IEA Oil Market Report 2017

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KEVIN BOOK: Good morning, and hi and welcome. My name is Kevin Book, and I’m a senior associate here at the Center for Strategic and International Studies. And I also wear a lot of hats, as someone with my haircut might, and I’m managing director at ClearView Energy Partners as well.

And we’re going to get started here in just a moment. I wanted to welcome you to this – second unveiling? You can’t really unveil, I guess, a second time. The Washington debut of the Oil Market Report with Keisuke Sadamori, back again to do I think what will be a very interesting discussion. We’ll go through slides. We’ll have a discussion. I will take the privilege of asking a few questions beforehand. And then hopefully we’ll look to a lot of old friends and skilled oil mavens in the crowd. Apparently they followed you up here from Houston. All the intelligentsia are here now for you.

For those who don’t have the benefit of knowing Keisuke Sadamori, he is the director of energy, markets and security at the IEA. If you – if you saw him last year or you’ve seen him speak in the past, you know that he has at his command a wealth of knowledge, not just in terms of what’s in the report but how the report was made. He has a command of statistics and figures, and more importantly trends and observations, and we’re very delighted to have him here to take us through what the IEA has learned.

As a matter of preface and context, I think last year I called your report an act of analytical courage. If you recall, we were – we were at a point where the oil market had crashed, collapsed, and left everybody bleeding and screaming alongside with questions about when, when, when will the market turn. OPEC had abandoned its control of the market, and nobody knew whence there might be a balance to the lack of balance. And into that came the IEA, bravely outlining a five-year forecast which they called the Medium-Term Oil Market Report – which is no longer called that, apparently. It’s now in Oil 2017 in the Market Report Series. So if you’re – if you’re doing search terms of MTOMR, that is now the wrong search term.

But here we are a year later. Look at – look at how things have changed. What a wonderful business we’re in that you can have a five-year forecast and a year later have an entirely different context for that five-year forecast. We’re at $50 and OPEC is back on the job, or at least a little bit on the job. There’s a lot of questions about the productivity of light tight oil out of the United States, a lot of questions about whether or not the movement we’ve seen in markets since the U.S. election reflects a fundamental change in the world, a recovering world zooming back to life, or false optimism on fake news, more cynically, as some have suggested. Is this the beginning of an underinvestment cycle and the next super-spike, a middling range where we’re going to be range-bound between a retreating OPEC and a resurgent North America? What to expect? Where do we look? There’s really no other place we can look but to you.

So, with that, I look forward to watching your slides and enjoying the presentation. Thank you for being here.


Thank you. Thank you, Kevin, for the very nice introduction.

Yes, I was here just about a year ago, again, immediately after I went to Houston for the CERAWeek event and presented last year’s Medium-Term Oil Market Report. And I remember that you called this publication something like an act of bravery of something, and I – and I have to agree, honestly. But at the same time, I was pleased afterwards that actually the picture we depicted in that report fairly stood for quite a long time, basically pointing to the right.

Of course, there are some changes in details, because we are not a – you know, we are not intelligent enough to predict the wildfire in Canada. So there are some, of course, ups and downs. But we basically believe that the fundamental picture there was held valid in the – in the coming months after that. So this year, again, I will also try to act bravely, and I would like to put forward our – the forecast in the coming five or six years toward 2022.

And the name changed. Well, actually, I personally don’t know why, but somehow we dropped the term “Medium-Term,” but this continues to be the medium-term forecasting. So I personally call it Oil Market Report 2017. So it’s an annual version, different from the monthly version that we release every month.

So here’s – let me start with the – how we see the demand outlook in the coming several years. And first of all, our forecast on the oil supply and demand is based on the Brent crude oil future strip, future curve, with nominal prices to stay around the middle 50s, somewhere between 55 (dollars) and 60 (dollars) throughout the forecast period. And global oil demand growth is forecast to average about 1.2 million barrels per year, which equates to a net 7.3 million barrels per day of gain between 2016 and 2022. And global oil demand will cross the 100 million barrels per day line in 2019; that’s our expectation. And of course, among that, China and India will contribute nearly half, 46 percent of the growth.

And we do not expect demand to peak over the next six years. Even if the electric vehicle were to grow rapidly, we foresee very little impact on oil demand. And when we talk about the electric vehicles, so EV crossed the 1 million vehicle probably somewhere in 2015, and I guess that probably at the end of last year or now we may be talking about something like 2 million vehicles of EV around the world. And China is actually leading the global growth of the EV deployment. Having said – and in our longer-term projection of World Energy Outlook, in the central scenario of NPS, we expect 150 million vehicles in 2040. And in the greener scenario of 450 ppm scenario, this number grow – increase to 700 million vehicles. So that’s what we need to achieve the 2-degree path.

But having said so, we have to bear in mind that this 150 million vehicles, for instance, would reduce the oil demand by the rate of something like 1.3 million barrels per day. And even if goes up to 700 million vehicles, it will probably be equivalent to 6 million barrels per day of demand decline. So that’s the impact of the electric vehicle going forward. And when we talk about the 2040, we expect a lot larger contribution from the efficiency improvements, which would be – probably be more than 10 million barrels per day of the demand decline in oil. And so, in this very short-term five-year projections, we expect a very limited amount, probably something like 0.2 million barrels per day worth of the oil decline coming from the electric vehicles.

