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Oil Industry Trends Energy Leadership Meeting

June 2003

Oil Price

Oil prices fell $10/bbl from 12-year highs in March and were back to levels at which they started the year - around
$26 per barrel in London and $29 in New York the day the Iraq conflict started. The price has been as high as $3640/bbl on certain days last February, as the market struggled to cope with the uncertainty of the international situation
and extreme cold weather in the USA. The fall in the price was a reaction to that uncertainty ending, and the promise
of a short conflict with little supply disruption. However, we now see some of that uncertainty creeping back into the
price, on April 1st Brent futures for May delivery were trading at $27/bbl and WTI had crept back over $30/bbl, with
some tightness to the market being supported by still below capacity Venezuela and Nigerian supply disruption. As of
June 26th, Brent was trading at $26 and WTI at $30 after a mid week fall due to IEA prediction of substantial stock
increases. Short term tightness in the market is still shoring up the price and the last OPEC meeting seems to have
left the oil price unaffected. Next months OPEC meeting (July) will likely have to counter a market psychology that
will have taken a turn for the worse, and respond to an underlying supply-demand balance that is much sloppier than
when OPEC last met earlier this month. Correcting the growing supply surplus will entail either a marked
improvement in quota compliance by other OPEC members, or a heavy burden of cuts falling on top producer Saudi
Arabia.
Upstream

The Iraq conflict caused no supply disruptions to anywhere other than Iraq, and the market has proved it can work
very well without Iraqi supply. Oil production in Venezuela continues to rise; it is now back up to 2.5 million b/d. The
strike however, caused such damage to the oilfields in Venezuela that it has been estimated that the country has lost
around 10% of it production capacity and it is therefore unlikely that production will be up at pre-strike levels of 3.1
million b/d before 2004
. Political unrest in Nigeria has cut around 40% of the countrys total production of 2.2 million b/d. At OPECs last
meeting on March 11th, it was asserted that there is no physical shortage of crude and it would ensure adequate
supply in the event of the conflict in Iraq. Current OPEC output is around 26.5 mm b/d with Saudi production running
at over 9.5 mm b/d. Fundamentally the market is still oversupplied, with most producers welcoming a fall in oil price
in the hope of stimulating economic growth

Gas prices in the USA have settled down with the milder weather, but were running at $7.4 mmbtu in February, due to
cold weather and low stocks. Gas storage levels in the USA are in fact, at record lows of 636 bcf compared with
1,636 bcf one year ago. UK gas prices are down from a winter high of around 28 p/therm to levels of 17p/therm, as
milder weather prevails. The Interconnector is running at full capacity so there is no support currently for the UK spot
price from Europe.
Downstream

Refiners are currently enjoying the highest margins on a global basis since spring 2001. Margins in all centres are
above $7/bbl. US refining margins are around 7.5/bbl, European margins also around $7.5/bbl with Asian margins
slightly lower at $7.2/bbl. The main reason for margin increase is the continuing low levels of middle distillate stocks
due to cold weather, strong gasoline demand, heavy maintenance schedules and the Venezuelan strike, which in the
USA has reduced product stock levels dramatically. Inventories are 14% below normal and are running at 10 year
lows due mainly to extreme weather in the USA. Refiners too are hoping for a lower more stable oil price in the $2225/bbl range, to support downstream profit margins and economic upturn. US refiners are also coping with the phase
out of MTBE. Now banned in California, it is costing refiners an extra estimated 3-6 cents per gallon and could result
in a production shortfall of 600,000 b/d as the ban extends to other states.

