RUssia oil & Gas Report

Transcription

1 Q RUssia oil & Gas Report INCLUDES BMI'S FORECASTS ISSN Published by Business Monitor International Ltd.

2 RUSSIA OIL & GAS REPORT Q INCLUDES 10-YEAR FORECASTS TO 2020 Part of BMI s Industry Survey & Forecasts Series Published by: Business Monitor International Copy deadline: March 2011 Business Monitor International Mermaid House, 2 Puddle Dock, London, EC4V 3DS, UK Tel: +44 (0) Fax: +44 (0) subs@businessmonitor.com Web: Business Monitor International. All rights reserved. All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher. DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.

3 Business Monitor International Ltd Page 2

4 CONTENTS Executive Summary... 6 SWOT Analysis... 8 Russia Political SWOT... 8 Russia Economic SWOT... 8 Russia Business Environment SWOT... 9 Russia Energy Market Overview Global Oil Market Outlook Balancing Act Oil Price Forecasts Table: Oil Price Forecasts Short-Term Demand Outlook Table: Global Oil Consumption (000b/d) Short-Term Supply Outlook Table: Global Oil Production (000b/d) Longer-Term Supply And Demand Regional Energy Market Overview Oil Supply And Demand Table: Central/Eastern Europe Oil Consumption (000b/d) Table: Central/Eastern Europe Oil Production (000b/d) Oil: Downstream Table: Central/Eastern Europe Oil Refining Capacity (000b/d) Gas Supply And Demand Table: Central/Eastern Europe Gas Consumption (bcm) Table: Central/Eastern Europe Gas Production (bcm) Table: Central/Eastern Europe LNG Exports/(Imports) (bcm) Business Environment Ratings Central/Eastern Europe Region Composite Scores Table: Regional Composite Business Environment Rating Upstream Scores Table: Regional Upstream Business Environment Rating Russia Upstream Rating Overview Russia Upstream Rating Rewards Russia Upstream Rating Risks Downstream Scores Table: Regional Downstream Business Environment Rating Russia Downstream Rating Overview Russia Downstream Rating Rewards Russia Downstream Rating Risks Business Environment Legal Framework Infrastructure Business Monitor International Ltd Page 3

5 Labour Force Foreign Investment Policy Tax Regime Security Risk Industry Forecast Scenario Oil And Gas Reserves Oil Supply And Demand Gas Supply And Demand LNG Refining And Oil Products Trade Revenues/Import Costs Russia Oil And Gas Historical Data And Forecasts Other Energy Russia Other Energy Historical Data And Forecasts Key Risks To BMI s Forecast Scenario Long-Term Oil And Gas Outlook Oil And Gas Infrastructure Oil Refineries Table: Refineries In Russia Oil Terminals/Ports Oil Pipelines LNG Terminals Gas Pipelines Macroeconomic Outlook Russia Economic Activity Competitive Landscape Executive Summary Table: Key Domestic And Foreign Companies In The Russian Oil And Gas Sector Overview/State Role Licensing And Regulation Government Policy International Energy Relations Gas Transit And Marketing Oil Transit Table: Key Upstream Players Key Downstream Players Company Monitor Gazprom Gazprom Neft Rosneft Lukoil TNK-BP Tatneft Total Imperial Energy Novatek Russneft Business Monitor International Ltd Page 4

6 Surgutneftegaz Summary Sistema Summary Bashneft Summary Itera Summary Royal Dutch Shell Summary ExxonMobil Summary Transneft Summary Sakhalin Energy Summary Wintershall Summary BP Summary Lundin Petroleum Summary Irkutsk Oil Company Summary Aladdin Oil & Gas Summary PetroNeft Summary Alliance Oil Summary Others Summary Former IOC Partners Summary Oil And Gas Outlook: Long-Term Forecasts Regional Oil Demand Table: CEE Oil Consumption (000b/d) Regional Oil Supply Table: CEE Oil Production (000b/d) Regional Refining Capacity Table: CEE Oil Refining Capacity (000b/d) Regional Gas Demand Table: CEE Gas Consumption (bcm) Regional Gas Supply Table: CEE Gas Production (bcm) Russia Country Overview Methodology And Risks To Forecasts Glossary Of Terms Oil And Gas Ratings: Revised Methodology Introduction Ratings Overview Table: BMI Oil And Gas Business Environment Ratings: Structure Indicators Table: BMI Oil And Gas Business Environment Upstream Ratings: Methodology Table: BMI Oil And Gas Business Environment Downstream Ratings: Methodology BMI Methodology How We Generate Our Industry Forecasts Energy Industry Cross Checks Sources Business Monitor International Ltd Page 5

