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Crude Oil and Product Price Outlook: Rising to the Challenge Y.H.Lee Vice President, GS Caltex Corporation Northeast Asia Petroleum Forum September 21, 2005 IEEJ: October 2005
Crude Oil and Product Price Outlook:Rising to the Challenge
Y.H.Lee
Vice President, GS Caltex Corporation
Northeast Asia Petroleum Forum
September 21, 2005
IEEJ: October 2005
1
IEEJ:October 2005CONTENTS
1. Introduction2. Factors that drive market change3. Change in price structure4. Other factors influencing the oil industry5. Long term price forecast6. Strategy to cope with current challenges 7. Conclusion
2
IEEJ:October 2005
1. Introduction
WTI PRICE TREND FOR THE LAST 4 YEARS
10
15
20
25
30
35
40
45
50
55
60
65
70
75
1-Jan 1-Feb 1-Mar 1-Apr 1-May 1-Jun 1-Jul 1-Aug 1-Sep 1-Oct 1-Nov 1-Dec
2002 2003 2004 2005
◆Will the Market continue to stay strong and rise ?
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IEEJ:October 2005
2. Factors that drive the market changes
China & India’s Strong Economic Momentum
China & India’s Strong Economic Momentum
Bullish Deferred Price & Higher E&P Cost
Bullish Deferred Price & Higher E&P Cost
Increased Uncertainty regarding Secure Supplies
Increased Uncertainty regarding Secure Supplies
Depletion of Non-OPEC ProductionDepletion of Non-OPEC Production
Continued Flow of Investment MoneyContinued Flow of Investment Money
Tougher Environmental RegulationTougher Environmental Regulation
Significant Market Change
and High Volatility in
Price
◆ Multiple factors are moving the market changes with complexity.
4
IEEJ:October 2005◆We are in the peak period of global economic growth .
2004 2005(E) 2006(E)S. Korea 4.6 4.5 5.3China 9.5 8.8 8.5Japan 2.7 2.0 2.8US 4.2 3.4 3.1Euroland 1.7 1.1 1.7Russia 7.2 5.6 5.0Taiwan 5.7 4.5 5.0India 8.2 6.3 6.7Canada 2.9 2.7 2.9Brazil 4.9 3.9 4.1World 4.7 3.9 3.9
Source : Goldman Sachs Economics Research, Aug.17, 2005
Global Economic Growth Outlook World Economic Growth Trend
2. Factors that drive the market changes
5
IEEJ:October 2005
World Oil Supply Demand Balance
77.0
78.0
79.0
80.0
81.0
82.0
83.0
84.0
85.0
86.0
87.0
88.0
89.0
1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06
Supply (IEA) Demand (IEA) Supply Forecast (PIRA) Supply Forecast (DOE)
OPEC Basket Price (Jan~Aug ’05)
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
55.00
60.00
Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05
2. Factors that drive the market changes
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IEEJ:October 2005
High Volatility in PriceHigh Volatility in Price
Large Differential between Sweet and Sour Crude
Large Differential between Sweet and Sour Crude
Large Differential between Light and Heavy Product
Large Differential between Light and Heavy Product
Sulfur Premium Sulfur Premium
Need to Setup new Strategy to cope
with these Challenges
◆ On top of change in crude oil price in extensive scale, other significant changes
in the price structure is prevailing.
3. Changes in Price Structure
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IEEJ:October 2005
1.97
1.72
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
1.80
1.90
2.00
Jan'01 May'01 Sep'01 Jan'02 May'02 Sep'02 Jan'03 May'03 Sep'03 Jan'04 May'04 Sep'04 Jan'05 May'05 Sep'05
Volatility Year Avg.
Volatility of NYMEX WTI Price Sweet/Sour Crude Spread (Murban/AH)
9.40
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Jan'01 May'01 Sep'01 Jan'02 May'02 Sep'02 Jan'03 May'03 Sep'03 Jan'04 May'04 Sep'04 Jan'05 May'05 Sep'05
Murban-AH Year Avg.
3. Changes in Price Structure
◆ In addition to spike in price, volatility in crude price and price differential has increased.
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IEEJ:October 2005
28.04
0.00
5.00
10.00
15.00
20.00
25.00
30.00
Jan'01 May'01 Sep'01 Jan'02 May'02 Sep'02 Jan'03 May'03 Sep'03 Jan'04 May'04 Sep'04 Jan'05 May'05 Sep'05
Gasoil-HSFOYear Avg.