And so – but having said so, we do expect the slowdown in the oil-demand growth, and that’ll be due to the vehicle – continued vehicle efficiency improvements and also the ongoing structural changes in the Chinese economy – kind of their rebalancing toward the more consumer- and service-oriented economies – and also the structural declines in the OECD countries. Tighter marine field standards from 2020 will also have a modest impact. And the IMF basically overall predicts the steadily accelerating economic growth over this period.

So this is about the kind of a country – regional breakdowns. And what happens if we turn to the product – the growth. So the transport sector – that’s road, water and air, airplanes – is forecast to lead growth through to the year 2022, and that the transport sector will probably account for about half of the oil growth projected worldwide. And this impacts gasoline, jet kerosene, but this – jet and kerosene is included in these other products, and so – in this brown part. And the gas, oil, and the – so those will lead the growth.

The pending 2020 IMO bunker fuel regulation will likely to trigger the unspecified switch of around 2.5 million barrels per day out of the high-sulfur fuel oil. And at this moment, it is currently the – not clear how much will be dealt with by the scrubbers, an in this case they will continue to use the high-sulfur fuel oil. Other options would be the refiners switching to the – more production of maritime diesel production, or some ships may turn to the LNG as a fuel.

But at the same time, there are serious concerns in this report. They note about it. But there is serious concerns over the how robust the actual implementation of the regulation would be. So there may be some – there’s a concern for the noncompliance by some of the operators.

The petrochemical sector, meanwhile, accounts for roughly one-third of the – so that’s presented in the LPG-nafta (ph) at the – at the dark blue at the bottom. So petrochemical sector will roughly lead the one-third – contribute one-third of the global oil demand growth. And so that’s basic breakdowns in terms of the products.

The traditional classification of the oil product demand is, of course, between the OECD and non-OECD countries. And the long-term trend is that the non-OECD is growing while the OECD countries are declining.

But recent years we actually have seen the gap actually narrow. And so in the five years between a bit in the pass. Five years between 2008 and 2012, non-OECD demand growth outpaced the OECD of an average of more than 5 percent points per year. For example, in the 201, non-OECD oil demand grew by 4 percent, while the OECD declined by 1 percent. So that means a 5 percent point gap.

But the gap actually went smaller, to 3 percent in 2013 and ’14, and fell below 2 percent in 2015 and 2016. So that means that actually the OECD oil product demand grew during the recent period. But in our outlook toward the future, the gap between the non-OECD and OECD will actually start to grow again, become larger, return, and rising to around 3 percent or a bit more in our projection period.

And sharp oil-price decline in 2015 and only partial recovery in 2016 supported the – well, it led to the fairly robust growth on oil demand. So we saw the growth of 2 million barrels per day in 2015, and in 2016. And in 2016, it was 1.6 million barrels per day. So that led to a rather rare site in the oil demand, meaning that the OECD demand actually grew in the two years in a row, in 2015 and ’16. And this was first driven by the United States, especially in the gasoline demand, and also the – South Korea demand also support it. But also what was rare was that European countries have seen almost kind of a one-decade of demand decline, but suddenly in 2015 and ’16 – so two years of continued growth, even in Europe.

So probably that was stimulated by the low – the oil prices in those two years. But going forward, they will see the higher prices – a bit higher prices, at least compared with 2015 and ’16. And we’ll see, again, the decline of those – the OECD countries by the pace of 0.2 million barrels per day annually, and that’s mostly coming from Europe and North America. So all during this period, that’ll be the 1.2 million barrels per day of decline for those countries. So that’s about the demand outlook. So we continue to expect solid demand growth toward the year 2022.

Before talking about the supply forecast, I would like to touch upon the decline in upstream investments in the past two years. So we saw 2015 about a one-quarter of decline in upstream spending, and again another one-quarter in 2016. So it is now standing something – in 2016, it was something like $430 billion. And following the consolidation of the oil prices above $50 that we are seeing right now, so we expect some modest marginal increase in 2017. But this is rather uncertain.

Of course the one-quarter – another one-quarter decline in 2015 and 2016. These include the cost declines and also the improved efficiency. So we cannot – we cannot say that this is – all lead to the actual kind of a decline in upstream investment levels, but nonetheless we have not seen much of the new investment decisions made in the past two years. So that’s where we are right now.

Now, the global oil supply grew last year, despite a very weak price environment, as low-cost producers from the Middle East and Russia pumped at record rates. In North America and other higher-cost regions, supply shrank as investment fell sharply. So last year, 2016, non-OPEC production declined by the rate of around 0.8 million barrels per day, and that was – this decline was aided by this kind of a temporary shortage – outage in Canada out of the wildfire, but it declined substantially. But the OPEC and the Russian production grew, and that offset the decline from the non-OPEC producers. So, all in all, as a result, the world supply rose by 0.4 million barrels per day in 2016, so this is what happened. Now, going forward, the global oil production capacity expands by 5.6 million barrels per day toward 2022, of which the non-OPEC side contributes 60 percent. But as you can see, growth is heavily frontloaded.

So, indeed, the supply situation looks quite comfortable throughout the early part of this projection period, but by 2020 the global oil capacity growth slows considerably as the two-year spending drought in 2015 and ’16 has left few projects in the pipeline. So while the tentative signs of an uptick in spending are emerging, especially here in the United States with the light tight oil sector, but the costs may rise again with this comeback of the investment. So the global spending levels remain currently at worrying low levels. And of course it’s not too late to avert the supply crunch, provided the companies start to sanction development work without delay. So that’s how we see on the supply outlook for the future.

Let me go into the region by region.