7 Executive Summary This latest Russia Oil & Gas Report from BMI forecasts that the country will account for 47.95% of Central and Eastern European (CEE) regional oil demand by 2015, while providing 70.33% of supply. CEE regional oil use of 5.42mn barrels per day (b/d) in 2001 rose to an estimated 6.09mn b/d in It should increase to around 6.93mn b/d by Regional oil production was 8.89mn b/d in 2001 and in 2010 averaged an estimated 13.78mn b/d. It is set to rise to 15.08mn b/d by Oil exports are growing steadily, because demand growth is lagging the pace of supply expansion. In 2001, the region was exporting an average of 3.47mn b/d. This total rose to an estimated 7.69mn b/d in 2010 and is forecast to reach 8.15mn b/d by Azerbaijan and Kazakhstan have the greatest production growth potential, although Russia will remain the most important exporter. In terms of natural gas, the region in 2010 consumed an estimated 636.3bn cubic metres (bcm), with demand of 736.3bcm targeted for 2015, representing 15.7% growth. Production of an estimated 787.9bcm in 2010 should reach 954.2bcm in 2015, which implies net exports rising from an estimated 151.6bcm in 2010 to 217.9bcm by the end of the period. Russia s share of gas consumption in 2010 was an estimated 62.16%, while its share of production is put at 71.07%. By 2015, its share of demand is forecast to be 57.90%, with the country accounting for 68.12% of supply. The 2010 full-year outturn was US$77.45/bbl for OPEC crude, which delivered an average for North Sea Brent of US$80.34/bbl and for West Texas Intermediate (WTI) of US$79.61/bbl. The BMI price target of US$77 was reached thanks to the early onset of particularly cold weather, which drove up demand for and the price of heating oil during the closing weeks of the year. We set our 2011 supply, demand and price forecasts in early January, targeting global oil demand growth of 1.53% and supply growth of 1.91%. With OECD inventories at the top of their five-year average range, we set a price forecast of US$80/bbl average for the OPEC basket in The unprecedented wave of popular uprisings in the Middle East and North Africa (MENA) that followed the removal of Tunisian President Ben Ali on January 14 has obviously fundamentally altered our outlook, particularly since the unrest spread to Libya in mid-february. Taking into account the risk premium that has been added to crude prices in response to actual and perceived threats to supply, we have now raised our benchmark OPEC basket price forecast from US$80 to US$90/bbl for 2011 and from US$85 to US$95/bbl for Based on our expectations for differentials, this gives a forecast for Brent at US$94/bbl in 2011 and US$99/bbl in We have kept our long-term price assumption of US$90/bbl (OPEC basket) in place for the time being while we wait to see what path events in the MENA region take. We have also retained our existing supply and demand forecasts until the scheduled quarterly revision at the start of April. Business Monitor International Ltd Page 6

8 Russian real GDP is assumed by BMI to have risen by 4.0% in We are forecasting average annual growth of 4.4% in State-controlled Gazprom has a virtual monopoly over gas transportation and exports. With it being the main provider, we see gas output rising from an estimated 560bcm in 2010 to 650bcm by Russian domestic companies control most of Russia s oil production. Rosneft is the main state-controlled oil producer. The companies delivered 2010 output of crude oil and condensates averaging an estimated 10.28mn b/d. Oil production seems likely to rise only slowly over the next few years. Our 2015 production forecast is for 10.60mn b/d. Between 2010 and 2020, we are forecasting an increase in Russian oil production of 0.5%, with output rising slowly from an estimated 10.28mn b/d in 2010 to a peak of 11.00mn b/d in 2016/17, before easing to 10.84mn b/d by Oil consumption during the period is forecast to rise by 28.3%, permitting exports peaking at 7.59mn b/d in Gas consumption is expected to be up from an estimated 396bcm to 471bcm by 2020, providing export potential peaking at 224bcm in Details of BMI s 10-year forecasts can be found in the appendix to this report. Russia now holds fifth place, below Poland and Turkey, in BMI s composite Business Environment (BE) ratings table, which combines upstream and downstream scores. It holds fifth place, below Turkey, in BMI s updated upstream Business Environment ratings, aided by unrivalled hydrocarbons resources. Its oil and gas reserves account for much of the upstream score, but licensing, privatisation and country risk factors are less impressive. Medium-term scope exists for Russia to overtake Turkey and Poland above it, but it is likely to remain behind Azerbaijan and Kazakhstan. Russia is at the top of the league table in BMI s updated downstream Business Environment ratings, but shares first place with Turkey and is just one point above Poland. There are a few particularly high scores, and there is some risk from Poland over the longer term. There are excellent scores for refining capacity, oil and gas demand, population and nominal GDP. Business Monitor International Ltd Page 7

9 SWOT Analysis Russia Political SWOT Strengths The Russian government maintains a strong parliamentary majority and overwhelming public support. Weaknesses A lack of transparency in decision-making, including high levels of behind-thescenes activity by various power groups, makes for a large element of unpredictability in domestic politics over the long run. The high degree of political authority in the executive poses a risk to further institutional development in the legislative and judicial sectors. Opportunities President Dmitry Medvedev has expressed a more compromising tone on foreign policy matters and has suggested a new emphasis on the development of civil society. Tight energy markets increase Russia's foreign policy options, especially as regards consumer states. Threats Russia's moves to increase its regional dominance in the energy sector risk a further deterioration in relations with the Western-leaning countries of the 'Near Abroad'. Russia Economic SWOT Strengths Russia maintains enviable external account dynamics, with a robust current account surplus, limited foreign debt and high reserve holdings. This will continue to provide significant stability as the economy recovers from the financial crisis. Russia's large resource base will provide a strong foundation for foreign investments and export growth over the long term. Weaknesses The economy's dependence on the oil sector makes it particularly vulnerable to a sustained decline in energy prices. The deterioration of Soviet-era infrastructure is a constraint to private sector activity, especially outside major cities. Opportunities A revitalisation of the structural reform agenda, including support for small and medium-sized businesses, restructuring of the banking sector, administrative reform to tackle red tape and corruption, and a revamp of the 'natural monopolies', would go a long way towards developing the non-oil economy and improving long-term growth prospects. A US$1trn public-private investment plan over the long term will substantially modernise Russia's transport, communications, electricity and utilities infrastructure. Threats The Russian economy is in a state of transition, with large current account and fiscal surpluses to be eroded significantly. With this will come new challenges to macroeconomic stability. The global financial crisis has created significant volatility in oil prices, which significantly elevates macroeconomic uncertainty. Business Monitor International Ltd Page 8

