Investment Challenges in the Energy Industry
László VarróSenior Vice President for Strategy Development
MOL GroupOctober 14, 2009
► The cycle: the effects of the global recession on the oil & gas industry
► Long-term challenges facing the energy industry
2
Agenda
A relatively mild crisis for the oil & gas industry
3
► Demand effect was consistent with expectations based on income-elasticity ► Inflexible supply and demand translated into
sudden price and margin drops
BUT► Prices shortly recovered due to OPEC action,
margins will remain depressed until the recovery takes hold
► The oil industry had less exposure to the credit crisis relative to other industries► Less exposure to constrained credit availability► Financing mainly from own cash-flow, separate
financing of different activities not typical ► Most CAPEX cuts due to low oil price (and
deteriorating commercial viability) and not due to the lack of capital
The crisis had a substantial effect on global oil demand
The short-term inelasticity of oil supply and demand
US
D p
er b
arre
l
Million barrel per day
$140
86.5 MMbd
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
2003 2004 2005 2006 2007 2008 2009 2010
Global Oil Demand Growth Global GDP Growth
Source: IMF, IEA
Source: PIRA
Upstream: oil price saved by OPEC, long-term gas fundamentals intact
0
5000
10000
15000
20000
25000
30000
35000
2009
.09.
30
2009
.04.
30
2008
.11.
30
2008
.06.
30
2008
.01.
31
2007
.08.
31
2007
.03.
31
2006
.10.
31
2006
.05.
31
2005
.12.
31
2005
.07.
31
2005
.02.
28
2004
.09.
30
2004
.04.
30
2003
.11.
30
2003
.06.
30
2003
.01.
31
2002
.08.
31
2002
.03.
31
2001
.10.
31
2001
.05.
31
2000
.12.
31
0
5000
10000
15000
20000
25000
30000
35000
OPEC-11 production Production quota
4
OPEC compliance level higher than during prior cuts
► OPEC took on the responsibility to limit production in order to stabilize oil prices
► Most adversely affected were small independent upstream players (due to the lack of credit availability)
► Integrated business model proved its viability
Oil Gas
Gas demand outlook in Europe by country
► The crisis left long-term gas demand fundamentals in Europe largely intact
► Gas remains the cheapest low-carbon energy source for power generation
► EU climate policy provides an additional push for increased gas use
Source: Bloomberg Source: CEDIGAZ, EU27 study
Downstream: margins will rebound along with recovery
5
0
50
100
150
200
250
300
350
400
Jan-0
8
Feb
-08
Mar
-08
Apr-
08
May
-08
Jun-0
8
Jul-08
Aug-0
8
Sep
-08
Oct
-08
Nov-
08
Dec
-08
Jan-0
9
Feb
-09
Mar
-09
Apr-
09
May
-09
Jun-0
9
Jul-09
Aug-0
9
Sep
-09
US
D/ton
Diesel (10 ppm FOB ROTT) Gasoline (10 ppm FOB ROTT)
► MOL downstream has an exposure to diesel demand, the most cyclical oil product► Experienced both ups and downs within 12
months► Margins will only improve once economic growth
recovers in MOL’s core markets
BUT► Dieselization trend in Europe has not stopped
due to the crisis
► Complexity proved valuable during the crisis
► More complex refineries fared better during the crisis
► Timing of complexity-improving investments have changed, but their mid-term viability is unquestionable
World gasoline demand World diesel demand
Diesel and gasoline crack spreads
Source: PIRA Source: PIRA
Source: MOL
► The cycle: the effects of the global recession on the oil & gas industry
► Long-term challenges facing the energy industry
6
Agenda
Future challenges facing the energy industry
7
Upstreamreserve replacement
1
Gas infrastructurefinancing
2Alternative energy /
CO2 abatement
3
Upstream reserve replacement
8
► In the next 20 years, more than 2.2 times more oil has to be found than in the past 20 years
► Continuously high oil price is needed to provide enough incentive for investment
► The oil industry faces a long-term skills shortage
► A step change will be needed in petroleum engineering education
Global upstream capital expenditure
Production capacity evolution 1988 to 2008 and 2009 to 2030
Timing of a typical major upstream project
0
50
100
150
200
250
300
350
400
450
500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
bil
lio
n U
SD
Project cancellations since October 2008:Oil: 2.03 mmb/dGas: 8.79 bcm/yTotal value: $ 170 bnProject delays by over 18 months since October 2008:Oil: 4.22 mmb/dGas: 23.6 bcm/yTotal value: $ 70 bn
Source: IEA
0
50
100
150
200
2008 2030
Yet-to-find oil reserves
Other oil reserves
2.27 x increase
Yet-to-find oil reserves 1988-2008as seen in 1988 compared to actual 2008 demand
