Katherine Spector (1-212) 834-2031 katherine.b.spector@jpmorgan.com Scott Speaker (1-212) 834-3878 scott.c.speaker@jpmorgan.com Sung Yoo (1-212) 834-7045 sung.k.yoo@jpmorgan.com Kristi Jones (1-212) 834-2835 kristi.l.jones@jpmorgan.com Sachin Kirtane (1-212) 834-8046 sachin.p.kirtane@jpmorgan.com
ST R I C T LY
P R I VAT E
AN D
This presentation was prepared exclusively for the benefit and internal use of the client in order to indicate, on a preliminary basis, the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure to any other party. This presentation is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by JPMorgan. Neither this presentation nor any of its contents may be used for any other purpose without the prior written consent of JPMorgan. The information in this presentation is based upon management forecasts and reflects prevailing conditions and our views as of this date, all of which are subject to change. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the client or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the client. The information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects. JPMorgan is a marketing name for investment banking businesses of J.P. Morgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by J.P. Morgan Securities Inc. and its securities affiliates, and lending, derivatives and other commercial banking activities are performed by JPMorgan Chase Bank and its banking affiliates. JPMorgan deal team members may be employees of any of the foregoing entities.
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Where does oil comes from - and where does it go? The energy investment cycle How oil is priced terms and conventions Interpreting the curve- why market participation matters Geopolitics, policy and economics Natural Gas Specifics LNG References, Websites and Data Releases to Watch
1 7 11 22 46 54 60 65
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DO ES
O I L
C O ME S
FR O M
AN D
WHER E
DO E S
I T
G O ?
WHER E
742.7
FR O M
AN D
WHER E
DO E S
I T
144.4 103.5
O I L
C O ME S
Asia Pacific
North America
Africa
DO ES
Middle East
WHER E
WHER E
DO E S
The worlds biggest producers are not necessarily the same as the worlds biggest exporters. For example, the US and China produce a lot of oil, but export very little given high domestic demand OPEC members Saudi Arabia and Iran are the worlds biggest exporters of crude oil
DO ES
O I L
C O ME S
FR O M
AN D
I T
WHER E
How is crude oil related to other oils, like gasoline and heating oil?
Crude oil is what gets pumped out of the ground. Very little crude oil is consumed directly it is a raw material that has to be refined into other products, such as gasoline and heating oil Oil refining is the process of turning crude into the fuels that we use every day, such as gasoline, heating oil, and jet fuel. Though refining processes differ according to the desired product, all begin by heating crude at increasing temperatures to separate it into component parts
G O ? DO E S I T
WHER E
Catalytic Reforming
AN D
C O ME S
FR O M
Hydrocracker
Catalytic Cracker
O I L
Coker/Thermal Cracker
DO ES
WHER E
DO E S
Other 49%
FR O M
AN D
WHER E
DO ES
O I L
C O ME S
India 3%
Germany 3%
FSU 5%
Japan 6%
China 9%
WHER E
Agenda
Page
Where does oil comes from - and where does it go? The energy investment cycle How oil is priced terms and conventions Interpreting the curve- why market participation matters Geopolitics, policy and economics Natural Gas Specifics LNG References, Websites and Data Releases to Watch
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$/bbl (real) $140 Global Rig Count (Left) Real Price of Crude (Right) $120 $100 $80
$40 $20 $'75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07
2,000 1,000
I N V E ST M EN T
Low prices discourage investment all along the supply chain. As demand grows, spare capacity falls and prices rise. High prices spur new investment. The lead-times for energy industry investment means that periods of over-and under-capacity dont go away over night. But the market always does its job eventually!
8
T HE
EN ER G Y
Downstream investment, or lack thereof, is also cyclical and tends to over-shoot in both directions Theres no reason to think that this investment cycle wont eventually be the same OECD demand exceeds OECD refinery capacity. That means that, increasingly, spare refinery capacity is in the nonOECD. That means that just like crude production most of the worlds refined products production is geographically far away from most of the worlds consumption
T HE
EN ER G Y
I N V E ST M EN T
C Y C LE
1987-91: 46%
Growth In Waterborne Crude & Products Transport
1987-1995 1996-2005 2001-2005 Crude Refined Products 3.6% 1.8% 2.5% 3.8% 1.7% 5.4%
35% 30% 0%
I N V E ST M EN T
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: JPMorgan Energy Strategy, BP Statistical Handbook
T HE
EN ER G Y
More refined products, in particular, have to travel greater distances to their end user. Ports, pipes, tankers, etc. are all an issue will they see the investment boom that refining is seeing?
