intertanko - tankers and energy

SIMMONS & COMPANYINTERNATIONAL

InterTanko Washington Tanker Event 2003April 9, 2003

Washington, D.C.Presented By:

Matthew R. Simmons

Connecting The Dots Connecting The Dots

TankersAnd

Energy

TankersAnd

Energy


The Flow Of Oil In 2001The Flow Of Oil In 2001

Source: BP Statistical Review of World Energy, June 2002.


2001 Inter-Area Oil Movements(‘000 barrels daily)

2001 Inter-Area Oil Movements(‘000 barrels daily)

To

From

United States

Canada

Mexico

South And

Central America

Europe

Africa

Australasia

China

Japan

Other Asia

Pacific

Rest Of World

Unidentified

Total

United States -- 130 253 165 232 4 6 6 13 82 19 -- 910

Canada 1,786 -- -- 4 10 -- -- -- -- 4 -- -- 1,804

Mexico 1,424 26 -- 185 197 4 -- -- 22 20 4 -- 1,882

South And Central America 2,567 122 31 -- 281 12 -- 6 8 114 -- -- 3,143

Europe 945 582 6 45 -- 148 -- 22 2 108 88 -- 1,947

FSU 90 -- -- 143 3,668 10 -- 109 14 179 47 418 4,679

Middle East 2,775 145 23 237 3,548 831 183 689 4,211 6,405 52 -- 19,098

North America 286 72 17 86 1,961 79 -- 6 10 142 64 -- 2,724

West Africa 1,370 20 -- 227 701 30 -- 76 16 741 -- -- 3,182

East And Southern Africa -- -- -- -- -- -- -- 100 28 18 -- -- 147

Australasia 45 -- -- -- -- -- -- 20 80 285 -- -- 430

China 23 -- -- 6 4 -- 6 -- 85 174 -- -- 298

Japan 8 -- -- -- 2 4 4 23 -- 52 -- -- 94

Other Asia Pacific 193 4 4 -- 48 6 391 562 703 222 17 -- 2,151

Unidentified1 107 47 -- -- 878 -- 25 175 10 22 -- -- 1,265

Total Imports 11,618 1,149 334 1,098 11,531 1,130 616 1,796 5,202 8,569 291 418 43,754

Source: BP Statistical Review of World Energy, June 2002._________________________1 Includes changes in the quantity of oil in transit, movements not otherwise shown, unidentified military use, etc.


The Flow Of Natural Gas In 2001The Flow Of Natural Gas In 2001



2001 Inter-Area Natural Gas Movements(Billion cubic meters)


To

Total Imports

North America 118.82

South And Central America 7.67

Europe 275.18

Middle East 4.20

Africa 1.20

Asia Pacific 4.25

Total Exports 411.32

Percent Moved By Pipeline 74%

Trade Movements By Pipeline





To

Total Imports

North America 6.59

South And Central America 0.63

Europe 33.53

Asia Pacific 102.20

Total Exports 142.95

Percent Moved By Tanker 26%

LNG Trade Movements



Oil Movements Far Different In Last Golden Era


Key Importers 1972 Key Exporters 1972 (‘000 b/d) (‘000 b/d)

Western Europe 14,060 Middle East 16,950

Japan 4,780 Caribbean 3,620

United States 4,740 North America 3,475

Latin America 2,050 West Africa 1,915

Southeast Asia 1,315 U.S.S.R. 1,260

Canada 915 Southeast Asia 1,090

Other 2,235 Canada 1,085

Total 30,095 Other 700

Total 30,095




0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000Western EuropeJapanUnited StatesLatin AmericaSoutheast AsiaCanadaOther

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Middle EastCaribbeanNorth AmericaWest AfricaU.S.S.R.Southeast AsiaCanadaOther

Key Importers Key ExportersThousands Of Barrels Per Day Thousands Of Barrels Per Day

1972 1972


Key Differences Between 1972 And 2003

Key Differences Between 1972 And 2003

n Oil demand now close to 80 million barrels per day.

n “Oil movements” now close to 45 million barrels per day.

n Long haul routes replaced many short hauls.

n Far greater oil at sea versus pipeline movements.

n Tanker economics awful for the past 3 decades.

n Much of the tanker fleet is very old.


