og market

2010

MEDIUM-TERM

OIL GASMARKETS&

Please note that this PDF is subject to specific restrictions

that limit its use and distribution. The terms and conditions are available at

www.iea.org/about/ copyright.asp

MEDIUM-TERM

OIL GASMARKETS

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Critical questions persist over the key oil and gas market drivers likely to prevail in coming years. Are economic and energy demand outlooks clearer than in mid-2009? In oil markets, have we seen a genuine structural shift in demand patterns? Will a nascent recovery in upstream spending evident in 2010 be sustained? How long will current levels of OPEC spare capacity persist? And for the gas market, will demand recover from its collapse in 2009? How long will the gas glut last? Will unconventional gas revolutionise gas markets outside North America? And how are China, Russia and the Middle East changing their approach to gas use?

The new combined IEA publication, Medium-Term Oil and Gas Markets 2010, tries to answer these questions, presenting a comprehensive, annual outlook for oil and gas market fundamentals for the next few years. The detailed oil market analysis develops two oil demand scenarios, given the ongoing uncertainties about the path of economic recovery after the worldwide slow-down in 2008/2009. Market balances are generated on a bottom-up basis, derived from detailed analysis of upstream investment projects, oil field decline rates, product-by-product demand trends, and refinery investment and operations. The gas market analysis provides a broader overview, assessing prices, unconventional gas, future demand developments, LNG markets as well as investment in all parts of the gas value chain and regional trends. It focuses on key producers, including Russia, the Caspian region, the Middle East and rising LNG exporters like Australia, and looks at the implications for global gas markets.

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INTERNATIONAL ENERGY AGENCY

The International Energy Agency (IEA), an autonomous agency, was established in November 1974. Its mandate is two-fold: to promote energy security amongst its member

countries through collective response to physical disruptions in oil supply and to advise member countries on sound energy policy.

The IEA carries out a comprehensive programme of energy co-operation among 28 advanced economies, each of which is obliged to hold oil stocks equivalent to 90 days of its net imports. The Agency aims to:

n Secure member countries access to reliable and ample supplies of all forms of energy; in particular, through maintaining effective emergency response capabilities in case of oil supply disruptions.

n Promote sustainable energy policies that spur economic growth and environmental protection in a global context particularly in terms of reducing greenhouse-gas emissions that contribute

to climate change.

n Improve transparency of international markets through collection and analysis of energy data.

n Support global collaboration on energy technology to secure future energy supplies and mitigate their environmental impact, including through improved energy

efficiency and development and deployment of low-carbon technologies.

n Find solutions to global energy challenges through engagement and dialogue with non-member countries, industry,

international organisations and other stakeholders. IEA member countries:

Australia Austria

Belgium Canada

Czech RepublicDenmark

FinlandFrance

GermanyGreece

HungaryIreland

ItalyJapan

Korea (Republic of)LuxembourgNetherlandsNew Zealand NorwayPolandPortugalSlovak RepublicSpainSwedenSwitzerlandTurkeyUnited Kingdom

United States

The European Commission also participates in

the work of the IEA.

Please note that this publication is subject to specific restrictions that limit its use and distribution.

The terms and conditions are available online at www.iea.org/about/copyright.asp

OECD/IEA, 2010International Energy Agency

9 rue de la Fdration 75739 Paris Cedex 15, France

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FOREWORD

MEDIUMTERM OIL AND GAS MARKETS 2010 3

FOREWORD Forthefirsttime,the IEA ispresentingacombinedpublicationthatsetsouttoanalyserecentandfuturetrends inoilandgasmarkets. Werecognisethatthesemarketsaredifferent,butthereareareas of convergence. Both, for example, are currently affected by uncertainty about thesustainabilityofOECDeconomicrecovery,togetherwiththemoreconsensualexpectationsforsharpgrowthinemergingcountries.

Forthenextfewyears,theoilmarketismarkedbymorecomfortablesparecapacitythanenvisagedlastyearandthedurationofthecurrentgasglutissettolastbeyond2013,atleastinsomeregions.Yetwe shouldntbe complacent.Developingnew suppliesofoilandgas is ingenerala longtermundertaking. Global oil demand is expected to grow by 2% this year and the gas market ischaracterisedbyastrongasymmetryasdemandmightpickupagain,especiallyinthepowersector,muchmorerapidlythanadditionalsupplies.Outputfrommatureoilandgasfieldscontinuestoshowaninexorabledecline,whileproductiongrowthisincreasinglyconcentratedinafewcountries,oftendistant from consuming regions. Recent tragic events in the US Gulf of Mexico highlight thedifficultiescompaniesandregulatorsfaceinsafelyaccessingmoredifficultsourcesofhydrocarbons.ThisiswhytheIEAurgesallstakeholderstoencouragesound,safeinvestmentalongthesupplychaintoensurethesecurityofoilandgassupplybeyondamorecomfortableshortandmediumterm.

Consumingregionsalsobeararesponsibilitytoencourageenergyefficiency inordertosmooththetransition towards a lowcarbon economy. In our mediumterm oil forecast, we present twoscenarios depending on the growth of the global economy. These scenarios are also based ondifferent assumptions in terms of energy efficiency progress. For the longer term, governmentsshouldstrivetoencourageathirdscenario:onewherestrongeconomicgrowth ispossiblewithoutexcessivetighteningofthesupply/demandbalance.Thisrequiresamoresystematicencouragementofmeasurestoboostenergyefficiency,acrossallenergyforms,startingnow.

This reportbrings togetherourmediumtermoverviewsofoilandgasmarkets.Suchanapproachhighlightsthesignificant,andongoing,progress inoildatatransparencyoverrecentyears,andthelackofsimilarprogressingasdata.Muchmoreneedstobedoneinthefieldofoildata,notablyforthedevelopingcountrieswhichwillsoonaccountforover50%oftheglobalmarket.Butthere isaclearneed also for improvedbreadth, accuracy and timelinessof statistical dataon gasmarkets.Thesemarketsareplayingan increasing role inenergypolicyand in the transition towardsa lowcarboneconomy.Aswehave learntfromoilmarkets,highquality,timelydataarealsoessentialtomanaginganyemergencythatmayarise,andholdsthepotentialtoreducemarketvolatilityborneofuncertainty.ThepartnersintheJointOilDataInitiativehaverecentlydecidedtoextendtheirworktoimprovethequality,coverageandtimelinessofdataongasmarkets.Weurgeallstakeholderstocontributetothisbolddataendeavour.

Despite all their differences, we are seeing increasing interaction between oil, gas and powermarkets.Ithoughtitwouldbeusefultoallowourreaderstomaketheirownjudgementsabouttheconvergenceofoilandgasmarketsbypresentingtheupdatesofourmediumtermanalysesforbothtogether.Wehopethisneweffortwillhelpprovidemoretransparencyandunderstandingofcurrentandfuturemarkettrendsatatimeofsuchgreatuncertainty.

ThisreportispublishedundermyauthorityasExecutiveDirectoroftheIEA.

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table of contents

oIl

Gas

Gas sUPPleMentIncluded on CD or available in PDF format

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forewordexecutive summary

overviewoil Pricing

Demandsupply

biofuelscrude trade

Refining and Product supplytables

overviewRecent Global Market trends

short-term Demand forecastsMarket trends in the lnG business

Unconventional GasPrices and trading Developments

Investments overviewInvestments in Production

Investment in lnGInvestments in Pipelines and Regasification terminals

Gas for Powersecurity of supply and transparency

Investments in storagenorth americalatin america

europeasia

appendices

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TABLE OF CONTENTS

6 MEDIUMTERM OIL AND GAS MARKETS 2010

TABLE OF CONTENTS

PART 1: OIL

OVERVIEW.......................................................................................19Plusachange......................................................................................................................19OilPricing..................................................................................................................................21Demand....................................................................................................................................22Supply.......................................................................................................................................23Biofuels.....................................................................................................................................24CrudeTrade..............................................................................................................................25RefiningandProductSupply....................................................................................................25

OILPRICING.....................................................................................27MethodologyforCalculatingtheIEAAverageImportPrice..................................................28OilPriceVolatility:Causes,ImpactsandPotentialRemedies............................................................29

FinancialMarketRegulation....................................................................................................31TheUSTakestheLead...........................................................................................................32DivergentEuropeanApproaches...........................................................................................34AsianMovestoClearing........................................................................................................34TheRoleofInternationalOrganisations...............................................................................35

