Oil market outlook Virendra Chauhan, June 2015

2 June 2015

OPEC’s decision not to cut output breaks the $100 range…

HISTORICAL PRICES

Prompt Brent prices (2012 – H1 15) $/barrel

Oil prices plummeted in Q4 14 following OPEC’s decision of not cutting output to balance the market. Their focus is on market share now. So prices had to fall to shut in high cost production and incentivise demand growth

Source: Bloomberg, Energy Aspects analysis

40

60

80

100

120

140

Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15

Iranian export sanctions

Risk of military strikes on Syria

Speculation over strike on Iran Protests in Egypt; disruption

in Libya

Russia annexes Crimea

ISIS invasion of Iraq

Slowdown in demand, increase in supplies

OPEC meeting: 30 mb/d quota rolled over

Expectation of falling supplies

3 June 2015

…but demand has received a huge boost thanks to lower prices

Gasoline demand growth, y/y change Mb/d

Global oil demand, y/y change Mb/d

Source: China Customs, PPAC, Energy Aspects analysis

DEMAND (1/2)

Already strong Asian gasoline demand growth has been spurred higher by lower flat price

Global oil demand growth has picked up tremendously in recent months

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1

2

3

Jan 14 Jul 14 Jan 15

(0.1)

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0.7

Jan 12 Jan 13 Jan 14 Jan 15

India

China

4 June 2015

OECD demand also doing far better

OECD oil demand growth, y/y change Mb/d

US vehicle miles travelled, y/y growth Billions

Source: FHWA, EIA, Energy Aspects analysis

DEMAND (2/2)

(10)

(5)

0

5

10

15

Jan 14 Apr 14 Jul 14 Oct 14 Jan 15

European on-road diesel demand has recovered strongly as low prices is supporting economic activity

US VMTs have started responding strongly to low prices and the scope for increase is huge

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(2)

(1)

0

1

2

12 13 14 15

Europe

Asia-Pacific

North America

5 June 2015

So, while the year started with expectations of large stockbuilds

Floating storage Mb

Global implied stock changes Mb/d

Source: IEA, Energy Aspects analysis

BALANCES

Expectations of stockbuilds were for a large 2 mb/d in H1 15 but the reality has been different

Floating storage rose in January, but less than figures talked about as most were with the option to store

(2)

(1)

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1

2

3

1Q11 1Q12 1Q13 1Q14 1Q15

F'cast

0

20

40

60

80

09 10 11 12 13 14 15

Actual barrels stored

Optionality to store

6 June 2015

In fact, lower stock builds despite record Saudi output

OPEC (1/2)

GCC crude production Mb/d

Saudi crude output Mb/d

Source: MEES, Energy Aspects analysis

GCC countries have raised output as refinery demand has soared and they have lowered OSPs to gain competitiveness

Saudi Arabia is producing at record levels due to new domestic refineries and strong export demand

7.5

8.0

8.5

9.0

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03 05 07 09 11 13 15

14.4

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16.4

Jan 13 Jul 13 Jan 14 Jul 14 Jan 15

7 June 2015

And an increasingly two-tiered OPEC makes cohesion harder

OPEC (2/2)

Total Iraqi exports Mb/d

Iraq crude exports and revenues

Source: MEES, Iraq Oil Report, Energy Aspects analysis

Venezuela, Libya, Iraq and Iran are all cash strapped, making it near impossible for them to reduce output

Despite pumping at record levels, revenues have plummeted, forcing spending cutbacks

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Jan 13 Jul 13 Jan 14 Jul 14 Jan 15

Actual Forecast

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4

5

6

7

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9

1.5

2.0

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3.0

Jan Apr Jul Oct Jan

Export volumes, LHS (mb/d)

Revenue, RHS ($ billion)

8 June 2015

Non-OPEC supplies have only just started to respond to low prices

Russian oil production Mb/d

US crude production Mb/d

Source: EIA, Energy Aspects analysis

NON-OPEC SUPPLIES (1/6)

4.5

5.5

6.5

7.5

8.5

9.5

11 12 13 14 15

US output, which will be the fastest to respond, has not reacted yet as there are time lags

Reduced costs and taxation changes also helping Russian output grow for now, although the bulk is condensates

(0.2)

(0.1)

0.0

0.1

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08 09 10 11 12 13 14 15

9 June 2015

US independent producers are highly sensitive to oil prices

NON-OPEC SUPPLIES (2/6)

US oil rig counts

Source: Baker Hughes, Company Reports, Energy Aspects analysis

US Independents 2015 Capex $ bn

Basin 2014 Capex2015E

Capex% chg.

