ArrowHead Models – Global Oil and Refined Products
ArrowHead’s Global Oil Model (AGOM) Represents the Way the Global Oil and Refined Products Markets Work throughout the World
Representing the Global Production and Transportation Matrix for Crude Oil
Oil is the quintessential energy commodity, from crude in the ground to final energy services, and companies need to understand every stage of the oil market to make informed decisions. AGOM uniquely enables such understanding. Beginning upstream, different qualities of crudes are produced in different locations throughout the world. Crudes are loaded onto transportation media and shipped (spot or contract) to various refineries around the world. The crude production and trans-shipment matrix within, across, and between regions looks like Figure 1 below. Crudes are produced regionally (green hexagons), trans-shipped between regions through red triangles, and uploaded to refineries regionally. AGOM is a many-region extension of Figure 1, representing all existing and prospective crude production regions in the world, the existing and prospective crude transportation matrix (pipes and ships), and the regional refinery uploads.
Figure 1: Global Crude Production and Trans-Shipment Matrix
A Comprehensive Model Must Include Refined Products, VGO Transportation Matrix and Sophisticated Refinery Modeling
When they reach refineries, crudes are distilled and then the residuals are upgraded. If they do not partially or completely upgrade, refineries must export (or dispose of) vacuum gas oil or VGO. VGO has significant economic value to a refiner who has upgrading capability. To adequately model world oil, models certainly need to include an accounting for refined products produced in each region. And clearly there has to be a worldwide transportation matrix for VGO in addition to a region by region, worldwide representation of refining (including distillation and upgrading) as in Figure 2 below. The regional refining model has to be sophisticated and run essentially instantaneously. To our knowledge, AGOM is the only model that meets all of these requirements.
Figure 2: AGOM Refining and VGO Trans-Shipment Matrix
Comprehensive Modeling of the Global Transportation Matrix
When refined products (e.g., gasoline, distillate, fuel oil, naphtha, lubes) are produced in a region, they can be consumed within that region, or they can be loaded onto product transportation media (pipes and ships) and transported to another region. Thus AGOM contains a complete world matrix of product transportation to, from, and through every region in the world, and every region of the world consumes products of various types as illustrated in Figure 3 below.
Figure 3: AGOM Distillation/Upgrading and VGO Transportation
ArrowHead’s World Oil Model Uniquely Includes These Components Correctly Modeling World Oil and Refined Product Prices and Basis
Representing all these market components and the way they function both operationally and competitively using sound economic science is what we have uniquely done to create the AGOM. It represents full regional production of crudes by type, interregional shipments of crude, regional refining of crudes by type, interregional shipments of VGO, regional production of products by type, interregional shipments of every product, and regional consumption of product. The model computes the full forward price of every type of crude, every type of VGO, and every type of product at every region in the world, both deterministically and probabilistically. It also tells you the basis differential between regions, both deterministically and probabilistically, as shown in Figure 4 below.
Figure 4: AGOM Comprehensive Representation of the Oil Market Structure
AGOM Uniquely Incorporates Uncertainty and Outputs Probability Distributions over Price and Quantity
Superimposed over the structural detail is the notion that all the agents operate under uncertainty. Probabilities are endogenous in AGOM, fully considered by agents in their investment, operation, and retirement decisions. Agent actions in the face of probabilistic “states of the world” hedge and avert risk. These actions determine price (or more formally probability distributions over price in every region of the world). AGOM uniquely calculates probability distributions over prices and quantities in a full world supply-transport-demand context with endogenous agent-by-agent probabilities. There is no other commercially available model in the industry that provides a probabilistic, multiregional, multi-technology representation of world gas supply, transportation, and demand. The AGOM output is a full probability density function over price and quantity, and also over basis, capacity additions and retirements.
Model Transparency and Adjustability Based on Client Need and Perspective
As with all of our models, the data and the structure are transparent and easily viewable by clients. For any analysis that we perform, the data, the market structure and all assumptions can be reviewed by clients. Adjustments can be made whether to a client base case or to create specific scenarios. Transparency and customizability, combined with the time-tested methodology of the AGOM are key reasons why AGOM (and earlier versions) have helped clients clearly and confidently understand the future oil and refined products markets and make correct, profitable decisions.