So let me start with the OPEC. So, despite its deal to cut supplies at the start of 2017, OPEC will surely build up the production capacity in anticipation of the higher demand for its crude. And actually, the call on OPEC crude – that’s what we call it – rises to 35.8 million barrels per day in 2022, and that’s from 32.2 million barrels per day in 2016. So that will grow by the rate of around 3.6 million barrels per day, if we do the math. During that same period, we expect that the OPEC capacity will grow by around 2 million barrels per day, so that implies the reduction in the spare capacity. And growth of 2 million barrels per day over this six years period is, as you can see, mostly concentrated in the low-cost Middle East region, and that’s driven by Iraq, Iran, UAE and Libya. But of course, the – we assume the political stability in those regions in projecting this growth in those countries. And on the other hand, countries outside the Middle East, they fare less well. The capacity shrinks in Venezuela, Algeria, Nigeria, and also Angola. So that’s how we expect it.

Now, a little bit more on Iraq. So, within OPEC, Iraq will post the biggest gains, roughly about one-third of the entire OPEC capacity growth of 0.7 million barrels per day out of 2 million barrels. And crude oil output capacity is projected to rise to – from Iraq to about 5.4 million barrels per day by 2022, so that’s an annual average growth of 120 kbd over this forecast period. But of course, as always, there are risks to this projection in both ways. To the upside, given Iraq’s vast low-cost reserves base and budget pressure, that can lead to more production. But on the other hand, of course, the downside is the security or financial, or the infrastructure or institutional obstacles. And in the past – it’s quite obvious that in the past two years – two years running, Iraq has managed to break the production records, so raising flows by more than 1 million barrels per day, even as it wages a costly battle against the ISIS and struggled under the various severe budgetary constraints.

And in this, Iraq’s southern oil heartland around Basra will provide the bulk of the growth over the forecast period. On the other hand, in the north, the complicated geology or the security risks, and also the lower oil prices, they have frustrated development drive in the north part of the country. So KRG is producing around 700 kbd from the fields under its control, but of course it’s struggling to meet the export payments to foreign contractors.

Turning to the non-OPEC side, so after a difficult 2016 with 0.8 million barrels per day of decline, non-OPEC oil production is expected to return to growth in this year, 2017. And of course, the higher prices are encouraging the increased investment in the United States now, while a number of long lead-time projects will be completed and brought onstream elsewhere. So growth will accelerate in 2018 and remain fairly robust in 2019, but the lack of new investment decisions since 2014 will substantially slow growth thereafter, as I showed in the previous slide. And for the 2016 to ’22 period, non-OPEC supplies are forecast to grow by 3.3 million barrels per day, to reach 60.9 million barrels per day in 2022.

And in this forecast period, you can see that the Americas – both North America and South America – will continue to dominate the growth. So U.S. will be the number one growth center, with 1.6 million barrels per day of growth in the period, and 1.4 (million) among them is coming from the – only from the U.S. light tight oil. And we expect that the growth will be very strong in the earlier period, but will stabilize in the second half of this projection period.

And other gains will come from Brazil, a bit more than 1 million; and Canada, around 0.8 million barrels per day. And they will – those growth will be coming from the kind of the long lead-time projects in pre-salt formation, and also the oil sands projects. And there will be small increases coming from Kazakhstan as well, and the fourth one is biofuel, the production growth, which is about 0.4 million barrels per day.

So adding those from number one to number five on the left-hand side, that would create – that will lead to about 4.3 million barrels per day of growth during this forecast period. So that means that the countries in red bars, they will decrease the non-OPEC supply by 1 million barrels per day in total.

And we expected the declines in Russian production in the past few years in MTOMR, and finally we somewhat raised the output – the forecast, and we expect some very stable plateau – stable, the production from Russia. And so we expect that the Russian production will stay something like current level of 11.3 million barrels per day, and that’s supported by the weaker ruble as well as their tax systems. So, in that respect, this – the Russian production is coming from – at the sacrifice, at the expense, of the Russian – the government’s deficit. So that’s how we look at it.

And on the right-hand side, we see some countries that expect a somewhat substantial decline in production, and that’s for instance China and Colombia. They are both characterized by the mature and declining output field, and they saw – they will see their output plunge by – and they saw the – actually, in the last year they saw the plunge by 7 (percent) and 12 percent, respectively. So in the last year, 2016, and because of those lack of investment and the lack of drilling activities, and also they shut the somewhat marginal fields. So that’s what we expect for those countries in terms of the non-OPEC production.

And in this year, we put some additional forecasts on the U.S. light tight oil sector, which is more price-sensitive/flexible compared with other fields. So as I said, the projection in this – the market report, we base it on the price assumption on the Brent future curve. So we expect something like $58 per barrel toward the year 2022. And of course, this is not a price forecast, and the actual world is a lot more – could be more volatile, and it’s really hard to predict, and we don’t do this price-forecasting business. But nonetheless, this is the working assumption.

But we all know here in the United States that this light tight oil sector responds more rapidly to price signals that other sources of supply, so the production response of the shale at different price level is critical. So we try to look in to do that kind of a sensitive case analysis. And so if price goes up to, for instance, $80 per barrel, in this case – and this is close to the World Energy Outlook New Policies Scenario’s price assumption – then we will see a lot more robust growth; and so, instead of a 1.4 (million), probably it will go up to the 3 million barrels per day of growth compared with 2016. But on the other hand, of course, if the price goes down to, say, 50 (dollars), then we may see that the light tight oil production will start to decline somewhere around the year 2020.

