Transcript GII Presentation Template

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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6
……..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
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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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0
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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