# Presentation: 737903

## Presented at:2006 EIA Energy Outlook and Modeling ConferenceWashington, DCMarch 27, 2006

- Presented at:*2006 EIA Energy Outlook and Modeling Conference**Washington, DC*March 27, 2006

**Kevin R. Petak**
**(703) 528-1900**
**kpetak@eea-inc.com**

**Oil and Gas Prices**
**Will They Stay Linked?**

**Energy and ****Environmental ****Analysis, Inc.**
**1655 N. Fort Myer Drive ****Suite 600****Arlington, Virginia  22209**

## Contents

- Recent Trends in Oil and Gas Markets
- Projected Trends
- Future Linkage Between Oil and Gas Prices

- Energy and Environmental Analysis, Inc.

## Growth in World Oil and Gas Use

**Global oil use rising at 1.6 percent per year.**
- Tiger economies dominate growth.
**Global gas use rising at 2.6 percent per year.**
- Growth evenly spread geographically.

*Bottom Line: Robust growth in both fuels.*

**World Oil Use**

**World Gas Use**

- Source: International Energy Agency

- Energy and Environmental Analysis, Inc.

## Oil SupplyThe Tightening Oil Balance

- Oil SupplyThe Tightening Oil Balance

- World oil use has grown at 1.6 percent per year, however, proven reserves have grown by only 0.5 percent per year.

**Reserves**

**Demand**

- While oil demand has grown, spare productive capacity has declined.

- Source: Energy Information Administration

- Even though reserve growth has kept pace with demand growth during the past 6 or 7 years, spare productive capacity has declined, indicating a reduced productivity for developed reserves.

- Energy and Environmental Analysis, Inc.

## World Oil Reserves

**1,277 Billion Barrels**
**of Proven Oil Reserves /1**

- 1. Source: Oil and Gas Journal.
- 2. North American reserves includes 175 billion barrels of oil sands reserves in western Canada.

- Oil reserves and production concentrated in the Middle East.  The calculated “HHI value for reserves” is about 0.37, indicating highly concentrated supply.

**Market subject to monopolistic or oligopolistic behavior.**

- 42 years of supply at current consumption levels

- Energy and Environmental Analysis, Inc.

## The Changing Gas Balance

*Divergent trends in gas supply and demand have led to a tight balance between supply and demand, higher gas prices, and increased price volatility.*
***TIGHT BALANCE EXPECTED TO CONTINUE***

- Price Spike Winter 2000-01

- Rising Prices  Winter 2002-03

*Source: Platts Gas Daily & Energy and Environmental Analysis, Inc.*

*Source: Energy and Environmental Analysis, Inc.*

- Hurricane Ivan

**Lower-48 Dry Gas Production Vs. Dry Gas Capacity (BCFD)**

- Hurricane Katrina & Rita

- The “Gas Bubble”
- Excess Productive Capacity

- Prices Relatively
- Low & Stable

- Energy and Environmental Analysis, Inc.

## World Gas Reserves

**6,044 Trillion Cubic Feet**
**of Proven Gas Reserves /1**

- 1. Source: Oil and Gas Journal.

- Gas reserves and production less concentrated in the Middle East.  However, the calculated “HHI value for reserves” of 0.30 indicates the market could become  concentrated.

**Global gas market likely to develop.**

- 60 years of supply at current consumption levels

- Energy and Environmental Analysis, Inc.

## Summary of Global Oil and Gas Production

- Oil reserves not increasing as quickly as oil use.
- Productivity of recently developed reserves declining.
- Oil reserves and production concentrated.
- Gas markets tightening around the world.
- Production waning in a number of areas (most notably the U.S. and Western Europe).
- Global LNG trade immature compared to oil trade.
*Bottom Line: Supplies under pressure to keep up with demand, leading to higher prices for both fuels ...*

- Energy and Environmental Analysis, Inc.

## Oil and Gas PricesAnnual Average Values in U.S. Nominal Dollars per MMBtu

- Sources: Energy Information Administration and Platts Gas Daily

- Energy and Environmental Analysis, Inc.

## Summary of Oil and Gas Prices

- Upward price trends indicative of tightening supply/demand balances globally.
- Wider range for gas prices indicates relatively weak correlation among regional markets.
- Global oil and gas prices historically linked by market competition and contract pricing.
- U.S. oil and gas prices more recently linked (weak correlation in 1990s).
*Correlation likely to be strengthened as a global LNG market evolves....*

- Energy and Environmental Analysis, Inc.

