Energy Industry Trends Review
Energy Industry Trends Review
Energy Industry Trends Review
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<strong>Energy</strong> <strong>Industry</strong><br />
<strong>Trends</strong> <strong>Review</strong><br />
Issue 18: 2011<br />
Editorial<br />
<strong>Trends</strong> snapshot<br />
Economic outlook
Editorial<br />
With the outlook for upstream oil and gas exploration and production<br />
still looking strong, infrastructure challenges are big concerns for the<br />
growth picture in some key markets. This is particularly true for the<br />
North American market. The International <strong>Energy</strong> Agency (IEA), in its<br />
Medium Term Oil and Gas Market 2011 report, has forecast demand<br />
for North America (defined by the IEA as Canada, the United States<br />
and Mexico) rising by 1.5 million barrels/day (b/d) in 2010 to 15.6<br />
million b/d by 2016, but highlights challenges around pipeline<br />
infrastructure which could affect this forecast. 1<br />
What is clear is that the US pipeline market<br />
in particular is undergoing a dramatic<br />
transformation. These deals not only involve<br />
new projects to transport greater volumes<br />
of unconventional oil and gas to market,<br />
but are also bringing into focus pipeline<br />
companies that are seeking greater consolidation<br />
and scale to grow their companies<br />
after a long period of operating in a market<br />
which, up until a few years ago, showed<br />
few prospects for growth. Notably, many of<br />
the transformations underway are seeing<br />
companies divest riskier exploration and<br />
production (E&P) operations (Williams,<br />
Kinder Morgan and Atlas <strong>Energy</strong>) to focus<br />
purely on their infrastructure businesses,<br />
broadening their operations and thereby<br />
realizing greater market value.<br />
In the United States this quarter, there<br />
have been several significant infrastructure<br />
deals. Hot on the heels of <strong>Energy</strong> Transfer<br />
Equity’s $9.5 billion deal to buy Southern<br />
Union Company and its gas pipeline system<br />
came Kinder Morgan’s mega-$38 billion<br />
(including debt) purchase of fellow<br />
midstream giant El Paso. Such deals are<br />
not only indicative of how the industry<br />
views the significance of North America’s<br />
tight resource assets, but is also a clear<br />
indication that infrastructure is back in<br />
focus as oil and gas companies position<br />
themselves for the next wave of change in<br />
the industry. With this deal, Kinder Morgan<br />
will become the fourth-largest energy<br />
company (in terms of market capitalization)<br />
in North America, but will notably<br />
be a company with almost no upstream<br />
2<br />
assets (after the planned sale of El Paso’s<br />
E&P company is completed). Kinder Morgan<br />
will be a pure infrastructure business and<br />
the largest midstream company in North<br />
America. The combined company’s pipeline<br />
network has a huge footprint; which means<br />
that expansions, extensions and additional<br />
acquisitions (particularly around the shale<br />
gas plays) can be accomplished at a very<br />
low cost, compared to building new<br />
projects completely from scratch. 2<br />
While merger and acquisition (M&A) data<br />
shows midstream transaction values for the<br />
third quarter of 2011 down on the previous<br />
year, activity in the fourth quarter is set to<br />
be stronger, with midstream transactions<br />
accounting for 64 percent of total transaction<br />
value for the quarter to date (November<br />
21, 2011) compared to only 26 percent<br />
for upstream, with total midstream deals<br />
valued at around $45 billion. 3<br />
The infrastructure frenzy in the United<br />
States is not only limited to gas pipelines.<br />
In one of the latest deals, Enbridge will buy<br />
ConocoPhillips’ 50 percent interest in Seaway<br />
Crude Pipeline System for $1.15 billion,<br />
and is expected to reverse the flow of oil in<br />
the pipeline, thereby alleviating the glut of<br />
oil located in US Midwest markets by providing<br />
an outlet for this oil to US Gulf Coast<br />
refineries. Enbridge expects the pipeline to<br />
begin operating in reversed service with<br />
an initial capacity of 150,000 b/d by the<br />
second quarter of 2012 (subject to receipt<br />
of regulatory approvals). The flow reversal<br />
in the Seaway pipeline is expected to have<br />
an impact on the West Texas Intermediate<br />
(WTI) oil price, by linking it back to export<br />
markets and bringing it more into line with<br />
the Brent oil price (there has been a substantial<br />
differential between WTI and Brent<br />
spot prices over the past two years). What<br />
the market can be certain about is that the<br />
North American pipeline market will look<br />
very different over the next few years than<br />
it does today. 4
Economic<br />
Oil supply<br />
Oil price<br />
4<br />
August 2011 September 2011 October 2011<br />
Global gross domestic product (GDP) growth will moderate to around 4 percent through 2012, from more than 5 percent in 2010. Real GDP in the<br />
advanced economies is projected to expand at a slow pace of about 1.5 percent in 2011 and 2 percent in 2012, due to continuing financial market<br />
volatility and sovereign debt challenges for some EU countries. China’s GDP growth is forecast lower for 2012 at 9 percent, largely due to a decline<br />
in manufacturing and rising inflation. Japan’s GDP is forecast to recover in 2012 to show 2.3 percent growth. 5<br />
Global oil supply rose by 1 million b/d to 89.3 million b/d in October 2011 from September, driven by recovering non-Organization of Petroleum<br />
Exporting Countries (OPEC) output. OPEC supply is well above year-ago levels, due to the political situation in Libya. A recovery in the<br />
non-OPEC output and some improvement in Libya and Angola supported the increase with a continued strong supply outlook for the Americas. 6<br />
Oil demand Global oil demand is expected to rise to 89.2 million b/d in 2011 and reach 90.5 million b/d in 2012. Some of the demand boost stems from<br />
temporary factors such as seasonal heating oil tank filling, while oil-fired power generation in Japan is providing an upside to demand, as utilities<br />
switch to oil as well as gas for power generation. There are, however, increasing concerns of a slowdown in demand due to the economic situation<br />
in the Eurozone and the United States. 7<br />
Gas supply<br />
Oil prices over the past quarter have been characterized by extreme volatility and futures price movements are currently showing 95 percent correlation<br />
with financial market movements since July. The Eurozone debt crisis and return of Libyan crude exports has led to some easing in crude prices, with some<br />
analysts now revising 2012 crude forecasts on the back of expected demand slowdowns. 8<br />
Global gas production is expected to continue to increase and meet future demand with further exploration and development of unconventional gas<br />
notably in the United States, which is now progressing with its plans to export liquefied natural gas (LNG). Gas production is due to resume from Libya<br />
to Europe in fourth quarter 2011 which, along with high levels of gas in storage, indicate a very strong supply situation here. Gas supplies in Japan still<br />
remain tight.<br />
Gas demand Short-term gas demand continues to vary significantly by region, with significant demand still evident in Asia, notably Japan and Russia, but with<br />
Europe and North America still showing weaker demand due to milder autumn weather conditions and the continuing weak economic outlook.<br />
Longer-term demand for natural gas will continue to grow (from 3.1 trillion cubic meters [tcm] in 2009 to 4.75 tcm in 2035); an increase of<br />
55 percent. 9<br />
Gas price<br />
Refining<br />
M&A<br />
Gas prices for most markets are expected to increase next year over 2011, due to better demand. The US market remains an exception due to the<br />
continued robust supply situation and weak demand. Prices are under pressure in Europe as Libya gas exports are due to restart. LNG prices<br />
remain high in Asia, notably Japan, where they are almost at parity with oil prices.<br />
Global refinery crude runs were averaging 75.5 million b/d in third quarter 2011. Global refinery crude estimates for fourth quarter 2011 have<br />
been revised lower for most regions due to shutdowns and seasonal maintenance in Europe, disruptions to refinery operations and unscheduled<br />
stoppage in Asia as well as seasonal maintenance in the United States. Recent refining margins have showed some recovery in the third quarter<br />
due to an outage at Shell’s refinery in Singapore, which temporarily tightened the market. 10<br />
Oil price and market volatility has led to a decline in oil and gas merger and acquisition (M&A) activity, now at its lowest level since 2008. North<br />
America continues to be the focus of the largest deals, with focus on the unconventional oil and gas sector still strong. A US pipeline deal for the<br />
Seaway pipeline will lead to a planned flow reversal and signals the end of the US Midwest supply glut and coming back into line with the WTI<br />
and Brent crude oil price differentials.<br />
Rig activity The rig market continues to look buoyant as the continued high oil price drives upstream activity. The number of oil rigs in the United States exceeded<br />
2,000 as of the beginning of November 2011, and US drilling activity has finally surpassed pre-crisis highs in October. There is a trend of US producers<br />
starting to bring in-house some rig and key servicing, such as pressure pumping. 11<br />
Companies Higher oil and gas prices once again contributed to higher profits for the integrated oil majors during the third quarter of 2011, even though asset sales,<br />
geopolitical problems and maintenance turnarounds led to another decline in production. Oilfield services companies continue to show strong profits<br />
supported by high levels of upstream activity, though some independents are struggling with individual issues and exposure to poor US natural gas prices.
