Transcript Iraq Discussion Points

The Geopolitics of Energy
Presentation by
Fareed Mohamedi
Chief Economist, PFC Energy
to
Strategic Advisors
in Global Energy
Energy and Nanotechnology Conference
Houston, Texas
May 3, 2003
The Geopolitics of Energy
 Introduction
 Focus on oil and gas
 The OPEC system, supply management
and prices
 Implications of the US invasion of Iraq
 Longer term issues related to the
development of adequate oil supplies
 Meeting US gas demand
| Page 2
Unprecedented OPEC cohesion
OPEC forged a deal in 1999 that has withstood a number of challenges
The deal was underpinned by the following developments:
 The election of Chavez
 The problems of the Iraq Oil for Food program
 The creation of the Riyadh Entente in the mid-1990s
 It provided a means for S. Arabia and Iran to work together
 It helped coordinate regional policies vis-à-vis Iraq
 It helped coordinate OPEC price and market share strategies
 Saudi ruling family used it to show its own public plus the rest
of the ME that its foreign policy was rooted in the region
Iran
Syria
Turkey
Iraq
Israel
Egypt
Saudi
Arabia
| Page 3
C.P Abdallah’s Survival Strategy Key
For Riyadh Entente
Economic Policy
High Priority
•Entrepreneurial
economy
•State balances books
•FDI for industry
Domestic Politics
•Restore social balance
•Curb subsidies
•Rule by committee
Foreign Affairs
Low Priority
•American ally
•Strong regional bonds
•Coordination w. Iran
| Page 4
2003 Prices Strong, But Fall As Year Progresses
Annual WTI Prices
$35
$30.29
$30
$25.95 $26.12 $26.62
$25
$20.59
$19.25
$20
$14.44
$15
$10
$/b 1997 1998 1999 2000 2001 2002 2003
2003 WTI Prices
$37.50
$35.00
$32.50
$30.00
$27.50
$25.00
$22.50
$20.00
$/b
 Prices will be relatively high
for 2003 thanks to high 1Q
prices in the run-up to war in
Iraq.
 The average 2003 price will be
about equal to those seen in
the past two years.
 Despite the loss of the war
premium, fundamentals
remain tight enough to keep
current prices in the upper$20s.
 However, as inventories rise,
prices will be pressured
downwards.
J F M A M J J A S O N D
| Page 5
Last 6 Months: Three Supply Shocks
The market was hit by a triple whammy of supply shocks in the past few
months:

First from the unexpected Venezuela strike

Then the predictable but still very significant outbreak of war in Iraq

And finally by losses due to civil strife in Nigeria just as refinery demand for
the country’s gasoline-rich grades was stepping up
Recent Lost Production Due To Supply Shocks
D-02
J-03
F-03
M-03
A-03
0
-500
-1,000
-1,500
-2,000
-2,500
kb/d
Iraq
Venezuela
Nigeria
| Page 6
Last 6 Months: OPEC Managed The Challenges

OPEC has managed by increasing production from its other members

Production outside Venezuela and Iraq increased 1.7 million b/d between
November and March, Saudi Arabia accounting for 1.0 million b/d

Despite much tighter fundamentals than during the last Gulf War, daily WTI
prices this time peaked at only $37.83, compared to $40.42 in 1990

