Foss AIChE - University of Texas at Austin

1

Bureau of Economic Geology, The University of Texas at Austin

Forward, Backward, Sideways:Global Energy Redux

AIChE Fuels Keynote, Spring Conference 2006

©CEE, BEG-UT Austin, 2

Dr. Michelle Michot Foss, CEE, BEG-UT Austin

Long Run Crude Oil Price

$0

$10

$20

$30

$40

$50

$60

$70

Feb-89

Feb-90

Feb-91

Feb-92

Feb-93

Feb-94

Feb-95

Feb-96

Feb-97

Feb-98

Feb-99

Feb-00

Feb-01

Feb-02

Feb-03

Feb-04

Feb-05

Feb-06

Cushing, OK WTI Spot Price FOB (Dollars per Barrel)

Source: NYMEX

2



WSJ’s Oil Price History

Note: inflation adjusted high is daily close.

Courtesy of Wall Street Journal



Current Inventories, Prices

Source: U.S. EIA

3



Five Factors Impacting Oil

• MTBE conversion to the “E word”




• MTBE conversion to the “E word”• Growth in actual demand

4



The Asian “Gulp”

0

5,000

10,000

15,000

20,000

25,000

65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03

Thou

sand

s b/

d

0%

5%

10%

15%

20%

25%

30%

35%

Perc

ent o

f Wor

ld

Asia Pacific% Asia

Source: BP Statistical Review of World Energy, 2005

As Asia’s share grows, the region has a bigger impact.




• MTBE conversion to the “E word”• Growth in actual demand• Artificial demand created by pricing

policies

5



AB$out > $in$in > $out

$energy < market

RESULTS•Apparent demand is overstated (“artificial”)

• Price subsidies support “artificial” demand but discourage investment on supply side

How “Artificial”Demand is Created





policies• Supply side problems

6



Who’s in Control?

National companies only (Saudi Arabia,

Kuwait, Mexico)35%

Limited access - National

companies 22%

Production sharing

12%

Concession21%

Iraq10%

1,032 billion barrels

Source: IEA Global Investment Survey 2003





policies• Supply side problems• Financial market speculation

7



Determining the Price of Oil

Finding and lifting cost (role of marginal producer)

“Artificial” demand = 10-20%Growth in demand*Political premium

Financial Speculation = $15-20

RESULT: Crude oil is overpriced

* Oil for economic development



Epilogue, Post AIChE (through May 28)

• International Energy Agency (IEA) adjusted global demand downward based on demand side response in reaction to prices

• China announced it is trying to remove barriers that prevent price signals from flowing through its economy

• Emerging market funds suffered significant declines – combination of high commodity prices and inflation fears

• Gold prices increased significantly on inflation fears and US monetary policy reactions

8



Historical Natural Gas Prices

$0

$1

$2

$3

$4

$5

$6

$7

$8

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

NominalReal

Source: USEIA



Long Run Oil, Nat Gas Prices

$0

$10

$20

$30

$40

$50

$60

$70

Feb-89

Feb-90

Feb-91

Feb-92

Feb-93

Feb-94

Feb-95

Feb-96

Feb-97

Feb-98

Feb-99

Feb-00

Feb-01

Feb-02

Feb-03

Feb-04

Feb-05

Feb-06

$/bl

$0

$2

$4

$6

$8

$10

$12

$14

$16

$/M

MB

tu

Cushing, OK WTI Spot Price FOB (Dollars perBarrel)Henry Hub Spot Monthly Average Gas Price($/MMBTU)

Source: NYMEX

9



Long Run Nat Gas Price

$0

$2

$4

$6

$8

$10

$12

$14

$16

Feb-89

Feb-90

Feb-91

Feb-92

Feb-93

Feb-94

Feb-95

Feb-96

Feb-97

Feb-98

Feb-99

Feb-00

Feb-01

Feb-02

Feb-03

Feb-04

Feb-05

Feb-06

Henry Hub Spot Monthly Average GasPrice ($/MMBTU)Inferred Natural Gas Price (6:1)

