Post on 15-Dec-2015
Drivers of Demand for Capital in Global EnergyRandall S. WadeManaging Director and COO
December 2010
Sector Attributes
• Energy is a building block of economic growth
• Benefits from long-term demographic trends that drive demand
• Demand largely caught up with supply in last five years; supply will struggle to keep pace with demand going forward
• Energy supply is comprised of several heterogeneous markets, each with distinct sub-sectors and underlying fundamentals
• Negative correlation with traditional investment classes such as equities, fixed income
• Commodities provide a natural hedge against inflation
• Long-lived, hard assets
• Inherent volatility in commodity prices
2
Source: EIA, CIA World Fact Book, World Health Organization, Bloomberg
Military, 2.4%
Energy, 25.9%
All Others, 61.5%
Healthcare, 10.2%
World GDP by Sector
33
Sector Attributes
Technically complex Complex and interpretive resource evaluation, and sophisticated engineering required for success
One off, purpose specific design
Project cost risk typically carried by owner (not EPC)
Capital intensive Very large capital investment required throughout lifecycle. Ability to ‘protect’ or follow initial investment is crucial
Investment decision heavily reliant on commodity price forecastCommodity price
volatilityOil prices in 2002 were sub $20/bbl, reached a high of ~$147/bbl in July 2008, and hit a low of ~$34/bbl in December 2008
Financial flows increasing volatilityCyclicality GDP growth drives underlying demand
Significant lag in investment cycle, leading to boom-bust profile
Complex demand-supply position
Energy markets are complex and intertwined (e.g. upstream importance to gas transmission, gas price on spark spread)
Structural change driven by:
- Decline of OPEC spare capacity, and rise of NOCs
- Development of unconventional resources
- Impact of the rise of Asia on demand
Drivers of DemandBeginning around 2005, EIG believes the world began a 15-20 year secular trend in energy and energy-related infrastructure requiring massive amounts of investment.
4
1) Developing world continues to industrialize, coupled with population growth and demographic trends
2) Depletion of aging “elephant” fields that have underpinned global supply for decades
3) Higher replacement costs as conventional supplies began to be replaced with higher cost “unconventional” supplies
4) Chronic under-investment in infrastructure caused by the inherent volatility of the sector and the need for long pay-back periods
5) Concerns about climate change and the introduction of price mechanisms for carbon
6) Assertion of market clout by national oil companies and other state actors and the resulting resource nationalism as energy independence takes on increased political importance
7) Security of supply as an enhanced geopolitical consideration as key supply states use energy as an economic weapon to leverage consumer states
8) Market distortions caused by increased government intervention through mandates, subsidies, taxes, and regulation
9) Fragility of the energy supply network and susceptibility to disruption by terrorist activity
10) Increased price volatility due to low reserve margins, correlation to U.S. dollar, and inflation expectations
Underlying Factors that Drive Demand
1) Industrialization of the Developing World is Driving Demand
• World population has more than doubled since 1950
• Urbanization increases demand for energy
• In 2009, for the first time in history, the world’s urban population overtook the rural population
5
Source: Historical data from World Bank (GDP), BP Statistical Review 2009 (Energy), US Census Bureau (Population). Forecasts per EIA International Energy Outlook 2009, IEA World Energy Outlook 2009, World Bank HNP Stats.
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,00019
65
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
GD
P (in
con
stant 2000 $ trillio
ns)
En
erg
y C
on
sum
pti
on
(m
m to
e) a
nd
Po
pu
lati
on
(m
m)
GDP (RH) Energy Consumption (LH) Population (LH)
Actual Forecast
1) Industrialization of the Developing World is Driving Demand
6
Source: BP Statistical Review 2009
China 67.6%
Middle East 39.6%
India 27.9%
Total World 10.9%
US (1.4)%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Cu
mu
lati
ve G
row
th S
ince
200
0
Oil Consumption
Drivers of DemandBeginning around 2005, EIG believes the world began a 15-20 year secular trend in energy and energy-related infrastructure requiring massive amounts of investment.
