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Session 1
Introduction : Risk and the 2012 global energy scene
Professor Albert BressandJanuary 23, 2012
1© Professor Albert Bressand
Part.
1
Energy risk in 2011: Reflecting on what risks materialized for various types of actors in 2011
Professor Albert Bressand
February 28, 2011© Professor Albert Bressand
Common sense questions
• How do we define ‘risk’ in the energy system?• What sort of risks materialized in 2011?• What can we expect in 2012?• … and how should we go about analyzing
energy risk in the future?
© Professor Albert Bressand 3
Thinking about risk (and opportunities)
• What sort of risk has the world energy system been exposed to most visibly in 2011?
• To answer, ask first: who worries about what?1. importing countries2. energy users3. net exporting countries4. stakeholders and civic society5. investing companies
Each of these five groups can be further divided into subgroups sensitive to different types of risks and opportunities
© Professor Albert Bressand 4
1. Risk as experienced by importing countries: the security of supply perspective, 2011• The ‘peak oil’ perspective has been receding, yet oil prices have risen• Continuing E&P successes in Africa, North America, Brazil• Libya’s revolution and a short lived supply challenge. IEA SPRs used.• Nigeria’s strike over oil subsidies and continuing unrest in Niger Delta• European boycott of Syrian oil• Saudi and global spare capacity down to pre-glut levels
… and knocking at the door:• Boycott of 400k Iranian oil to start in Spring 2012• Iraq close to adding 400k b/d from Southern fields
… and looking forward:Heritage Foundation scenario work on oil supply:• - The Strait of Hormuz is closed (2006)• - Attacks on major Saudi oil infrastructures• - To be released 2012: Downfall of the Saudi monarchy
© Professor Albert Bressand 5
2. Risk as experienced by energy users in 2011:Short term volatility, long term transition• 2011 the first year at 100 $ Brent average price• Volatility• Unusually high Brent-WTI differential in mid 2011 • Collapse in carbon prices• Transition towards a different energy mix:
• - EU roadmap to 2050• - US States RES AND the shale gas revolution• - China’s 13th Five year Plan
© Professor Albert Bressand 6
The role of futures markets
• Oil price formation, is OPEC really a cartel?• Nymex and ICE• Producers and consumers hedging• Non commercial and swap traders
7
8
November 2004: from short-term price increases to LT adjustments in expectations
• November 2004: - prompt prices doubled- forward prices also doubled- OPEC “suspended” the $22-$28/b target price band
• A conjunction of causes:- 2004 oil demand surge- Iraq recovery delayed- Spare capacity ran out- Buoyant “asset demand” for
oil futures- Non-OPEC supply growth
limited• The new $60-80 price band seems
to hold
Crude Oil "Forward Curves"
0
10
20
30
40
50
60
70
'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
$ /
barr
el
3/99
3/00
3/02
3/03
11/04
11/05
3/04
3/05
2/0610/0610
3/0710
Higherout year prices
Old OPEC price band
Note: this is a
year after Iraq
II
3.Risk as experienced by exporting countries in 2011:Geographic shift and ‘security of demand’
• Has OECD demand for oil peaked in 2008?• Europe’s efforts to move out of oil. Roadmap 2050 sees energy
consumption only 6% higher than now• US quest for ‘energy independence’, the Bush era CAFE
standards begin to bite, and the US hydrocarbon revolution…But also:• Fukushima and the German angst• the end of US ethanol subsidies• Diminished support for solar and win. Solyndra. Vesta
• Chinese and BRIC demand as the central driver for global oil demand
• Cheap LNG chasing demand• Security of demand in natural gas
© Professor Albert Bressand 9
Net imports of oil in the WEO 2011 New Policies Scenario
US oil imports drop due to rising domestic output & improved transport efficiency: EU imports overtake those of the US around 2015; China becomes the largest importer around 2020
Oil demand: OECD has peaked, China growth more than offsets
0
2
4
6
8
10
12
14
China India EuropeanUnion
UnitedStates
Japan
mb/
d
2000
2010
2035
4. Risk as experienced by stakeholders in 2011:environmental risk at the forefront
• Deep Sea Horizon oil spill• Climate change: muddling through at Durban• Keystone XL controversy• Fracking controversy• The French law on shale gas
© Professor Albert Bressand 14
The changing energy mix (IEA view, nov. 2011)
World primary energy demand by fuel in the WEO 2011 New Policies Scenario
Renewables & natural gas collectively meet almost two-thirds of incremental energy demand in 2010-2035
Additional to 2035
2009
0
1 000
2 000
3 000
4 000
5 000
CoalOil Gas Renewables
Mto
e
Nuclear
The age of fossil fuels is far from over, but their dominance declines (WEO 2011)
Shares of energy sources in world primary energy demandin the New Policies Scenario
Oil remains the leading fuel though natural gas demand rises the most in absolute terms
0%
10%
20%
30%
40%
50%
1980 1990 2000 2010 2020 2030 2035
Oil
CoalGas
BiomassNuclear
Other renewablesHydro
Part.
