crude oil: scenarios and
TRANSCRIPT
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
g
Crude Oil: Scenarios and Perspectives of the Market
““Heavy Sour Heavy Sour CrudeCrude Oil”Oil”
Robert SkinnerDirector
Oxford Institute for Energy Studieswww.oxfordenergy.org
Querétaro, MexicoAugust 16, 2005
Comisión de Investigación de los Precios del Petróleo
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gThe Market’s view of the long-
term has changedPrice of WTI for delivery 5 – 7 years out has moved up dramatically Since 2003 and prices all along the forward curve have moved up to new highs in recent weeks.
Source: Barclays Capital Aug 5, 2005
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gRefinery Capacity Tight
0
2
4
6
8
10
12
14
16
18
20Ja
n-81
Jan-
83
Jan-
85
Jan-
87
Jan-
89
Jan-
91
Jan-
93
Jan-
95
Jan-
97
Jan-
99
Jan-
01
Jan-
03
Jan-
05
Mill
ion
Bar
rels
Per
Day
U.S. Refining Capacity & Inputs
DOE/EIA
Tight Refinery Capacity.Today is not the whole Story--we have been there before.
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gCrude Supply Capacity
extremely tight
0
5
10
15
20
25
30
35
Jan-
90
Jan-
91
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Mill
ion
Bar
rels
per
Day
OPEC Crude Oil Production
Spare Capacity
… and the Marginal Supply fromOPEC is sour and heavy.
DOE/EIA
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gBenchmark crude oil (WTI)
setting record prices
Barclays Bank, Aug 10, 2005
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gAs oil prices increased,
differentials have widened: both Sweet – Sour…
-14
-12
-10
-8
-6
-4
-2
0
Jan-
02
Mar
-02
May
-02
Jul-0
2
Sep-
02
Nov-
02
Jan-
03
Mar
-03
May
-03
Jul-0
3
Sep-
03
Nov-
03
Jan-
04
Mar
-04
May
-04
Jul-0
4
Sep-
04
Nov-
04
Jan-
05
$/bb
l
WTI-Mars (Spot)WTI – Mars (spot)
Courtesy HETCO
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
g…and Light – Heavy:
WTI – Maya
9.00
11.00
13.00
15.00
17.00
19.00
21.00
02/08
/2004
16/08
/2004
30/08
/2004
13/09
/2004
27/09
/2004
11/10
/2004
25/10
/2004
08/11
/2004
22/11
/2004
06/12
/2004
20/12
/2004
03/01
/2005
17/01
/2005
31/01
/2005
14/02
/2005
28/02
/2005
14/03
/2005
28/03
/2005
11/04
/2005
25/04
/2005
09/05
/2005
23/05
/2005
06/06
/2005
20/06
/2005
04/07
/2005
18/07
/2005
01/08
/2005
US$/bbl
Courtesy HETCO
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
g…and not just for Maya
These differentials all reached a peak in late 2004; Canadian bitumen netbacks were negative ~$5.00/bbl
Companies reduced booked reserves
-15
-13
-11
-9
-7
-5
-3
-1
1Ja
n-02
Mar
-02
May
-02
Jul-0
2
Sep-
02
Nov-
02
Jan-
03
Mar
-03
May
-03
Jul-0
3
Sep-
03
Nov-
03
Jan-
04
Mar
-04
May
-04
Jul-0
4
Sep-
04
Nov-
04
Jan-
05
$/bbl
Brent-Dubai (Spot)
Courtesy HETCO
Brent – Dubai (Spot)
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
g
Why were heavy sour crudes so discounted?
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gWorld Crude Quality
Heavy Sour Crudes
Medium Sour Crudes
Light Sweet Crudes
Source: ENI World O&G Review, 2004
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gWorld Crude Quality
>50ºAPI ~ % S<0.5% S0.5-1%S>1% S
<35º >26º API
<50º>35ºAPI
<26º >10º API<0.5% S0.5-1%S>1% S
<0.5% S0.5-1%S>1% S
Excludes ‘ultra-heavy crudes’Source: ENI World O&G Review, 2004
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gWorld Crude Quality ‘stable’ since 1994
Source: ENI World O&G Review, 2004
Heavy
Medium
Light
Sour
Mediumsour
Sweet
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gQuality & Volumes of Main Crude
streams, Americas
Source: ENI World O&G Review, 2004
Maya is the mainplayer in the Heavy Sour
Stream, against mostly Venezuelan & Canadian streams
BrazilMaya
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gCrude Streams by Quality:
Americas
~ 47% in 1994 and ~ 60% in 2003 of crude streams with assigned qualities.