Retail margins are holding up better in the USA than in Europe. In Europe gross retail margins contracted and were
close to estimated breakeven levels of 8.8 eurocents per litre from a peak of 10.7 euro cents per litre in October
2002. USA retail margins increased substantially in March to just under $6/bbl, reflecting lags in passing on lower
product prices at the refinery gate. A similar effect is expected in Europe in April.
General UK Market Trends

Publication of the Energy White Paper in March 2003. Its key theme is how the UK can achieve a low carbon
economy at the same time as the country will become a substantial importer of gas and oil while defending the
economy against the shock of rapidly rising energy prices and while updating energy infrastructure. It focused
substantially around the increase of renewable energy and energy efficiency. The UK is to cut CO2 emissions by 60%
from 1990 levels by 2050; energy efficiency will be promoted as another means of reducing carbon emissions. The
government expects energy efficiency to increase by between 35% and 100% by 2050 and new targets were set for
renewables in order to generate 10% of the UK total energy through renewables by 2010.

Maturity of the North Sea a Different Set of Players - We are likely to see during the next few years the scaling
down or the exit of the most of the supermajors from the sector. What is sure is that, while the rate of the decline may
vary, the UK will be importing most of its gas and a significant amount of its oil by the next decade. The independent
oil companies moving in to exploit the remaining potential of the North Sea will now characterize the sector. We may
now start seeing not only an increase in North Sea A&D, facilitated by the government initiatives like the PILOT
scheme, but also by a real desire on the part of independents for North Sea operatorships and good quality assets,
the supply of which, in the shorter term, may not be unlimited. We are also likely to see a new generation of
companies, interested in renewable options like Wind and Wave power. We may also see the remaining larger gas
companies of Europe and North Africa like Gazprom and Sonatrach, taking stakes in UK market players or in
infrastructure and storage options.
Security of Supply - As the UK becomes a significant net importer of energy; the burden falls on the larger oil
companies to deliver the gas (and oil) and the utility companies to process it at a reasonable cost to the consumer.
We may see that likes of the supers and major oil companies becoming increasingly concerned about infrastructure
in the UK rather than exploration and development (if they remain in the sector at all) It is unlikely that the larger oil
companies will become heavily involved in the renewables solution
BP and Shell are involved in some schemes and in emissions trading, but infrastructure is likely to remain their focus.
The major utilities like Centrica have already signed significant deals with Statoil for Norwegian supply to the UK longterm gas import contracts with Statoil, Sonatrach and Gazprom may now become more common. The larger oil
companies like BP, are concerned about barriers in gaining access to supplies securing long term supply since
liberalization in Europe is not at an even level in all countries, it makes it harder to remove barriers to full and
transparent third party access to the transportation systems. Europe and the UK still need to construct additional
downstream pipeline infrastructure to increase connectivity and ensure a smooth movement of gas and also because
the UK is lacking in LNG development and storage infrastructure. Shells major concern is that environmental issues
may take precedence over security of supply in the government agenda.
Growth of Renewables - With the government setting targets like 10% of all UK power to come from renewable
sources by 2010, there should be some growth in this sector by 2010. The government will encourage the power
industry to invest around 1.5billion over the next seven years in wind farms and those companies like Scottish
Power, which today is the nation's leading producer of wind-sourced energy and looks well placed to benefit. Other
utility companies like British Energy however, see that the wind power targets are very ambitious growth in onshore
wind will be limited by the planning process and grid connection capacityconsenting timescales of 2-3 years
coupled with the marginal economics of offshore wind, make large-scale application unlikely (BE consultation
document)

Companies
BP

Target price of 475 pence (BNP Paribas outlook)

Neutral recommendation (BNP Paribas outlook) but with only a 15% upside to target compared to 26-29% upside for
Shell

BNP that BP has a superior exploration record and is currently active with major programmes of divestment and
share buybacks. They see that BP offer strong underlying growth and have the objective of regained their underlying
13% ROCE from last year. Since the beginning of 2002, BP has sold the Veba upstream interests, Qadirpur,
Kashagan, Montrose/Abroath, an N American asset package, Forties/GOM package, Trinidad assets, JBA/Colombia
swap and Tangguh, for around $5.5 billion in total. BP also did the deal in Russia with TNK for around $3 billion,
which combines all the assets in Sidanko, TNK, Moscow retail, Sakhalin and RUSIA into one company called
currently NewCo. NewCo will provide 13% of BPs 2002m oil and gas production and 30% of their booked 2002 oil
reserves.

