construction in a world of high energy prices

Construction in a World of High Energy Prices

Kevin LindemerExecutive Managing Director, Energy Markets Group

Copyright © 2008 Global Insight, Inc. 2

Two Competing Future Worldviews

• Oil is running out • Natural gas is running out• Prices will keep rising

• Oil and natural gas follow commodity cycles

• Commodity prices follow boom-bust cycles

• Technology reinforces cyclical trends:

Reduces costs of finding & producing resourcesCreates supply alternativesDevelops consumption efficiencies

• Capital choices lead to boom-bust resource availability

• Demand responds

Resource Shortage is Coming

Innovation and Capital Creates Change


Oil and Energy Prices: Are They Near the Peak? What Comes Next?

• Energy and oil prices are likely at or near peak and could begin to decline over the next several months

Assuming no significant further political and market disruptionsCapacity margins for all energy production are at or near historic low levels but gradual improvements are expectedThe dollar is expected to weaken further which may add short-term price support to prices

• Long lasting impacts on demand and supply from high energy prices should be expected

Past price ‘peaks’ have resulted in significant fundamental changes in energy production and usePast views of the future often underestimated the magnitude of the changes

• Negative impacts on demand growth from non-price factors are already in place

Carbon limits, biofuels, and vehicle efficiency standards

• Price impacts are emerging slowly


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Historical Price Financical Fundamentals DominatePhysical Fundamentals Dominate Physical Fundamentals Do Not DevelopGlobal Recession

Global Crude Prices:

Driven by Supply, Demand, and Financial Fundamentals


Henry Hub Natural Gas Price Outlook

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Nominal Forecast 2007 Real Forecast

Coal Price Forecast C&F ARA — Annually to 2012


The Fundamentals will Improve in the Short Term

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Data Sources: IEA, EIA, OPEC, Company Reports, Trade Press, The Energy Consulting Group

Net Global Oil Effective Capacity Changes, 5% Decline


OPEC Spare Capacity and Price

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WTI Price2002

Commodity Cycle Begins;Value of the Dollar Begins to

Decline; OPEC Spare Capacity Falls Below 5% of Demand

1979–19855.5 mbd demand decrease

5.5 mbd non-OPEC increase


Oil Prices and Inflation: Still Related, But Less So

• Oil prices have a smaller effect on inflation than 25 years ago

Economy is less oil intensiveMarkets are more efficient

• Oil prices have impacted economies differentlyUnited States and Europe experienced a smaller percent increase in the cost of imported crude oil than India and China

• The cost to China’s economy for imported oil is 10 times the level of 1995 and India is up by 5 times

– These economies have a greater incentive to change their oil consumption patterns than developed economies

• United States and Germany cost of imported crude oil has increased only three times from the 1995 level


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Emerging Markets Are Paying Proportionately More

Oil Net Import Costs as a Share of GDP


Oil Net Import Costs Share of GDP

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Prices at the ‘Top of the Mountain’…

• Consensus view of future prices has historically often been an extrapolation of the past

• Today’s energy production and consumption patterns are largely the result of two decades of low prices combined with the expectation of future low prices—the 1980s and 1990s

• High prices are changing market fundamentals and price expectations, which are moving to a higher future price playing field

Demand is slowingCapacity is being addedExpectations for future prices are higher than anytime in over 20 years

• Companies and governments are changing their budget prices and planning prices

• Consumers in some countries are changing their expectations about future price and consequently are changing their consumption patterns


…But What is on the Other Side?

• Future market drivers will be determined by higher prices

• Oil and energy markets by mid- 1980s were significantly different compared to the early- and mid-1970s

Current price environment has set the stage for possible dramatic changes in the next few years


Capital, Technology, and Policy Come Together for Change

• Capital: Venture Capital rushing into CleanTech; Utilities want to invest in clean coal, nuclear, wind, and energy efficiency

• Policy: Governments are forcing Energy Efficiency, Renewable Energy Adoption, and Clean Fuels

U.S. EPAct 2005: Nuclear Push, Energy EfficiencyU.S. EISA 2007: Biofuels Push, Lighting & Appliance, CAFEU.S. States: Renewable Portfolio StandardsU.S. States: Greenhouse Gas Emission RestrictionsComing: U.S. Federal GHG Emission Limits, Carbon capture & sequestration

• Technology: States are funding Cleantech Clusters around universities to spur economic development


Massive Fuel Switching Possible with Capital, Policy, & Technology


Has the Long-Term Mindset of Energy Prices Changed?

