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Olje og gass - de viktigste energibærerne det moderne samfunnet Sveriges Landtbruksuniversitet Uppsala Torsdag 8. mai 2008 Ole Gunnar Austvik Høgskolen i LIllehammer www.oga.no Tentativt program Global energi – oljemarkedet Prisdannelsen på olje Det europeiske gassmarkedet

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slide1

Olje og gass - de viktigste energibærerne det moderne samfunnet

Sveriges Landtbruksuniversitet

Uppsala

Torsdag 8. mai 2008

Ole Gunnar Austvik

Høgskolen i LIllehammer

www.oga.no

tentativt program
Tentativt program
  • Global energi – oljemarkedet
  • Prisdannelsen på olje
  • Det europeiske gassmarkedet
  • Diskusjon, spørsmål, meninger, innlegg….
slide3

Global Energy Use Since 1860

Million tons of oil equivalent

gas

End of WW2

oil

coal

Source: www.manicore.com

world primary energy demand

18 000

16 000

14 000

Oil

12 000

10 000

Mtoe

8 000

Gas

6 000

Coal

4 000

2 000

Other renewables

Nuclear

Hydro

0

1970

1980

1990

2000

2010

2020

2030

1971

World Primary Energy Demand

Oil, gas and coal together account for 83% of the growth in energy

demand between now and 2030 in the Reference Scenario

Source: IEA

slide6

Energy Consumption per Capita

USA and China 1975-2015

co 2 emissions and economic development
CO2- emissions and economic development

End of

WW2

Source: www.answers.com

world energy related co 2 emissions

40 000

35 000

30 000

25 000

2

20 000

Mt of CO

15 000

10 000

5 000

0

1971

1980

1990

2000

2010

2020

2030

Coal

Oil

Gas

World Energy-Related CO2 Emissions

Kyoto

target

Global emissions grow more than 50% between 2003 and 2030, but fuel shares hardly change

Source: IEA

the largest oil producers and exporters in 2006 i ncl ngl condensate
The largest oil producers and exporters in 2006 Incl. NGL/condensate)

Exports

Production

Norway has a R/P-ratio < 10 år,

Saudi-Arabia > 100 år

Source: Petroleum Economics Ltd.

oil development costs
Oil Development Costs

“Petrolist”

States

MENA oil reserves are among the cheapest to find, develop & extract in the world, with total production costs ranging from $3 to $5 per barrel

Source: IEA

slide15

Oil in The Middle East

|

Hormuz 18 mb/d

us oil imports by source
US Oil Imports by Source

Million Barrels per Day

Source: Energy Information Administration, Annual Energy Outlook

slide18

Oil Prize Developments 1861-2006

1978-80:

2d Oil Shock

”OPEC II”

1985/86:

Oil Price Callapse

2004:

3d Oil Shock

1973/74:

1st Oil Shock

”OPEC I”

slide19
Whatever the main motive for the invasion of Iraq, the conflict has major oil political and geoeconomic consequences.
slide20

Energy Information Agency (U.S. Department of Energy):

Persian/Arabian Gulf production must

double in 20 years in order to meet demand growth…..

(… unless substantial new oil is found other places or major technological breakthroughs take place.)

…This (administrative) claim has prevailed since the mid-1990s…

.. long before G.W. Bush took office …

not only private economic interests the oil price as a global common good
.. Not only private economic interests..The Oil Price as a Global Common Good
  • The oil price is the same for all (corrected for qualities and transportation costs).
  • In addition to commercial economic interests the oil price involves substantial national interests, as well.
  • At present consumption and production levels a price rise of 10 $/bbl represents an annual increase in expenditures and revenues in the range of (assuming constant exchange rates…):
    • All consuming countries - 110 billion $
    • OECD - 80 “
    • EU - 30 “
    • USA - 30 “
    • All producing countries + 110 “
    • Saudi Arabia + 30 “
    • Norway + 10 “
    • OPEC + 80 “
  • There are huge economic interests at stake!
possible outcomes of the conflict as seen from the bush administration
Possible outcomes of the conflict- as seen from the Bush Administration...
  • ”Best case”
    • A new west-oriented regime, no reactions in the Arab world, privatization of the oil industry, increased oil production, spill-over effects to other PG countries, ’democratization’ etc.
    • The oil prices stabilizes around 15-20 $/bbl. Perhaps less for a while.
    • Negative side-effect: Increased dependence on PG oil. Permanent military presence.
  • ”Worst case”
    • Long lasting conflict that spreads throughout the area. New fundamentalist regimes in several countries, coup in Saudi-Arabia, the Strait of Hormuz becomes an area of war, considerable destruction of oil installations, terror attacks around the world.
    • Oil prices unstable around 35-60 $/bbl, hikes up to 50-90 $/bbl.
    • Long term: SPRs becomes too small -> even higher prices.
    • Positive side-effect: Increased energy diversification, more oil from other places, increased conservation. Dependence on PG oil decreases in relative terms.
slide23