So, of course, the price is not the only determining factor in this light tight oil production. There are other elements like remaining resources or the technological improvements or the productivity gains. But also, on the other side, there could be the impact coming from cost inflation in case of more investment in this sector. They’re all important.

A little bit on the refining sector. So, in 2016, we observed the rare situation when the global refining capacity declined year on year, in 2016. And this is due to some long-planned shutdowns, and they were not offset by the new capacity. A few projects that were finished in 2016 did not actually enter into production, being postponed to 2017. And in the next six years, we see more than sufficient capacity additions, actually – about 70 greenfield refineries and expansion projects will materialize between now and 2022. Taking into account the projected shutdowns in Japan, Middle East and other countries, then the net additions we expect are 7 million barrels per day.

And Middle East and China dominate the growth, accounting for over half of all the additions. In India, the downstream capacity-building is slowing slightly as bigger projects have already come online and only capacity expansion plans at existing refineries are expected. But still, that amounts for a substantial increase in the coming years. Africa will see the first mega-refinery built on the continent. But other regions are lagging behind.

So while this refinery capacity growth of 7 million barrels per day is big, and especially demand for refined products during the same period will grow by about 6 million barrels per day. So that means that the excess capacity issue exacerbates with this – with this projected period.

Talking about the trade and crude flows among the various countries, so North America – so this shows – is that purple? So the purple is imports and the green is exports. So North America reduced the import dependence, and of course thanks to the increased U.S./Canadian production. So North America. Latin America, the higher Brazil output offsets the lower Venezuelan production capacity. Europe slightly reduces the imports as refinery runs decline. So the biggest change, of course, will happen in Asia, as you can see that. So net crude imports grows by 3.6 million barrels per day, to almost like 25 million barrels per day. At the same time, the incremental exports from the Middle East and the FSU are rather modest compared with this – the strong growth in Asia.

So the Asian countries continue ramping up the refining capacity to meet the growing demand. But at the same time crude production in that Asian region is actually declining, so this drives up the net crude oil imports requirement. Already, the biggest net importer of crude oil – so China increases its lead over the rest, and by 2022 it will be importing something like 9.5 million barrels per day. And this is close to the United States historical imports record of 10 million barrels per day, and that was at the beginning of this century, as I understand. And essentially, in 2022, there will be no net crude oil exporting country in Asia. So Indonesia – you know, they used to be the exporter and part of OPEC – will see net crude oil import triples to 0.5 million barrels per day.

So right now, even if Middle East sends all of its crude to Asia, Asia is still 1 million barrels per day deficit. So this in itself a big change from a few years ago, when east of Suez had excess oil, on the upper side, so crude mainly flow was from west – the east to west. But now the east-of-Suez region as a whole will fall into deficit, so this means that the Middle East sends – even if Middle East sends all of its available crude exports to Asia, the region will still need to import from other regions – Latin America, Africa, Russia, or Central Asia. So that’s the major implication of this balance picture.

Briefly, on the storage capacity, so global storage capacity is forecast to continue to grow rapidly over the next few years, with a total of 226 million barrels under construction or expansion, of which only 40 percent is located in the OECD area. So OECD total oil stock stood at a bit less than 3 billion barrels at the end of last year, and that’s something like around 400 million barrels above the recent five-year average. And the oil stock in the OECD started drawing – coming down in the second half of last year on the back of the tighter supplies, you know, smaller amount of non-OPEC production. But the growth in the global storage capacity over the medium-term will be led by Asia/Oceania, followed by North America, Middle East, Europe and Latin America.

In Asia, of course, the capacity will continue to be in line with the higher oil product demand, and also the expanding petrochemical production, while in North America the rising light tight oil production and also the oil sands bitumen, the oil sands production output, will drive the growth in crude storage. And Asia/Oceania has 120 million barrels of new tanks under construction, with a further 140 million barrels planned. China is focused on building the oil products and chemical storage in the coastal regions, while in India announced projects do not match up with the forecast amount increases. Malaysia, South Korea are both building tanks in the hope of becoming kind of a significant oil trading hub in the region. And Australian refinery closures have also led to more investment into the new storage capacity, and also we expect that this will continue. A total of 70 million barrels of crude and oil product storage is being built, expanded or planned here in the United States, and that’s only second in volume behind China. So this is the whole elements.

And then, if we put them – add up together, then the – so the balance will look like this. So OPEC has cut production this year to below the requirement for its crude in an effort to balance the world oil market, and of course how it is implemented is a big question for the entire oil market. But going forward, unless additional projects are sanctioned soon, the call on OPEC and the stock change rises by, as I said, 3.6 million barrels per day from 2016 to 2022. And during the same period, the OPEC capacity growth will be something like 2 million barrels per day. So that means that spare production capacity, in terms of the percentage of the global demand, will fall to less than 2 percent in 2022, and that’s a lot lower than the most recent low of 3.7 percent in 2008, when we saw the WTI hit $147 per barrel. So this is the – kind of the result of adding up all those projections in both demand and supply.

So here are the conclusions, but I don’t mean to read. So this is – so we expect that unless substantial investment should be started early, we may – we may see substantially a tighter market, especially after year 2020. So this is a fundamental message coming from this report.

So thank you very much for your attention, and I’ll be happy to field whatever questions you may have. So thank you very much for your attention. (Applause.)

MR. BOOK: So in our industry of prognosticating, the only constant is change and the only certainty is uncertainty, and you’ve articulated a lot of them here. I think just, Keisuke, probably right out of the gate the first thing that strikes me is that we’re going to all have to start finding space for our 100-million-barrel-per-day party in 2019. Space is going to go fast here in Washington. I’m sure there will be a celebration. No? OK.

