Implications for Global Markets and Asia, the Middle East, Russia, and Europe
The CSIS Energy and National Security Program is pleased to host Fereidun Fesharaki, Chairman of FACTS Global Energy, to discuss the changing U.S. role in the energy landscape. The emergence of the U.S. as a growing oil and gas producer has surprised the energy world. The backdrop of changes in supply from other regions, persistent supply disruptions, growing demand for natural gas and oil, raises the question of the future role of the U.S. in global markets and the implications for other major producers and consumers. Mr. Fesharaki, a leading expert on global oil and gas markets, will discuss these dynamics as well as other oil and gas market developments. David Pumphrey, Senior Adviser in the CSIS Energy and National Security Program, will moderate.
Fereidun Fesharaki is chairman of FACTS Global Energy (FGE). FGE is a leading consulting group focusing on the oil and gas markets east of the Suez, in Europe, and in the United States, with offices in London, Singapore, Dubai, Hawaii, Beijing, Tokyo, Perth, New York, California, and Jakarta. Dr. Fesharaki’s work is recognized worldwide for pioneering oil and gas market analysis and studies of the Asia-Pacific and Middle East energy markets since the early 1980s. Dr. Fesharaki is also a Senior Associate of the CSIS Energy and National Security Program.
I’m sure that we’ll have people uh still strike straggling in uh with the the rain delays and everything i know it was a difficult time for many people on their commute i’m david pumphrey i’m a senior advisor in the energy and national security program here at csis
And it’s really a great honor to be able to moderate this discussion with dr ferdinand feshiraki faire dune and i have known each other for many years would you say ferdinand is that a good estimate so we probably don’t want to say many many years
And i feel like i have really learned so much about energy markets from fair dune his knowledge and and watching his practice and his work grow over time to the point where he really has a global reach she started focusing in in asia markets was a leading expert on
Asia markets when nobody else really seemed to care too much what was happening in china and other places and has now moved his vision to really encompass the the whole world and i think that’s um appropriate for the discussion that we’re having because he can really bring
To this discussion um that perspective i think he’s probably been how many times around the world in the last year several times i think talking to leaders in energy markets about their perceptions of what’s changing what’s happening where things are headed and that’s why we thought and
We we have fair doing maybe once a year and it’s always a question of what to select for the topic for him to talk about because there’s so many opportunities so he’s common he’s presented discussions on india and china to a packed house like this global energy oil markets global uh gas markets
Um iran and iran sanctions so there’s so many different things we could choose but we thought given the focus that’s now in this town on the question of what does it mean to see the u.s situation changing so rapidly in terms of our gas production and our oil production that to have him
Comment on that so this is a little different presentation than he might usually give which would be very heavy laden with statistics and numbers and projections this one’s i think is more his observations of what’s happening in the implications of those things it also ties in nicely with the work
That has been finished the project the sarah ladislaw had led on our geopolitics of the energy revolution that we just published recently the new energy and new geopolitics and i i think it will be interesting to see the extent to which fair dune who hasn’t actually had a chance to review our copy
Agrees with us in terms of the conclusions in that study it’s also i think a special moment for me because this is likely my last opportunity to host a session here at csis and i can’t think of a better session to have be my last one than one with uh fair
Dude so fair dude if you would like to take the floor thank you much uh very much dave i’m uh very happy to be here again and uh honestly the reason that i picked this time is because i know he’s retiring next week and i wasn’t sure whether
Frank is going to let me to the building after he’s gone so so sort of i thought this is an opportunity to come here and see dave in the last week in being at csis he has been retiring a few times so we don’t know whether there will be additional retirement parties
But i don’t think he can separate himself totally from the this business so from wherever he’s sitting he’ll be his hands and arms and legs will be all over the place uh as dave says the presentation today is about what is the meaning of the u.s as an energy
Superpower for the rest of the world for us as consultants this is the best thing since sliced bread i mean you know unbelievable not only is happening in the us but everything that the u.s can produce and export has to go to asia that’s wonderful and
None of it is going to go to europe a little bit maybe to latin america almost nothing to africa a little bit maybe to the middle east but mainly it’s going to go to europe to asia so it is a fortunate that we are the big fish in that pond and so
A lot of new business a lot of new concerns about what is possible and what is not possible so i want to start first by defining what i mean by a superpower i don’t have a screen in front of me sir or that one okay so some of these things are obvious some
Of them are not obvious to many people and i must say that you know i am associated here with csis as a sort of think tank but i am very very of the too much geopolitics in the washington area because a lot of people talk about these issues and don’t
Understand what happens actually in the oil and gas markets a lot of conclusions are faulty and i think all of us remember that as soon as the crimea crisis began everybody called himself why don’t we just set some cheap gas to uh sort of ukrainians and be done with it i
Mean simply people just don’t understand how these markets work and uh some of those folks coming i think it was a lithuanian prime minister begging president obama give me some gas as if he has gas and he can give it and as if it can be turned on and off i
Mean this is all sort of um so much misunderstanding about how the markets work so let me define you from point of view of us what is makes the u.s superpower one is that there is an opaque size increase in production uh between light crudes and we have to distinguish i’ll
Distinguish between light crude and condensates total additional production by next year would be probably equal to the total kuwaiti oil production so this is a substantial addition which has come to the united states u.s becoming the largest is already a largest producer of condensates in the
World many of you may not know what condensate is or not care but it is very important condensate the liquids which are extracted from gas some natural condenses are produced but the value of condensate is that it is very very light and it produces a lot of nafta as a
Feeder stock for petrochemicals particularly advanced petrochemicals so number one in the world has been guitar eight hundred thousand seven eight hundred thousand bars per day and number two would have been iran and then number three and four i think are in uh two producers in australia that’s a couple of hundred thousand
Barrels per day so what’s happening in the u.s the volumes that u.s puts together is probably going to be more than all of them combined okay and i will tell you the significance of this is very great because uh we hope that adam zuminski is going to differentiate between crude and condensate
And people say well it’s the same thing it’s not the same thing nobody cares about condensate the united states nobody wants it but the rest of the world wants an asians desperate for it and pay a huge premium 25.30 a barrel more than what the u.s producer is receiving
Today so i’ll come back to the condensate issue when i get to asia but it’s a very significant issue then among the top three lng producers by 2020 22 may become number one we don’t know uh they are suicide bombers in the us lng industry people who want to produce the gas but