Saudis also communicated effectively: markets were reassured additional
supplies were on the way, OECD members did not release strategic inventories
OPEC Crude Production
Saudi Crude Production
9,000
Venezuela
Iraq
OPEC-9
28
27
8,750
26
8,500
25
24
8,250
23
8,000
22
7,750
21
mmb/d
O-02
N-02
D-02
J-03
F-03
M-03 A-03
kb/d
O-02 N-02 D-02 J-03 F-03 M-03 A-03
| Page 7
Non-OPEC Supply Keeps Growing…
 Every quarter of 2003 except 2Q will see rising Non-OPEC Liquids
supply, with strongest growth in 4Q
 On a year-on-year basis, Russia will continue to lead the growth at
500,000 b/d
 2003 Non-OPEC Liquids supply to rise 1.6 million b/d, filling much of the
2.7 million b/d rise in global crude demand
1,250
Absolute and Year-on-Year changes in Non-OPEC
Crude Supply
1,000
48.0
47.5
750
47.0
500
46.5
250
0
kb/d
46.0
4Q02
1Q03
2Q03
3Q03
4Q03
Canada
Kazakhstan
Russia
Brazil
Non-OPEC Liquids Supply (rt axis)
mmb/d
| Page 8
OPEC-10 Avoids Crisis in 2003…
 Need for inventory replenishment will allow OPEC-10 to produce 800,000
b/d more crude than 2002, but this is weighted to the first half of 2003
 Increasing Non-OPEC supply and slower demand growth point to
reduced demand for OPEC crude from now on
 Only low inventories and Iraq outage give OPEC-10 a temporary reprieve
OPEC-10 Crude Supply and
Projected Inventory Change
2003 OPEC production and
Quotas
mmb/d
OPEC-10 Crude Supply
Projected Inventory Changes
26
2
1
25
0
24
-1
23
-2
Jan
Mar
May
Jul
Sep
Nov
28
27
26
25
24
23
22
21
20
OPEC-9
Iraq
J F M A M J
Venezuela
Quota
| Page 9
J A S O N D
Was The Invasion of Iraq An Oil War?
 The oil companies are not behind this war
Who are the oil companies?
What have they become?
 The US oil companies would rather have sanctions
removed from all major producer countries
 The non-US oil companies used the constraints on US
companies to make inroads into the Middle East
 The current Administration has not fulfilled the few
promises it made to the oil patch
Drilling offshore Florida
Removing the subsidies for ethanol
Revoking ILSA
Alaska is not seen as a real oil play
| Page 10
George W. Bush’s New World Order
United States: Sole Superpower
Military Superiority – Space and Technology
MILITARY
SPHERE
DIPLOMATIC
SPHERE
ECONOMIC
SPHERE
Counter Proliferation
American
Internationalism
Fix It yourself
First Strike
Lead, Others
Will Follow
IMF: Systemic
WB: Poverty
Anti-terrorism
End Treaties,
Non Binding
Energy Security
Diversity
High Importance
Low Importance
| Page 11
Oil Key to New Iraq

The administration of the Iraqi oil industry will be a challenge,
particularly in the first year or two, and the prospects of a shortterm jump in production are effectively nil.

