Submitted 22 Feb 2010.

The updated presented

version can be downloaded
post--conference from
post
p
www.douglas--westwood.com
www.douglas

John Westwood
Chairman,, Douglas-Westwood
g

Sulphur World Symposium ,13 April 2010. Doha, Qatar

1
Energy Market Drivers
Oil
Gas
Sulphur
Su p u
Conclusions

2
 Energy – two linked concerns; one driver

Population growth

Energy supplies Global warming

3
 Energy demand outpaces population growth
193%

sources: DWL,UN,
DWL UN BP

95%

55%

oil demand population energy

growth growth demand
growth
Global Growth 1965-2008

Consider oil, the fuel of transportation:

• 1 billion cars worldwide. Production capacity
p y 86 million p
p.a. ((2008))
• Meantime China and India’s growing populations will ‘motorise’
• And cause a huge growth in oil demand and prices
• Can the global economy handle this?
4
 Market drivers – long-term demand growth
45
US - EIA
40
US - DWL
35 China - EIA
China - DWL
30
China (Korea model)
25 DWL – China + 16 Mbpd

20

15
DWL – US falls by 5 Mbpd
10

5
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2
2
2
2

2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
Source: EIA 2010 AEO,
Douglas-Westwood
China and US Oil Demand to 2030 – EIA & DWL analysis
million barrels per day

• China will be the key driver of global oil demand growth; half of total
• Korea
K model:
d l consumptionti up 88.8%
8% p.a., 1970
1970–1994
1994
• If oil supply limited, China growth will tend to reduce US, EU, Japan consumption 5
 China invests in future energy supplies

Canada: $1.7bn Russia: $300 bn. 300kbd

Oil sands UK: windpower bid

USA: $2.2 bn
Windpower

Venezuela: $8 bn Nigeria: 1/6th O&G reserves

Brazil: $10 bn. 160kbd

Australia: 20 year LNG
Australia: $5.2 bn Coal

January 2010:
S Korea to buy
10 oil companies
‘energy security
a priority’ Data: Major investments in 2009. Douglas-Westwood 6
Energy Market Drivers
Oil
Gas
Sulphur
Su p u
Conclusions

7
 They got it wrong before – will they again?

March 1999 April 2009 8

 Global oil & gas supplies & reserves
Full IOC access 120 Africa
New Russian 6% Asia Oil supplies will limit
Companies Australasia
6% 100 Eastern Europe & FSU (will demand?)
Latin America
Middle East
NOCs (equity North America

Million Barrrels a Day

access) 80 Western Europe
10%
60

NOCs (limited
40
equity access )
78% Middle East
20

0
Restricted access to oil reserves 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Source: Offshore Technology

120
Africa
Asia

• Oil – NOCs now control 100

Australasia
Eastern Europe & FSU
Latin America
Gas to have long-term supply
Middle East growth (and demand)
80% of global reserves North America
Milllion Barrels a Day (Oil Equivalent)

80 Western Europe

• Gas – 55% of conventional 60

FSU
reserves controlled by 40

Russia, Iran & Qatar 20

Middle East

0
1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

9
 Long-term liquids supply outlook: a narrowing of views

IEA, EIA, IOC’s
100
Douglas‐Westwood
Current Production Capacity
Total 
Current Production
80 Petrobras
Petrobras 

• Petroleum liquids supply 60

Uppsala University*
* Only material difference between 

forecasts range 75 –105

105 Mbpd Uppsala and IEA is depletion rates 
on fields to be discovered and 

for 2030 developed to 2030 

• All are essentially peak oil 40

forecasts
• Quiet consensus has emerged – 20
disagreements are increasingly
narrow and specific 0
Year 2030

Range of Global Oil Supply Forecasts – 2030 – All Liquids

Source: various

• Oil supply looks unlikely to keep up with demand over time

10
 Have 8 out of 10 oil majors have passed peak production?

2002 2003 2004 2005 2006 2007 2008

ExxonMobil 2496 2516 2571 2523 2681 2616 2404
BP 2018 2121 2531 2562 2475 2414 2410
PetroChina 2109 2119 2233 2270 2276 2312 2379
Shell 2359 2379 2253 2093 2030 1899 1771
Petrobras 1533 1701 1661 1847 1908 1920 1996
Chevron 1897 1823 1737 1701 1759 1783 1676
Total 1589 1661 1695 1621 1506 1509 1456
ConocoPhillips 891 1237 1242 1447 1698 1644 1367
ENI 921 981 1034 1111 1079 1020 1026
StatoilHydro 1112 1132 1135 1102 1058 1054 1056

Data: Petroleum Review, May 2009 Peak Year?