PETRO - NORGE

Net government cash flow from petroleum activities 1971- 2006

High oil prices

”Worst” case

”Best” case

slide25

Models of the Oil Market

  • Economic Theory of Exhaustible Resources
    • (”Hotelling” Rule)
  • Property Rights Theory
  • Target Revenue Theory
  • Price Capacity Analysis
    • “Peak Oil”
  • Political Models
  • Scenario Techniques
  • … others…
oil price prognoses from the 1980s
Oil Price Prognoses From the 1980s

1998 - $/bbl

Average price prognoses

(month/year)

?

Actual prices

Source: Manne & Schrattenholzer 1987

slide28

Price path with a backstop technology

price

Price of

backstop

technology

p0

Scarcity rent

b

time

T*

slide30

Privatization:

Nationalization of international oil companies was a necessary condition to create a strong OPEC

National vs. international oil companies within OPEC 1960-1981

Property Rights...

slide31

Property Rights Model

Price

Supply - 2

Supply - 1

P2

A lower discount rate implies a longer time horizon for the exploitation of the resource. Less will be produced now to the benefit of more production tomorrow

P1

Demand

Q2

Q1

Quantity

slide33

Target Revenue Theory:

Lower prices give higher production

Price

Negative supply elasticity..

Supply curve

Quantity

us energy department low oil prices gives higher opec production
US Energy Department:Low oil prices gives higher OPEC production..

Million Barrels per Day

Source: Energy Information Administration, Annual Energy Outlook

Target Revenue...

slide39

Price - Capacity Analysis

Capacity

Price

Price Reaction curve

Quantity

peak oil now
Peak Oil (Now)?

Or it will pass …?

-Thomas Malthus 1798..

-”Limits to Growth” 1970s..

slide42

Running Out of Cheap Oil

Mr. King Hubbert, Shell Oil 1956

Source: Energy Bulletin 2.4.2006

slide43

When Will Oil Peak Globally?

Int’l disagreement: .. From already peaked to peak in 2035..

..Of the 65 largest oil producing countries in the world, up to 54 have past their peak of production

..US in 1970/71, North Sea in 2001

Source: www.peakoil.ie

12 eia scenarios for conventional oil
12 EIA Scenarios for Conventional Oil

The peak depends heavily on economic growth

Source: Energy Information Administration, US Department of Energy 2004

slide47

The Oil Prize and World Geopolitics

1980: Iraq-Iran

War

1978: Iranian

Revolution

1974:

The IEA

Established

1967:

6 Day War

1990-91:

Kuwait War

1973: Yom

Kippur War

1960: OPEC

Foundation

2003:

Iraq War

slide48

Effect of a supply distruption

The role of the IEA

Price

S1

S2

S0

1

2

3

P1

2

P2

3

P3

1

P0

D0

D1

Quantity

slide51
Primary energy demand and “negajoules” for EU-25 1971-2005“Negajoules”: Energy savings calculated on the basis of 1971 energy intensity

Source: Action plan for energy efficiency: Realizing the potential, COM (2006)545 final 19.10.2006

slide52

EU (25) Gas Demand Projections to 2030

75 % of incremental demand is for power

+70 %

Source: WEO 2004 (IEA)

slide53

Gas Resources for the European Gas Market

Reserve size and transport distances to the EU

Cccc

hh

Barents Sea

Russia

Caribbean

Pipeline to nearest

European market

LNG to nearest European

regasification terminal

Source: Statoil

slide54

Rapid Growth of the European Natural Gas Grid

1970:

2007:

  • Relative Price Stability and Long-Term Contracts
slide57

European Gas from Producer to Consumer

EXPORTERS/

PRODUCING COMPANIES

IMPORTERS/

CUSTOMERS

Consumers

Distributing nework

?