But, no, EVs – not a huge demand surprise to the downside, but a rapid growth rate, China making up a lot of it. Demand not peaking, not a – not a near-term part of the discussion. Storage growing, petrochem and refining driving it. That’s a theme we’ve started to hear other places. Asia still the market. The trade flows you described, a fairly dramatic delta for Asia as a whole over the five-year period. In terms of the price responsiveness of LTO, you made some – I think some very clear points about where the growth is going to be. Russia’s staying flat on the ruble. A lot of these things are subject to caveats, and you’ve given caveats for I think all of them.

What are the biggest uncertainties? Is it – I mean, if we were to lift sanctions on Russia, the ruble would change. If we were to impose new sanctions on Iran, things would change there too. When you list all of these many things that could provide big deltas to your base case, what’s the – what’s at the top of that list?

MR. SADAMORI: You’re quite right that there is so much of uncertainties in this – the projection exercise. And of course, there are certain – huge amount of uncertainty in terms of the demand outlook as well, because we don’t know what may happen to the overall global economy. But having said so, when we look at the recent – the robustness in the demand growth, we expect that the – we think that the – there’s less amount of uncertainty on the demand side.

So I would say that most uncertainty would lie in the supply side. And if you take a look at the non-OPEC sector, of course the U.S. light tight oil is a big question mark. We expect 1.4 million barrels per day of growth, under this assumption of around $58 per barrel. But we’re announcing quite a rapid – the investment starting on this continent. And we see that it’s rather price sensitive. So that’s also a very big uncertain element which can go on both ways. And so that’s one factor.

But also, in terms of the OPEC supply, there are certain geopolitical factors behind it. So our assumption is that the somewhat status quo, in geopolitical terms, will be maintained. So if there are any drastic changes in the front, then – I mean, who knows. So that’s – you know.

MR. BOOK: That’s a very – it’s a very big caveat, because one of the – this being the Center for Strategic and International Studies, one would imagine that there are many changes to be discussed possible. But if we just look back at the last few years, the return of Iran to the supply side of the equation was a pretty dramatic change last year. The instability that’s permeated some of the less significant, but incrementally meaningful producing regions, has been – has been a big part of the story – the bull story that came before and the resolution of those supply disruptions. It’s part of the bear story that arrived thereafter.

In your trade slides – I was wondering if you could – if you could – you don’t have to go back to them. That’s all right. You can – all right, or you can go back to them. I think what you said, if I heard you right, is you said that even if 100 percent of the export volumes from the Middle East went to Asia, that still wouldn’t be enough. Can you talk a little bit about what this means in terms of trade dynamics? What’s the – what’s the story behind the story? Or, for that matter, just more about that story?

MR. SADAMORI: Yeah, so in our long-term outlook as well, we’ve been sending out the message that most of the growth will happen in Asia, while the supply will be coming from the low-cost Middle East regions. So that implies further concentration of the crude trade routes between the Middle East region and the Asian markets. And of course, those routes will have to go through the Malacca Straits, as well as the Hormuz Strait. And therefore – and the point here is that we somewhat confirm that the picture will be like that in coming five years.

But at the same time, even if all those – so Middle East export capacity growth will not be enough to supply the crude demand in Asia region. So they will have to import from other regions as well – some from probably Russia or some from the further-growing – the production from Africa or Latin America. Or, there may be room for the export from the United States as well, where the crude export was being kind of deregulated. So that’s the kind of findings that we made in this medium-term outlook – in this medium – in this Oil Market Report 2017, yeah.

MR. BOOK: I think that certainly speaks to if – what you just said – the two straits, the two choke points are going to be of great interest to Asian customers, given the 100 percent dependency in those years as the trade flows shift, and even then still not enough. So very important point there, I think deserves to be underscored.

One last one before we turn to the audience, who I know are raring to go. What I guess – you use the word “rare” in two contexts. We had a rare OECD demand uptick. And we had a rare global refinery capacity decline, which is to say that your base case does not include either. So you have OECD demand declining at 200,000 barrels per day per year on average and you have refinery capacity growing to seven over the five-years period. Is there – is there any reason why those rare events, or other rare events, might change? I mean, you’re describing what I think looks like a world where the trend that you described last year is still on pace, with the exception of the capacity decline in refining?

MR. SADAMORI: The OECD demand growth in the past two years was something above our – above the expectation of the analysts in the oil market division as well, I think – especially the growth in European demand was a bit surprising. And because we have been observing the European – the oil industry, the refining industry, suffering long time. And they had to close down quite a vast number of their refining capacities. And so they have been suffering for quite a long time. So in that respect, in the past two years seems to be – seems to have provided somewhat respite to those European – the industries, which may not be bad news.

But at the same time, you know, we – the IEA often says that the structure of the oil demand is changing, and the advanced economy is – in advanced economies, the oil demand will not grow, even if – and also, we often say that oil demand is not so price elastic. So even if the oil price may go down further, there will be no additional demand. So that’s what – that was the basic mindset in our – the oil market reports in the past – in the past years. But we had to somewhat review the basic understanding or assumption. So maybe that might be behind the factor that we have been somewhat upgrading our demand outlook in the past two years.

MR. BOOK: Certainly in our own work, we’ve seen what looks like to be a relatively new-vintage price sensitivity in Western drivers as well. Something that you used to think of as very inelastic starting to show bits of elasticity.

