The Outlook for the Economy and Petroleum Markets aka (A Walk Through a Minefield)

Transcription

1 The Outlook for the Economy and Petroleum Markets aka (A Walk Through a Minefield) Lucian Pugliaresi Energy Policy Research Foundation, Inc. Washington, DC September 20, 2011 Global Partners LP Waltham, MA Energy Policy Research Foundation, Inc st St, NW Washington, DC

2 The Economy The Fuels Market What Policy Makers Believe Why Policy Makers Beliefs are Bad for the Economy & the Fuels Market Energy Policy Research Foundation, Inc st St, NW Washington, DC

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4 Change in Employment- Population Ratio Energy Policy Research Foundation, Inc st St, NW Washington, DC

5 GDP Grow Per Quarter Energy Policy Research Foundation, Inc st St, NW Washington, DC

6 Unemployment Rate Energy Policy Research Foundation, Inc st St, NW Washington, DC

7 Employment Population Ratio Energy Policy Research Foundation, Inc st St, NW Washington, DC

8 Corporate Profits Post Recession (compared to previous recessions) Source: WSJ, July 5, 2011 Energy Policy Research Foundation, Inc st St, NW Washington, DC

9 Consumer Market: Credit Crunch Energy Policy Research Foundation, Inc st St, NW Washington, DC

10 Tight Credit, Lower Equity, Wages, and Income Growth Energy Policy Research Foundation, Inc st St, NW Washington, DC

11 Housing Market Still Near Rock Bottom Energy Policy Research Foundation, Inc st St, NW Washington, DC

12 The Job Market and Productivity Energy Policy Research Foundation, Inc st St, NW Washington, DC

13 The Manufacturing Sector Has Partially Recovered, but Energy Policy Research Foundation, Inc st St, NW Washington, DC

14 Inflation Varies, Depending on Where You Look Energy Policy Research Foundation, Inc st St, NW Washington, DC

15 Rail and Recession Energy Policy Research Foundation, Inc st St, NW Washington, DC

16 GDP Grow Per Quarter Energy Policy Research Foundation, Inc st St, NW Washington, DC

17 FUELS MARKET Energy Policy Research Foundation, Inc st St, NW Washington, DC

18 What Happened to the Natural Gas Shortage? January 28, 2010 Davos, Switzerland Unconventional gas will transform the entire energy production landscape in the United States...and alters the U.S. energy outlook for probably a hundred years* Tony Hayward Chief Executive Officer BP plc *In 2009 the United States became the world s largest producer of natural gas Energy Policy Research Foundation, Inc st St, NW Washington, DC

19 Production by Shale Gas Play Energy Policy Research Foundation, Inc st St, NW Washington, DC

20 Industry Estimates of NA Gas Supply Energy Policy Research Foundation, Inc st St, NW Washington, DC

21 North American Gas Supply Can Meet Demand Energy Policy Research Foundation, Inc st St, NW Washington, DC

22 Natural Gas Prices Energy Policy Research Foundation, Inc st St, NW Washington, DC

23 Energy Policy Research Foundation, Inc st St, NW Washington, DC

24 2007 $ per million BTU Natural Gas and Crude Oil Prices Through Henry Hub Spot Price 10 Imported Low-Sulfur Light Crude Oil ($ per million BTU) 5 0 Source: EIA Annual Energy Outlook 2009 Energy Policy Research Foundation, Inc st St, NW Washington, DC

25 Libya and Japan (feedstock costs & refining) Libya output loss nearly 1.65 MBD, largely light sweet (39, 0.28% sulfur). Saudi ramp up is effectively replacing supplies and refining capacity adequate to handle Saudi crudes. Japan refining capacity was at 4.5 MBD before earthquake, all restored except 500,000 bbls/d. Initial loss was 30% of capacity. Restart of oil, coal and LNG to replace lost nuclear capacity, net shift in oil demand estimated at 200,000 bbls/d. Light sweet supply loss from Libya not major issue yet, Nigeria up 340,000 bbls/d since 2008, and Bakken up 50,000 bbls/d LLS vs MARS spreads holding. U.S. capacity to handle (and access) heavy sour growing, conversions for 2012 at 480,000 bbls/d and 660,000bbls/d by Worldwide hydrotreating up 2.1MBD in last 4 years. Energy Policy Research Foundation, Inc st St, NW Washington, DC