They have no idea where it goes actually sort of so all the money that you remember people lost on the regas they’re going to lose it now on lng business but except multiplied by 10. since the regas terminal costs you a billion and liquefaction cost you 10 billion
So there is a lot of misreading i’m continuously amused by people who believe that there is a non-ending demand already in asia it’s difficult to sell lng all the people who have bought us lng have not been able to resell it our numbers show that 35 38 of
The firm’s sales and purchase contracts signed by the u.s the buyers many of them are middlemen if there’s international companies trading houses they don’t use it themselves they have to go resell it so i’ve got two sales in the business between 35 38 of it as of today still
Unsold so if they haven’t been able to sell it then how come a new player suddenly emerges who has never even traveled outside the u.s and be able to find those markets so a lot of misunderstanding but us will be the top three and may become number one we don’t know
This is happening by 2022 top lpg exporter in the world by end of next year this is real this is today that for decades saudis were the largest lpg exporter in the world four or five years ago the guitarist became number one after the big lng projects
Now abu dhabi is number two saudis are number three and iranians are number four lpg exporters by the end of next year the u.s would become number one this is significant very significant because lpg business doesn’t require a permit from anybody there’s a refined products based on the classification
Exports are permitted you don’t have to spend 10 billion dollars to build the liquefaction plant you have to build the terminal to be able to get it out of the country and we are just the first wave of beginning of the curve it’s remarkable the price of the us lpg based on mount
Bellevue hitting the asian market is 30 today less than the saudi price so already the prices are crashing it is not possible to have two prices at destination these prices have to converge and the way it will converge is that the saudi price have to come down to match the u.s price
This the future of it is already set in motion but it’s so new and it’s so amazing that suddenly from almost zero u.s becomes so big now the rage these days in asia particularly in china is pdh plants pth plants are people who use propane to produce properly
And i’ve heard so much about pdh i’ve decided to exchange my phd for pdh because it seems to be much more profitable these days these pdh plants are now many of them are based on what can be gotten from the us so there is a whole huge
New flow from u.s to china of lpg which hasn’t even started very dramatic then of course the us became last year the largest exporter of refined products this year still either number one or number two adam can tell but the u.s refiners are having such a great time i mean it is remarkable
Everybody in the world is suffering people with the best refineries in the world korea india they are barely making their costs and these folks in the us are enjoying it because of the crude discount now yes they are also smart guys they run the refinery as well
And independents in the us are pretty uh sort of savvy producers but it is the crude advantage which makes the difference and we have to anticipate how long is the crude advantage we’ll continue that depends on whether we can export crude or we cannot but it can disappear very quickly and
Fortune can disappear and become a major challenge also the poor performance of the latin american countries in building refineries it’s a boost it can export gasoline to latin america and diesel to europe and still escape all the problems that other people have in the refining business but this is what makes us the
Largest exporter of refined products today in the world and it is something which can continue for a while longer although the demand in the u.s is either flat or slightly declining now the u.s will also emerge as a major chemical exporter by 2020. this is ethane based petrochemicals
This is not based on after cracking based on ethane and that becomes a very very big number many people are coming basic ethylene petrochemicals to be done in the u.s but the sophisticated petrochemicals still require an after as feedstock and of course the u.s is a major call exporter has always been
And the chances of coal is back in fashion you know by the way we met we have a golden age of coal coming back and we have everybody including the japanese but also all over the world turning back to coal coal you can clean it up if you don’t
Have to worry too much about the carbon certainly in terms of pollutants you can make it as good as anything else so the u.s still has a bigger role to play on coal but i’m not focusing on that i’m going to focus on the
Oil and gas issues let me go back to the condensate story in the u.s the refiners they will fight tooth and nail against exports of crude they will fight harder than the chemical producers fight fought against exports of natural gas that battle on natural gas export is already lost
Exports will happen and of course a lot of permits are being given but permits being given doesn’t mean the project will get done because in the u.s you have doa non-fta permit you have a work permit but you have major permit has to be given by adam smith
The economic doesn’t work you can’t export it many of these guys will not get adam smith permit because once they get the premise they think it’s a slam dunk it’s not a slam dunk still you have to find the customers and as i said the boys which have
Already bought and signed firm contracts cannot sell their value so why would i believe that somebody else would go and sell the value i have to keep that in mind but the condensate story is a very different story the refiners will fight not to allow it to be exported
Because this is their future without that there is going to be a very very tough environment so what is crude what is condensate uh in my definition what works and this is please i don’t take note 48 degree and above make it condensate nobody cares 48 degree 45 to 48 degree
Probably a third of the industry cares below 45 degree they all clear nobody wants anything to go out so since actually the u.s crude is not very important crude tight oil nobody wants it there’s plenty of crude like that available in the market plenty nigerians who have been pushed
Out of the u.s market they are selling the crew that they can’t get it to get the market so it is not that this crude is now people are dying to get it but people are dying to get condensate now you can export the condensate in two different ways you can export it
Directly as condensate or you can split it in the united states itself and create it gives you seventy percent after as a petrochemical feed and 30 percent of other fuels including diesel kerosene four months ago zero plans in the us for candace had splitter today four or five projects of firm
And five are in discussion of course everybody wants to export nafta to asia so they have to talk to me or they want to export the condensate to asia they have to talk to me again so this issue is very very high priority for us because in asia
You have many people at least five condensate splitters are under construction with no condensate attached to them and convenience said it’s not like crude you can just go and buy it from somebody else you have the guitars seven eight hundred thousand bars per day four hundred thousand 000 per day from
Iran and 2 300 000 from australia that’s it there are no big volumes of condensate available anywhere else and then you’re looking at one to two million buyers per day from the us depending again on how we put the definition so those guys who are building the splitters are becoming desperate in
Getting access to condensate what do they pay for the condensate the prices that the gatherings charge today are dubai plus two so actually it gets crude to buy crude price the iranian prices are similar maybe a couple of dollars less because they don’t have the marketing network as such but
It is almost crude price so the people who would sell it outside will get wti brand differential plus what the discount on the contents in the us is which is right now running about 12 to 15 a barrel to wti so it’s about 25 extra money
It’s a huge huge boost for the u.s producers now if you can’t export it then you have to split it in the u.s and if you have to split in the u.s it cost a couple of hundred million dollars with 150 200 million dollars each but most of the people who have the