Economic outlook<br />
Key trend—Global GDP growth is expected<br />
to moderate to around 4 percent through<br />
2012, from more than 5 percent in 2010.<br />
Real GDP growth in the advanced economies<br />
is projected to expand at a slow pace<br />
of only 1.5 percent in 2011 and 2 percent in<br />
2012; the slowdown reflects crisis-hit advanced<br />
economies, notably the continuing<br />
sovereign debt and banking sector problems<br />
in the Eurozone and the continued uneven<br />
economic recovery in the United States.<br />
China’s GDP growth is forecast slightly<br />
lower for 2012 at 9 percent (compared to<br />
9.5 percent forecast for 2011), largely due<br />
to a decline in contracting manufacturing<br />
and rising inflation. 12<br />
The slowdown starting in 2011 reflects<br />
developments in crisis-hit advanced<br />
economies like the Eurozone, where<br />
sovereign debt and banking sector problems<br />
have proven more tenacious than expected.<br />
Real GDP growth in the major advanced<br />
economies is forecast to rise only modestly,<br />
from about three quarters of a percent in<br />
the first half of 2011 to about 1.5 percent<br />
in 2012, as the effects of temporary<br />
disturbances abate and the fundamental<br />
drivers of expansion slowly reassert<br />
themselves. Activity is expected to be more<br />
robust in a number of other advanced<br />
economies, especially in those with close<br />
ties to emerging Asia. 13<br />
In emerging and developing economies,<br />
GDP growth is expected to fall from about<br />
7 percent in the first half of 2011 to<br />
about 6 percent in 2012; this slowdown<br />
in growth is regarded to be mainly due<br />
to capacity constraints, policy tightening<br />
and slowing foreign demand. Inflationary<br />
pressures continue to concern emerging<br />
and developing economies with headline<br />
inflation expected to settle at about 6<br />
percent in 2012, down from more than 7.5<br />
percent in 2011, as energy and food prices<br />
stabilize, but demand pressures drive core<br />
inflation. Inflation is expected to stay high<br />
through the period 2011–2012 in the former<br />
Soviet Union, MENA (Middle East and North<br />
Africa) and Sub-Saharan Africa regions,<br />
5<br />
averaging 7 to 10 percent. Some economies<br />
are seeing noticeably higher inflation than<br />
their regional peers; for example, Argentina,<br />
India, Paraguay, Venezuela and Vietnam. 14<br />
Observation<br />
The turmoil in the Eurozone continued this<br />
quarter, with the bailout of Greece now<br />
confirmed. With the prime ministers in<br />
Greece and Italy resigning and the centerright<br />
party winning the general election in<br />
Spain, the pace of developments continues<br />
to be dramatic. The Eurozone economy<br />
managed only modest growth in the third<br />
quarter of 2011, with a rebound in Germany<br />
and France failing to dispel fears of a<br />
looming recession across the 17-country<br />
region. However, it is evident that the third<br />
quarter has been much shielded from the<br />
financial market turbulence, with the real<br />
impact not expected to be fully felt until<br />
the next quarter and in early 2012. For<br />
example, the Organization for Economic<br />
Co-operation and Development (OECD) is<br />
also forecasting that the United Kingdom is<br />
entering a recession. It predicted that the<br />
UK economy would shrink by 0.1 percent<br />
this quarter and 0.6 percent in the first<br />
three months of 2012. As of the beginning<br />
of November, new Italian prime minister<br />
Mario Monti was ready to announce his<br />
government while new Greek prime minister<br />
Lucas Papademos will face a vote to give<br />
him a three-month mandate to implement<br />
the new austerity budget measures, and<br />
overall, the situation in Europe remains<br />
volatile. 15<br />
The shift in focus of the Eurozone crisis<br />
has brought Italy and Spain more into the<br />
spotlight. Italy accounts for 17 percent<br />
of Eurozone GDP and 23 percent of total<br />
Eurozone debt. Italy’s gross debt as a<br />
percentage of its GDP is second only to<br />
Greece at around 121 percent, compared<br />
to 166 percent for Greece. 16 The situation<br />
in Spain continues to concern markets, as a<br />
more conservative government has won the<br />
general election there and is not expected<br />
to drive through the necessary reforms to<br />
prevent contagion there.<br />
What is surprising about the International<br />
Monetary Fund’s (IMF) 2012 forecasts is<br />
the view that the Japanese economy is<br />
estimated to grow by around 2.3 percent,<br />
(compared to growth estimates for the<br />
United States of between 1.5 and 2 percent,<br />
and the Eurozone by around 1 percent). This<br />
forecast signals that Japan is expected to<br />
start recovering from the current crisis, but<br />
also that the situation in the United States<br />
and the Eurozone is generally not expected<br />
to change. Japan is currently taking steps<br />
to make its oil supply chains more disasterresistant,<br />
due to lessons learned from<br />
serious fuel shortages in the wake of the<br />
March earthquake, when Japan’s domestic<br />
refining capacity at one point fell to about<br />
2.7 million b/d (900,000 barrels short of<br />
daily demand). 17<br />
This quarter also saw less positive growth<br />
news for China: with GDP growth forecast<br />
lower for 2012 at 9 percent (from 9.5<br />
percent in 2010), largely due to a decline in<br />
manufacturing and rising inflation. Some<br />
banks like Standard Chartered Bank, for<br />
example, have revised their GDP growth<br />
forecasts for China. Standard Chartered<br />
Bank has lowered its China GDP forecast<br />
for 2012 from 10 to 8.5 percent, saying,<br />
“Inflation has remained more elevated and<br />
domestic growth momentum has slowed<br />
more gradually in 2011 than we forecast.<br />
This has delayed the turn in policy—China’s<br />
monetary policy was not loosened in third<br />
quarter 2011 as we expected … momentum<br />
has clearly been lost in manufacturing<br />
growth, and CPI (consumer price index)<br />
inflation has now peaked, we believe.” 18<br />
Some analysts are forecasting more of<br />
a “hard” landing for China, not from its<br />
economic slowdown but, rather, from some<br />
more structural factors such as inflexible<br />
exchange rates, high property prices and<br />
pure demographics, which will see the<br />
influx of rural labor into the cities fall off<br />
and increasing social inequality, leading<br />
to potential rapid wage inflation and<br />
social unrest. 19
Oil supply<br />
Key trend—Global oil supply continues to<br />
look strong, with total oil production for<br />
October 2011 running at around 89 million<br />
b/d. There was some recovery in the non-<br />
OPEC output and also a continued strong<br />
supply outlook for the Americas. OPEC<br />
supply rose by 95,000 b/d to 30 million b/d<br />
in October, with higher output from Libya,<br />
Saudi Arabia and Angola, partially offset<br />
by lower output from other members. The<br />
“call on OPEC crude and stock change” for<br />
2011 is largely unchanged at 30.5 million<br />
b/d, while higher non-OPEC supply is<br />
expected to average around 30.4 million<br />
b/d in 2012. Effective OPEC spare capacity<br />
is estimated at 3.31 million b/d and OPEC<br />
has its next ministerial meeting in Vienna in<br />
December, during which it is likely to keep<br />
its production level unchanged. 20<br />
Non-OPEC oil supply is estimated to have<br />
fallen by 300,000 b/d to 52.6 million b/d<br />
in September 2011, largely due to weather<br />
and maintenance related shut-ins in North<br />
America, maintenance in the North Sea,<br />
unplanned outages in the Middle East and<br />
outages and maintenance in Latin America.<br />
Continued mature field decline, slower than<br />
expected ramp-up of new production and<br />
unplanned outages have caused a reduction<br />
in the expectations for non-OPEC growth<br />
for the fourth quarter of 2011. Growth for<br />
the next quarter is expected to come from<br />
Latin America and Russia, but will be offset<br />
by declines in non-OPEC Asia such as Malaysia,<br />
China and Indonesia. This same trend<br />
in 2012 is expected to lead to an overall<br />
reduction in non-OPEC supply growth for<br />
the coming year by 180,000 b/d to around<br />
900,000 b/d. 21<br />
This quarter, US oil production fell by<br />
57,000 b/d to an estimated 8 million b/d<br />
in August as production declined in the<br />
Gulf of Mexico and in the Lower 48 states,<br />
with US production expected to decline in<br />
coming months. News is more positive in<br />
the Gulf of Mexico, where a hurricane-free<br />
season allowed for the continuation of the<br />
post-Macondo recovery in production, with<br />
the pace of new well completion accelerating.<br />
The number of drilling permits issued to<br />
firms hoping to drill on their existing leases<br />
rose to 13 in October—nearly three times<br />
6<br />
the average seen so far this year—and is<br />
now approaching historical levels of 15 to<br />
20 permits per month. Analysts continue to<br />
focus on the considerable potential of the<br />
US tight and shale oil plays, which have the<br />
potential to produce more than 1.4 million<br />
b/d by 2020—reducing US imports. 22<br />
OPEC’s output is still running around<br />
300,000 b/d below pre-Libyan crisis levels<br />
of 30.5 million b/d from January 2011, and<br />
was producing just over 30 million b/d in<br />
October 2011. Libya’s return to the global<br />
market looks set to rebalance production<br />
flows for several OPEC member countries<br />
that stepped in to fill the gap caused by<br />
most of Libya’s 1.6 million b/d production<br />
capacity being shut in. Libyan production is<br />
now expected to return to production levels<br />
of around 600,000 b/d by the end of 2011.<br />
Saudi Arabia has cut back its production<br />
by an estimated 200,000 b/d to 9.6 million<br />
b/d in September. Saudi Arabia also recently<br />
announced that it is unlikely now to implement<br />
plans to raise its oil output capacity<br />
to 15 million b/d, arguing that increased<br />
production and expansion projects elsewhere,<br />
such as in Iraq and Brazil, should<br />
be adequate to meet global demand. Iraqi<br />
output in September reached its highest<br />
level in almost 10 years of 2.74 million<br />
b/d. However, production fell in October,<br />
following attacks on pipelines in the<br />
south of the country. Production of around<br />
650,000 b/d at the southern part of the<br />
Rumaila oilfield was initially shut following<br />
two bomb attacks (total production<br />
from the BP-China National Petroleum<br />
Corp. [CNPC] joint venture developing the<br />
Rumaila field had been running at around<br />
1.24 million b/d prior to this). 23<br />
Observation<br />
Libya’s return to the global market has contributed<br />
to a potentially more stable global<br />
supply outlook. Increasing supplies from<br />
Libya along with the rebound from unprecedented<br />
levels of unscheduled outages and<br />
maintenance, as well as growing production<br />
in Latin America, the Caspian, Russia, Australia<br />
and the United States should support<br />
supply growth in 2012.<br />
The picture starts to look less positive if<br />
a significant decline in demand occurs,<br />
leaving the market looking oversupplied<br />
and putting downward pressure on the oil<br />
price, although the increasing growth in US<br />
oil supply is likely to boost that economy as<br />
imports there continue to fall.<br />
There continue to be concerns on the supply<br />
side that security issues are continuing<br />
to affect oil production operations, notably<br />
in Iraq and Nigeria, but also potentially<br />
elsewhere in the Middle East and Africa<br />
as geopolitical unrest continues. In Iraq,<br />
the BP/CNPC consortium has been experiencing<br />
some production delays due to<br />
security issues, and there has also been a<br />
flare up of continuing troubles in Nigeria.<br />
Oil production in Nigeria fell in September<br />
to 2.18 million b/d, following a series of<br />
pipeline outages on the Bonny and Forcados<br />
network due to sabotage and oil theft.<br />
In October, Shell declared force majeure on<br />
its Forcados exports for October, November<br />