10 Russia Business Environment SWOT Strengths The post-1998-crisis economic rebound, combined with significant reductions in personal and corporate income tax rates, has made Russia a much more attractive place to do business. In 2010, estimated oil production will have been around 11.5% of the world s total at 10.36mn b/d, and Russia meets 22% of the world s gas demand. The June 2010 BP Statistical Review of World Energy attributes 74.2bn bbl of proven oil reserves to Russia, which represents almost 7% of the world s oil. Gas reserves of 44,376bcm (BP data) account for more than 30% of the world total. Weaknesses The operating environment remains hazardous on a number of fronts, with many foreign investors put off by poor legal safeguards, high levels of bureaucracy and corruption, and the Kremlin's apparently politically motivated campaign against foreign oil firms. In a March 2010 Moscow Times article, deputy energy minister Sergei Donskoy claimed that the Natural Resources and Environment Ministry believes that Gazprom and Rosneft have insufficient resources to develop Russia's continental shelf on their own. Opportunities Despite Russia's poor investment image in the West, the benefits of its immense natural resources wealth and large and rapidly growing domestic market are significant incentives for potential foreign direct investors. The government has made fighting corruption a key priority, and we expect sweeping legislative changes to significantly enhance the capacity of corruption fighting institutions in the medium term. Russia may relax rules limiting offshore exploration and production in the country to Rosneft and Gazprom, according to a report by the Moscow Times newspaper. According to the report, the proposal could lead to international oil companies becoming involved. The Russian government has stated that it intends to expand the role of nuclear and hydro-power generation in the future to allow for greater export of fossil fuels. Threats State influence over business is on the rise. Most recently, foreign operators in the energy sector have come under pressure to allow state-owned firms greater involvement in their projects. Nevertheless, the worst-case scenario of a reversal of the 1990s privatisations appears unlikely. Given very low confidence in the domestic banking industry, the central bank's efforts to restructure the sector could destabilise it further. Business Monitor International Ltd Page 9

11 Russia Energy Market Overview The June 2010 BP Statistical Review of World Energy attributes 74.2bn bbl of proven oil reserves to Russia, which represents almost 7% of the world s oil. However, the end-2009 Oil & Gas Journal (OGJ) annual survey suggests just 60bn bbl. Large parts of Russia are underexplored, and there appears to be significant reserves potential in its share of the Caspian Sea. Gas reserves of 44,376bcm (BP data) account for more than 30% of the world total. In 2010, oil production was around 11.5% of the world s total at an estimated 10.28mn b/d, and Russia meets 22% of the world s gas demand. Russian Prime Minister Vladimir Putin has said that the country will require investment of more than RUB8.6trn (US$280bn) to keep oil production at the current level until Energy minister Sergei Shmatko said that without tax reform, the country will see a fall of 20% in production to 8mn b/d. With a total processing capacity of 5.62mn b/d in 2009, according to the BP Statistical Review, Russia is the world s third largest refiner after the US and China. Although the vast majority of this capacity dates from Soviet times, the country s largest players such as Rosneft have invested in upgrading their facilities to meet stringent fuels quality standards, allowing many companies to export refined products, particularly diesel, to the EU. Russia has also followed the EU s lead in mandating cleaner fuels, introducing Euro-4 standards at the start of 2010 and preparing for the introduction of Euro-5 standards at the start of Gas is the dominant fuel in Russia, accounting for an estimated 54.7% of 2010 primary energy demand (PED). It is followed by oil at 20.3%, coal at 13.2%, nuclear at 5.7% and hydro with a 6.3% share of PED. Regional energy demand is forecast to reach 1,518mn toe by 2015, representing 17.00% growth over the period Russia s estimated 2010 market share of 50.20% is set to fall to 49.09% by State gas monopoly Gazprom provides subsidised gas to the power industry through a deal with former monopoly supplier Unified Energy System (UES), meaning that price increases as part of a deregulation programme could make gas too costly for much of the Russian population. Russian Prime Minister Vladimir Putin has confirmed that 2011 tax breaks for developers of new oil and gas deposits will remain unchanged. The statement came as Russia was considering several fiscal options to reduce budget shortfalls while maintaining spending plans. One such option is a planned rise in the country's mineral extraction tax (MET). Under legislation passed in 2008, offshore fields in Russia, with the exception of those in the Caspian Sea, can only be developed by companies in which the government owns a stake of 50% or greater. In addition, companies applying to work on the fields must have a five-year record of working on such Business Monitor International Ltd Page 10

