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Geopolitical Oil

Geopolitical Oil

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Published by Gill Wallace Hope
Geopolitical Changes and Global Oil Markets
Fareed Mohamedi - Partner and Head of Markets and Country Strategies
Geopolitical Changes and Global Oil Markets
Fareed Mohamedi - Partner and Head of Markets and Country Strategies

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Published by: Gill Wallace Hope on Dec 19, 2010
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Strategic Advisors in Global Energy

Geopolitical Changes and Global Oil Markets

Fareed Mohamedi Partner and Head of Markets and Country Strategies June 2009

Executive Summary
 The global economy is at a major point of transformation – the old system -US consumes and China produces -- is unsustainable  Historically, the declining power usually resists giving up control and the rising power usually is too cautious to assert a greater degree of control  Oil demand will be on the defensive for a long period  OPEC will require serious discipline to manage supplies and reduce stocks  Energy insecurity and China’s growth is shaping a new global oil distribution system  The US Administrations interest in efficiency and climate change will add to the uncertainty facing producers

| Markets and Country Strategies Group | Page 2

The Unsustainable System

Treasury Bonds


United States
Merchandise Exports


Commodities, Other Inputs

 The US consumes, China produces  The US run deficits, the Rest of the world finances
| Markets and Country Strategies Group | Page 3

Changing Global Balance of Power

United States



China India

 A declining but still powerful United States  Other rising powers, but no superpowers…yet  Era of grand alliances is passing If Washington fails to repair its power losses in the next 10-15 years, then other countries will assume the leading role in global affairs
| Markets and Country Strategies Group | Page 4

How Much Can Obama Change US Foreign Policy?
Obama’s rhetoric offers a visions of change
 Go beyond post 9/11 strategy—conventional policy cannot deal with unconventional threats of 21st Century  Transform the way the US deals with the world—dignity agenda:
– Pay attention how others perceive the United States and its policy – Appreciate other states have own priorities – Address “perception of unfairness” and problems that breed radicalism and prevent liberty, justice and prosperity—bottom up approach

 Emphasis on the centrality of active diplomacy and multilateralism
– International cooperation; American leadership – Working with broad range of partners, including Russia and China

 Forceful idealism—willing to use force to achieve specific ends

Obama is attempting to act on his belief that US foreign policy under the Democrats can be strong and right, but his administration faces structural limits
| Markets and Country Strategies Group | Page 5

Increasingly Ineffective US Hegemon, No-one Else Wants the Job

 Being a hegemon is expensive and risky. After WWII both Europe and Japan learned it was more comfortable to “free ride” on US hegemony.  China has the resources to make a bid for hegemony. But so far it prefers to concentrate them on economic growth projects.  Russia and India are growing stronger, but will not have enough power to make a bid for hegemony in the next 20 years (at least).

No major power has a sustained interest in undermining, much less replacing, US hegemony, but they may be forced to take a more overtly cooperative role
| Markets and Country Strategies Group | Page 6

Global Economics
US economy consumers give up

 Abundant evidence of radical change in behavior of US consumers:
– Retail sales, personal consumption are nose-diving – Rebounding savings rate – Household debt declined in third quarter 2008, first time since 1952

US: Labor Market Conditions
140 138 136 134 132 130 2007 2008 2009 10% 8% 6% 4% 2% 0%

Total Employment, millions

Unemployment Rate, %

 This has a direct bearing on steep falls in global manufacturing and exports
– Can the world economy find a substitute for US final demand? – Can the US economy adapt to a radically different growth model?

20 16 12 8 4 0 56 60 64

Household Debt
annual % change

68 72

76 80

84 88



00 04


| Markets and Country Strategies Group | Page 7

World Economy: Falling Off The Edge
Manufacturing, exports have plunged since September

 This is an inflection point, unusually hard to forecast  First half of 2009 certain to see sharp falls in growth rates throughout the world  De-stocking partly to blame—some signs this may be bottoming out  Secondary impacts yet to come, especially from job losses
Asian Exports, % change year/year
50 30 10 - 10 -30 -50 Jan 08
China Korea Taiwan