and December 2011 following the production<br />
shutdown due to sabotage on the<br />
Forcados pipeline. 24<br />
This quarter, oilfield services company<br />
Schlumberger has been talking about the<br />
potential impact of security issues on<br />
operations, notably in Libya and Iraq. Many<br />
companies operating in these countries<br />
are trying to manage security issues so<br />
that they do not lead to project delays and<br />
impact significantly on operating costs.<br />
Schlumberger has stated that it would need<br />
to deploy about 100 security personnel in<br />
Libya to resume activities there this year,<br />
and was still employing around 400 security<br />
personnel in Iraq. 25<br />
Other potential complications on the supply<br />
side include challenges in Iraq over relations<br />
with Kurdistan. More than a halfdozen<br />
projects are due to come onstream in<br />
Iraq up to 2013, which could add more than<br />
6 million b/d to Iraq’s production (which<br />
when added to current production, could<br />
put Iraq producing around 9 million b/d). 26<br />
However, not only are security challenges<br />
still an issue in the country, but now there<br />
are increasing concerns that oil companies<br />
that signed contracts with Iraq for fields in<br />
the center and south of the country might
lose these contracts if they continue to<br />
sign deals with Kurdistan. ExxonMobil has,<br />
this quarter, signed the first agreements<br />
with Kurdish Regional Government (KRG)<br />
in Kurdistan to explore for oil and gas in<br />
six blocks in the Kurdish region of Iraq. The<br />
company is already operating in Iraq, producing<br />
around 370,000 b/d of oil from the<br />
West Qurna field, under a service contract<br />
with the Baghdad government. The Baghdad<br />
government has previously excluded<br />
companies operating in the Kurdish region<br />
from oil contracts in the rest of the country<br />
and has warned that any deal with the KRG<br />
could result in the termination of contracts<br />
in Iraq. This could not only result in delays<br />
in bringing the Iraq fields to full production,<br />
but will also contribute to the general<br />
uncertainty around legal and regulatory<br />
issues in Iraq currently. 27<br />
Oil demand<br />
Key trend—Global oil demand is expected<br />
to rise to 89.2 million b/d in 2011 (growth<br />
of around 1 million b/d year on year) and<br />
reach 90.5 million b/d (growth of 1.3<br />
million b/d year on year) in 2012. Some of<br />
the demand growth is the result of some<br />
temporary factors in the market such as<br />
seasonal demand for heating oil; oil-fired<br />
power generation in Japan is providing<br />
some upside to demand as utilities there<br />
switch to using oil for power generation<br />
as well as gas as nuclear capacity is down.<br />
Overall, however, the demand picture<br />
remains very susceptible to continuing<br />
economic upsets and forecasts for a<br />
slowing economic growth outlook<br />
particularly in the OECD markets.<br />
This quarter saw stronger than anticipated<br />
OECD demand in August, which somewhat<br />
offset the effects of the worsening economic<br />
situation in the Eurozone. OECD demand<br />
forecasts for the fourth quarter of 2011<br />
are not expected to change significantly,<br />
despite the northern hemisphere moving<br />
into winter, largely due to the economic<br />
situation. The third quarter of 2011 did<br />
show some stronger-than-expected demand<br />
from some product categories, making it<br />
possible that OECD demand might still<br />
show some growth for 2011 as a whole.<br />
However, there are continued pockets of<br />
real weakness, such as gasoline demand in<br />
7<br />
the United States, where demand has been<br />
falling month on month. However, the IEA’s<br />
current outlook still sees OECD demand as<br />
a whole declining by around 0.7 percent to<br />
45.8 million b/d in 2011 and falling by 0.6<br />
percent in 2012. 28<br />
Non-OECD oil demand grew by 2.7 percent<br />
year-on-year (or around 1.2 million b/d) in<br />
August, down from 3.6 percent growth in<br />
July. The slowdown stemmed from relatively<br />
weaker demand growth in China and<br />
Saudi Arabia. China’s monthly apparent<br />
demand (calculated as refinery output plus<br />
net product imports) rose by 5.8 percent<br />
year on year in August as slower refinery<br />
runs outweighed higher product imports;<br />
strong demand growth in China was driven<br />
by higher demand for residual fuel oil, jet<br />
fuel and gasoil. With GDP growth in China<br />
forecast to be around 9 percent in 2012,<br />
the outlook in China looks robust if slightly<br />
slower. Total product demand in China is<br />
expected to reach over 10 million b/d in<br />
2012 from around 9.5 million b/d in 2011. 29<br />
Indian economic prospects are seen somewhat<br />
higher for 2011 and lower for 2012,<br />
with GDP growth now expected at 7.8 and<br />
7.5 percent, respectively. Demand in Russia<br />
has shown little sign of slowing, growing<br />
by 10.4 percent year on year in August;<br />
the 2012 forecast is expected to increase<br />
slightly to 3.5 million b/d. In Brazil, demand<br />
is expected to grow at a robust pace, by 1.8<br />
and 2.4 percent for 2011 and 2012, respectively,<br />
to reach 2.85 million b/d in 2012. 30<br />
In Japan, oil demand growth was supported<br />
by the fact that the main utilities<br />
companies used 217,000 b/d of crude oil<br />
in October versus around 140,000 b/d a<br />
year earlier (according to the Federation of<br />
Electric Power Companies of Japan), as they<br />
continue to switch to oil and gas for power<br />
generation due to continued nuclear power<br />
plant outages. As a result, the consumption<br />
of fuel oil rose to 190,000 b/d from around<br />
50,000 b/d in October 2010. Japan’s GDP<br />
forecast for 2012 is forecast to grow at 2.3<br />
percent, and product demand generally is<br />
expected to continue to be strong in 2012. 31<br />
Observation<br />
The outlook for oil demand remains little<br />
changed overall despite the continued<br />
financial market upsets. The IEA sees that<br />
global oil demand has grown at a “moderate,<br />
but stable pace” in recent months,<br />
suggesting that the impact of any economic<br />
downturn is either not yet being felt in<br />
global oil markets (and the worse might be<br />
yet to come) or that any declines in demand<br />
are being offset by growth elsewhere such<br />
as in Japan and China.<br />
It is perhaps surprising that analysts see<br />
the situation for GDP growth in Japan as so<br />
positive for 2012, given the impact of the<br />
earthquake and tsunami earlier this year.<br />
The IMF is forecasting that the Japanese<br />
economy will grow by around 2.3 percent<br />
in 2012, signaling that Japan is expected to<br />
recover from the current crisis more rapidly<br />
than anticipated. Japan is currently taking<br />
steps to make its oil supply chains more<br />
disaster-resistant, due to lessons learned<br />
from serious fuel shortages in the wake of<br />
the earthquake and tsunami when Japan’s<br />
domestic refining capacity at one point fell<br />
to about 2.7 million b/d (900,000 barrels<br />
short of daily demand). 32<br />
With OECD demand growth only forecast at<br />
around 0.6 percent growth for 2012 (with<br />
possible further downward revisions if the<br />
Eurozone economic crisis becomes more<br />
severe), the impetus for strong market demand<br />
for oil and products will have to once<br />
again come from Asia and, primarily, China.<br />
While Chinese oil demand has been slower<br />
than in 2010, so far this year it has contributed<br />
to more than half of global incremental<br />
demand, and is likely to do so again next<br />
year. Markets can also take heart that even<br />
if there is a slowdown in China (which is<br />
unlikely) there is also strong demand for oil<br />
in other non-OECD economies; for example,<br />
gasoil demand in Russia is particularly<br />
strong and expected to reach over 690,000<br />
b/d in 2011, compared to 634,000 b/d for<br />
the whole of 2010. 33
October 2011 was also the first month of<br />
the new “60-66” taxation regime for the<br />
Russian oil industry, which has cut duties<br />
on crude oil and some refined products to<br />
stimulate output of high-grade oil products<br />
and crude. As a result, there was a<br />
marked increase in Russian oil production in<br />
October, with oil production reaching 10.3<br />
million b/d (production levels not seen since<br />
pre-Soviet days in Russia). 34<br />
Oil price<br />
Key trend—Concerns around the Eurozone<br />
debt crisis and return of Libyan crude<br />
exports has led to some softening of crude<br />
prices. However, this quarter also saw<br />
crude oil prices being supported by supply<br />
constraints, which led to some contraseasonal<br />
inventory draws. There has been a<br />
continued disconnect between Brent crude<br />
prices and the US WTI oil price in response<br />
to the situation at Cushing, with landlocked<br />
supplies of WTI still not finding an export<br />
market outlet and depressing the WTI oil<br />
price as a result.<br />
As of November 21, 2011, WTI crude oil<br />
futures for January delivery were trading at<br />
around $99/barrel, with Brent futures trading<br />
at around $109/barrel. Crude oil futures<br />
prices were rising as markets focused on<br />
the possibility of greater involvement by the<br />
IMF in bailing out Eurozone governments.<br />
Short-term futures oil prices are expected<br />
to continue to be supported by financial<br />
market effects, causing volatility and a<br />
strong correlation of oil prices with stock<br />
market movements. 35<br />
In the short term, there appears to be<br />
more downward pressure on the oil price,<br />
as Libyan oil begins to return to the world<br />
market and as global economic growth<br />
overall is slowing. Downward pressure on<br />
oil prices generally is also coming from a<br />
rising dollar, although the market is seeing<br />
prices rise and fall according to financial<br />
market effects on any given day.<br />
8<br />
Some analysts are maintaining or raising<br />
their 2012 oil price projections. For example,<br />
J.P. Morgan has maintained its price<br />
projection of $115/barrel for Brent, and increased<br />
its price projection for WTI to $110/<br />
barrel in 2012 (from $97.50/barrel forecast<br />
in October). J.P. Morgan said it sees the<br />
Brent-WTI spread narrowing to $5 and $3<br />
per barrel in 2012 and 2013, respectively,<br />
due to the planned reversal of the Seaway<br />
pipeline. 36<br />
The OPEC Reference Basket price decreased<br />
in October, moving below the significant<br />
$100/barrel level in the first week for the<br />
first time since mid-February. The downward<br />
movement in the OPEC Reference<br />
Basket in early October was attributed to<br />
the weak performance of the global crude<br />
oil market on the back of the debt crisis in<br />
Europe.<br />
Observation<br />
The crude oil price outlook is softening slightly<br />
for the remainder of 2011, but has continued<br />
to be volatile throughout the quarter as<br />
it reacts to financial market effects. Some<br />
analysts have noted a 95 percent correlation<br />
between futures crude oil prices movements<br />
and the S&P 500 since July 2011. 37<br />
In early November, the WTI oil price started<br />
to make up some ground on Brent oil prices,<br />
but generally the prices have seen a $10<br />
to $20/barrel divergence throughout 2011<br />
due to the supply situation at Cushing.<br />
If this happens, we are now likely to see<br />
much more of a recovery in WTI prices as<br />
crude is released from the hub at Cushing<br />
to export markets, and this is expected<br />
to result in a significant narrowing of the<br />
WTI-Brent spread. The impact on WTI might<br />
be greater (depending on the volumes it<br />
might carry) as the US government has<br />
announced that a decision on TransCanada<br />
Pipelines’ 600,000 b/d Keystone XL pipeline<br />
would be postponed until 2013. This makes<br />
the Seaway pipeline the only short-term<br />
option to alleviate the situation at Cushing<br />
(according to some analysts, by the second<br />
quarter of 2012 the reversed Seaway could<br />
have a throughput of around 150,000 b/d,<br />