Condensate have never even traveled outside the u.s they don’t know where to go in fact one would have anticipated that the best thing is to go and find the asians who want it bring them to u.s and make investments invest in the u.s is great because you
Invest you actually own the stuff and you get a free green card too on top of it so a lot of people can be persuaded to come but you have to know who to go to and they don’t know so that aspect has not happened yet
And so much of these guys are not they’re building in anticipation that they cannot export but if the exports take place then there may be no need for these splitters because certainly those who are building the splitters outside would much prefer to get it and exporting condensate which is a very light crude
Could be done in the usual same style shapes it’s no big big deal but once you make it to refine product then you have to export each of them in smaller ships and segregated tanks so it’d be very different story so the definition of the uss superpower
In our view are these numbers that i have put in front of you now there is a an issue to be discussed about the longevity of this and i think this is what dave mentioned in terms of the study that csis has done that i have yet to read
But longevity of some of these projects are in in question there would be a peak level certainly on the liquid side now is the peak 2018 20 22 25 we don’t know honestly nobody knows it’s not that people are hiding it because it’s just so new people don’t know recently some of the
Marcellus drilling yields incredible results people are finding so much more shale and the liquids from marcellus that nobody expected people continue to innovate coming up with new technologies and things may surprise us but at the moment prudent assumption is that to see that on the liquids there is a limit on the gas
Side i think plenty of gas will be made available but of course henry hub prices would have to go up we don’t know how far we think at least six but it could be seven or eight by middle of next decade who knows uh i am much more confident
About my crude oil forecast than about my henry hub forecast because crude oil for crude oil market has bosses the world cannot afford too high the world cannot afford too low but in henry hop it’s really a free market and free market is very hard to forecast
So we don’t know what’s going to happen however i think that the continuation of exports of lng at the extent to the that we’re looking at i think is sustainable for a long time lpg is sustainable also so only i would say my my question mark would be on
On the liquids where the liquids can be maintained at that level or not and again chemical part the ethane based petrochemicals also can continue as is so this is my definition now impact on europe actually uh more coal exports to europe and while i expect that a little bit of lng
Will go to europe on a so opportunistic basis if today you take the european prices of 7.50 bit under eight dollars for uh uh the hub prices in the uk and you want to get a us producer to export lg to us to to europe they will be losing money
So when people say well let’s produce it and sell it to europe no or people say well actually let’s lift the sanctions from iran so iranians take natural gas to europe that’s also nonsense because the price in europe is too low until the prices in europe justified the
Iranians are now buying gas at 9 10 a million b2 from turkmenistan they built a pipeline without sanctions and all that they bring it to europe to sell it for 750 makes no sense to anybody so the problem in europe is not dependence on the russia the
Problem is that their prices are too low is it weak declining economies that’s not supporting the lng projects or pipeline projects i think if the russians hadn’t built the pipeline they wouldn’t build it today but their money is sunk the money is gone so when the money is gone
For them this is still the natural market and uh all this speculation that i read i find it comical europe has to buy from russia that’s it there’s nothing we can do about it until 2030. for now we have to continue and uh i need to say that you know sort of i
Don’t think what the russians are asking from ukraine is unreasonable they have a rack price the rack price is 13 40 cents they ask everybody the same price that’s the chinese the same price it’s germans the same price and then they will discount it to you based on your alternative
Ukraine’s alternative is about 16 gas there’s no alternative so if you’re nice to me then i can give you a discount if you’re my enemy why should i give you a discount i wouldn’t give a discount and part of the discount was related to the use of the port facilities in
Crimea which by the way is mine now i don’t have to pay you anything so why would i end up giving you a discount so i think eventually they will come down and give a lower price but i don’t think we need to vilify them as this is
The the gouging the ukrainians they try to know if today we take any lng from say guitar to poland or to slovakia and send it to uh ukraine it’ll cost them three dollars more ability than the russians are asking for the rack price the contract that poland has with guitar
Is about 14.50 million btu at 100.00 so these are not the kinds of things that really sort of realistic realistically us gas has very limited application to europe one thing that the us is important for europe is exporting diesel and as long as the crude advantages in the u.s
Europe will be receiving diesel and by the way the russians are pouring in diesel into europe overwhelming the american exports because they’re next door and they want to be in the european market and all the companies are either directly state-owned or quote unquote indirectly owned by the powers-to-be in russia so this diesel
Importance in europe will also gradually disappear but it is there today impact on russia you know there is no real big impact on russia except that the lng projects which the russians are planning get impacted by the us allergy projects one of the things that have not been announced yet so
It will come out in the next few weeks the japanese government has decided that they don’t like the russians anymore and all of the lng projects that they have promoted for 10 to 15 years they don’t want to promote it anymore that’s the vladivostok lng project this is the sakhalin one
Exxonmobil rosneft and sodeco project and the train three of sakhalin two they have been working so hard to to promote them now suddenly the political bosses says americans tell us russia is bad so we don’t want to buy it anymore so we asked them so what is your mission now mission is alaska
That’s the mission so the japanese companies will be lined up and will receive jb funding and we’ll begin to look alaska we can all speculate whether the alaskan economics how it is i have my views but there will be definitely a big push by the japanese government
Into that this is sort of this is one of the casualties of uh ukrainian crisis which actually means a lot to russia but the big competition is on the lng side and of course so the usa competitor for uh supply of refined products to europe but i think is a losing battle
With the russians they are sitting there they have their own crude and the next door and they will continue to come in in a big way now what is the impact on the middle east of course you know so many of these geopolitical geniuses in washington they all
Uh talked about as soon as the u.s production of oil goes up the exports from the middle east will go down well i have news for you exports from the middle east are going up not down and it is related to a number of factors when israel and crudes are heavily
Pushed into asia there are term contracts of almost 500 thousand buyers per day for venezuelan crudes in india between reliance and sr there is there are three hundred thousand buyers per day going to china today but the new refinery jointly with pdv is being built
For 400 000 bars per day of 17 degree crude expensive refinery very difficult and of course venezuela has no money to pay so you have to discount the crude you discount the crude somewhere in the range of um 10 to 20 bucks i can’t tell you the exact number but in that range
To pay for it so now if wti brand differentials are wider than that number actually venezuelans would be better off but if we go to our expected structural wti brand differential of four five dollars then these will have cost venezuelan people huge amount of money but you can’t undo these things