Source: NYMEX

Gas at discount to oil



Long Run, Actual Oil:GasPrice Ratio

0

5

10

15

20

25

Feb-89

Feb-90

Feb-91

Feb-92

Feb-93

Feb-94

Feb-95

Feb-96

Feb-97

Feb-98

Feb-99

Feb-00

Feb-01

Feb-02

Feb-03

Feb-04

Feb-05

Feb-06

Source: NYMEX

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Natural Gas Storage

Source: U.S. EIA

Total L48 Stocks: 4/14/06 1,761 Bcf vs. 1,336 Year Ago



Current Natural Gas Prices

Source: U.S. EIA

Recent pull from oil

11



1,200

1,300

1,400

1,500

1,600

1,700

1,800

Jul-8

7Ju

l-88

Jul-8

9Ju

l-90

Jul-9

1Ju

l-92

Jul-9

3Ju

l-94

Jul-9

5Ju

l-96

Jul-9

7Ju

l-98

Jul-9

9Ju

l-00

Jul-0

1Ju

l-02

Jul-0

3Ju

l-04

Jul-0

5

BC

F

0

200

400

600

800

1,000

1,200

1,400G

as Rigs

Monthly Dry Gas Production12 Month MA, ProductionMonthly Gas Rigs

Source: U.S. EIA, Baker Hughes

U.S. Gas Resource “Just in Time”Development: Reality is Perception



Source: NPC Sec. 1818 Update, 2005

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Impact of Prices, “Demand Adjustment”

Source: NPC, 2003



Source: NPC Sec. 1818 Update, 2005

Temporary or long term adjustment? Regional

differentiation?

Strength in spite of historically high generation costs and excess capacity

(air quality, etc)

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Oil as Marginal Alternative for Power Generation

0

10

20

30

40

50

60

70

2/15/1

989

2/15/1

990

2/15/1

991

2/15/1

992

2/15/1

993

2/15/1

994

2/15/1

995

2/15/1

996

2/15/1

997

2/15/1

998

2/15/1

999

2/15/2

000

2/15/2

001

2/15/2

002

2/15/2

003

2/15/2

004

2/15/2

005

2/15/2

006

$/bl

0

50

100

150

200

250

Cen

ts/G

al

Cushing, OK WTI Spot Price FOB (Dollars perBarrel)

U.S. Gulf Coast No. 2 Heating Oil Spot PriceFOB (Cents per Gallon



0

100,000

200,000

300,000

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1/15/2

001

3/15/2

001

5/15/2

001

7/15/2

001

9/15/2

001

11/15

/2001

1/15/2

002

3/15/2

002

5/15/2

002

7/15/2

002

9/15/2

002

11/15

/2002

1/15/2

003

3/15/2

003

5/15/2

003

7/15/2

003

9/15/2

003

11/15

/2003

1/15/2

004

3/15/2

004

5/15/2

004

7/15/2

004

9/15/2

004

11/15

/2004

1/15/2

005

3/15/2

005

5/15/2

005

7/15/2

005

9/15/2

005

11/15

/2005

1/15/2

006

Con

sum

ptio

n, M

Mcf

0

500

1,000

1,500

2,000

2,500

3,000

Act

ual R

atio

, HO

:Gas

Pric

es

Industrial Nat Gas Consumption (MMcf)Electric Power Consumption (MMcf)Actual Ratio, HO:Gas Prices (No. 2 Heating Oil)

Gas Peaks for Power Gen Remain Strong in Spite of Fuel Competition

14



High Cost Gas Attracts LNG

Proprietary Source



15



GDP Growth and Energy Costs,Long Run View

$0

$200,000

$400,000

$600,000

$800,000

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Rea

l Ene

rgy

Expe

nditu

res,

$M

illio

ns

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Rea

l GD

P ($

Bill

ions

)

Real Energy Expenditures

Real GDP (2000)

Linear (Real GDP (2000))

Linear (Real Energy Expenditures)

Sources: U.S. BEA, EIA

2001-2004 energy costsare estimated.



Our energy/economy dilemma…• In the U.S., we are an $11 trillion economy (2000$)…• We produce 28% of world economic output…• We use 25% of the world’s energy supply…• The U.S. is 43% of OECD energy and 33% of GDP…• The OECD nations use 59% of the world’s energy

supply and are 83% of world GDP…• We are a nation of roughly 290 million…• OECD population is roughly 1.1 billion…• World population is roughly 5 billion…• For the rest of the world to catch up to OECD will

mean at least 2-3X amount of energy currently used

…is an energy/economy opportunity

16



CO2 Value Chain Issues

CO2 fromfield

production

CO2 from petrochem

CO2 from power

production

Potential for competing processes

“Market”(includes bilateral contracts)

CO2 mitigation:• Enhanced oil recovery• Industrial (petrochem, food processing, etc)• Sequestration (brines, other)

Cost of captured CO2

vs. field production

“Finding”cost

•Cost of transportation (feasibility, ROW, potential for conversion of existing ROW)•Storage to mitigate interruptible CO2 supply (for commercial•Basis – produced vs. captured, distance from capture to injection•Forward market for risk management•Carbon credit system (if needed)•Insurance, verification

Re-capture of CO2 from refining point sources

(development of “closed loop” for petroleum)

Faci

litat

ing

Com

mer

cial

Fra

mew

orks

(pol

icy,

regu

lato

ry, f

inan

cial

)

Documents

Foss AIChE - University of Texas at Austin