fortis webinar april 2010

8/8/2019 Fortis Webinar April 2010

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Merchant Banking | Energy, Commodities & Transportation | 11

OECD: Recent historical demand Non-OECDOECD

OECD Pacific Oil DemandEuropean Oil DemandNorth American Oil Demand

12,8

13,3

13,8

14,3

14,8

15,3

15,8

16,3

2005 20097,2

7,4

7,6

7,8

8,08,2

8,4

8,6

8,8

2005 200922,0

22,5

23,0

23,5

24,0

24,5

25,0

25,5

26,0

2005 2009

Million b/d Million b/d Million b/d

10% 8% 12%

Demand has generally fallen across all productcategories. The largest percentage decline inresidual fuel oil, mainly used for power generation and the category most easily substitutable by otherfuels, e.g. gas.

Transport fuels (gasoline, jet fuel, diesel)dominating, but under pressure from legislation(higher fuel taxes, carbon emissions controls);changes in vehicle technology; and marketsaturation (slower demographic growth).

Source: IEA


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OECD: Short term projections demand

North America sees large declines in chemicaldemand and fuel oil, but modest gains in others,including motor gasoline.

Europe sees large declines in motor gasoline oncontinuing trend of switching to diesel, but gains in

jet and kerosene

OECD Pacific sees declines across the board butlargest in kerosene as used for heating, andresidual fuel oil in power generation.

In total, these regions see consumption declineby 1 million bpd on 2009.

Source: IEA

Non-OECD

OECD

OECD Pacific Oil DemandEuropean Oil DemandNorth American Oil Demand

2009 2013 2009 20132009 2013

Million b/d Million b/d Million b/d1% 3%

13%

22,0

22,5

23,0

23,5

24,0

12,5

13,0

13,5

14,0

14,5

15,0

6,2

6,4

6,6

6,8

7,07,2

7,4

7,6

7,8


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Non-OECD Demand & ST Projections

Non-OECD demand had seen a continuousincrease over the past 5 years.

If this trend continues then non-OECD demand islikely to rise above 40m bpd by 2013 Source: IEA

Non-OECD OECD

China Other Asia Middle East Latin America Africa

4,8

5,3

5,8

6,3

6,87,3

7,8

8,3

8,8

2005 2009

4,7

5,2

5,7

6,2

6,7

7,2

7,7

2005 2009

4,0

4,5

5,0

5,5

6,0

6,5

2005 2009

2,0

2,5

3,0

2005 2009

7,0

7,5

8,0

8,5

9,0

9,5

10,0

10,5

2005 2009

3,522% 13% 18% 17% 9%


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World Oil Supply and Demand mln / bpd

World Oil Supply and Demand up to 2013

Source: International Energy Agency (IEA)

Long-term Supply CrunchThe long-term supply crunch will be much moreapparent by 2013:

US Energy Information Agency forecasts globaldemand at almost 90m bpd by 2013

Supply will struggle to meet this on currentextraction rates previous peak extraction rate87.2m bpd in July 2008 (when price hit record of$147/barrel)

Current spare capacity (defined as that whichcan be brought on-stream within 30 days andsustained for 90 days) ~5m bpd

Price rise from current levels may not evokesupply-side response, as main space capacitylies in OPEC producers and they have alreadydallied with policy that the oil is worth more left inthe ground for the future

70

75

80

85

90

95

2000 02 04 06 08 10 2012

Demand

Supply


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World Oil Supply by Region mln / bpd

World Oil Supply by Region

Source: IEA

No new major cheap and easy oil discoveriesin past three decades.

Universally accepted annual depletion rate is4.7%/year, so total annual capacity lost isaround 4m bpd of current total liquidsproduction of ~84.5m bpd.

World Supply Flat Lining Currently around 10m bpd global capacity expansions

on the horizon from high cost sources such asdeepwater West Africa, Gulf of Mexico, Brazil andCanada oilsands. But these will not emerge by 2013.

Price probably required to justify development of theseresources: ~$110/barrel.

South AmericaAsia PacificAfrica

North AmericaEurope & Eurasia

Middle East


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Why Oil Supply will struggle to keep up withDemand 1/2

Declining Europe & Eurasia Structural decline in North Sea output all thelow-hanging fruit has been picked.

Russias problems are well-known under-investment for years, and access to new fieldsis difficult and expensive.