## Projected Consumption for Oil and Gas

- Source: Energy and Environmental Analysis, Inc.

- According to the U.S. Energy Information Administration, over the next ten years, world demand for oil will grow at 2.3 percent per year to nearly 38 billion barrels in 2015.
- Demand is driven by economic growth, particularly in developing countries like China.

- We expect gas demand to grow even more quickly, at 2.6 percent per year to 130 trillion cubic feet in 2015.
- Development of new liquefaction facilities uses “stranded gas” and fosters development of a true world market for natural gas.

- Source: Energy Information Administration

- Energy and Environmental Analysis, Inc.

## Bottom LineOil and gas supplies will have difficulty keeping pace with demand for the foreseeable future, continuing to place upward pressure on oil and gas prices.

***... ******gas and oil prices likely to stay coupled in this environment.***

- Energy and Environmental Analysis, Inc.

## Projected Oil and Gas PricesAnnual Average Values in U.S. Dollars per MMBtu (2005$)

- Energy and Environmental Analysis, Inc.

## Summary of Oil and Gas Prices

- Supply/demand balances expected to remain tight, keeping prices relatively high and volatile.
- Wider range for gas prices indicates relatively weak correlation between regional markets.
- However, regional prices should converge over time as the global LNG market evolves.
- Oil and gas prices are likely to trend in the same direction, but may disconnect over periods of time within any market.
- Current linkage between oil and gas prices is mostly a result of demand-side competition, such as fuel switching.  Future linkage will be driven increasingly by supply-side activity (i.e., LNG versus oil resource development, gas-to-liquid conversion).

- Energy and Environmental Analysis, Inc.

## Gas PricesImpact of Weather

*Changes in weather shift daily demand, causing wide swings in gas prices.*

*Significant price volatility suggests need of additional gas storage, peakshaving capability, or fuel switching capability.*

- Energy and Environmental Analysis, Inc.

## Some Signposts to Watch to Determine Whether Oil and Gas Prices Will Remain Coupled (A U.S. Perspective)

| Signpost | Example Market Event | Likely Outcome |
| --- | --- | --- |
| Gas-to-oil switching capacity | Retirement of capacity | Gas prices up relative to oil prices |
| Globalization of LNG | Political turmoil delays liquefaction development | Gas prices up |
| Globalization of LNG | Aggressive development of LNG liquefaction capability | Gas prices fall relative to oil prices |
| Environmental policies favoring gas | Carbon control leading to retirement of coal capacity | Gas prices up |
| Environmental policies favoring other fuels | Nuclear or IGCC subsidy | Gas prices down |
| Weather | Significant hurricane disruptions along the Gulf Coast | Gas prices up |
| Weather | Mild temperatures with wetter than normal conditions in the western U.S. | Gas prices down |
| Underground Gas Storage | Aggressive development of storage facilities  | Reduces the impact of adverse weather conditions, increasing the correlation between gas and oil prices |

- Energy and Environmental Analysis, Inc.

## Conclusions

- Demand growth in the face of waning oil and gas supplies is driving upward price pressure for both fuels.
- Oil and gas prices have both been on an upward trend over the past five years.  Prices have been highly correlated.
- Oil and gas prices are likely to stay coupled as supply/demand balances remain tight for both fuels, however, significant price volatility is likely.
- Weather alone can swing average annual prices by $3 to $4 up or down from a baseline trend.
- Development of the global LNG market is a critical signpost.
- Slower than expected development of liquefaction capability would maintain upward pressure on gas prices and weaken correlation between regional gas prices and oil prices.
- However, rapid deployment of liquefaction capacity may create temporary surpluses in regional gas markets, causing short episodes of gas price depression.

- Energy and Environmental Analysis, Inc.

## Presented at:2006 EIA Energy Outlook and Modeling ConferenceWashington, DCMarch 27, 2006

- Presented at:*2006 EIA Energy Outlook and Modeling Conference**Washington, DC*March 27, 2006

**Kevin R. Petak**
**(703) 528-1900**
**kpetak@eea-inc.com**

**Oil and Gas Prices**
**Will They Stay Linked?**

**Energy and ****Environmental ****Analysis, Inc.**
**1655 N. Fort Myer Drive ****Suite 600****Arlington, Virginia  22209**