World Oil Markets Prepared for International Petroleum Executive Seminar

1
World Oil MarketsPrepared forInternational
Petroleum Executive Seminar

• October 2003

2
Outlook

• Short-term Iraq, Russia, OPEC
• Long-term Demand, Non-OPEC Supply Growth
• Crude Oil Quality
• Crude Oil Trade Flows

3
Fundamentals Quiz
How much will non-OPEC production increase in
2003?
Brent at 30 WTI at 32 Dubai at 28 ????
1.0 million b/d
Which country accounts for the largest increase?
The second? The third?
Kazakhstan
Russia
Mexico
How much did OPEC production increase in 2003?
1.1 million b/d

• How much did Demand increase in 2003?

0.9 million b/d
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Venezuela and Iraq Lift 2003 Prices
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Iraq Endgame The Next 2 Years?
March-May 2003
December 2002
December 2003
June 2004
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Crude Balance
7
A Tale of Three Countries
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Should Russia Cut Production?
Saudi gains from 500,000 b/d export restraint
closer to 25 million per day
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Tough Times for OPEC
IEA has growth of 1.0
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Long-term Petroleum Assumptions

• Non-OPEC Output Slows but Does Not Decline
• Ample OPEC Production Capacity
• Global Economic growth can sustain 3.0 to 3.5
• Oil demand growth just shy of 2.0

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Where is the Non-OPEC Supply Coming from?
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Long-term Non-OPEC Supply
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Long-term Demand
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What is Left Over for OPEC?
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Rising Nominal Prices?
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Why Step Increase

• OPEC Behavior
• Price over Market Share
• Price Band -More effective OPEC and non-OPEC
  collaboration
• Quality disparities and fiscal disparities
• Multiple disruptions
• Lean Inventories
• Tighter Product Specifications

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Global Crude Oil Quality
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Global Additions by Quality
More than 55 is sour
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Refiners Respond
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Atlantic Invests more in desulfurization than the
Pacific
Asia still not making desulfurization investment
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Moderately Wide Quality Spreads

• More Medium and Light Sour crudes
• Low Sulfur strength in US and Europe due to
  diesel and gasoline specifications
• Light product strength in US (MTBE ban)
• Significant Hydro treating capacity additions
• Spoiler OPEC production Cuts

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The Evolution of Crude Oil Trade Flows

• Europe is Limited Market
• Asia is growth market for Persian Gulf
• Latin America, Africa and FSU capture North
  American growth
• Africa will turn to Asian and North American
  markets

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Atlantic and Pacific Divergence

• Pacific
• More sour crude
• Gradually Tighter Product Specs
• Less Hydro treating investment
• More African Crude
• Wider Quality differentials

• Atlantic
• More sour crude
• Very Tight Product Specs
• More Hydro treating investment
• More African Crude
• Quality differentials are mixed

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How to think about the future (s)
The Great Unknown
Return of Iraq
The Horizon
Non-OPEC investment Product specs and refining
investment Conservation and alternative
fuels Energy Security Concerns
Demand stronger and non-OPEC growth slower?
OPEC and Russia
2007?