Introduction to Oil Econ Jan 2015

INTRODUCTION TO OIL AND GAS INDUSTRY AND SUSTAINABLE DEVELOPMENT

JANUARY SEMESTER9 & 13 MARCH 2015

OIL ECONOMY AND ITS IMPACT


LECTURE OUTLINE

The World is Still in Economic Turmoil. The Importance of Oil. How Does Oil Impact the Economy Oil Prices: Trends, Key Drivers and Outlooks Petrodollars Curse or Windfall? Global Economic Crisis: Impact and Implications Challenges to Oil and Gas Industry Riding Out the Current

Economic Crisis


WHAT IS ECONOMICS?

The branch of knowledge concerned with the production, consumption, and transfer of wealth.

The condition of a region or group as regards material prosperity.


THE WORLD DESCENT INTO ECONOMIC TURMOIL..

2007 The sub-prime crisis led to a credit crunch causing the housing bubble to burst in the US.

2008 Financial turmoil was further aggravated by surging food, commodity and oil price hike

2011 The Arab Spring

Government debt crisis in Italy and Greece

2013 Leadership transition in US and China and reforms in

Euro Area.

The world is descending into deep economic turmoil asleading economies are tipping into recession

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Credit crunchUS Tech Deepening financial Rising unemploymentBubble Burst turmoil on the back of Elevated inflation

surging food & Plunging commodity & oil price2000 commodity prices & Wealth & demand destruction

oil price rally Declining corporate earningsSept 11

from 2003 to mid 2008 Rising bankruptcies & insolvencies

>US$600 bil banking losses & write downs2001US War > US$25 trillion wiped off from market capOn Iraq US$50 billion lost from commodity markets

Mass exodus of funds from commodities &2003 US sub-prime equities market into treasuries/bonds

crisis Contraction in GDP growth

2007

The Perfect Storm

2007-2008

Financial MeltdownRising costs ofUS-led ultra-low interestdoing businessrates policy & massive

Current Situationliquidity injection globally Declining businessUS house Leading economies onsentimentSynchronized & huge prices the verge of recession

Lower purchasingliquidity injection to revive collapsed/ Synchronised globalpowerthe economy and bolster housing slowdown impactingsentiment bubble burst Declining consumer emerging & developing

led to confidenceeconomies Globalfinancial

turmoil Recession

$$$ $$$


THE 2014 ECONOMIC OUTLOOK ..

Crisis in Iran, Syria and Ukraine.

The World Bank on 10 June 2014, cut outlook for 2014 global growth to 2.8% from 3.2% in January 2014.

The price of crude is still $100 per barrel and at that price sustained recovery seems unlikely. The rule of thumbs indicate in every $10 increase in the price of a barrel of oil ends up reducing global growth by 20% of a percentage point.

THE GLOBAL ECONOMY CURRENTLT FACES A NEW THREAT FROM AN OLD ENEMY

OIL


THE IMPORTANCE OF OIL

Oil is the raw material that makes possible the functioning of nearly every components of the worlds economy; directly or indirectly.

The world has staked the entire way of life on this NON-RENEWABLE resources that is DEPLETING.

Oil is a poisonous economic mix a rising oil price is both deflationary and inflationary.

Oil remains the lifeblood of most gainful economic activity. There is no chance of that changing in the foreseable future.


THE IMPORTANCE OF OIL IN THE MALAYSIAN ECONOMY

Malaysia is overly dependent on oil revenue (57%) With the depleting hydrocarbon resources, other form of revenue

generating alternatives need to be developed and quickly. The Malaysian Government policy on subsidy distort the economy and

this inhibits the building of resilience and competitive industry. The potential downside

Rising inflation particularly increase in food prices Falling commodity prices Declining industrial productions Declining exports Plunging consumer confidence Capital investment flight

Malaysian economy How vulnerable are we?

