Transition through gas world noc
- 1. Transition through Gas NOCs and Energy Security Chris Cook London 16th June 2015
- 2. Energy Security – Stakeholder Needs NOCs - stable transparent pricing & security of demand Consumers - stable transparent pricing & security of supply IOC's – security of supply & demand: stability & transparency....up to a point..... Traders & Banks – stability & transparency are Death
- 3. Energy Security: 1945 Bitter Lake
- 4. Energy Security: 1973 Oil Shock – price up 400%
- 5. Energy Security - US Approach US secretly agreed $12/bbl with OPEC via Shah of Iran Outcomes: 1/ Petrodollar – US agreed with Saudi Arabia to deposit dollar proceeds in US $ assets 2/ US got oil for T-Bills.....OPEC got blamed for high prices 3/ Alaska, North Sea, US Gulf oil viable & funded at $12bbl 4/ US/UK energy security achieved via stealth carbon tax
- 6. 2008 Oil Price Spike & Crash
- 7. Supply steady – consumption varied by <3%
- 9. 2009 Supercontango Supercontango indicative of market oversupply, but rapidly rising price simultaneously indicated market undersupply Question. Why did prices rise rapidly in an extremely oversupplied market? Answer. Financial buying was opaquely supporting the oil market price by funding oil inventory
- 10. High Prices – Cui Bono? Producers If a commodity producer can support prices then he will Using declining Brent Complex this is easier than ever Market support requires Capital: Sovereign reserves or Risk averse ('passive') investment funds Market support requires liquidity Central Bank Quantitative Easing (QE)
- 11. North Sea Benchmark – Declining Production
- 12. North Sea Benchmark – Brent Complex
- 13. Follow the Money – Oil Price & QE I forecast $45 to $55 oil post QE But end of QE took a long time!
- 14. Oil Price & QE Again
- 15. 2015 Oil Price Rebound Brent & WTI prices hit lows of c$45/barrel by mid January Within six weeks Brent rose 32% while US WTI rose 8% Not physical demand by refiners: due to financial demand Where did liquidity come from? European Central Bank announced € QE on 22nd January Oil price and German Bund yields now 92% correlated Q. Where did investment capital come from? A. Follow the Money
- 16. Follow the Money – Saudi FX Reserves
- 18. “History does not repeat itself, but it does rhyme” Support of oil prices above $80/bbl for 5 years & petrodollar funding for bank loans enabled shale oil development Demand for oil products also fell due to efficiency gains particularly transport Renewable energy substituted for carbon fuels
- 19. Stone Age did not end because of a shortage of stones ….and the Oil Age will not end because of a shortage of oil US is swing producer & has security of oil supply at a price Oil market price is now effectively capped at $60 to $70/barrel So NOCs must now focus on cutting costs and the cheapest oil of all.....Negabarrels of oil savings
- 20. Bitter Lake to Bitter End? US energy security through shale oil is the most significant market event since 1945 Saudis appear to have been ejected from the US tent US is now pivoting to the last remaining significant reserves of undeveloped low cost oil in Iran & Iraq
- 21. End of the Petrodollar? There are signs that Saudis may have begun switching reserves to € assets & access to free € QE liquidity Petro Euro has long been an ambition of the EU & ECB Have Saudis switched from Petrodollar to Petro Euro?