Biggest Shift In FlowsBiggest Shift In Flows

n U.S peaked in supply - “Lower 48” now 35% of 1970 level.

n Russia peaked in demand. FSU demand now 50% of peak.

n North Sea cut Europe’s high dependence on imports.

n Miracle of Asia made Far East key market.

n Only constant: high dependence on Middle East.


High Percentage Of Current Fleet Needed To Keep “Oil At Sea”

High Percentage Of Current Fleet Needed To Keep “Oil At Sea”

n Start with rough estimate of average tanker size by type.

n Assume 50% is always backhaul (plus 5% “downturn”).

n 100% capacity is about 900 million barrels.

n 45 million barrels per day is 20 days’ supply.

n When reports say there are 830 million barrels at sea, so what?


The Spare Capacity Of The Tanker Fleet Is Skimpy

The Spare Capacity Of The Tanker Fleet Is Skimpy

n Small tankers do not count.

n VLCCs are almost all incremental needs of Middle East oil.

n Future for single hull tankers is at high risk.– One more strike and “you are out”?– EU bans could extend to many other areas.

n Loss of 1 million b/d from Venezuela to U.S. crude creates need for 30+ VLCCs.

n 2% growth in demand creates even greater potential need.


Does The World Need More Tankers (Or Less)?

Does The World Need More Tankers (Or Less)?

n If all single hull tankers need replacing, the number of new orders might be too high for shipyards to handle.

n If global oil supply flattens out, can existing fleet size stay constant?

n What happens to tanker demand as North Sea and Latin American oil declines?

n Is there a reliable “model” to guide future tanker supply and demand?


Future Oil Supply And Demand For Oil Is Confusing Picture

Future Oil Supply And Demand For Oil Is Confusing Picture

n Oil demand should continue to grow (or even accelerate).– 1990 - 2002 non-FSU growth: 15.5 million b/d.– Growth from China, “Other Asia” and North America, alone,

was 9.2 million b/d.– 2 billion people still use no oil.– Another 3 billion use very little oil.

n Oil supply growth uncertain.– Many key non-OPEC basins in permanent decline.– Some OPEC producers also in decline.– Most OPEC producers could soon be in decline.– Adding new fields takes time and money.


Surge In Non-OPEC Supply “Petered Out”

Surge In Non-OPEC Supply “Petered Out”

1990

1995

2002

Change 1995-2002

United States 8.99 8.62 8.18 (0.44) Mexico 2.98 3.07 3.69 0.62 Canada 1.97 2.40 3.03 0.63 United Kingdom 1.94 2.79 2.51 (0.28) Norway 1.72 2.69 3.30 0.61 Australia 0.71 0.64 0.71 0.07 China 2.77 2.99 3.43 0.44 Malaysia 0.64 0.82 0.78 (0.04) India 0.69 0.77 0.75 (0.02) Brazil 0.85 0.95 1.86 0.91 Other Latin America 1.60 2.11 2.13 0.02 Oman 0.71 0.86 0.85 (0.01) Egypt 0.92 0.92 0.75 (0.17) Angola 0.50 0.69 0.94 0.25 Total 26.99 30.32 32.91


Even Some OPEC Producers Have Only Slight Gains

Even Some OPEC Producers Have Only Slight Gains

Excluding Iraq/Kuwait 1995 2000 2002

Saudi Arabia 7.94 8.00 7.38 Iran 3.65 3.69 3.42 UAE 2.20 2.24 1.99 Qatar 0.41 0.63 0.64 Nigeria 1.90 2.04 1.95 Libya 1.38 1.41 1.32 Algeria 0.75 0.81 0.85 Venezuela 2.44 2.79 2.29 Indonesia 1.32 1.27 1.12 Total 21.99 22.88 20.96


Could OPEC Supply Be Nearing Its Peak?Could OPEC Supply Be Nearing Its Peak?

n Absent a flurry of new exploration, many OPEC producers have now peaked.– Indonesia– Iran– Libya– Venezuela– Iraq

n Saudi Arabia’s oil is highly concentrated in a handful of old fields.– Rising water cuts are increasingly challenging.– Tight and complex formations also a challenge.– Exploration success has been scarce.


FSU Has Been The Only Big Supply Surplus

FSU Has Been The Only Big Supply Surplus

n FSU oil production peaked in 1987 at 12.54 million b/d.

n By 1995, production had collapsed to 7.09 million b/d.

n By first quarter 2003, oil production rebounded to 9.86 million b/d (+ 2.77 million b/d).

n Big uncertainties surround this surplus.– Are the numbers all real?– Are the gains sustainable?– Is this just “a start”?


