From Seven Sisters to Six Brothers: What changing global oil markets - - PowerPoint PPT Presentation

Professor Paul Stevens From “Seven Sisters” to “Six Brothers”: What changing global oil markets might mean for New Zealand Wednesday 30 October, 6.30-7.45pm

From “Seven Sisters” to “Six Brothers”: What changing global

• il markets might mean for New Zealand?

Professor Paul Stevens Distinguished Fellow Chatham House Professor Emeritus, University of Dundee Visiting Professor UCL Australia Energy Matters 2013 The Energy Centre, University of Auckland October 30th 2013

Presentation outline: A story of great uncertainties

• The prospects for oil demand
• The prospects for supply
• Changes to the global oil market since the 1970s
• “OPEC’s dilemma” leading to price volatility
• Implications of oil price volatility for New Zealand

3

The prospects for oil demand

4

The prospects for oil demand: A closer look

• 15
• 10
• 5

5 10 15 20 25 2020 2035 Million b/d

World oil demand growth from 2011 IEA New Policies Scenario WEO 2012

Middle East India China Rest of OECD OECD

• Note the role of the

MICs – 68% of the Non-OECD growth

• BUT beware …“Once

upon a time …”

5

But beware!!!

200 400 600 800 1000 1200 1974 1980 1985 Mntoe

OECD Oil Demand Forecast 1977

USA Japan Rest of OECD

World Energy Outlook OECD 1977

But beware!!!

200 400 600 800 1000 1200 1974 1980 1985 actual 1985 Mntoe

OECD Oil Demand Forecast 1977

USA Japan Rest of OECD

World Energy Outlook OECD 1977. Actual BP Statistical review of World Energy 2009

Real Domestic Oil Prices in Selected Developing Countries 1970 = 100

100 200 300 400 500 600 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1970 = 100 KOREA ARGENTINA BRAZIL INDIA INDONESIA MALAYSIA MEXICO PAKISTAN PHILIPPINES TAIWAN THAILAN VENEZUELA

But Beware!!! Do not forget the impact of price

COMMERCIAL ENERGY INTENSITIES

0.2 0.4 0.6 0.8 1 1.2 1.4 1.6

JAPAN GERMANY FRANCE UK USA BRAZIL KOREA ARGENTINA MALAYSIA THAILAND PHILIPPINES MEXICO INDONESIA PAKISTAN INDIA KENYA HIGH INCOME MIDDLE INCOME LOW INCOME

KG OIL EQUIVELENT NEEDED TO PRODUCE $1 GDP

Data for 1990 Source:World Bank

But Beware!!! Do not forget the impact of price

But beware!!! Do not forget the impact of price

• 15
• 10
• 5

5 10 15 20 25 2020 2035 Million b/d

World oil demand growth from 2011 IEA New Policies Scenario WEO 2012

Middle East India China Rest of OECD OECD

• Note the role of the

MICs – 68% of the Non-OECD growth

• Low prices to final

consumers BUT this has been changing

– India 2002 – China 2009 – Middle East ???

• Thus future oil

demand is uncertain

10

Presentation outline: A story of great uncertainties

• The prospects for oil demand
• The prospects for supply
• Changes to the global oil market since the 1970s
• “OPEC’s dilemma” leading to price volatility
• Implications of oil price volatility for New Zealand

11

The prospects for supply

12

0.5 1 1.5 2 2.5 3 3.5 PROVEN RESERVES REMAINING RECOVERABLE RESOURCES T R I L L I O N B A R R E L S Source: IEA Resources to Reserves 2013: Oil, Gas and Coal Technologies for the Energy markets of the

• Future. OECD Paris

ESTIMATES OF GLOBAL OIL RESOURCES

CONVENTIONAL OIL UNCONVENTIONAL OIL

The prospects for supply

13

20 40 60 80 100 120 OIL GAS COAL Y E A R S SOURCE: BP Statistical Review of World Energy 2013

GLOBAL RESERVE/PRODUCTION

The prospects for supply

14

20 40 60 80 100 120 OIL GAS COAL Y E A R S SOURCE: BP Statistical Review of world Energy 2013

GLOBAL RESERVE/PRODUCTION

Oil runs out in 2065 On 26th January 08.55 GMT

The prospects for supply? The ke key issu y issue o e of f wi will llingn ingness ess a and nd ab abil ilit ity y to invest and produce the oil

• Before the 1970s - The “Seven Sisters” dominated–

Exxon, Mobil, Chevron, Texaco, Gulf, BP, Shell (+CFP)

• TODAY are they their willing to invest, given a limited

ability to access low cost reserves in a world driven by a financial strategy – “value based management”

