Future Global Trends – Resource security: How Sovereign Wealth Funds will benefit.

Future Global Trends – Resource security:How Sovereign Wealth Funds will benefit

A simple observation

The world does not run on money it runs on energy

Money is just a permit to buy energy

To enhance sovereign wealth

The yield must exceed the increase in energy values

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Investment Funds Conference Doha 26/27 November 2007

Where are oil and energy prices going?

Oil Prices 2000-2010

0.0

20.0

40.0

60.0

80.0

100.0

120.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Year

$/b

arr

el

WTI Price Range Low Range High WTI projection (CIBC)


The CIBC answer

Assessed the likely supply shortfall and

the oil price needed to reduce demand

2006 1mn b/d and $61/barrel

2007 2.8mn b/d and $70/barrel

2008 4.8mn b/d and $80/barrel

2009 6.7mn b/d and $90/barrel2010 8.9mn b/d and $101/barrel


The challenge: All economies need plentiful energy to function

Food needs energy to produce, harvest and supply to consumers

Metals and minerals need energy to refine, transport and supply

Water needs energy to transport

Oil is the dominant energy it prices all the others – future availability

is now in question

All energy prices are set to rise

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Filling the gap produced by peaking oil supplies

The value of all energies will rise

Are these investment opportunities for Sovereign Wealth Funds?

In Near Oil – tar sands, heavy oil, shale

In Gas supply and gas supply infrastructure

In Coal supply and coal supply infrastructure

6Investment Funds Conference Doha 26/27 November 2007

If all energy prices are rising

Sovereign wealth funds will see massive and escalating flows of additional funds

All aspects of energy production will produce high returns

But will other areas such as key metals and minerals be even more rewarding?

Do rising energy and raw material costs threaten global growth?

Can the risks of economic slowdown be hedged?


New Epoch

Runaway inflation in energy and metals since end 2002 -- a historic turning point?

Oil -- $24 to $90 or 275%

Gas in US -- $4 to $7 or 75%

LNG in Japan -- $4.3 to $9 or 109%

Coal in Europe -- $35 to $100 or 185%

Uranium oxide -- $10 to $100 or 900%

Nickel 630%, Zinc 497%, Lead 705%

Cobalt 331%, Titanium 600%, Vanadium 2000%


2002/2003 -- A historic discontinuity?

From the 1880s the real value of most raw materials declined until 2002/2003.

Oil declined in real terms from 1880 until 1970 and from 1980 to 2002

During this period the world was short of manufacturing capacity but long

on potential raw material supply. The pricing power was with the manufacturers

Today there is plenty (an excess?) of manufacturing capacity but energy

and raw materials are supply constrained and prices are advancing steadily.

The pricing power is now with the energy and raw material producers


Supply security and import dependence (2006)

Country Oil imports Gas imports Coal imports

Japan 99.9% 99.9% 99.4%

EU 25 84.5% 41% 44%

India 69% 20% 7%

USA 67% 14% Exports 5%

Total OECD 60% 25% 13%

China 49% None LNG soon Started 2007

Russia Exports 72% Exports 30% Exports 22%


Gas to Boom

Why is gas so undervalued?

In all the OECD countries coal use rose in 2006

And OECD gas use fell in 2006

At the margin electricity generators were turning on

coal plants at the expense of gas plants

Coal was more cost competitive in 2006

Is this sustainable?


Low gas prices are unsustainable

Imminent falls in Canadian production

Potential declines in Russian gas supply without major investment

Emerging constraints on coal supply leading to coal price inflation

Gas powered generating plants are quicker and cheaper to built

Gas is more environmentally acceptable

Carbon costs are starting to rise

So is gas generation a profitable investment?

12 Investment Funds Conference Doha 26/27 November 2007

Reasons that gas prices will rise

Limited number of coal producers

Rapid inflation in coal prices

Bottlenecks for coal loading in Australia and South Africa

Gas is more flexible than coal (more uses)

On a calorific equivalence to fuel oil gas prices would be $13 million Btu

Carbon values will rise as will restrictions on coal usage


Just 8 Large coal producers (2006)Top 4 have 80% of reserves(reserves in million tonnes, Prodn/conspt in mtoe)

Country Reserves Production Consumption Exports

China 114500/12.6% 1212/39.4% 1191 Imports 2007

USA 246643/27.1% 595/19.3% 567 28 or 4.7%

India 92445/10.2% 209/6.8% 238 -29 or -12.2%

Australia 78500/8.8% 203/6.6% 51 152 or 74.8%

South Africa 48750/5.4% 144/4.7% 94 50 or 34.7%

Russia 157010/17.3% 144/4.7% 113 31 or 21.5%

Indonesia 4968/0.5% 120/3.9% 28 92 or 76.7%

Poland 14000/1.5% 67/2.2% 58 9 or 13.4%


LNG capacity to 2015 is very tight

Because of failure to sanction investment on lack of guaranteed offtake

Yet all around the world countries are planning to import LNG for

environmental and security of supply reasons

Russian gas supply is constrained to 2013

Canadian gas supply is set to fall

Another investment opportunity?

15 Investment Funds Conference Doha 26/27 November 2007

Conclusion

• Sovereign Wealth Funds will increase massively

•The balance of power has swung from the manufacturers

to the energy and raw material producers

•There are huge investment opportunities in energy and raw

material production

•A new balance of advantage is emerging

•Few currently recognise the significance of this long term change

THANK YOU FOR YOUR ATTENTION


Future Global Trends – Resource security: How Sovereign Wealth Funds will benefit.

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