eventually rising to a maximum of 400,000<br />
b/d by early 2013, all flowing toward US<br />
Gulf Coast refineries). 38<br />
Gas supply<br />
Key trend—Global gas production is expected<br />
to continue to increase and meet<br />
future demand with further exploration<br />
and development of unconventional gas,<br />
notably in the United States, which is<br />
now progressing its plans to export LNG.<br />
The short-term gas supply situation looks<br />
robust, but LNG capacity has tightened<br />
considerably, largely due to the situation<br />
in Japan. Longer term, the IEA is forecasting<br />
that global gas production of between<br />
3.9 tcm and 5.1 tcm is required to meet<br />
projected levels of consumption by 2035.<br />
Conventional gas will still account for the<br />
bulk of global gas production by 2035, but<br />
the share of unconventional gas will rise<br />
from 13 percent in 2009 to 22 percent in<br />
2035 and it provides 3 percent of incremental<br />
production to 2035. 39<br />
This quarter has seen Europe’s largest<br />
exporter, Gazprom, challenged by price<br />
disputes and falling exports, with preliminary<br />
Russian <strong>Energy</strong> Ministry data showing<br />
Russian gas exports for October 2011 falling<br />
by 9.2 percent from October 2010 (with<br />
some analysts noting that this was the<br />
lowest October production in the history of<br />
Gazprom). This is largely due to the effects<br />
of early stockpiling of gas by European<br />
countries ahead of fourth-quarter 2011<br />
price increases as well as Gazprom disputes<br />
with EU countries like Poland. Gazprom<br />
gas sales to Europe alone in October were<br />
almost flat year-on-year at 9.536 bcm. 40<br />
In the United States, the <strong>Energy</strong> Information<br />
Administration (EIA) expects US<br />
marketed natural gas production to average<br />
65.6 billion cubic feet (bcf)/d in 2011, a 3.8<br />
bcf/d (6.1 percent) increase over 2010. This<br />
growth comes from higher onshore production<br />
in the Lower 48 states, which more<br />
than offsets a year-over-year decline of 1<br />
bcf/d (17 percent) in the Gulf of Mexico.<br />
The EIA expects that total marketed production<br />
will continue to grow in 2012, but<br />
at a slower pace, increasing 1.3 bcf/d (2<br />
percent). Growing domestic natural gas<br />
production has reduced reliance on natural<br />
gas imports to the United States and the<br />
EIA now expects that pipeline gross imports<br />
of natural gas will fall by 6.7 percent to<br />
8.5 bcf/d during 2011, and by another 1.4
percent to 8.3 bcf/d in 2012. Projected US<br />
imports of LNG will fall from 1.2 bcf/d in<br />
2010 to 0.9 bcf/d in 2011 and even further<br />
to 0.7 bcf/d in 2012. 41<br />
Also in the United States, BG Group signed<br />
an $8 billion deal this quarter with a unit of<br />
Cheniere <strong>Energy</strong> Partners to buy 3.5 million<br />
tonnes/year of LNG over 20 years (starting<br />
in 2016 with a possible 10-year extension)<br />
from Cheniere’s new Sabine Pass LNG export<br />
terminal in Louisiana. This deal marks<br />
the first move to export some of the shale<br />
gas production from the US Gulf Coast to<br />
international markets. Cheniere has also<br />
reportedly signed a second export deal<br />
with Spanish utility Union Fenosa, which<br />
is a $9 billion 20-year agreement<br />
for 3.5 million tonnes/year of LNG. 42<br />
Short-term LNG supply continues to be<br />
strong, with new capacity continuing to<br />
come onstream. LNG as a share of global<br />
gas demand increased to 9 percent in 2010<br />
and is expected to increase further in 2011<br />
(with LNG now accounting for between<br />
25 to 30 percent of all gas traded). While<br />
Japan has seen its LNG demand grow by 21<br />
percent since the nuclear disaster in March<br />
this year, much of the anticipated growth<br />
in gas usage in Asia is likely to come from<br />
China and India. Chinese imports of LNG<br />
have increased 27 percent in the first half<br />
of 2011 and India is expected to double its<br />
gas usage from 2008 to 2015. With domestic<br />
supply failing to keep up with growing<br />
industrial demand, some countries are looking<br />
to ramp up their LNG import infrastructure<br />
to facilitate easier trade and increase<br />
their gas supply flexibility. Overall, global<br />
LNG imports are up by 11 percent over the<br />
first half of 2011 due to strong relative<br />
increases from the United Kingdom,<br />
Canada and Chile; incremental volumes<br />
are also up in the United Kingdom, Japan,<br />
Korea and China. 43<br />
Observation<br />
In Europe, the fall in domestic gas production<br />
continues to increase European<br />
dependency on imported gas. Under the<br />
current scenario, Russia is expected to gain<br />
most from this shortfall, but, despite Gazprom’s<br />
investment plans, there are concerns<br />
that the company is behind schedule with<br />
9<br />
production growth plans. Meanwhile, the<br />
market continues to change with LNG looking<br />
increasingly attractive to many countries.<br />
With the European Union tightening<br />
European gas market regulations for piped<br />
gas, Gazprom’s focus has been turning to<br />
international markets. However, despite up<br />
to 60 million tonnes of new annual LNG<br />
capacity under consideration in Russia, for<br />
now, only one LNG export plant is operating:<br />
Sakhalin-2. It therefore looks like<br />
Russia will be playing catch up in the LNG<br />
supply market for the foreseeable future,<br />
particularly with US Gulf Coast LNG exports<br />
on the horizon.<br />
If significant exports of LNG start to come<br />
out of the US Gulf Coast LNG export terminals,<br />
there is potential for more interconnectedness<br />
of global gas markets and<br />
prices, particularly now as the widening of<br />
the Panama Canal will offer a more direct<br />
route to Asia for larger LNG tankers from<br />
2015. (BG Group and Cheniere have both<br />
signed the first deals in October 2011, to<br />
start exporting LNG from the Sabine Pass<br />
terminal from 2014 and other deals are<br />
likely to follow.)<br />
BG and Cheniere are reportedly offering<br />
in their contracts options to allow buyers<br />
to cancel any liftings without penalty if<br />
they give advance notice. This means that<br />
essentially the sellers of US Gulf Coast LNG<br />
are selling gas based on Henry Hub spot gas<br />
prices (market related and competitive) and<br />
they are offering their buyers an unprecedented<br />
cancellation option (making these<br />
deals very flexible). With US Henry Hub<br />
prices at around $4/million btu and Asian<br />
LNG prices over $15/million btu, the potential<br />
for price arbitrage is considerable. 44<br />
As a result of these considerable hedging<br />
and price arbitrage opportunities between<br />
US and Asian gas markets, the LNG market<br />
is becoming a more attractive place for<br />
conducting business for investment banks.<br />
This quarter, J.P. Morgan announced a deal<br />
with Cheniere <strong>Energy</strong> to import LNG into<br />
the United States. Under the two-year deal,<br />
the two parties will jointly buy cargoes of<br />
the gas from overseas and share the profits<br />
from selling them into the US market.<br />
J.P. Morgan, already a big player in the<br />
downstream US gas market, will enter the<br />
LNG market through access to Cheniere’s<br />
Sabine Pass import terminal in Louisiana,<br />
which it is likely to use as a hedging tool.<br />
Most of the larger investment banks have<br />
all entered LNG trading over the past few<br />
years, including Morgan Stanley, Citigroup<br />
and Barclays Capital, with an increasing<br />
focus on the US gas market. 45<br />
Gas prices<br />
Key trend—Natural gas prices for most markets<br />
are expected to increase next year over<br />
2011, due to better demand. The US market<br />
remains an exception due to the continued<br />
robust supply situation and weak demand<br />
and gas prices are under pressure in Europe<br />
as Libya gas exports are due to restart.<br />
Supply to the global gas market remains<br />
robust and the segmentation of the global<br />
gas market into distinct pricing regions<br />
shows no sign of altering in the short term,<br />
although developments like increased shale<br />
gas production (and continued weak spot<br />
price market) in the United States, leading<br />
to potential US LNG exports, will start to<br />
change pricing dynamics. Over the next five<br />
to 10 years, the market is likely to see a gas<br />
price which is increasingly global (supported<br />
by possible US Gulf Coast LNG exports),<br />
which connects all three key demand markets<br />
(Asia, the United States and Europe).<br />
Gas price futures in Europe started to rise<br />
this quarter in anticipation of the coming<br />
winter but, in reality, a warm autumn has<br />
put some downward pressure on prices. In<br />
August, the United Kingdom’s wholesale<br />
natural gas price for the coming winter<br />
traded at its highest level in more than 34<br />
months at 78.25 pence/therm. This was<br />
caused by an expected reduction in output<br />
over the autumn from QatarGas so that it<br />
could hold essential maintenance to some<br />
of its production trains. (Qatar is the single<br />
largest supply source of LNG for the United<br />
Kingdom.) By mid-November 2011, however,<br />
the day-ahead gas price in the United<br />
Kingdom was only trading at 60.70 pence/<br />
therm, with futures prices for December<br />
also weak at 60.90 pence/therm. 46
Libya is expected to restart gas exports in<br />
late November/December 2011, and there<br />
are fears that this additional supply in the<br />
European market will cause a gas price<br />
decline due to the continued mild weather.<br />
The Libya-Sicily Greenstream pipeline is<br />
expected to start shipping gas to Italy in<br />
December with gas storage in Italy already<br />
reportedly nearly full. This is likely to cause<br />
other producers, notably Russia, Norway<br />
and Qatar, to lower or divert their gas<br />
production putting substantial pressure<br />
on European gas prices.<br />
Gazprom has posted high profits so far<br />
this year, supported by high gas prices and<br />
a surge in orders from customers locking<br />
into deals to avoid later estimated price<br />
increases. However, more recently, the<br />
company is experiencing a fall in exports<br />
due to some customers stockpiling gas<br />
ahead of winter price rises. Gazprom is<br />
reportedly in talks with customers such<br />
as Germany’s RWE, which is looking for<br />
cheaper gas (in light of Germany’s move<br />
away from nuclear power and continued<br />
low spots prices at key European hubs) and<br />
is also continuing talks with Japan’s major<br />
utilities that are looking for secure gas<br />
supplies, due to power generation supply<br />
concerns. 47<br />
US gas prices continue to be weak, as rising<br />
domestic production and slow demand<br />
growth influences price movements there.<br />
The Henry Hub spot price averaged $3.56/<br />
million btu in October 2011, 34 cents lower<br />
than the September 2011 average and 49<br />
cents lower than the August 2011 average.<br />
The EIA has lowered the 2011 forecast by<br />
6 cents to $4.09/million btu and also the<br />
2012 forecast by 19 cents to $4.13/million<br />
btu. 48 Should US Gulf Coast LNG markets<br />
become more linked to higher price markets<br />
in Europe and Asia through LNG exports,<br />
there are expectations that this might<br />
eventually lead to a rise in US gas price.<br />
On the downside, it might also cause US<br />
oil imports to rise (as gas becomes less<br />
competitive as a fuel for power generation)<br />
at a time when both US oil and LNG<br />
imports have been falling steadily.<br />
10<br />
Short-term LNG prices remain high, notably<br />
in Asia, where Japan continues to struggle<br />
with the impact of the Fukushima (and<br />
other) nuclear plant shut-downs. Around<br />
80 percent of the country’s nuclear capacity<br />
remains offline (just 11 of its 54 reactors<br />
are now operating) and there has been no<br />
word on potential restarts. LNG demand in<br />
Japan has risen by 31 percent in October<br />
over September to 3.9 million tons and LNG<br />
prices in Asian generally, have exceeded<br />