7
1) Developing world continues to industrialize, coupled with population growth and demographic trends
2) Depletion of aging “elephant” fields that have underpinned global supply for decades
3) Higher replacement costs as conventional supplies began to be replaced with higher cost “unconventional” supplies
4) Chronic under-investment in infrastructure caused by the inherent volatility of the sector and the need for long pay-back periods
5) Concerns about climate change and the introduction of price mechanisms for carbon
6) Assertion of market clout by national oil companies and other state actors and the resulting resource nationalism as energy independence takes on increased political importance
7) Security of supply as an enhanced geopolitical consideration as key supply states use energy as an economic weapon to leverage consumer states
8) Market distortions caused by increased government intervention through mandates, subsidies, taxes, and regulation
9) Fragility of the energy supply network and susceptibility to disruption by terrorist activity
10) Increased price volatility due to low reserve margins, correlation to U.S. dollar, and inflation expectations
Underlying Factors that Drive Demand
2) Depletion of Aging “Elephant” Fields
• There are ~70,000 oil fields in the world
• Bulk of production comes from a small number of very prolific fields, mostly giants and super giants
– World’s 10 largest fields produced 20% of world’s production
– 20 largest fields produced 25%; 16 are post-peak
– Ghawar’s 5.1 million bpd equaled 7% of world total
• Most of the largest fields have been in production for years, and in some cases several decades
8
Source: IEA World Energy Outlook 2008; Cantarell production updated for 2009 per CERA
0
1
2
3
4
5
6
Pro
du
ctio
n R
ate
(mil
lio
n b
arre
ls p
er d
ay)
Peak Production 2007 Production
Production at World’s Largest Oil Fields
The aggregate production decline (from peak output) at the world’s six largest oil fields equates to 6.6 million barrels per day.
Drivers of DemandBeginning around 2005, EIG believes the world began a 15-20 year secular trend in energy and energy-related infrastructure requiring massive amounts of investment.
9
1) Developing world continues to industrialize, coupled with population growth and demographic trends
2) Depletion of aging “elephant” fields that have underpinned global supply for decades
3) Higher replacement costs as conventional supplies began to be replaced with higher cost “unconventional” supplies
4) Chronic under-investment in infrastructure caused by the inherent volatility of the sector and the need for long pay-back periods
5) Concerns about climate change and the introduction of price mechanisms for carbon
6) Assertion of market clout by national oil companies and other state actors and the resulting resource nationalism as energy independence takes on increased political importance
7) Security of supply as an enhanced geopolitical consideration as key supply states use energy as an economic weapon to leverage consumer states
8) Market distortions caused by increased government intervention through mandates, subsidies, taxes, and regulation
9) Fragility of the energy supply network and susceptibility to disruption by terrorist activity
10) Increased price volatility due to low reserve margins, correlation to U.S. dollar, and inflation expectations
Underlying Factors that Drive Demand
3) Replacement Costs are Increasing as Source of Supply Shifts• Exploration spending increased by 21% in 2008, and has doubled since 2005
• However replacement rates fell to 88% of production (first year since 2004 in which production was not replaced)
• Finding and development costs soared 66% to $25.50/bbl
• Competition for unconventional resources increased sharply
10
US Natural Gas Production by Source
0
2
4
6
8
10
12
14
1990
1995
2000
2005
2010
2015
2020
2025
2030
Trill
ion
Cub
ic F
eet
Conventional onshore Unconventional onshore Offshore
Expected Costs of Production
$0
$20
$40
$60
$80
$100
$120
$140
ProducedMiddle East / North Africa
Other Conventional Oil
CO
2 -E
OR
Deep Water and Ultra-deep Water
Enhanced Oil Recovery (EOR)
Arctic
Heavy Oil and
Bitumen
Oil Shales
Gas to Liquids
Coal to Liquids
Prod
uctio
n Cos
ts ($/
bbl,
2008
)
Reserves (bnbbls)
1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000$0
$20
$40
$60
$80
$100
$120
$140
ProducedMiddle East / North Africa
Other Conventional Oil
CO
2 -E
OR
Deep Water and Ultra-deep Water
Enhanced Oil Recovery (EOR)
Arctic
Heavy Oil and
Bitumen
Oil Shales
Gas to Liquids
Coal to Liquids
Prod
uctio
n Cos
ts ($/
bbl,
2008
)
Reserves (bnbbls)
1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000
Source: IEA World Energy Outlook 2008 (left); EIA Annual Energy Outlook 2009 (right); 2009 Global Upstream Performance Review, IHS Herold/Harrison Lovegrove
Drivers of DemandBeginning around 2005, EIG believes the world began a 15-20 year secular trend in energy and energy-related infrastructure requiring massive amounts of investment.
