IEEJ: February 2013 All Right ReservedInternational energy markets:
challenges and prospects
Christopher Allsopp
New College Oxford
Director, Oxford Institute for Energy Studies
February 2013

IEEJ: February 2013 All Right Reserved

Outline• The world economy at the start of 2013
– Renewed optimism underpinning oil prices– Surprisingly stable picture – but could it change?

• Longer term and structural aspects of energy markets– Disconnect between industry consensus and scientific concerns overglobal warming– Impact of North American developments/policy– Gas markets changing rapidly– Breakdown in ‘oil linked’ pricing in Europe– Will Asia follow?
– Impact of LNG exports: East African potential• Russia/Asia– A swing producer? Or – missed the boat?

• What kind of a picture looking forward?

IEEJ: February 2013 All Right Reserved

The world economy• Recap on the great recession, recovery, and fears of a double
dip– Pessimism driven by global slowdown and mounting risks– Collapse in world trade and slowdown in 2011 and 2012: US, China
and elsewhere: two speed recovery faltering– Mounting risks: Geopolitical, Euro crisis, US fiscal cliff and debt ceiling– Renewed optimism for 2013 reflects diminished risks in US and China
and continuing problems (and low growth) in Euro area
– Surprisingly stable picture – but could it change?
– Roughly – back to the consensus growth of before the slowdown – butwith a further level effect of about ‐2% on global GDP. Continuing
downside risks but with some upside (esp. in US)• Effects on global energy demand and on oil and other energy
prices.
– Relatively minor

IEEJ: February 2013 All Right Reserved

The shape of the ‘great recession’ (V‐shaped: another dip?)
Consensus was for recovery at
4 ½ % per annum. Sharp revisions down –especially for second half of 2011 and 2012
World growth still dominated byEmerging countries. India, China. Forecasts
for OECD sluggish at best.
Euro zone – about – ½% for 2012The ‘level’ effect; step down in demand foroil, gas, energy. ( ‐2% ~ ‐10bcm gas inEurope)Consensus is for path marked ‘step down’. Now
a further step.

G 7 & E m e r g in g M a r k e t s : G D P g r o w th
% ye ar10

E m e rg in g
M a rk e ts

8

IMF World Economic Outlook Update June 2011 GDP growth, % p.a.
(quarter on quarter, annualised)

Previous trend
ECONOMIC
ACTIVITY

6

Recovery4

Step down

20

Slower growth-2

W o r ld

-4
G7
-6

F 'c a s t

-8
1985

19 88

1 991

1994

199 7

20 00

2003

2006

200 9

2 012

2015

S o u r c e : O x fo r d E c o n o m ic s

TIME

IEEJ: February 2013 All Right Reserved

The US Fiscal cliff (an automatic tightening of fiscal policy by 4 ‐ 5 % GDP)
has been avoided. The debt ceiling is unlikely to bind. But fiscal policy is
still constrained.
US: New orders
Bn $

Bn $
80

250
Durable goods
orders (LHS)

230

75
70

210

65
190
60
170
150

Nondefense
capital goods
excludingaircraft (RHS)

130
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Census Bureau/Haver Analytics

5

55
50
45

IEEJ: February 2013 All Right Reserved

Eurozone recession deepening…
Eurozone: Consumer & business confidence% balance
10

Industrial confidence

5
0
-5
-10
-15
-20
Consumerconfidence

-25
-30
-35
-40
1986

1989

1992

1995

Source: Oxford Economics

6

1998

2001

2004

2007

2010

IEEJ: February 2013 All Right Reserved

World trade growth slumped in 2012…
World: Trade index% year
20
15
10
5
0
-5
-10
-15
-20
2000

2002

2004

Source: Oxford Economics

7

2006

2008

2010

2012

IEEJ: February 2013 All Right Reserved

Signs that Chinese downturn is coming to an end…
China: Industrial ouput, retail sales & exports% year25% year60

Retail sales
(LHS)

50

20

40
30

15

20
10

10

0
-10
Exports (US$)
(RHS)

5

0
2008
Source: NBS

Industrial output
(LHS)

-20
-30
-40

2009

2010

2011

2012

IEEJ: February 2013 All Right Reserved

Corporate cash piles still growing – scope forinvestment revival and cumulative confidence
effects
Cash holdings of non-financial corporations% of GDP
23
UK

