Oil Value Chain & Markets Global Oil Markets
World Oil Reserves WORLD OPEC Middle East Former Soviet Union Africa End 2006 End 2000 End 1990 End 1980 North America USA South & Central America Asia Pacific 0 100 200 300 400 500 600 700 800 900 1,00 0 Billions of Barrels 1,10 0 1,20 0 1,30 0 Proved reserves with current technology and prices. Source: BP Statistical Review of World Energy 2007. OPEC includes Iran, Iraq, Kuwait, Qatar, Saudi Arabia, UAE, Algeria, Libya, Nigeria, Indonesia, Venezuela, and Angola since 2006. Global Energy Markets Trade Programme - 2 -
Oil Resources Russia USA Iran Iraq Kuwait UAE Nigeria Brazil Mexico Libya China Norway Algeria Great Britian Qatar Angola Australia India 3000 2500 2000 1500 1000 500 0 Global Energy Markets Trade Programme - 3 - Canada Venezuela Saudi Arabia Billion Barrels <In Place>
Global Proven Reserves Total 1.2 Trillion Barrels Exxon/Mobil 1.0% BP 0.9% Russia NOCs 6.8% Asia NOCs 2.1% Africa NOCs 6.6% Europe NOCs 1.0% Chevron 0.9% ConocoPhillips 0.6% Shell 0.5% Investor owned oil reserves are roughly 4% of global total Latin America NOCs 9.8% Middle East NOCs 69.6% Source: BP Statistical Survey of World Energy Global Energy Markets Source: Trade BP Statistical Programme Survey, 2006-4 -
World Oil Production Thousand b/ 90000 80000 Non-OPEC OPEC 70000 60000 50000 40000 30000 20000 10000 0 65 68 71 74 77 80 83 86 89 92 95 98 01 04 Source: BP Statistical Review of World Energy 2007. Global Energy Markets Trade Programme - 5 -
Major oil trade movements Source: BP Statistical Review of World Energy 2007 Global Energy Markets Trade Programme - 6 -
Global Oil Trade 2000 2030 EXPANDING FLOW TRENDS Source: NPC 2007 7 Global Energy Markets Trade Programme - 7 -
Supply Vulnerability Zones Bosporus Suez Canal / Sumed Panama Canal Red Sea Strait of Hormuz Strait of Malacca Source: NPC 2007 Global Energy Markets Trade Programme - 8 -
Derivation of Basis Risk Production Transportation Distribution End Use Basis Differential between cash/spot and nearest futures price as a result of time, product forms, quality, location Basis risk : Uncertainty as to whether differential will widen or narrow Global Energy Markets Trade Programme - 9 -
Balancing the Market Mean reversion is a reality if marketclearing participants exist DEMAND SUPPLY LOW Prices HIGH Global Energy Markets Trade Programme - 10 -
Mean Reversion: Oil Price Example 91:03-06:04 86:01-06:04 6 10 14 18 22 26 30 34 38 42 46 Price 80 70 60 50 40 30 20 10 0 Frequenc Global Energy Markets Trade Programme - 11 -
Price Volatility and Risk Trade Offs with Competition: Open Access Example Commodity price risk flows E&P Pipelines LDCs End Users Power Capacity price risk flows Risk accepting entities Global Energy Markets Trade Programme - 12 -
Mechanisms to Manage Price Risk Trading in futures contracts Long-term contracts Fixed-price contracts Storage for physicals hedging Ability to use alternate fuels; efficiency; conservation Allow residential customers to choose budget payment plans; energy service contracts for commercial and industrial customers Develop mechanisms for capacity risk Global Energy Markets Trade Programme - 13 -
Global Oil Market Illustration Physical Market Specific Market Term Market Spot Deals Forward Deals Tenders Bilateral Tenders Bilateral Futures Swaps & Other OTC Formal Options Source: Oil in Asia by Paul Horsnell, 1997, Oxford Institute for Energy Studies Global Energy Markets Trade Programme - 14 -
Source: ESAI Global Energy Markets Trade Programme - 15 -
Crude Oil Basis Differentials Global Energy Markets Trade Programme - 16 -
Oil and Gas Prices $18 $16 $14 U.S. Gulf Coast No 2 Diesel Low Sulfur Spot Price FOB ($/MMBtu) U.S. Gulf Coast No. 2 Heating Oil Spot Price FOB ($/MMBtu) U.S. Gulf Coast Residual Fuel Oil 1.0 % Sulfur LP Spot Price CIF ($/MMBtu) Henry Hub Monthly Average Spot Price ($/MMBtu) 25 20 $/MMBtu $12 $10 $8 $6 Actual Ratio, Crude Oil:Gas Prices 15 10 Oil:Natural Gas Price Ratio $4 5 $2 Rough 6:1 heat value ratio $0 0 Feb-89 Feb-90 Feb-91 Feb-92 Feb-93 Feb-94 Feb-95 Feb-96 Feb-97 Feb-98 Feb-99 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Sources: U.S. EIA; NYMEX Global Energy Markets Trade Programme - 17 -
Source: IEA OMR Oct 07 Global Energy Markets Trade Programme - 18 -
Physical and Financial Oil Markets $4,000 $3,500 $Billion $3,000 $2,500 $2,000 $1,500 $1,000 Total physical crude Total futures WTI crude Low-Range Notional Total Trade Value High-Range Notional Total Trade Value $500 $- Source: ESAI 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Global Energy Markets Trade Programme Source: -ESAI 19 -
Oil & Gas Investment Hinges on Price Expectations U.S. domestic first purchase price (real $) $60 $50 $40 $30 $20 $10 What kind of business are we in??? With OPEC Without OPEC Cheap Oil Oil Crisis $0 50 Source: 53 56U.S. 59EIA. 62 65 68 71 74 77 80 83 86 89 92 95 98 01 Global Energy Markets Trade Programme - 20 -
Long-term oil price trends Source: BP Statistical Review of World Energy 2005 Global Energy Markets Trade Programme - 21 -
70 65 60 55 50 45 40 35 30 25 20 15 10 But mean changes over time 1986 1989 1992 1995 1998 2001 2004 spot 24.6 26.5 19.1 34.4 Global Energy Markets Trade Programme - 22 -
WTI versus forward curve Contango vs Backwardation Global Energy Markets Trade Programme - 23 -
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OPEC (Saudi Arabia) has potential 80 Share of the World (%) 70 60 50 Production Reserves 40 30 20 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 Global Energy Markets Trade Programme - 26 -
Do Cartels Succeed in the Long Run? Nominal cartel commodity prices, U.S.$, indexed 14 12 10 8 It depends on how much of the market they control and: - Group cohesion - Market anticipation vs. policy action - Data transparency Cocoa Sugar Copper Coffee Tin Oil 6 4 1997 and 1999-00 were OPEC influenced 2 0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 Sources: Industry trade publications and U.S. EIA Global Energy Markets Trade Programme - 27 -
An Effective Cartel Requires: Minimum conditions: Narrowly defined target A good with no easy substitutes An entry cost for new producers that is very high relative to the marginal cost of cartel producers Incentives to cooperate Global Energy Markets Trade Programme - 28 -
Source: World Energy Outlook 2007, IEA Global Energy Markets Trade Programme - 29 -