Anadarko Global 9.2 6.8 (26)%

EOG Resources Eagle Ford / Permian 8.1 6.4 (21)%

Marathon Oil Corp Global 5.5 4.4 (20)%

Encana Corp Permian / Eagle Ford 2.6 2.8 10%

Continental Resources Bakken/SCOOP 4.6 2.7 (41)%

Concho Resources Permian 2.6 2.0 (23)%

Oasis Petroleum Bakken 1.4 0.8 (44)%

Halcon Resources Eagle Ford / TMS 1.4 0.8 (45)%

Rosetta Resources Permian / Eagle Ford 1.2 0.8 (38)%

Linn Energy California / E. Texas 1.6 0.7 (53)%

WPX Energy Williston / San Juan 1.4 0.7 (48)%

Sanchez Energy Eagle Ford 0.9 0.6 (28)%

PDC Energy Niobrara / Utica 0.6 0.6 (13)%

Denbury Resources USGC / Rockies 1.1 0.6 (50)%

Laredo Petroleum Permian 1.1 0.5 (52)%

Carrizo Oil & Gas Eagle Ford / Niobrara 0.6 0.5 (26)%

Stone Energy GoM / Marcellus 0.9 0.5 (49)%

Diamondback Energy Permian 0.5 0.4 (4)%

Matador Resources Permian / Eagle Ford 0.6 0.4 (39)%

Rigs have responded faster than expected to lower oil prices despite hedging, with even the best plays testing breakevens

The decline in drilling reflects the falling Capex by shale producers, which we estimate at an average 30%

500

700

900

1,100

1,300

1,500

1,700

Oct 14 Dec 14 Feb 15 Apr 15 Jun 15

10 June 2015

Lower Capex will mean the impact of declines starts feeding through

NON-OPEC SUPPLIES(3/6)

Analysis of number of rigs required to offset decline rates

Source: Texas RRC, Baker Hughes, Energy Aspects analysis

Permian rig counts

Eagle Ford rig counts

Williston (ND) rig counts

End 2014

production

Production lost to

natural declines

Production at

2015 end

Rigs requried to

offset decline

Average rig

count in 2014

Permian 0.8 0.5 0.3 81 107

Eagle Ford 1.8 1.3 0.5 170 199

Williston (ND) 1.2 0.7 0.5 133 185

Total 3.8 2.5 1.3 385 491

200

300

400

500

600

Oct 14 Dec 14 Feb 15 Apr 15 Jun 15

80

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220

Oct 14 Dec 14 Feb 15 Apr 15 Jun 15

60

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100

120

140

160

180

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Oct 14 Dec 14 Feb 15 Apr 15 Jun 15

11 June 2015

The financial position of shale producers remains precarious

NON-OPEC SUPPLIES(4/6)

US shale company cashflows $ billions

Production and debt Debt (LHS), $ billions, Production (RHS), mboe/d

Source: Energy Aspects analysis

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07 08 09 10 11 12 13 14

Total debt Production

The amount of new debt has on the large outpaced production growth as Capex is high

Consequently, as a sector, US independents have been Free Cash Flow negative quarter after quarter

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5

10

15

07 08 09 10 11 12 13 14 15

CFO

Net cash from financing

Capex

Free Cash Flow

12 June 2015

US tight oil growth outperformed last year, but will slow

NON-OPEC SUPPLIES (5/6)