DEMAND..........................................................................................36Summary..................................................................................................................................36GlobalOverview.......................................................................................................................38OilDemandSensitivity:CaughtBetweenIncomeandEfficiency............................................42OECDNorthAmerica................................................................................................................44EvaporatingUSGasolineDemand?.......................................................................................46

OECDEurope............................................................................................................................47OECDPacific.............................................................................................................................48EnergySubsidies:GettingthePriceRight................................................................................49Asia...........................................................................................................................................50MiddleEast...............................................................................................................................52StaringattheCrystalBall:NewTransportationTrends..........................................................54LatinAmerica............................................................................................................................57EthylenesBoomingTimesAhead............................................................................................58FormerSovietUnion................................................................................................................60

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SUPPLY............................................................................................62Summary..................................................................................................................................62NonOPECSupplyOverview.....................................................................................................63ABrighterOutlook....................................................................................................................63DissectingtheChanges:MoreUpstreamProjectsandSlowerDeclineRates.........................65RevisionstoForecast................................................................................................................66SustainedSpendingandAccesstoReservesWillDriveFutureProspects...............................67SourcesofNonOPECSupplyGrowth......................................................................................69TheEvolutionofCrudeOilProductionbyQuality...................................................................70RegionalBreakdown................................................................................................................71NorthAmerica.......................................................................................................................71PotentialImplicationsofUSGulfOilSpill..............................................................................72OECDEurope..........................................................................................................................73OECDPacific...........................................................................................................................74FormerSovietUnion(FSU).....................................................................................................74Asia........................................................................................................................................75LatinAmerica.........................................................................................................................76MiddleEast............................................................................................................................76Africa.....................................................................................................................................77

NaturalGasLiquidsCornerstoneofGlobalOilSupplyGrowth............................................77WhatareNGLs?.....................................................................................................................78RealisingInvestmentintheNGLValueChain.......................................................................78TrendsinNaturalGasProductionandImplicationsforNGLSupply.....................................79GlobalNGLSupplyOutlook...................................................................................................79

OPECCrudeOilCapacityOutlook............................................................................................81MiddleEastProducersStaytheCourse.................................................................................83ReversalofFortuneforOPECsAfricanProducers................................................................86IraqiEffortstoBoostCapacityFaceHeadwinds....................................................................87MixedOutlookforOPECsLatinAmericanProducers...........................................................89

BIOFUELS.........................................................................................91Summary..................................................................................................................................91BiofuelsProductionProspectsImprove,ThoughHurdlesRemain..........................................92KeyRevisionstotheSupplyOutlook........................................................................................94RegionalOutlookandPolicies..................................................................................................95OECDNorthAmerica.............................................................................................................95LatinAmerica.........................................................................................................................96OECDEurope..........................................................................................................................97AsiaPacific............................................................................................................................98

SecondGenerationBiofuelsHoldPromise,ButCapacityRemainsLow.................................99

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CRUDETRADE.................................................................................101Summary................................................................................................................................101OverviewandMethodology...................................................................................................101RegionalTrade........................................................................................................................102

REFININGANDPRODUCTSUPPLY....................................................105Summary................................................................................................................................105RefineryInvestmentOverview...............................................................................................106RefiningMarginsTrendingHigher.........................................................................................107RefineryUtilisationandGlobalThroughputs.........................................................................107ProductSupplyBalances........................................................................................................108ProductsSupplyModellingSeekingthePressurePoints....................................................109RegionalDevelopments.........................................................................................................112NorthAmerica.....................................................................................................................112USRefinersPrepareforIncreasedCanadianSupplies.........................................................113OECDEurope........................................................................................................................114OECDPacific.........................................................................................................................115JapanTalkingRefineryConsolidation,MajorReductionsYettoCome............................116China....................................................................................................................................117OtherAsia............................................................................................................................118IndiasDownstreamPetroleumSector................................................................................120LatinAmerica.......................................................................................................................121MiddleEast..........................................................................................................................122SaudiArabiasMegaProjectsSlipAgain?...........................................................................123Africa...................................................................................................................................125ChinaInvestingalsointheAfricanDownstream..............................................................125FormerSovietUnion............................................................................................................126

TABLES...........................................................................................127

PART2:GAS

OVERVIEW.....................................................................................141

RECENTGLOBALMARKETTRENDS...................................................145Summary................................................................................................................................145TheWorstDeclineEver..........................................................................................................146OECDDemandTrends.........................................................................................................146

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SeasonallyAdjustedDemandTrends..................................................................................147NonOECDDemandTrends..................................................................................................153

SupplyTrends:theBoomandtheBust.................................................................................154TheGasGlut........................................................................................................................154OilVersusGasDrilling.........................................................................................................155OECDRegions......................................................................................................................156NonOECDRegions..............................................................................................................158

AreGasMarketsGlobalising?................................................................................................158

SHORTTERMDEMANDFORECASTS..................................................161Summary................................................................................................................................161Methodology..........................................................................................................................162ShortTermGasDemandForecastsbySector.......................................................................163Residential/CommercialSector...........................................................................................164Industry................................................................................................................................164PowerGenerationSector.....................................................................................................165Others..................................................................................................................................167

MARKETTRENDSINTHELNGBUSINESS...........................................168Summary................................................................................................................................168StrongerLNGGrowthBuoyedbyLiquefactionExpansion....................................................168CurrentExpansionofLiquefactionanditsConsequences.....................................................170QatargasandRasGasMegaTrains,Qatar.........................................................................171SakhalinII,Russia................................................................................................................173Tangguh,Indonesia.............................................................................................................173YemenLNG,Yemen.............................................................................................................173PeruLNG,Peru.....................................................................................................................174Pluto,WesternAustralia.....................................................................................................174AngolaLNG,Angola.............................................................................................................174SkikdaandGassiTouil,Algeria............................................................................................175

SluggishPerformanceofExistingLNGPlants.........................................................................175BontangandArun,Indonesia..............................................................................................175NigeriaLNG,Nigeria............................................................................................................176MalaysiaLNG,Malaysia......................................................................................................176NorthWestShelf(NWS),WesternAustralia.......................................................................177

FloodofNewTerminals.........................................................................................................177TerminalsinEuropeNotablyintheUnitedKingdom,ItalyandFrance...........................177NewTerminalsinChina.......................................................................................................178LatinAmericaExpands........................................................................................................178MiddleEastEmerges...........................................................................................................179

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PortfolioLNGPlayersareThriving.........................................................................................179SupermajorsandInternationalOilandGasCompanies(IOGCs)........................................179AsianUtilityBuyersandTradingHouses.............................................................................180

UNCONVENTIONALGAS..................................................................181Summary................................................................................................................................181UnconventionalGasTypes..................................................................................................182

ASlowEvolution.....................................................................................................................182WhatPriceisNeededforUnconventionalGas?....................................................................184UnconventionalGasOutsidetheUS,aDreamoraReality?.................................................184LimitedStudiesonthePotential..........................................................................................185PopulationDensity...............................................................................................................186EnvironmentalConcerns......................................................................................................186GasGrid...............................................................................................................................187LandownersAcceptance.....................................................................................................187AccesstoTechnology...........................................................................................................187

UnconventionalGasDevelopmentsOutsideNorthAmerica................................................187Australia..............................................................................................................................188China....................................................................................................................................188India.....................................................................................................................................189Indonesia.............................................................................................................................190Europe:AnEvolutionRatherThanaRevolution................................................................190OtherRegionsHaveStilltoAppearontheRadarScreen....................................................192

UnconventionalGasGlobalPlayers.......................................................................................193TheNewPrize......................................................................................................................193WhatistheRationale?........................................................................................................194

PRICESANDTRADINGDEVELOPMENTS............................................195Summary................................................................................................................................195TwoDifferentPriceSystems:isa$5/MBtuGapSustainable?...............................................195GasPriceEvolution:aLookBackat200810......................................................................196

RegionalPriceEvolution.........................................................................................................203ContinentalEuropeanSpotPrice.........................................................................................203NorthAmericanPrices.........................................................................................................203AsianPriceDevelopments...................................................................................................204

EuropeanMarketDevelopment.............................................................................................205

INVESTMENTSOVERVIEW...............................................................214

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INVESTMENTSINPRODUCTION.......................................................217Summary................................................................................................................................217Introduction............................................................................................................................218DomesticMarketObligations(DMO)..................................................................................218

Russia......................................................................................................................................219TheYear2009:TheOutcome.............................................................................................220LongTermEnergyStrategyto2030:TakingintoAccounttheNewSigns?.......................223NewProjects........................................................................................................................227

