Relevant • Independent • Objective July 2010 CERI Commodity Report - Crude Oil CERI COMMODITY REPORT - CRUDE OIL Editor-in-Chief: Dinara Millington ([email protected]) About CERI The Canadian Energy Research Institute is an independent, not-for-profit research establishment created through a partnership of industry, academia, and government in 1975. Our mission is to provide relevant, independent, objective economic research in energy and related environmental issues. We strive to build bridges between scholarship and policy, combining the insights of scientific research, economic analysis, and practical experience. In doing so, we broaden the knowledge of young researchers in areas related to energy, the economy, and the environment while honing their expertise in a range of analytical techniques. For more information about CERI or how to become a member contact us at (403) 282-1231 or visit our website at www.ceri.ca Brazil’s Pre-salt Region under Strict Government Control In June, Brazil’s government passed two important bills that will affect the country’s oil industry development. The first bill allows the government to transfer drilling rights for up to 5 billion barrels of oil equivalent (boe) to Brazil’s largest energy company, the state-controlled Petrobras, as well as participate in the company’s planned rights issue in return for more stock and greater control. The second bill enables the government to replace the concession system, which was used to bring foreign investment into the offshore sector with production-sharing contracts (PSCs) for the pre-salt area 1 and other strategic areas having the same potential as the pre-salt. Petrobras would be an operator of all contracts under the PSC framework, with a minimum 30 percent working interest. Output will belong to the government under a production sharing model, and participating international oil companies (IOCs) will receive a fixed share of the revenues. The new changes to the petroleum law increase state control over the pre-salt areas of the Santos and Campos basins where recent discoveries might transform Brazil from a large oil producer to an important oil exporter. The pre-salt region, covering an offshore area 800 kilometers long and 200 kilometers wide between the states of Espirito Santo and Santa Catarina, is estimated to contain up to 80 billion barrels of light crude under a thick layer of salt far beneath the ocean floor 2 (see Figure 1). Since the discovery of theTupi oilfield in 2007, which is located in the pre-salt region, and is estimated to contain between 5 to 8 billion barrels of light crude, Brazil’s coast has become one of the hottest new oil locations in the world. In addition, the recent discovery of 4.5 billion boe indicates the pre-salt region may occupy an even larger area, beyond the Santos and Campos basins, extending in the northeast direction along the Brazilian coastline. Figure 1. Brazil’s pre-Salt Region Source: http://blogs.ft.com/energy-source/2010/06/16/ petrobras/ However, it will take a lot of funding to drill the oil out of the pre-salt areas. This is part of the reason why Petrobras is continuing to raise capital. The company is seeking to raise as much as US$220 billion in spending through the 2010-2014 period. Petrobras will launch a share offer to its shareholders as the first step to raise a portion of the capital needed. Brazil’s government indicated it might use the rights issued to buy shares in Petrobras in an oil-for- shares capitalization plan for the rights to the offshore crude, with the size and price to be determined after independent auditors value the barrels involved in the swap. Minority shareholders will have to pay cash to avoid dilution of their holding in the firm.
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
The Canadian Energy Research Institute is an independent,not-for-profit research establishment created through apartnership of industry, academia, and government in 1975. Ourmission is to provide relevant, independent, objective economicresearch in energy and related environmental issues. We striveto build bridges between scholarship and policy, combining theinsights of scientific research, economic analysis, and practicalexperience. In doing so, we broaden the knowledge of youngresearchers in areas related to energy, the economy, and theenvironment while honing their expertise in a range of analyticaltechniques.
For more information about CERI or how to become a membercontact us at (403) 282-1231 or visit our website at www.ceri.ca
Brazil’s Pre-salt Region under StrictGovernment Control
In June, Brazil’s government passed two important billsthat will affect the country’s oil industry development. Thefirst bill allows the government to transfer drilling rightsfor up to 5 billion barrels of oil equivalent (boe) to Brazil’slargest energy company, the state-controlled Petrobras,as well as participate in the company’s planned rights issuein return for more stock and greater control. The secondbill enables the government to replace the concessionsystem, which was used to bring foreign investment intothe offshore sector with production-sharing contracts(PSCs) for the pre-salt area1 and other strategic areashaving the same potential as the pre-salt. Petrobras wouldbe an operator of all contracts under the PSC framework,with a minimum 30 percent working interest. Output willbelong to the government under a production sharingmodel, and participating international oil companies (IOCs)will receive a fixed share of the revenues.