Tight oil growth September / October 2014 vs 2015 Mb/d

Note: Production growth forecasts derived using various cost reductions and IRR's at price deck shown. Total US includes conventional and GoM production Source: Company data, Energy Aspects analysis

Sensitivity of US production growth to prices

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0.2

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0.6

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1.2

Sep / Oct 2014 2015

Permian Eagle Ford Bakken

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1.6

40 60 75 90 110

Production from key US shale basins was growing at a rate of 1 mb/d in 2014, but falls to below 0.5 mb/d this year

Impact of lower spending offset to some extent by high grading and cost reductions, which we estimate at ~15%

13 June 2015

The damage from lower oil prices is being done outside the US

NON-OPEC SUPPLIES (6/6)

RoW non-OPEC supplies, y/y change Mb/d

Record investment stemmed rates of declines in the North Sea and the FSU temporarily

Brazilian oil production, y/y change Mb/d

Brazil reversed a trend of two years of outright declines in 2014, with Q4 14 registering y/y growth of 0.33 mb/d

Source: EIA, ANP, Energy Aspects analysis

(1.0)

(0.5)

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04Q1 07Q1 10Q1 13Q1

ROW non-OPEC US

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0.15

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0.35

0.45

10 11 12 13 14 15

14 June 2015

The industry was not happy at $100 oil

Global cost curve (ex dividend or interest payments) $/barrel

Source: Energy Aspects analysis

Shale plays lie at the higher end of the non-OPEC marginal cost curve, as infrastructure build-outs, decline rates and high levels of rig activity keep costs high. We estimate about 15% of global production is uneconomic at current prices

LONG TERM NON-OPEC SUPPLY (1/4)

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Average cost

Production (mb/d)

OPEC

Non-OPEC

Sa

ud

i

Ara

bia

Oth

er

OP

EC

Ru

ssia

Un

ite

d

Sta

tes

Ka

zakh

sta

Ch

ina

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rwa

y

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zil

US

sh

ale

Ca

na

da

Oil

Sa

nd

s

Oth

er

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n-

OP

EC

Me

xico

Non-OPEC avg

OPEC avg

Global avg

15 June 2015

Global spending has risen sharply but production has not kept up

LONG TERM NON-OPEC SUPPLY (2/4)

Analysis of the majors indicates continuing sharp cost inflation in the upstream oil sector. Whilst Brent prices have averaged above $100 since 2011, net income per barrel has continued to fall. The increase in costs supports longer term oil prices around $100

Breakdown of key E&P profitability metrics $/barrel

Source: Company data, Energy Aspects analysis

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 201310-yr

CAGR

WTI 31.0 41.5 56.7 66.2 72.4 99.8 62.1 79.6 95.1 94.1 98.1 12.2%

Brent 28.5 38.0 55.3 66.1 72.7 98.5 62.7 80.3 110.9 111.7 108.7 14.3%

Revenue 24.3 30.0 41.1 48.0 52.0 68.2 43.3 53.0 68.3 68.1 67.7 10.8%

Production Costs (3.7) (4.2) (5.1) (6.0) (7.3) (8.4) (8.5) (9.0) (11.1) (12.0) (13.4) 13.7%

Exploration Expense (0.8) (1.0) (1.1) (1.5) (1.8) (2.2) (2.1) (2.1) (2.3) (2.8) (4.1) 17.8%

DD&A (4.5) (5.0) (5.7) (6.9) (8.1) (9.7) (9.8) (10.6) (10.9) (13.1) (14.7) 12.5%

Other (1.6) (1.5) (2.5) (2.2) (2.6) (2.5) (2.2) (1.4) (3.5) (2.5) (2.5) 4.3%

Income Tax (4.2) (6.0) (9.7) (14.3) (14.1) (19.7) (8.9) (13.0) (17.9) (20.2) (15.2) 13.6%