Long-term Demand Estimates Show Need For Remarkable Growth

Long-term Demand Estimates Show Need For Remarkable Growth

n IEA’s long-term demand shows a great growth in total energy (196 MBOE/d in 2000 to 326 MBOE/d in 2030).

n Oil growth: 76 million b/d in 2000 to 124 million b/d in 2030.

n Key assumptions:– People still drive cars.– This “movement” spreads beyond OECD.

n Natural gas grows from 45 MBOE/d in 2000 to 91 MBOE/d (24% faster growth than oil).

n Only truism: Energy demand can never exceed energy supply.


Natural Gas Faces Similar UncertaintyNatural Gas Faces Similar Uncertainty

n All forecasts point to astonishing demand growth.

n But 60% of current base is in decline:– U.S.– Russia– Canada– U.K.

n Hard fact: 40% has to triple to make global supply balance.

n Middle East natural gas is expensive (not cheap).

n Most stranded gas has never seen a drill bit.

– Netherlands– Indonesia– Turkmenistan– Romania


LNG’s Future Has To Be Rosy (But Risky)

LNG’s Future Has To Be Rosy (But Risky)

n LNG has worked because projects were “seamless.”

n Spot LNG is a dangerous game.

n Ingredients for real LNG projects:– Dedicated reserves to support 30-year life span.– Dedicated pipelines.– Liquefaction plant.– Dedication trains– Receiving terminal.

n “All in” costs: $3 to $10 billion per 500 Bcf/day?


Tons Of Energy Data But Scarcity Of Accuracy

Tons Of Energy Data But Scarcity Of Accuracy

n The energy industry has fabulous set of industrial data.

n But most statistics are only estimates.

n Some are quite accurate; some are not.

n Big gaps create remarkable uncertainty.

n Some of the biggest gaps:– OPEC monthly production.– No non-OECD oil inventory data.– No OECD inventory beyond “primary stock.”– No accurate supply in most regions.– Good demand is available 18 - 36 months late.


Bad Data Creates Bad Roads MapsBad Data Creates Bad Roads Maps

“A bad road map is far more dangerous than no map at all”

n Oil gluts can come “out of thin air.”

n Price volatility follows rhetoric, not data.

n Lack of reliable data creates short-term reality from mere perceptions.

n Volatility in tanker market a perfect example.


The Explosion In Tanker RatesThe Explosion In Tanker Rates

Source: Bassoe Friday Report; March 28, 2003.

Awful

1st Explosion

2nd Explosion

3rd Explosion

A Correction?

What Was Going On?

No!


Two “Very Different” ExplanationsTwo “Very Different” Explanations

n “Soaring tanker rates proof of record OPEC oil at sea”

n “Some unforeseen consequences of pending oil price collapse” (10/9/02)

n “War premium now impacting tankers”

n “Two back to back hurricanes lead to record drop in U.S. imports”

n “Low oil inventories creating spikes in oil prices”

n “Lack of tanker capacity limiting further growth in exports”

One View Opposing View


Economics Of Oil Are ChangingEconomics Of Oil Are Changing

Past 20 Years • $15 - $20 oil was normal. • Tanker rates to move oil de minimis. • And no part in oil value chain made real money.

Today • Oil seems to like $25 - $35 range.

• Tanker rates are expensive. • Many supply basins in decline.

Future • Is non-OPEC oil peaking?

• What does anyone really know about OPEC? • What will 2,000 new vessels cost? • What will future energy cost? • Who will pay this bill?


Cost Of Energy A Genuine PuzzleCost Of Energy A Genuine Puzzle

n “Normal prices” ($15 - $20/barrel) did not work.– Financial returns were awful for everyone.– Most OPEC economies in shambles.– Aging asset base - needs expensive overhaul or replacement.

n Current energy is costly– “Big 5”: $150 billion in E&P costs to grow production by 4% or

600,000 b/d (1999 - 2002)– Most new fields now cost $15,000 to $35,000/peak bbl.

n While many think oil should be $15.20/bbl, this price is far too low.


Energy’s Future Will Be Extremely Challenging

Energy’s Future Will Be Extremely Challenging

n Oil and gas decline rates are extremely real.

n Some parts of global supply have clearly peaked.

n Demand must grow.

n Historical energy prices got far too low.

n Future energy costs must be high.

n The world’s current understanding of energy is slight.



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