10
Agenda
Page
Where does oil comes from - and where does it go? The energy investment cycle How oil is priced terms and conventions Interpreting the curve- why market participation matters Geopolitics, policy and economics Natural Gas Specifics LNG References, Websites and Data Releases to Watch
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HO W
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P R I C ED
T ER M S
AN D
C O N VEN T I O N S
12
P R I C ED
T ER M S
AN D
C O N VEN T I O N S
HO W
O I L
I S
13
Dated Brent
C O N VEN T I O N S
Urals
WTI
O I L
I S
P R I C ED
T ER M S
AN D
HO W
14
Over-the-Counter (swaps)
NY Mercantile Exchange
C O N VEN T I O N S
Swaps/Options
Brent Crude
1 lot = 1,000 bbl
AN D
Heating Oil
1 lot = 42,000 gallons = 1,000 bbl
Gas Oil
1 lot = 100 tonnes = 750 bbl
T ER M S
Unleaded Gasoline
1 lot = 42,000 gallons = 1,000 bbl
P R I C ED
HO W
O I L
I S
15
Time spreads e.g. Q1 vs. Q3; winter vs. summer, Cal 05 vs. Cal 06
C O N VEN T I O N S
Regional spreads e.g. NYMEX West Texas Intermediate vs. IPE Brent, NY Harbor gasoline vs. US Gulf gasoline Crude vs. refined product spreads Cracks (e.g. crude-gasoline; crude-heating oil) Refinery margins Crude grade differentials (physical trade only) e.g. West Texas Intermediate vs. West Texas Sour; Bonny Light vs. Brent Product vs. product spreads e.g. gasoline-heating oil Interfuel spreads e.g. natural gas-heating oil
16
HO W
O I L
I S
P R I C ED
T ER M S
AN D
HO W
O I L
I S
P R I C ED
T ER M S
AN D
C O N VEN T I O N S
Some futures curves assume a more or less standard seasonality For example, the heating oil and natural gas curves always reflect the expectation that heating oil and natural gas will be more expensive in the winter. The gasoline curve reflects the expectation that gasoline will be more expensive in the summer Traders look for opportunities to take advantage of abnormalities in the typical seasonality of the curves
$2.40 $2.20 Apr08 Sep08 Feb09 Jul09 Dec09 May1 Delivery Month
Source: JPMorgan Energy Strategy
AN D
HO W
O I L
I S
P R I C ED
T ER M S
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Lot Size 1,000 barrels 42,000 gallons 42,000 gallons 100 metric tons 100 metric tons 10,000 MMBtu
Quote Unit US$/barrel cents/gallon cents/gallon US$/metric ton US$/metric ton US$/MMBtu
Parcel Parcel
Barges: 1,000 - 5,000 MT (2 - 8 days loading) Cargoes: 10,000 - 25,000 MT (15 days loading)
AN D
P R I C ED
T ER M S
HO W
O I L
I S
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For example. . .
What is the price of spot fuel oil (a heavy, refined product) relative to crude?
What region? Europe. Rotterdam or Med? Med. What sulphur content? 1%.
C O N VEN T I O N S
T ER M S
AN D
$1.34 1
$239 1 tonne FO
= $13.16/bbl
P R I C ED
I S
Extensions of this idea? Look at the forward spreads; look at the spread to the US or Asian fuel cracks Warning! When using futures to compare different products, check for varying expiration dates.