2
Risk in 2011: The investing company’s perspective
Professor Albert Bressand
February 28, 2011© Professor Albert Bressand
5. Risk as experienced by investing companies, 2011
• Technical risk: the Macondo well debacle• Environmental risk, local: Chevron in Brazil• Environmental risk, global: Durban COP on climate• Market risk, energy: the crash in US natural gas prices• Market risk: soft growth and the euro crisis risk• Country risk: the Arab spring, • Geopolitical risk: Iran nuclear program• Resource curse: AND• A new oil & gas frontier in US, Africa and Brazil
18
© Albert Bressand19
Risk: the diversity of Shell experience• 1995: Ken Saro-Wiwa execution in the Niger delta
• 1995: Brent Spar platform and the Greepeace-led customer boycott
• 2004: ‘Reserves’ booking scandal
• 2000’s: Canadian tar sands emissions to be offset by reduced Nigerian flaring
• Ongoing: ‘bunkering’ of West African oil
• 2005: Sakhalin II
• 2000’s: Iran off limit
• 2010s: Beaufort Sea permitting uncertainties
AND
• Iraq, PEARL, Floating LNG platform
Saro-Wiwa• - President of the Movement for the Survival of the Ogoni People
(MOSOP), led a nonviolent campaign against environmental degradation by the operations of the multinational petroleum industry, especially Shell.
• - outspoken critic of the Nigerian government, which he viewed as reluctant to enforce environmental regulations on the foreign petroleum companies operating in the area.
- hastily tried by a special military tribunal and hanged in 1995 by the military government of General Sani Abacha, all on charges widely viewed as entirely politically motivated
- His execution provoked international outrage and resulted in Nigeria's suspension from the Commonwealth of Nations for over three years.
© Professor Albert Bressand 20
Offshore Terminals - Energy Bridge™ System Overview
High Pressure PumpsAnd Vaporizers
Reinforced LNGStorage Tanks
Energy Bridge™Regasification Vessel
TractionWinch
BuoyCompartment
OversizedBoiler
The Energy Bridge™ system is based on proven
technology used for over a decade in the
harsh North Sea marine environment
When not in use, the buoy will remain 80 to 90 feet below the
surface
How Shell –and followers– will expand LNG production to stranded fields and overcome siting challenges with 600,000 ton behemoths
The investing company’s perspective: a typology of risks• Market risk
• Energy prices and macroeconomic context• Refining margins• Financial intermediation crisis
• Technical risk, often with environmental implications:• - ENI in Kashagan : H2S• - BP in Macondo• - Chevron in Brazil deep water• .. And countless opportunities at the technology frontier
• Country risk: nationalization, forced renegotiation• - Exxon and other investors in Venezuela’s Orinoco Belt• - Petrobras in Bolivia• - BP in Kovykta, Russia
• Reputation risk- Shell and the Brent Spar boycott- Total in Myanmar
• Compliance risk• - Shell in breach of SEC reserve-booking rules• - China's state-run Zhuhai Zhenrong Corp sanctioned by US for its trade with Iran
© Professor Albert Bressand 24