Scenarios
In a capital-intensive industry such as petrochemicals, where investment decisions need to be made about plant which will not become operational for three to five years and then have an economic life of twenty-five years, the ability to understand the current and long-term future drivers of the industry and their impact on profitability and competitiveness is essential.
Producers are currently exposed to the challenges of operating in an environment of highly volatile energy and feedstock prices, with crude oil trading at record prices. Free-trade policies have proved very successful in providing manufacturing opportunities to previously under-developed economies, and are causing a significant shift in the balance of trade between regions. They have also unlocked new sources of demand for primary energy, and opened the possibility of a step change in market balance between suppliers and consumers of the key primary energy feedstocks. The voracious appetite for crude oil to feed the rapid industrialization of the Chinese market has been major driver of the current surge in crude oil. But is this sustainable? It is highly unlikely that crude oil prices are sustainable at $60 per barrel given that the cost of production of even marginal fields is below $20 per barrel and the reserves of crude oil from such inaccessible environments as Canadian oil shale become economic at well below current prices. So when will prices fall? By how much? What is the long term price likely to be? What macro-economic world is needed to support such prices?
This uncertainty over the future development of the economic environment renders attempts to “forecast” a single definitive future of the refining and petrochemical market futile, as the uncertainty surrounding basic input parameters exceeds the utility of the resulting market projection. A rational response is to offer alternative projections based on scenarios with well defined assumptions of the macroeconomic environment. Nexant’s scenario offerings are aligned with this more sophisticated methodology, and allow our clients to understand how future market developments may be shaped under various views of changes in the global economy and crude oil prices.
Nexant’s ability to offer scenario predictions is based on its petroleum and petrochemical simulator, the ChemSystems Online® Simulator, which provides a rules-based environment for projecting developments in the industry. This state-of-the-art software tool allows Nexant, and its clients, to develop distinct market projections based on a common methodology and ensure consistency in the resulting scenario predictions. To understand the range of possible futures Nexant develops a number of distinct, self-consistent scenarios and develops predictions of the petroleum and petrochemical markets that would result from each such macro-economic scenario.
Nexant has selected three scenarios to illustrate potential market developments. These scenarios retain the conventional titles that Nexant has previously used, referring to the oil price component of the scenario. Despite being named solely by the prevailing level of oil price, each scenario also contains a consistent set of macro-economic and market projections required to support the quoted oil price.
Medium Crude Oil Price Scenario
This scenario is the one expected to most closely correspond to the average business environment over the next fifteen years. The base assumptions include: recovery of a surplus in crude oil supply capacity and continued availability of crude oil and other primary energy sources for both developed and developing economies, economic growth rates consistent with population increases and improvements in productivity, and the continued development of an integrated global economy with a resultant shift of manufacturing activities to regions with advantaged infrastructure and low employment costs.
High Crude Oil Price Scenario
The high crude oil price scenario has been selected to illustrate the conditions that would be required to maintain energy costs at high prices for a further two to three years. These high levels are indicative of coincident strong demand and supply constraints in the primary energy sector. Thereafter a decline in price over a further four to five years is included to reach a sustainable high crude oil price. To ensure that the conditions are maintained throughout the following decade several assumptions are included in this scenario:
- consumption of petroleum products is not severely impacted by sustained high cost of acquiring crude oil
- the global economy maintains a steady trendline growth rate, consistent with history, though some redistribution would occur between regions, dependent upon their oil balance and state of development
- high primary energy prices continue through managed supply constraints across a range of industries
- failure to develop alternative supply sources that would relieve this “bottleneck”
- an investor retreat from developed oil-importing economies results in a shift toward investment in energy advantaged regions and the strong growth Asian economies
- developing economies with advantaged feedstock opportunities, however, do develop their refining and petrochemical sectors due to their competitive advantage.
Low Crude Oil Price Scenario
The low crude oil price scenario has been developed to illustrate the market conditions that would be required to keep price levels significantly below their historic average levels. This scenario requires continued high investment in low cost production assets without a concurrent reduction in supply capability in other regions. This scenario ensures the primary energy and petrochemical sectors have an abundant supply of low cost raw materials. Demand growth in refined products and petrochemicals is expected to be below supply availability.
