Conference

Chairman’s
By
Crystal Ball
Dr. Fereidun Fesharaki
Conference Chairman
And
Chairman, FACTS Global Energy
Presented to
The 15th Asia Oil & Gas
Conference
June 6-8, 2010
Kuala Lumpur
This presentation material contains confidential and privileged information intended solely for FGE clients.
The dissemination, distribution, or copying by any means whatsoever without FACTS Global Energy’s prior written consent is
strictly prohibited.

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 www.FGEnergy.co
• We have two Crystal Balls: m

Oil and Gas

• These Crystal Balls are very accurate and focused with a

very high success rate.
• Success rate is 50%! Right half of the time and
wrong half of the time!
• So, I often have to overrule them!

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 The Oil Market
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Q: Is peak oil real? Are we running out of oil?

A: Yes and No!

– Supply peak in Non-OPEC is real

– Demand peak in OECD is real

BUT…

– Supply peak in OPEC is not real

– Demand peak in developing world is not real

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Geological peak

may be far away….

But,

policy peak

is likely by 2015-2020

at 95 million b/d (including Iraq)

plus 5 to 10% non-conventional oil

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 Non-OPEC Production Plateau
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1.0

0.8
0.6
mmb/d change vs year earlier

0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
2006 2007 2008 2009 2010 2015* 2020*

NAmerica Europe LAmerica Africa M East Asia/Pacific FSU

* Average of 5 years change vs year

earlier.

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 OPEC Coming to Fill the
Supply/Demand “Gap”? www.FGEnergy.co
1. Clear 2. OPEC 3. Global 4. OPEC will eventually have m
lesson faces a oil trouble adding 1-1.5 mmb/d of
from natural demand additional capacity annually…
2003- decline of set to which Political,
may be required as non-
legal, and
2008 oil some 1.5 grow by OPEC plateaus.
management problems are
price mmb/d some 1- unlikely to allow for new
run-up… 1.5 capacity additions large
Much mmb/d enough to respond to the
new demand
Is the oil there? growth.
No one really
capacity
Non- knows for sure—reserves are
is
OPEC simply guesstimates driven by
needed…
suppl politics in certain countries.
Global oil production likely to
y …just to reach plateau of 95-100
platea stay in mmb/d by mid-next decade.
u the same This is not a geological limit,
place but a geopolitical limit.
At the very least, OPEC will
have an easier time sustaining
price levels.
Iraq is a key
wildcard.

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Sustained OPEC Spare Capacity
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At 90% of installed capacity

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Same Price Cycle Again—But Extended
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High, Base, and Low Price Forecasts for Dubai, US$/bbl m

What will choke off

200
demand?
190
180
170
160
150 High-Case
140
130
120
110
100
90
80
70
60
50
40 Base-Case
30 Low-Case
20

Note: Actual up to 2009 and forecasts in 2010$ thereafter.

Note:

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Conclusion

In the upstream business, if you

are clever, you can make a lot of
money.

If you are not so clever, you can

still make as much money,
provided you control costs.

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 Future Demand Prospects
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Forecasting demand is easy!

You just need a few assumptions for GDP
growth and elasticity.
But, where will the supply come from?
Most demand forecasters do not know or
care!
But…
There can be no demand if there is
no supply.
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Chinese Demand Forecasting: A Case
in Point www.FGEnergy.co
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Q: What happens if everyone in China

drives a car?
A: People in the US and Europe will
have to walk!

Never ending demand growth stories in

China often ignore supply realities.

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 Downstream Oil
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Downstream oil business is cyclical.

There is a structural overcapacity which
cannot be solved by waiting for demand
growth to absorb it.
Large-scale closures are necessary.
Million of barrels of refining capacity
must be closed.
It is not certain whether another
recovery cycle may come at all.
End of the cycle or just another
cycle? 12
 www.FGEnergy.co
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In the refining business, you may

be very clever and still lose money.
If your neighbor makes a mistake,
you will both pay the price.