$17/million btu in late September and are<br />
expected to reach parity with (Brent) oil<br />
prices soon (some analysts expecting Asian<br />
LNG spot prices to increase to as high as<br />
$20/million btu over the coming winter). 49<br />
Observation<br />
Short-term price rises in the European<br />
market are more reflective of preparation<br />
for the coming winter than any real change<br />
in supply/demand fundamentals, but overall<br />
demand in both Europe and the United<br />
States is weak, and being exacerbated by a<br />
mild autumn. With increasing amounts of<br />
Libyan gas coming back into the market, it<br />
is unlikely that European or US gas prices<br />
will rise substantially over the coming winter.<br />
Gazprom continues to try and market<br />
its gas more in line with current market<br />
realities of lower spot prices generally. In<br />
the United States, while there might be excitement<br />
over the potential for the gas price<br />
rises due to LNG exports, the reality is that<br />
natural gas prices are likely to languish for<br />
some time. US natural inventories remain<br />
high and if they are still robust at the end<br />
of the 2011–2012 heating season, then<br />
there is almost no prospect of any change<br />
in the gas price situation there.<br />
Longer term, the growing share of LNG<br />
in global gas supply and increasing opportunities<br />
for short-term trading of LNG<br />
are expected to contribute to a degree of<br />
convergence in regional prices, and LNG<br />
price rises generally. Global LNG demand<br />
grew 9 percent in the first half of 2011 and<br />
13 percent over the past 12 months, with a<br />
high percentage of LNG shipping capacity in<br />
use due to the situation in Japan. Countries<br />
such as the United Kingdom are importing<br />
increasing amounts of LNG; UK demand<br />
grew by 76 percent year on year in the first<br />
half of 2011. Despite the amount of LNG<br />
new build projects underway, the market is<br />
likely to see some tightening of spare LNG<br />
production capacity over the next two years<br />
until new LNG supply projects come onstream.<br />
According to some analysts, global<br />
spare LNG production capacity is likely to<br />
shrink to 26 million tonnes a year in 2011<br />
with spare capacity flattening out by 2014,<br />
which will translate to about 2 million<br />
tonnes per year of spare capacity. 50<br />
While there is likely to be significant continued<br />
spot LNG price differentials between<br />
the United States, Europe and Asia, reflecting<br />
the relative isolation of these markets<br />
from one another and the cost of transport<br />
between regions, the rise in Asian demand<br />
and the potential of new LNG exports<br />
starting from the US Gulf Coast will start to<br />
connect these three markets. This is likely<br />
to start to change LNG market dynamics<br />
and introduce, what many market analysts<br />
are calling, the first truly global gas price.<br />
Most analysts are predicting that North<br />
American LNG could be delivered at about<br />
$9/million btu. Such a low price could encourage<br />
Asian utilities to seek a new pricing<br />
regime linked to the US gas price benchmark<br />
(Henry Hub) rather than oil prices and<br />
would be a welcome relief for the large<br />
Asian Utilities most of whom are expecting<br />
to pay between $17 and $20/million btu for<br />
their gas this winter. 51
Gas demand<br />
Key trend—Short-term gas demand<br />
continues to vary significantly by region,<br />
with significant demand still evident in<br />
Asia, notably Japan and China, but with<br />
Europe and North America still showing<br />
weaker demand due to milder weather conditions<br />
and the continuing weak economic<br />
outlook. Longer-term demand for natural<br />
gas will continue to grow (from 3.1 tcm in<br />
2009 to 4.75 tcm in 2035) according to the<br />
IEA’s Medium Oil and Gas 2011 outlook; an<br />
increase of 55 percent. 52<br />
In the short term, gas demand in Europe<br />
continues to be weak, with poor economic<br />
conditions continuing to affect demand as<br />
well as the impact of a significant volume<br />
of prepaid Russian and Libyan gas, which<br />
has not yet reached the market. In the<br />
United Kingdom, gas demand during this<br />
winter is expected to be lower, due to the<br />
continued shift by power producers to use<br />
coal for power generation. The UK power<br />
distribution operator National Grid has<br />
revised power plant availability down by 4<br />
percent this winter to 61.3 gigawatts (GW),<br />
adding that power producers are expected<br />
to “strongly favor” cheaper coal instead of<br />
gas for electricity generation. 53<br />
In Italy, gas demand fell with lower offtake<br />
from power producers and industrial<br />
customers (total Italian gas demand in the<br />
power generation sector was 2.20 billion<br />
cubic meters (bcm) this October, while it<br />
stood at 3.15 bcm in October 2008). Spanish<br />
gas demand also witnessed a drop of 10<br />
percent in October from the same month<br />
last year due to warmer weather and power<br />
utilities switching to coal. However, there<br />
is evidence of slight increases in French gas<br />
demand, which is now forecast to increase<br />
by 2.3 percent in 2011, to 537 terrawatthour<br />
(TWh) due to five new gas-fired power<br />
plants coming online this year. Some analysts<br />
are forecasting European gas demand<br />
would be around 7.5 percent lower in 2011<br />
than in 2010, a faster annual rate drop than<br />
at the height of the international recession<br />
in 2009, due to weak demand and mild<br />
autumn weather. 2012 might show some<br />
recovery to reach 456 bcm (from estimates<br />
of 449 bcm for 2011) if the economic situation<br />
starts to improve. 54<br />
11<br />
US gas demand continues to be weak, with<br />
the EIA expecting that total natural gas<br />
consumption will grow by only 1.7 percent<br />
to 67.1 billion cubic feet per day (bcf/d)<br />
in 2011. Rising use of natural gas in the<br />
industrial and electric power sector in the<br />
US accounts for most of the increase in<br />
total US consumption in 2011 (with<br />
projected growth rates of 2 percent and<br />
1.5 percent, respectively). Projected total<br />
US natural gas consumption is expected<br />
to increase slightly by 1.1 percent to 67.9<br />
bcf/d (higher projections of residential and<br />
commercial consumption account for much<br />
of this change in the forecast). 55<br />
LNG demand continues to increase in Asia,<br />
due to the ongoing situation in Japan and<br />
rising demand in other nations like China<br />
and Korea. China’s LNG imports rose 27<br />
percent to 5.2 million tons in the first half<br />
of 2011 from a year earlier and reached<br />
a record over the summer of 2011. Petro-<br />
China has now started trial operations at its<br />
Jiangsu LNG terminal and China National<br />
Offshore Oil Corporation has stated that it<br />
might increase LNG imports by 16 percent<br />
via its Guangdong facility this year. India’s<br />
LNG imports increased 26 percent in the<br />
first half; with the country forecast to<br />
double its gas to up to 2016 (to around<br />
400 million cubic meters a day) with<br />
domestic supply only expected to supply<br />
half of this forecast demand. 56<br />
Observation<br />
While short-term demand in Europe generally<br />
has been weak this quarter, the outlook<br />
for gas demand remains strong over the<br />
next few years. Analysts are predicting that<br />
there will be high demand for new gas turbines,<br />
particularly from the United Kingdom,<br />
Germany and France. In the United Kingdom,<br />
around 14 GW of new turbine orders<br />
are expected to be placed as roughly 11 GW<br />
of aging plants will shut down by 2017.<br />
In Germany, gas is expected to play an<br />
increasingly important role due to the government’s<br />
decision to close down nuclear<br />
power plants in favor of more renewable<br />
energy supply. Due to the short-term gap<br />
in renewable energy supplies coming on<br />
stream, Germany will require short-term<br />
gas power capacity replacements. In France,<br />
the Fukushima nuclear situation is causing<br />
a re-evaluation of that country’s dependency<br />
on nuclear power, and if a left-wing<br />
government wins the 2012 French general<br />
election, it is likely that gas use in France<br />
will increase considerably also. 57<br />
The short-term outlook for LNG is that the<br />
market will continue to tighten largely due<br />
to the situation in Japan. It is expected that<br />
globally there will be limited LNG capacity<br />
additions over 2012-2014, including the<br />
Pluto project in Australia and Angola LNG<br />
(with the second “wave” of significant LNG<br />
capacity only coming onstream toward the<br />
end of 2014). There is also expected to be<br />
demand for LNG imports from new markets<br />
such as Thailand, Vietnam, Singapore,<br />
Indonesia and Malaysia (with the latter<br />
also being LNG exporters, but Indonesia,<br />
for example, is allowing private companies<br />
to start importing gas due to local shortages).<br />
This is expected to have an impact on<br />
Indonesia’s net exports and might lead to<br />
tightening LNG supplies in Asia generally. 58<br />
Refining<br />
Key trend—Global refinery crude estimates<br />
for the fourth quarter of 2011 have been<br />
revised lower for most regions due to<br />
shutdowns and seasonal maintenance in<br />
Europe, disruptions to refinery operations<br />
and unscheduled stoppages in Asia as well<br />
as seasonal maintenance in the United<br />
States. Global refinery crude runs averaged<br />
around 75.5 million b/d in the third quarter<br />
of 2011 with stronger US runs only partially<br />
offsetting lower than expected throughputs<br />
in Asia. Asia saw significant refinery outages<br />
and delays in starting up new capacity,<br />
which contributed a fall in crude runs of<br />
around 30,000 b/d. As a result of refining<br />
disruption, refining margins have showed<br />
some recovery this quarter (largely due to<br />
the outage at Shell’s 500,000 b/d Pulau<br />
Bukom refinery in Singapore, which tightened<br />
the market temporarily) but, generally,<br />
refining margins continue to be under pressure<br />
with September margins having shown<br />
a steep fall from August levels. 59
European crude refining runs estimates<br />
are largely unchanged at 12.2 million<br />
b/d for the fourth quarter of 2011 (down<br />
from 12.4 million b/d in the third quarter).<br />
Regional runs rose 165,000 b/d in August<br />
to 12.6 million b/d, 325,000 b/d below a<br />
year earlier. Refinery stoppages continue to<br />
be heavier than in 2010 so far this year, in<br />
part due to economic and some unforeseen<br />
shutdowns. While the loss of Libyan supplies<br />
since February has prompted several<br />
refiners to undertake turnarounds earlier<br />
than planned, several plants are currently<br />
reducing runs or shutting altogether due<br />
to poor margins. In terms of scheduled<br />
maintenance, the main contributors are<br />
the Netherlands, with both Shell’s Pernis<br />
and BP’s Rotterdam undertaking work in<br />
October. In Germany, Gelsenkirchen was<br />
down for most of October and in Greece,<br />
Petrolas Elefsis was also undertaking work.<br />
Also notable is the 49-day partial shutdown<br />
of Statoil’s 120,000 b/d Kalundborg refinery<br />
in Denmark from late September. European<br />
refining margins were depressed by weakening<br />
gasoline crack spreads in September,<br />
but also a widening fuel oil discount<br />
contributed, pressuring margins at simple<br />
refineries in particular. Toward the end of<br />
the quarter, crack spreads improved both<br />
due to weaker crude prices and the fire at<br />
the Pulau Bukom refinery in Singapore. In<br />
addition, the Urals oil price weakened relative<br />
to Brent giving extra support to Urals<br />
margins. 60<br />
US crude runs were lower in September,<br />
falling some 300,000 b/d from a month<br />
earlier, mostly due to lower Gulf Coast<br />
runs. September runs were nevertheless<br />
stronger than expected, and were in part<br />
supported by the lack of any hurricanerelated<br />
shutdowns on the Gulf Coast. By<br />
the end of September, however, refining<br />