Norway

Transmission network

in producing countries

Distributing network

Russia

Distributing network

A

B

Transmission network

in consuming countries

Algeria

Gas Power plants

Holland

Storage

Storage

Storage

Large industrial users

Others

End users

Brokers and marketers

Natural

monopolies

Competition

Natural monopolies

Competition

Unbundling

Regulation

Unbundling

Regulation

slide58

Example: Norwegian Gas to Europe

- No Perfect Liberalization So Far

GasLed:

Third Party Access,

Regulated Tariffs

Germany:

Third Party Access,

Negotiated Terms

Source: Norwegian Ministry of Petroleum 2000

slide59

Decreasing average costs in a natural gas pipeline

”Tariff” (s = pt - pp)

Average revenue (AR)

Demand curve

A: monopoly

A

Smon

G

Average cost (AC)

B: regulation

E

F

B

Sac

C: state company / subsidization

J

D

H

Smc

X

L

C

I

Marginal cost (MC)

qmon

qac

qmc

quantity

Marginal revenue (MR)

an optimal portfolio of competition tariff structure and unbundling is difficult to find
An optimal portfolio of competition, tariff structure and unbundling is difficult to find.
  • What a reasonable tariff?

Tariff should decrease with increased demand…

  • How to distribute a possible excess demand beyond pipeline capacity?

A pro rate system - prioritize customers . Firms vs interruptible service etc.

  • How to price new transport capacity?

“Roll-in” costs of the new pipeline in the tariffs for all transportation or individual tariffs?

  • How large should capacity be.?

Social vs private optimization.

  • What are the alternatives to regulation?.

Competition, alternative pipelines with new owners.

  • What about property rights?

Private vs government ownership, or that distributors and/or producers owns the transmission companies with a share which is so small that they do not want their profit to accumulate in the transmission sector. The GasLed system on the NCS take account of this aspect.

  • Market conditions change over time.

A politically controlled liberalization process must contain a dynamics in order to change optimally over time.

-> EASY TO ARGUE AGAINST AND FOR MOST ARRANGEMENTS!

Principle – agent problem

slide61

Old Gas Contracts:

Gas Prices Set in Relation To and Lower

Than Substitute Prices

$/bbl

$/mmbtu

60

10

(ii)

END USER PRICES ON FUEL OILS (substitute price)

PRICES ON

NATURAL GAS

40

Taxes

up

Taxes

Gas taxes

5

LDCs

20

.

Costs

Oil prices

vary

Transmission

Crude oil price

Producer

Here pi = pc, pd, pt, pp (prices at different levels in the gas chain)

The factor j expresses which weight energy carrier no. j is given in the price,

while pej is the price on alternative energy carrier no. j (j=1…n).

The function fi expresses the link between the price of the alternatives and gas throughout the gas chain.

slide62

Oil Prices to Producers and Consumers 1981-1998

OECD-Europe

$/bbl (1998-value)

100,0

80,0

60,0

Oil product taxes

40,0

Refining,

transportation,

marketing etc

20,0

Crude oil price

0,0

1981

1983

1985

1987

1989

1991

1993

1995

1997

Source: Austvik 1996 with updated data until 1998

effects of market liberalization 1
Effects of Market Liberalization - 1
  • Contracts
    • More short term
    • Fewer long term - long term shorter than before
    • Initial pressure for renegotiation of old TOP contracts
slide64

New Gas Contracts:

Increased Price Volatility Due to Liberalization.

Oversupply Gives Lower Prices in the Short Run

Lack of Gas Gives Higher Prices in the Long Run

NATURAL GAS PRICES

Oil product price

$/bbl

$/mmbtu

”equilibrium prices”

Short and medium term

END USER PRICES ON FUEL OILS

Weak market

Tight market

Gas taxes

LDC

Taxes

?

