1. Fuel Price Forecasting Service
A New Era of Higher Prices?
Fuel Price Forecasting Service
Graham Weale, Director of European Energy Service
David Goldsack – Coal
Graham Loveland – Oil
Graham Freedman – Gas
17th February 2005 Teleconference

2. Are We Entering a New Era of Higher Prices?
Oil Price per Barrel
Gulf War
Quotas followed.
Far East Demand Up
“9/11”
Oversupply

3. Higher Prices – Not Just Oil
300
Oil $/toe
250
Oil €/toe
Gas $/toe
200
Gas €/toe
$/toe or €/toe
150
Coal $/toe
100
Coal €/toe 50
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004

4. What is the Basis of Pricing Pressure?
What has driven prices up to their levels?
....and why no higher?
To what extent are the drivers common across fossil fuels?
Will we see classic economic responses:
Producers increasing output?
Consumers cutting back?
Will new forms of technology arrive?
Are we now in a new pricing era?

5. How are the Main Price Drivers Impacting Higher Fuel Prices?
OIL
GAS
COAL
Variable costs inc. freight  
Fixed costs
Demand level

Capacity margin(s)
Stocks
Producer market power 
Value of alternative fuels
Market sentiment & events

6. Two Explanatory Factors for Demand
Higher price demand elasticity
China
Low price demand elasticity

7. ……..but Only One for Supply
High producer concentration
Limited scope for expansion

8. Will Oil Continue to Set Fuel Prices?

9. Higher Finding Costs and Increased call on OPEC
Oil
Higher Finding Costs and Increased call on OPEC

10. Evidence that a new Era is Beginning…
The Relationship between Price & Stock Breaks Down.
7.5
12.5
17.5
22.5
27.5
32.5
37.5
42.5
47.5
52.5 -8 -6 -4 -2 2 4 6 8
Variation in days cover from seasonal average
BFO price $/barrel
Nov
Oct
Sep
Aug
Jul
May
Jun

11. Finding and Development Costs are Rising
F&D Costs for Different Groups of Oil Companies

12. Whither demand? …Whither OPEC?

13. But if the “Peak Oilers” are right….
The “Peak Oil” Debate
“Debate? ….What debate?”
Wide discrepancy of views
Tends to focus on resources and reserves
Falling discovery rates, access issues, oil company behaviour, manpower/logistics, and lack of investment are probably more important
But if the “Peak Oilers” are right….

14. Will the LNG Market Destroy Oil-Price Indexation?
Gas
Will the LNG Market Destroy Oil-Price Indexation?

15. The End of Oil Indexation?
Oil-price Indexation is under attack.
Competition is increasing.
Some countries are oversupplied
Removal of destination clauses
LNG enhances supply flexibility
Gas-on-gas competition will undermine the traditional link to oil products.
How quickly will this happen?
3 years?….5 years? ….or longer? 15

16. Impact of Coal Indexation as Required for Power Sector
Differences in indices can & will be traded, further undermining oil indexation.

17. Price Outlook – Oil-indexed or Cost-based?
Large Margins encourage new entrants
Margin $2.5/mmbtu

18. Prospects for Atlantic Basin Price Convergence
When will LNG trade volumes affect market prices?
Phase 1:
When will rising LNG trade change gas prices at market hubs?
Phase 2:
When will LNG producing countries force convergence to NYMEX Henry Hub prices?
United States
Average Natural Gas Price
Europe
Years
Source: Global Insight

19. How long will prices sit at twice costs?
Coal
How long will prices sit at twice costs?

20. How will Cross-Fuel Competition Impact Coal Prices?
History of delivered prices to ARA

21. Will Prices Stay at Their Current Level?
Coal prices are normally driven by marginal cost of production being regulated by supply/demand position
Current prices reflect tighter supply, high freight & high cost of competitor fuel (gas)
Freight markets are volatile & supply demand imbalances are normally regulated within 2 year time frame
As freight & supply markets come back into balance, prices will fall – based on whether:
producers maintain gas price linking
coal-on-coal competition causes prices to become detached

22. Both Freight and Mine Costs include a real return on investment of 10%
Actual Freight and fob Coal show scope for future price decreases ( all in tonnes basis 6000 Kcal, NCV)
Both Freight and Mine Costs include a real return on investment of 10%

23. Cross-fuel Conclusions

24. Broad Fuel Price Moderation is Likely to Lie Ahead…

25. Issues to Watch Early gas liquidity in Europe
End of oil-price indexation, preserves oil-price correlation
Peak oil issue and higher finding costs
Pressure on coal producers soften prices to accept cost of carbon?

26. For Additional Information on Global Energy Products & Services,
Graham Weale
Peter Seager