12 projects, effectively limiting participation to Gazprom and Rosneft. It is arguable that this has damaged Russian investment in offshore areas. In 2008, the two companies invested only RUR56.4bn (US$1.9bn at current rates) in E&P offshore Russia, a rate that energy ministry officials have claimed would mean ministry targets for offshore areas would take 165 years to fulfil. Russia is the major gas exporter to Europe but the reliability of its supplies in the past few years been causing concern, thanks to pricing disputes with transit states such as Ukraine, frequent pipeline incidents and the capriciousness of the Russian weather. The Kremlin sees Asia the future source of export growth, but gas pipeline projects to the east of the Ural Mountains remain in the planning stages. The country has an extensive gas export pipeline network bound for the Western markets. Some of the infrastructure, however, has fallen into disrepair, which is most acute in the poorer Former Soviet Union (FSU) countries that now serve as transit states on the way to the EU. In order to diversify its export routes, gain greater security of transport and maintain a closer grip on ex-communist states, Russia has been looking to construct new pipelines bypassing Eastern Europe. Poor management during the Soviet era and a sharp decline in demand during the early-1990s undermined the coal industry. After a slight decline in 2002, production rebounded in , with 2009 output of 298mn tonnes. According to the government's energy strategy, Russia should produce more than 400mn tonnes by Russia's adherence to the stipulations of the Kyoto Protocol may lower utility sector demand for coal. Russia's power sector includes more than 440 thermal and hydro-power plants (approximately 80 of the former are coal-fired), plus 31 nuclear reactors. A few generators in the far-eastern part of the country are not connected to the power grid. The system has a total electric generation capacity of almost 230 gigawatts (GW), with 2010 generation at an estimated 1,018TWh. The collapse of the Soviet Union initially precipitated a dramatic decline in energy generation, (down 18% between 1992 and 1999), followed by a gradual recovery (up 18% between 2000 and 2009). The Russian government has stated that it intends to expand the role of nuclear and hydro-power generation in the future to allow for greater export of fossil fuels. Russia has an installed nuclear capacity of more than 21GW, distributed across 31 operational nuclear reactors at 10 locations, all west of the Ural Mountains. However, Russia's nuclear power facilities are ageing. Half of the country's nuclear reactors use the RBMK design employed in Ukraine's ill-fated Chernobyl plant. The working life of a reactor is considered to be 30 years and nine of Russia's plants are between 26 and 30 years old, with a further six approaching 25 years of age. Business Monitor International Ltd Page 11

13 The Russian Ministry of Atomic Energy predicts that by 2020 nuclear generation could reach 300TWh, more than double the 2003 level. However, many plants are due for decommissioning, and meeting this target will require between US$5bn and US$10bn per year of investment over the next decade. Russian state-owned nuclear power companies in March 2010 announced investment plans for 2010, and have earmarked billions of roubles for the sector. Speaking at a meeting of the country's power sector, Prime Minister Putin announced that the federal government will allocate RUB53bn (US$1.77bn) for Energoatom's (formerly Rosenergoatom) 2010 capital investment programme. The state-owned nuclear power operator has a total investment programme of RUB163.3bn (US$5.45bn) for 2010, of which RUB102bn (US$3.4bn) will be allocated for the construction of new stations. According to Russia's nuclear power regulator Rosatom, five existing nuclear power plants will be modernised and have their capacity expanded, reported Czech Business Weekly. Business Monitor International Ltd Page 12

14 Global Oil Market Outlook The oil market activity of late 2010 was entirely as we predicted, with the result that the full-year price outturn of around US$77.40 per barrel (bbl) for the OPEC basket was barely above the BMI assumption. Dramatic winter scenes certainly helped provide an end-year shift in sentiment, even if actual crude consumption levels, as 12 months earlier, end up being little changed by the heating oil effect. BMI has long held the view that we would see further appreciation in 2011 thanks to demand growth, moderate supply expansion and some room for inventories to ease. As of mid-january 2011, BMI assumptions were that global growth in GDP would exceed 3% in the current year and through to 2014, with a likely 3.2% rise in 2011 accelerating to a 3.7% rate of growth in 2012 and While this has no direct correlation with oil prices and, in fact, little real relevance to oil consumption trends, it supported our view at the start of the year of a steady increase in crude prices in 2011, reflecting an improved supply/demand balance, greater OPEC influence and falling inventories. The unprecedented wave of popular uprisings in the Middle East and North Africa (MENA) that followed the removal of Tunisian President Ben Ali on January 14 has obviously fundamentally altered our outlook, particularly since the unrest spread to Libya in mid-february. Taking into account the risk premium that has been added to crude prices in response to actual and perceived additional threats to supply, we have now raised our benchmark OPEC basket price forecast from US$80 to US$90/bbl for 2011 and from US$85 to US$95/bbl for Based on our expectations for differentials, this gives a forecast for Brent at US$94/bbl in 2011 and US$99/bbl in We have kept our long-term price assumption of US$90/bbl (OPEC basket) in place for the time being while we wait to see what path events in the MENA region take. We have also retained our existing supply and demand forecasts until the scheduled quarterly revision at the start of April. Balancing Act Oil demand in 2011 will almost certainly increase from 2010 levels. Growth in absolute volumes and in percentage terms is likely to be appreciably lower but should still be significant. This growth is dependent on prices and underlying economic activity. Countering this positive factor is a list of negatives. First is the fragility of the energy-intensive developed economies where, as in 2008, substantial and sustained fuel cost inflation can cause great harm in terms of oil consumption and economic growth. Much of 2011 s projected oil demand growth can be attributed to the non-oecd states, which may prove more robust. Even here, however, removal or reduction of price subsidies could lead to demand disappointment in a high-price environment. Business Monitor International Ltd Page 13