11
1) Developing world continues to industrialize, coupled with population growth and demographic trends
2) Depletion of aging “elephant” fields that have underpinned global supply for decades
3) Higher replacement costs as conventional supplies began to be replaced with higher cost “unconventional” supplies
4) Chronic under-investment in infrastructure caused by the inherent volatility of the sector and the need for long pay-back periods
5) Concerns about climate change and the introduction of price mechanisms for carbon
6) Assertion of market clout by national oil companies and other state actors and the resulting resource nationalism as energy independence takes on increased political importance
7) Security of supply as an enhanced geopolitical consideration as key supply states use energy as an economic weapon to leverage consumer states
8) Market distortions caused by increased government intervention through mandates, subsidies, taxes, and regulation
9) Fragility of the energy supply network and susceptibility to disruption by terrorist activity
10) Increased price volatility due to low reserve margins, correlation to U.S. dollar, and inflation expectations
Underlying Factors that Drive Demand
4) Under-Investment in Infrastructure
• Infrastructure investment depends on stable political, regulatory, and fiscal regimes
• Energy sector is huge consumer of infrastructure and collectively accounts for 43% of global infrastructure investment
• Energy companies affected by global recession
– Demand growth uncertain, credit constrained, balance sheets stretched
– Deleveraging, postponement/cancelation of major projects
– Global upstream oil and gas budgets cut by 19% in 2009, or ~$90 billion
• Near-term fall in energy investment likely to lead to a medium-term shortfall in supply due to development lag
12
Middle East, 3%
Eastern Europe, 3%
South & Central America, 3%
Africa, 3%
Asia, 20%
Western Europe, 38%
North America, 30%
Expected Geographic Distribution
Communications, 6%
Waste & Water, 12%
Social Infrastructure, 6%
Other, 10%
Utility & Energy, 43%
Transportation, 23%
Expected Sector Distribution
Source: Amundi PEF
Drivers of DemandBeginning around 2005, EIG believes the world began a 15-20 year secular trend in energy and energy-related infrastructure requiring massive amounts of investment.
13
1) Developing world continues to industrialize, coupled with population growth and demographic trends
2) Depletion of aging “elephant” fields that have underpinned global supply for decades
3) Higher replacement costs as conventional supplies began to be replaced with higher cost “unconventional” supplies
4) Chronic under-investment in infrastructure caused by the inherent volatility of the sector and the need for long pay-back periods
5) Concerns about climate change and the introduction of price mechanisms for carbon
6) Assertion of market clout by national oil companies and other state actors and the resulting resource nationalism as energy independence takes on increased political importance
7) Security of supply as an enhanced geopolitical consideration as key supply states use energy as an economic weapon to leverage consumer states
8) Market distortions caused by increased government intervention through mandates, subsidies, taxes, and regulation
9) Fragility of the energy supply network and susceptibility to disruption by terrorist activity
10) Increased price volatility due to low reserve margins, correlation to U.S. dollar, and inflation expectations
Underlying Factors that Drive Demand
5) Climate Change and Price Mechanisms for Carbon
• Atmosphere currently contains ~455 ppm of CO2-equivalent greenhouse gases (“GHG”)
• IEA analyzed one scenario (“450 Scenario”) in which countries take coordinated actions to stabilize GHG at 450 ppm
• A low carbon future requires a major transformation of the sector (both in terms of sources of energy and required infrastructure)
14
Source: IEA World Energy Outlook 2009
0
200
400
600
800
1,000
1,200
Hydro Biomass Wind Solar/geothermal/tidal
Capa
city
Add
ition
s by
203
0, in
GW
IEA Reference Scenario IEA 450 Scenario
5) Climate Change and Price Mechanisms for Carbon
15
Renewables depend on government subsidies in order to compete against fossil fuel generation
US Renewable Generating Capacity
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
2007 2010 2020
MW
Wind Biomass & Waste Solar Geothermal
Source: EIA Annual Energy Outlook, April 2009 Update (left); California Energy Commission (right)
Generation Cost by Fuel Source
$0
$50
$100
$150
$200
$250
$300
Leve
lized
Cos
t ($
/MW
H)
Drivers of DemandBeginning around 2005, EIG believes the world began a 15-20 year secular trend in energy and energy-related infrastructure requiring massive amounts of investment.