TheCaspianRegion................................................................................................................230Turkmenistan.......................................................................................................................230Azerbaijan............................................................................................................................233

MiddleEastandNorthAfrica.................................................................................................234SaudiArabia........................................................................................................................234UnitedArabEmirates..........................................................................................................235Iran.......................................................................................................................................236Oman...................................................................................................................................237

INVESTMENTINLNG.......................................................................238Summary................................................................................................................................238PacificAdvancestwoMajorProjects:GorgonandPapuaNewGuinea................................240Gorgon,WesternAustralia..................................................................................................240PNG,PapuaNewGuinea.....................................................................................................241CBMtoLNGRaceisHeatingUpinAustralianStateofQueensland..................................242WesternAustralianRaceisalsoHot...................................................................................244Indonesia:DomesticMarketVersusExports......................................................................245

UncertaintyContinuesintheAtlantic....................................................................................246ShtokmanandYamalLNG,Russia.......................................................................................246Nigeria.................................................................................................................................247EquatorialGuinea................................................................................................................248Cameroon............................................................................................................................248Venezuela............................................................................................................................248

IranandIraqAreYettoEmergeintheMiddleEast..............................................................249Iran.......................................................................................................................................249Iraq.......................................................................................................................................249

NorthAmericanLNGExports?...............................................................................................250

INVESTMENTSINPIPELINESANDREGASIFICATIONTERMINALS.........251Summary................................................................................................................................251GlobalTrends.........................................................................................................................251Europe....................................................................................................................................256

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OnePipelineAdvances........................................................................................................257NorthAmerica........................................................................................................................261AMultitudeofLNGTerminalsisThereRoomorNeedforOthers?..................................262

SouthAmerica........................................................................................................................262NewLNGTerminalsanyHopeforaRegionalLNGMarket?............................................262PipelineProjectsMostlyonHold......................................................................................264

MiddleEastAfrica..................................................................................................................264ASmallRevolutionLNGImportProjects..........................................................................264PipelineDevelopmentsSmallInterconnectionsMoveForward.......................................264

Asia.........................................................................................................................................265PipelineProjects:MostlyLookingWest...............................................................................265LNGRegasificationTerminals:TwoMajorPlayersontheRise...........................................267

SoutheastAsia........................................................................................................................267PipelineDevelopment..........................................................................................................267RegasificationTerminals.....................................................................................................268

PART 3: GAS SUPPLEMENT

GASFORPOWER

SECURITYOFSUPPLYANDTRANSPARENCY

INVESTMENTSINSTORAGE

NORTHAMERICA

LATINAMERICA

EUROPE

ASIA

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EXECUTIVE SUMMARY


EXECUTIVE SUMMARY Oilandgasmarketsarestartingtoshowimportantsignsofrecovery,buttheimpactoftherecessionhasbeendifferentonthetwoenergysources.Gasdemandfellbymorethan3%in2009,doublethepace of decline seen for oil. This highlights the use of oil primarily as a transport fuel, whereconsumption is relatively inelastic. Gas on the other hand, as a major industrial and powergenerationfuel,wasfullyexposedtothedeclineinindustrialproductionseenintherecession.ButcommontobothoilandgasisthedichotomybetweenOECDandnonOECDmarkets,withcontinuinggrowth in nonOECD regions, notably China, India and theMiddle East, contrastingwithweakerdemandinOECDandFSUcountries.Lastyearsmediumtermoutlooksforoilandgasmarketswerewrittenamidapparentlycontradictoryconcerns.Inthemidstofchronicuncertaintyaboutprospectsfor the global economy, virtually at the nadir of the recession, there were nonetheless seriousquestionsabouttheadequacyofupstreamoilinvestmenttomeetananticipatedeventualreboundinoildemandgrowth.Whileupstreamgasconcernsweremoremuted,owingtothesurgeinNorthAmerican unconventional gas output, and the massive expansion of LNG liquefaction plants,uncertaintyabout the timingandextentofmediumterm investments throughout thevalue chainwerestillpresent.Ayear later,manyuncertaintiespersist. Regulationofcommodity futuresmarkets is stillclearlyonpolicymarkersradarandoperationalregulation inthephysicalmarketforbothgasandoilcouldbeoverhauled,dependingonresultsoftheenquiryintotheGulfofMexicodisaster.TheEuropeandebtcrisishascreatedadditionaluncertaintyovertheresilienceoftheeconomicrecoverythereandfurtherafield.QuestionspersisttooovertheimpactofstimuluswithdrawalandpotentialoverheatingintheChineseeconomy.Demand Althougheconomicrecoveryhasbecomereentrenched, insharpcontrastto lastyearsbackdrop,concernspersistabout itsstrengthanddurability. Asaresult,twooildemandscenariosareagainpresented.UsingMay 2010OMR data as our starting point,we have developed two contrastingviews on economic growth,with the lower variant also tempered byweaker assumed efficiencygains. Common featureshoweverare thepredominanceofboth thenonOECDcountriesand thetransportationsectorindrivingdemandgrowth.InthehigherGDPandefficiencygainscase(thebasecaseforouranalysis),oildemandgrowsbyanaverageof1.2mb/dannually(1.4%),reachingcloseto92mb/dby2015.Oildemandrecoverstoprecrisis2007levelsagainby2010.ThispresupposesGDPgrowtharound4.5%peryearfrom2010onwards(inlinewithrecentIMFprojections)andareductioninoiluseintensityof3%annually,nearthelevelseeninthelastfiveyears.But many voices still envisage a weaker path for global economic growth, amid world tradeimbalancesandtheweakening impactonactivityofaggressivefiscalconsolidation. ThissuggestsalowerGDPandefficiencygainscase. Here,globalGDPgrowsbyaweaker3%annually,while theprogress inoiluseefficiency isslowedbytheweaker investmentenvironment,pushinganticipatedreductionsinoiluseintensitybacktothe15yearaverage,near2%peryear.Inthiscase,annualoildemandgrowthaverages840kb/d(1.0%),takingtotalglobaldemandto90mb/dby2015,withthereattainmentof2007demandlevelsdeferredto2011.

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EXECUTIVE SUMMARY


Thisyear for the first time,wehavemodelledOECDgasdemand into themediumterm,usingthesamehighcaseGDPassumptionsasfortheoilmarketprojections,notwithstandingthatgasdataaregenerallylesscomprehensivethanforoil.WeseeOECDdemandreturningto2008levelsbyaround2012,butwithlargeregionalvariations,withEuropeespeciallyweak,givenitssharpdeclinein2009(nearly6%)andongoingconcernsaboutitsrecovery.OECDEuropedoesnotreturntodemandlevelsseeninearly2008untilafter2013.ThepowersectorisakeysourceofuncertaintyinOECDdemand,butalso insomenonOECDregions, includingtheMiddleEast.OECDNorthAmericaandPacificgasdemand is recovering, and canbe expected to surpass2008 levels as early as2012, as industrialproduction recovers, and gas remains the fuel of choice in the power sector. Asian demand isgrowing strongly;Chinese gasdemanddoublingbetween2007 and2015now looks conservative.Hencegasmarketsseemlikelytotightenmorequicklyinthemediumterminsomeregions,notablythePacific,incomparisontoEuropeorNorthAmerica.Supply Some of last years concerns aboutmediumterm oil supply prospects have eased,with baselineglobalsupplycapacitynowestimatedcloseto91mb/d,around0.9mb/dhigherthananticipatedinthe June2009MTOMR.Strongercrudeprices, lowercostsandareneweduptick inspendinghavehelpedfacilitatethisupturn.Newprojectscheduleshavebeenadvanced,andimplieddeclinefrombaseload fields looks tohaveeased slightly (albeit remaininga constantdrainonglobal supplies).NonOPECsupplycontinuestogrowthroughtheoutlook,concentratedontheAmericas,theCaspianandbiofuelswhichoffsetmaturefielddecline,notablyintheOECDcountries.HoweverOPECcrudeand natural gas liquids generate the bulk of expected net growth in production capacity of over5mb/d through 2015. Notwithstanding perpetual supplyside risks, the degree towhichOPEC isrequiredtocontrolsparecapacityovertheoutlookthereforedependslargelyonthetypeofGDP/oildemandpicturethatemerges.Ingas, thenotableexpansionofNorthAmericangasoutputhascontinuedapacedespitesubduedgasprices, addingmore than100bcmof gas toworldoutput, andmaking theUnited States theworlds largestgasproducer in2009,anda largevirtualgasexporter,asLNGsuppliesdestinedforthatmarket are diverted to other consumers. The development of unconventional gas in NorthAmerica isofglobalsignificance. Manycountriesareseekingtoemulatethissuccess,althoughthetimehorizonsforthissuggestmajorcontributionsbefore2020areunlikely,forexample, inEurope.However, a number of LNG projects based on coal bed methane are advancing towards finalinvestment decisions (FID) in Australia, and Chinamay also bewell placed to take advantage ofunconventional gas. While LNG capacity has continued to expand, output is lagging, as someupstreamsuppliesareconstrainedandtechnicalproblemsplaguenewplants. ButLNGoutputcanbeexpectedtoincreasebyaround120bcmby2013,anear50%increaseover2008.Notwithstanding thesepositivedevelopments, extendedproject lead times are stillwithus, evenmoresonowthatabriefspelloffallingupstreamcostsin2009seemstohavelevelledoff.Moreover,ongoinggeopoliticalandinvestmentrisksincountriessuchasRussia,NigeriaandIraqaffectbothoiland gas, and the potential for further deepwater project delays after the recentGulf ofMexicodisaster,suggestthatadegreeofsupplyforecastconservatismremainsinorder.