20
HO W
O I L
Sectoral trends are growth sector energy intensive? Power generation trends what kind of fuel does new generation use? Transportation trends number and type of cars sold? Tax and subsidy regimes distort price signals to consumers and affect their consumption behavior
Weather, seasonality winter heating demand, summer cooling demand, holidays, vacation and travel trends Non-oil fuel markets, substitution (e.g. gas, coal, hydro, nuclear) Misc events e.g. SARS, Sep. 11
T ER M S
AN D
Other Other
Deals associated with mergers/acquisitions Speculative flows
Distribution Distribution
Tanker supply/demand/rates Seaborne disruptions weather, traffic, accidents Port capacity, availability Pipeline capacity/nominations
HO W
O I L
I S
P R I C ED
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Agenda
Page
Where does oil comes from - and where does it go? The energy investment cycle How oil is priced terms and conventions Interpreting the curve- why market participation matters Geopolitics, policy and economics Natural Gas Specifics LNG References, Websites and Data Releases to Watch
1 7 11 22 46 54 60 65
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Futures tell us where a buyer of tomorrows crude can find a seller of tomorrows crude in the market today Futures are not necessarily a commentary on what market participants believe about the future
Nymex Nymex WTI WTI Up Up in in the the Front, Front, Up Up in in the the Back Back
$/bbl $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 95 96 97 98 99 00 01 02 03 04 05 06 07 08
MAR KET
P AR T I C I P AT I O N
I N T ER P R E T I N G
T HE
C U R V E-
WHY
23
P AR T I C I P AT I O N
$5.20
$5.10
MAR KET
C U R V E-
WHY
$4.80
T HE
$4.70 M01 M05 M09 M13 M17 M21 M25 M29 M33
I N T ER P R E T I N G
24
CONTANGO means: Crude for immediate physical delivery is cheaper than crude for future delivery People are not willing to pay a premium to own oil right now. Historically contango has implied a oversupply of physical crude, high oil inventories, and a weak market/low price In theory, one could make money by buying crude for immediate delivery, putting it in storage, and selling more expensive futures, then delivering the stored crude against those futures when they come due at a later date
BACKWARDATION means: Crude for immediate physical delivery is more expensive than crude for future delivery Everyone is willing to pay a premium to own oil right now. Historically backwardation has implied a real or perceived shortage of physical crude, low oil inventories, and a strong market/high price One could make money by buying relatively cheap futures, and selling crude for immediate delivery at a higher price
I N T ER P R E T I N G
T HE
C U R V E-
WHY
MAR KET
P AR T I C I P AT I O N
25
P AR T I C I P AT I O N
The oil curve shifts regularly between backwardation and contango Historically, oil has spent more time in backwardation than contango Backwardation has been steeper than periods of contango
I N T ER P R E T I N G
T HE
C U R V E-
WHY
MAR KET
26
Crude Crude Oil Oil Price Price History History & & Forwards Forwards
In US$/bbl $105 $95 $85 $75 $65 $55 $45 $35 $25 $15 $5 1988 1991 1994 1997 2000 2003 2006 2009 2012 WTI Brent
I N T ER P R E T I N G
T HE
C U R V E-
WHY
MAR KET
P AR T I C I P AT I O N
27
Adjusted Midwest Crude [Katherine to add] Adjusted Midwest Crude Stocks Stocks vs. vs. WTI WTI Backwardation Backwardation
$4 $3 M02-M04 NYMEX WTI $2 $1 $$(1) $(2) $(3) $(4) -15,000
P AR T I C I P AT I O N
WHY
MAR KET
C U R V E-
5,000
15,000
I N T ER P R E T I N G
T HE
Historically the market is in backwardation when stocks are low and contango when stocks are high
28
P AR T I C I P AT I O N
Supply/demand determine price in the long run, but increased participation in the financial energy markets increasingly influences the path we take to get there Increased participation has increased liquidity, but has also changed the way that the market responds to bullish fundamentals In the short-term, we see dislocations and exaggerations as a new mix of players compete for deferred price One result is that certain market paradigms are no longer applicable to energy markets. One is the idea that oil prices are mean reverting to a long-term average price of about $20. Futures prices today no longer approach that level
Front-month Front-month NYMEX NYMEX West West Texas Texas Intermediate Intermediate with Snapshot in Time Future Strips` with Snapshot in Time Future Strips`
In US$/bbl $110
$90
MAR KET
$70
$50
WHY
$30
C U R V E-
$10
T HE
I N T ER P R E T I N G
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I N T ER P R E T I N G
T HE
C U R V E-
WHY
MAR KET
P AR T I C I P AT I O N
Sep-01
Jun-02
Mar-03
Nov-03
Aug-04
May-05
Feb-06
30
WTI WTI Flat Flat Price Price vs. vs. Backwardation Backwardation (in (in US$/bbl) US$/bbl)
M01-M02 NYMEX WTI
$8 M01-M02 NYMEX WTI (left) $7 $6 $5 $4 $3 $2 $1 $$(1) $(2) '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
Source: JPMorgan Energy Strategy
P AR T I C I P AT I O N
$80
Backwardation
$60
WHY
MAR KET
$40
C U R V E-
$20
T HE
Contango
$-
I N T ER P R E T I N G
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Back to backwardation?
