Transcript 2. Security & Oil Prices - The Oil, Petrochemical and Energy Risks

Oil Insecurity – Current Trends &
the Economic Impact
Simon Wardell
Director – Global Oil
Global Insight
Oil Insecurity
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•
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Oil Industry Trends: Fundamental Changes
Security & Oil Prices
Oil Prices and the Global Economy
Conclusion
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1. Oil Industry Trends: Fundamental
Changes
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Accelerating Global Demand
Global Oil Demand by Region
Oil Demand Growth (2005-25)
12
120
80
10
Million Barrels per Day
Million Barrels a Day
100
FSU
Africa
Middle East
Asia/Pacific
S. Am erica
E. Europe
W. Europe
N. Am erica
60
40
8
Others
Pow er Generation
Transportation
Petrochem ical Feedstock
Industrial Sector
Dom estic Sector
6
4
2
0
20
-2
0
1990
1995
2000
2005
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2010
2015
2020
2025
North
West Eastern South
Asia/ Middle
Am erica Europe Europe Am erica Pacific
East
Africa
FSU
4
Supply Growth Lagging Behind
non-OPEC Supply (MBOPD)
OPEC Decline (MBOPD)
OPEC Supply (MBOPD)
Demand Growth (MBOPD)
non-OPEC Decline (MBOPD)
Net Capacity Change (MBOPD)
?
4000
3000
2000
1000
0
-1000
-2000
-3000
2003
2004
2005
2006
2007
2008
2009
2010
Note: Assumes Iraqi production stays 2 MMBOPD through 2010
2006 includes 250 MBOPD of restored GOM production
Data Sources: IEA, EIA, OPEC,
Company Reports, Trade Press, ECG
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Accelerating Declines?
One reason for nonOPEC production’s
struggle to grow has
been the acceleration
of decline rates
0.0%
18000
14000
-2.0%
12000
-3.0%
10000
8000
-4.0%
6000
• Aging fields, better technology
and rate acceleration economics
appear to be the culprits behind
the acceleration of decline rates
4000
Year-on-Year Decline (%)
-1.0%
16000
MBOPD
• Acceleration can perhaps best
be illustrated in areas with
relatively little new field
development
20000
-5.0%
2000
0
-6.0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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Source: EIA (USA lower 48 and Alaska),
Canada Onshore-Light, Oman, Syria,
Indonesia, Egypt, Australia),
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The Upward Push of Costs on Prices
350
Nominal Terms: F&D Costs, Steel Prices,
& Brent Crude (Index 1990=100)
F&D
300
Steel
Brent
Index 1990=100
250
200
150
100
50
1990
1992
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1994
1996
1998
2000
2002
2004
2006
7
Full Costs & Required Oil Price to Achieve 13% ROCE
60
Net income to achieve 13% ROCE
50
Income tax @ 40%
Depletion (DD&A) (= F&D)
$/Barrel
40
Operating (Lifting) costs
Production tax
30
Differential to average well-head price
20
10
0
Mid 1990s F&D Costs
2001-2003 F&D Costs
2006 F&D Costs
$4/barrel. Requires oil price $7/barrel. Requires oil price $13/barrel. Requires oil price
of $18/barrel
of $28/barrel
of $48/barrel
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OPEC Spare Capacity Falls = Increased Market Sensitivity
Relationship Betw een Price and Spare Production
Capacity
0
70
1
WTI (US$)
60
2
50
40
3
30
4
20
5
10
0
OPEC Spare Capacity
(mln b/d)
80
6
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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Futures Markets – Chickens & Eggs
NYMEX Crude Oil Non-Commercial Open Interest vs. WTI
800000
90
Lots
700000
80
WTI spot (RH axis)
70
600000
60
50
400000
40
$/Barrel
Lots
500000
300000
30
200000
20
100000
0
1999
10
0
2000
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2001
2002
2003
2004
2005
2006
2007
10
Expected Net Oil Production Growth to 2020 (EIA)
North America
6%
Western Europe
- 16%
+0.92m
bpd
South & Central America
65%
+4.1m
bpd
Russia
FSU
35%
- 1m
bpd
Middle East
37%
+11.38m
bpd
Sub-Saharan Africa
89%
+4m
bpd
Asia & Oceania
6%
+0.46m
bpd
+5.3m
bpd
Source: EIA
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Geographical Shift = Increased Political Risk
• Global Insight Risk Ratings:
OECD Risk = 1.50
‘New’ oil territories = 3.42 (significant risk)
• Concentration of supply in Middle East
• Oil consumers incrementally more dependant on
exports from more distant producers
• Longer supply chain, more chokepoints = more risk
of supply disruptions
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2. Security & Oil Prices
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Changing Oil Industry More Vulnerable to Attack
• Tight supply/demand balance = supply risks
exaggerated
• Shift in production = more opportunity for attack
• Value of oil revenues = more damage caused by attack
• Consequence: Insurgent/terrorist groups recognise
vulnerability and target oil installations where possible.
