2PM mohamedi ppt

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Published on November 21, 2007

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The Geopolitics of Energy:  The Geopolitics of Energy Presentation by Fareed Mohamedi Chief Economist, PFC Energy to Energy and Nanotechnology Conference Houston, Texas May 3, 2003 Strategic Advisors in Global Energy The Geopolitics of Energy:  The Geopolitics of Energy Introduction Focus on oil and gas The OPEC system, supply management and prices Implications of the US invasion of Iraq Longer term issues related to the development of adequate oil supplies Meeting US gas demand Unprecedented OPEC cohesion:  Unprecedented OPEC cohesion OPEC forged a deal in 1999 that has withstood a number of challenges The deal was underpinned by the following developments: The election of Chavez The problems of the Iraq Oil for Food program The creation of the Riyadh Entente in the mid-1990s It provided a means for S. Arabia and Iran to work together It helped coordinate regional policies vis-à-vis Iraq It helped coordinate OPEC price and market share strategies Saudi ruling family used it to show its own public plus the rest of the ME that its foreign policy was rooted in the region Slide4:  C.P Abdallah’s Survival Strategy Key For Riyadh Entente Domestic Politics Restore social balance Curb subsidies Rule by committee Economic Policy Entrepreneurial economy State balances books FDI for industry Foreign Affairs American ally Strong regional bonds Coordination w. Iran Low Priority High Priority 2003 Prices Strong, But Fall As Year Progresses:  2003 Prices Strong, But Fall As Year Progresses Annual WTI Prices 2003 WTI Prices $/b $/b Prices will be relatively high for 2003 thanks to high 1Q prices in the run-up to war in Iraq. The average 2003 price will be about equal to those seen in the past two years. Despite the loss of the war premium, fundamentals remain tight enough to keep current prices in the upper-$20s. However, as inventories rise, prices will be pressured downwards. Last 6 Months: Three Supply Shocks:  Last 6 Months: Three Supply Shocks Recent Lost Production Due To Supply Shocks kb/d The market was hit by a triple whammy of supply shocks in the past few months: First from the unexpected Venezuela strike Then the predictable but still very significant outbreak of war in Iraq And finally by losses due to civil strife in Nigeria just as refinery demand for the country’s gasoline-rich grades was stepping up Last 6 Months: OPEC Managed The Challenges:  Last 6 Months: OPEC Managed The Challenges OPEC has managed by increasing production from its other members Production outside Venezuela and Iraq increased 1.7 million b/d between November and March, Saudi Arabia accounting for 1.0 million b/d Despite much tighter fundamentals than during the last Gulf War, daily WTI prices this time peaked at only $37.83, compared to $40.42 in 1990 Saudis also communicated effectively: markets were reassured additional supplies were on the way, OECD members did not release strategic inventories mmb/d OPEC Crude Production Saudi Crude Production kb/d Non-OPEC Supply Keeps Growing…:  Non-OPEC Supply Keeps Growing… Absolute and Year-on-Year changes in Non-OPEC Crude Supply kb/d mmb/d Every quarter of 2003 except 2Q will see rising Non-OPEC Liquids supply, with strongest growth in 4Q On a year-on-year basis, Russia will continue to lead the growth at 500,000 b/d 2003 Non-OPEC Liquids supply to rise 1.6 million b/d, filling much of the 2.7 million b/d rise in global crude demand OPEC-10 Avoids Crisis in 2003…:  OPEC-10 Avoids Crisis in 2003… OPEC-10 Crude Supply and Projected Inventory Change mmb/d Need for inventory replenishment will allow OPEC-10 to produce 800,000 b/d more crude than 2002, but this is weighted to the first half of 2003 Increasing Non-OPEC supply and slower demand growth point to reduced demand for OPEC crude from now on Only low inventories and Iraq outage give OPEC-10 a temporary reprieve 2003 OPEC production and Quotas Slide10:  The oil companies are not behind this war Who are the oil companies? What have they become? The US oil companies would rather have sanctions removed from all major producer countries The non-US oil companies used the constraints on US companies to make inroads into the Middle East The current Administration has not fulfilled the few promises it made to the oil patch Drilling offshore Florida Removing the subsidies for ethanol Revoking ILSA Alaska is not seen as a real oil play Was The Invasion of Iraq An Oil War? Slide11:  ECONOMIC SPHERE DIPLOMATIC SPHERE MILITARY SPHERE Counter Proliferation First