15 Inventories of crude oil and refined products are still healthy. During 2010, in spite of much higher demand, there was little improvement in the global stock position. In spite of the weather and tax-related end-year crude stock draw in the US, inventories at the end of 2010 were still some 75mn bbl above the five-year average, with refined product stocks almost 50mn bbl in excess of the seasonal norm. Europe and Japan actually reported late-year stock builds, so the inventory overhang is substantial. This year needs a widening of the supply/demand gap in order to ensure a meaningful stock drawdown, which is the most necessary step towards sustainable oil price growth. Excluding Libya, supply is on the rise, with a useful increase in non-opec oil production forecast in This alone could offset much of the forecast demand growth and leave inventories close to current levels. In addition, OPEC members, long frustrated with inadequate quotas, had already begun to place more oil on the market prior to the outbreak of political unrest in MENA. The removal of Libyan crude volumes from the market prompted Saudi Arabia to boost volumes, with reports in March that Nigeria, Kuwait and the UAE were preparing to follow suit. There remain question marks over the likes of Iran and Iraq, but the overall picture is likely to be one of reduced quota compliance and increased volumes. So far, OPEC has decided against holding an emergency meeting prior to its scheduled summit in June. The more hawkish members of the producers club oppose raising quotas, arguing that the oil market remains well supplied despite the lost Libyan volumes, while also enjoying the surge in export revenues that higher prices provide. If the unrest in MENA spreads to other oil producing countries, however, and prices look likely to push beyond US$120/bbl, we expect a meeting to be called urgently and quotas to be raised. No OPEC member wants to see a repeat of the crude price collapse in H208, which crushed the cartel s revenues. A second half quota increase should not therefore be ruled out. While the extraordinary rise in prices in January and February has skewed the average price outlook for the year, in order for the oil price gains to be sustained, it is surely necessary for demand to rise more quickly than supply, thus reducing stocks and narrowing the safety margin. Too much oil price strength too early in the recovery will clearly weaken the demand trend, while encouraging suppliers. Bold speculators and charging bulls alone may not manage to create the conditions needed for crude to prosper in the long term. Oil Price Forecasts In terms of the OPEC basket of crudes, the average price in Q410 was about US$83.75/bbl, up from the US$73.76 recorded during the previous three months. This was an encouraging, if unsurprising outcome, given the intervention of Arctic weather and growing macroeconomic optimism. In Q409, the OPEC price averaged US$74.32/bbl, so the most recent quarter saw a year-on-year (y-o-y) gain of 12.7%. The 2010 full-year average works out at around US$77.40, compared with about US$60.90/bbl in 2009 (+27.1%). Business Monitor International Ltd Page 14

16 In terms of other marker prices, North Sea Brent averaged around US$86.50/bbl during Q4, with WTI achieving a surprisingly low US$ This is another indication that WTI is much more prone to speculative activity and market sentiment than the other crudes, reducing its usefulness as a barometer of underlying fundamentals. Urals (Mediterranean delivery) in Q4 averaged US$85.30/bbl and Dubai realised US$ These averages have been calculated using OPEC data and monthly prices from the International Energy Agency (IEA). The 2010 full-year outturn was US$77.45/bbl for OPEC crude, US$80.34/bbl for Brent and for US$79.61/bbl for WTI. Taking into account the risk premium that has been added to crude prices in response to the unrest in MENA, we have raised our benchmark OPEC basket price forecast from US$80 to US$90/bbl for 2011 and from US$85 to US$95/bbl for Based on our expectations for differentials, this gives a forecast for Brent at US$94/bbl in 2011 and US$99/bbl in We have kept our long-term price assumption of US$90/bbl (OPEC basket) in place for the time being while we wait to see what path events in the MENA region take. The WTI, Brent, Urals and Dubai assumptions are US$92.20, US$92.60, US$91.10 and US$90.70/bbl, respectively. We have also retained our existing supply and demand forecasts until the scheduled quarterly revision at the start of April. Table: Oil Price Forecasts e 2011f 2012f 2013f 2014f 2015f Brent (US$/bbl) Urals - Med (US$/bbl) WTI (US$/bbl) OPEC basket (US$/bbl) Dubai (US$/bbl) e/f = estimate/forecast. Source: BMI. Short-Term Demand Outlook The BMI oil supply and demand assumptions for 2011 and beyond have once again been revised for all 72 countries forming part of our detailed coverage, reflecting the changing macroeconomic outlook and the impact of environmental initiatives. Investment in exploration, development and new production has continued to rise as a result of relatively stable crude prices, but deepwater activity has been set back by events in the Gulf of Mexico (GoM). Costs associated with oil field development and exploration/appraisal drilling are rising again with commodity and labour prices. Deepwater programmes Business Monitor International Ltd Page 15

