Douglas Westwood Presentation

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<p>John Westwood Thom Payne</p> <p>London Business School Energy Club</p> <p>8 Feb 2010</p> <p>1</p> <p>About usEstablished 1990 Aberdeen, Canterbury &amp; New York</p> <p>Activities &amp; service lines</p> <p>offshore</p> <p>Market research &amp; analysis Commercial due-diligence Business strategy &amp; advisory Published market studiespower</p> <p>Industry sector coverageOil &amp; Gas Power Renewable EnergyLNG LNG</p> <p>onshore</p> <p>400 clients in 60 countries</p> <p>&gt;600 projects completed for: government agencies energy majors and their suppliers investment banks &amp; PE firms the leading independent provider of commercial DD to OFS investors</p> <p>downstream</p> <p>renewables</p> <p>22</p> <p>Published reports include</p> <p>3</p> <p>Brazil huge blackout. Half the country left without electricity g y y South Africa fear of return of power cuts UK peak d k demand could exceed capacity b 2017 d ld d it by Australia Victoriaelectricitydemandnearedarecordpeak China cold weather electricity rationing continues UK gas supplies for businesses turned off gas off Venezuela key industries halted by hydroelectric crisisPress reports since November 2009</p> <p>4</p> <p>4</p> <p>Energy Market Drivers Sustainable Energy UK Power Generation The Future 5</p> <p>Energy sources &amp; issuesHydro 2% Environmental concerns E i t l over large dams CRW 10% Combustible renewables &amp; waste Important in some countries p Growth potential</p> <p>Nuclear 6% NIMBY concerns Long plant build time 5x gas powergen Capex</p> <p>Coal 27% Abundant supplies Highly polluting CCS very expensive i</p> <p>Gas 21% Abundant but local shortages Expensive to transport Off-the-shelf powergen plant Emits half CO2 of coalWorld Energy ConsumptionSource: Douglas-Westwood /IEA 2009</p> <p>Oil 34% Preferred transportation fuel Supply concerns Emissions concerns</p> <p>6</p> <p>Energy two linked concerns; one driver</p> <p>Population growth Energy supplies Global warming</p> <p>7</p> <p>Energy demand outpaces population growth193%sources: DWL,UN, BP</p> <p>95% 55%</p> <p>oil demand growth</p> <p>energy demand growth Global Growth 1965-2008</p> <p>population growth</p> <p>Consider oil, the fuel of transportation:</p> <p> 1 billion cars worldwide. Production capacity 86 million p.a. (2008) Electric cars will help efficiency (eventually) But how long to change the world car fleet (&gt;20 years?) Meantime China and Indias growing populations will motorise And cause a huge growth in oil demand and prices Can the global economy handle this?8</p> <p>Energy demand and climate change</p> <p> Security of energy supplies is amore i immediate problem th di t bl than global warming (and somegovernments are now realising this!)</p> <p>US Russia Germany p Japan UK France China India</p> <p>3.0 30 1.4 0.8 1.3 13 0.6 0.6 1.5 15 1.1 0.4 4.9 3.8 4.0 3.5 4.0 4.3 6</p> <p>7.6 11.1 10 9.5 8.9 CO2 (t.p.a.)</p> <p>19</p> <p> The big political driver is climatechange</p> <p> US consumes 5x more energyp per capita than China and p produces 4.4x CO2 per capita</p> <p>energy (toe p.a.) population (hundred million) 13.3 11.5</p> <p> But China has 5x the population What might happen as suchdeveloping economies grow?</p> <p>Douglas-Westwood analysis using multiple data sources</p> <p>9</p> <p>Chinas oil demand could double in a decade</p> <p>Chinadoubles China doubles USin2025</p> <p>Chinareaches USin2018</p> <p>Were China to follow Koreas path of development - as it largely has to date its oil demand would more than double in the next decade. By 2030, Chinese consumption could exceed 50 mbpdsource: Douglas-Westwood analysis using EIA, IMF, and US Census Bureau data</p> <p> China is the key driver of global oil demand growth China oil consumption up 4.9% y on y , 7.3% in December p p year year, Vehicles sold: China 13.6 m vs. US 10 m in 200910</p> <p>China leads a return to growth</p> <p> Exports +17.7% YOY, (4.0% forecast) Imports +55.9% ( p (31% expected) p ) Industrial output +25% YOY (Dec) GDP growth in Q4 exceeded 11% The world's biggest car market in 2009. 