If mr madora goes you can’t undo it you’ve signed contracts you’ve committed major investments are already in the works so i expect that this will continue and of course please remember that venezuelan oil production is not going up so if it’s not going up then whatever goes out
Has to go out from somebody’s imports and of course that somebody’s import is the natural market which the u.s is so then of course the the issue of middle east exports which have a medium-heavy crude not really heavy crude what the u.s wants u.s definer is need really
Ugly crude 20 21 degree api and lower that’s what they really need with this code is not heavy enough however is better than nothing and certainly if you have to blend it into the existing light streams to feed it to the cokers in the u.s that would be okay
50 of the cooking capacity of the world is in the united states and they need heavy grades so the need for the middle east crudes have gone up saudi production exports have gone up kuwaiti exports have gone up and that becomes heavily dependent in our view on what happens with
Additional imports from canada canadian exports to the us mix with the u.s condensate this is bitumen mixed with condensate which canadians have this beautiful terms that we invented the dill bits the dill bits come at 20 21 degree api range and they are ideal feed for the cokers
They take the liquids out and put the bitumen inside the coker so this is what god wanted to do canadian bitumen into the u.s now we don’t want to allow it to go through ex custom and excel it will come through different ways it cannot be stopped those who believe that by stopping
Keystone xl somehow they would stop the canadians from producing their oil sands they don’t understand decision making these decisions already in motion for the next 10 years additional volumes will come whether we want it or not so you have three things you can do with canadian
Oil sands either you bring it on to the u.s which is what god wanted this to happen or you take it to the west coast of british columbia to export it and at that stage the first nation indian tribes have committed not to allow one drop of
Oil to pass through to the west coast of canada then the other option is to go a couple of thousand miles to the east coast and export it which may happen it may happen if it cannot come to the u.s but it will come to the us
It cannot be stopped the economics are too overwhelming so i think in a year or two we just be asking for additional comments on the comments on the comments and the comments on on excel that means that we give up on it we don’t need it anymore
It will happen by itself i know transcanada will not be happy but it will reach the u.s with two or three years the later it reaches the dependence would be on the middle story that’s the way the mathematics work and when that volumes become coming starts coming in then the dependence on
The middle east slowly goes down but we have to remember the saudis have a million barrels per day of refining capacity in the us whenever they want to bring it in they can bring it in of course at the moment they know that by selling
It to asia they get a lot more money than they get from the us so why would they count this ten dollars a barrel more so they would have to be in the u.s only for political reasons but they have the tools to make it happen irrespective of the market demand but of
Course if they bring it in they have to compete with the domestic crews and the saudis are very savvy today the saudis are telling the partners and shell that you can just buy from anybody you don’t have to buy my crude but if you have to buy my crude then i’ll sell
It to you at the market price of what competing crews are but they have the ability to show the us that the us still needs them although in terms of the economic realities may not be necessary to bring that crude so our view is that impact the middle is crude
Limited for the next two or three years maybe four years post 2017-18 i think middle east crude needs in the u.s can go down slowly but radically over a period of time so canadian policy would be more important than domestic u.s policy as far as their dependence on middle east imports are concerned
There is the u.s provides strong competition to gather lng i mean you know sort of we all had assumed that qatar would be number one for many years to come now australia is going to be number one and the us may go ahead of australia so there is i think big competition and
Big impact on the markets of the u.s exports and the way the u.s prices it although people are realizing that the exports from the u.s are not creating liquidity in the market actually you have to sell them on a 20-year contract so it doesn’t really help liquidity but it increases the total volume
And the flexibility in the market potential supply of lng to uae and kuwait i think both uae and kuwait are looking at possibly importing from the united states and i think they would like it and i think u.s would like it maybe not all their needs but part of the portfolio
There is a real desire to make that happen of course the u.s has become a major competitor to the middle east uh refined product exports because if you look at europe u.s exports to europe are more important than the middle east exports to europe middle east looking more at east the u.s
Has been looking at the western markets and of course insofar as gas-based petrochemicals are concerned the u.s can offer a significant advantage particularly because most of the people in the middle east who want to do gas-based petrochemicals are running out of gas they don’t have it anymore the saud is
Using lpg and nafta because they’re running out of gas they need the gas for power and they’re already short so in a way the u.s on the basic petrochemicals would have an advantage over them so impacts on asia of course are great crude availability for asia more african
Crudes are being offered because the us doesn’t need african crude certainly more condensates will be offered and the condensate would make a big difference to the asian market large exports of nafta can happen from the u.s if we split the conditions what the asians need on after
Terribly short of nafta a million and a half barrels per day via forecast shortage of nafta that can come from either the contested splitters or the condorcet that the u.s sells that they would split over there so between the nafta and the lpg that you can sub can supply the u.s can
Feed the massive petrochemical growth in asia so china are exporting gasoline and diesel themselves but before they can export petrochemicals another 15 years left so you have a much longer life to feed that so lng lpg these are the fine products gasps petrochemicals these all have homes
In asia and many of them asians would be happy to pay for it so here i’ve tried to define for you what is the definition of the u.s power in the energy business what are the impacts on different areas and i’ve decided not to show you charts
Because if i have to show you charts i have to bill you uh so these are just the pointers to tease you of course nobody in washington ever pays anybody right everything is for free but they are significant possibilities uh in in asia for the u.s volume of products and the number one
Issue today is get the condensate definition right get it out of the crude and get it exported out of the u.s and if you’re not exporting it then let the industry know so they can build the splitters and do it on this side but being left in the sort of state of
Suspension i think is a not the right thing to do number two is of course the lpg exports continue there is nothing anybody can do it’s just the time it takes to build the export facilities the terminals but is already in motion and will make a global change
In the system and of course on the oil side get the canadian story right and that is i think has a huge impact now i have talked about the canadian oil sands i have not talked about canadian lng projects we have our friend from alberta here so he may
Throw some rocks at me canadian projects are a lot more expensive than the u.s projects and as of today zero sales lots of mouss and hoas but no firm contracts the only firm contracts from the new players are from the united states where people have committed to buy
And although they have to resell it but they have to pay for it and these are in motion it can no longer be stopped for canada the most optimistic project from my point of view is progress lng which is led by five state companies petronas is leading it it has synop