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Incremental Refining Capacity
(CDU) vs. Demand in Asia www.FGEnergy.co
m

Weak
Massive
demand “Golden age of overbuil Rebalancing?
drove refining” d

closures

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 Heavy crudes make up most of the world oil www.FGEnergy.co

resources m

But…
Exports of heavy crudes are limited
And…
New refining capacity based on heavy crudes has
grown
And…
Many of the refineries facing closures are sweet
crude based
Result:
Narrower sweet-sour differentials, further
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squeezing the cracking margins.
 The Unbalanced World:
Oil Demand, Supply, and Refining Capacity Growth,
2009-2015 www.FGEnergy.co
m

mmb/d

WEST
EAST

Oil demand net of biofuels, GTL/CTL, i.e., Refining capacity increase (net, after closures)
refinery output only
Assumed refining closures
Oil supply (crude, condensates, NGLs)

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 Pressure on Refining Sector
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Global Refinery Capacity

and Utilization Rates
Spare Capacity (mmb/d)
To bring utilization rates
Utilization
20 90% back up to 82-83% will
require closure of around 7
88%
16
million b/d of capacity
86%
through 2015
84%
12

82% On the basis of current

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80% capacity + scheduled
expansions: global utilization
78%
4 rates are set to fall to about
76%
76% by 2015
0 74% This is not feasible on a
2005 2007 2009 2011 2013 2015
sustainable basis!

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Natural
Gas

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 The Three Shocks
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• US natural gas revolution significantly

dampens LNG import requirements.
• Financial crisis substantially reduced
LNG demand in foundation countries.
• Up to 50 million tonnes of high-cost
new LNG from Australian/PNG gets
committed to the premium Asian
market, while low-cost Qatari gas is
slated for the low value US market!

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 US Gas Revolution: Implications for Global LNG
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Marcellus
Shale
• Strong
potential and
lower costs
• BUT faces
topography,
infrastructure,
and regulatory
bottlenecks.

Barnett production
2009: 1,7678 bcf
(around 25% of total
Texas production).
Unconventional gas production: almost half of US total gas production;
shale gas accounts for around 15-16% of unconventional gas production.
Qatari Volumes Targeting US and North European Markets
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QatarLiquefactionCapacityandFlexibleSupplies

90

80
• Qatargas II, III, IV, and
70

60
RasGas III (6 trains, 46.8
50 mtpa capacity) were
m

initially all targeted to

p
a
t

40

30
Flexible/DivertibleVolumes western markets (US,
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UK, and Belgium).
ContractedSupplies

10 LiquefactionCapacity

• Some volumes have

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

been redirected to
eastern markets in
Japan, China, and Dubai.

Some 33 mtpa still targeting western markets

but can be diverted to alternative destinations.

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Will oil prices and gas prices

converge?
Not for many years.

Will gas prices converge together?

Not in my life time.

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 Middle East: Rapidly Emerging
Importer 12
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Despite the region’s massive Middle East LNG
petroleum reserves, gas
10 Imports
production in almost all
Middle East countries are
struggling to keep abreast 8

with demand, especially by

the industrial and power 6

m
tp
sectors.

a
Middle Eastern energy
market dynamics shifted 4

dramatically in 2009 as a
result of the commencement 2

of Kuwaiti LNG imports.

Dubai is also an LNG 0
importer. These illustrate the Low Base High Low Base High Low Base High Low Base High Low Base High
Case Case Case Case Case Case Case Case Case Case Case Case Case Case Case
Middle East’s strong
dependence on natural 2009 2010 2012 2015 2020

gas and the rapidly

increasing gap between
supply and demand.
This is evidenced by the fact that other countries like Kuwait, the UAE,
Bahrain, and possibly others, will use LNG to augment domestic
gas supply in the coming years.
Crystal Balls’ Recommendations
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• Oil is like dating, gas is like getting

married.
• Be brave going upstream.
• Be very cautious going downstream.
• Do not rush into building refineries.
• Sellers of LNG must take into account
market realities.
• Discriminating among buyers is
rational, but remember, buyers have
alternatives.
• Buyers also need to be reasonable
and remember that24markets change.
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Thank
you
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