And with that, let’s start taking some questions from the intelligentsia in the crowd. Three rules, not unique to CSIS. Please state your name clearly when you receive the microphone, and not before. Say with whom you’re affiliated. And to the maximum degree practical, please state your question in the form of a question.

Who’d like to go first? Jamie.

Q: Thank you. Jamie Webster with the Boston Consulting Group’s Center for Energy Impact, also with the Columbia Center of Global Energy Policy, also with the Truman Project.

Thank you very much for being here today. I appreciated it last year when I was at CERAWeek and I appreciate it here in a more – a more – a little bit tighter setting, with all of my – all of my local people here much more.

You mentioned a lot of changes that have taken place in the market and that you see taking place – you know, so changes in trade flows, changes in light tight oil and how it’s much faster. The OPEC secretary-general has talked about the need to pretend – you know, to bring in speculators that understand that. There’s lots of changes that are happening.

One of the things that you mentioned is that you expect capacity – storage capacity to go up about 226 million barrels over the next several years. Some analysts have been talking about the need, as we go back to rebalance, that the oil market needs to go back to, quote, unquote, “normal” storage, which to me seems quite difficult, particularly as with the data that came out as we were sitting here, crude storage is now up almost 50 million barrels since January 1st here in the United States.

Do you see kind of a changing role – or, does the IEA see a changing role for storage as a place that can kind of play that role of almost – not acting as a swing supplier, but as somebody – as an entity that can both absorb additional barrels and then put them out into the market when they’re needed, in a bigger way than we’ve seen in the past? Thank you.

MR. SADAMORI: I think at least in the market expectations, the amount of reserves or inventories are actually serving, providing the confidence in the market that they can serve as a kind of buffer. And because we already have something – if we only take a look at the OECD inventory levels, last year it went past the 3 billion barrels. And even as we speak – of course, it went down a bit in the second half of last year, but it still stays around somewhere a bit below 3 billion barrels. And that’s something like 400 million barrels above the past – the average. So that would provide some confidence to the market participants.

So if there is any disruptions, for instance, now happens, with the size of 1 million barrels per day, that would not give a big shock compared to a tighter market situation. So I think that in that respect, this current large amount of stock levels would provide some confidence and – well, could – it may be working as a kind of a spare capacity type of functions, in terms of the market confidence. But at the same time, as the market changes there could be some regional gaps in terms of the storage capacity and the actual needs, especially going forward. So the – so the world would need to continue to adjust.

So there may be some additional building needed. And that’s what we are focusing in this. So we’ll see more of the storage capacity to build in the Asian region, as well as the North America. So that’s how we look at the current storage situation. Thank you very much for your question.

MR. BOOK: So what I think Jamie’s question is getting at in part is on days of forward demand cover basis, where it’s not just an absolute number of barrels of storage, but in terms of forward demand cover we’ve seen inventories growing a lot. There’s this notion of a normalcy. And that normalcy may be, like many things that the market holds onto for too long, sort of a characteristic of the market as it used to be and not as the market will be. That’s what you’re saying?


MR. BOOK: OK. Let’s see, in the front.

Q: Thank you. Henry Nuzum, SEACOR Holdings.

You spoke a lot about electric vehicles. What prospects do ride sharing have on oil demand – Uber, et cetera, if it spreads in other places in the world, aside from America – North America and Europe?

MR. SADAMORI: We have not – as far as I know, we have not done specific studies on what the Uber type of services would impact the global demand. And partly that would replace some of the demand for the taxis, but could have somewhat difference because that may have a replacement effect, but as well as – there may be effect to increase the entire demand. So at this moment, I’m not so sure about the – what sort of services.

But if we talk about the – kind of the broader changes of the transportation systems, I think that’s something that we need to look at in the medium term, because the – with the, you know, self-driving or automated transportation system, that would surely be a positive – that would surely have a positive impact in terms of the better efficiency, and the more efficient transportation systems. But at the same time, that would stimulate the whole transportation demand growth. So that’s something like a very big question mark. And I’m not sure the transportation model experts are actually looking at that in the IEA. So that’s a big question for me as well. Thank you.

MR. BOOK: It’s a very good question. Lower cost of mobility increases demand for the good. Mark Finley.

Q: Thank you, Kevin. And thank you to Keisuke as well for the great presentation. And the IEA’s work is really such a great contribution in this field. I’m Mark Finley with BP.

May I ask for the moderator’s permission to ask two questions?

MR. BOOK: Small questions.

Q: Small questions. They’ll be small questions, but I’m not sure that they’re small answers. The first is, since we’re here in Washington, D.C., I’d be interested in your thoughts on what did you change in your outlook based on the recent election results in terms of, you know, prospects for a different regulatory and legislative environment regarding energy here in the United States? And secondly, if I heard you right, you seemed relatively sanguine about the coming big reductions in sulfur fuel and shipping. What I thought I heard you say was, well, you know, there’ll be scrubbers. Yeah, there’ll be so some switching to diesel, some LNG. But am I right in hearing that your big take-away is that you’re not too concerned about the market ramifications of that changeover? Thank you.

MR. BOOK: You can take them in any order you like.

MR. SADAMORI: Let me start with the more difficult one. So that’s the first question. I would have to say that we have not incorporated any of the policy changes by the new U.S. administration. I understand that the various changes in the – in the policy and rules are being discussed, including the – how to do with the energy efficiency standards – mileage standards, or the various tax systems, or the upstream of developments, yes. But, well, first of all, we have been working on this project since the end of last year. And of course, we have not seen yet the specific U.S. policies to be announced or implemented. So at this moment, we have not incorporated any of those – the possible policy changes in the United States. So that’s the answer to the first question.