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EXECUTIVE SUMMARY

MEDIUM-TERM OIL AND GAS MARKETS 2010 15

Of course, depletion from existing fields is an issue in gas just as for oil. Decline rates, estimated at between 5% and 7.5% per year, mean that nearly half of the worlds gas production needs to be replaced between now and 2030. Gas output is declining in many OECD countries, and imports from more distant, and harder to develop sources, are inevitable. Investments have to be made right through the gas value chain in a timely way, including long distance pipelines and storage facilities. Indeed these segments of the gas market are most likely to be affected by the current uncertainty. Moreover, supply-side risks abound in both oil and gas. Firstly, there is an ever-present threat of geopolitical disruption surrounding a number of key OPEC oil producers. Secondly, the potential for the recent Deepwater Horizon disaster in the US Gulf of Mexico to delay substantial deepwater developments which underpin much of expected oil and gas supply growth. Efforts to improve safety and environmental standards will understandably be redoubled after the tragedy. Should the impact of those measures be widespread delays to deepwater projects, anything between 100 kb/d and 800 kb/d of new 2015 oil supply currently included in our outlook might be deferred. For gas, domestic market obligations have emerged as a key trend in producing regions, with governments reserving volumes for their own customers. Exhausting the resource base is not the issue, but instead the ability of the oil and gas industry to respond quickly enough with adequate investment. This will be the case especially if demand should recover more quickly than envisaged here, either through a more broad-based recovery, or in the case of gas, more rapid expansion of gas-fired power generation, which has become the favoured option in many regions. So in the higher GDP base case, and in spite of an assumed ongoing improvement in oil use intensity, effective OPEC spare crude capacity begins to decline again from next year. Although the estimated 2015 level of 3.5 mb/d remains more comfortable than prevailed for much of 2002-2008, the declining trend itself, to well below 5% of global demand, suggests more nervous markets could re-emerge after a prolonged spell of relative price stability in the last year. Lower economic growth, or perhaps more importantly, a sustained impetus to improve oil and gas end-use efficiency and diversify transportation and electricity energy sources, could maintain oil spare capacity closer to recent levels, and prolong the period of comfortable gas supplies. In both cases however, the call on producers outside OECD will increase. Prices Against this backdrop, prices in the two energy commodities have followed different paths. Crude oil prices soared from the trough of $35/bbl in February 2009 to reach $85/bbl in May 2010. In contrast, gas prices have remained subdued, falling to levels at or below one-third of oil prices on an energy content basis over the last year. For oil, comparatively benign prompt market fundamentals following the economic recession look to have been over-ridden by other factors, with crude oil prices having remained within a steady range at a historically high $65-$85/bbl. The macro-economy, currency swings and expectations about longer-term market fundamentals have all helped shape recent oil price trends, over and above the influence of more tradional physical drivers. However, uncertainties within the physical oil market also persist. Reliable demand and stocks data are lacking for the non-OECD portion of the market that will soon surpass 50% of global demand. Fears of potential renewed supply tightness are offsetting downside demand risks from economic market uncertainty. A common feature for both the physical and financial markets for oil is the

EXECUTIVE SUMMARY


relativepaucityof reliable, timely,marketwidedata and information.Achieving sustainablepricestability needs greater visibility for the prompt market, allied to greater clarity about marketprospectsandpolicymeasuresforthefuture.Someofthesecommentsapplyequallytogas. A little lessthanhalfofOECDgasdemand ispriceddirectlyoffoil,withvaryingtime lagsand linkages. In2009,thesemarkets, includingJapan,Korea,andmostof continental Europe sawprices averaging about$9/MBtu. InNorthAmerica and theUnitedKingdom,pricesaveragedlessthanhalfthislevel,onanenergybasisaroundonethirdthatofoil.Unsurprisingly,thisdichotomyhasledtogasbuyers,especiallyinEurope,seekingaccesstolowerpricedspotgas,andplacedenormouspressureonlongtermtakeorpaycontracts.Forthemoment,both these features of the continental market, longterm contracts and oil indexation, remain,althoughproducershavemadesignificantconcessionstobuyers.Again,andarguablyevenmoresothanforoil,data isareal issue,particularlyforcountriesoutsidetheOECD,whichalreadyaccountformorethanhalfofglobalgasuse.EvenwithintheOECD,uptodategasdataaresadlydeficient.Anumberofpartiesareworkingtorectifythis,includingindustrybodies.TheIEAisactivelyworkingto improve this situationwith initiatives such as the recently released European gasmap,whichshowsmonthly crossborder gas flows in Europe. Muchmore remains to be done, however, ifmarketsarenottobesubjectedtounnecessaryuncertaintyandvolatility.The individualoverviewsofoilandgasmarketsatthebeginningofthetwosectionswillprovideamoredetailedsummaryofouranalysisforbothmarkets.

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Overview

Oil Pricing

Demand

Supply

Biofuels

Crude Trade

Refining and Product Supply

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OIL1Part

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PART 1: OIL OVERVIEW


OVERVIEW Plus a change Last yearsMTOMRwaswritten amid unprecedented uncertainty about prospects for the globaleconomy,andseriousconcernsabouttheadequacyofupstreaminvestmenttomeetananticipatedreboundinoildemandgrowth.ThatreportalsohighlightedafairlydireoutlookforOECDoilrefiners,andanongoingdebateoverthekeydriversofcrudepricesfundamentalandfinancial.

Global Balance Summary (Base Case)(million barrels per day)

2009 2010 2011 2012 2013 2014 2015GDP Growth Assumption (% per year) -0.83 4.13 4.27 4.40 4.47 4.51 4.52 Global Demand 84.77 86.39 87.69 88.87 89.98 90.99 91.93

Non-OPEC Supply 51.52 52.22 52.60 52.44 52.11 52.51 52.50 OPEC NGLs, etc. 4.66 5.40 6.25 6.64 6.89 7.11 7.24

Global Supply excluding OPEC Crude 56.18 57.62 58.86 59.08 59.01 59.63 59.74 OPEC Crude Capacity 34.85 35.59 35.36 35.23 35.51 36.51 36.78

Call on OPEC Crude + Stock Ch. 28.59 28.76 28.83 29.79 30.97 31.37 32.19

Implied OPEC Spare Capacity1 6.26 6.83 6.53 5.44 4.54 5.15 4.60 Effective OPEC Spare Capacity2 5.26 5.83 5.53 4.44 3.54 4.15 3.60

as percentage of global demand 6.2% 6.8% 6.3% 5.0% 3.9% 4.6% 3.9%

Changes since December 2009 MTOMRGlobal Demand -0.09 0.06 0.18 0.21 0.18 0.13 Non-OPEC Supply 0.25 0.58 0.47 0.32 0.42 1.16 OPEC NGLs, etc. -0.20 -0.28 -0.09 -0.01 -0.07 -0.23 Global Supply excluding OPEC Crude 0.05 0.30 0.38 0.31 0.35 0.93 OPEC Crude Capacity 0.03 -0.07 -0.01 0.04 -0.25 -0.39

Call on OPEC Crude + Stock Ch. -0.15 -0.24 -0.20 -0.10 -0.17 -0.80

Implied OPEC Spare Capacity1 0.18 0.17 0.19 0.14 -0.07 0.41 1 OPEC Capacity minus 'Call on Opec + Stock Ch.' 2 Historically effective OPEC spare capacity averages 1 mb/d below notional spare capacity.

