geopolitical oil

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Strategic Advisors in Global Energy

Strategic Advisors in Global Energy

Strategic Advisors in Global Energy

Geopolitical Changes and Global OilMarkets

Fareed Mohamedi

Partner and Head of Markets and Country Strategies

June 2009

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| Markets and Country Strategies Group | Page 2

Executive Summary

The global economy is at a major point of transformation the old system --

US consumes and China produces -- is unsustainable Historically, the declining power usually resists giving up control and the

rising power usually is too cautious to assert a greater degree of control

Oil demand will be on the defensive for a long period

OPEC will require serious discipline to manage supplies and reduce stocks

Energy insecurity and Chinas growth is shaping a new global oildistribution system

The US Administrations interest in efficiency and climate change will add tothe uncertainty facing producers

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TreasuryBonds

China World

MerchandiseExports

UnitedStates

Investment

Commodities,Other Inputs

The US consumes, China produces

The US run deficits, the Rest of the worldfinances

The Unsustainable System

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RussiaUnited States

India

EU

China

Changing Global Balance of Power

A declining but still powerful United States

Other rising powers, but no superpowersyet

Era of grand alliances is passing

If Washington fails to repair its power losses in the next 10-15 years,then other countries will assume the leading role in global affairs

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How Much Can Obama Change US Foreign Policy?

Obama is attempting to act on his belief that US foreign policy under the Democratscan be strong and right, but his administration faces structural limits

Obamas rhetoric offers a visions of change

Go beyond post 9/11 strategyconventional policycannot deal with unconventional threats of 21st Century

Transform the way the US deals with the worlddignityagenda:

Pay attention how others perceive the United States and itspolicy

Appreciate other states have own priorities

Address perception of unfairness and problems that

breed radicalism and prevent liberty, justice andprosperitybottom up approach

Emphasis on the centrality of active diplomacy andmultilateralism

International cooperation; American leadership

Working with broad range of partners, including Russia andChina

Forceful idealismwilling to use force to achieve specific

ends

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Increasingly Ineffective US Hegemon, No-one ElseWants the Job

No major power has a sustained interest in undermining, much less replacing, UShegemony, but they may be forced to take a more overtly cooperative role

Being a hegemon is expensive and risky. After WWII both Europe andJapan learned it was more comfortable to free ride on US hegemony.

China has the resources to make a bid for hegemony. But so far itprefers to concentrate them on economic growth projects.

Russia and India are growing stronger, but will not have enough powerto make a bid for hegemony in the next 20 years (at least).

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Abundant evidence of radical

change in behavior of USconsumers:

Retail sales, personal consumptionare nose-diving

Rebounding savings rate

Household debt declined in thirdquarter 2008, first time since 1952

This has a direct bearing onsteep falls in globalmanufacturing and exports

Can the world economy find a

substitute for US final demand? Can the US economy adapt to a

radically different growth model?

Household Debtannual % change

0

4

8

12

16

20

56 60 64 68 72 76 80 84 88 92 96 00 04 08

0%

2%

4%

6%

8%

10%

130

132

134

136

138

140

2007 2008 2009

US: Labor Market Conditions

TotalE mployment,mill ions Une mploymentRate,%

Global EconomicsUS economy consumers give up

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World Economy: Falling Off The EdgeManufacturing, exports have plunged since September

-5 0

-3 0

-10

10

30

50

Jan 08 Apr Jul Oct Jan 09

China Korea Taiwan

Thailand M alaysia

Asian Exports, % change year/year

This is an inflectionpoint, unusually hard toforecast

First half of 2009 certainto see sharp falls ingrowth rates throughoutthe world

De-stocking partly toblamesome signs thismay be bottoming out

Secondary impacts yet tocome, especially from joblosses

Stimulus in US, China and elsewhere will helpbut no recovery ispossible without restoring the financial sector to health

Stimulus in US, China and elsewhere will helpbut no recovery ispossible without restoring the financial sector to health

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A Coordination of Policies would be Necessary toReturn Global Growth

Current Account Balances, 2007$ billion

Surplus Countries Deficit Countries

Falling demand, credit squeeze are forcing adjustment of external deficits in deficitcountriesthis can happen in one of two ways:

Declining imports and lower levels of trade

Rising exports and relatively higher levels of trade

Second alternative is obviously preferable, but can only happen with policy

coordination among key countries

Success or failure of international coordination will be the mostimportant single factor in determining severity of the recession

Success or failure of international coordination will be the mostimportant single factor in determining severity of the recession

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OPEC: Balancing the Risks

Quiet confidence that OPEC is no longer chasing markets

But economic uncertainties still loom large with risks to demandprimarily on the downside

Current prices are at unacceptable levels, but core OPEC membersunderstand they will need lower prices in order to achieve durable,higher prices in the longer-term

Current trading range acceptable for next two quarters, and someconfidence a $35-40/b floor has been established

Want a products-led demand rally to lift the complex

Want to avoid an undue tax on the stimulus programs or any other oilpressure on markets

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-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

mmb/d

Supply-Demand Balance

Change in Supply Change in Demand

Unwinding the GlutActive OPEC management needed to restore balance

Premature fearsof recession

Premature fearsof recession

Saudi increases asdemand withers

Saudi increases asdemand withers

Aggressive tighteningneeded to clear overhang

Aggressive tighteningneeded to clear overhang

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OPEC Implements Major Cuts

Agreed to a total of 4.2

mmb/d in production cutssince September

Decision in December torebase level of cuts fromSeptember 2007 quotas toSeptember 2008 actualproduction

De facto re-apportionment of

output targets based onsecondary sources (includingPFC Energy)

Bulk of cuts to come fromGulf Arab states, but heaviershare of burden of additionalcuts on Iran, Venezuela,Angola and Libya

Initial indications suggestgood adherence to targetsbut is it enough?

Change in Commercial Stocks

-2.0

-1.0

0.0

1.0

2.0

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

mb/d

0

500

1000

1500

2000

2500

3000

Oct-08 Nov-08 Dec-08 Jan-09 Feb-09

Projected Cumulative OPEC Cuts (mb/d)

Angola

Ecuador

Algeria

Libya

Nigeria

Venezuela

Iran

Qatar

UAE

Kuwait (w/NZ)

Saudi Ar abia (w/NZ)

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OPEC Threshold Prices: Not Enough For Some

Price Needed to Balance External Accounts mid-2008

(Imports of Goods & Services Non-oil Exports)/Total volumes of Liquids Exports

$75/b

WTI $/b

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How will NOCs Respond in the Slowdown?

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NOC Upstream Capital Spending Still Strong

Source: NOC stated numbers or PFC Energy estimates

Stated / Estimated increase

CNPC

PetrobrasPEMEX (downside risk)

PETRONAS

ONGC

CNOOC

Ecopetrol

PTTEP

PERTAMINA (unlikely

No change to Capex:

QP

NIOC

Stated / Estim