geopolitical oil

8/8/2019 Geopolitical Oil

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Strategic Advisors in Global Energy



Geopolitical Changes and Global OilMarkets

Fareed Mohamedi

Partner and Head of Markets and Country Strategies

June 2009


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| Markets and Country Strategies Group | Page 2

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 Chinas growth is shaping a new global oildistribution system

The US Administrations interest in efficiency and climate change will add tothe uncertainty facing producers


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TreasuryBonds

China World

MerchandiseExports

UnitedStates

Investment

Commodities,Other Inputs

The US consumes, China produces

The US run deficits, the Rest of the worldfinances

The Unsustainable System


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RussiaUnited States

India

EU

China

Changing Global Balance of Power

A declining but still powerful United States

Other rising powers, but no superpowersyet

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


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How Much Can Obama Change US Foreign Policy?

Obama is attempting to act on his belief that US foreign policy under the Democratscan be strong and right, but his administration faces structural limits

Obamas rhetoric offers a visions of change

Go beyond post 9/11 strategyconventional policycannot deal with unconventional threats of 21st Century

Transform the way the US deals with the worlddignityagenda:

Pay attention how others perceive the United States and itspolicy

Appreciate other states have own priorities

Address perception of unfairness and problems that

breed radicalism and prevent liberty, justice andprosperitybottom up approach

Emphasis on the centrality of active diplomacy andmultilateralism

International cooperation; American leadership

Working with broad range of partners, including Russia andChina

Forceful idealismwilling to use force to achieve specific

ends


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Increasingly Ineffective US Hegemon, No-one ElseWants the Job

No major power has a sustained interest in undermining, much less replacing, UShegemony, but they may be forced to take a more overtly cooperative role

Being a hegemon is expensive and risky. After WWII both Europe andJapan learned it was more comfortable to free ride on US hegemony.

China has the resources to make a bid for hegemony. But so far itprefers to concentrate them on economic growth projects.

Russia and India are growing stronger, but will not have enough powerto make a bid for hegemony in the next 20 years (at least).


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Abundant evidence of radical

change in behavior of USconsumers:

Retail sales, personal consumptionare nose-diving

Rebounding savings rate

Household debt declined in thirdquarter 2008, first time since 1952

This has a direct bearing onsteep falls in globalmanufacturing and exports

Can the world economy find a

substitute for US final demand? Can the US economy adapt to a

radically different growth model?

Household Debtannual % change

0

4

8

12

16

20

56 60 64 68 72 76 80 84 88 92 96 00 04 08

0%

2%

4%

6%

8%

10%

130

132

134

136

138

140

2007 2008 2009

US: Labor Market Conditions

TotalE mployment,mill ions Une mploymentRate,%

Global EconomicsUS economy consumers give up


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

-5 0

-3 0

-10

10

30

50

Jan 08 Apr Jul Oct Jan 09

China Korea Taiwan

Thailand M alaysia

Asian Exports, % change year/year

This is an inflectionpoint, unusually hard toforecast

First half of 2009 certainto see sharp falls ingrowth rates throughoutthe world

De-stocking partly toblamesome signs thismay be bottoming out

Secondary impacts yet tocome, especially from joblosses

Stimulus in US, China and elsewhere will helpbut no recovery ispossible without restoring the financial sector to health

Stimulus in US, China and elsewhere will helpbut no recovery ispossible without restoring the financial sector to health


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A Coordination of Policies would be Necessary toReturn Global Growth

Current Account Balances, 2007$ billion

Surplus Countries Deficit Countries

Falling demand, credit squeeze are forcing adjustment of external deficits in deficitcountriesthis 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 mostimportant single factor in determining severity of the recession

Success or failure of international coordination will be the mostimportant single factor in determining severity of the recession


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OPEC: Balancing the Risks

Quiet confidence that OPEC is no longer chasing markets

But economic uncertainties still loom large with risks to demandprimarily on the downside

Current prices are at unacceptable levels, but core OPEC membersunderstand 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 someconfidence 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 oilpressure on markets


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-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

mmb/d

Supply-Demand Balance

Change in Supply Change in Demand

Unwinding the GlutActive OPEC management needed to restore balance

Premature fearsof recession

Premature fearsof recession

Saudi increases asdemand withers

Saudi increases asdemand withers

Aggressive tighteningneeded to clear overhang

Aggressive tighteningneeded to clear overhang


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OPEC Implements Major Cuts

Agreed to a total of 4.2

mmb/d in production cutssince September

Decision in December torebase level of cuts fromSeptember 2007 quotas toSeptember 2008 actualproduction

De facto re-apportionment of

output targets based onsecondary sources (includingPFC Energy)

Bulk of cuts to come fromGulf Arab states, but heaviershare of burden of additionalcuts on Iran, Venezuela,Angola and Libya

Initial indications suggestgood adherence to targetsbut is it enough?