Japex it has indian oil corporation brunei government and very soon taiwanese government so you have government folks which will go into this and make it as a strategic decision if you have to make strategic decision then decision making becomes much easier the future in our view is a future with lower oil prices
And lower oil prices mean lower gas prices so anybody develops a project it will only work in our view if they can deliver to asia at no more than 12 to 13 million btu if you can’t do it then you should wait and i think a lot of projects which are being discussed
In east africa in canada in alaska will cost more than that nobody is going to pay you the governments don’t sell and buy is the private sector who sells and buy buys career gas buys it but they have to sell it to private companies they go outside them by themselves so we
Should not believe that because the government chinese government can take it inside the system but huge ramifications petrochina lost six billion dollars of money last year on natural gas buy high sell low you can’t do this too long no matter how big and powerful you are
Bottom line is that we have to pay attention to economics and if they don’t pay attention to economics things that people say they will do cannot succeed if economics goes against it the license from adam smith will not be given and that is much bigger than ferc
And the oe thank you very much well thank you fairden for as usual a great and provocative uh presentation um i didn’t realize that we could no longer get the data for free so when did that rule change you know this is very distressing american way that’s right yeah i’ve been
In the u.s government i was in the u.s government too long to expect to have to pay for things when the time came um so we’ve got time now for questions i’m sure there are going to be a number of questions and there are many areas that you touched on that i
Think provoke people’s interests one of the ones that i’d like to start with is you sort of teased us a little bit and saying that well it doesn’t make much difference in what your crude price forecast would be without saying what that forecast was except to say maybe it’s going to be a
Little lower a lot of debate going on now about the implications if we enter into a world where the u.s becomes an exporter and what how does that change the trajectory so i guess two questions um how do you see the pathway because we can’t pay for it you can’t you don’t
Have to tell us the price but the pathway would be okay and then how does that change if the u.s actually enters the market as a liquids exporter and a bigger degree actually i don’t think there would be a massive impact if you export u.s
Buck and type of crew to the market i’ll sell in the market at brent price if the volume and i don’t expect a flood to happen but the half million buyers per day one million buyers per day in the market might reduce the price a dollar i mean it’s not very dramatic
And the most of the exports which the market needs are the condensates and the condensates will have a marginal impact on the crude price so actually not dramatic our view about the crude price is that in the 80 to 90 dollar range depending on um if things settled with iran and libya
Could be this year if it doesn’t settle then it’d be two three years down the road but it is a conclusion which is hard to avoid that the direction is down and twenty thirty dollars they makes a big difference big difference uh for the conventional crude producers who still
Still spend no more than thirty dollars a barrel and most of them average cost probably still less than fifteen dollars a barrel they’re still printing money but for those who have to do in an unconventional the massive rise in unconventional costs would put many of them into jeopardy a
Lot of lng exporters would have to rethink the strategy those who want to build pipelines for gas would have to rethink strategy and god forbid renewable energy would have a very very tough time with an 80 oil environment but i think that we have a natural floor to the price of oil
That we’ve never had before but in 89 this is a natural floor because of the way it would uh impact ignorant conventionals so we can go down but twenty thirty dollars make a huge difference in decision making today okay so uh let’s open it up for questions just the the
Usual ground rules i get to say this one more time uh please identify yourself uh your association and then if you can um work it into a question uh but if you have a statement to make that’s okay but if you could end with a question
Mark that would be great so we’ll start right here microcontroller coming up i know we can hear you easily yes thank you very much good morning and thank you very much for the excellent presentation my name is paulo from shira editor of the shirak report i was wondering if you could make some
Uh considerations which are a little bit off the subject and that and that is uh the impact of this energy revolution on the american economy and uh in other words is uh the shale gas revolution and the and the non-conventional oil north dakota et cetera et cetera
A game changer as far as the u.s economic potential is concerned or it’s just one of the things that are happening that may or as you correctly explained you know affect global markets and in particular uh some have speculated that the u.s natural gas can be used as transportation fuel in particular for
Heavy trucks we’re talking about the possibility according to some estimates of displacing three million barrels of imports do you see that as a realistic scenario does that make any changes does that really affect u.s imports from opec does that change something dramatically in the u.s economy
Or not in conjunction also as you said with canadian crude keystone and all that thank you well although i have a phd in economics i leave that to people who do macroeconomic analysis and i’m sure adam siminski and his group do this all the time what does it mean in terms of the
Employment and new jobs i’ll leave that out in terms of the impact on transportation i think the impact is heavily exaggerated in my view because at the end of the day we have two things which determine the trans gas for transportation the price of henry hub and the price of oil
Now if we start exporting all from the united states then definitely the wti price comes much closer to the international market and if you have henry hop prices rise a couple of dollars then it’s not so attractive any straight that we’ve done on lng for transportation the united states is
So heavily dependent on a small movement of price as of today it’s very marginal very marginal i think if you talk to the people who are doing it i don’t think anybody is making much money but people have expectations people have rushed into it assuming that this is the new major savior
After one year of frenzy we see it isn’t now if the oil prices keep going up and the gas prices stay down it could be but it could change very quickly if you make a big investment in infrastructure and suddenly you’ll have this market’s turn which we believe will turn
We believe henry hub will go up and oil prices will go down now how much should go up and down we can debate but any directional movement would make the the energy for transportation trucks not so economic and if i’ve already made several billion dollars of investment in building infrastructure then i’m caught
With it so i think this uh three million barrels per day this kind of thing is i i think it’s just uh pie in the sky i would be very surprised if it becomes several hundred thousand miles per day in my view until we have a clear understanding of where the markets will
Settle and we don’t know where the price market will settle until lng exports begin the united states once they begin then we have a few i want to remind all of you that you know what happened in australia the price of natural gas in australia and east coast
When the cbm to lng project started was three dollars a million btu they haven’t started yet but it’s 8.50 today and we are forecasting 11 dollars by end of 2015 in australia okay now the australian market is not as deep as the us so we we can’t say the prices will quadruple here
But it is i think foolish to assume that everything leaves and everything remains the same i just have a tough time buying that concept but honestly nobody knows because even the people are clients which are drilling they don’t know themselves this is just the beginning of the game we will know