17 remain particularly vulnerable thanks to equipment shortages, lack of personnel and the post-macondo regulatory environment. We have once again made some changes to forecast oil production levels, in line with OPEC output (prior to the MENA unrest) and known project delays, with no clear evidence of large-scale spending changes by international oil companies (IOCs) or national oil companies (NOCs). Even in the US, the backlash from BP s Macondo disaster has led to only minor revisions to the production outlook. Other deepwaterfocused regions appear to be re-examining procedures and legislation, but continuing with most exploration and development programmes. Table: Global Oil Consumption (000b/d) e 2011f 2012f 2013f 2014f 2015f Africa 3,762 3,810 3,877 3,959 4,062 4,197 4,333 4,479 Middle East 6,864 7,146 7,395 7,698 7,973 8,230 8,442 8,699 NW Europe 13,545 12,964 13,021 13,051 13,097 13,204 13,197 13,177 N America 21,785 20,881 21,385 21,400 21,420 21,535 21,649 21,763 Asia/Pacific 25,994 26,343 27,547 28,077 28,756 29,511 30,259 31,012 Central/Eastern Europe 6,121 5,792 6,086 6,256 6,381 6,550 6,757 6,929 Latin America 7,724 7,631 7,875 8,070 8,238 8,401 8,555 8,693 Total 85,744 84,510 87,122 88,459 89,868 91,564 93,121 94,678 OECD 43,399 41,509 42,171 42,106 42,017 42,179 42,275 42,394 Non-OECD 42,345 43,001 44,950 46,353 47,851 49,385 50,847 52,284 Demand growth % (0.32) (1.44) OECD % (3.55) (4.35) 1.59 (0.16) (0.21) Non-OECD % e/f =estimate/forecast. Source: Historical data: BP Statistical Review of World Energy, June 2010/BMI. All forecasts: BMI. According to the BMI model, 2011 global oil consumption will increase by 1.53% from the 2010 level. The 2011 forecast represents slight lower OECD demand (-0.16%) and a revised non-oecd increase of 3.12%. The overall increase in demand is estimated at 1.34mn b/d. North America is now expected to see expansion of just 15,000b/d, with OECD European demand set to recover by 30,000b/d. Non-OECD gains are expected to be 1.92% in Asia, 2.48% in Latin America, 2.79% in Central/Eastern Europe, 4.10% in the Middle East and 2.41% in Africa. Business Monitor International Ltd Page 16

18 The International Energy Agency (IEA) is slightly more bullish in its January 2011 Oil Market Report (OMR), predicting a rise in 2011 oil demand of 1.6%, or 1.4mn b/d. The organisation s assumptions suggest a 0.4% decline in 2011 OECD consumption, plus a 3.8% increase in non-oecd oil usage. January 2011 Energy Information Administration (EIA) estimates suggest that world demand will rise from 86.6mn b/d in 2010 to 88.0mn b/d in 2011, with the 1.4mn b/d increase amounting to a gain of 1.6%. Non-OECD demand is predicted to increase by 3.6% (1.5mn b/d), while OECD demand is expected to slip by 10,000b/d to 45.9mn b/d. Consumption in the US is expected to increase by 160,000b/d (0.8%). With Canadian demand 1.3% higher and that of Europe 0.7% lower, it is in Japan that the US energy body sees the greatest risk of a decline forecasting a fall of 3.4%. OPEC s January 2011 report suggests a likely increase in 2011 global oil consumption of 1.2mn b/d, or 1.4%. OECD demand is forecast to rise by 180,000b/d (0.4%). Non-OECD demand is expected to average 41.2mn b/d, compared with 40.2mn b/d in 2010 (+2.5%). Short-Term Supply Outlook According to the revised BMI model, 2011 global oil production will rise by 1.91%, representing an OPEC increase of 2.87% and a non-opec gain of 1.19%. The overall increase in supply is estimated at 1.75mn b/d in We assume that the current OPEC production ceiling will be retained for the first half of 2011, but that actual output will exceed the Q410 level. There is scope for an increased OPEC production ceiling in H2, dependent on demand and prices, but quota adherence is expected to deteriorate even if the theoretical ceiling is retained. The EIA was in January 2011 forecasting a 170,000b/d y-o-y rise in non-opec oil output, representing a gain of just 0.3%. World oil production is predicted to be 87.73mn b/d in 2011, up from 86.40mn b/d (+1.33mn b/d) in The US organisation expects a 1.2mn b/d (3.3%) upturn in OPEC oil and natural gas liquids (NGLs) output. OPEC itself sees 2011 non-opec supply rising by 410,000b/d to 52.67mn b/d. In 2011, OPEC NGLs and non-conventional oils are expected to increase by 460,000b/d over the previous year to average 5.25mn b/d. The January 2011 OPEC monthly report argues that the call on OPEC crude is expected to average 29.4mn b/d, representing an upwards adjustment of 200,000b/d from its previous assessment and an increase of 400,000b/d from the previous year. The IEA s 2011 assumption for non-opec oil supply is 53.4mn b/d, representing a rise of 1.1%. This view is based on higher estimated Chinese oil production offset by marginally lower output in the OECD Pacific, the former Soviet Union, Latin America and global biofuels. OPEC production of natural gas liquids (NGLs) is expected to rise sharply from 5.29mn b/d to 5.84mn b/d. Increased biofuels supply Business Monitor International Ltd Page 17

19 (+9.9%) and a slight increase in processing gains implies a need for OPEC crude volumes of 29.9mn b/d in This is above OPEC s estimated Q410 output of 29.5mn b/d. Business Monitor International Ltd Page 18