Change in Commercial Stocks

-2.0

-1.0

0.0

1.0

2.0

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

mb/d

0

500

1000

1500

2000

2500

3000

Oct-08 Nov-08 Dec-08 Jan-09 Feb-09

Projected Cumulative OPEC Cuts (mb/d)

Angola

Ecuador

Algeria

Libya

Nigeria

Venezuela

Iran

Qatar

UAE

Kuwait (w/NZ)

Saudi Ar abia (w/NZ)


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OPEC Threshold Prices: Not Enough For Some

Price Needed to Balance External Accounts mid-2008

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

$75/b

WTI $/b


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How will NOCs Respond in the Slowdown?


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NOC Upstream Capital Spending Still Strong

Source: NOC stated numbers or PFC Energy estimates

Stated / Estimated increase

CNPC

PetrobrasPEMEX (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


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In All Scenarios OPEC Spare Capacity RemainsAbove 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 inTransformative, oil becomes a less important fuel


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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 andcapabilities 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 demanda greater share of the countrys revenues

Supply side risks to demand side risks: Is that permanent?

Governance shifting from inside the sector to outside forces


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0

20

40

60

80

100

120

1995 2000 2005 2010 2015 2020 2025 2030

(mmb/d)

Non-OPEC Crude, NGL, & Condensate * OPECCrude, NGL, & Condensate

Non-OPEC Oil Sands Biofuels & Other Liquids

0.5% Demand Growth 1.5% Demand Growth

1.0% Demand Growth

Supply Crunch Still Exists But Has Now Become aPost-2020 Issue

* Includes Refinery Gain

Non-OPEC Liquids

OPEC Liquids

Tar Sands

Biofuels

0.5%

1.0%

1.5%

Demand


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But, Rising Decline Rates will Still Require Activityto Replace Production

Decline Rates for Non-OPEC Supply Online

in 2000

0%1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2000 2001 2002 2003 2004 2005 2006 2007 2008

Excluding FSU

Including FSU

High Oil Prices could not Arrest Non-OPEC Decline Rates


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0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2004 2008 2012 2016 2020 2024 2028

Production(mb/d)

Khoreis Abu Safah Expansion KhursaniyahShaybah Harahd Manifa 1Adco--SAS Expansions Darquain Upper ZakumNeutral Zone Qatif Azedegan SouthYadavaran Nuayyim Mansuri - AsmariNowrooz Doroud DehluranSoroosh OGD-3 and AGD-2 Azedegan NorthAdco--Bu Hasa Expansion South Pars Phases 4 & 5 Sirri EForoozan Adnoc--Qusahwira and Bida al-Qemzan Chesmah Kosh

Esfandiar Lower Zakum Expansion Adco--North East Fields ExpansionBab Phase II Sadat-Sarvestan Ahwaz - BangestanBalal Umm Shaif Expansion Adco--Huwaila ExpansionSirri C and D Manifa 2 Manifa 3Project Kuwait Sirri A

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

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:Project Kuwait, Manifa 2, and Manifa 3.

Projects delayed

+ 4.5 mmb/d


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17,000

21,000

25,000

29,000

33,000

1997 2002 2007 2012 201724%

28%

32%

36%OPEC Gulf Production

OPEC Gulf Production as % of Global Supply

mmb/d

Long Term Worries: World Depends On The Gulf


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The Gulf: Strategic Directions

The Gulf is at a critical crossroads and is being presented withunique 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 thedangers 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 opportunitiesbeckon

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


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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 andattempts to control its integration into the global economy

It should build meaningful ties beyond energy with Asia, Latin America andthe FSU

It should seek new global governance and environmental regulations


24/34


China: Regional Oil Sourcing Preferences

DragonZone(Local)

PandaZone(Global)

#1

#2

#5

#4

#3

#6


25/34


The Emerging Energy Architecture

Capita

l&Resourc

esCa

pit

al

&C

oordin

ation

Capital & Resources

Neo-Globalization requires a new energy architecture

A number of multi-lateral efforts are already underway tothis end

Capital & Coordination

Capital

&Reso

urce

s


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Future Energy Flows Will Shift East

OilGas

LNGPan-Asian Grid

RefiningPetrochemicals

Electricity

Russia

Middle East

Central Asia

Northeast Asia

Southeast Asia

South Asia


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Chinese Loans-for-Oil Agreements

Ecuador ($1 bn):-MOU to supply oilto China (Sinopecand PetroChinaJV owns oilblocks)

Kazakhstan ($10 bn):-50% stake in MMG which will giveCNPC +62 mb/d-Will ensure funding and completion offinal phase of 3,000 km Caspian-China

oil pipeline-Will help to fund 10 bcm gas pipelinefrom Beineu in western Kazakhstan toconnect to Turkmenistan-China 30bcm trunkline-Potential uranium-mining cooperation(Kazakhstan has worlds third largestreserves)-Joint refinery built in Kazakhstan onborder

Brazil ($10 bn):-Interest rate under 6.5%-Sinopec to receive 150 mb/d in 2009 then200 mb/d from 2010-2019-Oil used as collateral but loan repaid incash-No guarantees from Brazil to buy Chineseservices and products, but Chineseequipment factories might be built in Brazil-Sinopec might be offered two oil blocks