The new changes to the petroleum law increase statecontrol over the pre-salt areas of the Santos and Camposbasins where recent discoveries might transform Brazilfrom a large oil producer to an important oil exporter. Thepre-salt region, covering an offshore area 800 kilometers
long and 200 kilometers wide between the states of EspiritoSanto and Santa Catarina, is estimated to contain up to80 billion barrels of light crude under a thick layer of saltfar beneath the ocean floor2 (see Figure 1). Since thediscovery of theTupi oilfield in 2007, which is located inthe pre-salt region, and is estimated to contain between5 to 8 billion barrels of light crude, Brazil’s coast hasbecome one of the hottest new oil locations in the world.In addition, the recent discovery of 4.5 billion boe indicatesthe pre-salt region may occupy an even larger area, beyondthe Santos and Campos basins, extending in the northeastdirection along the Brazilian coastline.
However, it will take a lot of funding to drill the oil out ofthe pre-salt areas. This is part of the reason why Petrobrasis continuing to raise capital. The company is seeking toraise as much as US$220 billion in spending through the2010-2014 period. Petrobras will launch a share offer toits shareholders as the first step to raise a portion of thecapital needed. Brazil’s government indicated it might usethe rights issued to buy shares in Petrobras in an oil-for-shares capitalization plan for the rights to the offshorecrude, with the size and price to be determined afterindependent auditors value the barrels involved in theswap. Minority shareholders will have to pay cash to avoiddilution of their holding in the firm.
CERI Commodity Report - Crude Oil
PAGE 2
Petrobras has made some of the biggest oil discoveries inthe world in recent decades. Eventually the company’slatest finds could double its existing reserves of more than12 billion barrels,3 while production is set to growsignificantly, with Tupi’s commercial production startingas early as the fourth quarter of this year.4 Petrobrasprojects oil production will increase by 9.4 percent annuallyto 3.9 MMbpd by 2014, and double by 2020.5
Yet investors have been fleeing from the company, alarmedby the Brazilian government granting Petrobras productionrights for up to 5 billion boe in exchange for more stockand greater control. Some executives at IOCs haveexpressed doubts that the announced plans for drillingand development of pre-salt regions will go as plannedfor several reasons. First, any single company that is tryingto manage all activities by itself will likely develop moreslowly and face challenges, specifically on the technologyside. Technology is a key component of pre-salt regiondevelopment, and with the opportunity for growth in Brazil,continued improvements in technology are going to bevery important. Thus, partnership of Petrobras with otherIOCs will be essential since IOCs will bring the knowledgeand technological know-how to the table. However, thiscooperation might be jeopardized by the new changes toBrazil’s petroleum law since there is plenty of concern onbehalf of IOCs about greater state control, as well as theUS$220 billion cost of the company’s proposed four-yeardevelopment plan.
Moreover, the government insists that more of theequipment used offshore be owned by Brazilian firms orbe built in Brazil. Given the significantly higher cost ofconstructing the units locally rather than through a large,established manufacturer, Brazilian-made rigs may wellbe unprofitable. Such development of local content mustbe sustained on the long-term basis avoiding some ofBrazil’s past mistakes stemming from excessive subsidies.Sustainability requires that local companies be competitivewith international players on cost and quality; to develop
such sustainability in Brazil, the government must addressthe role of international service companies and equipmentsuppliers in the context of local content.
Nevertheless, Petrobras insists it has the expertise to workthe pre-salt oil fields. Besides, with the newly introducedlegislation, Petrobras will be favoured, with a minimum30 percent working interest in all contracts when thegovernment will start auctioning PSCs next year since it isunenthusiastic about sharing the huge gains from the pre-salt oil fields with others. Hence, the outlook for IOCs isless certain. However, some industry observers say thatwhile there is sufficient cause for concern about greaterstate control and the enormous cost of the company’sproposed development plan, the pre-salt oil fields still offeran attractive opportunity for long-term investors.
Endnotes
1The expression “pre-salt” makes reference to an aggregationof rocks located offshore in a large portion of the Braziliancoast and with potential to generate and accumulate oil. Itis called pre-salt because it forms a rock interval that rangesunder an extensive layer of salt which, in certain areas ofthe coast, can be as much as 2,000 meters thick. The “pre”expression is used because, through time, these rocks weredeposited before the salt layer. The total depth of theserocks, i.e., the distance between the surface of the seaand the oil reservoirs under the salt layer, can be as much as7,000 meters.2“Brazi l confirms hydrocarbon strategy”. http://mystockvoice.wordpress.com/2009/10/28/brazil-confirms-hydrocarbon-strategy. Accessed August 3, 2010.3“Drilling for Value in Petrobras Shares”. http://online.barrons.com/article/SB50001424052970203296004575338572714305994.html#. Accessed on August 3, 2010.4“New laws place Brazil’s oil and gas firmly under state control”.Petroleum Economist, July 2010.5“Drilling for Value in Petrobras Shares”. http://online.barrons.com/article/SB50001424052970203296004575338572714305994.html#. Accessed on August 3, 2010.
