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Investec

  1. 1. GSF Addicted to Energy Mark Lacey and Jonathan Waghorn Portfolio Managers Citywire, Citywire 16 - 18 November 2011
  2. 2. Energy sector outlook summaryNear term & long term thoughts on oil & natural gas markets Oil Natural gas • Very tight markets due to Libya outages and non-OECD demand • Tight global markets as gas remains preferred energy source • IEA SPR release reduces risk of price spikes • Concerns over nuclear is resulting in stronger global gas demand • Non-OECD and European inventories below average • US market is slowly re-balancing as demand strengthens erm Near te • OECD demand growth still at risk from further economic weakness • US gas trading at cash cost of marginal producer • Potential for further MENA unrest is positive for price • US rigs being redirected from gas plays to oil/liquids plays • OPEC expected to act quickly if prices fall • Demand switching from coal, being stimulated by low prices Forecast: $110/bl Brent for 2011, $100/bl Brent for 2012 Forecast: $4.30/mcf for 2011, $4.75/mcf for 2012 • Non OECD demand growth will tighten markets further • Significant arbitrage between international gas prices will close • OPEC spare capacity should continue to fall • Demand for natural gas likely to outstrip oil demand growth • Oil prices to remain high in order to ration OECD demand • Natural gas is the cleaner, cheaper ‘fuel of choice’ Long term • Limited non-OPEC supply reaction expected going forward • High decline rates imply significant development activity required • Oil price required to deliver marginal new fields is around $100/bl • New US shales need at least $6 gas for an economic return • Industry cost inflation gives upward bias to $100/bl forecast • US/Canada likely to export LNG by 2014 - Kitimat Forecast: $100/bl Brent for 2013 and thereafter Forecast: $6/mcf for 2013 and thereafterPage 2 | CONFIDENTIAL07075
  3. 3. Fundamental costs of crude oil and natural gasGas prices appear more positively skewed than oil prices presently prices,● There is better fundamental economic support for natural gas prices than for oil prices● Oil is trading above the marginal cash cost of extraction while natural gas is trading close to it● Oil prices have more downside risk while gas prices offer more upside potential 8.0 8.0 Price at which marginal y demand is destroyed 200 7.5 75 7.0 Price required for marginal producer to 175 make a 10% return on 6.0 6.0 investment 150 Price P i required f i d for Gas p rices ($/mcf ) 5.0 average cost producer to Oil price ($/bl) make a 10% return on 125 new investment 120 4.0 Current spot price 100 100 3.75 p Cash cost of current 3.0 supply for a marginal 75 cost producer 58 2.0 50 40 1.0 25 0.0 0 0.8 08 1.3 13 US gas price versus US gas 1.8 18 Oil price versus oil economics economicsSource: Bloomberg, October 2011Page 3 | CONFIDENTIAL07075
  4. 4. Energy commodity historic cost dynamicsCost of supply drives commodity prices● Historically, energy commodity prices have traded between the cash cost of the marginal producer and th price at which d d the i t hi h demand i d t d is destroyed dWTI crude oil Natural gas 160 Natural gas price Incentive price for 16 marginal producer 140 Incentive price for marginal Demand destruction 14 producer Cash cost of marginal producer 120 12 Cash cost of marginal producer Demand destruction Ga prices $/mcf 100 10Oil Price $/bbl Oil price 80 8 60 as 6 P 40 4 20 2 0 0 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10Source: Alliance Bernstein May 2011 and IAM estimatesPage 4 | CONFIDENTIAL07075
  5. 5. High oil prices could easily stifle global oil demand growthWorld oil burden as a percentage of GDP● In the 1980s, the world ‘oil burden’ represented over 5% of global GDP and demand fell as a result● In 2008, the ‘oil burden’ reached a 20 year peak of 5% and demand fell as a result● In 2011, the ‘oil burden’ will again break 5% and there is a risk of future demand falling 2011 oil burdenNominal ‘oil burden’ (global oil expenditures divided by global GDP) and oil prices 9% 120 8% Oil Burden Nominal Oil Expenditures as % of Nominal GDP 100 7% WTI (real, 2008 base) 6% 80 5% $/bbl 60 4% 3% 40 2% 20 1% 0% 0 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: DBPage 5 | CONFIDENTIAL07075
