Scenario Planning: Things to Consider ICIS Consulting Karl Bartholomew Vice President, Americas July 28, 2015 www.icis.com 1
Today s Topics Things all planners should know Oil Price Impact Long vs. short-term cycles Reality check Recap www.icis.com 2
Scenario Planning Fundamentals www.icis.com 3
Things to consider... Unless building a thermonuclear device, ensure a material balance (lbs. in = lbs. out) Economics beats technology every time You cannot forecast history Those who forget the lessons of history are doomed to repeat them Rising tides float all ships Correlation does not automatically mean causality Stewart s corollary: Politics beats economics every time Ziesmer s axiom Remember there s math, then there s government math www.icis.com 4
Brainstorm plan for the unexpected (like 50% drop in oil price) Create list of 10 items that could be unexpected Select top 3 mostly likely to impact your project / plant / business Develop contingency plan for your planning options But be aware of group-think www.icis.com 5
Oil Prices www.icis.com 6
No one gets oil forecasts correct Geo-political events Financial events Technology / resource changes Look at fundamental supply & demand patterns www.icis.com 7
Gasoline Demand = Miles Driven www.icis.com 8
Events that impacted oil price www.icis.com 9
Energy Information Administration forecasts www.icis.com 10
Brent pre oil price crash www.icis.com 11
Ethane pre oil price crash www.icis.com 12
Propane pre oil price crash www.icis.com 13
Brent look at drops & recoveries www.icis.com 14
Scenario planning could have captured drop (maybe not 50%) www.icis.com 15
Everyone has different forecasts for oil EIA www.icis.com 16
Goldman Sachs www.icis.com 17
World Bank www.icis.com 18
Wide range of forecasts dictates scenario planning EIA Short Term Energy Outlook (STEO) Shell Tudor Pickering Holt (TPH) www.icis.com 19
Oil Price Change Scenarios www.icis.com 20
Propane Dehydrogenation (PDH) Projects ICIS did an analysis last year looking at profitability of PDH projects at different price levels How do you think lower oil prices impact profitability? www.icis.com 21
Base Case www.icis.com 22
$50/bbl Case www.icis.com 23
Long vs. short-term cycles www.icis.com 24
Today s cycle is about low oil price; however... We re in the midst of a longer term cycle feedstock quality This can be seen by looking at supply & demand data, key ratios for both downstream segments 20-30 years ago, refiners were running lighter crude oils Same period of time, ethylene crackers were running more ethane During 1980s-1990s, heavier crudes were being processed; petrochemical operations were building flex-crackers In 2015 back to lighter feeds www.icis.com 25
Coker Utilization Gulf Coast refiners were reconfigured for Mexican Maya, heavy Middle East crude oils in 1990s Today, utilization is down; more refiners processing shale oil that don t have as many bottoms www.icis.com 26
Cracker Feeds In 1970s, crackers ran mostly ethane 1980s-1990s, flexcrackers were in vogue, taking advantage of propane, naphtha, heavier feed 2015 back to ethane! www.icis.com 27
Scenario Planning requires reality checks! www.icis.com 28
Calibrate, then forecast Client hired ICIS and another firm to provide forecasts ICIS developed base case scenario model based on historical operations, margins Other firm developed high, low cases, used 50-50 average as base Did not check to see if the model matched actual performance As a result, over-predicted 2015 YTD margins for the operation ICIS model matched 2015 YTD results while other model did not The low scenario was closer But best answer was to reset forecasts to match history first! www.icis.com 29
ICIS forecast www.icis.com 30
Other forecast www.icis.com 31
A 50/50 average isn t always the best answer www.icis.com 32
Recap www.icis.com 33
Scenario Planning Make sure fundamentals are solid: Supply & demand supports market direction Price scenarios have to tie back to actual history In periods of price volatility (like today s oil price), don t assume trend continues Trend that can t continue, won t continue Look for both short-term and long-term cycles chances are we ve been there before www.icis.com 34
One last thought... Same data can be interpreted differently www.icis.com 35
www.icis.com 36
Scenario Planning: Things to Consider Whitepaper Click here to download our free white paper for more information on this topic. www.icis.com 37
Contact us Karl Bartholomew Vice President, Americas Karl.Bartholomew@icis.com Mike Perkins Vice President, EMEA Mike.Perkins@icis.com Ee Foong Ewe Vice President, Asia Eefoong.Ewe@icis.com Paul Ray Head of Consulting and Analytics Paul.Ray@icis.com www.icis.com 38
www.icis.com 39