Oil

Short and medium term outlook

1

• A price level above 110 dollars per barrel seems to be beyond supply-demand fundamentals. There are many uncertainties regarding global

economic evolution in this and next year, primarily on concerns over the ongoing economic woes of Europe and fears that the Chinese economy is

set to slow. On the supply side, Saudi Arabia has been producing at 30 years record during almost the whole 2012 and Russian oil output has

reached a post-Sovietic record in September. Inventories are at comfortable levels and the pressure on “days of demand” storage is slowing down.

• Support to prices comes from emerging markets oil consumption and supply disruptions. According to the International Energy Agency (IEA), this

year Non-OECD countries are expected to increase their oil consumption 1.15 million barrels per day (MMBbl/d), with Asia and Middle East leading

the growth. Fourth quarter global demand estimation would represent a new all time record, 90.58 MMBbl/d. Additional pressure comes from

supply side. Even with Saudi Arabia and Russia at maximum production, more than 1 MMBbl/d is out of stream due to geopolitical issues in Iran,

Sudan, Syria and Nigeria, besides some operational problems in North Sea.

• Beyond supply-demand fundamentals, oil market moves between economics and geopolitics news, driven by speculation. The Large Traders

activity, well associated to speculation, along with part of the Swap Dealers activity, are increasing the volatility in the market. For example, the

speculative movement previous the announcement of a new Quantitative Easing in the United States in mid September took crude oil price to climb

around 5 dollars during the previous month and more than 3 dollars the days before, but during the next two days, after the announcement was

made, the reaction of high-speed computer trading programs plunged the price more than 10 dollars in a profit taking movement. The whole boom

and burst mini-cycle was prompt by speculation. But this over-reaction is not only to economics issues but to geopolitical ones too.

• Volatility is the issue in the near term, but in the medium and long term price perspectives have not moved. In the future markets, the Five-years

deferred crude oil price has been anchored in $90/Bbl along the whole post-crisis period. On the other hand, Official Agencies also keep

unchanged their long term price trends, but these are set at higher level in a increasing price tendency.

2Fuente: Thomson Reuters Ecowin y Dirección de Estudios y Análisis del Entorno de Repsol

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r-08

Jul-0

8

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-08

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9

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10

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per b

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Operation Twist Expectations about the ad Implementation of the program

S&P Brent (right axis)

QE1 QE2 QE3

Risk aversion, co-movements & fundamental

Evolution of Crude Oil Brent Price and S&P 500 Index, in a Monetary Relaxation Context

3

Evolution of World GDP and Earning per share of S&P

Source: Bloomberg, Oxford Economics and Repsol Economic Research Department

Risk aversion, co-movements & fundamental

Everything is about expected GDP and fears of tail events

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8,0

28,3

48,7

69,0

89,3

109,7

130,019

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1993=100USD

EPS S&P

Nominal World GDP

Nominal world GDP, adverse scenario

Oil

Long term outlook

4

• In the upcoming 2012 World Energy Outlook (WEO 2012), to be published in November, The International Energy Agency (IEA) will rise $10/Bbl its

crude oil price projection in average for the whole period 2011-2035. This level reflects the mounting cost of producing oil from new sources as

existing fields are depleted. In nominal terms, the price doubles between 2011 and 2035, to reach $216/Bbl at the end of the period under the New

Policies Scenario. Considering the Current Policies Scenario –which is gaining likelihood in the actual crisis context- the price at the end of the

period would be above $250/Bbl.

• Key question in the market is if we are finding enough crude oil to sustain current production and future demand. The rate of oil production has

exceeded that of discoveries by wide margin for many years. Production in each country is projected based on investment in different categories of

resource: existing fields (including those in production and those awaiting development) and new fields yet to be found, as well as unconventional

resources. According to the WEO 2012 New Policies Scenario, conventional oil (including NGLs) would represent 79% of oil production in 2035,

an increment of 2.7 MMBbls/d from 2011 levels. Unconventional resource increase would be of 9,5 MMBbl/d. So, there would be enough

resources to meet depleted volumes and future demand growth.

