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Copyright © Gulf Research Center 2010 All rights reserved Giacomo Luciani Director Gulf Research Center Foundation, Geneva Dar es Salaam, July 13-14 2010.

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Presentation on theme: "Copyright © Gulf Research Center 2010 All rights reserved Giacomo Luciani Director Gulf Research Center Foundation, Geneva Dar es Salaam, July 13-14 2010."— Presentation transcript:

1 Copyright © Gulf Research Center 2010 All rights reserved Giacomo Luciani Director Gulf Research Center Foundation, Geneva Dar es Salaam, July Oil & gas markets and companies

2 Copyright © Gulf Research Center 2010 All rights reserved Chart of crude oil prices since 1861

3 Copyright © Gulf Research Center 2010 All rights reserved Chart of crude oil prices since 1861 Crude oil prices US dollar per barrel World events

4 Copyright © Gulf Research Center 2010 All rights reserved Successive Price Regimes Before 1880: Disorder in the US : the Standard Oil Trust Regime : Transition : the 7 Sisters Pricing Regime: –Posted prices controlled by the companies : the OPEC Pricing Regime: –Posted prices controlled by the producing countries : the Netback Pricing Regime: –Transition period 1987 to date: the Reference Pricing Regime

5 Copyright © Gulf Research Center 2010 All rights reserved After 1987: The Reference Pricing Regime Reference pricing means that the price of a crude which is not freely traded is tied by some formula to the price of another crude which is freely traded. The two main reference crudes are Brent and WTI (West Texas Intermediate)

6 Copyright © Gulf Research Center 2010 All rights reserved The roots cause of oil price instability Why are oil prices so unstable? (At times, because at other times they were kept very stable) The key reason is that both supply AND demand are rigid to price changes in the short term. (Demand appears to be more responsive to income than to price shifts)

7 Copyright © Gulf Research Center 2010 All rights reserved Price Volume Non-OPEC OPEC Demand and Supply are Rigid in the Short Term A A PP

8 Copyright © Gulf Research Center 2010 All rights reserved The Structure of the Oil Market At the center, we find the market for Brent and WTI, which influence each other Brent and WTI trade few physical and lots of paper barrels Paper and wet barrels influence each other, but paper barrels are more important Smaller markets, such as ANS and Dubai, are influenced by Brent and WTI

9 Copyright © Gulf Research Center 2010 All rights reserved Options A call option gives the holder the right to buy the underlying futures contract, and a put option the right to sell. Call and put options may be combined to design complex risk management strategies.

10 Copyright © Gulf Research Center 2010 All rights reserved What are options for? Any buyer or seller on the petroleum market faces a price risk. Options and futures allow parties facing a structural risk to limit that risk, selling it to speculators (or insurers).

11 Copyright © Gulf Research Center 2010 All rights reserved Hedging A producer can sell futures or buy put options to ensure a minimum level of prices. A large consumer can buy futures or a call option to ensure against very high prices Major companies are on both sides of the market and may be doing both things at the same time.

12 Copyright © Gulf Research Center 2010 All rights reserved Why so many Paper Barrels? Most participants in the futures market are there to manage their risk, not to acquire Brent crude. Buying and selling Brent futures and options is an effective strategy because other crude prices follow Brent movements.

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15 DTS/T, Sunday, 08 June FinancialMarkets Commercial Operators & Independent Traders Over the Counter (OTC) Derivatives Markets FuturesMarketsPhysicalMarkets ForwardMarkets Oil Products Markets Non-traded Crude oils Natural Gas Markets Oil Prices - a increasingly complex market constellation Modified by GL

16 Copyright © Gulf Research Center 2010 All rights reserved Natural gas cost structure For oil the most important cost component is field development. For gas it is transportation. Natural gas is transported: –In gaseous form by gas pipelines –In liquefied form in LNG carriers Methane liquefies under atmospheric pressure at -161,5 C°. This is Liquefied Natural Gas or LNG.

17 Copyright © Gulf Research Center 2010 All rights reserved Pipeline advantage The cost of a pipeline is directly proportional to the distance covered It is also proportional to the diameter, but volume transported is proportional to the square of diameter: the larger the pipe, the lower the cost per cubic meter It is also a function of terrain: overland or underwater, difficult terrains etc.

18 Copyright © Gulf Research Center 2010 All rights reserved LNG advantage A significant share of the gas produced is burned to liquefy the rest – independently of distance. Distance influences the number of required carriers (ships) – but cost increases less than w. pipeline. For long sea passages, LNG is the sole alternative.

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21 Copyright © Gulf Research Center 2010 All rights reserved Contractual implications The large up front cost of all gas export projects means that the supplier must be assured of his market before he invests. Vicious circle of uncertain demand and supply Take or Pay, ship or pay, destination clauses Price indexation with reopeners Buyer takes the market risk, seller takes the price risk

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23 Copyright © Gulf Research Center 2010 All rights reserved Todays excess supply of LNG Because of the unexpected increase in US non-conventional gas production, there exists today an excess supply of LNG Cheap regasification and import opportunities are available which may allow establishing a market – e.g. for power generation This in turn may stimulate domestic discoveries and production

24 Copyright © Gulf Research Center 2010 All rights reserved What are Oil Companies? Companies are the main protagonists in the international oil and gas industry Companies are living organisms that take time to develop and grow, acquire a specific know-how and develop their own culture Companies are different – main cleavage between IOCs and NOCs, but certainly not the only important distinction

25 Copyright © Gulf Research Center 2010 All rights reserved The Oil Industry The system of companies constitutes the organisation of the industry Key issues: vertical integration and horizontal concentration The industry has gone through several waves of integration/dis-integration, and concentration/fragmentation

26 Copyright © Gulf Research Center 2010 All rights reserved Vertical integration Vertical integration is a consequence of the presence of a strategic segment If markets do not work properly companies controlling the strategic segment have an opportunity and incentive to integrate upstream/downstream in the value chain Doubts about the benefits of vertical integration

27 Copyright © Gulf Research Center 2010 All rights reserved Horizontal concentration Historically, oil and gas have been abundant, conditions for excessive competition have existed Large up front investment encourages high capacity utilisation even in negative market conditions Periodic waves of financial difficulty lead to disappearance of companies through mergers and acquisitions

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