Oneyearon,manyuncertaintiespersist,evenifsomeclarityhasreemergedconcerningtheeconomy,the supplyside and structural shifts in demand. Regulation of commodity futuresmarkets remainscentre stage,andOECD refiningmargins, thoughbetter thana yearago, remainweakbyhistoricalstandards. Uncertainty continues over the resilience of a particularly fragile European economy,although a broader economic recovery is underway, something that last years projections lacked.Questions persist too overthe impact of stimuluswithdrawal and potentialoverheating in the Chineseeconomy. For this reason,weagainruntwooildemandcases based on differenteconomic expectationsthrough 2015, albeit themore optimistic outlookshowing 4.4% economicgrowth for 20102015 now

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serves as this years base case. Crucially however, there are signs that an impetus for structuralimprovements in oil use efficiency has become embedded, under a proviso of continuedeconomicrecovery.Thisyear,aslast,weseeanupstreamsectorfacingdifficuliesexpandingoilsupplyrapidly,notleastasanestimated3.1mb/dofcapacity is losteachyeardue tomature fielddecline.But lastyearswidespread concerns over collapsing investment and accelerating decline now look a little jaded.Baselinesupplyhasbeenrevisedsignificantlyhigher,andaround5.5mb/dofnetsupplygrowth isexpectedby2015,eventhoughthisstilllagsdemandgrowthinthebasecasescenario.However,theindustry performed better than expected in 2009, even if renewed supply risks are evident.Physically, Iraq,Russia,NigeriaandVenezuelaarecapableofhigheroutputvolumesthanweshowhere.Butextendedprojectleadtimesarestillwithus,evenmoresonowthatabriefspelloffallingupstreamcostsseems tohave levelledoff.Moreover,ongoinggeopoliticaland investment risks intheabovecountries,andthepotentialforfurtherdeepwaterprojectdelaysaftertherecentGulfofMexicodisaster,suggestthatadegreeofsupplyforecastcautionremainsinorder.Runningoutofoil isnotthe issue,rathertheabilityofthe industrytomobilise investmentquicklyenough tomeet the higher of our two demand profiles. So in the base case, and in spite of anassumed3%annual reduction inoiluse intensity,effectiveOPEC spare capacitybegins todeclineagainfrom2011.Abroadbasedrise inexpectedOPECcapacity in2014pushessparecapacitybackabove 4mb/d again, before it dips toward 3.5mb/d in 2015. That level remains much morecomfortable thanprevailed formuchof20022008,notingalso thatsparecapacityalonedoesnotdeterminemarket sentiment.But thedeclining trend itself, to levelsbelow5%ofglobaldemand,suggestsmorejitterymarketsahead,afteraprolongedspellofrelativepricestabilityinthelastyear.

Global Balance Summary (Lower GDP Case)(million barrels per day)

2009 2010 2011 2012 2013 2014 2015GDP Growth Assumption (% per year) -0.83 3.23 2.87 2.95 2.98 2.99 2.98 Global Demand 84.77 86.11 86.62 87.22 87.96 88.83 89.82

Non-OPEC Supply 51.52 52.22 52.60 52.44 52.11 52.51 52.50 OPEC NGLs, etc. 4.66 5.40 6.25 6.64 6.89 7.11 7.24

Global Supply excluding OPEC Crude 56.18 57.62 58.86 59.08 59.01 59.63 59.74 OPEC Crude Capacity 34.85 35.59 35.36 35.23 35.51 36.51 36.78

Call on OPEC Crude + Stock Ch. 28.59 28.48 27.76 28.14 28.96 29.20 30.07

Implied OPEC Spare Capacity1 6.26 7.11 7.60 7.10 6.55 7.32 6.71 Effective OPEC Spare Capacity2 5.26 6.11 6.60 6.10 5.55 6.32 5.71

as percentage of global demand 6.2% 7.1% 7.6% 7.0% 6.3% 7.1% 6.4%

Changes since December 2009 MTOMRGlobal Demand -0.09 0.16 0.19 0.47 1.02 1.80 Non-OPEC Supply 0.25 0.58 0.47 0.32 0.42 1.16 OPEC NGLs, etc. -0.20 -0.28 -0.09 -0.01 -0.07 -0.23 Global Supply excluding OPEC Crude 0.05 0.30 0.38 0.31 0.35 0.93 OPEC Crude Capacity 0.03 -0.07 -0.01 0.04 -0.25 -0.39

Call on OPEC Crude + Stock Ch. -0.15 -0.52 -1.27 -1.75 -2.19 -2.97

Implied OPEC Spare Capacity1 0.18 0.44 1.26 1.79 1.94 2.57 1 OPEC Capacity minus 'Call on Opec + Stock Ch.' 2 Historically effective OPEC spare capacity averages 1 mb/d below notional spare capacity.

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Onceagainhowever,echoingourthoughtsoflastyear,1mb/dplusofannualoildemandgrowthisby no means inevitable. Lower economic growth (or alternatively high growth allied to anaccelerated impetus toimprove oil use efficiencyanddiversifytransportationfuel supplies) couldmaintain spare capacitycloser to recent levels ofbetween 56mb/d, whilestill generating a slow butsteady annual rise indemand for OPEC crude.With producers havingenjoyed priceswithin theirpreferred range of $65$85/bbl formuch of the last year, despite spare capacity remaining atrecessioninducedlevels,suchaprospectneednotbeundulyalarmingforproducers.

As always, projections like these raise asmany questions as they answer. Shifts in assumed oilintensityordeclineratescouldgeneratemarkedlydifferentoutcomes.Policychangeregardingenduserprice subsidies, access tohydrocarbon reserves andoilproduct quality could also transformthesedeliberatelysimplifiedscenarios.Witha revampof financialmarket regulationunderway,sotoocouldincomingregulationwereittosharplycurbliquidityincommodityfuturesmarketsandtheabilityofproducersandconsumerstohedgefutureinvestment,evenifthisnowlookslesslikely.

Bydefinition,afiveyearoutlooktakestheworldasitis,examininghowplannedinvestmentsmatchexpected demand under the prevailing policy framework. We know that several outcomes arepossible,andthatsustainedinvestmentandactivelymoderateddemandgrowthcanaverttighteroilmarkets,making increasedvolatilityfarfromcertainforthemediumterm.Thedie is largelycast intermsof thepolicieswhichwill impactuponmarket fundamentals to2015,but the importanceofclear policy guidelines for the period after that is clear. Extending the recent period of relativemarket stability requiresongoingefforts tomaximise safeandsustainable investment, tobroadenaccesstocapitalandenergyresources,andtopromoteoiluseefficiencyandmarkettransparency.Oil Pricing Inthe12monthssincetheJune2009MTOMR,debatehascontinuedovertherelativecontributionsofseveraloilpricedrivers.At firstglance,benignoilmarket fundamentals following theeconomicrecession look to have been overridden by other factors,with crude oil prices having remainedwithin a remarkably steady range at an historically high $65$85/bbl. Perceptions on the path ofeconomic recovery,equitymarkets,open interest in commodity futures, fluctuations in thedollarand, more recently, concerns about possible contagion from sovereign debt issues within theEurozonehaveallactedtoaugmentthemoretradionaldriversofprices.

However,uncertaintieswithinthephysicaloilmarketalsopersist,notleastconcerningthetruepaceofdemandgrowth inemergingcountries.Reliabledemandandstocksdataaredifficulttocomebyforaportionof themarket thatwill soon surpass50%ofglobalconsumption.Amiduncertaintiesabouttheinteractionsbetweenmarketcontangoandsupplytothepromptmarket,andwithcurrentlevels of OPEC spare capacity arguably only comfortable compared to recent history, fears ofpotential renewed supply tightness are offsetting downside demand risks deriving from renewed