Net Income 7.4 8.9 13.1 13.6 13.2 18.5 8.1 12.9 15.6 13.6 12.4 5.3%

Finding Costs 0.9 6.3 2.5 5.4 8.4 2.0 2.3 3.7 3.7 6.2 4.0 15.9%

F&D Costs 6.9 19.6 17.6 18.4 26.5 10.5 11.4 23.5 22.2 31.0 27.1 14.6%

Exploration Intensity 1.0 1.2 1.4 2.1 2.5 3.2 3.3 3.3 3.9 4.9 5.2 17.7%

Development Intensity 6.1 6.4 8.1 10.1 11.5 14.0 13.6 15.0 18.2 23.1 26.7 15.9%

16 June 2015

A thinner project pipeline in 2015 and slippages mounting

LONG TERM NON-OPEC SUPPLY (3/4)

Relative to the usual 2.5-3 mb/d of total large new projects that have come online in recent years (not including tight oil), 2015’s project pipeline is paltry at just 1.5 mb/d. Slippages are rising and over 1.5 mb/d of projects are at risk in 2016

2015 non-OPEC project additions (> 20 thousand b/d) Thousand b/d

Source: Company data, Energy Aspects analysis

Field name Size Field name (cont'd) Size

Banyu Urip expansion (Cepu block) Terre de Grace Phase 2Indonesia Canada

Iracema Norte (Cidade de Itauai) Western Isles (Harris and Barra fields)Brazil UK

Surmont Phase 2 Foster Creek Phase 1GCanada Canada

Kearl Lake Phase 2 Cold Lake Phases 14-16 (Nabiye)Canada Canada

Delta House FPSO (inc. Marmalard and MacKay River Phase 1USA Canada

Edvard Grieg (formerly Luno) Birch Mountain Phase 2Norway Canada

Lucius TermokarstovoyeUSA Russia

Big Foot Kebabangan/KumunsuUSA Malaysia

Eldfisk extension Bukit TuaNorway Indonesia

Goliat West SeahorseNorway Australia

Knarr (formerly Jordbaer)Norway

110

35100

3090

25

165

40150

40110

40

40

70

1,49060

80

2575

2070

20

Total (incl others)

17 June 2015

And the axe in Capex will only make the project pipeline worse

LONG TERM NON-OPEC SUPPLY (4/4)

Global Capex was around $700 billion in 2014, so a 13% decline would be nearly $100 billion. This will see projects, particularly deepwater and capital intensive ones, getting deferred and even cancelled, tightening future balances

Global Capex by region $ million

Source: Company data, Energy Aspects analysis

Region 2015E 2014A 2013 + / - %

United States 122,426 154,295 142,234 (31,869) (20.7%)

US Independents Intn. 15,458 22,731 22,842 (7,273) (32.0%)

Canada 33,691 38,270 37,773 (4,579) (12.0%)

Mexico 23,000 24,600 21,600 (1,600) (6.5%)

Asia Pacific 102,676 118,219 116,286 (15,543) (13.1%)

Majors International 104,271 112,724 112,400 (8,453) (7.5%)

Russia/FSU 44,020 47,897 44,428 (3,877) (8.1%)

Latin America 48,215 56,188 51,193 (7,973) (14.2%)

Europe 41,542 48,416 41,728 (6,874) (14.2%)

Middle East 40,565 40,745 35,790 (180) (0.4%)

Africa 17,955 20,417 22,666 (2,462) (12.1%)

Other 9,500 11,850 16,500 (2,350) (19.8%)

International 408,744 456,456 440,991 (47,712) (10.5%)

Global Capex 603,319 696,352 665,440 (93,033) (13.4%)

18 June 2015

Crude oil price forecasts

FORECASTS

Energy Aspects crude oil price forecasts (2014-15) $/barrel

Brent WTI LLS Oman Dubai

2014 actual 99.5 93.0 96.8 97.0 96.4

Q1 actual 55.1 48.6 52.8 52.7 53.5

Q2 forecast 57 51 55 57 55

Q3 forecast 65 57 63 64 63

Q4 forecast 73 69 72 72 72

2015 forecast 63 59 61 61 61

2016 forecast 81 78 79 80 79

2017 forecast 98 94 95 97 97

Source: Bloomberg (actuals), Energy Aspects analysis

19 June 2015

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