MAT T E R S
C U R V E-
WHY
MAR KET
P AR T I C I P AT I O N
I N T ER P R E T I N G
T HE
This most recent upward move in flat price has been accompanied by backwardation the first time since 2005!
32
P AR T I C I P AT I O N
Investors
MAR KET
C U R V E-
WHY
I N T ER P R E T I N G
T HE
Consumers: Buyers of producers, e.g. airlines Refiners: Buyers of crude, sellers of products
33
Focus on Corporates
MAT T E R S
P AR T I C I P AT I O N
Participant
Recent Trends
MAR KET
Down Significantly less dayto-day tactical hedging at high prices. Remaining deals large, Some heightened interest in forward selling from high cost producers as occasional, one-off M&A prices dipped early in the year. related strategic hedges. Old Active hedgers since the earlyOptions strategies generally Section 29 hedging has also featured 1990s. preferred over swaps, for prominently in recent period. Active May trade anywhere from daily to downside protection with annually depending on hedging program upside exposure.
Increased flexibility in timing of
WHY
C U R V E-
Buyers The natural buyers in the energy markets. Consumers typically hedge 1-3 years out, but increasingly may go out as far as 5-7 years in products with sufficient liquidity.
I N T ER P R E T I N G
hedge execution; growing Up If anything consumers preference for options-based have hedged more actively as strategies. prices have risen, the More involvement from small percentage of hedges done consumers as energy takes bigger with options rather than swaps share of business risk and cost Active May trade anywhere from daily to has increased to guarantee structure. annually depending on hedging program. upside protection with Shift towards hedging specific risk Old Active hedgers since the early-1990s. downside participation exposure as traditional proxy hedge correlations break down
T HE
34
Production
Exposure Type
Price of crude Cost of transportation, insurance, duty/tariff Cost of carry (time value of money), time spread Refinery margins
P AR T I C I P AT I O N
MAR KET
C U R V E-
WHY
Hedging cracks (spread between crude and refined products) or full margins Consumer hedging: swaps or call options Hedging product product risk, or regional risk
I N T ER P R E T I N G
T HE
35
Producer Producer SELLS SELLS a a fixed fixed price price swap swap
Consumer BUYS BUYS a a fixed fixed price price swap swap Consumer
P AR T I C I P AT I O N
MAR KET
WHY
C U R V E-
I N T ER P R E T I N G
T HE
36
I N T ER P R E T I N G
T HE
C U R V E-
WHY
MAR KET
P AR T I C I P AT I O N
37
Understanding OPTIONS
MAT T E R S
Options give the bearer the right, but not the obligation, to buy or sell a commodity at a given price A buyer of a put option reserves the right to sell oil at a specified strike price during a specified time period. If oil prices dip below the strike during the specified tenor of the option, it is in the money and the owner of the put may choose to exercise it by selling oil above current market value. If the strike price does not dip below the strike price during the life of the option, it will not be exercised and will expire with a value of zero A buyer of a call option reserves the right to buy oil at a specified strike price during a specified time period. If oil prices exceed the strike during the specified tenor of the option, it is in the money and the owner of the call may choose to exercise it by buying oil at a price below current market value. If the strike price does not dip below the strike price during the life of the option, it will not be exercised and will expire with a value of zero Buyers of options pay a premium upfront. Premiums vary based on the length of time to expiry of the option, based on the distance of the strike from current market prices, and based on the market supply of/demand for options at any given time
I N T ER P R E T I N G
T HE
C U R V E-
WHY
MAR KET
P AR T I C I P AT I O N
38
Buying/selling options
MAT T E R S
I N T ER P R E T I N G
T HE
C U R V E-
WHY
MAR KET
P AR T I C I P AT I O N
39
Focus on Investors
MAT T E R S
P AR T I C I P AT I O N
Recent Trends
No significant change. Most
Buyers or sellers Depending on view of the market. On average in recent years, hedge funds more long than short given price trend. Funds may participate in any part of the curve and have shown particular interest in owning deferred price and volatility, adding liquidity and price clarity to Up Generally more dollars in energy, but also that part of the curve. more sophisticated and Active Take proprietary risk daily. May have varied involvement in full long or short term views, and take directional or range of energy products. relative value positions in the full range of energy products. Old and new Not new to energy per se but more professional and putting more money towards this space in the last ~3 years. Buyers Institutionals enter the market almost exclusively from the long side via products like Commodities Indices and oil-linked notes.