– ExxonMobil, Chevron, BP and Shell all increasing capex. TOTAL is reducing capex. Guess whose shares have risen? (Bloomberg 28 Oct 2013)

• SINCE THE 1980s the “Six Brothers” dominated …

15

Meet the “six brothers”

• Willingness and

depletion policy

– “Oil in the ground …”

• Ability =Mixed record

– Saudi Aramco = excellent – ADNOC + Qatar = OK – KPC, NIOC + INOC = 

• Future supply uncertain

2 4 6 8 10 12 14 16 Million b/d *Includes NGL's and unconventional oil

Sources of growth in oil production* 2010-2035 IEA WEO 2011 New Policies Scenario

Qatar Petroleum NIOC INOC ADNOC KPC Saudi Aramco Rest of the World

The “six brothers” account for 91.2% of the growth

Presentation outline: A story of great uncertainties

• The prospects for oil demand
• The prospects for supply
• Changes to the global oil market since the 1970s
• “OPEC’s dilemma” leading to price volatility
• Implications of oil price volatility for New Zealand

17

The oil market and prices before the 1970’s

• The market was dominated by the “seven sisters”

– Exxon, Chevron, Gulf, Mobil, Texaco, BP, Shell (+CFP/TOTAL)

• They were operationally vertically integrated which required

“posted prices” as tax reference prices

• Price determination = Administered price

– A “group of men” –the producers - in a room said a number – If the “those outside the room” – the refiners - believed it, that was the

• il price!

18

The first oil shock

• Pre-1970’s “The men in the room” were from the “seven

sisters” - “those outside the room” were from the “seven sisters”.

• Since 1950, they had been saying a relatively low number

– They feared competition from other fuels (mainly nuclear) – They feared a backlash from their own (OECD) governments

19

Price patterns – before and after ….

20

20 40 60 80 100 120 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2 1 2 $ p e r b a r r e l

Oil prices 1928-2012

The first oil shock

• Pre-1970’s “The men in the room” were from the “seven

sisters” - “those outside the room” were from the “seven sisters”.

• Since 1950, they had been saying a relatively low number

– They feared competition from other fuels (mainly nuclear) – They feared a backlash from their own (OECD) governments

• New developments after 1970

– In Libya in 1970, gov’t forcibly enters the room jointly to negotiate prices – October 1973 Arab OPEC + Iran “why do we need oil company men?” – Unilaterally increase price = First Oil Shock 16th October

21

Price patterns – before and after ….

22

20 40 60 80 100 120 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2 1 2 $ p e r b a r r e l

Oil prices 1928-2012

The oil market today: very different from 1973

• The market is now dominated by the “Six Brothers”
• The oil price is now a market price largely based on spot prices
• BUT “the men in the room” are still relevant. However, now

they are the OPEC producing governments

• AND the “number they say” now is a production level not a

price

23

So now who are “those outside the room”?

Wet barrel market refiners *Trading real barrels *Spot and term contracts Paper barrel markets *“Money managers”

Wet barrel market Paper barrel markets

Influences perceptions about surplus/shortage “Signals” what prices might be

What are the main linkages? Perceptions

“Those outside the room”?

Wet barrel market refiners Paper barrel markets

RESULT = Price determination doubly complicated and uncertain

IN THE OLD DAYS – They simply had to believe the (price) number and that was the price – made it predictable TODAY – They have to 1. believe the (production) number AND then 2. decide how it will affect price = Very unpredictable

27

New approach to setting price: Problems generating uncertainty?

• 1. Believing the production number
• The market data on supply and demand are

awful

• Inventory data are even worse
• OPEC members cheat
• Added to this uncertainty – 2. translating the

production number into price…

Wet barrel market Paper barrel markets

Influences perceptions about surplus/shortage “Signals” what prices might be

IN OTHER WORDS “the paper barrel markets outside the room” often misread the implications of the production

• number. They don’t understand the oil industry…

Translating the production number into price Problems with the linkages = A disconnect

Wh When en the they y misre misread ad, , the there is re is a d a dram ramatic atic ad adjustm justmen ent t

20 40 60 80 100 120 140 2000 2002 2004 2006 2008 2010 2012 US$ per barrel

MONTHLY OIL PRICES - OPEC BASKET 2000 - October 2013

Presentation outline: A story of great uncertainties

• The prospects for oil demand
• The prospects for supply
• Changes to the global oil market since the 1970s
• “OPEC’s dilemma” leading to price volatility
• Implications of oil price volatility for New Zealand