Declining - US Supply declining steadily over past three

decades and no new major discoveries likely. Canada oilsands currently have extraction

costs of $85-$95/barrel. Obama administration now permitted the first

offshore drilling outside the Gulf of Mexico formore than 20 years but remains unclear howmuch new oil there may be and at what cost.

Stable Asia Pacific Asia Pacific region supply growth has beensluggish for the past two decades and wesuspect that there are few major oil resourcesto be discovered here.

Asia Pacific has peaked most likely.

Declining / Stable South America Declining output in biggest producer,

Venezuela, which needs massive investmentto recover previous output levels.

Mexicos output also threatened withoutsubstantial new investment. Current price level ought to be sufficient to

encourage new investment Venezuela andMexico e.g. have extraction costs at ~$30/barrel but politics is getting in the way.


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Why Oil Supply will struggle to keep up withDemand 2/2

Potential Africa Much potential, but high risk. Supply issues hang over all African output. Nigeria remains under-performing due to

political risk. Other producers and potential producers

suffering from under-investment.

Uncertain Middle East What happens in Iraq will be crucial. Its got

some of the worlds cheapest oil to produce and a lot of it.

Estimates vary widely but industry consensusis Iraq may have ~100 billion barrels ofrecoverable oil.

If it can raise its output from the current 2.5mbpd to more than 12m bpd then this wouldchange the game.

But those extra 10.5m bpd will with the bestwill in the world not start to appear until

2017 at the earliest. A realistic assumptionmust be output of ~4m bpd by 2013.

Concluding The most likely scenario is that demand will

significantly outgrow supply by 2013 Supply can not adjust fast enough due to cost

issues, investment issues, geopolitical factorsand simply time before output can beincreased.

Alternatives are needed to provide a solutionfor the supply demand imbalance.


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World Gas Supply By Region billion/cm

World Gas Supply

Source: International Energy Agency (IEA)

Reserves Rising Fast World output has been on rising

trend for past three decades.

Big question marks over preciselevel of global reserves but fracking

hydro-fracturing of rock and shale,a technology thats been aroundsince 1940 combined with new3-D seismic imaging is changing thegame in the US today, and willchange it around the worldtomorrow.

BP now estimates proved natural

gas reserves globally have risen to1.2 trillion boe (barrels of oilequivalent), enough for 60 yearsconsumption at current rates andare rising very fast.

North America S. & Cent. AmericaEurope & Eurasia Middle East

0

500

1000

1500

2000

2500

3000

3500

1980 1985 1990 1995 2000 2005

Africa Asia Pacific


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World Gas Supply by Region 1/2

South America - Major supply growth area Hosting reserves almost equalling those of North

America, South America has become the fastedgrowing natural gas energy provider.

Concerns over pipeline security has encourageddevelopment of LNG plants.

Demand growth, at 2.4% per year largelydriven by Brazil will provide a ceiling for naturalgas exports to international markets.

Need to diversify from hydropower drive demand.

US - supply rising fast Consensus that at current rates of production

and consumption the US has sufficient provedgas reserves for a century.

Shale gas discoveries so far made will extendthat by several decades.

US may switch from being net natgas importer tonet exporter within the 2010-2013 timeframe.

Consensus: shale gas production is commerciallyviable even at prices less than $4/mMBTU.

ME - Big potential for raising production ME region has more than 40% of known global

gas reserves but still only 12% of production. Biggest LNG producer, Qatar, currently with

annual output capacity of 30 mln mt. Region well positioned geographically, financially

and industrially to spearhead LNG marketing.

Africa - Output to grow 33% Soaring supply growth from Egypt and Nigeria

will drive total African output. Nigerian supply to expand rapidly. Current

reserve estimates indicate that Nigerian naturalgas reserves exceed those of Algeria, but itsoutput is a currently a third.


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World Gas Supply by Region 2/2

Asia - The lure of Asia China currently uses gas for just 4.5% of its

primary energy demand. As environmentalconcerns become more important to Beijingthere will be a drift away from coal-firedelectricity generation to more gas (andnuclear).

Asia becoming prime target for Atlantic basingas its exports to Asia were non-existent adecade ago but now account for about 12%of total Atlantic basin output.

Asian gas prices today about 50% lower thanwhat they were two years ago and likely tostay low for several years as a consequenceof global gas glut.

