[PPT] - Conference Chairman and Chairman, FGE Presented to The 20th Asia PowerPoint Presentation

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This presentation contains confidential and privileged information intended solely for AOGC participants. The dissemination, distribution, or copying by any means whatsoever without FGE’s prior written consent is strictly prohibited.

By

Dr. Fereidun Fesharaki

Conference Chairman and Chairman, FGE

Presented to The 20th Asia Oil & Gas Conference June 23-25, 2019 Kuala Lumpur, Malaysia

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www.fgenergy.com

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Oil & Gas Markets under Trumponomics!

No US president has ever had as much influence on the oil and gas markets as

President Trump.

He seems to have established a Trump ceiling for oil prices at US$70-75/bbl.
He has removed effectively 2.5-3 million b/d of oil from Iran and Venezuela. He is

aided by major growth in US oil production and slowing demand growth, which have mitigated price increases.

His brazen pressure on OPEC allies (especially Saudis) to compensate for the loss of

Iran and Venezuela crudes has been effective.

He has single-handedly impacted refining margins by raising fuel oil and heavy crude

prices through the removal of Iranian and Venezuelan sour crudes.

He has impacted the Brent-Dubai differential and partially negated the impact of IMO

2020 via policies that support heavy/sour crude prices.

His impact on US LNG exports to China has been neutralized for now by the trade

dispute, but encouraging new buyers—such as the Saudis—has been a factor in the development of US LNG.

He may not be fully aware of his policy impacts, but he has shown us the power of the

US presidency in a way that has never been exercised before.

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Crude Oil Market Outlook

Oil price roller coaster: In December 2016, OPEC/non-OPEC cut production and

prices strengthened. Then they relaxed the cuts and prices fell! Then again in December 2018, they agreed to cut and prices recovered!!!

Now in late June, the market is close to balance.
Oil demand in the short term has weakened partly because of fears of

recession, US-China dispute, and real economic slowdown.

OPEC meeting in July is likely to roll over the agreement for another six

months.

Oil prices would be in the range of US$65-75/bbl in the second half of this year on

supply and demand fundamentals. But geopolitical conflict (e.g., US-Iran conflict) can send it much higher. Over the next few years, US$60-70/bbl oil price is on the cards. .

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Demand for Oil: End of the Cycle?

In the short term, barring economic collapse, demand growth for oil is solid around 1

million b/d.

By the late 2020s, demand growth will slow down significantly to some 600-700 kb/d.

By the 2030s, the slowdown intensifies to some 300 kb/d of mainly jet fuel and naphtha.

Gasoline and diesel demand will peak by the early 2030s and begin to decline slowly.

Air transport, bunkers, naphtha, petrochemicals, LPG, and ethane will continue to grow but the heart of the oil industry (gasoline and diesel) will have reached the end of the line. .

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Refining Outlook: Poor Short Term, Strong Medium Term, Limited Long Term

In the short term, gasoline and naphtha weakness has been a source of concern.

Cause of weakness: Weaker demand, exports from the Atlantic Basin, and a huge increase in gasoline exports from China.

Besides China, there are very few new refining FIDs beyond Duqm in Oman. In

China, all new projects are petchem-based.

The future is in refining/petchem integration and crude to chemicals, not in standalone

refining.

Lack of new FIDS will generally keep refining margins healthy through the late 2020s.
By the late 2020s, refining margins will become indefinitely weak. This may signal the

end of strong refining cycles as we know it.

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www.fgenergy.com

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IMO: A Big Change but Limited Duration Impact

IMO 2020 seemed like an insurmountable problem last year. It is now relegated to an

18-24 month issue.

New blends and lots of scrubbers go a long way to solve the problem.
Declining volumes from Iran and Venezuela mitigate the differentials between light and

heavy products and sweet-sour differentials.

IMO 2020 is only a mid-term solution. What is the long-term solution? LNG bunkering?

IMO will not back LNG bunkering, but will demand new technologies for a 50% GHG reduction starting in mid-2020.

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www.fgenergy.com

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LNG Outlook: Cycles Are Alive and Well

By 2021/22, market surplus ends and a tight-to-balanced market emerges.
By 2025/26, another surplus market emerges. We expect at least 200 mtpa of

capacity to take FID between 2018-2023, far beyond what demand will absorb

rganically.
Two events can soak up the new volumes:
De-carbonization policies of IMO, which can increase LNG demand by at least

100 mtpa.

China’s GHG mitigation policies committed in Paris Accord can increase LNG

demand by another 60-80 mtpa.

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Short Term (2019-2020): A Traffic Jam with No Policeman

A flood of delayed LNG projects in the US and Australia enter the market in 2019-20. In 2019, the new volume is some 40 million tons, leading to a collapse in spot LNG prices of US$3.5-4.5/mmBtu in Europe and Asia. More of the same will happen in 2020.

The last of these projects come in late 2020, thereafter the flood stops.
The spot market has grown from 10% to more than 20% and will grow more

in the near term.

LNG is still not a commodity.
No long-term contracts based on spot prices in the East as of yet.

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Mid-term (2021-2025): A Tightening Market

With limited new volume, and annual demand growth of some 3-4%, the LNG market

tightens in this period. Spot prices rise above contract prices.

The buyers’ market changes into a sellers’ market very quickly.
Sellers will try to sell LNG longer term given the future surplus.

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Long Term (Post-2025): A New Flood?

Seeing the emerging gap, many LNG suppliers have chosen to move forward to

FID even without customers. We expect some 200 mtpa of capacity to take FID between 2018-2023, of which 70% have no designated customers and are internally financed (LNG trade today is about 350 mtpa).

The fundamental structure of the LNG business is changing, with major IOCs,

Qatar and PETRONAS, moving to internal financing. Those without deep pockets—especially in US projects—need to resort to very innovative ways to move forward.

There will likely be a huge surplus after 2025, which could take 3-5 years to

balance organically.

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Finally: The Role of China

China will remain critical to the future of the LNG market, both in the short term and

long term.

China has large domestic resources, major gas pipelines from Myanmar, Central Asia

and Russia, as well as LNG imports on a large scale.

Still, the potential for new LNG imports is huge.
Pollution control policies have given a big boost to LNG demand in the short term. But

when will carbon mitigation policies start? That can add 60-80 mtpa to LNG demand.

US-China trade dispute plays a key role in China’s move to an LNG-based economy. If

resolved, it could result in a dramatic flow of US LNG to China.

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