M alaysia


Jan 09

Stimulus in US, China and elsewhere will help—but no recovery is Stimulus in US, China and elsewhere will help—but no recovery is possible without restoring the financial sector to health possible without restoring the financial sector to health
| Markets and Country Strategies Group | Page 8

A Coordination of Policies would be Necessary to Return Global Growth
Current Account Balances, 2007
$ billion

Surplus Countries

Deficit Countries

 Falling demand, credit squeeze are forcing adjustment of external deficits in deficit countries—this can happen in one of two ways:
– Declining imports and lower levels of trade – Rising exports and relatively higher levels of trade

 Second alternative is obviously preferable, but can only happen with policy coordination among key countries

Success or failure of international coordination will be the most Success or failure of international coordination will be the most important single factor in determining severity of the recession important single factor in determining severity of the recession
| Markets and Country Strategies Group | Page 9

OPEC: Balancing the Risks
 Quiet confidence that OPEC is no longer “chasing markets”  But economic uncertainties still loom large with risks to demand primarily on the downside  Current prices are at unacceptable levels, but core OPEC members understand they will need lower prices in order to achieve durable, higher prices in the longer-term
– Current trading range acceptable for next two quarters, and some confidence a $35-40/b floor has been established – Want a products-led demand rally to lift the complex – Want to avoid an undue “tax” on the stimulus programs or any other oil pressure on markets

| Markets and Country Strategies Group | Page 10

Unwinding the Glut
Active OPEC management needed to restore balance

Supply-Demand Balance
3.0 2.0
Premature fears Premature fears of recession of recession Saudi increases as Saudi increases as demand withers demand withers

1.0 0.0 -1.0 -2.0 -3.0
Aggressive tightening Aggressive tightening needed to clear overhang needed to clear overhang

Change in Supply

Change in Demand
| Markets and Country Strategies Group | Page 11

OPEC Implements Major Cuts
 Agreed to a total of 4.2 mmb/d in production cuts since September
– Decision in December to rebase level of cuts from September 2007 quotas to September 2008 actual production – De facto re-apportionment of output targets based on secondary sources (including PFC Energy)
Projected Cumulative OPEC Cuts (mb/d)
3000 2500 2000 1500 1000 500 0 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Angola Ecuador Algeria Libya Nigeria Venezuela Iran Qatar UAE Kuwait (w/NZ) Saudi Arabia (w/NZ)

 Bulk of cuts to come from Gulf Arab states, but heavier share of burden of additional cuts on Iran, Venezuela, Angola and Libya  Initial indications suggest good adherence to targets— but is it enough?
m b/d

Change in Commercial Stocks
2.0 1.0 0.0

-1.0 -2.0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

| Markets and Country Strategies Group | Page 12

OPEC Threshold Prices: Not Enough For Some
WTI $/b

Price Needed to Balance External Accounts mid-2008


(Imports of Goods & Services – Non-oil Exports)/ Total volumes of Liquids Exports

| Markets and Country Strategies Group | Page 13

How will NOCs Respond in the Slowdown?

| Markets and Country Strategies Group | Page 14

NOC Upstream Capital Spending Still Strong
Stated / Estimated increase CNPC Petrobras PEMEX (downside risk) PETRONAS ONGC CNOOC Ecopetrol PTTEP PERTAMINA (unlikely No change to Capex:  QP  NIOC Stated / Estimated cut  Saudi Aramco  Sinopec  Gazprom  PDVSA  Rosneft  Sonatrach  LNOC  KMG EP
| Markets and Country Strategies Group | Page 15

Source: NOC stated numbers or PFC Energy estimates

In All Scenarios OPEC Spare Capacity Remains Above 3 mmb/d Until 2018

 New OPEC capacity comes online at same time as lower demand  Evolutionary and Protective reduce excess capacity as demand revives, but in Transformative, oil becomes a less important fuel
| Markets and Country Strategies Group | Page 16