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economic market uncertainty. Whether this uneasy truce for price volatility holds is open toquestion,amidongoinginelasticityonboththesupplyanddemandsidesofthemarket.However,acommonfeatureforboththephysicalandfinancialmarketsforoilistherelativepaucityofreliable,timely,marketwide data and information.Achieving sustainable price stabilitywill partly rest onimprovements invisibility for thepromptmarket,allied togreater clarityaboutmarketprospectsandpolicymeasuresforthefuture.Fornowat least,aperiodofrelativepricestabilityprevails.This isreflectedbyafuturesstripthat,although clearly shifted higher since our last twomediumterm projections, nonetheless shows agentle nominal price escalation throughmiddecade,with prices rising from $77/bbl to $86/bbl.Basedon the futures strip aroundmidApril, thisprice assumption (nota forecast)underpins themodelling of oil supply and demand through middecadeundertakenforthisreport.InthelowerGDPcase,pricesofcoursecouldweaken.Howeverthisisreflected implicitly via an assumption of slowerimprovements in oil intensity, rather than throughanexplicitchangeinthepricestripemployed.Concernsaboutapotentialreturntogreatermarketvolatility remainhowever.These, togetherwith thefallout from the global financial crisis, are alsopromptingregulatorychanges incommodityfuturesmarkets.While proposals vary internationally,withtighter energy commodity position limits one area of divergence, common features nonethelessexist.NewregulatoryproposalsattempttoshedmorelightontobilateralOTCmarketsinparticular,andtocurbriskswithintheglobalfinancialsystem.Morecentralclearingofstandardisedproductsislikely,alongside reportingof trades toa central repositoryand increasing collateral. In theend,adesire for globally harmonised standards may temper the more radical proposals for marketintervention, ensuring thatmarket liquidity, price discovery and the ability of physical players tohedgeriskismaintained.Demand Aseconomicuncertaintyhaspersistedbeyondthe2008/2009recession,thisyearsprojectionsagaininclude two oil demand scenarios. Using May 2010 OMR data as our starting point, we havedevelopedtwocontrastingviewsoneconomicgrowth,withalowervariantalsotemperedbyweakerefficiency gains. In the higherGDP and efficiency gains case (the base case for our analysis), oildemandgrowsbyanaverageof1.2mb/dannually(1.4%),reachingjustshyof92mb/dby2015.ThispresupposesGDPgrowthofnearly4.5%peryear from2010onwards (in linewith the IMF)andareductioninoiluseintensityof3%annually,closetothe20042009average.

Thepossibilityofweakerglobaleconomicgrowth,amidcontinuedworldtrade imbalancesandthechallengesoffiscalconsolidationandspirallingOECDnationsovereigndebt,generatesa lowerGDPand efficiency gains scenario. Here, global GDP grows by amoremuted 3% annually,while theimpetusforaggressiveoiluseefficiencygainsisdilutedbyaweakerinvestmentenvironmentand,byimplication,weakerenergyprices.Thispushesanticipatedreductionsinoiluseintensitybacktothe15yearaverage,near2%peryear.Inthiscase,annualoildemandgrowthaverages840kb/d(1.0%),takingtotalglobaldemandto90mb/dby2015.

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Global Oil Demand:GDP & Efficiency Sensitivity

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These aremerelyworking assumptions, and global 2015 demand could conceivably lie anywherewithinabroadrange,dependingon thecombinationofeconomicgrowthand intensityreductionsthat materialises. The implementation of new initiatives involves long lead times, meaning thatefficiencygainsinexcessofthoseassumedhereareunlikelytomaterialiseby2015.Thatsaid,NorthAmerica is introducingambitious fueleconomystandards from2012,whilevehiclemanufacturers,under pressure from stagnating OECD markets, are turning towards innovative new fueltechnologies. While unlikely to make huge market inroads before later in the decade, thesetransformationaltechnologiesholdthepotentialtorevitalisecarmakersfortunesintheOECD,whilealsohelpingthembreak intomore lucrativenonOECDmarketsandcurbthosemarketsotherwisehuge latent oil demand growth potential. In the end, the lower global demand profile could beachievedwerehigherGDPgrowthtobeaccompaniedbyfasterreductionsinoilintensity,ofaround3.5% per year. Accelerating efficiency gains to that levelwould be difficult by 2015, but it doesillustratethepotentialforthelongertermifenlightenedpolicychoicesarepursuedtoday.

The transportsectorand thenonOECDagainprovide the impetus fordemandgrowth in thenextfive years. In OECD markets, modest increases in transport fuel demand fail to offset ongoingstructural decline in oil use in industry and power generation, exacerbated by potentially weaknatural gas prices. OECD oil demand likely peaked in 2005 and falls by between 300400kb/dannually through 2015. In contrast, nonOECD demand grows by between 11.5mb/d per year,drivenbynonOECDAsia,theMiddleEastandLatinAmerica.Risingpopulationswithinacriticaloildemandtakeoffzoneof$3000$4000percapitaincome,plusananticipatedpersistenceofenduserpricesubsidies,sustainsoildemandgrowth in the faceof relativelyhighcrudeoilprices.Thereporthighlightsongoingworkon the subsidy issue, and the stark statistic that70%of expectedgrowthinMiddleEastOPECcrudecapacitystandstobeabsorbedbyregionaldemandgrowthamidongoingsubsidies.AsnonOECDdemand reaches52%of theworld totalby2015,so theneed forbetterdataonemergingmarketdemandandinventorycomesintoeversharperfocus.Supply Higherprices, lowercostsand fledglingsignsof increasedupstreamspendinghaveeasedsomeoflastyearsconcernsaboutmediumtermoilsupplyprospects.2009 itself turnedoutstronger thananticipated,with estimates of total production capacity now close to 91mb/d, around 0.9mb/dhigherthanintheJune2009reportand0.1mb/daboveourDecemberupdate.NonOPECoutputinparticularsurviviedlower2009spendingbetterthananticipated,andisrevisedhigher,togrowfrom51.5mb/d to 52.5mb/d by 2015. Latin America, the Canadian oil sands, the Caspian region andbiofuels generatemost of the growth, offsetting continued decline from the North Sea, the USandMexico.

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Thestrongerbaselinederivesinpartfromhighernewprojectsupply,butalsolowerobservedlevelsofdeclineatexisting fields.Thenetdeclineproxy fornonOPECbaselineoil supplynow standsatcloserto5.1%annuallythanthenear5.8%whichwederived lastyear,aftermonitoringdeclineatmature fields over the course of 2008/2009. Of course, fieldspecific data are patchy, and ourprojections for totalnonOPEC supply in2015would swing sharply subject to a relativelynarrowvariationinassumeddeclinerates.Inaddition,evenwithmorebenigndeclinerateassumptionsthisyear,theglobalcapacitybasestilllosesaround3.1mb/deachyearto mature field decline. Theinvestment challenge to offsetthis and meet global demandgrowthremainsformidable.That said, the global oil supplyoutlook is raised by an average0.3mb/d each year for theforecast period, with totalproduction capacity nowexpectedtorisefrom91.0mb/din2009to96.5mb/din2015.SupplygrowthderivesprimarilyfromnewOPEC investments,bothcrudeoilandNGL.OPECcrudecapacityrisesbyanet1.9mb/d from20092015,to36.8mb/d,withnotableincrementsfromIraq(+1.0mb/dafterthesigningofaraftofnew contractswith IOCs) and from SaudiArabia,Angola and theUAE.OPECNGLs also riseby2.6mb/dby2015to7.2mb/d,playingakeyrole inthe lighter/sweeterfeedstockslateanticipatedfor20092012,evenifglobalsuppliesthenbecomeheavieronceagain.AnextensivereviewofglobalNGLs and condensate industry drivers highlights that gas liquids could account for nearly 60% ofincrementalsupplythrough2015,withtheadded impetusforOPECproducersthatthisproductionstreamisunconstrainedbyoutputquotas.However,supplysiderisksabound.Firstly,there isaneverpresentthreatofgeopoliticaldisruptionsurrounding a number of keyOPEC producers. Secondly, the potential for the recentDeepwaterHorizon disaster in the US Gulf of Mexico to delay substantial deepwater developments whichunderpinmuchofexpectedsupplygrowth.Efforts to improvesafetyandenvironmentalstandardswill understandably be redoubled after the tragedy. Should the impact of those measures bewidespread delays todeepwaterprojects, anythingbetween 300kb/d and 800kb/dofnew 2015supplycurrentlyincludedinouroutlookmightbedeferred.Biofuels Biofuelsproductionisexpectedtorisesharplyin2010andtoseecontinuedgrowththereafter,withoutput increasing from1.6mb/d in2009 to2.4mb/d in2015.Assuch,biofuels remainamarginalsource of fuel supply overall, but nonetheless an important offset, togetherwithNGLs and nonconventionaloils, for thedeclineexpected inconventionalcrudeoiloutput fromnonOPEC in theforecastperiod.By2015,around5.7%ofgasolinedemandonanenergycontentbasiswillbemetbyethanol,and1.5%ofgaspoilbybiodiesel.Theeconomiccrisiscurtailedgrowth,butdidnotcompletelyderailit,as2009supplyroseby140kb/d.Indeed,baselinerevisionsgenerate2009/2010supply levelsthatare