Gas taxes

LDC

Transmission

Gas taxes

.

LDC

Producer

Costs

Transmission

?

Crude oil price

Producer

Transmission

Producer

slide65
Historical U.S. Annual Average Natural Gas Wellhead Prices 1978-2005Source: California 2006, Appendix 1
slide66

U.S. Natural Gas Production Capacity

1985-2001

Source: ”Natural Gas Productive Capacity for the Lower-48 States”, EIA 2001

slide67

Average Gas Prices to US Customers 1967-2000

Source: Historical Natural Gas Annual, EIA 2002

effects of market liberalization 2
Effects of Market Liberalization - 2
  • -Prices
    • More volatile
    • Possibly lower in the short and medium term - higher in the long run.
    • Move from taxes on labor to taxes on energy
slide69

Taxes as per cent of end user prices

on natural gas to European households

-The EU (2003) Introduced Higher Taxes on Gas Usage Across the Community...

Source: IEA Energy Prices and Taxes, Quarterly

slide70

Price Effects of an Increase in

Excise Taxes on Gas Consumption

Supply Inelastic With respect to Price in the Short and Medium Term?

Gas price

$/mmbtu

$/bbl

NATURAL GAS PRICES

END USER PRICES ON FUEL OILS

”Equilibrium price”

With gas taxes increased

Short term

Medium and long term

Taxes

Gas taxes

Gas taxes

Gas taxes

LDC

LDC

LDC

.

Costs

Transmission

Transmission

Crude oil price

Producer

Transmission

Producer

Producer

slide71

Demand more elastic in the long than in the short run

Price

Long term effect

Short term effect

P2

P1

Demand

long run

Demand

short run

∆Q

Quantity

Q2

Q1

Q0

slide72

Price Effects of Liberalization and

Increased Excise Taxes on Natural Gas

NATURAL GAS PRICES

Gas price

$/mmbtu

$/bbl

Without gas taxes

With gas taxes

Before liberalization

After

liberalization

Short term

More gas taxes

Medium and long term

END USER PRICES ON FUEL OILS

Short term

Medium and long term

+ Volatility for

Consumers and

Producers

Taxes

Gas taxes

LDC

LDC

Gas taxes

Gas taxes

LDC.

LDC

LDC.

Transmission

Transmission

LDC

.

Transmission

Transmission

Production

Transmission.

Costs

Production

Production

Production

Transmission.

Crude oil price

Production

Production

effects of market liberalization 3
Effects of Market Liberalization - 3
  • Security-of-Supply
    • Improved in the short and medium term because customers can buy gas from more sellers, alternative routes for transportation, storage capacity.
    • Detoriated in the long term because new capacity in huge and remote fields will not be realized.
    • Liberalization will be easier as the market matures
what is security of supply
What is Security-of-Supply?
  • Interdependent market actors
    • Reciprocal but not necessarily symmetrical
      • Can change over time
    • Security-of-Supply vs. Security-of-Demand
  • Risks:
    • Short term: Disruptions to existing supplies
    • Long term: Not enough supplies provided at “reasonable” prices.
  • Physical vs economic (i.e. price change) dependency
    • Ability to domestic adoption
slide75

Policy depends on schools of thought:

Is oil and gas economically a scarce

or an abundant resource?

Scarce

(peak Oil)

?

abundant

2015

2030

slide76

Prices may fall in the long run.

price

Scenario: The case of continuos upgrading of reserves, more elastic demand,

decline in economic growth and/or introduction of more efficient technology

time

alternative strategies to improve security of supply for the consuming countries
Alternative strategies to improve security-of-supply for the consuming countries
  • More and safe non-renewables (oil, gas, coal)
  • More renewables
  • Improved energy efficiency
  • Energy savings

All can be influenced by both economic and political means and by market mechanisms.

Optimization can be based on short or long-term considerations

PRESENT: STRONG EMHPASIS ON MORE OIL AND GAS;

FOR THE EU: MORE NATURAL GAS.

slide79

Two Possible Price Paths for Natural Gas as an Exhaustible Resource for the European Market.