• Peak oil is a reality, not just for the majority of the producing
cou t es but pe
countries perhaps
aps for
o tthe
e majority
ajo ty oof tthe
e top p
producers.
oduce s
• Offshore is one of the few remaining places where the oil majors
can increase p
production

11
‘Big oil’ to get best IRR in deepwater?

12
 The Movement
Growing importance of offshoreOffshore – Oil
production

120 Of f shore Deep

Of f shore
of oil per d ay 100 Onshore (inc. Unconventional Reserves)

80

60
on barrels o

40

20
millio

0
1950 1965 1980 1995 2010 2025

Global Oil Production 1950-2025

• Offshore oil ccurrently

rrentl 33% of global o
output:
tp t 35% b by 2020
• Deepwater was 3% of production in 2002, 6% in 2007, 10% by 2012
• After 2012,
2012 deepwater is the only oil sector likely to continue to grow

13
 Global offshore oil & gas production & spend to grow

400 Africa
Asia
350 Australasia
Eastern Europe & FSU

billions)
Latin America
300
Middle East
North America
250

Capexx & Opex ($b

Western Europe

200

150

100

50

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: EnergyFiles

• Global Capex fell in 09 but Opex sees long term growth

• Most regions to see overall growth
p to decline
• But W Europe

14
 Deepwater Capex to reach new highs

$35 Africa
Asia
$30 Australasia

$billions)
Latin America
$25 Others
North America
$20 Western Europe

Exxpenditure ($
$15

$10

$5

$0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

• Deepwater production to grow 99%

(shallow water 20%)
• Future deepwater investment:
$137 billion over the next five years
Source: “The World Deepwater Market Report
2009-2013” Douglas-Westwood

15
Energy Market Drivers
Oil
Gas
Sulphur
Conclusions

16
 Global natural gas production to soar

100 Africa

uivalent perr day

Asia
90 Australasia
80 Eastern Europe & FSU
Latin America
70 Middle East
North America
els of oil equ

60
Western Europe
50 FSU FSU

40
million barre

30
Middle East
20
m

N America
10
0
1930 1937 1944 1951 1958 1965 1972 1979 1986 1993 2000 2007 2014 2021
Source: Energyfiles

• Production currently dominated by E Europe & Russia

• Middle East, Latin America, Africa & Asia to see significant growth
• Deepwater gas and LNG to be of growing importance
• And ‘unconventional
‘ gas’’ – USS shale gas, coal bed methane, etc
• But local supply issues e.g. in Europe 17
 Continuing growth in global LNG capacity
400
Africa
Asia-Pacific
350 FSU
Middl E
Middle East

pacity (mmtpa)
300 South America
North America
250 Western Europe

quefaction Cap
200

150

100

Liq
50

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

• Large expansions to Qatargas and Rasgas plants to come onstream in

2009/2010. Will add 46.8 million tpa of new capacity to the market
• 33 additional installations forecast, incuding19 new facilities
• 53 new LNG import terminals and a number of expansions to expected
to be
b completed
l d iin the
h next fifive years

18
 UK electricity demand could exceed capacity by 2017

Gas

Nuclear

Coal

• Demand
D d could
ld exceedd capacity
it b
by 2017
• If existing station closure programme is implemented
• How will new capacity
p y impact
p on natural g
gas use – the fuel of choice?

Source: The UK Power Generation Expenditure Report 2010‐2030. Douglas‐Westwood
19
 UK to see “a dash-for-gas”
10

9
Solar PV •>50% of 2010-17
Bi
Biomass capacity additions
8
Hydro to be gas fired
7 Wave & Tidal
n)

OFFSHORE
ex (£billion

6 Onshore Wind WIND

Offshore Wind
5
Nuclear
Cape

4
Coal
NUCLEAR
3
Gas
2

1 COAL +CCS

• Gas plant is both available and the cheapest option

• A new UK ‘dash for gas’ underway with security of supply implications
• Power companies have to use wind and nuclear despite cost multiples

Source: The UK Power Generation Expenditure Report 2010‐2030. Douglas‐Westwood 20
 High industry costs remain a major concern
Offshore Cost Inflation Index
200 (CERA) $120