13.6 million sold compared with 10 million in the US Car sales forecast to rise 15% in 2010 Imports from Asia soar. S Korea +94%, Taiwan +91%, Malaysia +53% (Nov) China to move from 5th to 2nd largest economy overtaking Japan Oil imports +14% i D i t 14% in December, up 4 9% YOY b 4.9%</p> <p>DWL expect oil consumption to run1-2% ahead of GDP</p> <p> Other Asia oil consumption +12% Dec Other Asia Dec.And Other Asia has more consumption than China</p> <p>11</p> <p>China invests in future energy supplies</p> <p>Canada: $1.7bn Oil sands USA: $2.2 bn Windpower</p> <p>Russia: $300 bn. 300kbd UK: windpower bid</p> <p>Venezuela: $8 bn</p> <p>Nigeria: 1/6th O&amp;G reserves</p> <p>Brazil: $10 bn. 160kbd</p> <p>Australia: 20 year LNG Australia: $5 2 bn Coal $5.2</p> <p>January 2010: S Korea to buy 10 oil companies</p> <p>energy security a priority</p> <p>Data: Major investments in 2009. Douglas-Westwood</p> <p>12</p> <p>They got it wrong before will they again?</p> <p>March 1999</p> <p>April 2009</p> <p>13</p> <p>Europe oil production in decline, gas to follow7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 35 3.0 2.5 2.0 1.5 15 1.0 0.5 0.0</p> <p>Offshore OilSouthern Europe Other NW Europe Norway United Kingdom</p> <p>Source: Energyfiles</p> <p>Offshore gasSouthern Europe Other NW Europe Norway United Kingdom</p> <p>UK</p> <p>300 275 250 225 200 175 150 125 100 75 50 25 0</p> <p>Mil lions of bbls oil per day s</p> <p>Bcm per yea ar</p> <p>UK</p> <p>1985 1990 1995 2000 2005 2010 2015 2020 2025</p> <p>1985 1990 1995 2000 2005 2010 2015 2020 2025</p> <p> Offshore Europe has lost 50% of its oil production in a decade Massive dependency on Norwegian gas14</p> <p>Global oil supplies cannot continue to grow120 100millio barrels pe day on er200 prospects exist and growth will recover24</p> <p>Subsea recovers from a tough 20093,500 3,000Order Val lue $ millions</p> <p>2,500 2,000 1,500 1,000 500 0</p> <p>Aker Solutions Cameron Dril-Quip FMC GE Oil &amp; Gas</p> <p>1Q07</p> <p>2Q07</p> <p>3Q07</p> <p>4Q07</p> <p>1Q08</p> <p>2Q08</p> <p>3Q08</p> <p>4Q08</p> <p>1Q09</p> <p>2Q09</p> <p>3Q09</p> <p>Subsea Production and Processing OrdersSource: S bsea So rce Subsea Market Share Assessment December 2009 Do glas West ood Assessment, Douglas-Westwood</p> <p> Subsea processing orders were hard hit in with the recession Pl Players revenues reasonably stable due to backlog bl t bl d t b kl Orders bottomed in Q4 2008 Trend suggests 2010 will recover to normal levels normal FMC is subsea market leader 2009 Q1-3 by order value25</p> <p>Offshore ops &amp; maint spend to see good growth$80 $70 $60$billions</p> <p>$50 $40 $30 $20 $10 $0</p> <p>Africa Asia-Pacific Eastern Europe &amp; FSU Latin America Middle East North America Norway UK Rest of Europe</p> <p>2005</p> <p>2006</p> <p>2007</p> <p>2008</p> <p>2009</p> <p>2010</p> <p>2011</p> <p>2012</p> <p>2013</p> <p>2014</p> <p>Source: The World Offshore Operations &amp; Maintenance Market Report 2010-14 Douglas-Westwood</p> <p> &gt;7,000 fixed &amp; &gt;200 floating platforms 7 000 fi d 200 fl ti l tf Spend to exceed $330 billion over the next five years Plus demand for major modifications Subsea IRM 10% CAGR as subsea installations increase26</p> <p>Natural gas production to soarmillion barrels of o il equivalent per day n p</p> <p>100 90 80 70 60 50 40 30 20 10 0</p> <p>Africa Asia Australasia Eastern Europe &amp; FSU Latin America Middle East North America Western Europe</p> <p>Middle East</p> <p>1930 1937 1944 1951 1958 1965 1972 1979 1986 1993 2000 2007 2014 2021Source: Energyfiles</p> <p> Natural gas production currently dominated by E Europe &amp; Russia Middle East, Latin America, Africa &amp; Asia to see significant growth But local supply issues e.g. in Europe Deepwater gas and LNG to be of growing importance And unconventional gas US shale gas, coal bed methane, etc</p> <p>27</p> <p>Continuing growth in global LNG capacity400 350Liquefaction Capacity (mmtp pa)</p> <p>300 250 200 150 100 50 0</p> <p>Africa Asia-Pacific FSU Middle East South America North America Western Europe</p> <p>2004</p> <p>2005</p> <p>2006</p> <p>2007</p> <p>2008</p> <p>2009</p> <p>2010</p> <p>2011</p> <p>2012</p> <p>2013</p> <p> Large expansions to Qatargas and Rasgas plants to come onstream in2009/2010. 