• The most outstanding example of new oil resources is Tight Oil from USA. Although US Light Tight Oil production is considered “conventional oil”,

the coupling of horizontal drilling and hydraulic fracturing (commonly called “fracking”) technologies has transformed the outlook of the industry of

both Official Energy Agencies and private analysts. Combined US production from Bakken, The Eagle Ford and other emerging light tight oil plays

such as Niobrara, which straddles Colorado, Kansas, Nebraska and Wyoming, the Texas Permian basin and the California plays, is expected to reach

well over 2.5 MMBbl/d by 2025 in the New Policies Scenario. Resources are believed to be large enough to sustain production at the level until

about 2030, before decline in production sets in. The US Energy Information Administration estimates that unproved recoverable resources of

light tight oil end 2009 stood at 33 billion barrels.

Oil

Is a shale boom possible in Argentina?

5

• With Argentinian conventional oil and gas fields approaching maturity, unconventional hydrocarbon plays represent a solution for the gradual decline of

the country’s conventional supply. Argentinian unconventional plays hold a great potential, with projections indicating that shale gas production could

more than offset the decline of conventional gas supply.

• However, the development of unconventional hydrocarbons in the Latin American country depends on a change of the national energy policy. Regulated

hydrocarbon prices put in place since 2002 to support low-cost industrial activity have severely restricted investment in the upstream sector. In addition,

the recent nationalisation of Repsol’s stakes in YPF (51%), the country’s biggest oil and gas producer, represents a great uncertainty for the international

community regarding investment.

• Repsol YPF's Vaca Muerta shale oil discovery at Loma La Lata Norte in the Neuquén Basin, is by far the most significant discovery to date holding a

contingent resource potential of twice that of the whole North American Eagle Ford’s (five-fold if the total play is considered), according to company’s

estimations. This discovery has switched the focus for operators targeting the Vaca Muerta play from testing the play’s gas potential to testing its liquids

potential and has triggered the confiscation of the bulk of the shares held by the Repsol in YPF.

• Following the nationalization of the Spanish company’s stakes, the Argentinian Government published a plan concentrated on the country’s

unconventional oil and gas potential, targeting the Vaca Muerta formation as the main objective for production development investment: 146 new wells

have been scheduled for 2013 and a total of 1,600 wells for the period 2013-2017.

Oil WindowEagle Ford Vaca Muerta

YPF

Vaca Muerta

Total Play

Bakken

Play Area 9,600 9,120 22,800 25,600 km²

Play Thicknesss m 60 140 140 20 m

Play Porosity 8 8 8 8 %

Play HC Saturation 75 75 75 75 %

Formation Volume Factor 1.4 1.6 1.6 1.3 Vol/Vol

Play HC Concentration 15 32 32 5 MBOE/km²

Total Oil In Place 146,146 291,840 729,600 139,901 MBOE

EUR RF=3.5% 5,115 10,214 25,536 4,897 MBOE

Potential Plateau 490 979 2,449 470 kbopd

Oil

Is a shale boom possible in Argentina?

6

• As the Vaca Muerta shale oil play was only discovered at the end of 2010 this appears to be an aggressive programme. However, looking at the

analogous Texan Eagle Ford shale play, five years of activity resulted in the drilling of 1,979 wells. Assuming the same production rate seen in Eagle

Ford (in the case of Eagle Ford, the list of companies involved includes top industry names and capital availability was not compromised by political

risk or artificially low well head prices), the 1,600 wells that YPF intends to drill should result in a production of approximately 160,000 boepd. Of

this, 125,000 boepd would probably be absorbed in replacing the decline in YPF’s conventional production base, leaving very few barrels left to

alleviate the current production deficit which will of course grow as demand increases in time.

• What is then the potential for sustainable production from the Vaca Muerta Formation, and what level of activity would be needed to remedy the

energy deficit in Argentina? If the new resources at Vaca Muerta were to be developed with the same vigour as those at Eagle Ford, Argentina

should be scheduling a production rate of 0.4 Mbopd for 2015, the total play being capable of sustaining a rate of at least 1 Mbopd and 250 Mm³/d

of gas. These figures ignore the potential of the other significant shale plays present in the Argentinean portfolio.

• If the goal is the more modest meeting of internal demand, assuming the shortfall in internal supply would be met by the results of direct foreign

investment, then unconventional oil would be reaching a level of 0.4 Mbopd by 2017. This 250% increase in production should not require a 250%

increase in budget, as the inherent efficiencies of the system would rise as economies of scale and best industry practices would rapidly decrease

individual well costs. The benefits to the Argentine Current Account Balance are obvious; the effect of stable and improved economic conditions

would become patent.

• However, this alternative would require that the Government showed the international community that there exists an adequate legal framework

for investment in Argentina.