Success of insurgent groups leading to copy-cat attacks
from criminal gangs
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Oil Industry is a Target
• 2001/02: Colombia – frequent guerrilla attacks on
pipelines
• 2003/04: Sudan – threatened attacks on oil facilities
• 2002: Yemen – Limberg attack, kidnappings
• 2003-Present: Iraq – pipelines specifically targeted to
cause financial damage
• 2004-Present: Nigeria – Southern Delta
• 2001-Present: al-Qaida – Abqaiq attack, threats
made to Saudi Oil
• 2007: Mexico – Rebel groups attack pipelines
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Nigeria
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Ijaw community grievances:
 Lack of employment
 Environmental degradation
 Lack of investment in social welfare (state revenue control)
Unhappiness spawns militant activists (MEND)
 Oil industry is attacked through disruptive activities
 System of “pay-offs” develops (political talks, social spending)
 Ijaw community does have a stake in continued oil extraction (economic
future) – maintains low-level violence
Stability of low level politically-motivated violence now changing
 Political groups fractured – lacks unifying set of demands or
organisation
 Criminal gangs have taken over – ransoming workers and bunkering oil
(guerrilla entrepreneurs)
 Payment of ransoms/protection simply exacerbates the problem
Where IOCs could move on before, now they stay – and shut-ins result
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Middle East
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Threats to, and attacks on, domestic oil sector in MENA almost
entirely politically motivated
 Exceptions: Iraq (some bunkering), Yemen (kidnapping for financial
gain)
 Motivations are politico-religious: designed to put pressure on regional
governments (Saudi Arabia, Algeria)
 Clear link to wider international issues – Abqaiq attack took place on
Saudi soil but true target was the global economy
 Local governments have greater ability to counter threats
There are wider geo-political security threats in the region
 Iran-Saudi tensions
 Iraq fracturing
 Iran-US
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Oil installations are an obvious target in the event of any military clash
(Kuwait, Iran-Iraq, Iraq war precedents)
The likelihood of attacks low, but the potential damage far greater
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Security Trends
• The oil industry is a more tempting target now than in the past
because:
 Oil resources much harder to access
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IOCS more exposed to unstable regions
IOCS more resilient in face of attack – negative feedback loop
Attacks have wider significance – publicity for political causes or…
…Attacks designed to target wider economy
No reversal of this trend in immediate sight
The transformation from political to criminal violence the most
worrying
• But
 Most important installations can be protected
 It is still difficult to cause significant damage to the oil industry
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Kirkuk-Ceyhan 1st
major attack
Kirkuk-Ceyhan 2nd
major attack
Kirkuk-Ceyhan 4th
major attack
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02
/0
9/0
4
03
/0
9/0
4
01
/0
9/0
4
12
/0
9/0
3
11
/0
9/0
3
10
/0
9/0
3
09
/0
9/0
3
08
/0
9/0
3
07
/0
9/0
3
06
/0
9/0
3
Kirkuk-Ceyhan 3rd
major attack
05
/0
9/0
3
39
37
35
33
31
29
27
25
04
/0
9/0
3
$/b
Iraq Pipeline Attacks: Cumulative Increase
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$/b
05
/ 27
05 /04
/ 28
05 /04
/ 29
05 /04
/ 30
05 /04
/ 31
06 /04
/ 01
06 /04
/ 02
06 /04
/ 03
06 /04
/ 04
06 /04
/ 05
06 /04
/ 06
06 /04
/ 07
06 /04
/ 08
/04
$/b
43
42
41
40
39
38
37
36
Khobar Bombing
Foiled Attack on
Abqaiq oil facility
03
/2
5/
04
04
/0
1/
04
04
/0
8/
04
04
/1
5/
04
04
/2
2/
04
04
/2
9/
04
05
/0
6/
04
05
/1
3/
04
05
/2
0/
04
03/20/05
03/18/05
03/16/05
03/14/05
03/12/05
03/10/05
03/08/05
58
57
56
55
54
53
52
51
50
49
48
03/06/05
03/04/05
03/02/05
02/28/05
02/26/05
02/24/05
02/22/05
$/b
Price Spikes and Volatility
•Oil market sensitivity to
Saudi security is heightened
due to reduced spare
capacity
44
Yanbu Shooting
42
40
38
36
34
32
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Nigeria: Ongoing Attacks; Ongoing Volatility
$/b
68
66
64
62
60
58
56
54
52
ENI declares ‘force
majeure’
MEND hits Shell’s
Forcados exports
ENI pipeline hit by
MEND
Nigerian military
attacks MEND
02/15/06
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02/22/06
03/01/06
03/08/06
03/15/06
03/22/06