The Age of Energy Insecurity
 Global energy insecurity: Is this still true?  Destabilizing force in global economic and political relations:  Industrialized countries question the intentions and capabilities of the major resource holders  The competition for access to energy resources from the newly industrializing countries in Asia  The major resource holders question the sustainability of demand and the new obligations assigned to them  The populations of the major resource holders demand a greater share of the country’s revenues  Supply side risks to demand side risks: Is that permanent?  Governance shifting from inside the sector to outside forces

| Markets and Country Strategies Group | Page 17

Supply Crunch Still Exists But Has Now Become a Post-2020 Issue
(mmb/d) 120

Biofuels Tar Sands

Demand 1.5% 1.0% 0.5%



OPEC Liquids


Non-OPEC Liquids

0 1995 2000 2005 2010 Non-OPEC Crude, NGL, & Condensate * Non-OPEC Oil Sands 0.5% Demand Growth 1.0% Demand Growth 2015 2020 2025 OPEC Crude, NGL, & Condensate Biofuels & Other Liquids 1.5% Demand Growth
| Markets and Country Strategies Group | Page 18


* Includes Refinery Gain

But, Rising Decline Rates will Still Require Activity to Replace Production
High Oil Prices could not Arrest Non-OPEC Decline Rates

10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%

Decline Rates for Non-OPEC Supply Online in 2000

Excluding FSU

Including FSU

2000 2001 2002 2003 2004 2005 2006 2007 2008
| Markets and Country Strategies Group | Page 19

But New OPEC Supply is Coming: Capacity Expansions are Mostly Complete or Underway

Projects delayed

+ 4.5 mmb/d
Production (mb/d)





0 2004 2008 2012 2016 2020 2024 2028

Khoreis Shaybah Adco--SAS Expansions Neutral Zone Yadavaran Nowrooz Soroosh Adco--Bu Hasa Expansion Foroozan Esfandiar Bab Phase II Balal Sirri C and D Project Kuwait

Abu Safah Expansion Harahd Darquain Qatif Nuayyim Doroud OGD-3 and AGD-2 South Pars Phases 4 & 5 Adnoc--Qusahwira and Bida al-Qemzan Lower Zakum Expansion Sadat-Sarvestan Umm Shaif Expansion Manifa 2 Sirri A

Khursaniyah Manifa 1 Upper Zakum Azedegan South Mansuri - Asmari Dehluran Azedegan North Sirri E Chesmah Kosh Adco--North East Fields Expansion Ahwaz - Bangestan Adco--Huwaila Expansion Manifa 3

 

3.5 mmb/d of new capacity added from Saudi Arabia, Iran, and UAE over the last 5 years. Another 1 mmb/d will come onstream in the next 2 years.

 Only 3 discretionary projects that could be significantly delayed which equal only 1 mmb/d: | Markets and Country Strategies Group | Page 20 Project Kuwait, Manifa 2, and Manifa 3.

Long Term Worries: World Depends On The Gulf


OPEC Gulf Production OPEC Gulf Production as % of Global Supply


29,000 32% 25,000 28% 21,000

17,000 1997

24% 2002 2007 2012 2017

| Markets and Country Strategies Group | Page 21

The Gulf: Strategic Directions  The Gulf is at a critical crossroads and is being presented with unique opportunities – The economy has grown and citizens have (in general) prospered
• The key issue is that governments take economic development seriously • The crisis has provided a much needed cautionary reminder of the dangers of excess

– Oil prices have fallen and that has made the oil economy more sustainable
• Prices have stayed within the new price paradigm ($40/b-$50/b) • Gulf governments have shown that they can exert control over oil prices

– The US has retreated and massive new geopolitical opportunities beckon
• The US role is now limited to providing security • Haphazardly, Gulf governments have started to live in their neighborhood • The large Gulf powers, Iraq and Iran, are self consumed and exhausted • Asia offers massive new economic and strategic opportunities
| Markets and Country Strategies Group | Page 22

The Gulf: Is the New Model Sustainable?  The Gulf governments will have to be vigilant: – More globalized, the economies face more pathways of contagion
• Beyond the oil price, lower trade, investment flows and tourism receipts

– Move reforms from first generation to second generation
• Maintain fiscal and financial system stability • Continue investment in infrastructure and in people • Continue institutional and regulatory improvement

– Oil revenues will remain the main engine of growth for now
• High oil prices are important and, as a result, OPEC discipline is vital

