From Seven Sisters to Six Brothers: What changing global oil markets - PowerPoint PPT Presentation

Professor Paul Stevens From “Seven Sisters” to “Six Brothers”: What changing global oil markets might mean for New Zealand Wednesday 30 October, 6.30-7.45pm

From “Seven Sisters” to “Six Brothers”: What changing global oil markets might mean for New Zealand? Professor Paul Stevens Distinguished Fellow Chatham House Professor Emeritus, University of Dundee Visiting Professor UCL Australia Energy Matters 2013 The Energy Centre, University of Auckland October 30 th 2013

Presentation outline: A story of great uncertainties • The prospects for oil demand • The prospects for supply • Changes to the global oil market since the 1970s • “OPEC’s dilemma” leading to price volatility • Implications of oil price volatility for New Zealand 3

The prospects for oil demand 4

The prospects for oil demand: A closer look • Note the role of the World oil demand growth from 2011 IEA New Policies Scenario WEO 2012 MICs – 68% of the 25 Non-OECD growth 20 15 Middle East 10 • BUT beware …“Once Million b/d India 5 China upon a time …” Rest of OECD 0 OECD 2020 2035 -5 -10 -15 5

But beware!!! OECD Oil Demand Forecast 1977 1200 1000 800 Mntoe USA 600 Japan Rest of OECD 400 200 0 1974 1980 1985 World Energy Outlook OECD 1977

But beware!!! OECD Oil Demand Forecast 1977 1200 1000 800 Mntoe USA 600 Japan Rest of OECD 400 200 0 1974 1980 1985 actual 1985 World Energy Outlook OECD 1977. Actual BP Statistical review of World Energy 2009

But Beware!!! Do not forget the impact of price Real Domestic Oil Prices in Selected Developing Countries 1970 = 100 KOREA 600 ARGENTINA 500 BRAZIL INDIA 400 1970 = 100 INDONESIA 300 MALAYSIA MEXICO 200 PAKISTAN 100 PHILIPPINES TAIWAN 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 THAILAN VENEZUELA

But Beware!!! Do not forget the impact of price KG OIL EQUIVELENT NEEDED TO PRODUCE $1 GDP 0.2 0.4 0.6 0.8 1.2 1.4 1.6 0 1 JAPAN COMMERCIAL ENERGY INTENSITIES GERMANY FRANCE UK USA BRAZIL KOREA ARGENTINA MALAYSIA THAILAND Data for 1990 Source:World Bank PHILIPPINES MEXICO INDONESIA PAKISTAN INDIA KENYA HIGH INCOME MIDDLE INCOME LOW INCOME

But beware!!! Do not forget the impact of price • Note the role of the MICs – 68% of the World oil demand growth from 2011 IEA New Policies Scenario WEO 2012 Non-OECD growth 25 20 15 • Low prices to final Middle East 10 Million b/d consumers BUT this India 5 China has been changing Rest of OECD 0 OECD 2020 2035 – India 2002 -5 – China 2009 -10 – Middle East ??? -15 • Thus future oil 10 demand is uncertain

Presentation outline: A story of great uncertainties • The prospects for oil demand • The prospects for supply • Changes to the global oil market since the 1970s • “OPEC’s dilemma” leading to price volatility • Implications of oil price volatility for New Zealand 11

The prospects for supply ESTIMATES OF GLOBAL OIL RESOURCES 3.5 T R 3 I L 2.5 L I O 2 N CONVENTIONAL OIL 1.5 B UNCONVENTIONAL OIL A R 1 R E 0.5 L S 0 PROVEN RESERVES REMAINING RECOVERABLE RESOURCES Source: IEA Resources to Reserves 2013: Oil, Gas and Coal Technologies for the Energy markets of the Future. OECD Paris 12

The prospects for supply GLOBAL RESERVE/PRODUCTION 120 100 80 Y E 60 A R S 40 20 0 OIL GAS COAL SOURCE: BP Statistical Review of World Energy 2013 13

The prospects for supply GLOBAL RESERVE/PRODUCTION 120 Oil runs out in 2065 On 26 th January 100 08.55 GMT 80 Y E 60 A R S 40 20 0 OIL GAS COAL SOURCE: BP Statistical Review of world Energy 2013 14