MAR KET
End-year profit-taking came early in 2006, and was characterized by selling in the front of the curve to hedge deferred length. Little liquidation of long-dated positions was observed. Exiting of one large risk taker had some notable impact on curve structure and volatility in natural gas but was reasonably well absorbed in the market.
T HE
C U R V E-
WHY
I N T ER P R E T I N G
Up significantly Major inflow of money and Passive Take long-term, generally directional interest in commodities as Ongoing interest seen in commodities as an asset class; views. Tend not to enter or exit positions on short- an asset class that really strategies are getting significantly term price fluctuations. did not exist in a more diverse and sophisticated as meaningful way 3 years New Institutional investors have really only investors shun traditional indices. ago. started to participate in the energy space in the past ~3 years.
40
WHY?
The dot.com bust, weak dollar, and low interest rates encouraged investors to seek other opportunities. The significant amount of money searching for yield has meant a boom for alternative asset classes such as commodities, emerging markets, and real estate Commodities are good for portfolio diversification, and viewed as a good hedge for inflation and event risk
MAR KET
P AR T I C I P AT I O N
HOW?
Commodity equities buying/selling shares of publicly traded companies where profits are directly tied to commodity prices. e.g. commodity producers or refiners, companies that service those primary industries, companies that transport commodities Commodity assets direct ownership or private equity in commodity production, processing, storage or transport Commodity ETFs/commodity-linked notes/commodity indices structured products that allow for direct participation in underlying commodity price moves
41
I N T ER P R E T I N G
T HE
C U R V E-
WHY
P AR T I C I P AT I O N
Commodities indices take passive long positions in a basket of commodities (energy, metals, softs) Positions are held near the front of the curve, but not in the prompt month contract
Crude Crude Oil Oil Price Price History History & & Forwards Forwards
$34 $33 $32 $31 $30 $29 M01 M05 M09 M13 M17 2. Positive Roll Yield 1. Increase in Flat Price
I N T ER P R E T I N G
T HE
C U R V E-
WHY
MAR KET
M21
M25
M29
M33
42
WHY
During a period of low interest rates and relatively few opportunities in traditional investment arenas, the notion of commodities as an asset class and vehicle for portfolio diversification caught on, aided by a supportive fundamental bull story
MAR KET
P AR T I C I P AT I O N
GSCI Q/Q Returns DJ-AIG Q/Q Returns GSCI Annual Average Returns DJ-AIG Annual Average Returns 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07
I N T ER P R E T I N G
T HE
Investor products, such as commodity indices, commodity-linked notes, and exchange-traded funds (ETFs) give the non-expert an opportunity to add commodity exposure to a diversified portfolio. Branded indices, such as the Goldman Sachs Commodity Index and the Dow Jones AIG Commodity Index, are long-only baskets of commodities and have been the most popular product for passive participation in the commodities space The negative roll return associated with all index commodities except metals and negative spot return on energy meant that total returns year to date on pure GSCI and DJ-AIG investments have been negative
C U R V E-
43
P AR T I C I P AT I O N
For some time now, the great unknown for crude price has been index investment inflows to commodities. We have routinely cited larger than expected inflows into commodities from institutional investors as an upside risk to our price view, and according to both S&P and Dow Jones, licensors of the markets two biggest commodity indices, there has been a lot already this year. Anticipation of investor inflows has informed our somewhat contrarian view that a recession, or economic slowdown could actually be bullish for commodities The market really has no hard data on how much money is invested in commodities as an asset class. We know commodities investment has grown considerably, but we cant really measure it! By our methodology, our best estimates suggest that there is now some $180bn invested in commodity indices, compared to $125bn in Feb07, and $99bn in Feb06 and <$10bn in 2002! Inflows over the last six months have been especially robust
MAR KET
Value Value of of Index Index Investment Investment Monthly Monthly Chg. Chg.