The challenges will be:
1. To minimize short-term production losses while maintaining a
reasonably safe operating environment
2. Create an environment (political, administrative, legal) that will allow
a very rapid conclusion of negotiations for investment in new
capacity
Only then is substantial growth in production is possible. In the
best case, real growth (from 2001-2002 peak capacity) will not
happen before 2005.
| Page 12
How and When Exports Will Resume?
 Technical issues:
– Relatively little damage to fields and infrastructure
– Halliburton statement about getting up to “regional standards” (which are
quite high) is an uncertainty
– Fields are on a declining trend even when they do come back
 Political issues:
– Need to get revenue flowing means that the US will want quick resumption
– But lack of government recognized by UN and existing sanctions/OFF regime
mean US has to win battle at UN before exports can resume
PFC Energy Projected Iraqi
Production Return
Iraqi Production On A
Declining Trend
3,000
3,000
2,500
2,000
2,000
1,500
1,000
1,000
500
0
kb/d
F- M- A- M- J- J- A- S03 03 03 03 03 03 03 03
0
Jankb/d 01
Jul01
Jan02
Jul02
Jan03
Jul| Page 13
03
US-UN Relations
Despite Washington’s reluctance to deal with the UN, the international
organization’s role is crucial for the economic rehabilitation of Iraq
UN
recognized
government
Resumed
oil
exports
Oil
negotiations
Oil
deals
IMF
program
Paris
club
London
club
Donors
meeting
Reparations
meeting
| Page 14
Battle Over UN Role
A battle is taking place in the UN Security Council over who has
authority in post-war Iraq
Preferred Russian route —central UN role
Resumed
Oil-for-Food
program
Complete UN
weapons
inspections
New resolution
lifting
sanctions
UN/us
authority
Preferred French route — limited UN role
US
occupation
Suspended
Sanctions
Resumed
Oil-for-Food
program
Gradual OFF
phase-out
US/un
authority
Preferred US route —marginal UN role
New resolution
lifting
sanctions
US
authority
This battle will delay UN recognition of the new occupation government
in Iraq, and will be crucial for oil sector and financial sector decisions
moving forward
| Page 15
Best Case Scenarios
Crude Production Growth Potential In Iraq Assuming Rapid
Negotiation of Investment Terms and Internal Stability
P90 Upsteam Capacity
Mean (P50) Upstream Capacity
P10 Upstream Capacity
P90 Upstream Capacity (status quo)
Mean Upstream Capacity (status quo)
P10 Upstream Capacity (status quo)
6,000
This model
assumes that there
will be no
commercial or
logistical
constraints on
companies. In other
words, within 12 to
18 months
contracts would be
signed and
companies would
find the necessary
equipment to ramp
up operations in an
aggressive manner
5,000
4,000
3,000
2,000
1,000
2010
2009
2008
2007
2006
2005
2004
2003
2002
0
2001
Oil Field Production Capacity (mbopd)
7,000
| Page 16
Back To Market: In 2004 Moment of Truth
1. Declining market share for the group—Non-OPEC plus Iraq will outpace demand
growth
2. Seasonal demand decline in half of 2004 will force OPEC to implement a very
large production cut from already low levels
3. Uneven increase in capacity among OPEC-10 has initiated a debate about quota
redistribution that will heat up when more cuts need to be made
4. Saudi Arabia’s unique position as swing producer will leave it with the difficult
choice of enduring an untenable price and low production, or crashing the price.
2003 OPEC production and Quotas
OPEC-9
Iraq
28
27
26
25
24
23
22
21
20
mmb/d
J
F M A M J
Venezuela
Quota
J
A S O N D
| Page 17
Limited Margin of Maneuver for OPEC
In an $18+ price environment, Non-OPEC and Iraqi supply will
