Resource+Adequacy+and+the+Marketplace+Prepared+for+California by mestisa

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									Resource Adequacy and the Marketplace
Prepared for California Energy Commission

ESAI

Presented by Sarah Emerson April 2003
301 Edgewater Place Suite 108 Wakefield, MA 01880

Tel: 781.245.2036 Fax: 781.245.8706 www.esai.com

The Marketplace
Politics
Technology

Politics

Technology

Foreign Investment

OPEC production

Price

Developed country demand

Environmental regulation

Technology

Non-OPEC production
Politics

Flow of Funds In financial markets

Developing country demand

Taxation

Technology
Technology
ESAI Presentation

Politics

Politics

Technology
2

Flow of funds

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Resource Adequacy

Production Additions to Reserves Reserves
Regulation and tax

Price
Technology

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Demand

4

Oil in the Ground

Stock
Flow
Harold Hotelling: the future price of oil is an inclining curve, largely because the volume of oil in the ground is a finite and fixed stock Morris Adelman: Prices have been flat or actually declining in the long run…Mineral depletion is in fact an endless tug of war:diminishing returns versus increasing knowledge. So far the the human race has won big

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Price
• As long as the price of oil exceeds the cost of exploration, development and extraction, companies will continue to invest in adding to reserves

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Why are oil prices higher than production costs?
Risk premium
Transport Political instability Regulation OPEC decisions Financial markets Terrorism

= $10-15

Transportation Investment Incentive

= $2 = $5 = $5
7

Production costs
ESAI Presentation

Western Canada’s Oil Sands

• Established reserves: 175 billion barrels of bitumen • Production of synthetic crude and bitumen rising quickly
• 660,000 b/d in 2001 • over 1.2 million b/d by 2005; up to 2.6 million b/d by 2012?

• Output destined primarily for the Midwest; possible pipeline from Alberta to Canadian west coast by end of decade • Concerns:
• Kyoto Protocol and CO2 emissions • dependence on natural gas • refinery configurations and heavy to light crude differential

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Venezuela’s Orinoco Belt

• Proven reserves: 36 billion barrels of extra-heavy crude • Estimated recoverable reserves: 270 billion barrels • Four joint venture projects between PDVSA and foreign companies ramping up production since 1999
• over 400,000 b/d shortly before PDVSA oil strike • 600,000 b/d by 2005

• Extra heavy crude upgraded to lighter synthetic crude • Large portion destined for U.S. Gulf Coast refineries • Considerations:
• OPEC quota • political risk • Venezuelan oil sector regulations
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Venezuela’s Orimulsion

• Blend of 70% extra heavy crude and 30% water • Marketed to utilities as a low cost boiler fuel
• Customers in Italy, China, Japan, and Canada

• Production set to increase
• 100,000 b/d in 2001 • above 200,000 b/d by 2005, up to 340,000 b/d by 2010?

• Considerations:
• environmental standards (utilities burning Orimulsion must install scrubbers etc) • capital cost required for conversion to Orimulsion • political risk • Venezuelan oil sector regulations
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Technology
• Upstream: horizontal drilling, computer 3-D seismic imaging, FPSO • Downstream: Refinery upgrading to shift yields to reflect product mix of demand

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Global Regulatory Reform
• Foreign investment • Environment
– Lead content of fuels – Sulfur content of fuels

• Industrial Policy • Energy Security
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More Producing Countries and Regulatory Regimes
Number of Producing Countries Worldwide
110

105

100

95

90

85

80

75

70 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

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Foreign Investment Laws Change

• The Geography of Foreign Investment
– – – – – – Venezuela Saudi Arabia Iraq Kuwait? Russia, Azerbaijan, Kazakhstan China

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Something for Everyone
• Foreign Investment
– Licensing agreement: Foreign company pays royalties and taxes to host government, but oil belongs to company once its out of the ground – Production Sharing Agreement: Foreign company can “book” host reserves and get oil to cover development and extraction costs as well as portion of oil over and above costs – J.V: Foreign company and host government or national oil company share ownership of project and oil – Buy back: Host government retains all ownership, but concludes development, extraction service contract with foreign company for a fee. Foreign company then receives preferential treatment in concluding a purchase agreement for the crude
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Tax Laws Change
• Tax relief
– UK: Petroleum Revenue Tax – US: OCS Deepwater Royalty Relief

• Consumption taxes
– France: diesel demand vs gasoline demand

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Industrial Regulation Changes