21
19

Germany

17
15
13

France

11
US
9
7
5
2003

2004

2005

2006

2007

2008

2009

Source : Oxford Economics/Haver Analytics

9

2010

2011

2012

IEEJ: February 2013 All Right Reserved

Oxford Economics baseline forecast
World GDP Growth% Change on Previous Year
2011

Av
2012 2013 2014 2015-17

US

1.8

2.2

2.3

3.1

3.0

Japan

-0.5

2.0

0.5

1.5

1.7

Eurozone

1.5

-0.4

-0.2

1.0

1.5

3.1

1.0

0.8

1.7

1.6

France
Italy
UK
China

1.7
0.6
0.9
9.3

0.0
-2.1
0.1
7.7

0.2
-1.2
1.0
8.3

1.1
0.3
2.1
9.0

1.3
1.2
2.5
8.0

India

7.5

5.3

6.0

7.6

7.8

Other Asia
MexicoBrazil

3.8
3.9
2.7

2.7
3.9
1.0

3.9
3.7
3.9

4.9
4.9
4.9

5.0
4.2
4.5

Other Latin America

7.0

4.4

2.6

4.1

4.1

Eastern Europe

3.7

2.8

2.1

3.6

4.1

MENA

5.1

3.2

4.6

5.1

5.0

World

2.9

2.3

2.4

3.5

3.8

World (PPP)

3.6

3.0

3.5

4.2

4.4

of which:
Germany

10

IEEJ: February 2013 All Right Reserved

Risks are shifting to the upside Middle East tensions (5%)
Political tensions escalate in Egypt, Syria
and IranConcerns about stability in the region
push oil prices to over $200/barrel
Business and consumer confidence hit
by energy shock
Political situation stabilises gradually. Oilprices return to baseline by 2015.

Oxford Forecast (60%)
Steps to ensure Eurozone survival aretaken, although they are not enough tokick start significant growth.
Risk premia fall, and consumer andbusiness confidence gradually recover.
Recovery limited by public and privatedeleveraging and weak job growth
EMs robust as policy eases and growing
middle class support consumer
spending and trade11

 Eurozone exits in 2014 (15%)
Fiscal austerity in peripheral countries
becomes unbearable
No growth pushes unemployment yethigher. Pro-exit parties gain popularity.
No real progress on banking and fiscal
union,
6 countries exit Eurozone in 2014 Q1.

 Faster upturns in US & EMs (15%)
Resolution of outstanding fiscal issues
encourages investment and hiring in theUS.
Momentum in EMs builds as trade picks
up and accommodating policy feeds
throughBusiness and consumer confidence riseas conditions improve.

IEEJ: February 2013 All Right Reserved

Summary: Emerging markets rebounding after soft patch: pick‐up in
US. Serious downside risks remain.
Forecasts have not changed much. What has changed is theassessment of risks – assumed to be overcome or avoided in thebaseline assessment.
G7 & Emerging Markets: GDP growth% year10
8Emerging
Markets

6
4
2
0
-2
G7
-4
-6

12

F'cast-8
1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

IEEJ: February 2013 All Right Reserved

Eurozone breakup is still the greatest risk
• A monetary union but no political union. So markets fear
breakup ‐ which leads to unsustainable bond yields ‐ theshort term crisis. ECB appeared to be unable to act like a true
central bank.
• Germany is imposing incredibly tight fiscal policy as part ofthe ‘solution’ which is leading to severe recessions andpolitical instability.
• Many countries are uncompetitive with large current accountdeficits which exacerbates the problem of weak growth andincreases nervousness in the markets.
• The two big changes that have made a difference are– Some moderation of Germany’s position– Draghi’s move in the summer to take off currency risk applying tosovereigns

IEEJ: February 2013 All Right Reserved

But what if the crisis returns?

IEEJ: February 2013 All Right Reserved

The effect on oil prices, though hard to
estimate, could be dramatic. (As in the lastrecession, the OPEC response would be crucial).