margins decreased both on the Gulf and<br />
West Coasts following a sharp deterioration<br />
in gasoline cracks and this, combined with<br />
an increase in maintenance shutdowns,<br />
will further reduce runs over the balance<br />
of the year (however overall runs are<br />
forecast to remain above 2010 levels on<br />
an annual basis). 61<br />
12<br />
The IEA has revised non-OECD refinery<br />
throughputs lower for both the third quarter<br />
and fourth quarters of 2011 following<br />
weaker-than-expected runs in China in<br />
August and disruptions to refinery operations<br />
in other parts of Asia (primarily due<br />
to the fire and closure of Shell’s refinery<br />
in Singapore). Total non-OECD runs are<br />
expected to increase to 39 million b/d for<br />
the fourth quarter of 2011 (an increase of<br />
675,000 b/d year on year) with China also<br />
showing higher runs toward the end of 2011<br />
due to the restart of PetroChina’s Dalian<br />
refinery in early September, as well as the<br />
start up of new capacity. In Asia, Singapore<br />
refining margins fell even though product<br />
cracks improved toward month-end due to<br />
the fire at the Singapore refinery. Weak fuel<br />
oil product cracks at the beginning of the<br />
month depressed margins as did relatively<br />
stronger Tapis crude prices. 62<br />
Observation<br />
This quarter, any boost in refining throughputs<br />
and margins were due to short-term<br />
outages and maintenance rather than any<br />
endemic changes in the industry outlook for<br />
refining. There is still significant rationalization<br />
underway globally in the industry<br />
focused on OECD markets. ConocoPhillips<br />
announced at the end of September it had<br />
idled its Trainer refinery on the US East<br />
Coast and that the refinery would permanently<br />
shut if no buyer is found within six<br />
months. The announcement comes only<br />
weeks after Sunoco said it would also<br />
sell or shut its two East Coast plants. In<br />
Europe, Eni idled its Venice refinery on poor<br />
margins, while LyondellBasel announced<br />
the French Berre l’Etang refinery will close<br />
permanently. Finally, in Japan, Showa Shell<br />
completed the shutdown of the Oghimachi<br />
factory, in line with previously announced<br />
plans.<br />
OPEC has announced in its 2011 World Oil<br />
Outlook that the global refining surplus<br />
might reach 10 million b/d by 2015 unless<br />
some refining capacity is closed and such<br />
overcapacity will continue to depress refining<br />
margins. OPEC estimates that around<br />
6.8 million b/d of new crude distillation<br />
capacity is expected to be added globally<br />
in 2011-2015, half of which will be in the<br />
Asia-Pacific region, mainly in China and<br />
India. 63<br />
Refiners are also struggling to cope with<br />
developments underway in key markets,<br />
which will affect their operations and<br />
margins. On the negative side, in the United<br />
States, the decision by Enbridge to reverse<br />
the flow in the Seaway pipeline starting<br />
next year will begin to end the advantaged<br />
feedstock position that Midwest refiners<br />
have been enjoying in that market. The glut<br />
of crude in the market, which could not<br />
find an outlet to the US Gulf Coast refiners,<br />
has depressed prices for WTI crude and<br />
helped create a record spread between the<br />
price of WTI crude and Brent Crude. It will<br />
mean that Midwest refining margins are<br />
likely to decline, along with the profits of<br />
some refiners in that region. 64<br />
On a more positive note, changes to fuel<br />
taxation in the European Union is likely to<br />
have a positive effect on refining margins<br />
here, according to analysis by OPEC’s 2011<br />
World Oil Outlook, by increasing diesel<br />
demand. An EU proposal to remove diesel<br />
tax advantages and put the fuel on par<br />
with gasoline would mean that diesel taxes<br />
would have to rise in more than half of<br />
the European Union’s 27 member states,<br />
helping redress the balance of refined<br />
product needs in the region by encouraging<br />
more use of gasoline, stimulating European<br />
output. “The (current directive) has led to a<br />
situation in which the open market diesel<br />
price is higher than that for gasoline due to<br />
greater diesel demand, but retail prices for<br />
final consumers are reversed at the pump<br />
because of lower taxation rates—this creates<br />
even more demand for diesel, despite<br />
EU shortages. This proposal could also be<br />
viewed as a signal to EU member states<br />
to reverse unwarranted tax advantages to<br />
diesel and to steer toward a more balanced<br />
future demand pattern which is sustainable<br />
for the refining industry.” OPEC expects that<br />
diesel’s tax could go up to 0.41 euros per<br />
liter from 0.33 euros per liter while gasoline<br />
would stay roughly unchanged at 0.36<br />
euros per liter. 65
Merger and acquisitions<br />
Key trend—Oil price and market volatility<br />
has led to a decline in oil and gas M&A activity,<br />
which is now at its lowest level since<br />
2008. North America continues to be the<br />
focus of the largest deals with midstream<br />
activity forecast to increase substantially.<br />
In 2010, there were a total of 1,717 M&A<br />
deals in the global oil and gas sector, with<br />
the total deal value at about $322 billion.<br />
This year (up to the end of October 2011),<br />
the sector has seen 1,508 mergers valued<br />
at around $211 billion. 66<br />
In the third quarter of 2011, according to<br />
data from IHS Herold, upstream transaction<br />
values fell to $31.9 billion as compared to<br />
$77.6 billion in the third quarter of 2010.<br />
The deal count also witnessed a drop from<br />
75 to 52 in the third quarter of 2011. A lot<br />
of the value in upstream M&A is still being<br />
driven by activity in the US shale gas sector.<br />
BHP’s all-cash $15 billion takeover of US<br />
shale-focused Petrohawk <strong>Energy</strong> was the<br />
largest global corporate deal in more than<br />
two years, accounting for nearly half of<br />
third-quarter 2011 worldwide deal value.<br />
BHP will pay $12.1 billion in cash, giving it<br />
access to shale oil and gas assets across one<br />
million acres in Texas and Louisiana. The<br />
deal comes just months after BHP agreed<br />
to buy Chesapeake <strong>Energy</strong>’s Arkansasbased<br />
gas business for $4.75 billion. Other<br />
significant deals this quarter also focusing<br />
on US shale basins included Statoil’s $4.4<br />
billion bid for Brigham Exploration. Statoil<br />
is looking to enter the Bakken and Three<br />
Forks shale plays in North Dakota with<br />
its purchase of Brigham, which has current<br />
production of 21,000 b/d, potentially<br />
increasing to 100,000 b/d over the next five<br />
years. As part of its US shale play strategy,<br />
Statoil is looking to build more shipping<br />
capacity, with a focus on pipelines, but has<br />
not yet committed itself to any specific<br />
pipeline project. Hess Corporation has<br />
carried out a transaction in the Ohio Utica<br />
Shale (a $593 million cash-plus drilling<br />
carry joint venture with Consol <strong>Energy</strong> and<br />
the $750 million corporate acquisition of a<br />
privately held Marquette Exploration). The<br />
French major Total has also made it known<br />
that it is looking for further opportunities<br />
13<br />
in the US shale plays. Total currently has no<br />
operated production from US shale plays,<br />
but has been participating in a joint venture<br />
with Chesapeake <strong>Energy</strong> in the Barnett<br />
Shale in North Texas for nearly two years. 67<br />
Downstream total transaction value for the<br />
third quarter of 2011 was down 36 percent<br />
compared to third-quarter 2010 and deal<br />
count was lower to 11 as compared to 13<br />
for the same period in 2010. The natural gas<br />
distribution sector contributed more than<br />
one third of downstream total transaction<br />
value in the third quarter of 2011 driven by<br />
ATCO’s $1.1 billion acquisition of a natural<br />
gas network that serves Western Australia.<br />
Both refining transactions were sales of<br />
assets by Murphy Oil Co. in the United<br />
States. With these sales, Murphy Oil exits<br />
the refining business to focus on its E&P,<br />
service station and terminal businesses. 68<br />
While the number of midstream transactions<br />
fell dramatically in the third quarter of 2011<br />
to the lowest level since the first quarter<br />
of 2009, fourth-quarter 2011 activity is<br />
increasing and pipeline deals are starting<br />
to drive the market in North America.<br />
Kinder Morgan, the US oil and gas pipeline<br />
company, has agreed to a $38 billion deal<br />
(including debt) to buy El Paso Corporation,<br />
another pipeline operator, creating<br />
the fourth-largest energy company in<br />
North America by market value. The deal<br />
represents a bet by Houston-based Kinder<br />
Morgan on the future growth of North<br />
American natural gas supplies, giving it<br />
operations in all the leading areas for US<br />
shale gas production. Another significant<br />
transaction this quarter was <strong>Energy</strong> Transfer<br />
Equity’s most recent $9.5 billion offer to<br />
acquire Southern Union Group for $44.25<br />
per share in cash. On the oil pipeline side,<br />
there was a significant deal this quarter<br />
with the $1.15 billion Enbridge has agreed<br />
to pay for ConocoPhillips’s half of the<br />
Seaway line which originally ran from the<br />
Gulf Coast to Oklahoma, serving Conoco’s<br />
Ponca City, Oklahoma, refinery. Because of<br />
the large amount of oil in the Midwest, the<br />
Seaway line has recently been running at<br />
very low capacity and its reversal looks like<br />
it will be the first pipeline online to be able<br />
to move enough crude out of the oil hub of<br />
Cushing, Oklahoma to the refineries along<br />
the US Gulf Coast, cutting into the price<br />
premium held by North Sea Brent blend<br />
against the price US benchmark West Texas<br />
Intermediate and avoiding the need to build<br />
completely new infrastructure. 69<br />
Observation<br />
M&A deal volume and activity continues<br />
to be dominated by the US unconventional<br />
sector this quarter, where increasingly there<br />
are concerns that the growth picture might<br />
be constrained by infrastructure challenges.<br />
Total US oil production from shale plays is<br />
currently estimated at 700,000 b/d but is<br />
estimated to increase substantially, depending<br />
on access to pipeline shipping capacity.<br />
For example, in one key US shale production<br />
area, the Eagle Ford in South Texas<br />
(where there are still very few pipelines),<br />
companies continue to rely on trucks and<br />
railways to handle the increasing oil production<br />
output. 70 As shale gas production<br />
also increases, the US Interstate Natural<br />
Gas Association of America Foundation (a<br />
trade group) estimates that companies will<br />
need to build 35,600 miles of large scale<br />
natural-gas pipelines between 2011 and<br />
2035 to meet market demands, at a cost<br />
of $178 billion. 71<br />
As a result, the focus of M&A activity has<br />
now moved its focus to infrastructure<br />
deals, as companies seek to capitalize on<br />
this growth and as a result, the US pipeline<br />
market is undergoing a dramatic transformation.<br />
Deals like the Kinder Morgan<br />
acquisition of El Paso, or Enbridge’s deal for<br />
a 50 percent share of the Seaway pipeline,<br />
will change the way the US infrastructure<br />
market operates. These deals not only<br />
involve new projects to transport greater<br />
volumes of unconventional oil and gas to<br />
market, but are also bringing into focus<br />
pipeline companies that are all seeking<br />
greater consolidation and scale to grow<br />
their companies after years of operating in<br />
a market which up until a few years ago,<br />
showed few prospects for growth. Notably,<br />
many of the transformations underway are<br />
seeing companies divest riskier E&P operations<br />
(Williams, Kinder Morgan and Atlas<br />
<strong>Energy</strong>) to focus purely on their infrastructure<br />
businesses, broadening their operations<br />
and thereby realizing greater market value.
