debate)– Very costly today– Different definitions about reserves, and different evaluations

Predominance of unlisted companies

– Strategic importance for oil companies etc.– Statistics on bio resources and other renewables also important

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More information:

• Aune, Glomsrød, Lindholt and Rosendahl (2005): Are high oil prices profitable for OPEC in the long run? Discussion Papers 416, Statistics Norway(http://www.ssb.no/cgi-bin/publsoek?job=forside&id=dp-416&kode=dp&lang=en)

• E-mail: ker@ssb.no