The prospects for supply? The ke key issu y issue o e of f wi will llingn ingness ess a and nd ab abil ilit ity y to invest and produce the oil • Before the 1970s - The “Seven Sisters” dominated – Exxon, Mobil, Chevron, Texaco, Gulf, BP, Shell (+CFP) • TODAY are they their willing to invest, given a limited ability to access low cost reserves in a world driven by a financial strategy – “value based management” – ExxonMobil, Chevron, BP and Shell all increasing capex. TOTAL is reducing capex. Guess whose shares have risen? (Bloomberg 28 Oct 2013) • SINCE THE 1980s the “Six Brothers” dominated … 15

Meet the “six brothers” Sources of growth in oil production* 2010-2035 • Willingness and IEA WEO 2011 New Policies Scenario 16 depletion policy 14 – “Oil in the ground …” 12 • Ability =Mixed record 10 Qatar Petroleum NIOC Million b/d INOC – Saudi Aramco = excellent 8 ADNOC – ADNOC + Qatar = OK KPC 6 Saudi Aramco – KPC, NIOC + INOC =  Rest of the World 4 • Future supply uncertain 2 0 *Includes NGL's and unconventional oil The “six brothers” account f or 91.2% of the growth

Presentation outline: A story of great uncertainties • The prospects for oil demand • The prospects for supply • Changes to the global oil market since the 1970s • “OPEC’s dilemma” leading to price volatility • Implications of oil price volatility for New Zealand 17

The oil market and prices before the 1970’s • The market was dominated by the “seven sisters” – Exxon, Chevron, Gulf, Mobil, Texaco, BP, Shell (+CFP/TOTAL) • They were operationally vertically integrated which required “posted prices” as tax reference prices • Price determination = Administered price – A “group of men” – the producers - in a room said a number – If the “those outside the room” – the refiners - believed it, that was the oil price! 18

The first oil shock • Pre- 1970’s “The men in the room” were from the “seven s isters” - “those outside the room” were from the “seven s isters”. • Since 1950, they had been saying a relatively low number – They feared competition from other fuels (mainly nuclear) – They feared a backlash from their own (OECD) governments 19

Price patterns – before and after …. e a b e p $ 2 1 0 2 r r r l 100 120 20 40 60 80 0 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 1954 Oil prices 1928-2012 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 20

The first oil shock • Pre- 1970’s “The men in the room” were from the “seven s isters” - “those outside the room” were from the “seven s isters”. • Since 1950, they had been saying a relatively low number – They feared competition from other fuels (mainly nuclear) – They feared a backlash from their own (OECD) governments • New developments after 1970 – I n Libya in 1970, gov’t forcibly enters the room jointly to negotiate prices – October 1973 Arab OPEC + Iran “why do we need oil company men?” – Unilaterally increase price = First Oil Shock 16 th October 21

Price patterns – before and after …. e a b e p $ 2 1 0 2 r r r l 100 120 20 40 60 80 0 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 1954 Oil prices 1928-2012 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 22

The oil market today: very different from 1973 • The market is now dominated by the “Six Brothers” • The oil price is now a market price largely based on spot prices • BUT “the men in the room” are still relevant. However, now they are the OPEC producing governments • AND the “number they say” now is a production level not a price 23

So now who are “those outside the room”? Wet barrel market refiners Paper barrel markets * “Money managers” *Trading real barrels *Spot and term contracts

What are the main linkages? Perceptions Wet barrel market Paper barrel markets Influences perceptions about surplus/shortage “Signals” what prices might be

“ Those outside the room”? Wet barrel market refiners Paper barrel markets RESULT = Price determination doubly complicated and uncertain IN THE OLD DAYS – They simply had to believe the (price) number and that was the price – made it predictable TODAY – They have to 1. believe the (production) number AND then 2. decide how it will affect price = V ery unpredictable

New approach to setting price: Problems generating uncertainty? • 1. Believing the production number • The market data on supply and demand are awful • Inventory data are even worse • OPEC members cheat • Added to this uncertainty – 2. translating the production number into price … 27

Translating the production number into price Problems with the linkages = A disconnect Wet barrel market Paper barrel markets Influences perceptions about surplus/shortage “Signals” what prices might be IN OTHER WORDS “the paper barrel markets outside the room” often misread the implications of the production number. They don’t understand the oil industry…

Wh When en the they y misre misread ad, , the there is re is a d a dram ramatic atic ad adjustm justmen ent t MONTHLY OIL PRICES - OPEC BASKET 2000 - October 2013 140 120 US$ per barrel 100 80 60 40 20 0 2000 2002 2004 2006 2008 2010 2012