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OPEC Crude Capacity Growth OPEC NGLs GrowthGlobal Biofuels Growth Non-OPEC Growth (ex Biofuels)Total Net Change

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some 45kb/d higher than in the December update, largely on the basis of upgrades to NorthAmericanestimates. Industryrationalisationbroughtaboutbyeconomiccrisis, loweroilpricesandhighsugarpriceshasresulted inabiofuelssectornowsomewhatstrongerandprimedforrenewedgrowth,evenifquestionssurroundingenvironmentalsustainabilityandlanduseforfirstgenerationsupplies,andlocalisedovercapacity,persist.On average, forecast production comes in around135kb/d higher than Decembers equivalent, withNorthAmerica, followeddistantlyby LatinAmericaand Europe, generating the bulk of this upgrade.Asian project economics, on the other hand, nowlookmoretenuous.Asinpreviousyears,theUSandBrazildominate absoluteproduction (together75%of world supply) and provide 75% of the growthexpectedfor20092015.Secondgenerationbiofuelactivityshouldincrease,notablywithaUScellulosicbiofuelmandatefrom2010onwards.Currentplans implyglobalpotentialat150kb/d in2015,with55% from cellulosicethanol and 45% from secondgeneration biodiesel. Yet, challenging economicsmay keep actualproductionwellbelowthis,andbreakevenpricesnear$120/bblcrudemayberequiredforcellulosicethanolandbiomasstoliquids(BTL)tocompeteeffectivelywithfossilfuelsinthelongerterm.Crude Trade International crude oil trade is expected to increase by 3.2mb/d from recessionaffected lows in2009andattain36.5mb/dby2015.Trade isexpected tobecomemore longhaul,something thatmay gradually ease shortterm pressures on the international tanker industry brought about byvesseloversupply.TheMiddleEastislikelytoretainitspredominantmarketshare,witharound48%of crude exports,whileAfrica and LatinAmerica boost their shares of international crude trade,partlyattheexpenseoftheFSU.All incrementalsuppliesfromtheMiddleEastheadtowardsAsia.BoththeFSUandLatinAmericaalsoincreasinglytargetgrowthmarketsinAsiaduringtheoutlook,askeyexport infrastructureprojectsarebrought to fruition.Notsurprisinglygivendecliningdemand,trade into the OECD countries diminishes, to the tune of 900kb/d by 2015, although decliningdomesticproductionseesOECDEurope imports increase.Aselsewhere inthisreport,expectationsfor China are impressive,with crude imports increasing by 2.7mb/d to 6.4mb/d in 2015, havingseeminglybeeninsulatedfromtheglobalrecession,increasingby600kb/din2009alone.Refining and Product Supply Reneweddemandgrowth,focusedinthenonOECDmarkets,lookstohavetrumpedlaggingrefiningmarginstobolsterexpectedrefinerycapacityadditionsforthe20092015period.Wenowenvisagenet growth of 9.0mb/d in global distillation capacity, alongside 7.0mb/d of new upgrading and8.2mb/d of desulphurisation capacity through the outlook period, based on firmly committedprojects.TheoutlookincludesamodestfirstwaveofcapacityclosureswithintheOECD,evenifmoremay be required beforeOECD refiners can overcome depressed operating rates and suboptimaleconomics.Worldwide, surplus refining capacity could reach 7.0mb/dby 2015 in the absenceoffurtherclosures.

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Givenexpectedtrendsindemandgrowth,lesscompetitiveOECDcapacitywillbepressuredbynewhighcomplexity facilities and strategicunitsbeingbuilt inChina,OtherAsia, theMiddleEast andLatinAmerica,eventhoughsomeretrenchmentinMiddleEasternexpansionplanshasbeenevident.China has plans to boost capacity by at least 3.3mb/d by 2015, and the other three regionsmentionedcollectivelyaddnearly4mb/d.

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Furtherunderminingsomeofthemorevulnerabledownstreamfacilitieswillbethesizeableportionoffuturedemandthatwillbemetfromrisingsuppliesofbiofuels,gasliquidsandnonconventionaloil, derived from outside the refining system.Moreover, a lighter, sweeter feedstock slate until2011/2012couldundermineupgradingmargins,placingsomeofthe lessstrategicallyorientednewcracking investments intodoubt.Longerterm, incentives forupgradingmay improveasthesupplybarrelturnsheavierandsoureragain,amidrisingsuppliesfromCanada,VenezuelaandColombia.Weaker fueloildemand and theultimatelyheavier crudeoil slateeradicate a key featureof lastyearsprojectionstighteningfueloilmarkets.However,ourmodellingoflikelyproductssupplyforlightendsandmiddledistillatesstillsuggestafundamental imbalancehere,withasharptighteninginmarketsformiddledistillatespossibleovertheforecastperiod,andatendencytowardssurplusingasoline. Further hydrocracking investment, over and above firm plans,will be required to helpresolvethispotentialimbalance.

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PART 1: OIL OIL PRICING


OIL PRICING Benchmarkoilfutures,whiletrendinghigher,havenonethelesstradedinarelativelynarrowrangeof$6585/bbl since last Junes MediumTerm Oil Market Report (MTOMR). They have beenunderpinnedvariouslybypromptphysical fundamentals,shiftingmarketsentimenton thepaceoftheglobaleconomicrecoveryandtheebbandflowininternationalfinancialmarkets.BothWTIandBrenthavehoveredwithina$20/bblpricebandformuchofthepastyear,averagingaround$75/bblsinceJune2009.Thatcompareswiththevolatileswingsthatservedasthebackdropto lastyearsreport,afterpricespeakedatahighofnear$150/bblinJuly2008andfelltoalowofaround$35/bblinFebruary2009.

Since the financial crisis broke in mid2008 a multitude of ever changing macroeconomicdevelopments has underpinned financial and oil market direction, at times exerting adisproportionate influenceonoilprices.Ashift inmarketpsychologyawayfromamyopicfocusonshorttermfundamentalsandmicrofinancialpositionsonthefuturesmarket,towardsalongertermviewappearstohavehadsomethingofastabilisingimpactonpricemovementsthispastyear.

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In the wake of the global economic recession, equity and other macrofinancial markets haveemergedascriticalbarometersforfutureoildemandgrowth.PerceptionsoverthepaceofdemandrecoveryandthesustainabilityofgrowthinChinaandemergingmarketsinparticularhaveplayedakeyrole in leadingoilpricesbothhigherand lower.Oilpricemovestotheupsidemoreoftenthannothavebeenaccompaniedbyamultitudeofpositivemacroeconomicdevelopmentsandbullishfinancialmarkets. Swings to theupside frequentlydefied conventionalmarket thinking,especiallygiventhehealthycushionofoilstocksandspareproductioncapacityoverthepast12months.

Thatsaid,OECDstocks representonlyapartialpictureof market flexibility, meaning that over time, theirdiagnosticvalueasregardspricemightbeexpected todiminish.Someanalysts,moreover,havepointedtotheincreaseduseofarbitrageforprofitassuggestingthatshifts into storage can themselves withdraw oil fromthe promptmarket and therefore push prices higher.Notwithstandingthishypothesis,prevailingweaknessinOECD oil demand, and persistent high levels of oilinventoriesbothonshoreandheldatsealikelyexerted

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NYMEX WTIUS Dollar Index (inversed RHS)