Yet-to-find oil reserves 2009-2030as seen in 2009 compared to expected 2030 demand
Source: CERA Source: MOL
3-5 yrs
4-6 yrs
CA
PE
Xhi
ghes
tlo
wes
t
25 yrs
2 yrs
ExplorationApp-raisal
Development Production
Corporate financing of gas infrastructure
9
► Gas import needs in Europe will inevitably increase
► Political push for supply security will lead to improving environment for financing gas infrastructure projects
► Risks of gas infrastructure development
► Uncertain demand
► Exchange rate risk
► Uncertain regulation
► The EU’s energy security agenda has already translated into improved conditions for corporate financing in case of Nabucco
► Approved business model
► Approved unified tariff system
► Approved rules on exemptions
► Investment climate for other crucial infrastructure projects must still substantially improve to attract private capital (e.g. HU-CRO interconnector)
Conditions for financing Nabucco has already been substantially improved…
…but financing conditions for other crucial infrastructure projects are still unfavorable
Source: MOL
Source: Nabucco Gas Pipeline International GmbH
Existing high pressure grid
Ongoing and planned cross-border interconnections
Nabucco
Countries to form the Joint Venture
Observer status
Other interested Countries
“When we hear that a project is strategic priority from the Chinese, then it means construction will start tomorrow; when we hear it from the EU, then it means that the Commission will put out a Green Paper about it.”
By a senior Central Asian policymaker
Alternative energy and CO2 emissions
10
0
10
20
30
40
50
60
70
2009 2010 2011 2012 2013
bil
lio
n U
SD
► Alternative energy investments were hit particularly hard by the economic crisis
► Capital-hungry
► Primarily credit-financed
► High exposure to energy prices
► Long-term investment
Strong political determination in the developed world to reduce carbon emissions
► Global green stimulus spending at least partly offsets lost incentives and capital shortage
► Regardless of what happens in Copenhagen, alternative energy sources / energy efficiency will remain a long-term investment opportunity
Global new investment in clean energy2004-2009
Annual global clean stimulus spending2009-2013
Source: New Energy Finance
World energy-related CO2 emissions abatement
450 scenario is a World Energy Outlook 2009 scenario where concentration of greenhouse gases in the atmosphere stabilise at 450 parts per million of CO2 equivalent
Source: IEA
$105-115 bn
$155 bn$148 bn
$93 bn
$60 bn
$35 bn
0
20
40
60
80
100
120
140
160
2004 2005 2006 2007 2008 2009e
bil
lio
n U
SD
Source: New Energy Finance
The cost of CO2 abatement within the EU
11
► Under IEA’s 450 ppm scenario, the EU will have to provide nearly 10% of total additional energy investment and 14% of total global renewable investment
► More than 2/3 of new investment by the EU will occur between 2020 and 2030
► Nearly half of total additional costs will occur in the transportation sector
World cumulative new investment in total energy supply and renewables (2010-2030)
Breakdown of the additional cost of the 450 ppm scenario in the European Union by sector
European Union CO2 abatement cost in the 450 ppm scenario (2010-2030)
Source: IEA
0
5
10
15
20
25
30
35
40
45
Total Energy Renewables
tril
lio
n U
SD
450 ppm scenario
Reference scenario
Total addtional cost:USD 1,800 billionOf which renewables:USD 380 billion
Source: IEA
Source: IEA
Conclusions
12
► Time horizon of projects aimed at solving long-term challenges is longer than that of the capital markets
► Equity investors usually look ahead 3.5 years at most (shorter than the lead time of a typical project in the energy industry)
► Shortsightedness: Projects with long lead time are not valued at their true NPV
► Policy uncertainty increases investment risks and makes it harder to finance strategic projects
Overview of Allowed Return of Regulated Networks Across Europe
7.32%7.85% 7.85%
9.60%
8.00%
7.25%7.60%
6.70%5.49%
9.25%
5.50%
6.90%
9.00%
9.90%10.25%
11.10%
5.88%
7.28%7.36%
7.20%6.86%
6.91%
5.49%5.15%
5.85%5.50%
6.91%
5.99% 5.85%6.25%6.25%
9.70%
11.50%
5.15%
10.50%
6.86%
5.50%
7.00%
5.40%
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
Gas Electricity Other Premium for Development Capex
7.10%7.25%
5.06%5.06%
7.00%
5.44%
Pre-Tax Real Return on Asset (%)
Source National Regulating Authorities
UK ItalyNetherlands Germany France Spain
Average = 6.58%
Portugal
(2)
(2)
Finland
(3)
(1)
14
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