IEEJ: February 2013 All Right Reserved

Other risks: fiscal cliff, China hard landing, Euroexits plus China hard landingIEEJ: February 2013 All Right Reserved

Longer term trends, forecasts and scenarios• The issues raised by longer term assessments are rather different.
They are crucially dependent on assumptions about growth andabout policy.
• Different scenarios (e.g. IEA, EIA, BP, Shell) use different methods– Current policies, new policies, 450 scenario (2 degrees global warming)– 450 scenario very difficult to achieve. Climate change mitigation policies
are not working. Essentially a ‘backcast’.
– BP uses ‘most likely policies’ for its base case

• Nevertheless, scenarios can be useful– Eg Business as usual (BAU) does not work!
– Even ‘most likely policies’ may throw up inconsistencies (usefully)• Illustrated by the disconnect between the industry consensus andthe climate change imperative. (They cannot both be right)
17

IEEJ: February 2013 All Right Reserved

Illustration: World Primary Energy Demand by
Scenario: IEA

Source: International Energy Agency
18

IEEJ: February 2013 All Right Reserved

BP Energy Scenarios to 2030

Source: BP, 201119

IEEJ: February 2013 All Right Reserved

Global Energy-Related Carbon Dioxide Emissions
by Scenario

Source: International Energy Agency

20

IEEJ: February 2013 All Right Reserved

Greenhouse Gas Concentration Pathways (left) and Probability Distribution of
Equilibrium Temperature Increase Above Pre-Industrial Levels (right)

21

IEEJ: February 2013 All Right Reserved

World Oil Demand and Oil Price by Scenario*(IEA 2012)

Remark: does anyone believe that in 2035 the 450 scenario is consistent
with $100 oil?

Source: International Energy Agency

22

IEEJ: February 2013 All Right Reserved

The problem of price: especially relative prices ...
• Oil prices relatively high – under current conditions• Natural gas prices vary from around $3 per Mmbtu in the US,
to about $8‐9 in Europe, and up to double that in Japan/Asia.
Coal prices, on an energy equivalent basis are much lower
than that.
• Low US gas prices are pushing out coal from power
generation in the US, stimulating low price coal exports toNorthern Europe, increasing the coal burn in countries suchas Germany (which is dropping nuclear)

23

IEEJ: February 2013 All Right Reserved

Ratio of Average Natural Gas and Coal Prices to Crude Oil
Prices in the New Policies Scenario

Source: International Energy Agency

24

IEEJ: February 2013 All Right Reserved

Globally, coal prices are much too low relative tonatural gas, nuclear and renewables
Potential solutions include: taxes on coal, a carbon
tax (favouring, for example, natural gas). Or cap
and trade systems, such as EU ETS; command andcontrol or regulatory interventions.
A carbon tax would have to be large to give
(imported) gas an advantage over coal in mostcountries outside N America.

25

IEEJ: February 2013 All Right Reserved

Share of Coal in World Primary Energy Demand by Scenario

Source: International Energy Agency

26

IEEJ: February 2013 All Right Reserved

IEEJ: February 2013 All Right Reserved

North American developments and policy• US expansion of tight oil – near self sufficiency
by 2030• Implications for the call on OPEC
• More price uncertainty

IEEJ: February 2013 All Right Reserved

IEEJ: February 2013 All Right Reserved

Shale: The rationale for North American LNG exports:
large price differentials leading to arbitrage
opportunity
Gas imports to the US and Asia

Gas prices in US, Europe and Japan•The shale gas revolution in the US has seen gas imports drop sharply and LNG importfacilities lie idle•

In contrast gas imports to Asia have risen sharply thanks to Chinese demand growth and theimpact of Fukushima•

A significant price gap has opened up, driven by the supply‐demand imbalance and also by
the continuance of oil‐linked pricing – an arbitrage opportunity that is begging to be
exploitedIEEJ: February 2013 All Right Reserved

The opportunity is perhaps even more relevant for
Canada than it is for the US
Gas price in US and Canada

Canada’s gas production and exports•

Canada’s gas exports to the US have been falling thanks to increased shale gas
production•

Production has declined in line with this fall, but Canada has significant conventional
and unconventional reserves to exploit•

Exports to Asia are a commercial and a political goal, with a particular focus on assets
on the West Coast–

Gas prices in Canada would not support development of the country’s unconventional resources

IEEJ: February 2013 All Right Reserved

16 new LNG export schemes are identified by the FERC,
excluding Sabine Pass which has been approved