In two or three years what happens to decline rates what happened to liquids but to assume everything is the same while we probably export close to one fifth of one-sixth of the u.s total consumption of natural gas and everything you may just say i think it’s uh being extra optimistic okay
So paul and then sarah paul connor’s canadian embassy your thoughts on russian natural gas supply new pipelines getting to china or asia markets and what that does to lng in that basin next monday next wednesday mr putin will be in beijing and there is a 50-50 chance of signing right now
Three months ago the gap between the two prices was five dollars fifty per million btu as of two weeks ago the gap is only two dollars so uh and uh the way it’s worked is that the russians have come down i mean they have started with the iraq price exactly
What they asking ukraine and then they came down and the chinese went up a little bit the chinese wanted to pay what they paid turkmenistan they have to pay a bit more i think there is a serious chance of signing an agreement now the volumes are also in question
It could be three to four bcf a day so it could be 21 22 to 30 million tons of lng equivalent the russians are asking for 30-year contracts the chinese would like to have 15 to 20 years this all has to settle but at the moment it’s a purely political negotiation
Between mr putin and mr xi that’s really what’s left to do the people at gazprom and the people at cnpc have said their things their their peace and we have a clear understanding of what each of them want but the gap should be bridged by politicians now
Is it good for both sides well actually still exporting to europe and getting eight dollars is better for the russians because the pipeline is already there this is a huge pipeline it could cost 20 billion and it could take 10 to 15 years to build from the chinese side it’s not so good
For them because once they get it they committed to 30 years and we all know we’re all clever for five years nobody’s clever for 20 years or 30 years things change i have seen it change many times things that i was sure is going to continue reverse themselves
So to commit yourself when you are in stage of infancy with your shale gas development yourself and you don’t know where your economy will go this big volume is a very dangerous proposition but i would give it 50 50 and we’ll know by next thursday just to follow up it’d be interesting to
Know when you meet with cnpc and others is that the advice you give them as well i told them it’s a bad idea okay good thanks very much for doing i’m sarah ladislaw here with the energy program um okay so uh i’m gonna go out on a limb
And ask you a somewhat provocative question which is always dangerous with you because even straightforward questions you give provocative answers so i’m very interested in how this is gonna go so you’ve decided that god is on the side of markets and adam smith is giving out permits
Right but i’ve been at at least three or four conferences in the last probably two or three weeks that have somehow decided that the world is less about economics these days and more about geopolitics and you’ve just given a few examples of where politics is weighing in in geopolitics very specifically on some
Big energy decisions do you think that sort of a near-term trend that is associated with the the sort of events in sort of russia ukraine right now and sort of the the place we are there or do you actually see some long-term credibility to this idea that there’s
Some feature in the market these days that are driving people to make more politically or geopolitically driven energy decisions than maybe the past 10-year period that we’ve been in actually i don’t you know if the things are close then the geopolitics can push them together but there are some things which are really
Stupid things to do you know sort of you can’t make bad things into good things by politics i don’t know you remember how many times was uh george bush and vladimir putin shook hands about exports of oil to the united states from russia but it didn’t happen because it shouldn’t happen
And certainly in the u.s president obama or president bush is not buying any oil or not selling any gas you have to make the economics of it work with private sector no matter how much you can twist arms even in russia you can’t go totally against the trend so what the russians actually
Are going to be if they sign with with china the price would still be higher than the price they sell to europe but in europe the price the net pack is much higher because the pipe is already done so i think that it’s the dangerous proposition that we
Say that geopolitics can solve our problems it cannot solve it and washington is especially dangerous for this because you have all the congressmen they say well let’s make it happen when are we exporting let’s get them the let’s get teach the russians a lesson you know
It doesn’t work that way any lng project from the beginning to the end on average is 10 years you start to the end you can’t say well by that 2025 is mr putin still there he may be gaga by that time or somebody else may be sitting there
Who knows what happens to say that i do things the impact of these things are long dated in the future you know i joke sometimes people say that oil is like dating gas is like getting married in oil you can change your mind but in gas you cannot you get stuck
You need a mortgage a house children and the cost of separation is very very high so you have to know what you’re doing from the beginning and you have to leave room for price review of course in marriage you can’t do price review but uh you stay in a relationship you have to
Pay the price but by the same token production of oil can go into surplus because nobody who produces oil thinks about where to sell it i produce it and sell it later it’s a fundable commodity there is an anti-surplus mechanism on the gas side because you have to sign with the customer first
And even if you’re a big boy like some of the majors is still 70 percent commitment you want if you’re a small independent you want 95 commitment because otherwise the banks are not gonna lend you that’s the bottom line of it so you need the customers so you can’t have a surplus on
The gas but you can have a huge surplus on the oil side so oil and gas are not brother and sister they are distant cousins it’s very different behavior different markets and within this environment the geopolitics which requires long speculative sort of commitments is far less
Important than on the oil side that you can make a decision right away of course the advantage of gas is that by the time the project happens you’re dead or gone so nobody can be held responsible for what they’ve done but if you are governments you look for glory
If you’re in the private companies you look for cash so some of these projects give glory people will push for it and argue for it but two dollars they can be bridged but five dollars could not be bridged i think it’s interesting sort of as i look at the
Back on the time that i spent in government and have my colleagues here frank and guy and others who went through the 1980s watching the divorce action in the gas market in the u.s i think you can really corroborate what you’re saying is it’s very expensive to change that structure
Once it’s locked into place okay more questions cheers uh bill murray with uh energy intelligence group i guess two questions the first is if oil is like dating in natural gas like marriage what is condensate i thought you were gonna say what are the portfolio players no i’m not the condensate is uh
Basically it’s the beauty of it is that it’s traded as crude so the markets it’s selling as crude and there are three ways of pricing condensate internationally one way is the guitari model that essentially said it dubai based plus or minus one is the iranian model that you saved
On the price of nafta and what is the algeria model that you said on the price of netbacks but so far the highest prices have been obtained by making the crude based because what you can do with condensate is that you can split the condensate or you can
Blend it into crude put the refinery and produce more nafta so there are a very high variety of things you can do that today in the u.s a lot of these condensates are just blended into crude however they get heavily penalized because nafta is not what the u.s needs
