Presentazione Riyadh 25jan

8/14/2019 Presentazione Riyadh 25jan

1/16

Paolo ScaroniCEO

Riyadh, 25 January 2009


2/16

2

The oil turbulence

Just few months ago, the big issue would have been high oil prices:whether they were sustainable, whether markets were functioningproperly, and whether something should be done to regulate speculation

These days, energy ministers and oil executives focus instead on the oil-price collapse: the pros and cons of further production cuts, the new

outlook for oil and the impact this will have on the projects needed tosecure supply in future

Our sector is no stranger to cycles. But the turbulence we are currentlyexperiencing - with oil doubling in the 9 months to July 2008 and thenlosing two thirds of its value in the following 6 months is unprecedented


3/16

3

Oil price boom

15 years of low prices, and the consequent underinvestment in explorationand production. From the mid-1980s to the end of the 1990s, 70% of globalexploration was carried out in the US and Canada, mature areas whichhold only 3% of global reserves. By contrast, only 3% of exploration wascarried out in the Middle East, which accounts for 70% of global reserves.Add in growing demand, driven by the economic expansion of China andIndia, and what you get is declining spare capacity, vulnerable markets,global uncertainty and rising prices.


4/16

4

Proven Oil Reserves 1,166 bn bl150,000 New Field Wildcats drilled1980 -2006

Source: IHS PEPS, WO&GR 2008

North America69%

Africa; 3%

Australasia; 10%

Europe; 6%

FSU; 6%

Others; 5%

Middle East65%

North America; 3%Australasia; 3%

Europe; 1%

Others; 10%

FSU; 8%

Middle East; 1%

Africa; 10%

Little is known about the worlds underground oil resources


5/16

5

Oil price fall

Oil price fall is driven by three main reasons :

1. falling demand,2. uncertainty about economic prospects,3. rising production capacity.


6/16

6

Oil price fall

When oil prices rise beyond a certain level, demand for oil products in thedeveloped world suddenly becomes elastic. And given that the OECD stillaccounts for 60% of consumption, this has a big impact on global demand:

when the barrel rises above $110 -$120 dollars, even the mostobstinate consumer just can't make his or her dollar stretch;for example, between 2000 and 2008, per capita energy spending inthe US almost tripled to $7000 dollars a year, around a fifth of theaverage per capita annual income;as a result, US demand fell by almost a million barrels a day;this trend was already starting to emerge elsewhere. In the last twoyears, consumption in France, Germany, the UK and Italy hasdeclined by more than half a million barrels of oil a day, and by aquarter of a million barrels in Japan. And all over the developed world,high oil prices have sparked increased interest in energy savingmeasures, whether it be energy efficient city lighting schemes or neweco-friendly skyscrapers;already, OPEC is predicting that in 2009 demand for its oil will be atleast a million barrels a day lower than in 2008.


7/167

Oil price fall

The extent to which the real economy will suffer in the aftermath of thefinancial crisis is still unclear but it could actually lead oil demand furthersouth

The rising oil prices stimulated investments in production capacity.Indeed, global investments in the upstream sector doubled between 2002

and 2007. As a result, production capacity has also started to increase,albeit at a slower rate than investments.


8/168

Three critical issues

Besides, in this particular phase, a sector like ours, where a 5-year viewcounts as short term, is even more plagued by the following threedifferent issues

1. poor quality of oil data2. the recurrence of peak oil theories3. the financial speculation


9/169

Poor quality of oil data

China and many other developing nations have yet to implement a full

reporting system, and even the consumption data for OECD countries isonly available after a long time lag. On the production side, OPEC itselfhas to rely on secondary sources to gauge the production rate of itsmembersPoor data quality fogs up crystal balls all over the world, not least at theIEA: the Agency has consistently overestimated demand since 2004. InJanuary 2007 it asserted that in 2008 global demand would rise by 2million barrels a day. From February onwards, the Agency graduallynibbled away at its own forecast until in December when it finally admittedthat 2008 demand would actually fall, by 200,000 barrels a dayIt seems to have failed to spot that demand, rather than rocketing out ofcontrol, is actually on a rather moderate growth trend, with a meagreaverage increase of 1.4% a year since the turn of the century. The same

rate we saw in the decade before, when demand growth was widelyperceived to be sluggishBy consistently forecasting that demand growth would outpace supplygrowth, the IEA led many market operators to predict an impending oilcrisis and contributed to the spread of groundless anxieties in the market