- 22. Is Oil Market Capped at $60 to $70 per barrel? IOC 'Oil as a Commodity' transaction model squeezed Irresistible Force of rising E & P costs squeezes NOCs against Immovable Object of $60/$70 bbl oil price cap IOC Options Consolidate – defers the inevitable Switch to natural gas eg Shell Compete for last remaining low cost oil in Iran/Iraq Or - transform to Capital Lite 'Energy as a Service' model
- 23. Energy Security: 1973 Oil Shock – Price up 400%
- 24. Energy Security - Danish Approach Mandatory strategic operating principle for energy policy Least carbon fuel cost - for a given output of heat, electricity or power, minimise carbon fuel input Danes funded investment via high local taxation Outcomes Danish GDP has doubled, while energy use has been flat & carbon fuel use has declined Decentralised production & consumption; local heat networks & renewables – a Natural Grid
- 25. Problems - NOCs and Energy as a Commodity Existing legacy infrastructure fragmented, fragile & often inefficient (often <20% output efficiency) Huge carbon fuel waste between NOCs & consumers NOCs compete for sales of energy-as-commodity
- 26. More NOC Problems Intractable conflict between NOC resource sovereignty & IOC need for reserves on balance sheet Adversarial relationships with traders & banks NOCs & Consumers lose from opacity & volatility Volatility & bank capital shortage makes conventional financing & funding increasingly difficult
- 27. Energy as a Service Least Carbon Fuel Cost Principle - minimise carbon fuel system input for given electricity, heat or power output Market Structure & Instruments Energy Swaps – production sharing supply agreements – Capital Partnership Energy Credits – risk sharing of energy prepay credit instruments – Guarantee Society
- 28. Energy Swaps NOC supplies flow of oil or natural gas to consumers NOC agrees proportional shares of product or service output with service providers & consumers Balance of output is available to investors Investment may be conventional (eg $ bank loans) or unconventional (energy loans of prepay energy credits)
- 29. Oil/Product Swap RefineryRefinery Investors Consumers Service Providers %Prepay Oil NOC Products
- 30. Gas/Power Swap Generator (eg CCGT) Generator (eg CCGT) Investors Consumers Service Providers %Prepay Gas NOC Power as Service
- 31. Prepay Energy Credit What it is - promise issued by NOC in exchange for value received - returnable in payment for NOC supply What it is not - Debt - no right to demand money from NOC - Derivative – no right to demand delivery by NOC - Equity – no ownership right in respect of NOC asset Requires trust between NOC and Acceptor/Investor
- 32. Energy Loans – prepay energy credit funding Energy Loan Proposition - consumers pay in advance & lock in price - NOCs obtain interest free credit & lock in price - investors obtain energy return - investors may pay for consumption or sell to consumers Requirements - physical energy market & pricing benchmark - accounting system - framework of trust – Guarantee Society agreement
- 33. Energy-as-Service – Value Propositions NOCs & Consumers - share cost of supply infrastructure Service Providers - receive agreed %age of revenues - balance of revenues available to investors Investors - buy prepay credits & so make energy loans Consumers – pay for energy delivered using either conventional payment or energy prepay credits
- 34. Example - Caspian Energy Grid – KAT Core Turkmen Gas/ Power Hub
- 35. Tried & tested - Marchwood (UK) – 58% efficient CCGT
- 36. Tried & Tested - BritNed and NorNed HVDC Links BritNed 260km - 600MW NorNed 580km - 600MW
- 37. KAT Core - Outcomes Turkmen NOC exports power to Caspian littoral states Energy savings fund development of infrastructure Turkmen NOC conserves gas which is then available for generation or export Azerbaijan & Kazakhstan NOCs release production for export through reduced local carbon fuel requirement Caspian energy market & pricing benchmark Minimise funding costs: energy loans bear no compound interest Increased resilience - Grid also capable of carrying regional renewable energy power & load balancing
- 38. Energy Security - Transition through Gas Security of demand for NOCs Supply of oil & gas as a service Collaboration, stability & transparency adopted as market standard Win/Win behaviour Shared services, costs & risks via market framework agreement
- 39. Energy Security - Transition through Gas Optimal low carbon financing & funding via Energy Loan direct investment in carbon fuel savings Least carbon fuel cost principle minimises CO2 emissions: higher the carbon fuel price, the more $ profit in saving it Instead of oil priced in $ (or €) and gas indexed against oil, dollars, euros & oil are priced in energy value of gas
- 40. Energy Security - Transition through Gas Optimal low carbon financing & funding via Energy Loan direct investment in carbon fuel savings Least carbon fuel cost principle minimises CO2 emissions: higher the carbon fuel price, the more $ profit in saving it Instead of oil priced in $ (or €) and gas indexed against oil, dollars, euros & oil are priced in energy value of gas
- 41. Beyond OPEC OPEC has been dead and on life support for years as a puppet of the Saudis Global oil market pricing through Brent Complex is completely corrupt with no replacement in sight Dollar and euro banking systems essentially bankrupt New multilateral global oil & gas institutions are needed to bring together producers & consumers directly Non-OPEC NOCs well placed to share costs of creation of a new oil & gas market trading & funding platform