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Depleting hydrocarbon Subsidies distort the economyOverly dependent on oil revenuesresourcesInhibits us from building

Unable to fully diversify the resilience andeconomy and move up the competitivenessvalue chain

Inefficient utilisation of energy

About 53% of the Governments Revenue contributed by the petroleum sector (2008)

Possible downside risks for Malaysia as the economy continues to

brace external challenges, political uncertainty & inflationary pressureCIRU-CPDD

Rising Inflation Declining Industrial Production

8.5%

HIGHEST(July 08)

1.6%

Jan 2007

Falling commodity prices Other Key Concerns :

Crude Palm Oil : Declining export

RM4,486/tonnePlunging consumer confidence

(March 2008)

Capital flight

RM1,515/tonne(end Oct 2008)


OIL ECONOMYThe portion of the overall economy connected to or depending on the production, refinement, sale, or use of petroleum. Because oil is required for production and transportation of many other goods, as well as consumer uses such as automobile fuel and heating, events that affect the oil economy have significant effects on other areas of the economy.

HOW DOES OIL IMPACT THE ECONOMY? Inflation Consumer Spending Automotive Industry


OIL PRICES: TRENDS, KEY DRIVERS AND OUTLOOKS

The price of oil has the ability to blow the world economy, and the Middle East often provided the spark

Crisis will cause serious supply disruption either real or perception and dearer oil price fuel inflation

The indices for crude prices are the West Texas Intermediate (WTI), Brent Blend and OPEC Basket for a barrel of oil equivalent to 42 gallons or 106 bottles of 1.5 litres mineral water.

Oil prices are factors of contract conditions, side benefits and commercial interest.


OIL PRICES: KEY DRIVERS

Geopolitical instability and heightened security concerns including geopolitical conflicts.

Supply and Demand OPEC is the governing body to discipline the worlds oil players.

Environmental factors technology, political relationship, experienced personnel and environmental protection.

Financial Economics oil has strong inverse relationship with fund investment.

Rising cost of upstream activities including depleting resources. Speculation - represents 40% to 60% to the total crude oil per barrel. Political policy protect a countrys interest and agenda.

A combination of traditional drivers (Geopolitics, supply/demand, and environment) and new market fundamentals (financial economics, rising cost, and speculation) have led to oil prices rally from 2000 to mid 2008

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11 July 2008

Highest price : $147.27

Dollars/barrelJanuary 2008

160 Oil price broke the landmark 147.27$100/bbl barrier

140 September 1980August 2005

1st major fighting in Iran-IraqHurricane Katrina

war120March 2003

January 1979US invaded Iraq100 2nd oil crisis: 100

Iranian revolution1997

Asian economic crisis80

October 1973 64.961st oil crisis:60 August 1990

Yom Kippur war 63.15Iraq invaded KuwaitOPEC oil embargo

4033.43

October 200836 27.33Lowest price :20

14.85 $63.1511.34.310

1973 1979 1980 1990 1997 2003 2005 Jan-08 Jul-08 Oct-08

The precipitous decline in oil prices to below $70 per barrel in end October 2008 wasprimarily due to the demand destruction as a result of the current global downturn

Source of data : Average monthly price in dollars of New York sweet light crude, AFP, Bloomberg & Financial Post

What drives oil prices Financial economics/markets

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Speculation inflates the oil price premium as traders leverage on negative sentiment & supply uncertainty

Precipitous decline in the US Dollar leads financial investors to excessively switch into commodities trading, particularly crude oil, but as commodity prices fall, the dollar exit commodities into safe haven such as treasuries & bonds

Before the current fall in oil & commodity prices, billions of dollars being diverted by financial investors and traders for speculative purposes.

The share of oil futures contracts controlled by speculators at the New York Mercantile Exchange (NYMEX) has doubled in the last 8 years, up from 37% in 2000 to 71% in mid 2008.

Speculation raises a premium of between 40% and 60% tothe total crude oil price per barrel.

Excessive and uncontrolled speculation may lead to furtherprice-distortion in the oil markets

Source of info & data : Financial Times & Bloomberg


PETRODOLLAR CURSE OR WINDFALL?

The Oil Curse is the mismanagement of oil revenue for personal gain or lack of transparency in its utilization. This will lead to deplorable state of economy and society, and may trigger internal strive and conflict.

