Good morning ladies & gents, thanks for being her, thanks to Platts, etc As ED said, Only 7 months since 2012 MTOMR . Outlook not dramatically different, headlines figures are broadly consistent: Demand growth -- relatively subdued versus pre-2008 fin. crisis Non-OPEC supply growth very robust, led by N. Am., especially US LTO Total supply growth> demand growth Refining cap. expanding even more rapidly, especially E of Suez More comfortable global balances , increase in OPEC spare capacity , on a sustained basis, to level unseen since the 1990s -- but against high risk backdrop. - That was our msg then, that’s our msg today. we don’t forecast prices, but consistent w/ current easing of prices What’s new: -US growth even steeper OPEC capacity growth significantly slower ( Africa, Iraq pbs had been discounted) More analytical depth - market implications of these trends, what it all means: Next five years will be pivotal in oil markets: Supply shock – shock waves, ripple effects, horizontally and vertically Arab spring – the real challenges are ahead of us. Major transition New chapter in non-OECD demand. China slows., others accelerate (Afr) -the supply chain , the way products are getting to customers is changing dramatically . This is a very different market. Different volumes from different places, different quality of crude, different logistics, cast of mkt participants. Pivotal change in oil markets Security and price implications – we set the stager for understanding them
In terms of demands, three or 4 main points: Moderate demand growth . Based / IMF forecast of moderate growth, 3 speed recovery . 6.9 mb.d total, 1.1 mb/d / year Not very different from 2012 MTOMR, small cut due to lower 23012 baseline, only <100 kb/d lower for 2017 Main story is OECD/non-OECD divergence . Non-OECD overtakes OECD as early as this quarter, gaps widens thereafter - IMF sees 3 speed - non-OECD leads growth - Bifurcation in OECD US/EU - but demand still 2-spped: UIS GDP increase not reflected in oil demand Within the non-OECD, China slowdown , changing gears, shifting to lower gear: China demand up 2.4 mb/d 2012-18, to 12 mb/d Same aggregate growth as 2003-2009, but from higher base, so lower annual growth, 3.7% versus 6.2% - China entering new phase of development, new growth targets, etc - efficiency and environmental control policy (fuel switching) Ascent of other non-OECDs : rising income growth, car ownership, consumer demand. Africa – new demand frontier? Oil demand up 4% per year, near 1mb/d total Africa baseline up 1-5 kb/d 2012 New role of non-OECD : refining capacity, crude imports, storage, etc. New international footprint , non-OECD companies active, rising equity production, major participants in international trade, can act as key suppliers to OPECD countries. – refining capacity in OECD countries, storage ,etc Greater integration on non-OECD countries in the international energy system Possibly in financial sector as well, futures, exchanges ,etc
If we break down demand by products, story broadly consistent, but a few changes TRANSPORT STILL TOP DIVER OIL STILL TOP TRANSPORT FUEL 2 CHANGES: BRIEF PAUSE IN THE TREND TOWARDS DIESELISATION. GASOLNIE STRENGTH, DRIVEN BY NON-OECD OIL BEGINNNING TO LOSE ITS GRIP ON TRANSPORT FUELS, WE ARE BEGINNING TO SEE NATURAL GAS MAKING INROADS INTO THE TRANSPORT SECTOR Gas had a role in transport in some countries like Pakistan but mostly niche markets But in top two countries, gas making inroads: US, driven by cheap and abundant shale gas Rail Trucks, buses, garbage fleets, etc Cars last China, driven by environmental policy Huge potential given size of bus and truck fleet Next five years will see mostly infrastructure rollout, biggest impact likely post-5 years But some impact already, becoming a reality
Moving to the supply side, Iraq and the US are still top sources of supply growth, as in 2012 MTOMR. But balance is shifting: - 2012 MTOMR - roughly equal OPEC/non-OPEC growth - 2013 MTOMR - more from N-OPEC. (1.75 mb/d OPEC crude, 5.8 mb/d non-OPEC) Reflecting 2 adjustments: 1) more N. Am supply, 2) less OPEC capacity ** 40% comes from N. American oil sands and LTO prod. (** incl. 2.3 mb/d from US LTO alone, only 1 mb/d elsewhere. ) ** Around 20% of liquids growth comes from Iraqi capacity… US LTO as supply shock: - Volume growth just part of the story (see KSA increases) quality - location -- mature market, inland, etc - backing our imports, chain reaction Chain reaction downstream – refining, petchems, etc Also, impact on supply growth outside of North America. This is twofold: Portfolio management, capex allocation (next slide) Potential application of non-conventional technology elsewhere: Sale oil (beyond mid-term) Low-permeability mature, conventional plays
Sustained high oil prices + technological advances are causing a broad shift in capital expenditure: Tight oil driving much of that increase but DW also sees increase LTO share of capex doubles from 7% 2010 to 14% 2018 DW from 16% to 22% - OPEC vs non-OPEC: 2006-2012: OPEC + 90%, non-OPEC +50% 2012-2018: OPEC +20%, non-OPEC +30% Deepwater more attractive improving breakeven prices for higher DW capex Majorit y of spending in next couple years from Gulf of Mexico, West Africa, and the North Sea through 2015 Brazil should drive offshore spending as the company takes delivery (or seeks alternatives to) its 28 domestically built floaters for developing ultradeepwater pre-salt reserves.
