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Oil – How MarketBuilder helps inform your decisions

How will the changing price of crude oil by location by crude type throughout the world over the next 30 years affect your business?

When making strategic decisions, there are many unknowns that must be analyzed and understood, such as the answer to the question above, in order to make informed choices for your business. We’ve categorized important questions addressing many issues to be considered in making strategic decisions, questions that MarketBuilder (Deloitte MarketPoint’s premier software solution for fundamental market analysis and price forecasting for commodities) can help you answer. Each category is listed below, with two questions included as examples. Following the question section below is a brief introduction of how MarketBuilder can help you answer these questions in making strategic decisions.

  1. Oil and Product Prices
    • What is the revenue or profit maximizing level of output for Saudi Arabia, Russia and OPEC as an aggregate, and how does that affect your business?
    • How good a track record do traded forwards have as a predictor of future price? Is there a better approach for predicting future prices?
  2. Demand for Refined Products and Primary Resources
    • What regions of the world are expected to grow, and how fast and what effect would that have on your businesses globally?
    • Is demand the leading term in crude oil and product price, or are there more important drivers?
  3. Refining
    • How profitable is future operation of crude oil refining likely to be? Does it justify investment?
    • How does the profitability of refining compare to the profitability of upstream or downstream options?
  4. CO2 Policy
    • What will happen to the price of crude oil under CO2 regulation? Will it go up, down, or be unaffected and how will that affect your business?
    • Are CO2 taxes simply passed through the petroleum system directly downstream to consumers in the form of higher prices, or do they impact the profitability of producers, refiners, and shippers, eroding profits to players within the petroleum supply chain?
  5. Projects, Investments, and Assets
    • What projects presently either contemplated or underway are likely to underachieve? Should they be cancelled, rescheduled, or sold?
    • To what degree will a given project, for example a refinery project in India, act to compress the spread between crude and product prices and thereby hurt others’ profitability? To what degree do competitors’ actions really affect you?
  6. Data
    • Do you have an estimate of crude oil volumes in place with associated exploration, development, and production costs for known existing and prospective producing basin in the world?
    • Do you have an estimate of refining capacities and volumes in place and committed to construction?

How MarketBuilder helps you make decisions in oil

Companies typically calculate the profitability of assets they build, buy, or sell as depicted in the diagram. They estimate the capital cost, operating cost, and energy efficiency of the asset (as shown at the bottom of the diagram); they specify the time and risk preference, book and tax parameters, and taxes and other “takes” (top); and they project the price of the output over time (top left) and the price of the input over time (bottom left) and grind them through a profit calculation (typically Discounted Cash Flow or DCF).

Diagram 1

What do they find? They find that the most important determinant is the difference between the price of the product outputs and the price of the input. That difference is the driver of asset profitability, and yet often this is the least accurate component of the analysis.

MarketBuilder models the supply curves for the input and output commodities for the required markets, treating each component as a competitive independent agent simulating the way the real market works. As a result you are able to forecast the price of both the input and the output providing a justifiable, price difference for each of your assets. Rather than using questionable accuracy for the key determinant of asset profitability, you calculate the profitability forward through time of new or existing assets, depicted in the shaded area of the second figure, using time-tested technology and data. The diagram emphasizes that margins are not level, normalized, or annuitized, and they are determined by simulating realistic market behavior forward through time. Accurate prices and the profitability of each of your assets through time are central to your strategic and asset decisions.

Diagram 2

For what types of assets is this analysis of output-input price difference fitted?

  • Upstream assets—how much money do you make with E&P on conventional crude oil
    • By location/basin, tar sands and others
    • By refinery bypass alternatives like biodiesel or alcohol
  • Refining, as discussed in the foregoing diagrams

MarketBuilder with its flexibility, sound methodology, ease of use, and time-tested accuracy, help you to easily adjust parameters to model potential market and policy changes (e.g., shale gas cost, CO2 policy, renewable, etc.) and incorporate them in your analysis

Returning to the question: How will the changing price of crude oil by location by crude type throughout the world over the next 30 years affect your business?
MarketBuilder’s World Oil Model provides you with the oil supply chains from resources in the ground through shipping through refining through product transportation and finally to consumption. These supply chains with MarketBuilder’s many other features, help you to forecast at each location throughout the world what the price of the various qualities of crude oils and products will be in many different scenarios. MarketBuilder’s reporting capabilities help you to visualize how these prices apply to your business by asset, by business, in aggregate, etc. for each potential scenario you analyze.

As used in this document, ‘Deloitte’ means Deloitte LLP (and its subsidiaries). Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.