Europe - Russian control EU market slipping? Gas is ceasing to be a national/regional

market and becoming a genuinely global one. Hence Gazproms decision to put on hold

development of its massive Shtokman field

(until 2016) partly explained by US shalegas revolution, which is diminishing demandfor Russian (and other) LNG.

Gazprom maintains that its share ofEuropean supply will rise from current 25% to30% over current decade. This doubtful asmore (and cheaper) LNG will be taken by EUmarket. Gazproms share of European marketslowly declining, if the shale gas revolutionsucceeds in gaining pace.


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Agenda

1. Introduction Fortis Bank Nederland / ABN AMROHarris Antoniou; CEO of Energy, Commodities & Transportation

2. Oil and Gas Market fundamentalsBruno Gremez; Managing Director of Energy Commodities

3. Oil Services IndustryMarius Messer; Managing Director of Energy

4. Impact on Tanker MarketGust Biesbroeck; Managing Director of Transportation

5. Trends in FinancingHarris Antoniou; CEO of Energy, Commodities & Transportation


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E&P Spending Uncertain Recovery

Historically, E&P spending correlates with oil price development. Surge of spending since 2005 however mainly caused by

prolonged period of underinvestment. E&P spending seems now mainly driven by reserve-replacement

considerations of oil majors as well as strategic considerations ofNational Oil Companies. Although global oil demand decreased in 2009, US EIA forecasts

global demand at almost 90 mb/d by 2013 with an increase of1.8% per annum in the coming two yrs, with China and India asthe drivers. Such growth remains however heavily dependable onthe global economic rebound.

Supply will struggle to meet this demand growth on current

extraction rates previous extraction rate peaked at 87m bpd inJuly 2008 when price hit record of USD 147 / barrel. Current spare capacity is estimated to be approximately 5 mln

bpd. Main part of the spare capacity lies with OPEC producers, but

these consider oil worth more left in the ground for the future.70

75

80

85

90

95

2000 02 04 06 08 10 2012

DemandSupply

World Oil Supply and Demand

Source: BP

Source: EIA and VM Group


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Offshore Oil & Gas becomes more important

Offshore Expenditures and Production

Offshore oil production accounts for approximately33%of global production. Deepwater offshore oilproduction accounts for about 7% of total

production. This percentage will grow to 10% in2012. Global offshore oil & gas expenditures (Capex and

Opex) will continue its strong growth in the comingthree years from this years ~ USD 250 billion to ~USD 350 billion in 2013.

Future deepwater investment is estimated at USD125 bio for the coming 4 years.

Main areas of activity for the deepwater segmentare West Africa and Latin America.

Source: Douglas Westwood

Source: EnergyFiles, Douglas Westwood


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Offshore Drilling: Trends Deepwater Floater Market

Refers to semi-submersibles and drillships withrated water depths >3,000 ft. mostly modern,high specification units.

No attritions in the past 6 years and averageage of fleet of around 16 years. Most of theolder units have undergone substantial life-

extension work. Although utilisation has remained stable, around

96%, day rates have not been as robust.Average rates have dropped from USD 530,000p.d. around USD 350,000 per day for newfixtures.

High number of newbuild scheduled deliverieswithout firm contracts indicate that accumulatedavailabilty can increase substantially over thenext few years.

Av. Fixture Day Rates Deepwater Floaters USD

Global Deepwater Devolopment 2003-2013 No /rigs

Source: ODS Petrodata Ltd.



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Offshore Drilling: Trends in Midwater Floater Market

The global midwater floater fleet (rigs anddrillships with rated water depths of


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Offshore Drilling: Main trends in the Jackup Market

The global jackup fleet currentlyconsists of around 460 jackups. Morethan 60 units are planned, on order orunder construction, for delivery the nextthree years.

Average age of the global jackup fleet

is more than 25 years. Substantial number of jackups currently

passive, with 107 jackups stacked,whereof 57 rigs have been taken out ofthe market on a semi-permanent basis(cold-stacked)

Average utilisation rate has droppedfrom >90% in mid-2008 to the current

level of around 74% of the total fleet. Oversupply spurring oil companies to

cherry pick, favorising modern unitsvs. older units. This is reflected inutilisation rate differentials.