Strike Anti-terrorism American Internationalism Lead, Others Will Follow End Treaties, Non Binding Fix It yourself IMF: Systemic WB: Poverty Energy Security Diversity George W. Bush’s New World Order United States: Sole Superpower Military Superiority – Space and Technology High Importance Low Importance Oil Key to New Iraq :  Oil Key to New Iraq The administration of the Iraqi oil industry will be a challenge, particularly in the first year or two, and the prospects of a short-term jump in production are effectively nil. The challenges will be: To minimize short-term production losses while maintaining a reasonably safe operating environment Create an environment (political, administrative, legal) that will allow a very rapid conclusion of negotiations for investment in new capacity Only then is substantial growth in production is possible. In the best case, real growth (from 2001-2002 peak capacity) will not happen before 2005. Slide13:  PFC Energy Projected Iraqi Production Return kb/d kb/d Iraqi Production On A Declining Trend Technical issues: Relatively little damage to fields and infrastructure Halliburton statement about getting up to “regional standards” (which are quite high) is an uncertainty Fields are on a declining trend even when they do come back Political issues: Need to get revenue flowing means that the US will want quick resumption But lack of government recognized by UN and existing sanctions/OFF regime mean US has to win battle at UN before exports can resume How and When Exports Will Resume? Slide14:  UN recognized government Resumed oil exports Oil negotiations Oil deals IMF program Paris club London club Donors meeting Reparations meeting US-UN Relations Despite Washington’s reluctance to deal with the UN, the international organization’s role is crucial for the economic rehabilitation of Iraq Slide15:  Battle Over UN Role A battle is taking place in the UN Security Council over who has authority in post-war Iraq This battle will delay UN recognition of the new occupation government in Iraq, and will be crucial for oil sector and financial sector decisions moving forward US authority US/un authority UN/us authority US occupation Preferred US route — marginal UN role Preferred French route — limited UN role Resumed Oil - for - Food program Complete UN weapons inspections New resolution lifting sanctions Suspended Sanctions Resumed Oil-for-Food program Gradual OFF phase-out New resolution lifting sanctions Slide16:  Best Case Scenarios This model assumes that there will be no commercial or logistical constraints on companies. In other words, within 12 to 18 months contracts would be signed and companies would find the necessary equipment to ramp up operations in an aggressive manner Back To Market: In 2004 Moment of Truth:  Back To Market: In 2004 Moment of Truth 2003 OPEC production and Quotas mmb/d Declining market share for the group—Non-OPEC plus Iraq will outpace demand growth Seasonal demand decline in half of 2004 will force OPEC to implement a very large production cut from already low levels Uneven increase in capacity among OPEC-10 has initiated a debate about quota redistribution that will heat up when more cuts need to be made Saudi Arabia’s unique position as swing producer will leave it with the difficult choice of enduring an untenable price and low production, or crashing the price. Slide18:  Limited Margin of Maneuver for OPEC In an $18+ price environment, Non-OPEC and Iraqi supply will capture all of the incremental demand, at least until 2006. This leaves very little margin for OPEC-10 to increase production in the next four years. Non-OPEC Supply and Demand Growth: New OPEC-10 Supply Not Needed million b/d Non-OPEC Supply Growth Iraq Supply Growth Global Demand Growth Slide19:  OPEC Quota and OPEC Capacity The opening up of the upstream sector in a number of OPEC countries has started a trend of rising capacity. Some of these increases might not go through (Kuwait, Saudi Arabia, Iran), but others are already underway. This rising excess capacity, with the potential return of Iraq, will destabilize OPEC from the inside. OPEC-10 Quota Potential and Capacity Expansion at Odds million b/d OPEC-10 quota OPEC-10 Production OPEC-10 Capacity Quota Reallocations Out of the Closet:  Quota Reallocations Out of the Closet As long as demand for OPEC-10 crude has stayed high, rising production capacity in Algeria, Nigeria and Libya has not been an issue. However, as OPEC is forced to cut production, increasingly large and untenable percentages of member countries’ capacity would have to be shut in to maintain quotas. By 1H 2004, there will be no way