2009/2010 Will add 46.8 million tpa of new capacity to the market 46 8</p> <p> 33 additional installations forecast, incuding19 new facilities 53 new LNG import terminals and a number of expansions to expected p p pto be completed in the next five years28</p> <p>Escalating costs are a major concern for future developments200 190 180 Oil Price Actuals (Brent) $100</p> <p>Offshore Cost Inflation Index (CERA)</p> <p>$120</p> <p>Offhsore Cost Index C</p> <p>170 160 150 140 130 120 110 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014</p> <p>$80</p> <p>Brent Oil Price (Forecast) Brent Oil Price (Actuals)</p> <p>$60</p> <p>$40</p> <p>$20 $</p> <p>$0</p> <p> Cost Inflation has tracked oil prices closely over the past 10 years. Costs cooled somewhat in 2009 but remain high. BUT Oil prices are on the move again. BUT i th i Another flurry of offshore activity may well trigger a similar cost inflation scenario. Major challenge for the industry to manage costs in the supply chain over the next five years.29</p> <p>$/bb bl</p> <p>Oil &amp; Gas The Post-Recession World</p> <p> Technology-driven IOCs will be under increasing pressure for new discoveries and expanded production mostly from deepwater OECD countries are unlikely to sustain oil prices much above $80 Threat of recurring recession, sluggish growth, possibly stagflation China and other emerging economies will tend to absorb incremental oil production p If we find the oil, can we afford to lift it? Natural gas has to take up some of the load</p> <p> But recession has ended price is no object environment</p> <p> Cost will be an important driver Oil supply will be insufficient to meet future needs Both innovation and cost will be critical drivers in the years ahead Challenging times ahead, but the global economy will absorb all oilvolumes that can be produced at affordable prices</p> <p>30</p> <p>Energy Market Drivers Sustainable Energy UK Power Generation The Future 31</p> <p>Alternative energy challenges &amp; opportunities</p> <p>onshorewindoffshorewindbiomasssolarhydrowavetidal</p> <p>There is no magic bullet. None are ideal: many are very high cost &amp;/or technically immature / impractical / location specific / unproven /conflicting interests, etc</p> <p>nuclearCCScarboncap&amp;tradeconservation</p> <p>But.they are a major part of the way ahead32</p> <p>Alternatives the problem is costCon nventional Oil Unconventio onal Oil</p> <p>Middle East Oil Other Conventional Oil Deepwater Venezuela's Orinoco Belt Candadian Oil Sands (new dev.) Coal to Liquid Oil Shale European Biodiesel US Corn Ethanol Brazilian Sugar Cane Ethanol Coal with CCS Traditional Coal Nuclear</p> <p>Tidal energy costs 0.15 kWh, wave energy 0.25, coal-fired electricity costs 0.05. 0 05 The Carbon Trust Feb 2010</p> <p>R Renewables</p> <p>Coal</p> <p>Biofuels</p> <p>Offshore Wind Onshore Wind 0 20 40 60 80 100 $/bblequivalent 120 140 160</p> <p>Source:FT12/08</p> <p>33</p> <p>Windpower: a $36 bn world marketPortugal 2% Denmark 2% France 3% Italy 3% ROW 14%</p> <p>UK 3%</p> <p>US 22%</p> <p>158GWIndia 7% China 16% Spain 12% Germany 16%</p> <p>Installed Global Windpower Capacity (end 2009)Source:GWEC</p> <p> 2009: world installed capacity grows by 31% China +100% to 25GW; US by 39% to 35GW Europe +54% of which UK added1MW +36% Wind is a green solution and an important part of the energy mix But best locations are remote &amp; major NIMBY issues in some countries Offshore has major attractions: out of sight &amp; a better wind regime34</p> <p>Offshore wind: 5.3 GW to come online 2009-13Forecasts 2009-13 UK 2.3 GW Germany 1.4 GW Denmark 0.9 GW