DESARROLLO DE SEGUROS PÚBLICOS DE SALUD (BIRF N° 8062-AR Y

Predicting the near- to medium-term future development of bunker fuel prices is not straightforward, but some key factors which are likely to influence price developments can be identified.

The price of bunker fuels with low sulphur content can be expected to rise (while all other factors remain relatively similar across fuel types). This price increase will be driven by heightened demand for low-sulphur fuels as increasingly stringent sulphur emission controls are put in place, such as SECA. Demand for bunker fuels with high sulphur contents will decrease.

0 0,5 1 1,5 2 2,5 3 3,5

2003-10-01 2004-02-01 2004-06-01 2004-10-01 2005-02-01 2005-06-01 2005-10-01 2006-02-01 2006-06-01 2006-10-01 2007-02-01 2007-06-01 2007-10-01 2008-02-01 2008-06-01 2008-10-01 2009-02-01 2009-06-01 2009-10-01 2010-02-01 2010-06-01 2010-10-01 2011-02-01 2011-06-01 2011-10-01

Price ratio LNG/HFO and MGO/HFO

Ratio MGO to HFO Ratio LNG to HFO

Bunker fuel prices are also likely to be influenced by the following factors:

• The prevailing levels of supply, and hence prices, of competing fuels for shipping, in particular gas, LNG and crude oil;³⁷

• The rate / proportion of shipowners who make a fuel switch from bunker fuels to alternative fuel sources, including LNG;

• Overall demand for shipping activities, regionally and globally; and

• The timing (and level of success) of attempts to equilibrate bunker fuel refining capacity and demand.³⁸

In this study, import price forecasts for HFO, MGO and LNG have been developed. The methodology used and the resulting price forecasts are described in this section.

5.2.1 The Base for the Crude Oil Price Forecast

For the purpose of forecasting future LNG and oil prices, a survey of available long-term forecasts produced by reputable institutes was undertaken. Specifically, the analysis resulting in price forecasts was based on the

´Fossil Fuel Price Forecast´ produced by the UK Department for Energy and Climate Change (DECC), updated in June 2010. The price forecasts made by the US Energy Information Administration (EIA), published in the Administration´s Energy Outlook 2011 was used to benchmark and quality-check the forecast based on the DECC forecast. Both of the above price forecasts are highly trusted by industry players in the oil and gas sectors.

5.2.2 Estimating Future Crude Oil Fuel Prices and HFO Prices

In order to forecast crude oil prices up to 2030, the DECC price forecast’s Central scenario was used³⁹. Specifically, the forecasted rates of growth in oil prices were calculated. Then the average oil prices in 2010 and up to July 2011 were calculated, and the predicted annual rates of price growth in each year up to 2030 were applied on that average price.

In this way, a base scenario for the future crude oil price was developed. For that scenario, DECC asumes that the global economic recession eases off but depressed demand keeps prices low in the short term. In the medium term, global economic growth picks up and pushes strong demand for energy in the medium term to 2030. Investment is made and supply is sufficient to meet demand. To forecast HFO prices, a regression analysis was applied using historical data of crude oil prices and HFO prices as shown in Figure 22 above.

That analysis resulted in an average future HFO import price of 520 €/tonne (715 $/tonne).

37 United States Environmental Protection Agency, 2008. Global trade and fuels assessment – future trends and effects of requiring clean fuels in the energy sector. EPA420-R-08-021.

38 In Europe, this is likely to be related to the rate of closure of some refining capacity, due to the excess in capacity in that region. In the region east of Suez, there is a requirement to upgrade refining capacity.

39 DECC also presents a Low and a High scenario, but since this report’s analyses are based on MGO/LNG prices relative HFO, only one HFO price scenarios is needed.

5.2.3 Estimating Future MGO Prices

The forecast of relative MGO prices was based on the historically strong correlation between MGO and HFO prices as shown above in Figure 23 MGO price relative to HFO and LNG price relative to HFO.. Based on that figure two relative price levels for the future were assumed; 1.6 and 2.2 respectively. The latter relative price level represents the assessment that MGO prices will increase significantly (due to the above-mentioned judgment that low-sulphur fuel will become more expensive), to a level which has only seldom been reached during the last ten years. The assumed price level for MGO relative HFO of 1.6 represents the view that it will be only moderate increases in relative MGO price compared to the relative price level during 2010 to 2011.

5.2.4 Estimating Future LNG prices

Figure 23 above can also be used for creating scenarios regarding future LNG prices. Based on the figure three levels of future LNG prices were estimated: 0.5, 0.7 and 0.9. These levels also correspond very well to DECC’s three LNG price scenarios, named Low, Central and High, which DECC summarizes like this:

Low case

New production comes on-stream and combined with falling demand, results in a significant price fall. There is a glut of LNG supply in the Atlantic basin as the United States approaches self-sufficiency and more United States production comes on-stream. It is assumed that the European market is liberalized which means that the oil-gas link no longer holds.

Central case

Prices are expected to weaken in the short term due to low global demand and a glut of LNG. In the medium term the link between oil and gas prices is expected to remain in place. Continued use of oil-linked contracts is driven by a number of factors such as the greater depth of the traded oil market enabling better hedging of risks. Timely investment enables supply to remain sufficient to meet growing demand. LNG trading, capacity and storage capacity increase.

High case

The desire of buyers to ensure security of supply means that long-term contracts remain in place. There is limited potential for substitution in energy generation and in energy-intensive industries, meaning that demand remains strong despite high prices. Investments in gas production and LNG are not made in a timely fashion and are insufficient to meet continued growth in demand.

5.2.5 Results – Price Scenarios

As explained above, the MGO and LNG prices were derived from a forecasted HFO price of 520 €/tonne using assessments of relative MGO and LNG prices. Table 10 below summarizes the relative price levels chosen and the resulting absolute prices of MGO and LNG. Later in the report, the so-called Scenario 2 is used as base line, e.g. sensitivity analysis regarding pay-back time is based on that scenario.

Table 10 Price levels relative HFO for MGO and LNG as well as corresponding fuel prices in €/tonne fuel for the

2. CentralLNG_CentralMGO Central 1.6 875 Central 0.7 440

3. HighLNG_CentralMGO Central 1.6 875 High 0.9 570

4. LowLNG_HighMGO High 2.2 1200 Low 0.5 315

5. CentralLNG_HighMGO High 2.2 1200 Central 0.7 440

6. HighLNG_HighMGO High 2.2 1200 High 0.9 570

Import prices, based on a forecasted HFO price of 520 €/tonne . The relative prices are expressed on an energy basis (i.e. €/GJ MGO divided by

€/GJ HFO or €/GJ LNG divided by €/GJ HFO).