10/1610

0.1

0.70.8

1.0

1.72.0

-0.2Jan 08 Mar 08 May 08 Jul 08 Sep 08 Nov 08 Dec 08

mb/d

From +2.0 mb/d (2.3%) estimated in January to a forecast of -0.2 at year end

month of forecast release

IEA forecasts: growth of world oil demand on yearly basis(2008 vs 2007)


11/1611

A u g

( 2 0 0 5 )

N o v

( 2 0 0 5 )

F e

b

M a y

N o v

A c

t u a

l A u g

2006 20072005

A u g

( 2 0 0 4 )

N o v

( 2 0 0 4 )

F e

b

M a y

N o v

A c

t u a

l

A u g

A u g

( 2 0 0 6 )

N o v

( 2 0 0 6 )

F e

b

M a y

N o v

A c t u a

l

A u g

mb/dmonth of forecast release

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Downward revisions also throughout 2005, 2006 and 2007

IEA forecasts: growth of world oil demand on yearly basis


12/1612

The recurrence of peak oil theories

Over the last few years, the imminent end of oil has been widelyprophesised by some influential figures inside the industry as well - forthe fourth time since the beginning of the oil age.

But rumours about oils demise have been greatly exaggerated.

Even if you just add up proved, conventional recoverable andunconventional resources, we can count on 130 more years of oil. And thisfigure fails to take into account the significant increase in recovery rateswhich we can achieve through technological advances.


13/1613

Financial speculation

As if poor data quality and fears about the end of oil werent enough, theoil price is also buffeted by hoards of ill-informed speculators, who boughtand sold 1.4 billion of paper barrels every day on average during thebooming times, compared to daily global consumption of only 85 million.And the Brent and WTI prices that the speculators influence have little todo with the price of real oil on any given day


14/16

14

The impact of the price turmoil

Spiking and plunging oil prices certainly make life complicated for oilcompanies, whether they be international or national, as they try to plansomething in the region of $1.5 trillion of investments over the next 5 yearsand provide adequate returns to shareholders. Uncertainty about whetheroil will rise to $200 a barrel or crash to $20 also impacts our humanresource management, our R&D efforts, and doesn't make it easy to drawup fair and sensible production sharing agreementsWhen oil prices are lower than expected, planned investments need to bedelayed. And when prices rise too high, the surplus cash tends to causeasset-price bubbles, which are then pricked when oil prices come downagainIn the west, low oil prices encourage waste, and detract attention from thedevelopment of alternative energy sourceshigh oil prices mean inflation and pinch consumer spending. Their impactis also regressive, hitting the poorest segments of the populationdisproportionately hardOil-price spikes and falls have important geopolitical impacts, periodicallyshifting power between countries which have oil and countries which useoil


15/16

15

A way towards stability

The time is ripe for the oil industry as a whole, producers and consumers,

to move beyond short term power shifts and work together in the interestof mutually beneficial stability

One idea would be to work towards a new contractual framework whichensures that producers can count on stable demand for their oil and stablerevenues, perhaps taking a leaf out of the take-or-pay structures which arecommon in the gas market. This would give producers rational incentivesto invest in exploration and production capacity

it would also make sense to work out some sort of remuneration for sparecapacity, along the lines of what happens in the electricity market. Sparecapacity has enormous value for consumers, ensuring security of supplyand limiting the uncertainty that feeds speculation. But for producers itcurrently constitutes an investment which doesn't provide a return


16/16

16

A way towards stability

The exact shape and nature of a new model for the oil industry would needto be carefully discussed. But it is in everyones interest to forsake their short-term interests and work towards a compromise

Just as consumers need supply stability, producers need demand stability.And the whole world needs to ensure oil is used rationally and efficiently.

In order to safeguard the environment, but also to buy scientists workingon alternative energy the time they need to produce truly effective energysolutions

Presentazione Riyadh 25jan

Documents

Transcript of Presentazione Riyadh 25jan