Illustrated long run marginal costs (LRMC) for large and smaller fields (assumed constant for each).

price

Increased supply now, depletion of smaller fields,

reduced investment in large and remote fields

Less supply from smaller fields,

investment in large and remote fields

LRMC for large and remote fields

LRMC for smaller fields

SRMC

time

T1

T2

or

slide80

Gas Supply Cost Curve to EU30 for 2002 (additional volumes)

2006 Increased uncertainty

& 2000

Import price 1990

?

Import price 1999

OME, October 2001

russian oil and gas for europe
Russian oil and gas for Europe

Few transit routes to the West

50%

80%

slide82

Nordstream – North European Gas Pipeline

.. An alternative corridor..

slide83
SKANLED
  • navn på planlagt gasstransport-system (se også Grenpipe), som skal sikre gassleveranser til Øst-Norge, Vest-Sverige og Danmark. 13 selskaper har signert avtaler om bruk og eierskap, mens det polske olje- og gasselskapet PGNiGs vurderer å delta i prosjektet. PGNiG ønsker å føre gass fra norsk sokkel gjennom Skanled til Danmark, for deretter å bygge en egen rørledning fra Danmark til Polen. PGNiG kjøpte nylig en 15 prosent eierandel i Skarv-lisensen i Norskehavet. Også det store tyske gasselskapet E.ON Ruhrgas vurderer å ta del i Skanled.• Skanled planlegger investeringsbeslutning i 2009 og oppstart av gassleveranseri 2012. Anslått investering for Skanled er 7 milliarder kroner. Det planlegges også å bygge et separasjonsanlegg for etan i Grenland i tilknytning til transportsystemet. Separasjonsanlegget har et investeringsanslag på 2 milliarder kroner. Gassco har sammen med brukerne etablert en arbeidsgruppe for å lage en forretningsmodell og sikre finansiering av anlegget, etter anmodning fra Olje og energidepartementet.
  • Skanled eies av: Skagerak Energi (20 prosent), E.ON Ruhrgas (15), PgNiG (15), Energinett dk. (10), Hafslund (19), Østfold Energi (10), Gøteborg Energi (8), Agder Energi (5), Swedegas (5) og Preem Petroleum (2 prosent). 
gazprom
Gazprom
  • OJSC Gazprom, (Russian: Газпром; long version: Открытое Aкционерное Oбщество Газпром; is the largest Russian company.
  • Gazprom is the biggest extractor of natural gas in the world.
    • With sales of US$31 billion in 2004, it accounts for about 93 percent of Russian natural gas production;
    • with reserves of 28,800 km³, it controls 16 percent of the world's gas reserves (as of 2004, including the Shtokman field.)
    • After acquisition of the oil company Sibneft, Gazprom, with 119 billion barrels (18,900,000,000 m³) of reserves, ranks behind only Saudi Arabia, with 263 billion barrels (41,800,000,000 m³), and Iran, with 133 billion barrels (21,100,000,000 m³), as the world's biggest owner of oil and oil equivalent in natural gas
  • Gazprom's Board of Directors as of December 2006:
    • Dmitry Medvedev (Chairman, First Deputy Prime Minister of the Russian Federation), coming President in Russia in May 2008.
    • Alexei Miller (Deputy Chairman)
    • Source: en.wikipedia.org
slide87

Gazprom increasingly stronger

  • at home and abroad…

Source: Gazprom

thank you for your attention
Thank you for your attention!

Ole Gunnar Austvik

www.oga.no

E-mail: oga@oga.no

Tel: +47- 612 88246 Mob: +47- 906 77251

slide92

Total Norwegian Petroleum Production

and Start-Up of Important Fields 1971-2030

Oil peak in 2004

macroeconomic indicators for the petroleum sector 1970 2005
Macroeconomic indicators for the petroleum sector 1970-2005

Sources: Statistics Norway, Ministry of Finance

net norwegian government cash flow from petroleum activities
Net Norwegian government cash flow from petroleum activities

High oil prices

(= ca. 70 Bill USD)

1996: First money into the Fund

Thank you China, Iraq war, and all others not mentioned

Source: MPE Fact Sheet 2007

slide95
The size of the Government Pension Fund – Global (The Petroleum Fund) at 31.12.2006, as share of GDP, and official forecast for 2010.