The Oil Windfall is a proper management and utilization of oil revenue with the utmost accountability and transparency. Oil revenues are channeled towards development projects, infrastructure and facilities and other related socio-economic activities that will create a better life for the people and nation.

Petrodollars - Curse or Windfall?

Food for thought

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Oil revenues can lead to a curse or windfall - depending on how it is being managed

The Oil Curse The Oil Windfall

Proper management and utilisation of oilMismanagement of oil revenues, eitherrevenues with the utmost accountability andfor personal gain or lack transparent intransparency. Oil revenues are channeled

its utilisation. This will lead to deplorabletowards development projects,

state of economy and society, and may infrastructure and facilities and other relatedtrigger internal strife and social conflict socio-economic activities that will create a

better life for the people and the nation.

Petrodollars - Curse or Windfall? Some Examples

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Saudi Arabia Norway RussiaThe richest oil nation on earth is Prudent utilisation of its oil revenues via Russia has done well to avoid

struggling with a 25% the Petroleum Fund has made Norway one "resource curse." The budget

unemployment rate, huge gap of the leading examples of best practices surpluses, the reserve fund, a

between wealth and assets in economic management using oil money three-year rolling budget for

ownerships, a massive public debt, as the country does not face issues such planning purposes, the analytical

and an undiversified economy as chronic unemployment, high inflation, use of a non-oil budget and its

dependent on commodity exports, and huge national debts. high external reserves

particularly oil. underscore its commitment to

maintaining a prudent stance.

VenezuelaChavezs populist policy has been What about Malaysia?

regarded as a windfall for the population, but it comes at a cost as investment in its oil sector continues to dwindle owing to the current resource nationalism policy that gives the state

(via PDVSA) a dominant stake in the oil Nigeriaand gas projects, thus creating a barrier Oil exploitation and export revenues haveto entry for foreign players to access its engendered conflict, corruption, environmentalhydrocarbon resources. degradation and deepening poverty, which leads to

the so-called "resource curse".

Source of data & info : All Africa.com, BBC & Slate Magazine

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THE DEEPENING GLOBALECONOMIC CRISIS :

IMPACT & IMPLICATIONS

The deepening financial meltdown weighs down heavily onthe economy, business and the people

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Business & Industry

Declining business sentiment Projects become uneconomic

Wealth erosion Declining corporate earnings & lower margins

Demand destruction Bankruptcies & insolvencies

Higher risk premium Mass exodus of funds from commodities &

Credit & liquidity squeeze equities market into treasuries/bonds

Increasing cost of capital Mergers & acquisitions intensify

Recession &

synchronised global

slowdown

Macro-economy Consumer at large

Contracting/declining GDP growthLower purchasing power

Wealth & demand destructionDeclining consumer

Lower energy, food & commodity costconfidence

Easing inflation expectationNot spending but savings

Rising unemploymentconscious

Credit & liquidity squeeze

The oil and gas industry will also be impacted along the value chain

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E&P OIL GAS PETCHEM

More industry consolidation via M&As

Decline in oil prices - Less protectionism, marketliberalisation & more access to resources?

Demand destruction

Inventory build-up/Tank-top/supply surplus

Sharp & precipitous decline in prices

Margin erosion/squeeze

Higher risk premium - Supply-Chain and Counter-partyrisks

Projects become uneconomic (Delay & postponement)

Increasing cost of capital

Tighter lending & borrowing criteria

Plant shutdown/scale down operations

Waning interest in clean technology, RE, Biofuel &Unconventional oil development

Key Issues/Challenges

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Key issues/challenges for PETRONAS The oil & gas industry faces

that evolve around growth, costs & myriad of issues/challenges

gaps in technology & skills: from many fronts :

Access to resources. Geopolitics - Uncertainty and heighten security

concerns.Escalating costs & changing fiscal terms.

Environment - Increasing concerns on climateHuman capital and talent development. change and global warming.

Technology as a competitive edge - How have Energy vs. food security.we progressed?

Capacity constraints - oil production decline,reserves depletion, thin spare capacity.

Enabling technology - difficult geology, harshoperating environments; unconventional sources.

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THANK YOU

Documents

Introduction to Oil Econ Jan 2015