Low Price Case 62.90 64.60 63.75 62.05 63.75 63.75 66.30
CERI Commodity Report - Crude Oil
PAGE 8
DATAAPPENDIX
Relevant • Independent • Objective
PAGE 9
A1: Historic Light Sweet Crude Futures Prices($US per barrel)
Notes (Tables A1 and A2): Prices are listed by contract month. Close: final contract close on the last day of trading. Last 3 Day Average Close:simple average contract close on last three days of trading. Average When Near Month: simple average closing price on trading days whencontract was near month. 12-Month Strip Average: simple average of daily near 12-month contract closing prices in a given contract month.Spread: difference between one-month and two-month forward prices in a given period. Source: New York Mercantile Exchange (NYMEX).
A2: Historic Crude Product Futures Prices(¢US per gallon)
NYMEX Light Sweet CrudeLast 3 Day Avg. When 12-Month Spread
Close Average Near Mo. Strip Avg. (1-2 Mo.)2007 69.72 69.78 68.89 70.09 -0.492008 104.42 103.36 104.97 104.36 0.202009 58.61 58.58 55.69 63.97 -1.78
A4: North American Posted Crude Oil Prices(FOB, $US per barrel)
Notes: 1. ANS is Delivered price on U.S. West Coast. 2. Edmonton Light Sweet. 3. Hardisty Heavy. Posted prices are based on price at theend of each month. Sources: Oil & Gas Journal; Natural Resources Canada.
A3: World Crude Oil Contract Prices(FOB, $US per barrel)
Notes: 1. Urals is Delivered price at Mediterranean. Contract prices are based on prices at the end of each month. Source: Weekly PetroleumStatus Report.
Saudi U.A.E. Oman U.K. Norway Russia Venez. Colombia Ecuador Mexico Nigeria Indon.Arab Lgt Dubai Oman Brent Ekofisk Urals1 T.J. Light C.Limon Oriente Isthmus Bonny Lgt Minas
A5: Crude Oil Quality Differentials(FOB, $US per barrel)
A6: Crude Oil Spot Prices and Differentials(FOB, $US per barrel)
Notes: 1. OPEC-Reference Basket is average price of seven crude streams: Algeria Saharan Blend, Dubai Fateh, Indonesia Minas, MexicoIsthmus, Nigeria Bonny Light, Saudi Arabia Light and Venezuela Tia Juana Light. Spot prices are average daily prices over specific timeframe.Source: International Energy Agency (IEA) Oil Market Report.
Notes: 1. Edmonton Light Sweet. 2. Hardisty Heavy. Based on contract prices at end of each month. Sources: EIA Weekly Petroleum StatusReport: Oil & Gas Journal; Natural Resources Canada.
Light vs. Heavy Sweet vs. SourArab Lt Arab Hv Diff. Isthmus Maya Diff. ELS1 HH2 Diff. GCS WTS Diff.
Notes: 1. Regular unleaded gasoline. 2. High Sulfur (3.0%) Residual Fuel Oil. 3. High Sulfur (3.5%) Residual Fuel Oil. Spot prices are basedon average daily prices over specific timeframe. Source: IEA Oil Market Report.
A7: World Petroleum Product Spot Prices($US per barrel)
A8: Product Spot Prices in Select American Cities(¢US per gallon)
Notes: 1. Reformulated regular unleaded gasoline. Spot prices are based on average daily prices over specific timeframe. Source: EIA WeeklyPetroleum Status Report.
NY Harbor US Gulf Los AngelesGasoline1 No. 2 H.O. Resid. Gasoline1 No. 2 H.O. Resid. Gasoline1 Resid.
B1: World Petroleum Supply and Demand Balance(million barrels per day)
Notes: 1. Totals for OECD and Non-OECD supply include net refining gains; specific regions/groupings within each do not. 2. OPEC demandis an estimate based on historical annual data. 3. Balance for World equals global stockbuilds (+) and stockdraws (-) for crude oil and petroleumproducts and miscellaneous gains and losses. Regional surpluses (+) and deficits (-) are balanced through net-imports and stock changes inthe short-term, and net-imports in the longer term. Supply includes crude oil, condensates, NGLs, oil from non-conventional sources andprocessing gains. Demand is for petroleum products. Source: IEA Oil Market Report.
