OECD LONG-TERM PETROLEUM DEMAND UNLIKELY TO SURPASS 2005 PEAK

As the world moves from recession to growth, oil demand will grow once again. However, all of the demand lost in the developed world (countries in the OECD) is unlikely to return, even over the long term, and 2005 could be the peak year of OECD oil demand. The long-term demand outlook has dimmed under ongoing demographic and socioeconomic changes (such as the aging of OECD populations), improved transportation efficiency, and encroachment by substitutes such as biofuels and natural gas. An OECD demand peak’s significance includes

• Potentially less long-term upward pressure on crude prices. OECD oil demand represents 54 percent of world demand in 2009. Although that share has been trending down for years, if it has peaked, this will help counteract the expected rapid demand growth in the developing world. Such a peak does not eliminate the potential for higher oil prices in the future, but could help to diminish such pressures.
• OECD economies less susceptible to oil price shocks. As the oil intensity of OECD economies declines, economic growth will be more insulated from the impact of oil price swings. It will likely take larger price spikes to inflict the same damage to the economy as would otherwise be the case.
• The potential for increased energy “resilience.” Less OECD oil demand could also prevent the rate of dependency on imported oil from increasing. Developed countries may therefore be able to withstand physical oil supply disruptions more readily.
• Increased potential for rationalization of the OECD refining sector. Without steady long-term demand growth, refining overcapacity in the United States, Europe, and Japan will ultimately lead to the shutdown of less competitive refining assets.

US CLIMATE POLICY AIMS TO TRANSFORM ENERGY SECTOR

The American Clean Energy and Security Act of 2009 (HR 2454), which passed the US House of Representatives in June 2009, and the US Senate’s draft introduced in September 2009 seek to transform the US energy sector to a low-carbon infrastructure. IHS CERA analyzed HR 2454 to determine the effects on the US energy sector, greenhouse gas (GHG) emissions, and energy prices.

• Carbon dioxide (CO₂) prices, mandates and subsidies would overtake demand growth as key drivers of energy investments. Significant investments would be required to replace existing infrastructure, particularly in power. CO₂ prices and new subsidies would substantially alter the relative economics of supply options and investment patterns.
• A significant price for CO₂ is required to drive the degree of change required under HR 2454. Prices rise from $22 per ton in 2012 to $84 per ton (real 2008 dollars) in 2030 in IHS CERA’s outlook.
• HR 2454 would materially increase energy costs. By 2030 average real retail electricity prices would rise 29 percent compared to a case without federal GHG legislation (and 42 percent compared to 2008 prices). Retail gasoline prices in 2030 are projected to be below 2008 levels but 29 percent higher compared to a case without legislation.
• Assessments of HR 2454 are subject to significant uncertainty. IHS CERA’s analysis assumes that a majority of GHG abatement would come through GHG offsets and development of new nuclear and coal plants with carbon capture and storage. Cost projections are highly sensitive to these assumptions and assumptions for future energy demand.

WHAT HAS BEEN THE IMPACT OF THE CRISIS ON THE FUTURE OF EUROPEAN ENERGY M&A DEALS?

Merger and acquisition (M&A) activity has altered the European gas and power utility landscape in the past several years, with the aggregate deal value reaching US$390 billion. In this paper, based on an analysis of the M&A activity from 2002 onward, IHS CERA assesses the impact of the crisis on the current business environment and on the future of M&A deals. IHS CERA expects to see the following trends continue to evolve through the end of the current recession and the recovery of the financial and energy markets by 2011:

• The impact of the financial crisis has all but stifled M&A activity. Capital markets have been very thin and will continue to restrict the main focus of M&A to the pursuit of smaller, mainly asset acquisitions.
• Large pan-European deals will not come back in the next two years. These deals are difficult to get approved and have required huge debt support. In addition, there may be fewer opportunities after a wave of consolidation.
• Gas and power convergence deals have lost momentum and will likely not return until financial markets fully recover. Both the main motivating drivers behind these big deals, upstream cost volatility hedging and retail marketing synergies, and the financial resources needed are currently weakened.
• A "second wind" for renewables deals is likely. Long-term subsidies can provide support for a "second wind" for renewables deals even during the crisis, but the business model is changing.
• Large, well financed players will look more aggressively outside of Europe. Well capitalized European companies will be looking for opportunities outside of Europe and especially in the United States, even though it doesn’t appear that there are currently discounted deals.

IHS CERA EXTENDS QUARTERLY LIQUEFIED NATURAL GAS OUTLOOK THROUGH 2012

The current significant liquefied natural gas (LNG) supply overhang is driven by the "triple whammy" of decreased gas demand, increased liquefaction capacity, and significant growth in North American shale gas. This overhang is expected to endure through the next couple of years. IHS CERA has extended our global projections through 2012 and sees balance returning to the market, assuming that liquefaction utilization returns slowly to a historical range.

• Trade should rebound quickly. IHS CERA expects global LNG trade to reach 250 million metric tons (34 billion cubic feet per day) in 2012, representing 48 percent growth over 2008 levels.
• Growth in absolute terms will be led by Asia, predominantly by China and India. New supply contracts and low prices will lead to more than a doubling of imports in Asia. European growth will also be significant, with Italian and UK imports driving most of the growth. North American imports will grow considerably next year and then fall—not because of demand in North America, but rather because of market forces elsewhere.
• A balanced market is likely to emerge in 2012. Returning demand in Asia and Europe, as well as the compound effect of smaller niche markets, will bring supply and demand back into balance by 2012.