Well, in terms of this maritime regulations, the – well, I might have sounded sanguine, but I think that will be very big changes. And also, I’m hearing that there are quite substantial concerns about how this regulation will be implemented and enforced in a fair manner. And so I understand that there are some shippers is willing to invest, but at the same time concerned about the possible outcome of the unfair loose implementation of this regulation. So we consider, if we look at the current – the supply-demand structure, we expect more than 2 million barrels. So 2 ½ million barrels per day of heavy, high-sulfur fuel oil would have to be replaced or be addressed in some form.

And we have not come up with very specific numbers of how much will go to the maritime diesels. I think that will be the most – kind of the most practical way, while scrubbers will depend upon the actual – the investment in the formulation of the ship. And an LNG ship would have broader challenges in terms of the infrastructures in the ports. And also, with the LNG ships, the cargo space will have to be a bit smaller, with larger space of the fuel and the engines. So we expect that that will bring about major changes. But we are still not sure to what extent that would kind of – the impact in kind of break down terms. And also there’s concerns about this – the enforcement. So that’s how I understand it. Yeah, thank you.

MR. BOOK: For the record, I want to give Keisuke a get out of jail free card with regard to the hard question you asked, Mark. After all, the vehicle fuel efficiency standards that could change as a result of the Trump administration would be in model years 2022 through 2025, which are after the five-year horizon of this outlook. And the clean power plan wasn’t due to phase in until 2022. So you’re off the hook this year, but next year you’re on alert. (Laughter.)

Next question. Nicos (ph).

Q: Thanks. Hi. I’m Alex Woodward (sp) with the Department of Energy.

MR. BOOK: Oh, sorry. Alex. I’m not wearing glasses. My apologies.

Q: Sorry? Can you hear me?

MR. BOOK: You’re not – you’re fine. I thought you were someone else.

Q: Oh, OK.

MR. BOOK: It’s my fault.

Q: That’s fine.

So Alex Woodward (sp) with the Department of Energy.

My question is for when you were talking about the drop in upstream investment in the United States, how much of that can you attribute to efficiency gains as opposed to delaying projects, and maybe also just dropping costs for service – for service companies, et cetera?

MR. SADAMORI: Our report has the box article in the non-OPEC section about this upstream investment and its impact on it. I think that was – where is it? And we also have another publication that we started last year which is called the World Energy Investment Report. And they also look into the factors behind this – the declines in upstream investment. And according to that, the – according to that analysis, in global terms, around two-thirds of the reduction can be attributed to the cost declines, cost deflations, as well as – so that can turn to the efficiency improvements in those projects. And especially cost deflation in the U.S. shale industries was even higher than the global average. And so the cost decline in the U.S. shale industry section was at 30 percent of 2015 and 22 percent in 2016. So in that respect, we expect quite a substantial contribution from the cost efficiency in the U.S. light tight oil sector.

MR. BOOK: Alex, you have a follow up?

Q: So to follow up on that, if I understand right, you’re saying about two-thirds of that is efficiency gain. So that kind of changes the story when you say that investment is falling by a quarter last year and a quarter this year. It’s not necessarily falling, it’s just cheaper. So maybe the production outlook could remain the same rather than expecting a drop in production. Do I understand that correctly?

MR. SADAMORI: So I try to be careful that I don’t give the impression that this one-quarter decline simply led to the decline in the investment levels in terms of the quantity that we can expect. But having said so, it is true that we have seen the decline in the investment level. So that has not changed. And we have seen a lot smaller number of investment decisions made in those past two years. So in our report, we incorporate all those kind of project plans by the – by the oil companies they’ve so far announced.

And when we add them up together, then we expect that we will see continued solid growth towards 2018 and ’19, especially in this non-OPEC countries. But the – after that we have, at this moment, no projects in the pipeline – a very limited projects in the pipeline. So we will see a lot slower growth in the 2020 to the 2022. So that’s our major findings. Of course, if there are additional investment decisions made in this year, then this picture would turn to a more positive one, and so on.

MR. BOOK: Alex’s very good question, just to reiterate his point, is the overall investment dollars is one unit, but the productivity yield from that investment is a different unit. And to what extent is counting dollars missing productivity gain. And I have a follow-up question on his follow-up question, if I may take the moderator’s prerogative.

To what extent do you think the – right now, a lot of the big investors in the – in the publicly traded company space are keeping their powder dry and focusing on short-cycle projects for their incremental growth. Part of that is probably uncertainty about markets and everything else, but also the low prices that have drained cash available. To what extent do you think that we might start to see a recovery in those longer-cycle projects with the recovery in prices? Is this – is this perhaps what we saw – just a transient reflection of less cash available to commit to big projects? Speculative question, but I’d be interested in your opinion.

MR. SADAMORI: Yeah, that’s highly speculative. And the – I’m not a real expert in those kind of project planning by the international companies. But I think you’re right that right now the focus is on the – kind of a shorter time circle that can expect kind of short-term returns, compared with the kind of long lead-time difficult project, especially in the very difficult terrain. So that’s a reason why we expect the largest amount of growth coming from North America.

And so in our expectation of more than 3 million barrels per day of growth in the non-OPEC countries, about half is, we expect, from the U.S. light tight oil sector, which would collect money. But coming back to this cost efficiency and the deflation, if the U.S. light tight oil sector suddenly collects a lot of money and investments and starts – we start to see the project, this report also warns that there may be some cost inflation coming back to the region. So that’s also something that we need to bear in mind.