Global Jackups Age 03/2010 459 units/N o /rigs

Global Distribution of Jackups 03/2010




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Main Trends in the Jackup Market Contd

Rate for premium jackups has fallen fromUSD 225,000 p.d. at the peak of the marketto current level of USD 120-125,000 p.d.

Substantial newbuild deliveries combinedwith roll-off from existing contracts expectedto create supply pressure in the short term...

... but leading offshore brokerage housesbelieve that the market has bottomed out.

There has been a recent pickup in activity,although rates have not followed. Autilisation rate of around 90% is requiredbefore any significant increase in rates canbe expected.

A strengthening of the oil prices andeconomic recovery in the major economieswill have a positive impact on day rates asoil companies increase production volumesand exploration activities to meet growingdemand.

Av. Fixture Day Rates - Jackups USD

Global Jackup Development 2003-2013 units/N o /rigs



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0

10

20

30

40

50

60

70

80

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Floating production: going deeper.

There has been a strong increase in order backlogat the peak of the cycle on the back of the oil price

development Order backlog included various speculative orders Significant number of failures with speculative

participants due to unavailability of contract awardsand consequently lack of funding

FPSO contract awards slowly picking up (late 09)

Major and recent discoveries have been inincreasing water depth

This leads to a significant increase in costs forthe development of such fields

Strong dependency on very specialisedinstallation equipment and deepwater rigavailability for development throughout the fieldlifes Source: IMA (March 2010)

Floating Production Systems Order Backlog Av. Water Depth for Floating Production System

0

200

400

600

800

1000

1200

2000 2005 2010 On Order


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Over the past years, we have seen a significant cost inflation per FPSO unit due to theincrease in general complexity but also the increase in costs of all major components

An example:

In 2003, a simple FPSO would cost about USD 100 150 mln, a mid range FPSOabout USD 200-350 mln and a top specification FPSO would cost over USD 500 mln

In 2010, a simple FPSO would cost USD 150-200 mln, a mid range FPSO about USD400-700 mln and a top specification FPSO approximately USD 1.2 bln

The return on capital for FPSO lease operators has been relatively low over the lasthigh cycle as the general cost increase exceeded the increase in lease tariffs

Furthermore, there have been a significant number of budget overruns and delays in

FPSO conversion and construction projects Although the pricing for equipment and construction services has generally decreased

following the slump in oil prices after July 2008, the current cost of the units (and lack ofavailability of financing) may shift the subtle balance between the lease or buy decisionby oil companies and contractors

. and getting more expensive


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Floating Production Systems Fleet

The floating production market outlook

18%

9%

7%4%

62%

FPSO Semis

TLP Spar Others

FPSO remains the predominant solution chosen foroffshore production

Less requirements for ancillary infrastructuredue to the availability of storage capacityFaster delivery times, especially whenconversion of old tankersLower cost and great flexibility (large deckspace)Easier redeployment

FPSO will remain the preferred solution for offshoreproduction

Remoteness of discoveries and very expensiveaccess to infrastructure or inexistence ofinfrastructure

Proven track record Relative cost Development of natural gas production technology

Source: IMA (March 2010)

Floating Production Systems on Order

64%9%

2%

25%


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Agenda







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Tanker Market: narrowing of supply demand gap

The IEA have revised their forecast for global oildemand upwards for both 2009 and 2010 basedon higher than expected non-OECD data.

Expected increase in crude tanker demand at asteady 2.6% in 2010 measured in terms of dwt,with the highest expected growth in the VLCCsegment, followed by Aframax.

Correspondingly, expected increase in producttanker demand estimated at 2.6% in 2010measured in terms of dwt, with the highestexpected growth in the Aframax segment.

Growth in 2010 will be mainly driven by demandfrom China and India, whilst European demand isexpected to remain subdued.

Demand/Supply Crude Tankers Demand/Supply Product Tankers


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... As indicated by recent Tanker Market Trends

As the crude price contango has narrowed,inventories in floating storage have declined downward pressure on the tanker freight ratesin the shortterm due to reduced tonne-miledemand and an oversupply of vessels.

Most noteworthy recent development is spot

fixture count for VLCCs in the AG surging tolevels not seen in the recent past, althoughrates have softened since.

Downward pressure on MR and Handymaxrates caused by reductions in European andUS consumption of diesel and gasoline. In thelonger term, this could lead to development ofnew long-haul routes from Europe.