  6. 6. U.S. Gasoline Demand as a percentage of incomeDemand destruction intensifies when gasoline cost is +9% of disposable income ● US gasoline prices are currently around $3.6/gallon Historical analysis 16% 10% Gasoline Demand - Y/Y Change (Right Axis) Cost at Beg of Period Cost at Peak Period Gasoline / Disposable Income (Left Axis) 8% 14% 1979-1982 9.0% 14.9% 1974 8.1% 11.2% sposable Income 6% 2008-2009 6.7% 11.2% 12% 1989-1991 5.8% 7.8% 4% Gasoline Demand - Y/Y Change 10%Cost of Gasolin / Per Capital Dis C 2% Current sensitivity 8% 0% % of Per Capita US Gasoline ne -2% Disposable e 6% Cost Income $3.00 8.0% -4% $3.25 8.7% 4% $3.50 9.4% -6% $3.75 10.0% $4.00 10.7% 2% -8% $4.25 11.4% $4.50 12.1% 0% -10% 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 197 197 197 197 197 197 198 198 198 198 198 198 198 198 198 198 199 199 199 199 199 199 199 199 199 199 200 200 200 200 200 200 200 200 200Source: Simmons & CompanyPage 6 | CONFIDENTIAL07075
  7. 7. Near term oil supply/demand: Demand outstripping supply2010 saw demand growth ahead of non-OPEC supply growth● In 1Q 2010, oil demand grew faster than non-OPEC supply growth for the first time in six quarters● This trend was caused by non-OECD demand growth and has continued● This is a fundamental strengthening of demand which will lead to sustained tight oil markets 3000 2000 1000 000 Barrels per day 0 -1000 B -2000 -3000 -4000 1Q2006 2Q2006 3Q2006 4Q2006 1Q2007 2Q2007 3Q2007 4Q2007 1Q2008 2Q2008 3Q2008 4Q2008 1Q2009 2Q2009 3Q2009 4Q2009 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 3Q2011E 4Q2011E 1Q2012E 2Q2012E 3Q2012E 4Q2012E Global demand growth (yoy) Global non-OPEC growth (yoy)Source: Goldman SachsPage 7 | CONFIDENTIAL07075
  8. 8. OPEC has limited light oil spare capacityThe oil industry is running at about 97% utilisation● OPEC 11 are currently producing 26.4mnb/d, well over their quota of 24.8mnb/d● The quota has been unchanged since Jan 2009 and has now become obsolete● Since then, Libya production is down by 1.5mnb/d and is unlikely to return quickly● Relative to peak volumes in 2008 we estimate OPEC has c 2 4mnb/d of spare capacity 2008, c.2.4mnb/d 32,000 Theoretical total capacity 30,000 Simple OPEC spare capacity estimate 28,000 000 barrels per day Theoretical capacity 30.3mnb/d 26,000 Loss of Libya L f Lib - 1 5 b/d 1.5mnb/d New theoretical capacity 28.8mnb/d 24,000 Current production 26.4mnb/d Effective spare capacity 2.4mnb/d 22,000 Implicit % global spare capacity 2.7% 20,000 Implicit oil industry utilisation 97% Dec/2000 Dec/2001 Dec/2002 Dec/2003 Dec/2004 Dec/2005 Dec/2006 Dec/2007 Dec/2008 Dec/2009 Dec/2010 J un/2000 J un/2001 J un/2002 J un/2003 J un/2004 J un/2005 J un/2006 J un/2007 J un/2008 J un/2009 J un/2010 J un/2011 D D D D D D D D D D DSource: Bloomberg, September 2011Page 8 | CONFIDENTIAL07075
  9. 9. Energy demand assuming conservative demand estimatesBy 2020 the world will require an additional 45mn bls/d of oil to meet predicted demand● Assuming OECD oil demand stays flat for the next decade● Assuming non-OECD (ex China) oil demand growth is half the rate of the last decade non OECD● Assuming China’s oil demand grows at 7% per annumGlobal il demand projectionGl b l oil d d j ti Incremental oil required – based on organic demand 120,000 and expected decline rates 50,000 China Non-OECD ex China 45,000 100,000 100 000 OECD 40,000 80,000 35,000 30,000 /d 000 bls/ 000 bls 60,000 25,000 20,000 40,000 15,000 10,000 20,000 5,000 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2000 2010 2020Source: IAM, BP statistical review and IEA Incremental decline Incremental demandPage 9 | CONFIDENTIAL07075
  10. 10. Iraq has significant production potentialRecent strong production growth but volume targets are unlikely to be reached● Iraq has oil reserves of 115 billion barrels, the third largest in the world● Production was more stable in 2009/2010 and started to increase significantly in 2011● New development projects target over 2.5mnb/d of incremental Iraqi production by 2017● The massive investment and risks involved mean these targets are unlikely to be achieved g yIraq production Iraq production expectations 3,500 6,000 3,000 , 5,000 5 000 2,500 4,000 uction kb/d 000 barrels per day 2,000 3,000 Produ 1,500 2,000 1,000 1,000 500 0 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 0 Dec/2000 Dec/2001 Dec/2002 Dec/2003 Dec/2004 Dec/2005 Dec/2006 Dec/2007 Dec/2008 Dec/2009 Dec/2010 Jun/2000 Jun/2001 Jun/2002 Jun/2003 Jun/2004 Jun/2005 Jun/2006 Jun/2007 Jun/2008 Jun/2009 Jun/2010 Jun/2011 West Qurna 2 Half aya Majnoon West Qurna expansion Zubair Rumaila expansion Base productionSource: Bloomberg Source: Goldman SachsPage 10 | CONFIDENTIAL07075