to avoid the quota allocation issue any longer. Current OPEC Quotas and 2004 Estimated Capacity kb/d 2003 Prices Strong, But Fall As Year Progresses:  2003 Prices Strong, But Fall As Year Progresses Annual WTI Prices 2003 WTI Prices $/b $/b Prices will be relatively high for 2003 thanks to high 1Q prices in the run-up to war in Iraq. The average 2003 price will be about equal to those seen in the past two years. Despite the loss of the war premium, fundamentals remain tight enough to keep current prices in the upper-$20s. However, as inventories rise, prices will be pressured downwards. Slide22:  Debt Flows Asset Flows Billion US$ Current Account Balance Can Saudi Arabia Take Lower Prices? The Capital Account of the Balance of Payments Slide23:  ExternalAssets External and Domestic Liabilities Billion US$ Saudi Arabia: Assets and Liabilities Can Saudi Arabia Take Lower Prices? Slide24:  Current Account Balance Debt Flows Asset Flows Billion US$ Iran: Capital Account Can Iran Take Lower Prices? Slide25:  ExternalAssets External Liabilities Billion US$ Iran: External Assets and Liabilities Can Iran Take Lower Prices? The Other Wild Card: The Neo-Con Agenda :  The Other Wild Card: The Neo-Con Agenda Has the neo-con agenda peaked, or will new phases unfold over the next few years? Create a Pax Americana in the Middle East Win the peace in Iraq Succeed in creating a viable democracy Convince the Middle East to abandon Palestinian state Answering the North Korean challenge in Asia Containment or regime change? Induce China to cooperate and accept US agenda in the region Downgrading the UN and Bretton Woods institutions Contain the French and Russian challenge Institutionalize American Internationalism Slide27:  The Neo-Con Agenda in The Middle East The Neo-Conservative agenda sees regime change in Iraq as the first step towards fundamentally altering regional dynamics: Consolidate US and Israeli interests in the region Create appropriate conditions in the Levant for quick solution to Israeli-Palestinian conflict on Sharon’s terms Force change in neighboring states and the Gulf Israel Iraq Turkey PNA Pax Americana Short Term Secular reformist take over in Iran Isolated, politically neutralized and forced to reform Authoritarian leader/popular revolution in Syria; peace deal Leadership reform and peace deal Political isolation and threats Iraq PNA Syria Lebanon Weakening Syrian power PNA Saudi Arabia Iran Egypt Medium term How Will Saudi Arabia Respond?:  How Will Saudi Arabia Respond? It will largely depend on the US success in Iraq: Successful US, with pro-US regime in Baghdad US unsuccessful, with Shi’a regime emerging US unsuccessful, with Shi’a- Sunni Nationalist regime Washington may use it to dislodge the Al-Sauds The Saudi public could see the New Iraq as a model Iran could emerge as a major influence over Iraq weakening the rationale for its alliance with Saudi Arabia The US would be opposed to an Iranian backed Iraqi govt. and use the Saudis to offset this growing power For Iran an insular, domestically preoccupied Iraq could pose less of a threat and a model The Al-Sauds could see this as an opportunity to have some influence Riyadh Entente will remain useful for the Saudis The OPEC strategy will be maintained = higher prices Saudis will use the oil price as a weapon against a strong Iran/Iraq bloc in OPEC and the region Riyadh Entente will be reinforced to oppose US Could the OPEC strategy be maintained? What is Happening in the Oil Industry?:  Note 1: 2002 reserves and production for all companies are PFC estimates. 2002 production is based on 1H2002 data. Reserve Estimates are primarily based on a 110% reserve replacement rate. Data for BHP, CNOOC, PDVSA, Pemex, Yukos, and MOL represents 2001 data. * Data for Petronas and Lukoil pertains to 2000. Data for TNK pertains to 1999. Rosneft’s reserves estimates are for 2000 and are obtained from IEA’s Russia report. Note 2: PDVSA (1,340; 102,499), Rosneft (152; 27,915) and Pemex (1,574; 51,655) excluded for scaling reasons. Changing Competition Reserves vs. Production: 2002 Global Competitors Regional Majors Focus Players What is Happening in the Oil Industry? 