26 US Diesel Fuel and Crude Oil Prices Energy Policy Research Foundation, Inc st St, NW Washington, DC

27 U.S. Crude Oil Stocks Energy Policy Research Foundation, Inc st St, NW Washington, DC

28 Energy Policy Research Foundation, Inc st St, NW Washington, DC

29 Energy Policy Research Foundation, Inc st St, NW Washington, DC

30 Energy Policy Research Foundation, Inc st St, NW Washington, DC

31 US Cracking Margins Source: Platts Data Energy Policy Research Foundation, Inc st St, NW Washington, DC

32 Refinery Utilization by PADD Source: EIA Energy Policy Research Foundation, Inc st St, NW Washington, DC

33 Refinery Acquisition Cost of Crude Source: EIA Energy Policy Research Foundation, Inc st St, NW Washington, DC

34 PADD I LOP Imports Energy Policy Research Foundation, Inc st St, NW Washington, DC

35 U.S. Shale Oil Plays and Federal Land Energy Policy Research Foundation, Inc st St, NW Washington, DC

36 Williston Basin Production Source: North Dakota Pipeline Authority Energy Policy Research Foundation, Inc st St, NW Washington, DC

37 Canadian Imports and Potential Markets Energy Policy Research Foundation, Inc st St, NW Washington, DC

38 Cushing Dilemma and Why it Matters to the Bakken Increased domestic production coupled with continually increasing Canadian imports and a non adaptive pipeline system is building inventories in Cushing, Oklahoma, the pricing point for West Texas Intermediate on the NYMEX and eroding prices against Brent. Bakken crude is already at a severe discount given its distance from markets and its lack of infrastructure to move crude quickly to major refining centers Source: EIA Energy Policy Research Foundation, Inc st St, NW Washington, DC

39 What Do Policy Makers Believe? Petroleum import dependence is a good measure of vulnerability Petroleum likely to be in short supply need directed and crash program to transition to the fuels of the future (peak oil). Alternative fuels/technologies yield high environmental benefits, improve energy security, are cost-effective---and generate lots of jobs..but a look at the numbers does not support the belief structure and policies supporting these assumptions are increasing the financial risk to the industry. THIS IS YOUR TAKE AWAY!!!!!!!!!!!!! Energy Policy Research Foundation, Inc st St, NW Washington, DC

40 Conventional Wisdom -- Just 5 Short Years Ago World to Face Large Scale Shortages in Refining Capacity No Major Large Scale Additions Likely in Petroleum Reserves (peak oil) prices will rise to well over $100/bbl. U.S. to Face Natural Gas Shortages Massive Commitment to Domestic LNG Receiving Facilities Developing World (particularly China, India) Liquids Demand to Double in 10 years Latin America has been Fully Explored Energy Policy Research Foundation, Inc st St, NW Washington, DC

41 Global Production, million b/d $/bbl A Series of Unfortunate Events Leading to New Expectations Positive Expectations Expectations Shift Negative Expectations 95 Yukos -- Kremlin taking control of Russian oil development Russia takes over Sakhalin II, Chavez Nationalizes Projects Oil development in Iraq delayed Continuing civil strife in Sudan, Nigeria Outlook positive for expanded output from Nigeria, Mexico, Venez., Russia, North Slope Congress continues ban on ANWR and offshore development OPEC Excess Capacity remains limited Nigeria rebels hurt output e World Oil Production (EIA) OPEC Excess Capacity (EIA) Expected Production (EIA 2001 Predictions) Crude Oil Price 41

42 More Oil on the Horizon? Energy Policy Research Foundation, Inc st St, NW Washington, DC

43 Future Oil Production: Access and Tech Dependant Energy Policy Research Foundation, Inc st St, NW Washington, DC

44 The world s largest concentration of oil - 60 billion barrels of oil within 100 km radius We did a private evaluation of Iraq s oil resources for the government We believe they are probably greater than Saudi Arabia s. an executive of one of the original Aramco partners, and an Aramco Board member, in a private conversation in 1987 Energy Policy Research Foundation, Inc st St, NW Washington, DC