$bn 20 15 10 5 0 -5 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08
Source: JPMorgan Energy Strategy
I N T ER P R E T I N G
T HE
C U R V E-
WHY
44
How investors are adapting (and how banks manage index risk)
MAT T E R S
For Each $1 Move In the Spot Price of Crude Reallocating between commodities Based on mean reversion algorithms Based on momentum algorithms Based on a view Long / short strategies Distributing the investment to the deferred part of the forward curve The combined liquidity of the entire curve is greater than the liquidity in the front contracts alone Buying longer dated contracts and rolling less frequently reduces transaction costs Avoids the steepest part of the contango Investment in the deferred part of the forward curve now participates more fully in a spot price move than it did historically. Changing roll dates
R
2
P AR T I C I P AT I O N
Chg in Month 24 R
2
I N T ER P R E T I N G
T HE
C U R V E-
WHY
MAR KET
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Agenda
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Where does oil comes from - and where does it go? The energy investment cycle How oil is priced terms and conventions Interpreting the curve- why market participation matters Geopolitics, policy and economics Natural Gas Specifics LNG References, Websites and Data Releases to Watch
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A little history. . .
US US Refiner Refiner Acquisition Acquisition Price Price of of Imported Imported Crude Crude
US$/bbl '70 $100 $90 $80 $70
EC O N O MI C S
In Today's $ '72 '74 '76 '78 '80 '82 '84 '86 '88
In $ of the Day '90 '92 '94 '96 '98 '00 '02 '04 '06
Oil producing countries form OPEC, but struggle with regional unrest; tensions with the West mount. US oil market is liberalized; event-driven price spikes foreshadow energy conservation in consuming countries and substantial growth in non-OPEC E&P.
Iran-Iraq War; increased competition from nonOPEC producers; strained OPEC cooperation results in netback pricing, effectively flooding the market with cheap oil; energy conservation in consuming countries curbs demand growth.
Gulf War I and subsequent military strikes in Iraq; ongoing tension with Iran; weak demand following the collapse of the Soviet Union.
OPEC struggles to rebalance the market, succesfully courts non-OPEC cooperation. Mega-mergers, price deregulation, and tightening enviro specs.
Global terror threat; Gulf War II, major labor strikes in producing countries; tight upstream & downstream capacity; strong oil demand recovery; increased financial investment in energy. Israel-Lebanon conflict
US crude stocks hit 25 year low, Clinton releases from SPR; Chavez elected; USS Cole attacked Iraq agrees to ceasefire US Congress authorizes offensive strike; Operation Desert Storm begins
US boycotts Libyan oil Iran-Iraq War US begins to liberalize oil prices Non-OPEC oil market share hits 70% in 1985 Hostage Crisis Iraq invades then annexes Kuwait; UN authorizes military action
P O LI C Y
AN D
Hurricanes At the now-infamous Jakarta Katrina & Rita meeting OPEC raises production for 1st time in 4 years Hurricane Ivan 5 non-OPEC UN-sponsored Oil for producers cooperate Food program allows Sep. 11 attacks; with the cartel to sales of Iraqi oil reign in over-supply economic & oil demand growth collapse Iran tests missiles in Strait of Hormuz
G EO P O LI T I C S,
Clinton releases Low OECD oil stocks; OPECs netback pricing USSR collapses SPR crude Venezuela strike, Gulf rules the day, effectively High global production, OPEC slashes output twice in response War II, Nigerian strike flooding the market with oil to Asian Crisis, oil demand collapse weak demand
'84
'86
'88
'90
'92
'94
'96
'98
'00
'02
'04
'06
*Crude Price shown for 1974-present is the US refiner acquisition cost of imported crude. Crude price shown pre-1974 is the official selling price (OSP) for Saudi Light delivered to the US Source: JPMorgan Energy Strategy, EIA
47
Iraq Iraq
In million b/d 4
Iranian Revolution
Gulf War II
3 2 1 0
'67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05
Source: JPMorgan Energy Strategy , BP Statistical Handbook
Nigeria Nigeria
In million b/d 3
Strike cripples production