Belgium 0.4 GW Others 0.3 GW</p> <p>1400 Belgium 1200Annual Installed Capacity MW M</p> <p>China Denmark Germany Netherlands Sweden UK Others</p> <p>1000 800 600 400 200 0 2004</p> <p>2005</p> <p>2006</p> <p>2007</p> <p>2008</p> <p>2009</p> <p>2010</p> <p>2011</p> <p>2012</p> <p>2013</p> <p>Source: Douglas-Westwood</p> <p> UK is the worlds leading market Germany to follow China emerging (and exporting monopiles)35</p> <p>Tackling the installation problem</p> <p>Source: Keppel FELS</p> <p> By applying offshore oil &amp; gas techniquesSource: RESTATS,July2009</p> <p>36</p> <p>Offshore renewable energy global Capex in context200 180 160Source: Douglas-Westwood</p> <p>200 152 1 2</p> <p>Capex ($ billion)</p> <p>140 120 100 80 60 40 20 0 0.2 0.6 Marine Renewables 2 5.2 Of f shore Wind All Wind Of f shore O&amp;G 47 2009 2012</p> <p> Offshore renewables small but with strong g g growth Wind power is EU supply chain dominated Marine renewables is new with great future potential But will UK invest or will see a repeat of the windpower situation37</p> <p>Coal huge growth in world demand. Can CCS be financed?3.0</p> <p>Rest of world ld2.5</p> <p>Coal (billion tonnes s)</p> <p>2.0</p> <p>China consumes 45% of world coal</p> <p>1.5</p> <p>1.0</p> <p>0.5</p> <p>0.01965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007</p> <p>Dirty coal UK 1952</p> <p>Dirty coal China 2009</p> <p> Carbon capture &amp; storage has not yet been achieved on a large scale</p> <p>38</p> <p>38</p> <p>Is nuclear the answer?</p> <p> &gt;426 new reactors planned or proposed planned proposedworldwide (125 in China) Source: World Nuclear Assn.</p> <p> 28 under construction in China Nuclear suited to centralised grids The cheapest large scale, low carbonelectricity source EDF</p> <p> Newbuild takes 8-10 years &amp; 5 bn euros French EPR design safety issues raised f Finland reactor 3 years late and severalbillion euros over budget New [UK] sites at risk from lack of subsidies (CEO EDF) Level playing field with wind needed39</p> <p>The Negawatt</p> <p>Picture:</p> <p> The need to invest in less Average UK home emits 5.5 t CO2 p.a. twice as much as a car Reducing thermostat by 1 degree saves 10% of heating costs I a typicall B iti h h In t i British home 1/3 of th h t i l t th f the heat is lost through roof &amp; walls h f ll40</p> <p>Energy Market Drivers Sustainable Energy UK Power Generation The Future 41</p> <p>4 February 2010</p> <p>British h B iti h households h ld risk unaffordable energy bills Ofgem bills, warnsHouseholds and businesses face the risk of unaffordable energy bills unless radical action is taken to safeguard Britain s supply Britain's supply, the regulator Ofgem warned today.</p> <p>42</p> <p>Demand could exceed capacity by 2017</p> <p> If existing station closure programme is implemented How will new capacity impact ? p y pSource:TheUKPowerGenerationExpenditureReport20102030.DouglasWestwood</p> <p>43</p> <p>Coal, Nuclear &amp; Gas (CCGT) dominate UK powergenHydro and pumped storage, 5% Others, 0% Interconnector, 3%</p> <p>Wind, Wind 2% Gas turbines and oil engines, 6% Coal &amp; Coal Others, 35%</p> <p>CCGT &amp; CHP, 31% Oil, Oil 5% Nuclear, 12%</p> <p>Source:TheUKPowerGenerationExpenditureReport20102030.DouglasWestwood</p> <p>44</p> <p>79 GW of additions needed by 2030*8 Solar PV 7C Capacity Ad ditions GW W*Base case. Online dates</p> <p>Biomass Hydro Wave &amp; Tidal</p> <p>6 5 4 3 2 1 0</p> <p>Onshore Wind Offshore Wind Nuclear Coal Gas</p> <p> Total annual new plant additions of 1-7 GW per annum 2010-17 additions: &gt;50% gas, 44% wind (mainly offshore) A new UK dash for gas with security of supply implicationsSource:TheUKPowerGenerationExpenditureReport20102030.DouglasWestwood</p> <p>45</p> <p>149 billion spend forecast*10 9 8Capex (bil lion)*Scenarios range 119-162 bn</p> <p>Solar PV Biomass Hydro Wave &amp; Tidal Onshore Wind Offshore Wind Nuclear Coal GasNUCLEAR OFFSHORE WIND</p> <p>7 6 5 4 3 2 1 0</p> <p>COAL +CCS</p> <p> Total period gas spend 8% (C...</p>