• Not every deregulated oil industry will look like the US
– Remove subsidies: generally prices rise and taxes may come later (net exporters) – Remove import restrictions: generally prices fall..but taxes may be high as in Korea and Japan (net importers, protect refining) – Remove Price Controls: generally prices fall and taxes rise to replace the government receipts (net importers, protect refiners) – China and India are doing both
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Regulation
Market deregulation
Taiwan India China (*)

Price mechanism
Generally higher prices as subsidies are removed or lower prices as import controls are removed The end result is something closer to world prices

Efficiency
less demand

Indonesia
Philippines FSU E. Europe

Fuel taxes to build roads, build SPR (India)

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Cars in Asia

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Gasoline taxes

Japan Europe

India China US

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Long-term Demand

Demand Estimates in mmb/d and % 2000 2010 2020 00-10 10-20 IEA 75.0 EIA 76.1 ESAI 75.6 88.8 104.0 91.5 112.0 88.9 105.8 1.8% 2.0% 1.8% 1.7% 2.2% 1.9%

source: IEA WEO, 2002, EIA AEO 2003

ESAI Presentation 21

The Pace of Oil Demand growth
Global Oil Demand Growth 79000 76000 73000 70000 67000 64000 61000 58000 55000 52000 49000 46000 43000 40000 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0%
4.3% 0.1% 1.3% 1.0%

-6.0% -8.0% -10.0%

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70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

oil demand in %

Oil demand in b/d

Is 1.8% demand growth really possible
Global Demand Drivers
2,500 2,000 1,500 1,000 500 0 (500) (1,000) (1,500) 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 US Gasoline
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Average annual growth: 950,000 b/d

Average Annual growth: 1,600,000 b/d

European total oil

China

Rest of Asia

Rest of World

Energy Security
• Asian countries rely on PG for 80% of their imports of crude oil • This is a significant change since first Gulf War because China is now a net importer • India and China will build Strategic Reserves • Oil Import Dependence is growing problem
ESAI Presentation 24

Asia’s Oil Demand

15- 20%
Gasoline

Diesel

35- 40%
15- 20%

Fuel Oil

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What will Asia do
Will Asia's fuel oil demand decline one day?
3500 3000 2500 2000 1500 1000 500

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

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2003

Demand restraint
• Developing Countries
– road construction has required fuel taxes – deregulation may be followed by some form of fuel taxes to generate government income – Asian countries requiring mandatory stocks for energy security – Energy security concerns also helping gas/LNG – Tougher environmental fuel specifications

• Developed Countries
– – – – New auto technologies, such as hybrids, fuel cells, etc Environmental specifications Fuel technology US conservation

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Long-term Non-OPEC Supply
Non-OPEC Output Estimates in mmb/d and % 2000 2010 2020 00-10 10-20 IEA 44.5 EIA 45.7 ESAI 45.3 50.8 55.0 54.6 51.3 60.9 58.0 1.4% 2.0% 2.1% 0.1% 1.1% 0.6%

source: IEA WEO, 2002, EIA AEO 2003
ESAI includes processing gain

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Long-term Call on OPEC

Call on OPEC* Crude and Condensate Output in mmb/d 2000 2010 2020 00-10 10-20 IEA 30.5 38.0 52.7 2.5% 7.3% EIA 30.4 36.5 51.2 2.0% 6.9% ESAI 30.3 34.3 47.8 1.3% 5.8%
source: IEA WEO, 2002, EIA AEO 2003
*T he implied call on OPEC equals demand minus non-OPEC. thus includes OPEC NGLs
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Resource Adequacy
• Oil supplies will “last” longer than the physical assessment of supply and demand suggests • When and if supply concerns emerge, the market (w/ govt and industry) response will be wide ranging

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Market Early Warning System
• 20..30..40..50 years?
– Gradual problem – Marketplace will send early indicators…financial markets flip from backwardation to contango?

• Flexible Response
– Crisis management from energy security is improving – Significant room for conservation if we force demand restraint – Trend towards broader energy mix underway with natural gas and LNG..Could Asia follow Europe and Asia in fuel oil demand – Transport Boom unlikely in Asia – Environmental movement tightening emissions and fuel specifications..all over the world – Auto technology: hybrids, fuel cells – Fuel Technology: GTL diesel extenders
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Recommendations
• Monitor the 10-20 year outlook closely
• • • • Market analysis can be very rigorous Price mechanism is powerful Develop early warning signs Develop strategy with incremental and proportional policy responses

• Longer Forecasts are intellectual exercise

ESAI Presentation 32


								
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