Rig activity<br />
Key trend—The rig market continues to<br />
look buoyant as the continued high oil<br />
price drives upstream activity. According to<br />
data from Baker Hughes, during the third<br />
quarter of 2011, the average number of rigs<br />
under operation generally witnessed steady<br />
growth (though there were declines in some<br />
markets) as compared to the same period in<br />
2010; North America (17 percent), Europe<br />
(33 percent), Middle East (6 percent), Africa<br />
(-15 percent), Latin America (13 percent),<br />
Asia-Pacific (-10 percent). The number of<br />
oil rigs in the US exceeded 2,000 as of the<br />
beginning of November 2011 and drilling<br />
activity has finally surpassed pre-crisis lows<br />
(a year ago the rig count stood at 1,668<br />
rigs). Gas rig activity in the United States,<br />
however, has been starting to slow over<br />
recent weeks. The number of rigs drilling<br />
for natural gas in the United States fell to<br />
865, toward the end of November 2011, the<br />
lowest level since January 2010, down from<br />
highs of 936 just a few weeks ago. 72<br />
Globally deepwater and ultra-deepwater<br />
rig availability remains tight, with day rates<br />
for deepwater and ultra-deepwater rigs<br />
increasing and contracts becoming longer,<br />
as the market tightens. Deepwater drilling<br />
activity continues to recover in the US Gulf<br />
of Mexico, where a hurricane-free season<br />
allowed for a continuation of the post-<br />
Macondo recovery in production, with the<br />
pace of new well completions accelerating.<br />
So far this year, the U.S. Bureau of Ocean<br />
<strong>Energy</strong> Management, Regulation and Enforcement<br />
has given approval to more than<br />
40 drilling permits, with 13 being issued<br />
in October—nearly three times the average<br />
seen so far this year; awards are now<br />
approaching historical levels of 15 to 20<br />
permits per month. 73<br />
There continues to be a steady rise in orders<br />
for rigs as drillers replace old fleets and step<br />
up exploration and production activities<br />
to take advantage of high global crude oil<br />
prices. Analysts expect the world’s two largest<br />
rig builders by market share (Singapore<br />
based Keppel Corporation and Sembcorp<br />
Industries Ltd.) to continue to receive<br />
strong orders for rigs in 2011, which is likely<br />
to boost their profits over next two to three<br />
years. Both Keppel Corp. and Sembcorp<br />
14<br />
Marine have seen their share prices rise on<br />
the back of better-than-expected US retail<br />
sales and hopes that Europe will act soon<br />
to resolve its debt crisis. The stocks of the<br />
rig builders generally have been recovering<br />
from a recent sell-down due to concerns<br />
about a possible slowdown in orders amid<br />
a weakening global economy as oil prices<br />
stay high and there is strong demand from<br />
countries like Brazil. Sembcorp management<br />
is reportedly seeing higher enquiries for<br />
semi-submersible rigs and remains upbeat<br />
on new order intake, especially on potential<br />
rig orders from Brazil. 74<br />
Observation<br />
As the rig market continues to tighten and<br />
rig rates rise, the outlook for the services<br />
industry and rig suppliers in particular is<br />
much improved. The industry is showing<br />
high rig utilization in most markets, with<br />
rig rates rising as demand increases.<br />
As demand for rigs and oilfield services<br />
increases in high growth markets, it is fair<br />
to say that a trend is emerging of some<br />
companies either buying rigs or increasingly<br />
looking to bring key services in-house. This<br />
is particularly true of the US onshore oil<br />
and gas market, where producers are buying<br />
onshore drilling rigs and related equipment<br />
to keep their costs in check, rather than<br />
rent from the market at increased prices<br />
amid strong demand for work in shale<br />
fields. While prices to rent rigs and costs<br />
of operating them are increasing, some<br />
analysts are noting that the rise in prices<br />
for buying a rig have risen more slowly,<br />
meaning buying a rig is more cost efficient.<br />
With a 15 to 20 percent increase in the<br />
cost of land-based drilling, North America<br />
had the highest cost escalation in the past<br />
12 months (according to some analysts),<br />
meaning that in this environment, company<br />
can recoup the $20 million or so cost of<br />
a rig within two years. Some smaller US<br />
producers are also bringing key services like<br />
pressure pumping in-house to better control<br />
costs and access to services as oil and gas<br />
fracking activity continues to increase. 75<br />
Companies<br />
Key trend—Most of the major oil companies<br />
have continued to generate high profits<br />
in the third quarter owing to higher oil<br />
prices—though declining production and<br />
rising costs are still much in evidence. Most<br />
of the majors reported a fall in production<br />
with new field start-ups failing to match<br />
natural declines in portfolios and significant<br />
portfolio rationalization still taking place.<br />
This quarter also saw the continued effect<br />
of unforeseen situations such as the conflict<br />
in Libya and delays in getting back to<br />
work in the Gulf of Mexico. While industry<br />
costs fell in 2009 and 2010 due to the global<br />
economic crisis, the trend appears to be<br />
on the turn, with some analysts expecting<br />
industry cost rises of 6 percent for 2012. 76<br />
Higher oil and gas prices once again contributed<br />
to higher profits for the integrated<br />
oil majors during the third quarter of 2011,<br />
even though asset sales, geopolitical problems<br />
and maintenance turnarounds led to<br />
another decline in production. Each of the<br />
majors recorded production declines for the<br />
quarter, ranging from a less than 1 percent<br />
decline at Total to 10 percent-plus declines<br />
at BP and ConocoPhillips. Total’s relatively<br />
small production decline was due in part to<br />
increased output at Russian gas producer<br />
Novatek, in which Total took an equity<br />
stake earlier this year. BP’s third-quarter<br />
production fell 12 percent to 3.32 million<br />
barrels of oil equivalent (boe)/d, largely<br />
on the back of major turnarounds and<br />
production declines in the Gulf of Mexico.<br />
Conoco’s sharp production decline came<br />
from a variety of sources, shut-ins in Libya,<br />
asset sales and reduced output at the Peng<br />
Lai 19-3 field offshore China following an<br />
oil spill. 77<br />
Profits were also strong at the larger<br />
oilfield services companies, that continue<br />
to benefit from the upturn in upstream<br />
activity, as well as national oil companies<br />
(NOCs) generally. However, Brazil’s NOC,<br />
Petrobras, actually reported a drop in profits<br />
this quarter of 26 percent as government<br />
price controls prevented it from capitalizing<br />
on high crude prices and its fuel costs<br />
increased. Petrobras’ profit was curbed by<br />
price controls for gasoline and diesel while<br />
a weaker local currency increased imported<br />
fuel costs. (Petrobras’ gasoline imports quadrupled<br />
this year to about 30,000 b/d.) 78
Observation<br />
Analysts are starting to look beyond the<br />
bumper profits many of the oil companies<br />
announced on the back of higher oil prices,<br />
and are now looking for evidence of how<br />
the oil majors in particular, can maintain<br />
income growth if production is falling.<br />
After six or seven quarters of strong profit<br />
growth driven by rising oil prices, it is looking<br />
doubtful as to whether companies can<br />
continue to increase earnings next year and<br />
beyond, if oil prices start to plateau or fall.<br />
Challenges for oil companies are not only<br />
limited to the upstream part of the business.<br />
While downstream profits were<br />
also strong this quarter, this environment<br />
continues to be difficult. Companies are<br />
dealing with stagnating demand in OECD<br />
markets and refining overcapacity with<br />
more new refining capacity being added<br />
especially in the Middle East and Asia.<br />
(There is significant new refining capacity<br />
coming on-stream between 2015–2017 and<br />
continued structural overcapacity, which<br />
is likely to result in continued massive closures,<br />
particularly in OECD markets.) Globally,<br />
according to data from the IEA, crude<br />
distillation capacity is expected to increase<br />
by 9.6 million b/d between 2010–2016, of<br />
which 95 percent will be located in non-<br />
OECD nations like India and China. (China<br />
alone is estimated to account for around<br />
40 percent of oil demand growth between<br />
2010 and 2016.) 79<br />
The growth outlook for downstream activities<br />
in Asia is also not without its concerns.<br />
Some analysts are predicting that Asian<br />
refiners could earn as much as 20 percent<br />
less in 2012 from processing a barrel of<br />
crude into product than this year’s average,<br />
as they get squeezed between new additions<br />
to capacity and expectations of slowing<br />
global demand growth. Refiners who do<br />
not have more complex refineries could be<br />
forced to cut production with those refiners<br />
planning expansions and facing delays due<br />
to declining demand. Most refiners continue<br />
to look to China for positive news, and more<br />
specifically, to China’s gasoil demand which<br />
is increasingly driving higher margins for<br />
refiners. 80<br />
15<br />
Generally in the downstream sector, oil<br />
companies are increasingly focusing on<br />
what they can do to reduce costs, improve<br />
process efficiencies and how they can<br />
use technology to better manage refining<br />
portfolios. Some are choosing to deintegrate<br />
their operations, like Marathon or<br />
ConocoPhillips, and are spinning off their<br />
downstream operations into a separate<br />
company. Others, like Total, are reorganizing<br />
their downstream operations into a more<br />
integrated operation, effectively merging<br />
its refining and petrochemicals operations<br />
together. For smaller refiners, that do not<br />
have integrated operations, one solution<br />
might be to see how they can mimic what<br />
Total is doing by completely integrating<br />
refining and petrochemicals and looking for<br />
partnerships with petrochemical companies,<br />
to offset declining refining margins or to<br />
see how they can best position themselves<br />
to access high growth markets like China. 81<br />
Demand for gasoil/diesel in China looks<br />
strong in both the short and long term.<br />