– The Gulf must exploit the opportunities of a multi-polar world
• It should not get sucked into a surplus country/deficit country disputes • It should guard against the retreat of globalization: Think “Dubai Ports” and attempts to control its integration into the global economy • It should build meaningful ties beyond energy with Asia, Latin America and the FSU • It should seek new global governance and environmental regulations
| Markets and Country Strategies Group | Page 23

China: Regional Oil Sourcing Preferences

Dragon Zone (Local)

#4 #6 #3


Panda Zone (Global)


| Markets and Country Strategies Group | Page 24

The Emerging Energy Architecture

tio n

Capital & Coordination


Co o rd ina

al p it
u so e s ce r

&R es

pit al &

r ce ou



l& ta i




Capital & Resources

 Neo-Globalization requires a new energy architecture  A number of multi-lateral efforts are already underway to this end | Markets and Country Strategies Group |

Page 25

Future Energy Flows Will Shift East


Northeast Asia

Oil Gas LNG

Central Asia

Pan-Asian Grid
Refining Petrochemicals Electricity

Southeast Asia

Middle East

South Asia

| Markets and Country Strategies Group | Page 26

Chinese Loans-for-Oil Agreements
Russia ($25 bn): -Interest rate, estimated at 5.65% by Rosneft, is floating margin linked to LIBOR; five-year grace period of interest-only payment to start - 300 mb/d oil delivered via ESPO pipeline for 20 years to commence in 2011 -Price of oil paid by China determined by monthly average of Kozmino or Primorsk marine terminal spot price

Ecuador ($1 bn): -MOU to supply oil to China (Sinopec and PetroChina JV owns oil blocks)

Kazakhstan ($10 bn): -50% stake in MMG which will give CNPC +62 mb/d -Will ensure funding and completion of final phase of 3,000 km Caspian-China oil pipeline -Will help to fund 10 bcm gas pipeline from Beineu in western Kazakhstan to connect to Turkmenistan-China 30 bcm trunkline -Potential uranium-mining cooperation (Kazakhstan has world’s third largest reserves) -Joint refinery built in Kazakhstan on border

Venezuela ($4 bn): - Venezuela to increase exports from 350 mb/d to 1 million b/d by 2015 -Agreement to build joint refinery in Guangdong (sent to NDRC for approval) -80-200 mb/d to pay off $4 bn loan from CDB to Venezuelan Development Bank BANDES -MOU signed for Sinopec and PDVSA to study Campos Yopales Sur, Oca, Oleos and Merey fields with aim to produce 22 mb/d by 2012

Brazil ($10 bn): -Interest rate under 6.5% -Sinopec to receive 150 mb/d in 2009 then 200 mb/d from 2010-2019 -Oil used as collateral but loan repaid in cash -No guarantees from Brazil to buy Chinese services and products, but Chinese equipment factories might be built in Brazil -Sinopec might be offered two oil blocks

$50 billion in loans-for-oil deals have unlocked previously inaccessible supplies for China, strengthening its energy security during the economic crisis
| Markets and Country Strategies Group | Page 27

Brazil and the Changing Pattern of LA Supply
Non-traditional areas favorably positioned due to the recent pre-salt discovery in off-shore Brazil.  Brazil’s sizable Tupi discovery has spurred exploratory interest in other areas of the South Atlantic (e.g., Offshore Argentina and Uruguay), which may lead to the creation of a new energy hub  But the resource size in the traditional oil producing zones will also continue to provide substantial supplies if some of the funding and institutional constraints are overcome  Plus, most importantly, the region has the resources to be part of the global transformations – energy and in other economic areas
New Energy hub?

| Markets and Country Strategies Group | Page 28

Oil Era: Post-Oil Era 2010+ (Consumer Driven)
Environmental Conservation Concerns
GE (power & battery) GTL/LNG

Wind/ Geothermal

Asian NOCs?
Nuclear Companies Gazprom

Saudi Aramco

Coal Companies CTL

Biofuel Companies


Unconventional Onshore Resources



Energy Security Concerns No one in control, but successful actors will be those who become No one in control, but successful actors will be those who become “energy providers” “energy providers”
| Markets and Country Strategies Group | Page 29