?

120%?

3000

(= Ca. 550 Bill USD)

  • Returns on investments increasingly more important!

(= Ca. 360 Bill USD)

2010

Sources: Fact Sheet MPE 2007, NBIM

slide99

Russian Total Liquids

Production and Consumption 1992-2008E

www.eia.doe.gov

slide102

?

Source: CIA

resource nationalism high prices gives more gvt involvement
“Resource nationalism”?:High prices gives more gvt involvement.

Competitive

industry regulated as any other economic activity

State – private industry

combinations

Nationalized

Industry

russia
Russia
  • Dominates the Eurasian High North
  • Needs transportation alternatives
  • Wants to control the petro-sector
    • Gazprom important instrument commercially as well as politically
    • But needs foreign technology
  • Integration into international economics and politics
    • WTO, EU, US, China
  • The world energy super-power
    • But: ”Locked in”
    • ”Imperial energy overstretch”?
slide106
US Geological Survey expects 25 % of world unproven reserves to be in the Artic Area..
slide108

The polar ise is reduced in depth and area

January 1990

January 1999

These images show decreasing thickness and extent of Arctic sea ice from January 1, 1990, and January 1, 1999, respectively. The images were created using data from the Defense Meteorological Satellite Program's Special Scanning Microwave Imager. (Courtesy NASA)

iraq the oil and opec
Iraq, the oil and OPEC
  • The U.S. (and all oil consuming nations) must do something to secure oil supplies from PG in the long term.
  • The alternative is high oil prices, energy diversification, development of alternative energies, conservation measures and in the medium term slower economic growth.
    • Change in way of life - but: Less dependence on PG oil.
  • On the other hand: An ‘unsuccesful’ post-Saddam regime may contribute to a destabilization of the region.
    • Unstable political situation, oil market and world economy.
  • Until the situation of more clear, prices must be expected to remain reasonably high and UNSTABLE.
    • Only if the conflicts spread dramatically prices should be expected higher than this, and only for a period of time (but economic slowdown or recession will follow).
  • It will be necessary for the US (and other countries) to be diplomatically and military present in the area for a long time (if they can)
    • Reactions in the Arab world in the long run?
slide111

Demand more elastic in the long than in bthe short run

Price

P2

P1

Demand

long run

Demand

short run

∆Q

Quantity

Q2

Q1

Q0

slide112

Oil Prices and

World Capacity Utilization

1975-200

•08/06

(as in 73/74!)

Price Change

50%

40%

30%

20%

10%

0%

-10%

-20%

-30%

-40%

-50%

50%

40%

30%

20%

10%

0%

-10%

-20%

-30%

-40%

-50%

00

•80

79

99

04

87

89

•02

90

•96

03

Gulf War

1990-91

•95

77

75

81•

92

94, 98

•78

93

84

76

85

82

01

83

91 •

88

97

PG Security Premium

86

40% 50% 60% 70% 80% 90% 100%

Capacity Utilization

Is the price reaction curve being moved back now?

slide114

Economic Limits to Oil Prices 2002-2012

Economic and Political Limits

to Oil Prices 2004-2014

- Politics Modify Prices

Strategic Petroleum

Reserves (SPR)

modify temporary price hikes?

Real 2002 prices

Long run substitute price /

Macroeconomic

sustainable price

?

2004

2007

2012

2000

Prices should over time be kept

at or above long run marginal cost

of production outside Persian Gulf

Long run marginal cost of

production (Persian Gulf)

slide115

Limits to Oil Pricing:

A Window for Oil Prices 2004-2014

More oil, other energies,

conservation, lower growth;

SPRs

Real 2002 prices

Upper Limit?

1990s

1990s

Lower Limit

Less oil; OPEC, Norway++

2004

2009

2014

Developed from Austvik 1992 (Energy Policy)

slide117

HI GUY’S!

….

I want more oil !

our questions now
Our questions now:
  • Is oil a scarce or an abundant resource in economic terms?
    • Implications for planning and investments
  • Long vs short term
  • Does policy matters?
future changes
Future changes?
  • The availability of substitutes
  • Efffiency gains
    • Production
    • Consumption
  • Incremental or radical change?f