Annual Report 2010

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OUR MARKET products “ Demand for oilinand gaspast even has increased 2010, 2007 levels and is forecast to grow again in 2011. Whilst ﬁnancial markets have recovered from the lows of 2009, the high levels of volatility currently being experienced shows that investors still lack conﬁdence in the underlying principles of the recovery. This lack of conﬁdence is due not only to the uncertainty around the pace of recovery and political instability, but the exposure of banks and investors to European debt, particularly in countries in risk of default such as Greece and Ireland. The lending market showed a cautious recovery in 2010, although liquidity could tighten as banks are required to sustain higher levels of equity to support debt. European banks are taking a more long-term view to funding, accessing funding from the US market and ﬁxing interest rates for long-term funds, attempting to avoid the reliance on short term funds which led to problems in the credit crunch of 2008. The oil market continued to recover from the ﬁnancial crisis, with prices moving past the USD100 per barrel mark in early 2011. Although part of this is due to short term disruption such as the unrest in the Middle East, the oil price has also undergone a sustained underlying increase post 9/11, driven by a narrowing gap between supply and demand for oil and oil products. OIL PRICE AND UNDERLYING DEMAND 2008 ﬁnancial crisis 100 80 1985/6 Saudi Arabia adopts netback pricing 1978 Building tensions in Iran & Iraq 2003 Invasion of Iraq 2001 9/11 1998 Asian ﬁnancial crisis USD/bbl 60 40 20 0 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1973 Yom Kippur war 1995 1998 2001 2004 2007 2010 USD 2009 Adjusted USD Source: BP (2007) to 32 MMboepd in 2035 in the Non-OECD Asia region. This large increase in consumption must be ﬁlled by supply from hydrocarbon or non conventional sources, despite the increasing diﬃculty in ﬁnding conventional reserves, and the cost of developing non conventional sources. Supply dynamics The supply of oil has increased from the economic crisis of 2008, but the underlying dynamic is uncertainty in the quantity and the type of supply. Short term supply can be heavily inﬂuenced by current political and economic events, but long-term supply is dependent on the oil price and long-term infrastructure investment. DEMAND DYNAMICS Demand for oil and gas products increased in 2010, past even 2007 levels, and is forecast to grow again in 2011. This demand increase has mainly been sustained by increasing demand from developing economies such as China. An indication of this growth phenomenon is that from 2008-2009, when western economies underwent a demand decrease of more than ﬁve percent, China showed an increase in demand for oil of six percent. In long-term demand to 2035, the International Energy Agency Statistics database shows an increase in forecast consumption in all geopolitical areas. However, of most signiﬁcance is the projected doubling of consumption from 17 MMboepd OIL STOCKS The ability to absorb short term supply shocks is dependent on the availability of inventory and stocks. OPEC stated in 2010 that they were withholding 5-6 MMboepd of production, which can be used to relieve supply constrictions and hold the oil price within the range of USD 70–90 per barrel. However, as can be seen by the recent Libyan crisis, this ability does not relieve the situation where reﬁneries are geared towards processing a particular type of oil (Libyan sweet oil – OPEC produces mainly a sourer crude), and critically there are no indications of how long it would take to get this additional production onstream. Long-term supply mix Much attention has been paid to the introduction of gas as an alternative in power generation and heating, however the infrastructure for gas is 18 Lundin Petroleum ANNUAL REPORT 2010

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