BP reported in their year end 2002 results, 175% reserve replacement, dividend up 9%, 2.9% production growth
(5.5% was estimated) with total proforma results of $8.7 billion (down 25% on 2002)

Key strategy as laid out by John Brown is finding new reserves, focusing on 5 key upstream profit centres (Angola,
Asia LNG, Azerbaijan, Deepwater GOM and Trinidad), increasing investment and return and the upstream and
growing the downstream (refining, petrochemicals and marketing) By 2007, 40% of BPs upstream profit will come
from these five centres and most of their production capacity will be located there (total production capacity by 2007
estimated at 2 billion boe/d)
Shell

Target price of 460p (BNP Paribas)

Neutral recommendation (BNP Paribas) 26-29% upside to target

BNP see that Shell is indicating minimal growth in production in 2003-2005, and is aiming to raise underlying ROCE

Shell reported in its latest strategy presentation that it has a short term goal of 15% ROACE, a medium term goal of
delivering projects (it has $7 billion of assets identified for portfolio upgrading) and a long term goal of creating new
legacy positions

The company is making much of its truly global upstream portfolio compared to that of BP and EM
The key next step in its strategy is to create EP Europe under one management and business plan. As part of this
strategy along with a more general reorganisation of the upstream where Shell is aiming to cut upstream operating
costs by $500-800 million up to 2007, Shell will lose 15% of its total global E&P workforce of 28,600 people (around
4000 jobs) Such cuts should help Shells E&P business deliver a growth rate of 6-8% per year after 2004. Globally
the upstream will be refocused on 5 regional centres, Europe, Americas, Asia Pacific, Middle East/Russia/CIS, and
Africa. 60% of the $8 billion annual expenditure on E&P up to 2007 will go to the heartland areas of the US, NW
Europe, Nigeria, Oman, Malaysia, Brunei and Australia. 30% will go into building new positions in Canada, Brazil,
Russia, Kazakhstan, West Africa, the Middle East and Malaysia. The remaining 10% will go into exploration plays in
GOM, Nigeria, Ireland, Kazakhstan and Malaysia. Shell hopes to raise over $500 million selling non-core assets in
the US and the UK

Total

Target price of Euros 162 (BNP Paribas)


Outperform recommendation (BNP Paribas) 33% upside to target
BNP see that TFE offer the prospect of relatively strong growth in production combined with already solid mid-cycle
returns, which are expected to increase.
British Gas

Target price of 284p (BNP Paribas)


Neutral recommendation (BNP Paribas) 19% upside to target
BNP see that BGs management has reaffirmed its 2003 production target of 400,000 boe/d, which implies an 18%
increase on 2002. This growth should be achieved without losing control of costs, which remain in the top quartile of
this sector

Target price of Euros 16.2 (BNP Paribas)


Neutral recommendation (BNP Paribas) 17% upside to target
BNP see that ENI s current low upstream returns of 8-9% are casting a shadow over management external growth
targets. However, it is currently being saved by its attractive dividend yield of 5.8% and its stronger utility element

ENI

OMV

Target price of Euros 100 (BNP Paribas)


Under perform recommendation (BNP Paribas) 1% upside to target
BNP see that OMV 1Q2003 earnings may benefit from the upturn in refining margins and the company may figure
more prominently on investors screens now that it has entered the Eurotop 300

Statoil

Target price of NOK 62 (BNP Paribas)

Under perform recommendation (BNP Paribas) 17% upside to target

BNP see that Statoil has cautioned on its 2003 production growth targets, signalling a drop in output to 1.06 mm
boe/d from 1.07 mm boe/d in 2002. However the company is generally conservative in setting output goals so this
could improve, but will probably show no concrete growth in 2003
RepsolYPF

Target price of Euros 13.5 (BNP Paribas)

Under perform recommendation (BNP Paribas) 5% upside to target

BNP see that Repsol did not welcome the Gas Natural bid for Iberdrola as it put its deleveraging plan at RYPF at risk
and cut the market value of its 24% stake. With presidential elections scheduled in Argentina