Gasoline - HSFO Price Spread Gasoline(0.05%) –Gasoil(0.5%)
4.04
4.53
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Jan'01 May'01 Sep'01 Jan'02 May'02 Sep'02 Jan'03 May'03 Sep'03 Jan'04 May'04 Sep'04 Jan'05 May'05 Sep'05
Gasoil(0.05%)-Gasoil(0.5%)Year Avg.
3. Changes in Price Structure
◆ Differential trend between grade and sulphur content also shows significant change.
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IEEJ:October 2005
4. Other Factors influencing the Oil Industry
4-1) Korea’s Economy Outlook
Until the mid 80’s, Korea joined the ride in global economical growth thru labor intensive commodities but inflation, deficit and faltering of competitiveness of enterprise were co-existent.
During the mid 80’s ~ end of 90’s, Korea promoted open market economy
Emerging (~1987) Globalization(1987~1997)
Paradigm Shift(1997~)
After getting over the financial turmoil, Korean Economy was experiencinga sluggish economical growth as it faced a decline in investments, rise in unemployment, and rapidincrease of the agingpopulation
It is forecasted that Korean economy growth in 2005 is estimated to be only around 4% and this trend will continue for the time being.
Excluding specific product such as Diesel,domestic consumption of petroleum product has almost reached its plateau and needs to aggressively seek a foreign market due to surplus in capacity.
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IEEJ:October 2005
4. Other Factors influencing the Oil Industry
4-2) Environmental Regulation (Kyoto Protocol)
Crisis
- Constraints on Business Activity
- New Barrier in Trading Activity
- Modification in structure of existing Market
- Consumer's boycotting of product
- Faltering of Company’simage
Opportunity
- Improvements in Process andreduction of cost throughdevelopment of technology
- Strengthening the current position through acquisition of new technology
- Create new business
- Establishment of sustainablemanagement system
Change in business environment
- Introduction of new policy bythe government
- Development of newtechnology and establishmentof a new market
- Increase in preference for Eco-friendly enterprises
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IEEJ:October 2005
4. Other Factors influencing the Oil Industry
4-3) Supply and Demand
▶ China, the decisive country in influencing the supply/demand balance, will have to depend on imports in the near term considering the gap between expansion of the refining capacity and rapid demand growth.
▶ India will play the role of net exporter by acclerating the establishment of new facilitieswhich exceed its demand growth.
▶ Overall, the shortfall of product is predicted to continue due to global economic growthand limited refining capacity . Refining margins are likely to remain relatively healthy inthe near term.
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IEEJ:October 2005
4. Other Factors influencing the Oil Industry
4-3) Supply and Demand – Especially China
World, Oil Demand
-1.0
0.0
1.0
2.0
3.0
4.0
76
78
80
82
84
86
1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06
Change Y-o-Y Year Av. Demand
OECD, Oil Demand
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
47.5
48.0
48.5
49.0
49.5
50.0
50.5
1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06
Change Y-o-Y Year Av. Demand
Non-OECD less China, Oil Demand
-0.5
0.0
0.5
1.0
1.5
2.0
23.5
24.5
25.5
26.5
27.5
28.5
1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06
Change Y-o-Y Year Av. Demand
China, Oil Demand
-0.5
0.0
0.5
1.0
1.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06
Change Y-o-Y Year Av. Demand
Y-o-Y Change in Demand
<2004>
* World : +2.9 mmb/d (+3.7%)* OECD : +0.9 mmb/d (+1.9%)* Non-OECD less China
: +1.3 mmb/d (+5.2%)* China : +0.8 mmb/d (+14.3%)
<2005>
* World : +1.6 mmb/d (+1.9%)* OECD : +0.4 mmb/d (+0.8%)* Non-OECD less China
: +0.8 mmb/d (+3.0%)* China : +0.3 mmb/d (+4.7%)
<2006>
* World : +1.8 mmb/d (+2.2%)* OECD : +0.5 mmb/d (+1.0%) * Non-OECD less China
: +0.7 mmb/d (+2.6%)* China : +0.6 mmb/d (+9.0%)
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IEEJ:October 2005
5. Long Term Price Forecast
5-1) Long Term Price Forecast by analysts
WTI Price Forecast
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
2002 2003 2004 2005Q1 2005Q2 2005Q3 2005Q4 2005 2006 2007 2008 2009 2010 2012 2015 2020
FACTS PIRA
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IEEJ:October 2005
5. Long Term Price Forecast
5-2) Market Comments
▶ Oil price forecasters/consultants have predicted high oil prices for the next 15 years.
