Energy Industry Trends Review

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October 2011 was also the first month of the new “60-66” taxation regime for the Russian oil industry, which has cut duties on crude oil and some refined products to stimulate output of high-grade oil products and crude. As a result, there was a marked increase in Russian oil production in October, with oil production reaching 10.3 million b/d (production levels not seen since pre-Soviet days in Russia). 34 Oil price Key trend—Concerns around the Eurozone debt crisis and return of Libyan crude exports has led to some softening of crude prices. However, this quarter also saw crude oil prices being supported by supply constraints, which led to some contraseasonal inventory draws. There has been a continued disconnect between Brent crude prices and the US WTI oil price in response to the situation at Cushing, with landlocked supplies of WTI still not finding an export market outlet and depressing the WTI oil price as a result. As of November 21, 2011, WTI crude oil futures for January delivery were trading at around $99/barrel, with Brent futures trading at around $109/barrel. Crude oil futures prices were rising as markets focused on the possibility of greater involvement by the IMF in bailing out Eurozone governments. Short-term futures oil prices are expected to continue to be supported by financial market effects, causing volatility and a strong correlation of oil prices with stock market movements. 35 In the short term, there appears to be more downward pressure on the oil price, as Libyan oil begins to return to the world market and as global economic growth overall is slowing. Downward pressure on oil prices generally is also coming from a rising dollar, although the market is seeing prices rise and fall according to financial market effects on any given day. 8 Some analysts are maintaining or raising their 2012 oil price projections. For example, J.P. Morgan has maintained its price projection of $115/barrel for Brent, and increased its price projection for WTI to $110/ barrel in 2012 (from $97.50/barrel forecast in October). J.P. Morgan said it sees the Brent-WTI spread narrowing to $5 and $3 per barrel in 2012 and 2013, respectively, due to the planned reversal of the Seaway pipeline. 36 The OPEC Reference Basket price decreased in October, moving below the significant $100/barrel level in the first week for the first time since mid-February. The downward movement in the OPEC Reference Basket in early October was attributed to the weak performance of the global crude oil market on the back of the debt crisis in Europe. Observation The crude oil price outlook is softening slightly for the remainder of 2011, but has continued to be volatile throughout the quarter as it reacts to financial market effects. Some analysts have noted a 95 percent correlation between futures crude oil prices movements and the S&P 500 since July 2011. 37 In early November, the WTI oil price started to make up some ground on Brent oil prices, but generally the prices have seen a $10 to $20/barrel divergence throughout 2011 due to the supply situation at Cushing. If this happens, we are now likely to see much more of a recovery in WTI prices as crude is released from the hub at Cushing to export markets, and this is expected to result in a significant narrowing of the WTI-Brent spread. The impact on WTI might be greater (depending on the volumes it might carry) as the US government has announced that a decision on TransCanada Pipelines’ 600,000 b/d Keystone XL pipeline would be postponed until 2013. This makes the Seaway pipeline the only short-term option to alleviate the situation at Cushing (according to some analysts, by the second quarter of 2012 the reversed Seaway could have a throughput of around 150,000 b/d, eventually rising to a maximum of 400,000 b/d by early 2013, all flowing toward US Gulf Coast refineries). 38 Gas supply Key trend—Global gas production is expected to continue to increase and meet future demand with further exploration and development of unconventional gas, notably in the United States, which is now progressing its plans to export LNG. The short-term gas supply situation looks robust, but LNG capacity has tightened considerably, largely due to the situation in Japan. Longer term, the IEA is forecasting that global gas production of between 3.9 tcm and 5.1 tcm is required to meet projected levels of consumption by 2035. Conventional gas will still account for the bulk of global gas production by 2035, but the share of unconventional gas will rise from 13 percent in 2009 to 22 percent in 2035 and it provides 3 percent of incremental production to 2035. 39 This quarter has seen Europe’s largest exporter, Gazprom, challenged by price disputes and falling exports, with preliminary Russian Energy Ministry data showing Russian gas exports for October 2011 falling by 9.2 percent from October 2010 (with some analysts noting that this was the lowest October production in the history of Gazprom). This is largely due to the effects of early stockpiling of gas by European countries ahead of fourth-quarter 2011 price increases as well as Gazprom disputes with EU countries like Poland. Gazprom gas sales to Europe alone in October were almost flat year-on-year at 9.536 bcm. 40 In the United States, the Energy Information Administration (EIA) expects US marketed natural gas production to average 65.6 billion cubic feet (bcf)/d in 2011, a 3.8 bcf/d (6.1 percent) increase over 2010. This growth comes from higher onshore production in the Lower 48 states, which more than offsets a year-over-year decline of 1 bcf/d (17 percent) in the Gulf of Mexico. The EIA expects that total marketed production will continue to grow in 2012, but at a slower pace, increasing 1.3 bcf/d (2 percent). Growing domestic natural gas production has reduced reliance on natural gas imports to the United States and the EIA now expects that pipeline gross imports of natural gas will fall by 6.7 percent to 8.5 bcf/d during 2011, and by another 1.4