Obama’s Energy Proposals
During his campaign, Obama outlined three broad energy policy goals:
 Energy independence  Finding a solution to climate change  Creating 3 million “green” jobs over ten years through a federal-governmental-sponsored, $150 billion energy-related program

Obama has suggested a number of potential initiatives as part of an overall plan that he has likened to the Manhattan Project or the Apollo Program:
 Alternative energy and renewables initiatives  Fuel efficiency and new transport technology  Infrastructure and end-user energy efficiency

| Markets and Country Strategies Group | Page 30

Obama’s Energy A-Team
 Obama has mustered a cabinet and advisory team with deep expertize and focus on energy and environmental issues  Selections reinforce the sense of his own commitment to these issues  Energy and environmental expertise also resides in other cabinet appointments (Salazar— Interior; Solis—Labor; LaHood— Transport)  Officials already pushing for ambitious policy initiatives
Nancy Sutley
Chair of White House Council on Environmental Quality Dep LA mayor for energy & environment Former EPA official

Carol Browner
Pres Assistant for Energy and Climate Change Environmental and climate counsel at Albright Group Former head of EPA Former leg director for Al Gore

Steven Chu
Energy Nobel winning physicist Transformed Lawrence Berkeley National Lab into board R&D center for energy technology

Lisa Jackson EPA Administrator
Head of NJ DEP Regional EPA official

| Markets and Country Strategies Group | Page 31

Challenges to Obama’s Proposed Energy Policies

Policies will need to be introduced incrementally and initially as part of the economic stimulus initiative, and Obama’s ambitions are unlikely to be fully realized
| Markets and Country Strategies Group | Page 32

Obama Initiatives Likely to be Phased
Short Term Short Term
Cap and trade system Cap and trade system Increased alternative energy investment Increased alternative energy investment Renewable production tax credit Renewable production tax credit Clean coal funding Clean coal funding Improved energy codes and end-user efficiency Improved energy codes and end-user efficiency New vehicle standards New vehicle standards

Medium Term Medium Term
Tighter environmental regulation Tighter environmental regulation Longer-term alternative energy investment Longer-term alternative energy investment Additional “green” job creation Additional “green” job creation Tighter vehicle emissions standards Tighter vehicle emissions standards Nuclear energy Nuclear energy

Long Term Long Term
Smart electrical grid Smart electrical grid Broader climate change legislation Broader climate change legislation

Timing and scope of initiative will depend on the economy, but a reduction in demand is likely to be a medium to long term impact
| Markets and Country Strategies Group | Page 33

Strategic Advisors in Global Energy
PFC Energy consultants are present in the following locations:

Main regional offices: Asia
PFC Energy, Kuala Lumpur Level 27, UBN Tower #21 10 Jalan P. Ramlee 50250 Kuala Lumpur, Malaysia Tel (60 3) 2172-3400 Fax (60 3) 2072-3599

             

Bahrain Beijing Brussels Buenos Aires Calgary Houston Kuala Lumpur Lausanne London Mumbai New York Paris San Francisco Washington, D.C.

Middle East
PFC Energy, Bahrain Flat 72, Building 2334, Road 2830, Al Seef 428, King Mohammed VI Avenue P.O. Box 11118 Manama, Kingdom of Bahrain Tel (973) 1758-0775 Fax (973) 17 58-1776

PFC Energy, France 19 rue du Général Foy 75008 Paris, France Tel (33 1) 4770-2900 Fax (33 1) 4770-5905 __ PFC Energy International, Lausanne 19, Boulevard de la Forêt 1009 Pully, Switzerland Tel (41 21) 721-1440 Fax: (41 21) 721-1444

North America
PFC Energy, Washington D.C. 1300 Connecticut Avenue, N.W. Suite 800 Washington, D.C. 20036, USA Tel (1 202) 872-1199 Fax (1 202) 872-1219 __ PFC Energy, Houston 4545 Post Oak Place, Suite 312 Houston, Texas 77027-3110, USA Tel (1 713) 622-4447 Fax (1 713) 622-4448

Main regional offices are shown in blue.

www.pfcenergy.com | info@pfcenergy.com

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