Sabine PassIEEJ: February 2013 All Right Reserved

North America could swamp the LNG market if all its
projects came online (which is why that won’t happen)
Possible North American LNG exports•

If all the US and Canadian projects came online 185mt of LNG could be exported by
2020 (compared to a global LNG market of 330mt in 2011)•

The key criteria for a new liquefaction plant are FERC approval for construction and DoE
approval for non‐FTA exports – only Sabine Pass (Cheniere) has these to date•

Political decision on US exports expected in 2013, with the impact on domestic prices
and industry being the key uncertainty

IEEJ: February 2013 All Right Reserved

Key question is about domestic gas price impacts.
•

EIA survey looked at three key issues – the volume of exports, how fast they might beintroduced and how shale gas production might respond•Base case with no exports sees HH price rising to an average of $5.80 over period to2035•

Exports cause early peak in prices but levelling out as production responds•

Key issue is the supply response of shale gas output – in worst case scenario HH pricecould average almost $10/mmbtu
US policy very uncertain. Range of outcomes from ban on exports (crude oil exports
are banned) to free for all
Auction of permits? Export tax ? (As in Russia). Fiscal terms
Effects on competitiveness (hype) and on consumer incomes.
Major uncertainties

•
•
•
•

IEEJ: February 2013 All Right Reserved

Breakeven cost of shale gas production set to force anincrease in Henry Hub price irrespective of exports
Cost curve for US shale output•

Consensus view is that current US shale gas production is not sustainable in the longer
term at current price levels•

Liquids output and forward sales have mitigated low prices to date, but ultimately dry
gas likely to be the marginal cost price setter•

Breakeven price likely to be in a $4‐7/mmbtu range, with $5.50/mmbtu the mid pointIEEJ: February 2013 All Right Reserved

Cost of US gas exports into Europe and Asia
Gas imports to the US and Asia

NB: does not assume 15% mark-up in Cheniere contracts•

Delivered cost to Europe or Asia includes upstream cost (or market cost), liquefaction,transport and regasification–

Cheniere contracts include a 15% mark‐up on Henry Hub price•

Delivered price to Asia assumes transport through a widened Panama Canal, where thetariff has yet to be confirmed•

At current (low) HH price delivered cost to Europe would be .c$8/mmbtu and to Asia
would be $10.mmbtu•

Add about $2 for a more realistic assesment

IEEJ: February 2013 All Right Reserved

Gas from US Gulf Coast would be competitive in Asia
but would not cause a huge price shift
Breakeven delivered gas prices to Asia•

At a HH price of $5.50/mmbtu Sabine Pass LNG would sit in the middle of the cost curve to
Asia•

Canadian LNG has a significant transport cost advantage but the initial capex for greenfieldsites would be higher•

North American LNG would be unlikely to cause a large effect on prices, but is alreadychanging the way in which price formation is being negotiatedIEEJ: February 2013 All Right Reserved

In Europe US gas can again be competitive but isunlikely to cause a price crash
US gas export costs vs European prices•

US gas exports are likely to have a marginal impact in Europe•

A most likely delivered cost would be c.$10/mmbtu•

This would undercut current oil‐linked contract prices, and would continue to do sounless the oil price falls back to c.$90‐95 per barrel•

Price of US LNG imports to Europe can provide a benchmark for Gazprom if it seeks to
be price competitiveIEEJ: February 2013 All Right Reserved

Numerous Asian consumers are already involved in
North American gas•

Supply contracts have already been signed with Cheniere Energy and with Kitimat
in Canada•

Tolling agreements have been reached with a number of other potential
liquefaction facilities•

Asian players have acquired significant gas assets across the US and Canada fromwhich gas could be sourced for liquefaction•

Japanese and Chinese companies are most prevalent, but Korean and Indiancompanies are also taking upstream interests•

All these companies are likely to push for exports from North America, and canuse their assets as negotiating tools with competing suppliers
Would it be better to pay the price and invest elsewhere?