20 Table: Global Oil Production (000b/d) e 2011f 2012f 2013f 2014f 2015f Africa 10,197 9,679 9,982 10,372 10,691 11,028 11,409 11,922 Middle East 26,229 24,406 24,901 25,221 25,553 25,966 26,576 27,240 NW Europe 4,912 4,657 4,438 4,288 4,040 3,833 3,693 3,503 N America 11,668 11,912 12,365 12,250 12,450 12,750 13,190 13,750 Asia/Pacific 8,689 8,568 8,827 9,090 9,095 9,174 9,029 8,847 Central/Eastern Europe 13,045 13,417 13,776 13,946 14,157 14,400 14,686 15,078 Latin America 9,857 9,749 10,028 10,288 10,442 10,783 11,220 11,662 OPEC NGL adjustment 4,600 4,660 5,260 5,870 5,970 6,109 6,301 6,553 Processing gains 2,084 2,290 2,200 2,230 2,275 2,320 2,366 2,414 Total 91,274 89,331 92,009 93,762 94,752 96,446 98, ,125 OPEC 35,568 33,076 33,924 34,439 35,027 35,845 36,971 38,445 OPEC inc NGLs 40,168 37,736 39,184 40,309 40,998 41,954 43,272 44,998 Non-OPEC 51,106 51,595 52,825 53,452 53,755 54,492 55,354 56,127 Supply growth % 1.55 (2.13) OPEC % 3.15 (6.05) Non-OPEC % e/f =estimate/forecast. Source: Historical data: BP Statistical Review of World Energy, June 2010/BMI. All forecasts: BMI. Longer-Term Supply And Demand The BMI model predicts average annual oil demand growth of 1.68% between 2011 and 2015, followed by 1.42% between 2015 and After the assumed 3.09% global demand recovery in 2010, we are assuming 1.53% growth in 2011, followed by 1.59% in 2012, 1.89% in 2013, 1.70% in 2014 and 1.67% in OECD oil demand growth is expected to remain relatively weak throughout the forecast period to 2020, reflecting market maturity, the ongoing effects of price-led demand destruction and the greater commitment to energy efficiency. Following the 1.59% rise in 2010 OECD oil consumption, we expect to see a decrease of 0.16% in On average, OECD demand is forecast to rise by 0.11% per annum in , then fall by 0.19% per annum in Business Monitor International Ltd Page 19

21 For the non-oecd region, the demand trend in is for 3.07% average annual market expansion, followed by 2.66% in Demand growth is forecast to ease from 4.53% in 2010 to 3.12% in BMI is forecasting global oil supply increasing by an average 1.91% annually between 2011 and 2015, with an average yearly gain of 1.53% predicted in We expect the trend to be at its weakest towards the end of the 10-year forecast period, with gains of just 0.75% and 0.62% predicted in 2019 and Non-OPEC oil production is expected to rise by an annual average of 1.22% in , then just 0.34% in OPEC volumes are forecast to increase by an annual average of 2.81% between 2011 and 2015, rising to 2.95% per annum in In 2012, the EIA is predicting world oil demand growth of 1.6mn b/d. Its current base case sees the world consuming 89.7mn b/d during the year, up around 1.9%. OECD consumption is expected to edge ahead, but the non-oecd countries are tipped to deliver 3.7% growth. Business Monitor International Ltd Page 20

22 Regional Energy Market Overview Although Russia will continue to dominate oil supply in the region, backed by huge and under-exploited reserves, the Caspian states have an important role to play, with Azerbaijan and Kazakhstan an increasingly significant factor. The growth rate in Russian oil supply has slowed appreciably since the beginning of the decade but the acceleration of Caspian expansion means that the region will make a growing contribution to world oil production. Russia s gas deposits not only dominate regional supply but are also the biggest single source for Western Europe. While consumer countries wish to diversify away from Russia, there are no other regional suppliers of note. LNG is not a major trade for the CEE region, although Russia began exporting gas in March 2009 from the Far Eastern Sakhalin projects into the Asia Pacific markets. Oil Supply And Demand Russian 2009/10 production surprised on the upside, with output fighting back after tax adjustments were introduced and modified. The country s supply had fallen in 2008, ending a strong growth trend that began in We see little risk of a downturn in 2011, but 2011/12 could emerge as the near-term peak in output. A decline below 10.4mn b/d is thought likely in 2013, before increased investment delivers extra volumes of Russian crude and supply rises towards 10.6mn b/d in 2015 and to 11mn b/d by 2016/2017. The other regional theme is the Caspian states and their ability to meet production and export targets. The ultimate long-term potential is in little doubt, but a mixture of technical, commercial and political factors looks set hold back the rate of supply expansion. In 2009/10, the previously expected strong growth in output evaporated in the wake of persistent technical and commercial problems. Azerbaijan has some near-term upside. Kazakhstan s near-term output growth potential is limited thanks to technical problems and the Kashagan field dispute, but longer-term prospects are good once Kashagan becomes a major contributor. CEE oil production averaged an estimated 13.78mn b/d in The region's output is expected to be 13.95mn b/d in 2011 and to reach 15.08mn b/d by In terms of demand, the estimated 2010 average of 6.09mn b/d is set to rise to 6.93mn b/d by This means that net exports from the region will climb steadily, from an estimated 7.69mn b/d in 2010 to 8.15mn b/d by Business Monitor International Ltd Page 21

23 Table: Central/Eastern Europe Oil Consumption (000b/d) Country e 2011f 2012f 2013f 2014f 2015f Azerbaijan Bulgaria Croatia Czech Republic Hungary Kazakhstan Poland Romania Russia 2,817 2,695 2,930 3,010 3,085 3,162 3,241 3,322 Slovakia Slovenia Turkey Turkmenistan Ukraine Uzbekistan BMI universe 5,874 5,641 5,934 6,104 6,228 6,396 6,602 6,774 other CEE Regional total 6,121 5,792 6,086 6,256 6,381 6,550 6,757 6,929 e/f = estimate/forecast. Historical data: BP Statistical Review of World Energy, June 2010/BMI. All forecasts: BMI. CEE regional oil use of 5.42mn barrels per day (b/d) in 2001 rose to an estimated 6.09mn b/d in It should increase to around 6.93mn b/d by Russia accounted for an estimated 48.15% of 2010 regional consumption, with its market share expected to be 47.95% by Business Monitor International Ltd Page 22