  11. 11. Non-OECD is the key long term demand driverPer capita oil demand and car density remain very low● Non-OECD oil demand has grown at 3.8% pa (1965-2010) versus the OECD at 1.5%pa● China and India per capita oil demand is a fraction of OECD levels● Car density is rapidly increasing in China and India, and still a fraction of the OECD● In contrast, US and western European per capita demand will likely moderate contrast2010 per capita oil demand (bl) Global oil use by sub-sector Per capita oil demand (bl) Road Other construction 6% 2010 Oil Population Oil Consumption 4% Heating Demand (mb) (in mil) per capita (bls) 7% US 6,948.1 308.7 22.5 Ref inery f uel 5% OECD 16,615.0 1,190.6 14.0 Industrial f uel Japan 1,589.0 127.7 12.4 8% y Germany 895.0 82.1 10.9 Petrochemicals Transport p 64% 6% China 3,303.0 1330.1 2.5 India 1,211.7 1,166.0 1.0 Source: IEA, Investec Asset Management estimates 2010 , gSource: OECD and BPPage 11 | CONFIDENTIAL07075
  12. 12. Car demand in emerging markets Demand for transport continues to increase ● Vehicle ownership per 1,000 people in China is 55 – the developed world average is 582 ● The expected saturation level for China is over 550 cars per 1 000 people 1,000 ● By 2015 we expect to see the number of vehicles double from 74mn units to 150mn units, this equates to 2mn bls/d of additional demand for fuel Vehicle ownership of major countries vs estimated Forecast growth in light vehicle registration saturation level for China 900 60.0% on enger vehicles/1000 driving populatio 800 50.0% 700 40.0% 600 30.0% Brazil & Argentina 500 India  0 20.0% 20 0% 400 China 10.0% 300 US 0.0% 200 Japan  ‐10.0% W Europe  100Passe ‐20.0% 0 ‐30.0% 2011 2012 2013 *Expected saturation level pSource: Citi, Sanford Bernstein Research, NBS Page 12 | CONFIDENTIAL 07075
  13. 13. Non-OECD demand growth expectationsWhat if China and India follow the paths of South Korea Japan or the USA Korea,● Industrial production growth in non-OECD countries should have a bigger impact on overall oil demand going f d d i forward d● Whilst we expect OECD oil consumption per capita to reduce over time, this will be more than offset by the industrialisation of China and India aloneNon-OECD as a % of global demand Per capita oil consumption (barrels per year) OECD Demand Non‐OECD Demand100% 32.5 Japan USA South Korea China India 90% 30.0 80% 27.5 27 5 25.0 70% 22.5 60% 20.0 50% 17.5 ) 15.0 40% 12.5 30% 10.0 20% 7.5 5.0 10% 2.5 0% 0.0Source: Simmons & Company; Investec Asset Management estimates, Source: Simmons & Company; Investec Asset Management estimates, JuneJune 2011 2011Page 13 | CONFIDENTIAL07075
  14. 14. Declines and poor exploration mean weak long term growthA lack of exploration success and increasing decline rates● The IEA estimate that global oil production will decline at 4.4% per annum over the next decade● Over 83% of the worlds major oil fields are past peak production● The worlds largest 580 oil fields are declining at a rate of 5.1%● A lack of new discoveries and increasing declines should limit long term production growthDecline rates A lack of exploration success 14.0% 450 420bn 7.0 mber of discoveries / reserves discovere (bnbls) 12.0% 400 6.0 Average discovery size (bnbls) ed 350 10.0% 5.0 300 8.0% 4.0 250 6.0% 200 3.0 d 150 4.0% 2.0 100 2.0% 20bn 1.0 50 0.0% Num 0 0.0 00 Super-giants Giants Large World (top 580 1850- 1900- 1910- 1920- 1930- 1940- 1950- 1960- 1970- 1980- 1990- 2000- (>5gb) (5gb><1.5gb) (<1.5gb) f ields) 1899 1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2006 Decline phase 1 (production plateau above 85% of peak annual production) Volume discovered (bnbls, LH axis) Decline phase 2 (past plateau but above 50% of peak production) Number of discoveries (LH axis) Decline phase 3 (production is below 50% of peak production) Total (weighted by total production) Average discovery size ( g y (bnbls, RH axis) , )Source: IEA and Investec Asset Management estimates, 2011 Source: AAPGPage 14 | CONFIDENTIAL07075