Non-OPEC supplies + 1.4 mb/d per year, (around 2% per year) -- Next 5 years driven by the Americas; US supply (inc. NGL) +2.8 mb/d to 11.9 mb/d US crude+condensate +2.5 mb/d; US fractionation capacity additions boost NGL +770 kb/d Canada + 1.2 mb/d , led by oil sands, despite bottlenecks Brazil + ca. 1 mb/d, mostly deepwater US supply: breakeven at current prices or lower; Realized prices would have to average in the $60-65 range in the Bakken to stop growth in its tracks. Constraints: Labor and supply chain management : Lack of lodging, traffic, and socio-economic impacts on communities could impact the pace of production growth significantly; public policy will have to balance this with employment impacts. Takeaway capacity : Lack of low-cost takeaway capacity will crimp producer profit margins most acutely in the Bakken, to a lesser extent Eagle Ford play and the Permian basin. Temporary bottlenecks have already caused significant price discounts from the Permian Basin in Texas and the Bakken play. Financing : Companies may be challenged to attract capital to respond to commodity price changes and if banks assess that companies are over-leveraged. Decline rate, composition, Initial Production rates : We know more about shale gas plays that have been producing for twice as much time. Initial production levels and decline rates are highly variable across a given play. Companies can cherry pick these key variables for investors, leading to over-optimistic forecasts. Also, composition of crude, NGL, water mix can change over time and within a given acreage, requiring changes in infrastructure and lower (or higher) oil output depending on economics, capital constraints, or infrastructure constraints. Comingled conventional oil : It can be difficult to distinguish between oil produced from LTO and oil that is collected at the same time from non-tight or non-shale formations, thus skewing resource and production estimates.
World biofuel production is expected to reach 2.36 mb/d in 2018 , up 485 kb/d on 2012. but uncertainty on EU + US support policies provides major downside risk. EU: Draft EC legislation launched Oct. 2012 would cap use of food-based biofuels to 5% of transport fuel demand (roughly current avg EU blending share) vs maximum 10% stipulated in the Renewable Energy Directive. Discussion ongoing, but ind. confidence affected, likely negative investment impact US , 2012 drought fuelled opposition to RFS2 mainly from livestock farmers hurt by high corn prices & low margins. Since early 2013, market participants also claim to have difficulties surpassing the ethanol “blend wall” about 10% share of ethanol in the gasoline pool) (RIN rally) US ethanol output still affected by 2012 drought , with 2013 production reaching 853 kb/d, down 10 kb/d y-o-y. 10% of ca. 200 US ethanol plants sit idle, 1Q13 production avg 800 kb/d (vs. 910 kb/d in 1Q12) - US biodiesel sector is better-off thanks to a re-introduction of a $1/gln blender’s tax credit that should push production to 84kb/d, the mandated volume under the RFS2 Canada biofuel support phase out in 2017, leading to a reduction in production over the medium-term Blend wall: 10% share (vol.) of ethanol in gasoline declared safe by car manufacturers Shrinking US mogas demand (CAFÉ Standards) Gasoline retailers, car manufacturers, et al. flag liability w/ blends > E10. ->Costs & logistical challenges of reconfiguring pumps & storage at fuel stations Non-OECD Americas biofuel production reached 510 kb/d in 2012 , up 25 kb/d y-o-y; 560 kb/d 2013; up to 720 kb/d in 2018, driven mainly by Brazilian ethanol. Brazilian ethanol production seen up 50 kb/d in 2013 , on expected banner sugarcane harvest, a re-increase in the domestic ethanol mandate from 20% to 25%, and improved competitiveness of ethanol production over sugar. S ugarcane sector still in financial difficulties, likely to persist as low sugar prices hurt smaller and outdated mills. The financial situation of mills will also have an important impact on the expansion of the sugarcane area. Access to financing for mills will be key to ensure needed capacity additions in next 5 years Argentine biodiesel production to drop 7 kb/d to 40 kb/d in 2013 , due to ongoing EU anti-dumping investigation that might lead to retro-active import tariffs on Argentine biodiesel exports to the region. 2012 Biodiesel exports down 7.5% in 2012 on the probe, 1Q13 exports down 50% y-o-y
Global rude trade falls by 900 kb/d to 32, 4 mb/d - N. American supply hike - lower refinery demand elsewhere in OECD -- Increased imports to China, other Asia -- More crude refined closer to wellhead Flip side; high product trade
Global stocks: implied 200 mb build in 2012 OECD + 72 mb reported China SPR Phase 2 likely fill +89 mb Total Phase 2 capacity now estimated at 245 mb, to be completed end-2015 Phase 3 capacity seen 152 mb, to be completed 2020 China commercial +10 mb reported KSA crude stocks +36 mb? Other non-OECD Patchy non-OECD stock, storage capacity data