Source: ICE, P latts

downwardpressureonpromptpricesrelativetoforwardmarketsatvariouspointsthroughouttheyear.Themarketcontango (wherebypromptprices tradeatadiscount to forwardprices) forWTIM1M12 contracts in 2009 averaged $8.52/bbl comparedwith $5.28/bbl through endMay 2010.Afterwideningto$10/bblatend2009,theM1M12contangohassteadilynarrowedthroughmuchof2010, to justover$2/bblatendMarch,which thebroadermarket interpretedasa signal thatstronger demandwas finally starting tomake a dent in the global stock overhang.However, thenarrowingof thecontango reversedcourse inearlyApril,inpartduetoacombinationofreducedrefinerdemand during seasonal maintenance as well asrising stock levelsat thepivotalCushing,Oklahomastorageterminals.Indeed, volatility returned to the market with avengeanceinMay,inlargepartduetotheEurozonedebt crisis and fears that broadening budgetarypressureswillundermine global economic recoveryandanticipatedgrowth inoildemand.Thecollapseof the Euro has also triggered a disconnect in theNYMEXWTI inverse relationshipwith theUSDollarIndex,evident throughmuchof2009.Oilpricesbroke through theupperand lower limitsof theirerstwhile range in May. Benchmark prices plummeted by just over $18/bbl by 20 May beforepartiallyrecoveringtoaround$74/bblattheendofMay,backwithinthe$6585/bblrangeseenformuchofthepastyear.Globaleconomicissues,especiallyEUfiscalproblems,andbroaderfinancialmarketactivitylooksettoremainkey influencesonoilpricevolatility intheshortand longerterm.Thesefactorshavenotsupplantedamore traditional focusonsupplyanddemand. Indeed, the inelasticityofbothsupplyand demand to price remains arguably the key longstanding contributor tomarket volatility, offwhichinvestorsentimentbothbullishandbearishtendstofeed.Increasingly, linkages between the physical and papermarketswill need to be studied to betterunderstandcurrentandfuturepricedynamics.AjointIEA/IEEJworkshop inTokyo inFebruary2010touched upon some of these issues, (see Oil Price Volatility: Causes, Impacts and PotentialRemedies)andwillbefollowedbyfurtherworkbytheIEAandothersinmonthstocome.Methodology for Calculating the IEA Average Import Price A relativelynarrowprice range isalso seen in thepriceassumptionemployedfortheforecastperiodintheMTOGM.TheIEAdoesnotforecastoilprices,but deploys oil price assumptions for use in ourforecastingmodels.TheMTOGMpriceassumptionis broadly generated by using a combination ofhistoricalNYMEXfuturespricesforthe light,sweetcrude contract (WTI)and the forwardprice curve,which is then benchmarked against the averagecrudeoilimportpricesforIEAmembercountries.

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For this yearsMTOGM projections, an average of the last threemonths'WTI futures strips forrespectivedeliveryyearwasused.Thiswasthenconvertedtoan IEAaverage importpriceonthebasisofthe5.2%discounttocrudefuturesevidentinthelastfiveyears.Thisgeneratesapriceprofileapproaching$85/bblforthe latteryearsoftheforecastperiod,$17$22/bblhigherthantheprofileemployedinlastJunesreportandaround$4/bblhigherthantheassumptionintheDecember2009mediumtermupdate.

Oil Price Volatility: Causes, Impacts and Potential Remedies Risingcrudeoilpricesthroughmid2008,andtheirsubsequentcollapseandthenrecovery,havefocusedattentiononthe issueofpriceformation.Anongoingdebatehaspolarisedaroundtherelativerolesoffundamentals and financial market speculation in determining crude oil price levels. This polarity,however,mayunintentionallymisleadfinancialregulatorsandpolicymakers.WhiletheIEAviewisthatfundamentals are themaindeterminantofoilpricesover time, clearlyother factors ranging frommacroeconomic developments, equity and other derivative markets to government policies andgeopoliticaleventscanalsoplayaroleininfluencingoilpricelevelsintheshortterm.

The IEA held the third in a series of workshops on oil price formation in February2010 in Tokyo.Partneredwiththe InstituteofEnergyEconomics Japan (IEEJ),withthesupportof JapansMinistryofEconomy,TradeandIndustry(METI)thisyearsworkshopfocusedonthecauses,impactsandpotentialremediesforoilpricevolatilityand involvedover80participantsfrom industry,government,researchbodies,financialinstitutions,regulators,commodityexchangesandinternationalorganisations.

A wide crosssection of views was aired on the many drivers influencing oil prices, the impact ofvolatilityandmeasures to combat excessivevolatility,even if the latterwas impossible toquantify.Therewasnearunanimousconsensusthatattemptsto identifyandmanagea fairprice failtograspthe importantrolemarketsplay in improvingtransparencyandpricediscovery.Simplifyingthedebatebetween the speculation camp on one side, and fundamentals proponents on the other,may beunhelpful andoverly simplistic. If themultipledriversofprice changes aredifficult to identify, thenpolicy prescriptions to reduce volatility risk targeting the wrong culprits. Assigning precise priceimpactsderivedfromspeculationwasseentobeinconclusive,evenfutile.

While entrenched views on the role of speculation and fundamentals were evident, a majority ofexpertstendedtoviewspeculatorsasplayingasecondaryrolerelativetofundamentals,at leastoverlongerperiodsoftime.Almostallspeakersappearedtoagreethatspeculationitselfisnotabadthing,and is indeed necessary in well functioning markets, providing liquidity, allowing physical marketparticipants to hedge risks and facilitatingprice discovery. The question is ratherwhether excessivespeculationcausedthesurgeinpricestotheirmid2008peakandcontinuestodistortpricelevelstoday.

Proponents of the speculative view acknowledged that todays fundamentals and perceptions oftomorrowsfundamentalsarekeyinsettingpriceexpectations.However,theyseetheshiftofoilfrombeingapurelyphysicalcommoditytobecomingalsoafinancialassethasembeddedanexcessivedegreeof volatility. For others, the social damage caused by high volatility in food and energy prices,particularlywhen the economic recovery is still fragile,means that position limits in energy futuresmarkets are required. The size of these markets is poorly understood (leading some to call formandatory data reporting), but may be around ten times the size of the physical market. Highlyleveragedfinancialmarketswereseenbysomeasaccentuatingvolatility.Passiveindexinvestorsweresingledoutbyproponentsofthespeculativeviewasbeingdifferentfromtraditionalspeculators,sincetheyarenotshorttermbuyersandsellers,butratherbuy,holdandrollcommodities.

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Oil Price Volatility: Causes, Impacts and Potential Remedies (continued) Most participants across the spectrum acknowledged the key fundamental drivers of prices rapid,emergingmarketdemand growthdrivenby subsidisedprices and rising incomes, constraintson theabilitytoexpandsupplyand,moregenerally,thepriceinelasticityofbothsupplyanddemand.Alackofvisibility on both emergingmarket supply and demand prospectswas also seen as contributing topotentiallyalarmistviewsaboutfuturemarketbalances.

Proponentsofthephysicalmarketviewarguedmultiparticipantmarketsaremorelikelytoreflecttruevaluesothequestionwaswhetherthemarketcaneverbesaidtoprovidethewrongprice.Priceisoneofthefewaccurate,prompt,realtimedatapointsthatwehave.Themarketitself,sotheargumentruns,ismorelikelytosendrationalsignalstoparticipantsthananyattempttoartificiallycontrolprices.

DataandMoreData

Fromafundamentalpointofview,thekeytopricestabilityandmarkettransparencyisbetterdataonthe current state of themarket covering upstream, downstream, inventories and demand,mostnotablyfornonOECDcountriestominimisemarketuncertainties.

Demandsideuncertaintynow isperhapsasgreatas ithaseverbeen.Expectations for2010demandgrowth were said to range from 0.8mb/d to 2.5mb/d. Suggestions to minimise this uncertaintyincludedforecastingagenciesprovidingmoredetailontheassumptionsanduncertaintiesthatunderpinprojections. Indeed, a common theme throughout the forum was that forecasts are inherentlyuncertain,andperceivedwisdomaboutfuturefeastorfamineoftengetsoverturnedbygamechangingdevelopments,whichanalystsfailtospotinadvance.

More generally, speakers saw domestic price subsidies in emerging markets playing a key role indampening price feedthrough to consumers, and effectively increasing volatility in internationalmarkets.Thishasalsoblunted the traditionalviewof risingoilprices inevitablyhavingan immediateadverse impact on global economic growth. Although some signs ofwage inflation in China due toincreasedpriceswereidentified,thethemeoftheglobaleconomysabilitytobetterwithstandsharplyhigherpriceswasalsohighlighted.

Improved transparency in the refining sectorwould also help, given refined productsmarkets havefrequentlybeenadriverofrisingcrudepricesintimeoftightness,especiallydieselmarketsin2008.Thedownstream component isoftenoverlooked,butat its root is relatively straightforward.Amismatchbetweencrudeslate,refiningcomplexityandproductsdemandcaninflatecrudeoildemand,somethingthatlikelycontributedtohighercrudepricesin2007/2008.

AlthoughtheimportanceofOECDinventoriesasameasureofphysicalmarketflexibilityisdiminishing,asnonOECDdemandbegins topredominate, these,alongsideOPEC spare capacity,are seenas keyshockabsorbers for the system. Seemingly abundant current spare capacity of around 6mb/dwasnonethelessseenasbeingarelativelynarrowmargin,bothincomparisonwithotherindustriesandwithhistorical levels.Somepointedoutthata5%capacitymarginmaybea tippingpointforoilmarkets,noting thatsparecapacitywasconsistentlybelow this level formuchof20032008.The fact that IEAmember governments also control strategic stocks foruse in a supplydisruptionwas identif