  15. 15. Upstream project sanctionsA stable debt market is needed for long term projects to be sanctioned● Project sanction drives production growth in the medium term● 2007-2009 saw low levels of sanctioning activity with a production crunch in 2010-2012 2007 2009 activity, 2010 2012 only averted due to the contribution of oil shale projects● Levels of sanctions need to pick up substantially in order to service growing demand 30000 25000 20000 ned in year Exploitation Traditional Russia R i mn bls sanction 15000 Heavy Oil GTL LNG Deepwater 10000 5000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Source: GS, IAM estimatesPage 15 | CONFIDENTIAL07075
  16. 16. Supply is unresponsive to sanctions in the short term● Project sanctions are not a short-term fix for supply● The time between sanction and first oil / gas is typically around 3 years● Unconventional gas and oil provide short term supply in small increments 5.0 4.5 4.0 on tion  to first productio 3.5 3.0 2.5 Years from sanct 2.0 1.5 1.0 0.5 0.0 GTL LNG Gas Russia Deepwater Heavy Oil Traditional Exploitation Unconventional  Unconventional  gas liquidsSource: GSPage 16 | CONFIDENTIAL07075
  17. 17. Significant regional gas pricing differentials: US is standoutGas trading cheap relative to oil● US gas prices are depressed versus global prices, LNG exports will close this arbitrage● I t International gas prices are i ti l i increasingly li k d t oil prices and are bi i l linked to il i d biased hi h d higherInternational gas prices 25 Japan LNG Henry Hub (US Natural gas) 20 UK Natural gas European Natural gas Asian gas trades closer to 17.7 oil price parity. This will Brent crude oil 16.1 continue. ti Short Sh t term t 15 delivery prices are higher than this USD/Mcf 10 9.0 European gas prices are 8.7 linked to oil but trade much lower than Asia 5 US gas prices are at a 3.7 significant discount 0 Dec-1999 Sep-2000 Dec-2000 Sep-2001 Dec-2001 Sep-2002 Dec-2002 Sep-2003 Dec-2003 Sep-2004 Dec-2004 Sep-2005 Dec-2005 Sep-2006 Dec-2006 Sep-2007 Dec-2007 Sep-2008 Dec-2008 Sep-2009 Dec-2009 Sep-2010 Dec-2010 Sep-2011 Mar-2000 Mar-2001 Mar-2002 Mar-2003 Mar-2004 Mar-2005 Mar-2006 Mar-2007 Mar-2008 Mar-2009 Mar-2010 Mar-2011 J un-2000 J un-2001 J un-2002 J un-2003 J un-2004 J un-2005 J un-2006 J un-2007 J un-2008 J un-2009 J un-2010 J un-2011 M M M M M M M M M M M M D D D D D D D D D D D DSource: Bloomberg, 30.09.11Page 17 | CONFIDENTIAL07075
  18. 18. China’s gas demand – domestic gas supply insufficientDemand from China will help to tighten global markets● The Chinese gas market is currently similar in size to the markets of Canada, UK and Germany● The Chinese market is only 11% the size of the North American gas market● Domestic gas supply is not sufficient to satisfy expected demand growthChina total gas demand and domestic gas supply Total domestic output meets <65% of total demand from 2015 onwardsSource: Wood Mackenzie, September 2010Page 18 | CONFIDENTIAL07075
  19. 19. US drilling and gas in storage summaryUS natural gas rig count is falling gas in storage at the five year average levels falling,● US gas drilling activity continues to fall as rigs are used to drill oil targets instead● W expect this switch in activity t result in l We t thi it h i ti it to lt i lower natural US gas production growth t l d ti th● US natural gas in storage has come back already below five year average levelsUS natural gas and oil active rig count g g US natural gas storage data ( ) g g (bcf) 1300 US Natural gas implied storage data 4000 US Natural gas rolling 5 year estimated storage data Gas rig count (LHS) Oil rig count (RHS) 1600 1100 3500 1400 900 3000Gas rig count Oil rig count 1200 US storage gas (bcf) 700 2500 g 1000 500 2000 800 300 1500 600 100 1000 01/2006 07/2006 01/2007 07/2007 01/2008 07/2008 01/2009 07/2009 01/2010 07/2010 01/2011 07/2011 01/2008 03/2008 05/2008 07/2008 09/2008 04/11/2008 01/2009 03/2009 05/2009 07/2009 09/2009 04/11/2009 01/2010 03/2010 05/2010 07/2010 09/2010 04/11/2010 01/2011 03/2011 05/2011 07/2011 09/2011 04/0 04/0 04/0 04/0 04/0 04/0 04/0 04/0 04/0 04/0 04/0 04/0 04/0 04/0 04/0 04/0 04/0 04/0 04/0 04/0 06/0 06/0 06/0 06/0 06/0 06/0 06/0 06/0 06/0 06/0 06/0 06/0 Source: Bloomberg, 30.09.11Page 19 | CONFIDENTIAL07075

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