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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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