Energy Security: Are Things Really
Changing or Is It the Price Environment?
Kevin Lindemer
Energy
Global Insight
Governments & Energy
Is the pendulum swinging back
toward a stronger government role?
•
Oil prices have always been subject to political forces and concern; is
that concern rising?
– Natural gas may be joining oil
•
Most countries have moved to more open and deregulated markets over
the past 25 years
– Is that process now reversing?
•
Perceived risks are rising in numerous hydrocarbon producing areas
– Accelerating production declines and low spare capacity are exacerbating
perceptions of risk
•
Globally, government policies toward energy security, environment, and
agriculture are converging
– A new policy environment maybe emerging over the next few years
Copyright © 2006 Global Insight, Inc.
Work Crude Oil Prices: Event Driven Volatility
70
US Price De-controls
Price
2005 $
Iraq/Iran
War
60
Iranian Nuclear
Stand-off;
Nigerian Unrest
Global
Recession
Hurricane Katrina
Saudi Arabia
increases production
OPEC spare
capacity near 0%
40
Gulf War
Iranian
Revolution
OPEC Quota
Increase & Asia
Financial Crisis
30
Arab Oil
Embargo
20
OPEC Formed
Suez Crisis
US becomes
Net Importer of
Crude Oil
10
0
Iran/Iraq
Ceasefire
End of
Netback Pricing
Rising FSU
Oil Exports
Collapse
of FSU
OPEC spare
capacity falls to
>5% world demand
19
4
19 7
49
19
51
19
5
19 3
55
19
57
19
59
19
6
19 1
63
19
65
19
6
19 7
69
19
71
19
7
19 3
75
19
77
19
79
19
8
19 1
83
19
85
19
8
19 7
89
19
91
19
9
19 3
95
19
97
19
99
20
0
20 1
03
20
05
$ per Barrel
50
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U.S. Natural Gas Wellhead Price: Increasingly Event Driven
$12
Hurricane
Katrina
Hurricane
Ivan
$10
$ per MMCF
Cold Weather/
Low Inventory
$8
U.S.
Natural Gas
Production
Peaks
$6
$4
Unwinding of
long-term
contracts
Natural Gas
“Bubble”
Begins
$2
$1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
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OPEC Spare Capacity and Price
25%
$60
20%
$50
OPEC Spare Capacity/Demand
$40
15%
$30
10%
$20
5%
$10
$-
0%
1985
1987
1989
1991
1993
1995
1997
Copyright © 2006 Global Insight, Inc.
1999
2001
2003
2005
WTI Price (2004$)
OPEC Spare Capacity/Demand
WTI Price
Incremental Global Oil Capacity Projections
5000
4000
3000
non-OPEC Supply
OPEC Supply
non-OPEC Decline
OPEC Decline
Demand Growth
Net Capacity Change
?
MBOPD
2000
1000
0
-1000
-2000
-3000
-4000
2003
2004
2005
2006
2007
Note: Assumes Iraqi production stays 2 MMBOPD through 2010
2006 includes 250 MBOPD of restored GOM production
Copyright © 2006 Global Insight, Inc.
2008
2009
2010
Data Sources: IEA, EIA, OPEC, Company
Reports, Trade Press, ECG
Country Risk Indices of Oil Reserves & Demand
40
Saudi
Arabia,
Iran
35
Risk Index
30
Saudi
Arabia,
Iran
Iraq
Kuwait
25
Saudi
Arabia
USA
China
10
USA
China
Japan
5
USA
0
20%
30%
Oil Reserves
Oil Demand
Saudi
Arabia,
Iran
Iraq
Kuwait
UAE
20
15
Median
Median Country
Country Risk
Risk Indices
Indices of
of
Oil
Oil Reserves
Reserves and
and Demand
Demand
Indicate
Indicate aa High
High Degree
Degree of
of
Uncertainty
Uncertainty Over
Over the
the Oil
Oil Supply
Supply
Saudi Arabia,
Iran Iraq
40%
USA
China
Japan
Germany
Russia
India
50%
10
7
16
48
24
15
11
60%
70%
Cumulative % of Total
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80%
90%
Source: Global Insight Energy Group & Country Risk Service
World Oil Production: ⅔ Increasing Risk or Falling Production
Saudi Arabia
Terrorism, Proximity to Iran
Russian Fed.
Contract Enforceability, Expropriation
USA
Declining Production
Iran
Gov’t Stability, Sanctions, International Action
Mexico
Declining Production
Norway
Declining Production
Venezuela
Contract Enforceability, Expropriation
Proximity to Iran
U.A.E.
Gov’t Stability, Infrastructure Disruption, Internal Violence, Contract Enforceability
Nigeria
Kuwait
Proximity to Iran
United Kingdom
Declining Production
Iraq
Colombia
Terrorism, Internal Stability, Infrastructure Disruption
Infrastructure Disruption, Internal Stability
Ecuador
Infrastructure Disruption, Contract Enforceability, Expropriation
Sudan
Contract Enforceability, Internal Stability
Chad
Terrorism, Internal Stability
0.0%
20.0%
40.0%
60.0%
80.0%
Cumulative Oil Production
Copyright © 2006 Global Insight, Inc.
100.0%
WTI Price Outlook
$95
$85
Base
High
Low
Recent prompt price fall reversed as refineries gear up for higher winter runs.
Cold winter provokes higher demand. High crude inventories mostly in terms of difficult-to-use
heavier grades.
Iran overplays its hand & becomes an issue again.
Further losses in Iraq, Nigeria, or other "events", while non-OPEC disappointments rise further.
Paper markets rebound.
$75
OPEC
Range
$65
$55
$45
Continuing liquidations of positions in futures markets undermine prices further.
$35
Price floor set by OPEC actions to support prices, but high inventories, poor refining
margins, and weak paper markets mean OPEC has to settle for only $45/barrel for the
Reference Basket, below its minimum aspirations.
Lack of cuts by African members undermines OPEC's ability to achieve its target.
Iran remains a non-issue.
$25
04Q1
04Q3
05Q1
05Q3
06Q1
06Q3
07Q1
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07Q3
08Q1
08Q3
The Three Policy Legs
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Government & Energy: Will the Pendulum Swing Back?
1980s – 1990s
TODAY?
Pre-1980s
Strong Government Controls
& Regulation of Markets
Copyright © 2006 Global Insight, Inc.
Open Markets
Thank You!
Kevin Lindemer
Energy
Global Insight