If recent inquiry statistic is indicative of future demand, owners may indeed have reason for optimism. RS Platou

Source RS Platou Oslo

WeeklySpot Ratesfor CrudeCarriers

WeeklySpot Ratesfor Clean

Carriers


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Removals of Crude Carriers 80,000 DWT +

Outlook for Supply side continues to improve

Source RS Platou Oslo

The Oil Tanker Fleet & OrderbookTanker Market VLCC and Panamax crude fleets set to

contract, whilst Suezmax and product tankerfleet expected to have firm growth in 2010.This raises questions of demand/supplyimbalances for the latter segments.

Chinese owners placing orders for larger-sized tankers at domestic yards, reflectingChinas goal of securing tonnage for oilimports on Chinese flagged vessels.

Newbuilding prices still sliding somewhatdownwards as shipyards seek to replenishdeclining orderbooks.

Scepticism has increased over whether thethe planned phase-out of single-hulledtankers will reach the expected levels....

...but delivery slippage and cancellations maystill counteract massive fleet growth.


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Values bottoming out with increased S&P activity

Second-hand market activity has increased, withmajority of buyers seeking modern, quality tonnage.

Increased buying interest for both crude andproduct tankers and prices seem to be firming inall segments, butspread between buyers andsellers expectations is preventing closure of sales.

Recently reported sales mainly to Chinese andGreek buyers. We may expect developingeconomies and oil trading countries to emerge askey players in second hand tanker investments.

Number of IPOs successfully launched in U.S. andnew transactions announced, indicating increasedequity market appetite for tanker investments.

Second-hand Tanker Price index Second-hand Sales Volume


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Agenda







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Access to finance remains difficult andcumbersome for some operators and borrowers

The lending behaviour and appetite of financialinstitutions and banks that historically providedcapital to the Offshore and Shipping industrieschanged considerably during the past 2 years.

Export Credit Agencies, such as Giek / ExportFinans and KEIC, offered great help in themeantime but for how long?

Financial markets show improvements recently

but margins remain substantially higher thanpre-crisis levels. Key covenants, restrictions anddue diligence requirements remain vigorous

The rise of alternative funding?

Trends in Financing

Trends in Financing


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Funding Gap: Investors Looking for Alternatives

Trends in asset backed finance Many big players have significantly reduced activity Also driven by market forces in banking:

Increased capital costsEnd of maturity mismatch play

Recapitalization costs This takes at lending capacity out of the market.

Instead of traditional investments Institutional investors are reducing

exposure to traditional asset classes inparticular equity

Very low yields on government bondsand recent sovereign concerns reduce

their attractiveness

investors are looking for: Long-term assets with a preference for

higher yieldingInflation protectedLow correlated risk

Significant financing shortfall shipping example

Est. Annual New BuildingFinancing Need 09-11

010203040

506070

38.0

Annual Shortfallc. $13-30Bn

Est. AnnualLending Availability

50.7

68.0

US$ Bn

There is abig gap with

the expectedcapacity inthe bankingmarket.


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Alternative Sources of Debt Fortis Initiatives

Starting points Use leadership

position in ECTmarkets

Find alternative,innovativefinance/equitysolutions for ourglobal clients

Investor base fromFBNs global network

Focus Debt funding (also

DCM) of Energy andShipping Finance

transactions Co-investments in

equity relatedShipping/Energyasset-owningventures

Capital raising for

Fund structures inEnergy orTransportation sector

Initiatives / Examples Joint Bookrunner in 181 mln

Accelerated Bookbuilding offer.for SBM Offshore. Nov 2009

JV with instit. investors in US$100 mln Newbuilding TenderDrilling Barge; FBN stake 23%;June 2009

US$ 300 mln Private Placementand co-investment in shipping;March 2010

QInvest: a mezzanine fundestablished by FBN and QatariInvestment bank.


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Thank You


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Harris AntoniouCEO of Energy,Commodities &Transportation

Fortis Bank Nederland

Merchant Banking

Tel +31(0)10 401 [email protected]

Bruno GremezManaging Director ofEnergy Commodities


Merchant Banking


Marius MesserManaging Director ofEnergy


Merchant Banking


Gust BiesbroeckManaging Director ofTransportation


Merchant Banking


ECT contact details

fortis webinar april 2010

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