16
1) Developing world continues to industrialize, coupled with population growth and demographic trends
2) Depletion of aging “elephant” fields that have underpinned global supply for decades
3) Higher replacement costs as conventional supplies began to be replaced with higher cost “unconventional” supplies
4) Chronic under-investment in infrastructure caused by the inherent volatility of the sector and the need for long pay-back periods
5) Concerns about climate change and the introduction of price mechanisms for carbon
6) Assertion of market clout by national oil companies and other state actors and the resulting resource nationalism as energy independence takes on increased political importance
7) Security of supply as an enhanced geopolitical consideration as key supply states use energy as an economic weapon to leverage consumer states
8) Market distortions caused by increased government intervention through mandates, subsidies, taxes, and regulation
9) Fragility of the energy supply network and susceptibility to disruption by terrorist activity
10) Increased price volatility due to low reserve margins, correlation to U.S. dollar, and inflation expectations
Underlying Factors that Drive Demand
6) Resource Nationalism
• International Oil Companies (“IOCs”) only own 7% of the world’s oil reserves
• National Oil Companies (“NOCs”) operate as an extension of the government (e.g. Saudi Aramco, Pemex, PDVSA), or as autonomous entities that concurrently support government objectives (e.g. Petrobras, Statoil)
– Activities of NOCs are frequently inefficient and/or not market-oriented
• NOCs produce the majority of the world’s oil and hold most of the world’s proven reserves
• IOCs are increasingly relegated to exploring in high-risk areas in order to secure reserves (Arctic, ultra-deep water, unconventional)
17
OECD, 6.6%
Non-OPEC, 12.9%
OPEC, 70.6%
EU, 0.5%
Former Soviet Union, 9.4%
World Proved Oil Reserves, 2008
Source: BP Statistical Review 2009
World Oil Production, 2008in million bpd
OECD, 18.4
Non-OPEC, 32.3
OPEC, 36.7
EU, 2.2
Former Soviet Union, 12.8
Drivers of DemandBeginning around 2005, EIG believes the world began a 15-20 year secular trend in energy and energy-related infrastructure requiring massive amounts of investment.
18
1) Developing world continues to industrialize, coupled with population growth and demographic trends
2) Depletion of aging “elephant” fields that have underpinned global supply for decades
3) Higher replacement costs as conventional supplies began to be replaced with higher cost “unconventional” supplies
4) Chronic under-investment in infrastructure caused by the inherent volatility of the sector and the need for long pay-back periods
5) Concerns about climate change and the introduction of price mechanisms for carbon
6) Assertion of market clout by national oil companies and other state actors and the resulting resource nationalism as energy independence takes on increased political importance
7) Security of supply as an enhanced geopolitical consideration as key supply states use energy as an economic weapon to leverage consumer states
8) Market distortions caused by increased government intervention through mandates, subsidies, taxes, and regulation
9) Fragility of the energy supply network and susceptibility to disruption by terrorist activity
10) Increased price volatility due to low reserve margins, correlation to U.S. dollar, and inflation expectations
Underlying Factors that Drive Demand
7) Geopolitical Considerations
19
Geopolitical influence on sector evident at an increasing rate in the daily news
Drivers of DemandBeginning around 2005, EIG believes the world began a 15-20 year secular trend in energy and energy-related infrastructure requiring massive amounts of investment.