30

What is “OPEC’s dilemma”? Starts with the need for a higher “supply price”

• The legacy of the Arab

uprisings

– Need to pacify populations – “Supply price” risen. Saudi Arabia 2008 =$50 2012 =$94 BUT HIGHER PRICES …

20 40 60 80 100 120 140 US$ per barrel

Source: Ali Aissaoui Apicorp Economic Commentary Vol 7 N0. 8-9 August- September 2012

OPEC Median Budgetary Break-Even Price

100000 200000 300000 400000 500000 600000 700000 800000 900000 1000000 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Saudi Arabia Public Sector employment and current government spending 1992-2011

Current spending (Mn SR) Saudis employed (thousands)

… Higher prices lead to demand destruction

• Meet the MICs! (AGAIN)

– Between 2011-35 they are expected to account for 68% of Non-OECD oil demand growth. BUT ….

32

• 15
• 10
• 5

5 10 15 20 25 2020 2035 Million b/d

World oil demand growth from 2011 IEA New Policies Scenario WEO 2012

Middle East India China Rest of OECD OECD

20 40 60 80 100 120 140 2000 2002 2004 2006 2008 2010 2012 US$ per barrel

MONTHLY OIL PRICES - OPEC BASKET 2000 - September 2013

Higher prices also lead to more supply

• Technological legacy of

the “shale gas revolution” + the impact on liquids

• 2011 oil analysts joke –

“the next member of OPEC will be…..”

• 2012 US oil production

increased by 1 million b/d

EIA Energy Outlook 2013

All this leads to “OPEC’s dilemma”

• OPEC members need a high price to survive politically
• But this will lead to a market reaction

– Demand destruction – Increased supply

• This situation is unsustainable and is very similar to

1980-86. Will it be a re-run of 1981-86 leading to a price collapse?

Price patterns – before and after ….

35

20 40 60 80 100 120 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2 1 2 $ p e r b a r r e l

Oil prices 1928-2012

Similarities to 1981-86 THEN …

• Saudi Arabia was acting as “swing supplier” to

protect prices – same again today

• New oil provinces lurked on the sidelines but

requiring higher prices – same again today

• Very bullish outlook on oil demand which

ignored price effects – same again today

• BUT THERE ARE DIFFERENCES…

What are the differences from 1981-86?

• As explained price determination far more complex
• The rise of the paper/futures markets means prices are more

volatile and price will change faster.

• Post the Arab Uprisings = much greater threat of political

unrest which will spook markets and create a geo-political premium on prices

• Greater divisions within OPEC post 2003. 1986 rescued

because of détente between Saudi Arabia and Iran. Today …

Conclusions

• A much lower price is likely although the timing is uncertain

and depends upon how long Saudi Arabia will play the “swing role” … How much “wriggle room”?

• When price falls, possible political unrest in MENA may lead

to a price rebound driven by the “money managers”

• Meanwhile the potential for more geo-political outages and

consequent price spikes remain real. 2013 outages Libya 1 mb/d, Nigeria 0.8 mb/d, Iran 0.3 mb/d, Iraq 0.3 mb/d

• Overall = much greater crude price volatility

Presentation outline: A story of great uncertainties

• The prospects for oil demand
• The prospects for supply
• Changes to the global oil market since the 1970s
• “OPEC’s dilemma” leading to price volatility
• Implications of oil price volatility for New Zealand

39

New Zealand: The energy picture

• 5.0

10.0 15.0 20.0 25.0 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 M n t

• e

BP Statistical Review of World Energy 2013

New Zealand Energy Consumption 1965-2012

• ther

coal gas

• il
• Oil remains important

for New Zealand

• Accounts for 35.5 %
• f primary energy in

2012

• Vast majority for

transport = limited scope for alternatives

40

1 2 3 4 5 6 7 8 2012

New Zealand "other” energy consumption

geothermal, biomass +other wind hydro

New Zealand: The economic picture and oil

• Importance to New

Zealand balance of payments

41

• 12,000
• 10,000
• 8,000
• 6,000
• 4,000
• 2,000

2,000 4,000 6,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 M n N Z $

New Zealand balance of trade 2000-12

Balance of trade

New Zealand: The economic picture and oil

• Importance to New

Zealand balance of payments

• Issue of investments with

volatile oil prices

– To develop oil and gas – needs an “attractive” fiscal/regulatory regime as you compete for upstream investment dollars – In renewables given New Zealand’s comparative advantage?

42

• 8,000
• 6,000
• 4,000
• 2,000

2,000 4,000 6,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 M n N Z $

New Zealand balance of trade 2000-12

Balance of trade Net petroleum imports

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