45 thousand barrels per day Expected Iraqi Production Growth Excluding Auctioned Projects 2,500 2,000 1, Cumulative Growth (Right Axis) , Cumulative Growth (Right Axis) Incremental Growth by Field (Left Axis) Incremental Growth by Field (Left Axis) Energy Policy Research Foundation, Inc st St, NW Washington, DC

46 thousand barrels per day 16,000 Iraqi Production Growth Under Several Scenarios 14,000 12,000 10,000 8,000 6,000 4,000 Contracted Volumes - First Scenario - 75% of Targets in 2017 and 100% in 2020 Contracted Volumes - Second Scenario - 50% of Targets in 2017 and 75% in 2020 Expected Growth Excluding Auctioned Fields Base Production 2, Energy Policy Research Foundation, Inc st St, NW Washington, DC

47 A Quick Look at America s Most Successful Alternative Fuels Program.ethanol Energy Policy Research Foundation, Inc st St, NW Washington, DC

48 Billion Gallons EISA 07 Renewable Fuels Standard Biomass based Diesel Any Advanced Cellulosic Advanced Corn Ethanol / Other EPACT 05 10% Ethanol Penetration (The Blend Wall) 0 Source: DOE, EIA Data and June 2009 STEO. Blend wall assumes projected 2009 gasoline consumption found in the June 2009 EIA STEO. Energy Policy Research Foundation, Inc st St, NW Washington, DC

49 1/1/2008 4/1/2008 7/1/ /1/2008 1/1/2009 4/1/2009 7/1/ /1/2009 1/1/2010 4/1/2010 7/1/ /1/2010 1/1/2011 4/1/2011 $ per gallon Corn and Oil Feedstock Cost (per gallon of product) Corn crush is practically 0 at the moment. Only DDG to offset costs, even then potentially negative. Ethanol Cost of Corn (Including $0.35/gallon DDG Recovery) (Corn/2.8) Gasoline Cost of Crude (Crude/42) BTU Adjusted Ethanol Cost of Corn (Including DDG Recovery) 0 Energy Policy Research Foundation, Inc st St, NW Washington, DC

50 Jan-2000 Aug-2000 Mar-2001 Oct-2001 May-2002 Dec-2002 Jul-2003 Feb-2004 Sep-2004 Apr-2005 Nov-2005 Jun-2006 Jan-2007 Aug-2007 Mar-2008 Oct-2008 May-2009 Dec-2009 thousand barrels per day Approaching the Blend Wall U.S. Product Supplied of Finished Motor Gasoline (Thousand Barrels per Day) Ethanol Component of Gasoline Supply Theoretical Blend Wall (10% of National Gasoline Pool) 0 Energy Policy Research Foundation, Inc st St, NW Washington, DC

51 $ per gallon The Blend Wall and the Value of Ethanol The cost of corn feedstock is more valuable than the ethanol it produces when ethanol is discounted to RBOB on a BTU basis Ethanol Futures Price Ethanol has a high value as an oxygenate, but. It must then compete with gasoline on a BTU basis RBOB Futures Price Corn Feedstock Costs Per Gallon of Ethanol (at $5/bushell, 2.8 gallons per bushell [USDA Estimate]) Ethanol Blend VALUE Relative to RBOB (On a BTU Basis) 0 % Ethanol Concentration Energy Policy Research Foundation, Inc st St, NW Washington, DC

52 Million Vehicles FFVs and E85 Usage % 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Light Duty E85 FFV's In Use % of FFV's Actually Operating on E85 Source: EIA Data, DOE Data, EPRINC Calculations Energy Policy Research Foundation, Inc st St, NW Washington, DC