Russia ($25 bn):-Interest rate, estimated at 5.65% byRosneft, is floating margin linked toLIBOR; five-year grace period ofinterest-only payment to start- 300 mb/d oil delivered via ESPOpipeline for 20 years to commence in2011

-Price of oil paid by China determinedby monthly average of Kozmino orPrimorsk marine terminal spot price

Venezuela ($4 bn):- Venezuela to increase exports from 350 mb/d to 1million b/d by 2015

-Agreement to build joint refinery in Guangdong (sentto NDRC for approval)-80-200 mb/d to pay off $4 bn loan from CDB toVenezuelan Development Bank BANDES-MOU signed for Sinopec and PDVSA to studyCampos Yopales Sur, Oca, Oleos and Merey fieldswith aim to produce 22 mb/d by 2012

$50 billion in loans-for-oil dealshave unlocked previously

inaccessible supplies for China,strengthening its energy security

during the economic crisis


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Brazil and the Changing Pattern of LA Supply

Brazils sizable Tupi discovery has spurredexploratory interest in other areas of theSouth Atlantic (e.g., Offshore Argentina andUruguay), which may lead to the creation of

a new energy hub But the resource size in the traditional oil

producing zones will also continue toprovide substantial supplies if some of thefunding and institutional constraints areovercome

Plus, most importantly, the region has theresources to be part of the globaltransformations energy and in othereconomic areas

Non-traditional areas favorably positioned due to the recent pre-salt

discovery in off-shore Brazil.

New Energyhub?


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CTL

Environm

entalConservation

Concerns

Oil Era: Post-Oil Era 2010+ (Consumer Driven)

Energy Security ConcernsLow High

Low

H

igh

No one in control, but successful actors will be those who becomeenergy providers

No one in control, but successful actors will be those who becomeenergy providers

SaudiAramco

AsianNOCs?

GE

(power& battery)

NuclearCompanies

BiofuelCompanies

Gazprom

UnconventionalOnshore

Resources

CoalCompanies

GTL/LNG

Wind/

Geothermal


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Obamas 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 yearsthrough a federal-governmental-sponsored,$150 billion energy-related program

Obama has suggested a number ofpotential initiatives as part of an overallplan that he has likened to theManhattan Project or the ApolloProgram:

Alternative energy and renewables initiatives

Fuel efficiency and new transport technology

Infrastructure and end-user energy efficiency


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Obamas Energy A-Team

Obama has mustered a cabinet andadvisory team with deep expertizeand focus on energy andenvironmental issues

Selections reinforce the sense ofhis own commitment to theseissues

Energy and environmentalexpertise also resides in othercabinet appointments (SalazarInterior; SolisLabor; LaHoodTransport)

Officials already pushing forambitious policy initiatives

Steven ChuEnergy

Nobel winning physicistTransformed LawrenceBerkeley National Lab intoboard R&D center for energytechnology

Carol BrownerPres Assistant for Energy and

Climate ChangeEnvironmental and climatecounsel at Albright GroupFormer head of EPAFormer leg director for Al Gore

Nancy SutleyChair of White House Council

on Environmental QualityDep LA mayor for energy &environmentFormer EPA official

Lisa JacksonEPA Administrator

Head of NJ DEPRegional EPA official


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Challenges to Obamas Proposed Energy Policies

Policies will need to be introduced incrementally and initially as part of theeconomic stimulus initiative, and Obamas ambitions are unlikely to be fully realized


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Obama Initiatives Likely to be Phased

Short TermCap and trade system

Increased alternative energy investmentRenewable production tax credit

Clean coal fundingImproved energy codes and end-user efficiency

New vehicle standards

Short TermCap and trade system

Increased alternative energy investmentRenewable production tax credit

Clean coal fundingImproved energy codes and end-user efficiency

New vehicle standards

Medium TermTighter environmental regulation

Longer-term alternative energy investmentAdditional green job creation

Tighter vehicle emissions standardsNuclear energy

Medium TermTighter environmental regulation

Longer-term alternative energy investmentAdditional green job creationTighter vehicle emissions standards

Nuclear energy

Long TermSmart electrical grid

Broader climate change legislation

Long TermSmart electrical grid

Broader climate change legislation

Timing and scope of initiative will depend on the economy, but a reductionin demand is likely to be a medium to long term impact


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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

Europe

PFC Energy, France

19 rue du Gnral Foy

75008 Paris, France

Tel (33 1) 4770-2900

Fax (33 1) 4770-5905

__

PFC Energy International,

Lausanne

19, Boulevard de la Fort

1009 Pully, Switzerland

Tel (41 21) 721-1440

Fax: (41 21) 721-1444

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

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, USATel (1 713) 622-4447

Fax (1 713) 622-4448

www.pfcenergy.com | [email protected] regional offices are shown in blue.

PFC Energy consultants are present inthe following locations:

Bahrain

Beijing

Brussels

Buenos Aires

Calgary

Houston

Kuala Lumpur

Lausanne

London

Mumbai

New York

Paris

San Francisco

Washington, D.C.

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