20
1) Developing world continues to industrialize, coupled with population growth and demographic trends
2) Depletion of aging “elephant” fields that have underpinned global supply for decades
3) Higher replacement costs as conventional supplies began to be replaced with higher cost “unconventional” supplies
4) Chronic under-investment in infrastructure caused by the inherent volatility of the sector and the need for long pay-back periods
5) Concerns about climate change and the introduction of price mechanisms for carbon
6) Assertion of market clout by national oil companies and other state actors and the resulting resource nationalism as energy independence takes on increased political importance
7) Security of supply as an enhanced geopolitical consideration as key supply states use energy as an economic weapon to leverage consumer states
8) Market distortions caused by increased government intervention through mandates, subsidies, taxes, and regulation
9) Fragility of the energy supply network and susceptibility to disruption by terrorist activity
10)Increased price volatility due to low reserve margins, correlation to U.S. dollar, and inflation expectations
Underlying Factors that Drive Demand
10) Oil vs. US Dollar and Inflation
• Oil has been a strong hedge against inflation (0.86 correlation)
• Oil has provided a similarly strong hedge against the US dollar (-0.80 correlation)
21
Source: EIA, Bloomberg
0.000
0.200
0.400
0.600
0.800
1.000
1.200
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
$0
$20
$40
$60
$80
$100
$120
$140
US
CP
I
Oil P
rice, in $/b
bl
Oil (RH) US CPI (LH)
0
20
40
60
80
100
120
140
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
$0
$20
$40
$60
$80
$100
$120
$140
Do
llar
Ind
ex
Oil P
rice, in $/b
bl
Oil (RH) Dollar Index (LH)
Drivers of Demand
22
$26 Trillion of Investment Required Through 2030
Source: IEA World Energy Outlook 2009
Oil$5,900 billion
Gas$5,100 billion
Biofuels$200 billion
Coal$700 billion
Electricity$13,700 billion
23%
20%
53%
3% 1%58%
33%
9% LNG chain
Transmission& distribution
Exploration &development
79%
17%
4%Transport
Refining
Exploration &development
14%
86%
Mining
Shipping &ports
48%
52%Generation
Transmission& distribution
Capturing the Market Opportunity
23
Investment demand is growing across the entire energy value chain on a global basis
Upstream Infrastructure Midstream Gas to Liquids Transportation Gas to Electrons
Reserve-based DevelopmentProduction
PaymentsForward Oil Sales
PipelineGathering Systems
Processing FacilitiesGas StorageBunkering
LNG TankersSpecialty TankersVLCC Vessels
Production PlatformsDrill ShipsFPSOs
Drilling Rigs
LNGSynfuels
Processed Gas(methanol, fertilizer, DME)
LNG Regasification TerminalsGas Sales, Pipelines,
Gas-Fired Power Plants,Electricity T&D
Renewables
WindSolar
BiofuelsGeotherm
al
Capturing the Market Opportunity
24
Opportunity Current Dynamic EIG Portfolio Examples
Energy-related Infrastructure
• Pipelines, gathering systems, compression, processing, and rigs for energy companies looking for growth capital or to recycle capital currently tied-up on their balance sheet
Oil versus Gas • Onshore and offshore primary and tertiary oil recovery plays recognizing the relative value of oil versus gas on a BTU equivalent basis in the current market
Renewable Energy • Wind, geothermal, solar, and biofuels primarily in the US and Europe in response to the implementation of carbon regimes
Recapitalization of Mature Assets
• Operating assets with significant existing cash flow as a source of liquidity for large energy companies in a credit constrained environment
China/Asia Energy Demands
• Enhanced activity in existing EIG Austral-Asian platform recognizing continuing resource nationalism and demand for energy and resources
LARCHMONT
PINON~
PINON~
COOGEE
RESOURCES
COOGEE
RESOURCES
Impact of the Credit Crisis
• Contraction in global GDP took pressure off near-term supply/demand fundamentals and caused one to two year “time out” in the otherwise dominant secular trends in the industry
• Two key impacts of the credit crisis:
– Re-pricing of risk across the credit spectrum, particularly for illiquid assets
– Contraction in suppliers of capital: “survivors” continue to be price makers, not takers
25
Source: Bloomberg (Merrill Lynch data)
0
200
400
600
800
1,000
1,200
1,400
Dec
-96
Jun-
97D
ec-9
7Ju
n-98
Dec
-98
Jun-
99D
ec-9
9Ju
n-00
Dec
-00
Jun-
01D
ec-0
1Ju
n-02
Dec
-02
Jun-
03D
ec-0
3Ju
n-04
Dec
-04
Jun-
05D
ec-0
5Ju
n-06
Dec
-06
Jun-
07D
ec-0
7Ju
n-08
Dec
-08
Jun-
09D
ec-0
9
Asset S
wap
Sp
read (b
ps)
US Corporate Bonds, B-rated