capture all of the incremental demand, at least until 2006. This
leaves very little margin for OPEC-10 to increase production in
the next four years.
Non-OPEC Supply and Demand Growth:
2.0
New OPEC-10 Supply Not Needed
1.5
Global Demand
Growth
1.0
0.5
Iraq Supply
Growth
Non-OPEC
Supply
Growth
0.0
-0.5
-1.0
million b/d
02
03
04
05
06
07
08
09
10
| Page 18
OPEC Quota and OPEC Capacity
The opening up of the upstream sector in a number of OPEC
countries has started a trend of rising capacity. Some of these
increases might not go through (Kuwait, Saudi Arabia, Iran), but
others are already underway. This rising excess capacity, with the
potential return of Iraq, will destabilize OPEC from the inside.
36.0
OPEC-10 Quota Potential and Capacity
Expansion at Odds
34.0
32.0
OPEC-10 Capacity
30.0
28.0
26.0
OPEC-10 Production
24.0
22.0
OPEC-10 quota
20.0
18.0
million b/d
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
| Page 19
Quota Reallocations Out of the Closet
As long as demand for OPEC-10 crude has stayed high, rising production
capacity in Algeria, Nigeria and Libya has not been an issue. However, as
OPEC is forced to cut production, increasingly large and untenable
percentages of member countries’ capacity would have to be shut in to
maintain quotas. By 1H 2004, there will be no way to avoid the quota
allocation issue any longer.
Current OPEC Quotas and 2004 Estimated Capacity
Current Quota
12,500
50%
2004 Capacity
10,000
40%
Percent of 2004 Capacity Idled
if Current Quota Kept (rt axis)
7,500
30%
5,000
20%
2,500
10%
Iraq
Qatar
Algeria
Indonesia
Libya
Kuwait
Nigeria
UAE
Venezuela
Iran
kb/d
0%
Saudi
Arabia
0
| Page 20
2003 Prices Strong, But Fall As Year Progresses
Annual WTI Prices
$35
$30.29
$30
$25.95 $26.12 $26.62
$25
$20.59
$19.25
$20
$14.44
$15
$10
$/b 1997 1998 1999 2000 2001 2002 2003
2003 WTI Prices
$37.50
$35.00
$32.50
$30.00
$27.50
$25.00
$22.50
$20.00
$/b
 Prices will be relatively high
for 2003 thanks to high 1Q
prices in the run-up to war in
Iraq.
 The average 2003 price will be
about equal to those seen in
the past two years.
 Despite the loss of the war
premium, fundamentals
remain tight enough to keep
current prices in the upper$20s.
 However, as inventories rise,
prices will be pressured
downwards.
J F M A M J J A S O N D
| Page 21
Can Saudi Arabia Take Lower Prices?
The Capital Account of the Balance of Payments
35
Billion US$
30
25
20
Asset
Flows
Debt
Flows
15
10
5
0
-5
-10
-15
-20
Current Account Balance
-25
-30
86
87
88
89
90
91
92
93
94
95
96
97
98
99
0
1
2
3
4
5
| Page 22
Can Saudi Arabia Take Lower Prices?
Saudi Arabia: Assets and Liabilities
250
Billion US$
200
External
and
Domestic
Liabilities
150
External
Assets
100
50
0
86 87 88 89 90 91 92 93 94 95 96 97 98 99
0
1
2
3
4
5
| Page 23
Can Iran Take Lower Prices?
Iran: Capital Account
14
Asset
Flows
Billion US$
12
Debt
Flows
10
8
6
4
2
0
-2
-4
-6
-8
Current Account Balance
-10
85
/8
6
86
/8
7
87
/8
8
88
/8
9
89
/9
0
90
/9
1
91
/9
2
92
/9
3
93
/9
4
94
/9
5
95
/9
6
96
/9
7
97
/9
8
98
/9
9
99
/0
0
00
/0
1
'0
1/
02
'0
2/
03
'0
3/
04
'0
4/
05
'0
5/
06
-12
| Page 24
90
89
88
87
86
/9
0
/8
9
/8
8
/8
7
/
19 91
91
/9
19 2
92
/9
19 3
93
/9
19 4
94
/9
19 5
95
/
19 96
96
/9
19 7
97
/9
19 8
98
/9
19 9
99
/
20 00
00
/0
20 1
01
/0
20 2
02
/0
20 3
03
/0
20 4
04
/0
5
19
19
19
19
19
Can Iran Take Lower Prices?
Iran: External Assets and Liabilities
Billion US$
35
30
External
Liabilities
External
Assets
25
20
15
10
5
0
| Page 25
The Other Wild Card: The Neo-Con Agenda
Has the neo-con agenda peaked, or will new phases unfold over the
next few years?
 Create a Pax Americana in the Middle East