Heavy & Sour stream increasedfrom 35% to 42%
Source: ENI World O&G Review, 2004
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gHeavy Crude Oil (HCO)
• ‘Reversing nature’s work’ costs money all along the HCO supply chain
• Producer Refiner: opposing interests—reconcilable through contracts
• Supply bbl and Demand bbl headed in different directions re Sulfur [Morecrudes with more sulfur for markets wanting less/no sulfur]
• Relatively few suppliers
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
g
World Internationaldemand trade
CONDENSATES2.5 MMBD
GENERAL PURPOSE53 MMBD
WORLDPRODUCTION
2001 = 68 MMBD
Paraffinic crudes for lubes
Naphthenic crudes for lubes
SPECIALTY CRUDES12.5 MMBD
2 <2
15 12
<2 <1
<2 3
78 82
3 <2
(%)
ILLUSTRATIVE
World Oil Market: MicroeconomicCharacterization
Waxy crudes for direct burning
Heavy crudes(Deep conversion, asphalt)
Specialty crude markets: • Require special capital assets with single base-load feedstock (switching costs are high).• Strong bilateral commercial co-dependence for the long term.• Restricted to few sets of counter-parties.
Source: OIES, J-C Boué
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gDifferent Crudes yield different products
Maya22 °API3.3% S
Isthmus33 °API1.5% S
Olmeca40 °API0.8% S%
36.6
22.8
20.9
19.6
1.4
14.6
27.9
19.4
38.2
2.3
10
22
31
36
4
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Light ends
Gasoline/Naphtha
Distillates
Gasoil
Resid/HFO
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gDifferent Markets want Different Products
9
18
57
16
18
39
27
16
25
31
22
22
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Others
Gasoline/Naphtha
Distillates
Fuel Oil
United StatesCoker
EuropeFCC
JapanHydroskimming
…and use different refinery configurations
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gAnd the Product Barrel must meet
more stringent environmental specs
2000 2005 2010E
150 ppm350 ppm
150 ppm50 ppm[Germ 10 ppm/03]
10 ppm10 ppm
32EU Auto OilAuto Oil: Sulfur GasolineSulfur Diesel
United States Reformulated Gasoline required in urban areas of the East Coast (DC-Boston); Midwest; Texas; and most of California
SulfurConventional GasolineReformulated Gasoline
Diesel (Highway)
A complex set of standards introducedIn steps 2004, 2005, 2006, involving phased in specsincluding pool averages, % share off-spec, eventual caps with full compliancefor both Gasoline and Diesel@ 15 ppm by 2010
330 ppmRFG 125CA 40
500 ppm
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gEconomic incentives for deep conversion—
to increase Gross Product Worth (GPW)
Processing UnitsAtmospheric Dist.
Vacuum Dist.Reforming
FCCAlkylation
CokingHydrocracker
VeryComplex Coking
FCC/Alkyl
FCC SimpleHydroskimmer
50%
100%
Gasoline
Distillates
Fuel oil/ others
GPW (USD/B) 20.50 20.06 19.70
Typical feedstock Maya Maya Arab medium Arab light BrentCIF Price (USD/B) 15.57 15.57 17.00 18.10 21.03
18.35 18.88
1997 Prices
Source: OIES, J-C Boué
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gWorld Market for Heavy Sour Crude:
SupplySupply
7%
14%
9%
18%
5%12%
15%
20% Other
Other Middle East
Venezuela
Mexico
United States
Canada
PRODUCTION = 11 MMBD
Neutral Zone
Brazil5%
17%
25%
25%
8% 5%
15%
Other
Other Middle East
Venezuela
Mexico
Canada
INTERNATIONAL TRADE = 5.2 MMBD
Neutral Zone
Brazil
The heavy crude supply comes essentially from the Western Hemisphere (2001) Source: OIES, J-C Boué
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gWorld Market for Heavy Sour Crude
6%
6%
5%
12%
10%
4%4%
3%
10%
25%
2%
12%
1%0%
52%
MEXICO
OTHER
EUROPE
FAR EAST
UNITED STATES
BY PADD:
I
II
III
IV
V
THE DEMAND SIDE OF THE WORLD MARKET FOR HEAVY CRUDE (2002)BRAZIL
CHINAINDIA
0, VI
The US and USGC in particular takes the Lion’s share. (2002)
…and Heavy sour crudes don’t travel far—they stay in the WesternHemisphere
Source: OIES, J-C Boué
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
g
USGC DEMAND FOR 650°F+ MATERIAL) 2002
0%
2%
0%
6%
15%
32%
43%
2%
96%Refinery units
Bunkers FCC units
Cokers
Hydrocrackers
Asphalts
Power generation
Others
with dual burners
without dual burners
Where Residual Oil* goes (USGC, 2002)
*>650oF
92%
Power Gen.Mono-fuel 6%Bi-fuel < 1% Bunkers ~2%Others <1%
RefineryUnits
~75% at refineries
Bulk of residual oil consumed by CAPTIVE consumers. When supplyexceeds demand in these uses, price of heavy crude collapses.