And the u.s refinance they don’t want it and you can make the nafta into gasoline by putting more reformers but you already have enough testosterone in capacity generating capacity from the catalytic crackers so you don’t need any more of that so the incentives in the us to make a
Valuable product out of condensate is very limited and we’ve talked to all our clients in the us with refineries nobody cares if it’s exported as long as it is above a certain level of api which does not interfere with the world of glory that they have today what about the idea that
You were mentioning how different the different relationships and markets should take precedence over the geopolitics that seems to be raising its head but it isn’t part of the issue that the the u.s market change and the way it relates to energy is the biggest deal in 40 years in in the
Marketplace and as a result people are losing their footing one of the things that came out in the report that you’ll probably read shortly here from csis is that europe seems to be on the back foot under almost any situation concerning energy and that it seems to be and that that
Could have some really unintended consequences in terms of just politics in the future 20 years even between the u.s and europe what are your thoughts of that i’m not sure what your question is what what is your question i understand what you say but it seems the shale revolution is actually creating
Uh disconnect between the us and and and europe and in confusion as to what the real causes of of uh political displacement is i mean the russian ukraine issue is actually about uh european weakness but it’s being viewed as weakness on the obama administration and perhaps even viewed in asia as that way
In the middle east so there seems to be a discipline about europe as a european community but i mean it’s not a real country they’re different places and they have different things and different policies and there are the economies which are in long-term decline so you know it’s a different world
The disconnect between them and the us would have happened anyway without the shared revolution now that what this does is that it gives a boost to the us to go forward that nobody has the similar boost to give to europe so the gaps become wider but uh i’m not sure you know
If the what would have happened let’s say there was no shared revolution still the europeans will be in the same boat as they are the price of gas would be still the same the dependence would be still the same on russia whatever the u.s produces in energy has nothing to do with europe
Europe is not a market it’s not going to go to europe there’s no need for it so what’s the difference what’s the impact on europe are we talking about impact on the eu in europe or us the u.s would have a boost boost because of the cheaper fuels the
Refinery can say okay refineries in the u.s many of them would have shut down maybe because they don’t have the advantage you don’t have an advantage but the separation from u.s and europe in terms of gaps in terms of the energy gap i don’t see how it’s affected by the
Shared revolution the boost to the u.s economy yes of course is coming but the europeans would be exact exactly the same place as they were before if the u.s prices were nine dollars a million btu for natural gas it wouldn’t help the europeans the u.s advantage of the competing in the market
With europe would have been less but you know you us is in a competition with the powerhouses in asia europe is a mature economy to be polite some more questions or surely with this group nobody wants to reveal themselves i think i know where you live so sure it’s possible that i
May ask an additional question on the you mentioned in passing uh shale development in china um and of course we know at least in terms of estimates that there’s plenty of shale all over the world china being obviously the most important place with significant challenges for them technological and and geological to
Develop it there’s shale in argentina shale in south africa can you see or is this a too far down the road that is impossible to forecast a global shale gas revolution which really that then would really cause a real displacement for the traditional producers keeping in mind what you just said about
Glut in lng et cetera et cetera if indeed china becomes a major producer argentina et cetera does that change things or or is it we simply don’t know i think of course it could change but you know we’re talking 15 20 years the issue i think we have to keep in mind that
The perfect storm is in the u.s nothing could be more perfect than this there’s no perfect storm in canada canada still has to produce and transport it you have the swimming pool the henry hop swimming pool it’s a wonderful swimming pool you produce conventional gas you throw it in the pool
Cbm you throw it in the pool tight gas shell gas you throw it in the pool it’s all mixed up and it has a life it has its own life if you don’t export it it has a market it has a life export is an offshoot and if it becomes
Bigger it impacts the pool but the pool is there there is no perfect storm anywhere else in china you don’t have water you have deep for fracking you have to bring in water and you have to go much deeper than u.s plus it’s all in the farms the farmers are up in arms
In the areas of drilling all the chickens have stopped laying eggs do you know why tremors in some of the areas none of the animals mate the farmers are really upset but since you’re drilling here my livestock is in turmoil and in china yes of course is an important strong
Central economy but the provincial issues are very important so you can’t rush this kind of thing in the uk because everything which is found in the farms the issues of to do it in the same way that the us has done is impossible but can it be done over 10
15 20 year period i’m sure it can be done then of course most of the places is all dry it’s remarkable you have some areas in canada which are wet but most are dry the whole of the horn river is bone dry in australia it’s all dry argentina anything they found is dry
Poland is all dry now we don’t have enough history to know what else can be done but without the liquids i think and without this fantastic infrastructure in the u.s it’ll be very slow and we have to remember this is a manufacturing process in a manufacturing process it takes time to do things
And you have to build in in china you have to bring in huge pipelines of water and then take pipelines of gas away in the middle of nowhere so our forecast for china is that by 2030 10 to 15 percent of the total gas production not consumption production they come from sure
And later on it may become more of course as the infrastructure is built but it is at the moment just an american revolution fred lawrence independent petroleum association of america what are your thoughts about mexico in terms of expanding the north american energy footprint not not as much looking at lng but also
Pipelines and you know natural transportation and some of the opportunities that that will that will bring for for our energy market well you know i forget now is it four or six bcf a day of gas has been committed to mexico in the long term so maybe one day these pipelines will be
Reversed mexico will export gas to the u.s we’ve seen this kind of things happen so many times but today mexico pays as high a price for lng as the japanese do fifteen dollars a million btu they pay they don’t pay henry hop they pay fifteen dollars a million people argentina
Pays fifteen dollars a million bit to you brazil pays 15 billion btu but all these contracts are short-term contracts short-term contracts in lng is defined up to two years and medium terms two years to five years so you have short and medium-term contracts but everybody assumes i get my act together
And they probably won’t and will renew it but i don’t want to commit myself to the larger volumes so the developments in mexico and we are now at the stage one of the new reforms in mexico and it’s not done until it’s done you know this is still subject to many many pitfalls
So if it goes forward i think then they would take less from the u.s they take refined products from the us they take natural gas from the us these they don’t have to take so it has an impact in the u.s i don’t see them as exporting into the u.s but
They could be a much important global player i think they should rightly be as one of the earliest players in the global system a lot of opportunities have been lost so i don’t see that there would be a huge impact in the us but some of these markets will disappear