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Quantifying Price Impact: “Risk Premium”
• “Proportion of oil price not attributable to
supply/demand fundamentals”
Risk Premium $15
Supply/Demand
$15
Marginal Cost
$48
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Security and Oil Prices
• Ultimately it’s always a question of supply and demand
• Security/geopolitical risks = future supply
• ‘Risk premium’ exaggerated by lack of spare capacity
• Difficult to isolate security threats within crude price
• If quantified security ‘risk premium’ approximately 2030% of oil price at present (best guess)
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3. Oil Prices and the Economy
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Debate Over High Oil Prices and Economy Rages
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•
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1970s & 80s: High oil = inflation, recession
1990s & 00s: High oil = lower growth
Western economies less oil dependent now
Energy diversification
Growth in service sector has helped sever direct link
But
• Oil still underpins global economy
• Transport industry heavily reliant on crude
• Oil does still impact broader economy, but more lag
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Demand Responding to Price?
Oil demand growth million b/d
World Oil Demand Growth Moving Average vs.
Crude Oil Price Moving Average 1999-2007
3.5
3
2.5
2
2005
2007
1.5
1
0.5
2006
0
-0.5
0
10
20
30
40
50
60
70
NSD $/barrel
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Declining Oil Intensity of the Global Economy
Oil/gdp - b/d per 1000$
3.0
Fuel substitution
Efficiency
Growth of service sector
2.5
2.0
1.5
1.0
0.5
Annual decline
averages around 2%
since first oil price
shock in 1973
0.0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035
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Global Economy More Resilient to High Prices
• Incremental oil demand/gdp nearly half the level of 10
years ago
• For many OECD consumers, the price of crude oil is
a small fraction of their fuels costs
• In some major emerging markets, energy prices are
subsidized and consumers do not ‘see’ higher prices
• Petro dollars are being recycled more quickly through
investments and financial flows
• There has been an absence of inflationary pressures
thanks to increased global and domestic competition
• For US retail fuel prices to match European levels
a $200/b price would be needed
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How High Can Price Go Before There is a GDP Impact?
• Global Insight sensitivity analysis of an oil price
‘shock’ on the global economy
• WTI price over $100 for two months and over $70 for
six months and over $50 for an additional year.
• Slight negative impact on global GDP in the first year,
no impact in the second and positive impacts in the
following years.
• Price impact shaves 0.3 – 0.4 percent off growth for
China and India in year 1 and 2.
• What price is too high?
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Impact of $100 Oil Shock on World Growth
Percent Change in Real GDP
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Global Insight Scenario Model
Base Case
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Oil Shock
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Conclusion: The Causal Chain
• Security > oil prices > economic consequences
• Psychological impact of ‘oil jitters’ on wider economy hard to
quantify
• Oil industry trends will only accentuate impact of supply
threats, and the threats themselves
• ‘Risk premium’ pales in comparison to impact of significant
strike on oil infrastructure
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•
•
•
Mitigates:
Big oil price movements require big actions – still rare
Economies less oil dependant than in the past
Government stocks can act as a buffer if expanded
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Conclusion: Final Thought
•
Can we quantify the cost of oil insecurity?
•
Assuming:
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•
•
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World GDP 2007 = $55.0trn
$20/b average above trend = -0.85 GDP Growth
‘Risk premium’ accounts for 30% of higher price...
...and 50% of ‘risk premium’ is due to security fears
•
Then oil insecurity will cost the global economy...
$233,750,000,000 per annum in lost growth
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Thank you for listening
Simon Wardell, Director – Global Oil, Global Insight
[email protected]