MR. BOOK: So it’s a sliding productivity per dollar, because if you have 11 percent or 10 percent unemployment and you can grow 5 million with slack capacity, that’s different from trying to grow those 5 million at 5 percent unemployment.

Bill Eichart (sp), I saw you. And then we’ve got more coming. Plenty of time still.

Q: Hi. Bill Eichart (sp), consultant.

I wanted to understand your assumptions behind the transport growth figure a little bit more, and specifically relating to the North American vehicle market, to what extent vehicle fleet turnover contributes either to efficiency or inefficiencies. And especially in light of, you know, I would say somewhat anecdotal evidence and maybe more substantive evidence, that given the price declines that we’re seeing fleet turnover occur more to truck-like vehicles as opposed to automobiles with higher efficiency levels. In other words, the fleet turnover may be positive in the sense that you’re getting a more efficient truck, but it’s still going to be less than the more efficient automobile.

MR. SADAMORI: I think that’s what’s happening in North America, as I understand. And so if we look at the record – truck record of the mileage economy improvements in the United States, that has somewhat become less impressive in the recent years, in particular to the lower gasoline prices. So that’s what we are actually observing. And that’s also identified in our Efficiency Market Report. That’s another product, as well as the World Energy Outlook. And also, it’s quite evident, when we take a look at the gasoline demand growth in the United States, it was very, very robust in 2015. And as a Japanese national, I envied that the U.S. consumers are really responding to the price signals, and they suddenly spend more gasoline, while in my home country gasoline demand is declining, declining. And there still it continues to decline. So it’s more of a kind of a structural declines.

So the cheaper gasoline is having a real impact in terms of the gasoline – the car, the mileage efficiency improvements. And we are now seeing kind of a slow up. But having said so, at the same time, our efficiency market report also points out that the regulation of various countries are actually working to somewhat prevent the further deterioration of the mileage economy coming from the cheaper gasoline prices. So that’s a positive factor. So that also points to the kind of critical importance of fuel mileage standards being put in place. And we – in the world, we have many countries that have already deployed the fuel or mileage standards for the light duty vehicles and normal passenger cars. But the truck sector – heavy-duty trucks – that’s lagging behind. And there are some limited number of countries who have introduced the mileage standards for those heavy-duty trucks. So that’s also a very important policy area if we are to seriously address the climate change issues.

MR. BOOK: It’s a very relevant question here in the U.S. In December, the EPA granted California a waiver on medium- and heavy-duty truck standards of their own, setting up potentially the next wave of efficiency improvements in that vehicle class in the U.S. In the back there, please.

Q: Hi. Ken Austin, U.S. Treasury Department.

Almost all of the growth in the light tight oil sector has been in North America, which has a unique corporate eco-structure and also almost unique it having private mineral right. Now, there are other resources in the rest of the world that can similarly produce light tight oil, at least geologically. We haven’t seen that sort of expansion. Argentina has been trying to expand its light tight oil production, but its growth has been very slow, particularly compared to North America. Do you see the rest of the non-North American world starting to increase light tight oil production over the next five, 10 years? Or is that going to remain a uniquely North American phenomenon?

MR. BOOK: Donde esta Vaca Muerta?

MR. SADAMORI: In the – I think you are right that the United States has a very unique conditions in terms of the that allowed quite a rapid production growth in light tight oil, shale oil, in terms of the legal frameworks, as well as very established infrastructures, like pipelines, that served for the conventional oil fields that were applicable to the light tight oil production as well. So and there are many – yeah, I also understand that there are many shale gas, shale oil resources being spread around the world. But some countries have more the complex geologies. And also, the very short answer is that we don’t expect substantial increase in the light tight oil or shale oil production from other regions, other than North America, U.S. and Canada.

And there are some countries also that surely has vast unconventional resources. But at the same time, those resources lie in a country with plenty of conventional resources. So in those regions, they don’t need to tap into the more difficult – the oil sources. They can simply continue and prevent the declines of the existing fields. So that’s also one element that North America is rather unique in. And we expect that at least in the short term that will continue to be so. And it takes a long time – longer time for the other regions to tap into this, the light tight oil, shale oil formation.

MR. BOOK: OK. Last question in the back to Amy.

Q: Hello. Amy Jordan Bason from Aramco.

I was curious, in your electric vehicle numbers for China, did you include the recent cuts in new energy vehicle subsidies? And if not, how would that affect your forecast going forward?

MR. SADAMORI: I don’t think that we have come up with a kind of specific detailed numbers. What I said was that I understand that EV went beyond the 1 million mark in 2015. At the end of 2015 we expected it to be something like 1.3. And 2016 saw something like 600(,000) or 700,000 vehicles newly sold. So if we add them up together, it would be something like 2 million vehicles, probably.

And in 2016, we saw that China really led the growth. And we expect that about half of the global EV might have been sold in China. But we also observed that the growth – the pace of growth is slowing down due to, as we point out, the change in the incentives for the EV vehicles. So but we have yet to kind of examine how it would impact the Chinese EV sales. That’s a question for the future. Thank you. But that’s a very relevant question. Thank you.

MR. BOOK: Well, I want to thank you, Keisuke, for sharing the report with us. This is candy for the eyes of analysts everywhere. And you’ve been very generous with your time. We want to keep you on your schedule, and thank you for being here today. (Applause.)