What we sell to mexico today would have to be used to be exported outside other places and i think there would be it would happen and seeing how things work at a very slow pace in mexico i wouldn’t worry about it for the next 10 15 years
So i had a couple more questions that i was going to put on the table in previous discussions you’ve talked about qatar’s strategy in terms of selling lng into the marketplace i think the point you’ve made is their gas is essentially free when you take account of the of the liquids or
Close to that so they have a country strategy not to overbuild do you see that changing because that can make a huge difference in terms of how the global lng market evolves if they decide to now compete with new players and expand capacity and then the other is
We’ve gone almost an hour and a half and not talked about china and china oil demand so what’s happening in that area and what do you foresee uh let’s say the next 10 years in terms of the growth of of oil dam i know i know those are small questions but
Well on the qatari side the qatari is the reason they’re not expanding because it’s not there you know sort of uh one day i was discussing with herman franson and he was saying but they have 900 tcf of gas they can do a lot so in the middle east
All the countries without exception the numbers of oil and gas reserve they just make it up themselves there is no no verification no audit we know there is a lot so we accept it but actually there is no certified numbers uh i remember the time when the iranians
Said that i have 100 tcf of glass and the guitarist said i have a hundred and then the guitar i said i have two hundred i have two hundred i have three hundred three hundred then i said five hundred i have they said i have five hundred two
And one day the former minister i think had a little bit more too much to drink and he said i have 900 tcf the iranians said that’s a bit too high i stick to my 500. that tells you something but the reality is that you have one big plate and two people
Are eating from it one is hungry and one is not hungry one has stomach ache cannot swallow and that’s the iranian side but when they eat they will eat very fast so the guitar policy of keeping these volumes unchanged is the prudent policy it’s the right policy that i want to
Have to i want to know that i can supply my 20 bcf a day production for 20 years so the idea of producing more lng reproducing more gas to be in the export market is not on and in fact what they do is what they do is that they
Essentially locked out and i hate to say this with fukushima crisis whatever they wanted to sell to the u.s they sold to japan and the immediate fear to taiwan and korea 18 million tons committed in that market which is about what they were hoping to sell to the us
So essentially they are they don’t have that much extra they have some volumes in the uk think they’d be happy to pull it out they are in four or five arbitrations with europeans at the moment by the way in you know europeans always go to arbitration after every deal
You know so it’s a normal process not one arbitration has happened in asia on the on the lng business not one they think it’s rude when you promise you have to do what you promise so the guitar is sooner or later they’re trying to move everything out of there
And take it to asia but they don’t want to do it in a way that disrupts the uk economy so they have they don’t have a lot of extra volume they have to worry about in terms of competing they’ve already scored and they sold long term so until mid 2030s they’ll be okay
Now on china you know sort of we get lower percentages but the absolute numbers are not that much lower so base is becoming bigger and bigger i think the demand growth in china about 200 300 000 bars per day on an absolute number which is the only
One we care about absolute number we don’t care about percentages impact on the market is based on absolute numbers this will continue for many more years but in 2015 for the first time we expect that the demand growth for oil in the persian gulf will be bigger than china
That china would be at three hundred thousand bars per day the persian gulf countries will go up 350. of course in persian gulf they waste a lot of energy sort of the more money you have in the middle east the more money you waste your handouts low prices the richer you
Become the more subsidies you give which is totally against the logic of need for subsidy you can be in uae the indians which come from india to uae this is a great situation i pay one-eighth of the price of gas in uae than i pay in india and one-sixth
Of the price of petroleum products and i pay in india with subsidized prices in this area so something is sort of wrong with the logic here the logic here is that if i have money i have to give it out if i have less money then i don’t have to give it out
The people people you know these arguments people make what are the budgets and what the people are going to do with the budget how the the budgets in these countries are not real budgets if you have less money you waste less money and if you have less money people
Don’t come to you and say give me a handout if you have more money they ask for the handle so these budgets have no meaning at some point it hurts but i would be surprised if the i think the price would have to be 40 50 i’m guessing before it really hurts
It doesn’t hurt less prices you know in 2010 the saudi price in the budget was fifty dollars so what happened between 2010 and 14 that has to be 95 you just spend more and you have less you spend less so in in the middle east the demand will go higher so they will
Become larger than china and i think the any kind of lower price of oil reducing subsidies that would make a big impact on the global oil demand global oil demand is driven by the middle east by those who produce the oil themselves rather than by the global market as much so
You have lower oil prices then you become more rational the best decisions in the middle east are taken at the time of lower oil prices so then there would be less demand and they may be able to export more so oil is becoming a luxury good yes exactly i think there’s a
One one let me see if there’s uh time for two more questions so one here is there another one anymore okay so one last question hi uh dave at ivanovich with argus media you talked about exports of condensate and then the issue of the splitters being built here in the
U.s but i was a little fuzzy in terms of how you come down on the issue with the demand for condensate in asia would it be more advantageous for the u.s to allow exports of condensate or would we be better off to go ahead and split the stuff and export the nafta
Which from a balance of trade perspective which would be more advantageous for the users would be much better to export condensate as is as is because you’re saying outside the reason you do the splitter is is because you can’t export it and let’s say i am
An investor and we have many of our clients who are seriously thinking if they’re like go spend the money you spend the money and then suddenly hundreds of exposure allowed to go out so there’s no need for your business anymore so you are at risk already now these are
Not big dollops of money okay 100 200 million for the candidate said splitter if you put some serious infrastructure in place you’re talking three 350. so it’s not like a 10 billion dollar liquefaction plants you know each of them could be 30 of these splitters
So but it is still a big issue that shall i make it or not but some of the producers themselves and i think that’s more important the producers themselves say look why don’t i build this splitter myself once they do it then if it’s allowed for export still they will split because
They’ve made the money they would look really bad if they built the splitter and then shut it down a year after so you can have some of these guys forcing themselves to be linked in to the splitters after they build it so if we can get the condenser the story sorted out
Earlier either later it would be better for everybody well fair dune i want to uh thank you very much for for coming it’s always great to have you here to provide a bit more of market realism in the uh building of a geostrategic think tank so thank you very much for those insights
And thank you for your long association with us thank you very much