$/bblHCO
SupplySource: OIES, J-C Boué
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
g
CANADA•Expanding supply•Gov’t support success:
Upstream = YesDownstream = No
•Landlocked•Seeking new outlets west•Many players (discounting?)•Diversifying by blending
MEXICO•Volumes flat/declining?•Domestic upgrading $$$•Contractual rigidity w/ buyers•Focused regional strategy
VENEZUELA•Strategy changing/unclear•Maximum upgrading?•SCO increasing
BRAZIL•New volumes•Low S, high TAN• Asia?
SAUDI ARABIA•CIF exporting; integrated•Blending•Domestic upgrading to come
US•Declining supply•Main buyer
DestinationRestrictions
Future:More
UpgradingAt Source:
•Brazil•Canada
•Venezuela•Saudi Arabia
Main HCO Suppliers:Prospects & Strategies
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gOil Resource Plays
Continuous-type Deposits of Hydrocarbons
•The global in-place resources of the three principal oil resource plays:
• Extra-heavy oil
• Bitumen in oil-sands
• Shale oil
•~ 7,500 billion bbls - > 3 times recoverable resources of conventional oil discovered to date.
•Canada, USA & Venezuela account for over 86% of these in-place resources.
Courtesy: K.Chew, IHSE
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
g
Heavy Oil Categories
10
100
1,000
10,000
100,000
1,000,000
10,000,000
0 5 10 15 20 25
Athabasca
Peace River
Cold Lake
Boscan
Orinoco Tia Juana
Bachaquero
Duri
API Gravity
Dow
nhol
eVi
scos
ity (C
po)
C Class: Bitumen
B Class: Extra Heavy
A Class:MediumHeavy
Canadian Oil Sands
Kern River
Chinese steam projects
OIES, After Kupcic, 2003
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
g
All ‘heavy’ is not ‘heavy’ when it
gets to theMarket
CERA’s Projected Gross Liquids Capacity Additions, 2004 to 2010
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gOil Resource Plays
Venezuela Orinoco Extra-heavy Oil Historic and Forecast Production
0
100
200
300
400
500
600
700
800
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Mill
ion
Bar
rels
per
Yea
r
Greenfield ProjectsExpansion of Existing AssociationsHamaca DebottleneckSincor DebottleneckCerro Negro DebottleneckHamacaSincorCerro NegroPetrozuataOrimulsion 1 (BITOR)
__ 1.0 mm b/d
__ 2.0 mm b/d
200,000 bbl / d / yr
*
* Raw heavy crude
Source: IHSE after PDVSA
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gAlberta Oil Sands Projected Supply
1000 b/d
Estimated (risked) output based on project schedules
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Suncor
Syncrude
Shell
CNRL HorizonDeer Creek MineOPTI/Nexen
IOL Cold Lake
Kearl Lake
IntegratedMining
Projects
RawBitumen
Net Total supply to marketFrom Oil Sands
Source: OIES
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gPotential heavy/medium sour
supply from Canada
20101,845
20051,086
20152,268
Source: CAPP, 2005
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gOil Sands Risks
Project execution, especially for large-scale projects (materials, equipment and skilled manpower)
• Infrastructure and labor supply in small area with simultaneousprojects
• High CAPEX projects limit scope for investments elsewhere
• Operational Risks: asset reliability in northern environment
• Market volatility: supply upsets, access, differentials, margins,natural gas costs.
• Environmental issues and performance
• Regulatory issues with expansions
• Financing: Business cycle; interest and exchange rates
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gSummary
• Crude supply is increasingly heavy & sour
• Refinery investment must ‘catch up’ to meet heavier crude slate
• Especially as product barrel must meet more strict sulfur standards
• And as HFO demand continues to decline
• Crudes that produce a lot of unwanted HFO will be discounted until new coking capacity is available—either at source or in the end market
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gToday’s Fundamentals
World GDP: 3.7-3.9/4.7 2005/2004China still airborne; USA still consumingand driving ‘UAV’s to WalMart
Economy
Demand
Supply
• Global growth 1.77 - 2.2 mb/d in 05.• U.S., China and rest of Asia & M.E.• Lighter (less HFO) & sweeter• Demographics and incomes trump price• Asymmetrical elasticity versus supply
• Non-OPEC outlook lower in short term• Russian atavism wobbly supplier?• West Africa, GOM, Unconventional• Lumpy supply; costs rising• Supply heavier & more sour• Investment up, but slow response
OXF
OR
D IN
STIT
UTE
FO
R E
NER
GY
STU
DIE
Sw
ww
.oxf
orde
nerg
y.or
gBudget Price Assumptions for Selected
Oil-Producing Economies
*For Export crudeSource: MEES, 23 May, 05