CIBC

BoonePickens


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Market RemanagedSupply ConstrainedDemand Constrained

Spikes don't last… But is this one ‘Special'?

Oil Price History and Global Insight Scenarios


Per Capita Energy Demand and GDP

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What growth path will Emerging Markets follow?

What growth path will Emerging Markets follow?

PriceEnvironmentTechnology

GrowthEnergy Security

Poland


World Energy Consumption: Are We Near an Inflection Point?

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Oil Demand in Emerging Markets: How High Will They Go?


World Oil Consumption: Will High Prices Make a Difference?

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Resources, Refining, and OPEC

• Global oil resource base is not a constraint but access to it is becoming more difficult and costly, and will require longer lead times

The low-cost ‘layer’ of oil has largely been developed and is being depleted

• Refining capacity constraints expected to ease over the next few years and be less important to overall price movements

Refiners adding capacity in response to high margins of the past few years

• OPEC’s market share is increasing and unmanageable levels of spare capacity are not expected to develop without significant demand developments

OPEC spare capacity through the 1980s and 1990s was a legacy of the rapid market shifts in the early 1980sOPEC has been raising its target price. Will it continue to rise?


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Oil Volumes & Technology: Resource Base is Not a Constraint

Source: IEA, EIA, Company Websites, O&G Journal, World Oil, Rand Corporation, ECG


What Do High Prices Mean for the Demand Forecast?

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2Tcf Industrial demand

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2Tcf Industrial demand

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Natural Gas ConsumptionNatural Gas Consumption

Power Market Gas Demand Growth Slows

Power Market Gas Demand Growth Slows


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Coal Nuclear Gas Renewables Hydro Petroleum

Renewable energy grows quickly under mandated “Renewable Portfolio Standards”

Renewable energy grows quickly under mandated “Renewable Portfolio Standards”

Technology, Policies, and Investments Favor Renewables…

Electric Generator Fuel DemandElectric Generator Fuel Demand


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L-48 Production Canada Net Imports LNG Imports Alaska

Outlook Assumes LNG is Priced to Fill the Supply Gap

LNG fills the gap until,

with Alaska joining after

2024

LNG fills the gap until,

with Alaska joining after

2024


Stabilizing Henry Hub at a New $7.00/MMBTU

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Henry Hub Price ForecastHenry Hub Price Forecast


LNG Prices Track Henry Hub in the Gulf Coast, Not Oil

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Henry Hub Trinidad Nigeria EqyptAlgeria Qatar Eq Guinea

Egypt Closest to Henry HubAlgeria, Nigeria, and Qatar Lowest Price

Outliers are Excelerate Energy

Egypt Closest to Henry HubAlgeria, Nigeria, and Qatar Lowest Price

Outliers are Excelerate Energy

Gulf Coast LNG Cargo Price 2007Gulf Coast LNG Cargo Price 2007


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Requirement for new refining capacityPutative additons to capacity

Implied surplus

Requirement for New Refining Capacity vs. Proposed AdditionsRequirement for New Refining Capacity vs. Proposed Additions

Capacity Tightness is Expected to Ease


OPEC Price Floors: Past, Present, and Future?

2007 Reference Price

2005 OPEC Reference Price

‘Old’ OPEC Reference Prices

…but why not target here?

2008 OPEC Reference Price

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Thank YouKevin Lindemer

Energy Markets Group, Global Insight

Presentations are available for download at www.globalinsight.com/events/2008ConstructionChicago

construction in a world of high energy prices

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