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Asian Oil and Gas Industry in a Global Context: Emerging Issues and How to Tackle Them

Presented by:

Dr. Fereidun Fesharaki, Chairman

38th JCCP International Symposium

January 30, 2020

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Summary: Dramatic Changes in Oil Market Structure

• Oil demand growth has dropped to only about 650 kb/d in 2019.

• Oil supply growth continues unabated, led by the US, but also everywhere else.

• IMO may shift prices higher in 2020.

• We see prices in the US$55-US$65/bbl range for the next few years. In 2020 prices can reach US$70/bbl.

• Prices can probably be managed in the upper and lower range—but OPEC+ needs to retain cuts and Saudis will need to drop a bit further. We think they are ready to defend prices at US$55/bbl. Saudi Aramco’s IPO seems to be based on US$60/bbl price.

• Of course, any geopolitical issues in the Gulf could quickly shift the equation!

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Wild Card—Trump’s Political Impact on Global Oil Market

Trade War with China Iran Sanctions

OPEC+/Saudi Production Venezuela Sanctions

300-500 kb/d+ less oil demand growth globally

2+ mmb/d decline in oil supply

500+ kb/d decline in oil supply

Cuts sustained? How low are Saudis willing to go?

3

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OPEC Wild Cards: Venezuela Collapsing, Iran Squeezed, Libya & Nigeria Unstable

0500

1,0001,5002,0002,5003,000

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kb/dVenezuela

01,0002,0003,0004,0005,000

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kb/dIran

0200400600800

1,0001,2001,400

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14Ju

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kb/dLibya

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1,0001,5002,0002,500

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14Ju

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-14

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-15

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kb/dNigeria

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Brent Crude Price: Three Paths to the Future (Real 2020$)

30

40

50

60

70

80

90

100

110

120

130US$/bbl

US$100/bbl+ (10% Scenario)—Supply Surprise: US shale underperforms + ME turmoil

Reference Scenario—OPEC Muddles Through: Both demand and US shale plateau, leaving room for OPEC to manage

$30-50/bbl (45% Scenario)—OPEC Overwhelmed: Demand declines early, OPEC cohesion challenged

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US Oil Supply: A Tale of Two Majors—Transforming US Shale

0

200

400

600

800

1,000

1,200

1,400

kboe/dExxon 2019 US Tight Oil Outlook

Exxon Tight Oil HistoryExxon Base Case @ 2018Exxon Outlook @ 2019

0

100

200

300

400

500

600

700

800

900

1,000kboe/d

Chevron 2019 Tight Oil Outlook

Chevron Tight Oil HistoryChevron Outlook @ 2018Chevron Outlook @ 2019

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World Long Term Oil Demand Outlook

• Base case: 115 mmb/d by 2040, compared with 98 mmb/d in 2016.

• High case: 131 mmb/d by 2040, supported by low oil prices and strong consumer demand.

• Low case: peak at 108 mmb/d around 2030, strict implementation of environmental policies and strong efficiency gains.

0

20

40

60

80

100

120

140

0

20

40

60

80

100

120

140mmb/dmmb/d

World Demand Outlook

Golden Age 1960-1979 +5.6% p.a.

Slowdown 1985-2010+1.6% p.a.

Last Era of Growth? 2010-2040+0.6% p.a.

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Gasoline Not Going Away, But EVs Hit Growth by Late 2020s

20

25

30

35

40

45mmb/d

Global Gasoline Demand Lost to Electrification and Fuel Economy

Gasoline demand lost to fuel economy

Gasoline demand lost to plug-ins

ACTUAL gasoline demand

-400

-200

0

200

400

600

800

1,000mmb/d

Fuel Economy vs. Electrification Effect on Global Gasoline Demand Growth

Gasoline demand growth lost to fuel economy Gasoline demand growth lost to plug-insACTUAL gasoline demand growth Gasoline demand growth without plug-ins and fuel economy loss

Source: FGE Long-Term Global Oil Market Outlook to 2040/Road Transport and Electric Vehicle Section

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Asian Demand: Shifting Patterns of Growth

*Includes other products and direct crude burn for Japan

Total Oil Demand Growth,* kb/d

2015 2016 2017 2018 2019 2020

China 495 359 515 415 297 337

India 356 265 144 213 98 171

Japan -128 -157 -134 -151 -128 -46

South Korea 181 191 39 -20 -38 -46

Rest of Asia 149 223 412 86 69 111

Total 1,053 882 975 540 298 461-800

-600

-400

-200

0

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400

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800

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1,200

1,400

2014 2015 2016 2017 2018 2019 2020

kb/d

Asia Pacific Main Product Demand Growth

Fuel oil Gasoil Kero/JetGasoline Naphtha LPG

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China’s Gasoil and Gasoline Exports Weigh on Market

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2015

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kb/d China's Gasoline Exports

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2011

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2014

2015

2016

2017

2018

2019

2020

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2022

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2024

2025

kb/d China's Gasoil Exports

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Asia Grassroots Refinery Additions and Closures, 2019-2030

