Towards A New Price Equilibrium
Graham Weale
Director of European Energy Consulting
Real Oil Price – First Time > $40/bbl (real) in 20 years
60
50
40
$ (2005)/
bbl
30
Average
20
10
0
1990
1992
1994
1996
1998
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2000
2002
2004
2
1. Short-Term Economics
2. Price Drivers
3. Conference Themes and LT outlook
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3
Economics Working or Failing?
ECONOMICS WORKING
ECONOMICS FAILING
• Demand side
ƒ Growth slows
ƒ New technology
ƒ Reduced driving?
• Demand side
ƒ Chinese and Indian
price mgt
ƒ Others?
• Supply side
ƒ Improved recovery
ƒ Biofuels
ƒ Oil sands
ƒ Wind energy
• Supply side
ƒ IOCs test projects
against low oil prices
ƒ Limited capex increase
ƒ Non-OECD restrict
foreign investment
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4
Short-Term Demand Effect
Oil Price
40%
Demand
20%
Oil Price
China
Other Asia
N America
World
Europe
35%
30%
25%
20%
15%
10%
15%
10%
5%
5%
0%
0%
-5%
-10%
-5%
2004
2005
2006
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2007
5
Short-Term Supply Effect
Oil Price
Supply
20%
40%
Oil Price
OPEC
N. America
FSU
Non-OECD - Other
35%
30%
25%
.
20%
15%
10%
15%
5%
10%
5%
0%
0%
-5%
-10%
-5%
2004
2005
2006
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2007
6
1. Short-Term Economics
2. Price Drivers
3. Conference Themes and LT Outlook
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7
Key Differences in Price Drivers
LRMC Production
Transport
Alternative fuel
Producer power/
Demand resilience
Oil
XX
X
X
XXX
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Gas
XX
XX
XXX
X
Coal
XX
XX
X
X
8
Cost Structure vs. 2006 Price
450
400
EU Border (2006)
$ 63/bbl
350
Indicative Taxes
$ 7.8/mBtu
300
€/toe
Variable costs
Transport
250
200
$ 76/tce
Fixed costs Transport
150
Variable costs
Production
100
50
Fixed costs Production
+ ROCE
0
Oil
Gas
(Non OPEC) (LNG)
Coal
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9
Factors taking LRMC into a New Equilibrium
1. Increased demand
2. Extractive industry effects
3. Resource constraints and price inflation
4. Role of China underlies all three
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10
1. Demand
• Growth is relentless
• China and India
• But reality checks
ƒ How many cars can be added?
ƒ How much energy production capacity can be
added? How fast?
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2. Extractive Industry Effects
• Normally progressive cost increases
ƒ Location and quality of resource base
• Reverse has been case for coal
• Technology can offset – at times dramatically
• Differential impact on fossil fuels:
ƒ Greatest for oil – F&D doubled in 5 yrs
ƒ Moderate for gas
ƒ Low for coal
• How will this play out across the fuels?
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3. Resource Constraints and High Inflation
• Shortage of skilled resources
ƒ Geologists’ salaries doubles
• Iron ore price €40/t (1992) - €95/t (2006)
ƒ Chinese demand dwarfs global
consumption
• Sakalin = Much higher cost of capacity vs.
M. East. Costs rose strongly.
• Solar power – silicon shortage $200/kg –
500% up on 2004 prices
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Demand and Price of Steel
1200
No
No demand
demand response
response to
to price
price
1000
$ (2005)/tonne
Demand (mt)
800
600
400
200
0
1990
1995
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2000
2005
14
4. China’s Share of Global GDP, Oil and Steel Growth
100%
90%
GDP
Oil
Steel
80%
70%
60%
50%
40%
30%
20%
10%
0%
2000
2001
2002
2003
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2004
2005
15
1. Short-Term Economics
2. Price Drivers
3. Conference Themes and LT outlook
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16
Key Themes for Conference
1. Economics – where it works/fails
2. Extractive nature of fossil fuels
3. Politics constraining economics
4. Policies constraining demand
5. Role of technology
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Global Insight Reference Scenario
500
70
450
60
400
Brent
350
50
300
Troll Gas @ Emden
$(2005)/
250
toe
200
40
30
150
$(2005)/
boe
20
Steam Coal ARA
100
10
50
0
0
2000
2005
2010
2015
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2020
2025
18
Thank you!
Graham Weale
Director European Energy Consulting
[email protected]