Venezuela Venezuela
In million b/d 4 3 2
Strike cripples production
AN D
P O LI C Y
1 0
'79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05
G EO P O LI T I C S,
0
Source: JPMorgan Energy Strategy , BP Statistical Handbook
'67
'70 '73
'94 '97
'00 '03
48
More corrupt/risky
Less corrupt/risky
8% 6% 4% 2% 0% '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06
Source: JPMorgan Energy Strategy, BP Statistical Handbook
AN D
P O LI C Y
Average of Country Risk Rating & Corruptionion Perception Index (0 = highest risk/most corrupt)
Source: JPMorgan Energy Strategy , BP Statistical Handbook, Transparency International, UNCTAD
G EO P O LI T I C S,
More and more of the worlds remaining oil reserves are in geopolitically risky parts of the world, and thats not going to change
49
Energy Energy Intensity Intensity Declines Declines As As GDP GDP Increases Increases
Oil bbl consumed per US$1,000 GDP 9
Japan
China
8 7 6 5 4 3 2 1
OECD
Non-OECD
2 1 0 0 1,000 2,000 3,000 4,000 5,000 GDP (in billion current US$)
Source: JPMorgan Energy Strategy, BP Statistical Handbook
0 250 5,250 10,250 15,250 20,250 25,250 GDP (in billion current US$)
Source: JPMorgan Energy Strategy, BP Statistical Handbook
P O LI C Y
AN D
G EO P O LI T I C S,
Chinese oil demand growth will continue to be significant to the global balance, especially in the lead-up to the Beijing Olympics. But the energy intensity to growth ratio does moderate as countries get richer
50
Contrary to popular believe, it is not to OPECs advantage to target as high an oil price as possible. The cartel wants to maximize revenues, but needs consumers as much as consumers need OPEC oil. At very high oil prices, OPEC faces two risks: 1. 2. High oil prices could reduce economic growth and oil demand growth High oil prices could encourage higher-cost non-OPEC producers to make investments that would increase global oil supply, and reduce OPECs market share
G EO P O LI T I C S,
P O LI C Y
AN D
51
Until this bull run, loss of market share was a real concern for OPEC
Shifting Shifting Market Market Share Share
OPEC Share of Global Oil Production (%) 42% 12.5 41% 11.5 40% 10.5 39%
EC O N O MI C S
Saudi Oil Production 9.5 8.5 FSU Oil Production 7.5 OPEC Share of Global Production 6.5 5.5 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
G EO P O LI T I C S,
P O LI C Y
AN D
52
OPEC OPEC Spare Spare Capacity Capacity vs. vs. Price Price
In kbd 8,000 7,000 $100 6,000
EC O N O MI C S
$80
$60
AN D
$40
P O LI C Y
$20 1,000 0 Jun-97 $Dec-98 Jun-00 Dec-01 Jun-03 Dec-04 Jun-06 Dec-07
G EO P O LI T I C S,
* Excluding declines Note: This is not a complete list and is subject to change Source: JPMorgan Energy Strategy, government reports, media reports
53
Agenda
Page
Where does oil comes from - and where does it go? The energy investment cycle How oil is priced terms and conventions Interpreting the curve- why market participation matters Geopolitics, policy and economics Natural Gas Specifics LNG References, Websites and Data Releases to Watch
1 7 11 22 46 54 60 65
O I L
&
G AS
BA SI C S
54
The widespread adoption of liquefied natural gas (LNG) when and if it happens will change the gas market from a regional market to a global market. In other words, the development of LNG will make the gas market look more like the oil market
N AT U R AL
G AS
55
In the basis market hub locations trade at a differential to NYMEX futures contracts on a forward basis Hence leading to the ability to buy the NYMEX +/ the appropriate basis differential forward to hedge a future sale of the physical commodity Some of the most frequently quoted basis markets are: the Rocky Mountain region, the Houston Ship Channel Hub, AECO (Canada), and the Panhandle Hub
N AT U R AL
G AS
56
1 MMcf = 1,000 MMBtu 10 MMcf = 10,000 MMBtu = 1 NYMEX contract 1 Bcf = 1 billion cubic feet = 1,000,000 MMBtu 1 Tcf = 1 trillion cubic feet
N AT U R AL
G AS
57
Oil price is also a driver of gas price, because there is some degree of substitutability between the two fuels Liquefied Natural Gas (LNG) is a minor factor in the gas market now, but will become increasingly important as the market develops. LNG will make the gas market more global
58
N AT U R AL
G AS
