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A New Era of Higher Prices?
Fuel Price Forecasting Service
Graham Weale, Director of European Energy Service
David Goldsack – Coal
Graham Loveland – Oil
Graham Freedman – Gas
17th February 2005 Teleconference
Are We Entering a
New Era of Higher Prices?
Oil Price per Barrel
45
40
Gulf War
$/bbl (Real- 2003)
35
Quotas followed.
Far East Demand Up
30
25
“9/11”
20
15
Oversupply
10
5
0
1986
1988
1990
1992
1994
1996
1998
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2000
2002
2004
2
Higher Prices – Not Just Oil
$/toe or €/toe
300
Oil $/toe
250
Oil €/toe
200
Gas $/toe
Gas €/toe
150
Coal $/toe
100
Coal €/toe
50
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
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What is the Basis of Pricing Pressure?
What has driven prices up to their levels?
....and why no higher?
Will we see classic economic responses:
To what extent are the drivers common across fossil
fuels?
Producers increasing output?
Consumers cutting back?
Will new forms of technology arrive?
Are we now in a new pricing era?
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How are the Main Price Drivers
Impacting Higher Fuel Prices?
IMPACT
DRIVER
Variable costs inc. freight
OIL
GAS
COAL
Fixed costs
Demand level
Capacity margin(s)
Stocks
Producer market power
Value of alternative fuels
Market sentiment & events
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Two Explanatory Factors for Demand
Higher price demand
elasticity
China
Low price demand
elasticity
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……..but Only One for Supply
High producer concentration
Limited scope for expansion
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Will Oil Continue to Set Fuel Prices?
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Oil
Higher Finding Costs and Increased call on OPEC
Evidence that a new Era is Beginning…
The Relationship between Price & Stock Breaks Down.
52.5
Oct
47.5
Aug
BFO price $/barrel
42.5
May
37.5
Sep
Nov
Jul
Jun
32.5
27.5
22.5
17.5
12.5
7.5
-8
-6
-4
-2
0
2
4
6
8
Variation in days cover from seasonal average
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Finding and Development Costs are Rising
F&D Costs for Different Groups of Oil Companies
10
Deutsche Bank
Merrill Lynch (3 yr centred moving average)
9
8
7
$/barrel
6
5
4
3
2
1
0
1992
1993
1994
1995
1996
1997
1998
1999
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2000
2001
2002
2003
11
Whither demand?
…Whither OPEC?
120
100
Call on OPEC crude
OPEC NGLS/non-conv
GTLs
Processing gain
Non-OPEC
million b/d
80
60
40
20
0
1985
1990
1995
2000
2005
2010
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2015
2020
12
The “Peak Oil” Debate
“Debate? ….What debate?”
Wide discrepancy of views
Tends to focus on resources and reserves
Falling discovery rates, access issues, oil company
behaviour, manpower/logistics, and lack of
investment are probably more important
But if the “Peak Oilers” are right….
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Gas
Will the LNG Market Destroy Oil-Price Indexation?
The End of Oil Indexation?
Oil-price Indexation is under attack.
Competition is increasing.
Some countries are oversupplied
Removal of destination clauses
LNG enhances supply flexibility
Gas-on-gas competition will undermine
the traditional link to oil products.
How quickly will this happen?
3 years?….5 years? ….or longer?
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Impact of Coal Indexation as
Required for Power Sector
5.5
Differences in indices can & will be traded,
further undermining oil indexation.
5.0
4.5
$/mmbtu
$ Brent Base Case
(2004 Real)
4.0
3.5
3.0
Value Lost / Gained
for the buyer/seller
Coal Index for Gas
(2004 Real)
2.5
2.0
2000
2005
2010
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2015
2020
16
Price Outlook – Oil-indexed or Cost-based?
5.0
4.5
4.0
Large
Margins
encourage
new entrants
$/mmbtu
3.5
Margin
3.0
$2.5/mmbtu
2.5
2.0
1.5
LRMC (2004)
X Factor 1
$ Brent Base Case (2004)
X Factor 2
1.0
1995
2000
2005
2010
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2015
2020
17
Prospects for Atlantic Basin Price Convergence
Average Natural Gas Price
When will LNG trade volumes affect market prices?
Phase 1:
When will rising
LNG trade
change gas prices
at market hubs?
Phase 2:
When will LNG producing
countries force
convergence to NYMEX
Henry Hub prices?
United States
Europe
Years
Source: Global Insight
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Coal
How long will prices
sit at twice costs?
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How will Cross-Fuel
Competition Impact Coal Prices?
140
Real 2004 c&f price ARA
Nominal c&f price ARA
Average +10%
Average nominal c&f price ARA
Average -10%
120
US$/tce
100
80
60
40
History of delivered prices to ARA
20
0
1977
1980
1983
1986
1989
1992
1995
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1998
2001
2004
20
Will Prices Stay at Their Current Level?
Coal prices are normally driven by marginal
cost of production being regulated by
supply/demand position
Current prices reflect tighter supply, high freight
& high cost of competitor fuel (gas)
Freight markets are volatile & supply demand
imbalances are normally regulated within 2
year time frame
As freight & supply markets come back into
balance, prices will fall – based on whether:
producers maintain gas price linking
coal-on-coal competition causes prices to
become detached
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Actual Freight and fob Coal show scope for future price
decreases ( all in tonnes basis 6000 Kcal, NCV)
100
2004 Top Quartile fob
Average Spot fob 2004
2004 New Vessel
Average Spot Freight to ARA 2004
80
60
USS/t
Both Freight and
Mine Costs
include a real
return on
investment of 10%
40
20
0
Estimated
Cost
Average
Price ARA
Australia
Estimated
Cost
Average
Price ARA
Estimated
Cost
South Africa
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Average
Price ARA
Colombia
22
Cross-fuel Conclusions
Broad Fuel Price Moderation
is Likely to Lie Ahead…
300
200
150
100
50
300
0
2001
300 FOB
Brent
2003
2005
2007
2009
Brent FOB
2015
2017
2019
GAS - Russian pipeline to German border
GAS
200- Norwegian Troll at German border
LSFO - CIF NW European
GAS - Russian pipeline to German border
GAS - Norwegian Troll at German border
COAL - Wt Average CIF ARA
LSFO - CIF NW European
2011250 2013
COAL - Wt Average CIF ARA
2004 US$/toe
250
2004 US$/toe
2004 US$/toe
250
200
150
100
150
50
100
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24
Issues to Watch
Early gas
liquidity in
Europe
End of oil-price
indexation,
preserves oil-price
correlation
Peak oil issue
and higher
finding costs
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Pressure on
coal producers
soften prices to
accept cost of
carbon?
25
For Additional Information on Global
Energy Products & Services,
Graham Weale
44-20-8544-7882
[email protected]
Peter Seager
44-20-8544-7924
[email protected]
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