Win the peace in Iraq

Succeed in creating a viable democracy

Convince the Middle East to abandon Palestinian state
 Answering the North Korean challenge in Asia

Containment or regime change?

Induce China to cooperate and accept US agenda in the region
 Downgrading the UN and Bretton Woods institutions

Contain the French and Russian challenge

Institutionalize American Internationalism
| Page 26
The Neo-Con Agenda in The Middle East
The Neo-Conservative agenda sees regime change in Iraq as the first
step towards fundamentally altering regional dynamics:
 Consolidate US and Israeli interests in the region
 Create appropriate conditions in the Levant for quick solution to IsraeliPalestinian conflict on Sharon’s terms
 Force change in neighboring states and the Gulf
Pax Americana
Turkey
Israel
Short Term
Syria
Lebanon
PNA
Iraq
Iraq
PNA
Medium term
Authoritarian
leader/popular revolution
in Syria; peace deal
Weakening Syrian
power
Leadership reform
and peace deal
Iran
Egypt
PNA
Saudi
Arabia
Secular reformist take
over in Iran
Political isolation and
threats
Isolated, politically
neutralized and forced
to reform
| Page 27
How Will Saudi Arabia Respond?
It will largely depend on the US success in Iraq:
Successful US, with pro-US
regime in Baghdad
US unsuccessful, with
Shi’aSunni Nationalist regime
US unsuccessful, with
Shi’a regime emerging
 Washington may use it to
dislodge the Al-Sauds
 The Saudi public could see
the New Iraq as a model
 For Iran an insular,
domestically preoccupied
Iraq could pose less of a
threat and a model
 The Al-Sauds could see this
as an opportunity to have
some influence
 Iran could emerge as a major
influence over Iraq
weakening the rationale for
its alliance with Saudi Arabia
 The US would be opposed to
an Iranian backed Iraqi govt.
and use the Saudis to offset
this growing power
Riyadh Entente will be
reinforced to oppose
US
Riyadh Entente will
remain useful for the
Saudis
Could the OPEC
strategy be maintained?
The OPEC strategy will
be maintained = higher
prices
Saudis will use the oil
price as a weapon
against a strong
Iran/Iraq bloc in OPEC
and the region
| Page 28
What is Happening in the Oil Industry?
Changing Competition
Reserves vs. Production: 2002 PDVSA (1,340; 102,499)
25000
Pemex (1,574; 51,655)
Rosneft (152; 27,915)
Petronas*
Reserves (mmboe)
20000
ExxonMobil
Shell
BP
15000
Lukoil*
Yukos
10000
TFE
Petrobras
TNK
ENI
Anadarko
5000
ChevronTexaco
ConocoPhillips
Repsol YPF
HydroOxy
Statoil
CNOOC
EnCana
BG
Marathon
0
MOL BHP
0
600
Global
Competitors
Regional
Majors
1200
Focus Players
1800
Production (mmboe)
Note 1: 2002 reserves and production for all companies are PFC estimates. 2002 production is based on 1H2002 data. Reserve Estimates are primarily based on a 110%
reserve replacement rate. Data for BHP, CNOOC, PDVSA, Pemex, Yukos, and MOL represents 2001 data. * Data for Petronas and Lukoil pertains to 2000. Data for TNK
| Page
pertains to 1999. Rosneft’s reserves estimates are for 2000 and are obtained from IEA’s Russia report. Note 2: PDVSA (1,340; 102,499), Rosneft (152; 27,915)
and 29
Pemex
(1,574; 51,655) excluded for scaling reasons.
Replacing Core Areas
 Many core areas in maturity phase
– Business going to Non-OECD basins
– Strategy depends on region (e.g., Petrobras, Repsol YPF, and PDVSA in
Latin America and Petronas in Asia-Pacific)
 Selected “oil cores” transiting to gas
 With the exception of deepwater plays, major companies are not
creating new core areas through exploration, but through production
deals
 Production deals create new challenges -- new risks
 Core “transitions” from oil risk to gas risk -- e.g. technical to
commercial
| Page 30
Global Competitors Must Replace Maturing
Legacy Assets