190 Oil Price Actuals (Brent)

$100
180

ndex 170
$80
Offhsore Cost In

160

$/bbl
150
Brent Oil Price $60
(Forecast)
140 Brent Oil Price
O

(Actuals) $40
130

120
$20
110

100 $0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

• Cost inflation has tracked oil prices closely over the past 10 years
• Costs cooled somewhat in 2009 but still remain high
• As oil prices eventually rise another flurry of activity may well trigger cost
inflation again
• Major challenge to manage costs over the next five years

21
Energy Market Drivers
Oil
Gas
Gas
Sulphur
Conclusions

22
• Increasing reliance on high
sulphur crudes
• Up to 2/3 global production now sour
• Sour crude expected to grow three
times as fast as sweet to 2020
• Major
M j growth
th iin natural
t l gas
production underway
• Lower price than oil
• Sulphur standards tightening in
Europe & N America
• Increasing sulphur volumes to
process and market

23
 Increasing production of sour and heavy crudes

• Sour
S crude
d iis oilil with
ith sulphur
l h 33 1.6%

content greater than 0.5-1.0% 1.5%

• Often presented with heavy 32 1 4%

1.4%

crude –’sour and heavy crude’ 1.3%

31 1.2%
• Both require suitably 1.1%
configured refineries and 30 U.S. API Gravity (left) 1.0%
higher
g refining
g costs U.S. Sulfur Content (right)
( g ) 0 9%
0.9%

• Both sour and heavy crudes 29 0.8%

have been increasing as a

proportion of US refinery
U.S. API Gravity and Sulphur Content (Weighted Average)
inputs for many years of Crude Oil Input to Refineries (Degrees, Percent)
Source: EIA

24
 Sour crude increasing prominence

• Sour crude ordinarily trades at a

di
discount
t tto sweett crude
d $
$25

• Traditionallyy $5-6 for US Gulf $20

region; $2-4 for others $15

• After 2004
2004, the sweet
sweet-sour
sour $10
differential became massive,
more than $15 / barrel, >$22 at $5

peak in 2008
$0

• Sour crudes did not follow

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010
1

2
sweet, widely-traded crudes like
Price Differentials: WTI minus Maya Sour, per barrel
WTI up one-for-one crude oil, 1997-2010
Source: EIA

• Less speculation in less liquid

sours?

25
 Sour gas

• Sour gas has an H2S proportion >4 ppm

• Historically, producers have developed the simplest, cheapest fields. In
coming decades, they will have to contend with fields containing
increasingly sour or acid gas

• Some 40% of the world’s

world s remaining gas reserves are sour or acid, with
about 10 bcm containing more than 10% H2S and at least 20 bcm more
than 10% CO2 (Total)

• In Canada, natural gas fields with more than 35% H2S have been
successfullyy developed
p

• Several removal processes, from amine gas treating to developments in

downhole sulphur recovery

26
 Shah Field

• Sour gas forms half of UAE’s 214 tcf natural gas reserves; and UAE’s
reserves are the
th fifth largest
l t in
i th
the world
ld
• Perhaps the most prominent sour gas projects is the UAE Shah Field
• Contains nearly 30% H2S
• One of few in the region open to western companies
• Adnoc (60%) and ConocoPhillips (40%) to develop the sour gas
reserves of the onshore Shah field at a cost of more than $10 billion
• The project is slated to extract 1 Bcfd of gas to produce 570 million cfd
of sales gas, and 50,000 bpd condensate
• First gas is targeted for 2013-2014
• Conoco-Phillips has yet to make a final investment decision as it
considers cost and technical challenges associated with production
10 000 tons of sulphur daily
10,000

27
Energy Market Drivers
Oil
Gas
Sulphur
p
Conclusions

28
 The post-recession world

• Technology-driven
− IOC’s will be under increasing pressure for new discoveries and
expanded production
• But recession has ended ‘price
price is no object’
object environment
− OECD countries are unlikely to sustain oil prices much above $80
• Cost will be an important
p driver
− If we find the oil, can we afford to lift it?
• Global oil supply will be insufficient to meet future needs
− Natural gas has to take up some of the load
− High-cost biofuels will make little short-term impact
• Increasing use of high
high-sulphur
sulphur hydrocarbons inevitable
• Sulphur standards tightening
• Handling ever
ever-increasing
increasing sulphur volumes could become an issue
• Both innovation and cost will be critical drivers in the years ahead

29
 Thank you
o

This presentation can be downloaded from www.douglas-

www.douglas-westwood.com
30