percent to 8.3 bcf/d in 2012. Projected US imports of LNG will fall from 1.2 bcf/d in 2010 to 0.9 bcf/d in 2011 and even further to 0.7 bcf/d in 2012. 41 Also in the United States, BG Group signed an $8 billion deal this quarter with a unit of Cheniere Energy Partners to buy 3.5 million tonnes/year of LNG over 20 years (starting in 2016 with a possible 10-year extension) from Cheniere’s new Sabine Pass LNG export terminal in Louisiana. This deal marks the first move to export some of the shale gas production from the US Gulf Coast to international markets. Cheniere has also reportedly signed a second export deal with Spanish utility Union Fenosa, which is a $9 billion 20-year agreement for 3.5 million tonnes/year of LNG. 42 Short-term LNG supply continues to be strong, with new capacity continuing to come onstream. LNG as a share of global gas demand increased to 9 percent in 2010 and is expected to increase further in 2011 (with LNG now accounting for between 25 to 30 percent of all gas traded). While Japan has seen its LNG demand grow by 21 percent since the nuclear disaster in March this year, much of the anticipated growth in gas usage in Asia is likely to come from China and India. Chinese imports of LNG have increased 27 percent in the first half of 2011 and India is expected to double its gas usage from 2008 to 2015. With domestic supply failing to keep up with growing industrial demand, some countries are looking to ramp up their LNG import infrastructure to facilitate easier trade and increase their gas supply flexibility. Overall, global LNG imports are up by 11 percent over the first half of 2011 due to strong relative increases from the United Kingdom, Canada and Chile; incremental volumes are also up in the United Kingdom, Japan, Korea and China. 43 Observation In Europe, the fall in domestic gas production continues to increase European dependency on imported gas. Under the current scenario, Russia is expected to gain most from this shortfall, but, despite Gazprom’s investment plans, there are concerns that the company is behind schedule with 9 production growth plans. Meanwhile, the market continues to change with LNG looking increasingly attractive to many countries. With the European Union tightening European gas market regulations for piped gas, Gazprom’s focus has been turning to international markets. However, despite up to 60 million tonnes of new annual LNG capacity under consideration in Russia, for now, only one LNG export plant is operating: Sakhalin-2. It therefore looks like Russia will be playing catch up in the LNG supply market for the foreseeable future, particularly with US Gulf Coast LNG exports on the horizon. If significant exports of LNG start to come out of the US Gulf Coast LNG export terminals, there is potential for more interconnectedness of global gas markets and prices, particularly now as the widening of the Panama Canal will offer a more direct route to Asia for larger LNG tankers from 2015. (BG Group and Cheniere have both signed the first deals in October 2011, to start exporting LNG from the Sabine Pass terminal from 2014 and other deals are likely to follow.) BG and Cheniere are reportedly offering in their contracts options to allow buyers to cancel any liftings without penalty if they give advance notice. This means that essentially the sellers of US Gulf Coast LNG are selling gas based on Henry Hub spot gas prices (market related and competitive) and they are offering their buyers an unprecedented cancellation option (making these deals very flexible). With US Henry Hub prices at around $4/million btu and Asian LNG prices over $15/million btu, the potential for price arbitrage is considerable. 44 As a result of these considerable hedging and price arbitrage opportunities between US and Asian gas markets, the LNG market is becoming a more attractive place for conducting business for investment banks. This quarter, J.P. Morgan announced a deal with Cheniere Energy to import LNG into the United States. Under the two-year deal, the two parties will jointly buy cargoes of the gas from overseas and share the profits from selling them into the US market. J.P. Morgan, already a big player in the downstream US gas market, will enter the LNG market through access to Cheniere’s Sabine Pass import terminal in Louisiana, which it is likely to use as a hedging tool. Most of the larger investment banks have all entered LNG trading over the past few years, including Morgan Stanley, Citigroup and Barclays Capital, with an increasing focus on the US gas market. 45 Gas prices Key trend—Natural 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 continued robust supply situation and weak demand and gas prices are under pressure in Europe as Libya gas exports are due to restart. Supply to the global gas market remains robust and the segmentation of the global gas market into distinct pricing regions shows no sign of altering in the short term, although developments like increased shale gas production (and continued weak spot price market) in the United States, leading to potential US LNG exports, will start to change pricing dynamics. Over the next five to 10 years, the market is likely to see a gas price which is increasingly global (supported by possible US Gulf Coast LNG exports), which connects all three key demand markets (Asia, the United States and Europe). Gas price futures in Europe started to rise this quarter in anticipation of the coming winter but, in reality, a warm autumn has put some downward pressure on prices. In August, the United Kingdom’s wholesale natural gas price for the coming winter traded at its highest level in more than 34 months at 78.25 pence/therm. This was caused by an expected reduction in output over the autumn from QatarGas so that it could hold essential maintenance to some of its production trains. (Qatar is the single largest supply source of LNG for the United Kingdom.) By mid-November 2011, however, the day-ahead gas price in the United Kingdom was only trading at 60.70 pence/ therm, with futures prices for December also weak at 60.90 pence/therm. 46
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Page 20: About Accenture Accenture is a glob

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