▶ Crude prices are likely to remain bullish due to supply/demand imbalances and periodic surges in speculative fund trading and political unrest .
▶ Unpredictable and destabilizing events such as terrorism, accidents, strikes and weather
will significantly impact supply stretching a market that already lacks of spare capacity.
▶ Unlike the past, the current capability of the global economy is enough towithstand continued high crude oil prices.
▶ Overall, the shortfall of product is forecast to continue due to robust globaleconomic growth and limited downstream capacity, leaving refining margins relatively healthy
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IEEJ:October 2005
6. Strategy
General Remarks
▶ Korea is the 5th largest oil importing country in the world and spends 20% of its revenue on energy resources.
▶ Rises in crude prices lead to increases in petroleum product prices which result inweakening of competitiveness in exports due to basic cost increases.
▶ Considering the strong dependency on oil imports, the rise in demand will result inan increase of imports and declining exports -- this ultimately aggravates trade balance leading to slowdowns in the domestic economy.
▶ Sudden changes in cooperation management are also a burden in coping with thischallenge . However, these can be perceived as the beginnings of a new era and new opportunities to be seized if we prepare ourselves properly.
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IEEJ:October 2005
6. Strategy
6-1. Expand upgrading Capacity and Facility
▶ Korean Refineries have demonstrated investment strategy oriented towards increasingthe scale of refining capacity in order to support demand during economic growth.
▶ It is necessary to undertake plans for investment and front run facilities insynchronization with the changing environment.
▶ Considering the characteristics of the refining industry , ongoing support and cooperationfrom the government is essential.
▶ In GS Caltex’s case, it is speeding up its construction of 150MBD vacuum distillationunit and 55MBD hydrocracker which are expected on-stream by 2007 toadapt to rapidly changing market conditions
▶ To cope with the high volatility in price, companies need to expand their storagecapacity, the government should increase its reserves and establish an optimal supply logistics system to enhance efficiency.
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IEEJ:October 2005
◆ Korea’s Refining Capacity is about 2,735MB with limited Upgrading units.
0
500
1,000
1,500
2,000
2,500
3,000
CDU FCC FCC(Inc. Plan) Cracker Cracker(Inc. Plan) Hou Total Hydro Treating
8% 12% 5% 9%
21%
31%
2,735MB
207M B327M B
150M B245M B
572M B
846M B
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IEEJ:October 2005
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Hydroskimming Cracking
◆ Due to changes in demand patterns, the differential between simple and CrackingMargin is widening significantly
Source : Facts Energy Advisory
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IEEJ:October 2005
6. Strategy
6-2) Energy Business Diversification▶ Korea’s Petroleum Market has entered a phase where demand has slowed and the market has
become saturated.
▶ It is time to diversify those segments of the business landscape offering high growth potential.
▶ Considering the changes in the economy and environmental regulation, it is imperative to diversify the main business domain into Petrochemical, Gas, Power generation/distributionand Fuel Cell which are Eco-friendly and technologically sophisticated energy sources.
6-3) Diversify the Crude import source
▶ To alleviate the factors influencing the price risk, we should break away from purchasing crude from specific territory and vigorously examine the possibility ofimporting new grades and sources of feedstocks.
▶ Crude from the Caspian, West Africa, Sakhalin and Canadian Oil Sands where out is expectedto rise, should be reviewed as alternative energy sources.
▶ Northeast Asian Countries should collaborate on co-freighting policy or devise other methods such as utilizing long-distance pipeline to reduce the transportation costs and addresspotential energy security threats.
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IEEJ:October 2005
6. Strategy
6-4) Expand the E & P project
▶ Three nations import about 24% of the global crude import volume; hence, crude cost becomes a crucial factor in charting the future economic growth of importing nations.
▶ Importing countries and corporation must extend the search for independent sources of energy.
▶ GS Caltex’s efforts have been successful to date in finding sweet crude from 4 wells in Cambodia
block A. The Company is presently examining the economical feasibility of commercial production .
6-5) Diversification of sales outlets and strengthening of business alliances among the neighboring countries
▶ The intra-trade between countries that have entered into the FTA has become morecritical The coalition among the neighboring countries can enhance mutual optimization.
▶ China has already proven itself as our largest energy market. The business relationship withJapan should be strengthened further especially in technology and finance.
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IEEJ:October 2005
7. Conclusion
▶ Living in front of the flood of change
▶ Accurate analysis of current phenomena
▶ Adequate selection of and concentration on effective strategies
▶ Create distinguished quality and competitiveness thru active implementation