•IEEJ: February 2013 All Right Reserved

Likely outcome is total exports in the range 50‐65mtpa
by 2020
Estimate of North American LNG exports•

Application to FERC a key indicator of commitment to LNG exports•

Involvement of significant Asian partners may also catalyse developments•

5 US projects and 3 Canadian projects seem most likely to move ahead by 2020•

Significant further development could push HH price to a level where exports becomea less profitable option and could also cause political reactionIEEJ: February 2013 All Right Reserved

Prospect of North American gas exports already having
an expectational impact on contracts and priceformation•

The potential for North American LNG exports is undoubtedly large, and thecurrent arbitrage opportunity is very tempting•

Political decisions will confirm or undermine the opportunity in 2013•

However, commercial considerations will play a greater role in limiting the overall
size of export volumes•

North American exports are price competitive in Asia but sit in the middle of thecost curve•

In Europe US LNG exports are likely to act as a marginal price setter•

In both regions, though, the potential for HH‐linked pricing has already caused are‐think of the price formation model

IEEJ: February 2013 All Right Reserved

Price formation in Europe – and Asia
• Oil linked pricing breaking down
• The Groningen net back system• Rise of European hubs – gas on gas
competition• Flexibility and renegotiation• What accounts for the high prices in Asia?
• Competition policy and market structure• Rusia and China

IEEJ: February 2013 All Right Reserved

European Gas Prices vs Coal
June 2009 – October 201216

Oil Indexed Contract estimate

14

12

BAFA

$/mmbtu

10

NBP
8Gas Price
Competitive with Coalin Power generation

6

4

Henry Hub2

Jul-12

Jan-12

Jul-11

Jan-11

Jul-10Jan-10Jul-09043
Source: Platts, BAFA, EIA, ICE, Argus, Own Analysis

IEEJ: February 2013 All Right Reserved

What about East Africa?
• The potential• Infrastructure and financing issues• Costs and prices• Managing the resource

IEEJ: February 2013 All Right Reserved

IEEJ: February 2013 All Right Reserved

IEEJ: February 2013 All Right Reserved

Concluding remarks• There has been a marked turn in sentiment about the world
economy – without much change in consensus‐type medium
term forecasts.
• Medium term scenarios help delineate possible futures – but,inevitably highlight uncertainty and the ‘disconnect’ between
climate science and the industry.
• North American developments will have a large impact.
Additional (tight) oil supplies could affect prices ‐ unless there
is an offsetting response from OPEC.
• Shale gas from N America is unlikely to be cheap.
• But do they mean that Russia has ‘missed the boat’ insupplying Asia? Dr Paik is the best person to answer this.

“Globalisation”: how quickly can international “basis”
develop?
25

Brent

20
Asian LNG
Spot

Europe Oil
Indexed Contract
estimate.

Average Japan LNG
Price$/mmbtu

15

?

10
NBP

5

Henry Hub

Sources: Argus, EIA, Platts, Own Analysis

Jul‐12

Jan‐12

Jul‐11

Jan‐11

Jul‐10Jan‐10Jul‐09Jan‐09Jul‐08Jan‐08Jul‐07

Jan‐070

IEEJ: February 2013 All Right Reserved

IEEJ: February 2013 All Right Reserved

US Oil and Gas Directed Drilling
2,500
2,000
1,500
Gas

1,000

Oil
500
0

Source: Baker Hughes,
Arthur E Berman, Labyrinth Consulting Services

49

IEEJ: February 2013 All Right Reserved

What if?
• Simulations are difficult – major uncertainties.
• Oxford Economics – about ‐ 6 % growth in euro area after
multiple exits. Major effect on world economy

IEEJ: February 2013 All Right Reserved

Other risks: fiscal cliff, China hard landing, Euroexits plus China hard landingIEEJ: February 2013 All Right Reserved

The political debate in Canada is still evolving and may
limit future developments•

Canadian politicians have been very enthusiastic about increased economic inks
with Asia, seeing energy as a key plank in this strategy•

However, this enthusiasm may be tempered by a number of concerns•

Nexen and Progress Energy deals highlight concerns over Asian influence inCanada•Environmental lobbies against gas industry development are increasing theircomplaints
–
–
–

•

Development of shale gas
Pipeline routes
Shipping routes from Kitimat

Some projects also remain fixated with oil‐linked pricing (e.g. Kitimat) which would
reduce competitiveness. (this is likely to change)
Contact: report@tky.ieej.or.jp