0 5000 10000 15000 20000 25000 0 600 1200 1800 Production (mmboe) Reserves (mmboe) ConocoPhillips Oxy Shell ChevronTexaco BP TFE ENI ExxonMobil Repsol YPF BG Marathon Statoil Petronas* Lukoil* Petrobras Yukos CNOOC PDVSA (1,340; 102,499) Pemex (1,574; 51,655) Rosneft (152; 27,915) Anadarko EnCana BHP Hydro MOL TNK Replacing Core Areas:  Replacing Core Areas Many core areas in maturity phase Business going to Non-OECD basins Strategy depends on region (e.g., Petrobras, Repsol YPF, and PDVSA in Latin America and Petronas in Asia-Pacific) Selected “oil cores” transiting to gas With the exception of deepwater plays, major companies are not creating new core areas through exploration, but through production deals Production deals create new challenges -- new risks Core “transitions” from oil risk to gas risk -- e.g. technical to commercial Global Competitors Must Replace Maturing Legacy Assets:  Global Competitors Must Replace Maturing Legacy Assets Replacement of earnings from historical assets Growing earnings in areas where Regional Majors & Governments control 2000-2002 Average Upstream Net Income From North America & Europe % North America & Europe of Worldwide Total % of Upstream Net Income from N. America and Europe Reported and PFC estimates. Access to Oil & Gas Reserves Constrained:  Reserves held by Russian companies Full IOC access reserves Access to Oil & Gas Reserves Constrained NOC Reserves (no equity access) NOC reserves (equity access) Source: PFC Upstream Competition Service & BP; reserve figures are conventional billion boe, 2001 140 / 7% 113 / 6% 324 / 17% 1,354 / 70% Industry Shift:  Industry Shift Divestiture in mature areas Majors withdrawing from non-strategic areas Independents moving in and aggregating positions New independents likely to be created to capture opportunities unattractive to large independents National Oil Companies:  National Oil Companies NOCs growing importance in the industry Generally more commercial and some privatizing But NOCs can be threat to state especially if political leadership is from different background from NOC managers Distrust of IOCs falling – even among populist or leftist governments States looking for production deals to attract capital and technology What States want is evolving so IOC access issue is a very dynamic and at times confusing one for IOCs Slide35:  Entrepreneurial Capitalist Social Democratic Capitalist Authoritarian Globalizer Populist Development Rentier State Entrepreneurial Bureaucracy Statist Bureaucracy Public Entrepreneurs Privatized & Competitive Façade/No Institution Excluded Traditional Monopoly Oligopoly Limited Opening Open Competition Government NOC IOC Role Driving Forces Increased Opportunities State Types and Implications For NOCs/IOCs The Global Portfolio & Risk:  The Global Portfolio & Risk Source: PFC’s Petroleum Risk Manager Based on 26 Risk Factors at end-2002 Size = Reserves US Nat. Gas Supply: A Pressing Issue:  US Nat. Gas Supply: A Pressing Issue Energy security also means natural gas supply security Defined as reliable supply at a reasonable cost Demand encouraged, but supply shrinking Washington encouraged the growing consumption of gas but has actively discouraged production In 2002, gas supply has declined by 5.6% in continental US, forcing the suppression of industrial demand In the next few months, up to 4 bcf of industrial demand need to be suppressed to allow storage to refill for next winter Industries and jobs lost in the US US Nat. Gas Supply: A Political Question?:  US Nat. Gas Supply: A Political Question? Continental supply is extremely difficult to grow quickly -- no matter how high the price: Basin exhaustion a fact of life in a mature asset base Accelerating decline rates creating treadmill effect Regulatory hurdles for areas now open to exploration Access to federal land practically closed Offshore Florida, California and East Coast closed LNG: siting issues, so little help in the foreseeable future Alaskan/MacKenzie Delta pipelines: Right Answer, wrong decade US Has No Surplus Gas Supply:  US Has No Surplus Gas Supply Excess Pipeline Gas Supply Capability in the US (I.e., as a Share of US Gas Consumption, annualized) Sources: *PFC estimates. Includes Canadian imports, **EIA. Canadian Pipeline Imports Nearly Tapped; New LNG Supply of Increasing Importance:  Canadian Pipeline Imports Nearly Tapped; New LNG Supply of Increasing Importance Abnormally Large Gas Storage Draws Lead to Increased Price Volatility:  Abnormally Large Gas Storage Draws Lead to Increased Price Volatility Market Tightness is Driving up U.S. Gas Prices -- Floor Price is Rising:  $9.13 Market Tightness is Driving up U.S. Gas Prices -- Floor Price is Rising $8.72 Slide43:  Strategic Advisors in Global Energy Corporate Offices 1300 Connecticut Avenue, N.W. Suite 800 Washington, DC 20036 USA Tel: 1-202-872-1199 Fax: 1-202-872-1219 3, Cité Paradis 75010 Paris, France Tel : (33.1) 4770-2900 Fax : (33.1) 4770-2737 Houston, Texas Tel : 1-281-599-7099 Fax: 1-281-599-9891 info@pfcenergy.com www.pfcenergy.com

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