Power Power Generation Generation by by Source Source (Dec (Dec 07) 07)
S P EC I F I C S
Coal 50.7%
N AT U R AL
G AS
59
Agenda
Page
Where does oil comes from - and where does it go? The energy investment cycle How oil is priced terms and conventions Interpreting the curve- why market participation matters Geopolitics, policy and economics Natural Gas Specifics LNG References, Websites and Data Releases to Watch
1 7 11 22 46 54 60 65
O I L
&
G AS
BA SI C S
60
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
The long-term gas price will depend heavily on LNG to fill the growing disconnect between demand from residential, commercial, industrial and power generation consumers and North American sources of supply The declining domestic production scenario makes LNG vital to satisfying projected US demand growth. . . or price will have to ration demand
LN G
61
5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Everett (MA) Lake Charles (LA)
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
Source: JPMorgan Energy Strategy, Waterborne LNG Report
LN G
62
The last two years have seen the start of what we see as a growing trend toward increased US imports of LNG during shoulder periods mainly in the spring. While last winter was seen as anomalous in Europe, the decreased springtime demand and increased Norwegian deliveries into the UK should continue to free up cargoes during that time of year
LN G
63
Hydro conditions in Spain Norwegian flows into the UK French nuclear generation levels
Asian demand levels (Japanese nukes), displacement of other cargoes Simple price for Trans-Atlantic arbitrage, with transport included Crude oil, crude product pricing in regions where contracts continue to be tied to formulas utilizing baskets of other parts of the energy complex Operations, maintenance at upstream LNG liquefaction and export terminals as well as downstream import terminals
LN G
64
Agenda
Page
Where does oil comes from - and where does it go? The energy investment cycle How oil is priced terms and conventions Interpreting the curve- why market participation matters Geopolitics, policy and economics Natural Gas Specifics LNG References, Websites and Data Releases to Watch
1 7 11 22 46 54 60 65
O I L
&
G AS
BA SI C S
65
DAT A
R ELE AS E S
T O
W AT C H
Websites: www.eia.doe.gov US Department of Energys Energy Information Adminstration. Data and informational/educational materials about US and global energy http://blogs.wsj.com/energy/ -- A roundup of the days energy news headlines, posted by the Wall Street Journal online
R EF ER EN C E S,
WE BS I T E S
AN D
66
R ELE AS E S
T O
EIA Petroleum Supply Monthly Report (end of month) EIA Short Term Energy Outlooks (beginning of month) IEA monthly Oil Market Report (~10th of the month) Euroilstock inventory report (~10th of the month) CFTC Commitment of Traders report (Fridays)
R EF ER EN C E S,
WE BS I T E S
AN D
DAT A
67
Key websites
US Department of Energy, Energy information Administration www.eia.doe.gov
W AT C H
Organization of Petroleum Exporting Countries www.opec.org BPs Statistical Review of World Energy www.bp.com New York Mercantile Exchange www.nymex.com Commodity Futures Trading Commission www.cftc.gov International Energy Agency www.iea.org
R EF ER EN C E S,
WE BS I T E S
AN D
DAT A
R ELE AS E S
T O
68
Bloomberg codes
Prices: Prices:
Main energy page
W AT C H
EIA inventory data Global crude oil prices Exchange menu Nymex WTI crude Nymex heating oil Nymex RBOB gasoline Nymex natural gas IPE Brent crude IPE gasoil Cash values for refined products
R EF ER EN C E S,
WE BS I T E S
AN D
DAT A
R ELE AS E S
T O
69
Reuters codes
Prices: Prices: Main energy page
W AT C H
News & & Info: Info: News Q: ENERGY Q: EIAA Q: CLc1 Q: HOc1 Q: HUc1 Q: NGc1 Q: LCOc1 Q: LGOc1 Q: PRODUCT/1 Energy highlights Link to energy codes All energy news Oil news Gas news OPEC news EIA inventory report US refinery news Energy glossary Q: nTOPO or TOP/O O/CODES O OIL NGS OPEC EIA/S REF/US ENERGY/3
EIA inventory data Nymex WTI crude Nymex heating oil Nymex gasoline Nymex natural gas IPE Brent crude IPE gasoil Cash values for refined products
R EF ER EN C E S,
WE BS I T E S
AN D
DAT A
R ELE AS E S
T O
70
R EF ER EN C E S,
WE BS I T E S
AN D
DAT A
R ELE AS E S
T O
71