OECD Non-OECD OPEC WorldN. A. Europe Asia-Pac Total1 Asia Non-Asia FSU Total1 P. Gulf Non-Gulf Total2 Total3
Notes: 1. Product includes only finished petroleum products. 2. Total stocks include NGLs, refinery feedstocks, additives/oxygenates andother hydrocarbons. All stocks are closing levels for respective reporting period. Source: IEA Oil Market Report.
B2: World Petroleum Production(million barrels per day)
Notes: 1. Production includes crude oil, condensates and NGLs. 2. Reserve-Production ratio is based on latest month production and BritishPetroleum reserve estimates. Sources: IEA Oil Market Report and BP Statistical Review of World Energy.
OECD Non-OECD OPEC WorldN. A. Europe Asia-Pac Total Asia Non-Asia FSU Total P. Gulf Non-Gulf Total Total1
Notes: 1. Based on dated Brent being processed in average U.S. Gulf cracking refinery. 2. Based on dated Brent in average Rotterdamcracking refinery. 3. Based on spot Dubai in average Singapore hydroskimming refinery. Source: IEA Oil Market Report.
B4: OPEC Crude Oil Production and Targets(million barrels per day)
Notes: 1. Does not include NGLs; OPEC production targets apply to crude oil only. 2. Iraq does not have an official OPEC target. 3. OPEC-10production targets. 4. As of latest month. Source: IEA Oil Market Report.
C1: U.S. Petroleum Supply and Demand Balance(million barrels per day)
Notes: 1. Does not balance because of unaccounted for crude oil. Regional surpluses (+) and deficits (-) are balanced through net-imports/transfers and stock changes in the short-term, and net-imports/transfers in the longer term. 2. As of most recent month. Supply includescrude oil, condensates, NGLs, oil from non-conventional sources and processing gains. Demand is for petroleum products. Source: EIAPetroleum Supply Monthly.
United States1 East Mid-WestSupply Demand Net-Imp. Stk. Chg. Supply Demand Balance Supply Demand Balance
C2: U.S. Petroleum Demand by Product(million barrels per day)
Notes: 1. Total includes other finished petroleum products. 2. Total petroleum demand includes refinery feedstocks, additives/oxygenates andother hydrocarbons. Source: EIA Petroleum Supply Monthly.
C3: U.S. Petroleum Stocks(million barrels)
Notes: 1. Petroleum stocks include crude oil, finished products, NGLs, refinery feedstocks, additives/oxygenates and other hydrocarbons. 2.Includes approximately 685 million barrels of oil in the Strategic Petroleum Reserve. 3. Total includes other finished petroleum products. Allstocks are closing levels for respective reporting period. Source: EIA Petroleum Supply Monthly.
Notes: 1. Total includes net-imports from Russia and Asia-Pacific region. 2. Total OPEC includes other eight cartel members. 3. As of latestmonth. Source: EIA Petroleum Supply Monthly.
Notes: 1. California includes Federal Offshore crude oil production. 2. Gulf of Mexico includes Federal Offshore production adjacent to Texasand Louisiana. 3. Crude oil Reserve-Production Ratio as of latest production month. Crude oil production does not include NGLs. Source: EIAPetroleum Supply Monthly.
C4: U.S. Petroleum Net-Imports by Source(million barrels per day)
C5: U.S. Regional Crude Oil Production(million barrels per day)
OPECCanada Mexico Lat. Am. Europe Africa M.E. Total1 Venez. S. Arabia Nigeria Total2 P. Gulf
C6: U.S. Refinery ActivityCrude Input (MMbpd) - Utilization (percent)
Note: Based on specified crude being processed in average cracking refinery in given area. As ofFebruary 2010, NY Harbor Arab Med. is now East Coast Composite. Source: Oil & Gas Journal.
Note: 1. As of most recent month. Source: EIA Petroleum Supply Monthly.
East Mid-West South-Central North-West West U.S.Input Util. Input Util. Input Util. Input Util. Input Util. Input Util.
D1: Canada Petroleum Supply and Demand Balance(million barrels per day)
D2: Canada Oil Demand by Product(million barrels per day)
D3: Canada Petroleum Stocks(million barrels)
Notes: 1. Total includes other finished petroleum products. 2. Totalpetroleum stocks include NGLs, refinery feedstocks, additives/oxy-genates and other hydrocarbons. All stocks are closing levels. Source:Statistics Canada’s Energy Statistics Handbook.