24 Table: Central/Eastern Europe Oil Production (000b/d) Country e 2011f 2012f 2013f 2014f 2015f Azerbaijan 914 1,033 1,060 1,100 1,215 1,385 1,395 1,425 Bulgaria Croatia Czech Republic Hungary Kazakhstan 1,554 1,682 1,765 1,820 1,850 1,900 2,050 2,300 Poland Romania Russia 9,888 10,032 10,275 10,350 10,400 10,395 10,499 10,604 Slovakia Turkey Turkmenistan Ukraine Uzbekistan Regional total 13,045 13,417 13,776 13,946 14,157 14,400 14,686 15,078 e/f = estimate/forecast. Historical data: BP Statistical Review of World Energy, June 2010/BMI. All forecasts: BMI. Regional oil production was 8.89mn b/d in 2001 and in 2010 averaged an estimated 13.78mn b/d. It is set to rise to 15.08mn b/d by Russia in 2010 contributed an estimated 74.59% to regional production, with a market share of 70.33% forecast for Oil exports are growing steadily, because demand growth is lagging the pace of supply expansion. In 2001, the region was exporting an average of 3.47mn b/d. This total rose to an estimated 7.69mn b/d in 2010 and is forecast to reach 8.15mn b/d by Azerbaijan and Kazakhstan have the greatest production growth potential, although Russia will remain the most important exporter. Business Monitor International Ltd Page 23

25 Oil: Downstream Table: Central/Eastern Europe Oil Refining Capacity (000b/d) Country e 2011f 2012f 2013f 2014f 2015f Azerbaijan Bulgaria Croatia Czech Republic Hungary Kazakhstan Poland Romania Russia 5,596 5,616 5,663 5,663 5,663 5,763 5,763 5,813 Slovakia Slovenia na na na na na na na na Turkey Turkmenistan Ukraine Uzbekistan Regional Total 10,036 10,118 10,329 10,329 10,414 10,552 10,752 10,832 e/f = estimate/forecast. na = not applicable. Historical data: BP Statistical Review of World Energy, June 2010/BMI. All forecasts: BMI. Refining capacity for the region was 10.02mn b/d in 2001, rising gradually to an estimated 10.33mn b/d in Capacity expansion will lag that in most other emerging regions, although Russia plans a processing boost and the likes of Poland and Kazakhstan should also build new or expand existing facilities. The region s total capacity is forecast to reach 10.83mn b/d by 2015 well ahead of oil demand, therefore implying substantial net exports of refined products. Russia s share of regional refining capacity in 2010 was an estimated 54.83%, and its market share is set to be 53.67% by Business Monitor International Ltd Page 24

26 Gas Supply And Demand Table: Central/Eastern Europe Gas Consumption (bcm) Country e 2011f 2012f 2013f 2014f 2015f Azerbaijan Bulgaria Croatia Czech Republic Hungary Kazakhstan Poland Romania Russia Slovakia Slovenia Turkey Turkmenistan Ukraine Uzbekistan Regional Total e/f = estimate/forecast. Historical data: BP Statistical Review of World Energy, June 2010/BMI. All forecasts: BMI. Business Monitor International Ltd Page 25

27 Table: Central/Eastern Europe Gas Production (bcm) Country e 2011f 2012f 2013f 2014f 2015f Azerbaijan Bulgaria Croatia Czech Republic Hungary Kazakhstan Poland Romania Russia Slovakia na na na na na na na na Slovenia Turkey Turkmenistan Ukraine Uzbekistan Regional total e/f = estimate/forecast. na = not applicable. Historical data: BP Statistical Review of World Energy, June 2010/BMI. All forecasts: BMI. In terms of natural gas, the region in 2010 consumed an estimated 636.3bcm, with demand of 736.3bcm targeted for 2015, representing 15.7% growth. Production of an estimated 787.9bcm in 2010 should reach 954.2bcm in 2015, which implies net exports rising from an estimated 151.6bcm in 2010 to 217.9bcm by the end of the period. Russia s share of gas consumption in 2010 was an estimated 62.16%, while its share of production is put at 71.07%. By 2015, its share of demand is forecast to be 57.90%, with the country accounting for 68.12% of supply. Business Monitor International Ltd Page 26

28 Liquefied Natural Gas Table: Central/Eastern Europe LNG Exports/(Imports) (bcm) Country e 2011f 2012f 2013f 2014f 2015f Russia na Croatia na na na na na na na na Turkey (5.3) (5.7) (6.5) (6.5) (6.5) (12.0) (12.0) (12.0) Poland na na na na na na (2.0) (4.0) Regional total (5.3) e/f = estimate/forecast. na = not applicable. Historical data: BP Statistical Review of World Energy, June 2010/BMI. All forecasts: BMI. Land boundaries mean pipeline transportation of gas is the favoured option, particularly from Russia through the CEE region into Western Europe. However, Russia became an LNG exporter in 2009 as Gazprom/Shell s Sakhalin-II project entered production. Also, Poland is planning medium- to long-term LNG imports as a means of diversifying supply away from Russia, while proposals are being discussed for a Croatian LNG terminal on the Adriatic coast, with imports possible by Business Monitor International Ltd Page 27