Refiners in China in October 2011 bought<br />
about 320,000 tonnes of diesel to cover<br />
domestic shortages of diesel (used for<br />
power generation during times of shortage).<br />
High Chinese demand for diesel is likely<br />
to continue to support refinery margins<br />
for producing diesel into the early months<br />
of 2012, according to industry analysts. 82<br />
Longer term, gasoil demand in China<br />
is expected to increase to around 4.5<br />
million b/d by early 2016, and it is likely<br />
to continue to underpin refining margins<br />
over this period. 83
Endnotes<br />
1 “Medium Term Oil and Gas Markets 2011,<br />
IEA, ©OECD/IEA.<br />
2 “Kinder Morgan’s El Paso deal forms new<br />
pipeline giant,” October 17, 2011, The Globe<br />
and Mail, via Factiva, © 2011 The Globe and<br />
Mail Inc.<br />
3 Quarterly Transaction <strong>Review</strong> Report, ©<br />
IHS Herold, Inc.<br />
4 “Seaway oil pipe to be reversed after<br />
Enbridge deal,” November 16, 2011, Reuters<br />
News, via Factiva, © 2011 Reuters Limited.<br />
5 IMF World Economic Outlook Update,<br />
“Slowing Growth, Rising Risks,” September<br />
2011, © 2011 International Monetary Fund.<br />
6 “IEA Oil Market Report,” November 10,<br />
2011, © OECD/IEA - http://omrpublic.iea.org.<br />
7 “For S&P 500 Trajectory Clues, Look To<br />
Oil,” November 9, 2011, Dow Jones News<br />
Service, via Factiva, © 2011 Dow Jones &<br />
Company, Inc.<br />
8 Ibid.<br />
9 “IEA Oil Market Report,” November 10,<br />
2011, © OECD/IEA - http://omrpublic.iea.org.<br />
10 Ibid.<br />
11 “US oil rig count at record high-Baker<br />
Hughes,” November 4, 2011, Reuters News,<br />
via Factiva, © 2011 Reuters Limited.<br />
12 IMF World Economic Outlook Update,<br />
“Slowing Growth, Rising Risks,” September<br />
2011, © 2011 International Monetary Fund.<br />
13 Ibid.<br />
14 Ibid.<br />
15 “OECD predicts recessions in UK and<br />
Eurozone,” November 28, 2011, Guardian<br />
Unlimited, via Factiva, © Guardian<br />
Newspapers Limited 2011.<br />
16 “Market test looms; Initial financial<br />
tick on Italy faces series of bonds hurdles,”<br />
November 15, 2011, The Daily Telegraph,<br />
via Factiva, © 2011 News Ltd. All Rights<br />
Reserved.<br />
17<br />
17<br />
17 “Disaster reform eyed for oil industry,”<br />
November 18, 2011, Daily Yomiuri, via<br />
Factiva, © 2011 The Daily Yomiuri All<br />
Rights Reserved.<br />
18 “Standard Chartered Lowers China<br />
Growth Outlook,” October, 25 2011, Dow<br />
Jones International News, via Factiva, ©<br />
2011 Dow Jones & Company, Inc.<br />
19 “China’s economy may face hard<br />
landing; analysts see ominous signs in<br />
credit, employment and monetary policy,”<br />
October 25, 2011, MarketWatch, via<br />
Factiva, © 2011 MarketWatch, Inc. All<br />
Rights Reserved.<br />
20 IEA Oil Market Report, October 12,<br />
2011, © OECD/IEA, http://omrpublic.iea.org/<br />
omrarchive/12oct11full.pdf.<br />
21 Ibid.<br />
22 “Offshore drilling permits soaring 13<br />
wells OK’d in October are seen as sign of<br />
new confidence,” November 3, 2011, Houston<br />
Chronicle, via Factiva, © 2011 Houston<br />
Chronicle.<br />
23 IEA Oil Market Report, October 12,<br />
2011, © OECD/IEA, http://omrpublic.iea.org/<br />
omrarchive/12oct11full.pdf.<br />
24 Ibid.<br />
25 “Views Differ on Restoring Libyan Oil<br />
Output,” October 12, 2011, The New York<br />
Times, via Factiva, © 2011 The New York<br />
Times Company.<br />
26 “Iraq oil starting to come on strong,”<br />
October 31, 2011, CNN Money, via Factiva,<br />
© 2011 Cable News Network. A Time Warner<br />
Company. All Rights Reserved.<br />
27 “ExxonMobil to Explore for Oil in Iraqi<br />
Kurdistan,” November 11, 2011, Dow Jones<br />
Business News, via Factiva, © 2011 Dow<br />
Jones & Company.<br />
28 IEA Oil Market Report, October 12,<br />
2011, © OECD/IEA, http://omrpublic.iea.org/<br />
omrarchive/12oct11full.pdf.<br />
29 Ibid.<br />
30 Ibid.<br />
31 “Japan burns 200,000 bpd more crude<br />
for power in October,” November 14, 2011,<br />
Reuters News, via Factiva. © Thomson<br />
Reuters.<br />
32 “Disaster reform eyed for oil industry,”<br />
November 18, 2011, Daily Yomiuri, via Factiva,<br />
© 2011 The Daily Yomiuri.<br />
33 IEA Oil Market Report, October 12,<br />
2011, © OECD/IEA, http://omrpublic.iea.org/<br />
omrarchive/12oct11full.pdf.<br />
34 “Russia oil output hits new high after<br />
duty cut,” November 2, 2011, Reuters News,<br />
via Factiva, © 2011 Reuters Limited.<br />
35 “Nymex Crude Gains On Pause In Europe<br />
Worries,” November 18, 2011, Dow Jones<br />
Business News, via Factiva © 2011 Dow<br />
Jones & Company, Inc.<br />
36 “J.P. Morgan raises WTI price forecasts<br />
for 2012, 2013,” November 16, 2011, Reuters<br />
News, via Factiva, © Thomson Reuters.<br />
37 “For S&P 500 Trajectory Clues, Look To<br />
Oil,” November 9, 2011, Dow Jones News<br />
Service, via Factiva, © 2011 Dow Jones &<br />
Company, Inc.<br />
38 “Enbridge reverses oil pipeline toward<br />
Gulf; Seaway Crude pipe can carry up to<br />
400,000 barrels from Cushing,” November<br />
16, 2011, MarketWatch, via Factiva, © 2011<br />
MarketWatch, Inc.<br />
39 “Medium Term Oil and Gas Markets<br />
2011,” IEA, © OECD/IEA.<br />
40 “Russia oil output hits new high after<br />
duty cut,” November 2, 2011, Reuters News,<br />
via Factiva, © 2011 Reuters Limited.<br />
41 “Short Term <strong>Energy</strong> Outlook,” November<br />
8, 2011, US <strong>Energy</strong> Information Administration,<br />
© EIA.<br />
42 “BG Inks Landmark US Gas Export Deal<br />
With Cheniere,” October 26, 2011, Dow<br />
Jones International News, via Factiva, ©<br />
2011 Dow Jones & Company, Inc.<br />
43 “Medium Term Oil and Gas Markets<br />
2011, IEA, © OECD/IEA.<br />
44 “Lower Natural Gas Prices Will Impact<br />
E&P Stocks,” October 21, 2011, Barron’s<br />
Online, via Factiva, © 2011 Dow Jones &<br />
Company, Inc.<br />
45 “Low gas price challenge for J.P.<br />
Morgan-Cheniere deal,” November 7, 2011,<br />
Reuters News, via Factiva, © 2011 Reuters<br />
Limited.
46 “UK gas prices drop on milder weather<br />
forecast,” November 23, 2011, Reuters<br />
News, via Factiva, © 2011 Reuters Limited.<br />
47 “RWE breaks free from some expensive<br />
gas contracts,” November 10, 2011, Reuters<br />
News, via Factiva © 2011 Reuters Limited.<br />
48 “Short Term <strong>Energy</strong> Outlook,” November<br />
8, 2011, US <strong>Energy</strong> Information Administration,<br />
© EIA.<br />
49 “LNG Surges as Japan Vies With China,<br />
Exxon’s Shipments Grow,” September 19,<br />
2011, Reuters News, via Factiva, © 2011<br />
Reuters Limited.<br />
50 Ibid.<br />
51 Ibid.<br />
52 “Medium Term Oil and Gas Markets<br />
2011, IEA, © OECD/IEA.<br />
53 “UK faces colder-than-normal winter—<br />
National Grid,” October 11, 2011, Reuters<br />
News, via Factiva, © 2011 Reuters Limited.<br />
54 “High EU gas prices at odds with big<br />
supply surplus,” October 21, 2011, Reuters<br />
News, via Factiva, © 2011 Reuters Limited.<br />
55 “Short Term <strong>Energy</strong> Outlook,” November<br />
8, 2011, U.S. <strong>Energy</strong> Information Administration,<br />
© EIA.<br />
56 “LNG Surges as Japan Vies With China,<br />
Exxon’s Shipments Grow,” September 19,<br />
2011, Reuters News, via Factiva, © 2011<br />
Reuters Limited.<br />
57 “Europe to order 70 GW of gas plants by<br />
2017,” September 4, 2011, Reuters News,<br />
via Factiva, © 2011 Reuters Limited.<br />
58 “Indonesia to allow private industry to<br />
import gas,” July 18, 2011, Reuters News,<br />
via Factiva, © Thomson Reuters.<br />
59 IEA Oil Market Report, October 12,<br />
2011, © OECD/IEA, http://omrpublic.iea.org/<br />
omrarchive/12oct11full.pdf.<br />
60 Ibid.<br />
61 Ibid.<br />
62 Ibid.<br />
18<br />
18<br />
63 “Global Refining Surplus Could Reach<br />
10 million b/d by 2015, November 8, 2011,<br />
Dow Jones Newswires, via Factiva, © Dow<br />
Jones International News.<br />
64 “ConocoPhillips’ Refining Margins<br />
Impacted as Refineries Have Trouble Keeping<br />
Up with Production,” November 22,<br />
2011, Trefis.com, via Factiva, http://www.<br />
trefis.com/stock/cop/articles/86442/conocophillips-refining-margins-impacted-asrefineries-have-trouble-keeping-up-withproduction/2011-11-22.<br />
65 “EU diesel tax proposal could help<br />
refining sector—OPEC,” November 8, 2011,<br />
Reuters News, via Factiva, © 2011 Reuters<br />
Limited.<br />
66 “Oil, gas sector ripe for picking as<br />
mergers surge; Shale resource plays<br />
contribute to merger & acquisition boom,”<br />
October 21, 2011, Market Watch, © 2011,<br />
MarketWatch, Inc. All Rights Reserved.<br />
67 IHS database, © IHS Herold, Inc.<br />
68 Ibid.<br />
69 Ibid.<br />
70 “Oil, gas sector ripe for picking as<br />
mergers surge; Shale resource plays<br />
contribute to merger & acquisition boom,”<br />
October 21, 2011, Market Watch, © 2011<br />
MarketWatch, Inc. All Rights Reserved.<br />
71 “Deal to Create Pipeline Giant—Shale-<br />
Gas Frenzy Drives Kinder Morgan’s $21.1<br />
Billion Offer for El Paso Corp,” October 17<br />
2011, The Wall Street Journal, via Factiva,<br />
© 2011, Dow Jones & Company, Inc.<br />
72 “US natgas rig count at 22-month low,”<br />
November 23, 2011, Reuters News, © 2011<br />
Reuters Limited, via Factiva.<br />
73 “Pace of US Gulf Drilling Permits Has<br />
Picked Up,” October 4. 2011, Dow Jones<br />
Newswires, via Factiva, © 2011 Dow Jones<br />
& Company, Inc.<br />
74 “Singapore Hot Stocks—Rig builders up<br />
on order hopes,” October 17, 2011, Reuters<br />
News, via Factiva, © 2011 Reuters Limited.<br />
75 “For oil explorers, it pays to buy, not<br />
rent,” September 16, 2011, Reuters News,<br />
via Factiva, © 2011 Reuters Limited.<br />
76 “Oil Majors to report Q3 profit jump,<br />
investor’s eye 2012,” October 21, 2011,<br />
Reuters News, via Factiva, © 2011 Reuters<br />
Limited.<br />
77 “Higher prices help Big Oil profits, but<br />
production slowdowns raise concerns about<br />
supplies,” October 27, 2011, Associated<br />
Press Newswires, via Factiva, © 2011 The<br />
Associated Press. All Rights Reserved.<br />
78 “Petrobras Profit Slides 26 percent on<br />
Currency, Higher Fuel Costs,” November 11,<br />
2011, Reuters Reuters News, via Factiva, ©<br />
2011 Reuters Limited.<br />
79 “Medium Term Oil and Gas Markets<br />
2011, IEA, © OECD/IEA.<br />
80 “Asia 2012 refining profits to fall on<br />
new capacity, cooler demand,” November<br />
2, 2011, Reuters News, via Factiva, © 2011<br />
Reuters Limited.<br />
81 Ibid.<br />
82 “China makes rare diesel imports to<br />
cover domestic shortages,” November 4,<br />
2011, Reuters News, via Factiva, © 2011<br />
Reuters Limited.<br />
83 “Medium Term Oil and Gas Markets<br />
2011, IEA, © OECD/IEA.
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