Replacement of
earnings from
historical assets
Growing earnings in
areas where
Regional Majors &
Governments
control
% North America & Europe of Worldwide Total
% of Upstream Net Income from N.
America and Europe
80%
ExxonMobil
BP
Shell
60%
ChevronTexaco
40%
TotalFinaElf
20%
0%
$0
$2,000
$4,000
$6,000
$8,000
2000-2002 Average Upstream Net Income From North America & Europe
Reported and PFC estimates.
| Page 31
Access to Oil & Gas Reserves Constrained
Full IOC access
reserves
NOC reserves
(equity access)
140 / 7%
113 / 6%
Reserves held
by Russian
companies
324 / 17%
1,354 / 70%
NOC Reserves (no equity access)
| Page 32
Source: PFC Upstream Competition Service & BP; reserve figures are conventional billion boe, 2001
Industry Shift
 Divestiture in mature areas
 Majors withdrawing from non-strategic areas
 Independents moving in and aggregating positions
 New independents likely to be created to capture opportunities
unattractive to large independents
| Page 33
National Oil Companies
 NOCs growing importance in the industry
– Generally more commercial and some privatizing
 But NOCs can be threat to state especially if political leadership is
from different background from NOC managers
 Distrust of IOCs falling – even among populist or leftist governments
– States looking for production deals to attract capital and technology
 What States want is evolving so IOC access issue is a very dynamic
and at times confusing one for IOCs
| Page 34
Increased Opportunities
State Types and Implications For NOCs/IOCs
Government
NOC
IOC Role
Entrepreneurial
Capitalist
Privatized &
Competitive
Open
Competition
Social
Democratic
Capitalist
Public
Entrepreneurs
Limited
Opening
Entrepreneurial
Bureaucracy
Oligopoly
Populist
Development
Statist
Bureaucracy
Traditional
Monopoly
Rentier
State
Façade/No
Institution
Excluded
Authoritarian
Globalizer
Driving
Forces
| Page 35
The Global Portfolio & Risk
Size = Reserves
A
B
C
Source: PFC’s Petroleum Risk Manager
D
Based on 26 Risk Factors at end-2002| Page 36
US Nat. Gas Supply: A Pressing Issue
 Energy security also means natural gas supply security
– Defined as reliable supply at a reasonable cost
 Demand encouraged, but supply shrinking
– Washington encouraged the growing consumption of gas but has actively
discouraged production
– In 2002, gas supply has declined by 5.6% in continental US, forcing the
suppression of industrial demand
– In the next few months, up to 4 bcf of industrial demand need to be
suppressed to allow storage to refill for next winter
– Industries and jobs lost in the US
| Page 37
US Nat. Gas Supply: A Political Question?
 Continental supply is extremely difficult to grow quickly -- no matter
how high the price:
– Basin exhaustion a fact of life in a mature asset base
– Accelerating decline rates creating treadmill effect
– Regulatory hurdles for areas now open to exploration
– Access to federal land practically closed
– Offshore Florida, California and East Coast closed
– LNG: siting issues, so little help in the foreseeable future
– Alaskan/MacKenzie Delta pipelines: Right Answer, wrong decade
| Page 38
US Has No Surplus Gas Supply
Excess Pipeline Gas Supply Capability in the US
(I.e., as a Share of US Gas Consumption, annualized)
35%
30%
25%
20%
15%
10%
5%
0%
Sources: *PFC estimates. Includes Canadian imports, **EIA.
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
-5%
| Page 39
Canadian Pipeline Imports Nearly Tapped;
New LNG Supply of Increasing Importance
Canadian Imports
LNG Imports
7
14
Additional Spot or New LNG
Potential
6
13
12
5
LNG Imports from Atlantic Basin
Projects
4
Capacity of Existing Terminals
(Including Expansions)
11
bcfd
9
3
8
Imports from Canada
7
2
Current Pipeline Capacity
6
1
5
4
2010
2008
2006
2004
2002
2000
1998
1996
1994
Oct-09
Oct-07
Oct-05
Oct-03
Oct-01
Oct-99
Oct-97
Oct-95
0
Oct-93
bcfd
10
| Page 40
Abnormally Large Gas Storage Draws Lead to
Increased Price Volatility
Working Gas in Storage
3,500
3,000
BCF
2,500
2,000
1,500
1,000
500
Apr- May- Jun02
02
02
Jul02
5-Yr Max/Min
Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar02
02
02
02
02
03
03
03
Current Year
Historical Avg.
| Page 41
Market Tightness is Driving up U.S. Gas Prices -Floor Price is Rising
$9.13
U.S. Gas Prices
(Henry Hub)
$6.00
$5.50
$8.72
$5.00
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
Feb-03
Jun-02
Oct-01
Feb-01
Jun-00
Oct-99
Feb-99
Jun-98
Oct-97
Feb-97
Jun-96
Oct-95
Feb-95
Jun-94
$1.00
Oct-93
$/mmbtu
$4.50
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Strategic Advisors
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Houston, Texas
Tel : 1-281-599-7099
Fax: 1-281-599-9891
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www.pfcenergy.com