Notes: 1. Total includes other finished petroleum products. 2. Totalpetroleum demand includes refinery feedstocks, additives/oxygen-ates and other hydrocarbons. Source: Statistics Canada’s EnergyStatistics Handbook.
Notes: 1. As of most recent month. See notes for Table C1 for additional comments. Source: Statistic Canada’s Energy Statistics Handbook.
D4: Canada Crude Oil Production(million barrels per day)
Note: 1. Total includes small amounts of production from Manitoba and Ontario. Source: Statistics Canada’s Energy Statistics Handbook.
Note: 1. Includes all non-OPEC production. 2. Includes production by other seven OPEC-members. 3. As of most recent month. Source:Statistics Canada’s Energy Statistics Handbook.
D5: Canada Petroleum Imports by Source(thousand barrels per day)
Major Producers Canada Petroleum TypeAlta. Sask. B.C. N.W.T. Atlantic Total1 Light SCO Heavy Bitumen NGLs
For More Information, Contact:Dinara Millington at (403) 220-2384 or [email protected]
Canadian Energy Research Institute#150, 3512 - 33 Street NW
Calgary, AB T2L 2A6
Geographical Specifications
1. The World: OECD is comprised of countries from three regions: North America (Canada, Mexico, US); Europe (Austria, Belgium, CzechRepublic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland,Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, UK); and Asia-Pacific (Australia, Japan, New Zealand, South Korea). OPECis comprised of Persian Gulf (Iran, Iraq, Kuwait, Qatar, Saudi Arabia, United Arab Emirates) and non-Persian Gulf countries (Algeria, Indonesia,Libya, Nigeria, Venezuela). Non-OECD is comprised of countries from three regions: Former Soviet Union (Armenia, Azerbaijan, Belarus,Georgia, Kazakhstan, Kirghizstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan); Asia (including non-OECD Oceania); andnon-Asia (Africa, Middle East, Latin America, and non-OECD Europe).2. United States: East (PADD I) – New England (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont); CentralAtlantic (Delaware, Maryland, New Jersey, New York, Pennsylvania, and the District of Columbia) and Lower Atlantic (Florida, Georgia, NorthCarolina, South Carolina, Virginia, and West Virginia). Mid-West (PADD II) – Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota,Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, and Wisconsin. South-Central (PADD III) – Alabama, Arkansas,Louisiana, Mississippi, New Mexico and Texas. North-West (PADD IV) – Colorado, Idaho, Montana, Idaho, Montana, Wyoming. West (PADD
V) – Alaska, Arizona, California, Hawaii, Nevada, Oregon,Washington.3. Canada: East is comprised of Ontario, Manitoba, Quebecand the Maritime provinces (New Brunswick, Newfoundlandand Labrador, Nova Scotia, and Prince Edward Island). Westis comprised of Alberta, British Columbia, Saskatchewan andthe northern territories (NorthWest Territories, Nunavuut,and Yukon).
Additional Notes
1. Petroleum and oil refer to crude oil and natural gas liquids(NGLs), whereas crude oil refers to its namesake and fieldcondensates. Condensates derived from natural gas process-ing plants are classified as NGLs. 2. The spot price is forimmediate delivery of crude oil or refined products at a spe-cific location. Spot transactions are generally on a cargo bycargo basis. In contrast, a futures price is for delivery of aspecified quantity of a commodity at a specified time andplace in the future. 3. Crude oil sold Free-On-Board (FOB) ismade available to the buyer at the loading port at a particulartime, with transportation and insurance the responsibility ofthe buyer. Crude oil sold Cost-Insurance-Freight (CIF) ispriced at a major destination point, with the seller responsiblefor the transportation and insurance to that point. A “Deliv-ered” transaction is similar to a CIF transaction, except thebuyer in the former pays based on the quantity and qualityascertained at the unloading port, whereas in a CIF transac-tion, the buyer accepts the quantity and quality as deter-mined at the loading port. 4. Processing gain is the volume ofwhich refinery output is greater than crude oil inputs. Thedifference is due to the processing of crude oil products,which in total have a lower specific gravity than crude oil. 5.Unaccounted for crude oil reconciles the difference betweencrude input to refineries and the sum of domestic production,net imports/exports, stock changes and documented losses(in the U.S.). 6. Totals may not equal the sum of their partsin the statistical tables due to rounding.