Malaysia

2019RAPID 279 kb/cd

China (additions)

2019Hengli Petrochemical Dalian 400 kb/cd 2020Rongsheng (Phase I)400 kb/cd 2021Sinopec Zhanjiang 200 kb/cd2023Shenghong Petrochemical320 kb/cd2026Rongsheng (Phase II) 400 kb/cd

Addition

Closure

Japan

2020Various-107 kb/cd2023Various-98 kb/cd2024Various-98 kb/cd2026Various-140 kb/cd

Brunei

2020Hengyi Industries163 kb/cd

India

2026HPCL’s Rajasthan Refinery Project168 kb/cd 2030West Coast Refinery Project372 kb/cd

Australia

2028Various-93 kb/cd

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China’s Quest for Petrochemical Self-Sufficiency Leads Naphtha-Focused Expansion

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2018 2019 2020 2021 2022 2023 2024 2025

mmtChina's Ethylene Deficit

Hengli Dalian Sinopec Zhanjiang

Sinopec Zhangzhou Shenghong Lianyungang

Rongsheng Zhoushan Sinochem Quanzhou

Wanhua Yantai Baolai Panjin

Current Import Requirement (2018)

China imported 16.2 mmt of ethylene in 2018

0

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2018 2019 2020 2021 2022 2023 2024 2025

mmtChina's Paraxylene Deficit

Dongying Weilian Hengli Dalian

Rongsheng Zhoushan Sinopec Hainan

Sinochem Quanzhou Current Import Requirement (2018)

China imported 15.9 mmt of PX in 2018

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Middle East—Refinery CDU Projects (Firm & Likely, Up to 2025)Iraq2019Baiji (65 kb/cd), NRC

2020Basra (65 kb/cd), SRC

2024Karbala (130 kb/cd), INOC/ORA

Kuwait2020MA/MAA Clean Fuels Project (net +60 kb/cd), KNPC

2021Al-Zour (572 kb/cd), KNPC

Oman2023Duqm (214 kb/cd), KPI/ORPIC

Saudi Arabia2020Jizan (372 kb/cd), Saudi Aramco

2025Yanbu (COTC) (372 kb/cd), Saudi Aramco

Bahrain2023Sitra (93 kb/cd), BAPCO

UAE2020Dubai (Jebel Ali)* (65 kb/cd), ENOC

* Condensate Splitter

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3.5% High-Sulfur Fuel Oil (HSFO)

0.5% Bunker Fuel Oil

Marine Gasoil (MGO)

LNGOther fuels

such as LPG

HSFO with Flue Gas Scrubbers

14

IMO 2020—Several Solutions, All Costly

Near-term quick solutions

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2000 2005 2010 2015 2020 2025

% SulfurSulfur Cap by Region

Global Emission Control Area (ECA)

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IMO 2020: Forecast Compliance and Scrubber Uptake

75%

80%

85%

90%

95%

100%

2020

2023

2026

2029

2032

2035

2038

Global Sulfur Cap Compliance

Small VesselsMedium VesselsLarge VesselsVery large Vessels

0

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3,500

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# scrubbers

Annual Scrubber Installations

Small VesselsMedium VesselsLarge VesselsVery Large Vessels

0

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10,000

15,000

20,000

25,000

# scrubbers

Vessels Equipped with Scrubbers

Small VesselsMedium VesselsLarge VesselsVery large Vessels

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Transition to IMO 2020 Starts (In Earnest) in 4Q 2019Shipowners and bunker suppliers will lead the front-line change; refiners will be stressed, while logistics systems will need to be flexible

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3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22

mmb/dIMO Bunker Fuel Composition

Post-2020 Scrubbed HSFO Post-2020 Non-Compliant HSFO Pre-2020 HSFO 0.5% S Fuel Gasoil

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Asia Is Well Prepared to Supply VLSFO in the New Low S World

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Gas/LNG Market

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Supply Surges Then Suddenly Stops

-5

5

15

25

35

45

55

mt

Global LNG Supply Growth

Supply growth surges over 2019-20 Supply growth slows

down from 2021

19

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Projects Looking to Take FID Without Firm End-User Contracts

0

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40

60

80

100

120

140

FIDs over 2012-17 Expected FIDs over 2018-21

mtp

a

Share of FIDs Without Firm Contracts to Grow

Firm Contracts Prior to FID Equity/Sponsor Offtake Without Firm Contracts with End-users Prior to FID

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200

250

300

350

400

450

500

550

600

650

mt

Global LNG Supply-Demand Balance

Likely FIDs by 2021

Under Construction

Operating

Demand Growth 1% Higher

Demand Growth 1% Lower

Global LNG Demand (Base)

21

Boom-and-Bust Cycles Alive and Well, Demand Growth a Wild Card

*The above supply numbers factor in unplanned outages from 2020 onwards

2019-2021: Long Market

2022-24: Short-Balanced Market

Post-2025: Long Market

Research & Analysis | Consultancy Services | Data Analytics | Commercial Advisory Services | Multi-Client Studies

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