53 What Were They Thinking? 15 billion gallon mandate easily achievable with growing gasoline demand -- blend wall would not exceed 10% (2007 forecast environment). Gasoline prices would rise making ethanol cost competitive an antidote to high gasoline prices. Mandates were needed to overcome resistance from the petroleum industry. Rural renaissance. And besides it would deliver substantial benefits in lower emissions of GHGs. Energy Policy Research Foundation, Inc st St, NW Washington, DC

54 What did they miss? Gasoline demand did not grow, prices fell RFS mandates were volumetric driving fuel sector to the blend wall in next year or two. Ethanol not cost competitive under most scenarios. Ethanol substitutes for gasoline -- not crude oil -- leading to refinery output inefficiencies Food versus fuel problem. Carbon benefits under attack from ILUC. Energy Policy Research Foundation, Inc st St, NW Washington, DC

55 OK That s Not So Great But What About Electric Cars, Cash for Clunkers, and LCFS Energy Policy Research Foundation, Inc st St, NW Washington, DC

56 Cost and Effectiveness of Cash for Guzzlers Program Baseline=18 mpg, 12,000 VMT Voucher Value Program Cost for One Million Vehicles Gallons Saved Per Vehicle, Annually Total Fuel Savings for One Million Vehicles Over Eight Years, Gallons Cost Per Gallon Saved Over Eight Years Fleet Fuel Consumption Reduction Compared to 2008 Rate New Car, +4 MPG $3,500 $3,500,000,0 00 New Car, +10 MPG $4,500 $4,500,000,0 00 New Light Truck/SUV, $3,500 $3,500,000,0 +2 MPG 00 New Light Truck/SUV, +5 MPG $4,500 $4,500,000, ,600,000 $ % ,904,800,000 $ % ,600,000 $ % ,159,200,000 $ % Sources: EIA Data, EPA Data, EPRINC Calculations Energy Policy Research Foundation, Inc st St, NW Washington, DC

57 Net Effect of National LCFS Note: US LCFS limits leads to significant reductions in emissions attributed to the LCFS, but these reductions are largely offset by increased emissions in the rest of the world: Canadian oil sands go elsewhere & most increased biofuel use is at the expense of biofuel use elsewhere. Source: Unpublished research from US DOE. 57

58 Start Dates for Low Sulfur Regs Energy Policy Research Foundation, Inc st St, NW Washington, DC

59 Energy Policy Research Foundation, Inc st St, NW Washington, DC

60 High Oil Prices and Gov t Incentives Required for Alternative Transportation Fuel Technologies to Compete Source: CERA Data Energy Policy Research Foundation, Inc st St, NW Washington, DC

61 EPRINC Policy/Price Outlook Transportation Fuels: Shift from Atlantic Basin to East of Suez, Product mix getting lighter & tighter, 1.5% growth in fuels demand. Gasoline/Diesel Differencial to Converge as Alternative Fuel Subsidies are withdrawn and Refining Capacity Additions Come on Line GTL is wild card and could accelerate arrival of backstop price Government policy presents unique risks to pricing of transportation fuels, alternative and exotic fuels subject to catastrophic risk failure. Crude Outlook: No reserve limitations, major risk factors are all above the ground. Iraqi stability, Canada Oil Sands Growth, Moderate Stability in MENA, Gradual Market Pricing in Asia/Middle East Long Term Average Crude Price: $60-$80/bbl Turmoil Scenario: $100-$120/bbl Energy Policy Research Foundation, Inc st St, NW Washington, DC

62 Policy Implications Energy Security more closely linked to volatility instead of dependence. Oil Shortages and Peak Oil backstop price for petroleum likely to be well below $100/bbl. Iraq, and abundance of natural gas likely to drive down and/or limit large increase in backstop price. Expensive and state directed strategies (e.g., US commitment to electric cars, ethanol, bio-diesel) pose severe and difficult to manage financial risks----potential for paradigm shifts and failure modes remain high. America s largest renewable fuels program (ethanol) is broken, expensive, and facing growing fiscal fatigue. Biodiesel is not fare behinfd Market developments (in the real world) will force a much slower and lower cost transition to the fuels of the future. Proceed with Caution!! Energy Policy Research Foundation, Inc st St, NW Washington, DC