The Oil Slump: It’s Not Just About Supply 08 April 2015 Trusted commercial intelligence

Trusted commercial intelligence 1 Agenda 1. Emerging price environment 2. Response of the upstream industry 3. Impact on the demand side? 4. Potential role for US exports

Trusted commercial intelligence 2 Source: Macro Oils Service Oil demand growth weakness and Saudi behaviour are the key changes compared to our 2013 forecast of 2014

Trusted commercial intelligence 3 Growing US tight oil offset unplanned outages…and then came June US tight oil growth keeping pace with rise in losses

Trusted commercial intelligence 4 Agenda 1. Emerging price environment 2. Response of the upstream industry 3. Impact on the demand side? 4. Potential role for US exports

Trusted commercial intelligence 5 Upstream companies needed US$90/bbl to cover capital spending Few companies execute their original capital spending plans in the current environment Brent price required to retain current net debt levels Upstream portfolio only, including development, financing and all other costs. Dividend and buy-back estimates allocated in proportion between business segments, upstream share only shown. Assumes equity financing for all projects. Source: Corporate Service

Trusted commercial intelligence 6 Company capital expenditure cuts approaching $120 billion in capital spending, with potentially more coming Share of announced capital spending cuts by operator and development type

Trusted commercial intelligence 7 Recent pricing impacts to our base case supply forecast  At $100/bbl Brent pricing we would have expected onshore US oil production to exit 2015 at million b/d.  Under a lower oil price outlook, we now expect Onshore US oil production to exit 2015 at 7.9 million b/d.  More than 50% of the potential lost supply were from onshore conventional fields, which we expect to see greater investment reductions than tight oil plays.  Production growth to become even more concentrated to the core areas of the best plays as companies focus capital to high- returning and high-growth areas  US tight oil volumes will increase 980,000 b/d in 2015 and 430,000 b/d in 2016 compared to over 1 million b/d in 2014 US oil production forecast

Trusted commercial intelligence 8 Year-on-year change and total non-OPEC supply Strong non-OPEC growth continues in early 2015; then slows as low oil price trims US momentum and accelerates declines in other areas

Trusted commercial intelligence 9 Agenda 1. Emerging price environment 2. Response of the upstream industry 3. Impact on the demand side? 4. Potential role for US exports

Trusted commercial intelligence 10 Global demand: growth to be slightly higher in 2015 than in Limited upside from low prices on global GDP and oil demand Annual growth in global oil demand (mil b/d)

Trusted commercial intelligence 11 US refinery crude oil runs heading towards all-time high this summer Storage draws later this year when combined with slowing US crude oil production growth United States refinery runs  Wood Mackenzie’s Product Markets Short- term Service is forecasting US refining runs to rise 1.5 million b/d from a seasonal low in February to 17 million b/d in July.  Wood Mackenzie expect a similar seasonal pick up in global crude oil runs to support Brent and WTI prices during the 3rd quarter of 2015.

Trusted commercial intelligence 12 HOUSTON ST. JAMES SAN FRANCISCO DELAWARE CITY ST. JOHN EDMONTON Rail: $8 - $10 / bbl. $5 - $7 / bbl (Jones Act) Closed arbitrage Key CUSHING HARDISTY LOS ANGELES Note: tariffs are Wood Mackenzie estimates $2 - $3 / bbl. (non-Jones Act) $2 - $4 / bbl. import Rail: $11 - $13 / bbl. Rail: $10 - $12 / bbl. Rail: $10 - $13 / bbl. Rail: $10 - $12 / bbl. $2-$3 / bbl. import NORTH DAKOTA (BAKKEN) Condensate exports: $2 - $5 / bbl. Open arbitrage $3 - $6 / bbl (Jones Act) PADD I 79% 19.5 mmbbl PADD II 78% 136 mmbbl PADD III 60% 285 mmbbl PADD IV 64% 17 mmbbl PADD V 66% 63 mmbbl Cushing 80% 70 mmbbl Pipe: $2-4 / bbl Refinery and tank capacity (millions of barrels) mmbbls % full crude storage at refineries and tank farms Source: Wood Mackenzie, EIA, Although Cushing is over 80% full, US has ample storage available

Trusted commercial intelligence 13 Too early to conclude Asia will run out of spaces to store crude oil… Planned SPR Completion in China, 2015 – 2017 Planned SPR Completion in India, Source: Wood Mackenzie Filling China’s new SPR capacity in 2015 could remove about 40 million barrels of crude from the market, or 110,000 b/d if smoothed out over the year.

Trusted commercial intelligence 14 Agenda 1. Emerging price environment 2. Response of the upstream industry 3. Impact on the demand side? 4. Potential role for US exports

Trusted commercial intelligence 15 US crude oil could reach global markets through a variety of routes, vessel sizes, and costs

Trusted commercial intelligence 16 Europe primarily processes its own light-sweet crude oil, while Asia is exposed to long-haul supplies USGC tight oil surplus exceeds European light oil imports, so will leave the Atlantic Basin NWE Refinery Light Crude Slate Asia-Pacific Light Crude Slate

Trusted commercial intelligence 17 Less complex refining configurations in Europe and Asia put a higher value on LLS than the USGC, even after transportation LLS Netback in USGC

Trusted commercial intelligence 18 Eliminating US export ban reduces Brent – LLS differential, but US refiners retain some competitive advantage over other regions Europe Asia

Trusted commercial intelligence 19 Condensate gets its best value by splitting the species ans sending each to its most valuable market Eagle Ford Condensate Netback in USGC

Trusted commercial intelligence 20 Medium-sour is a declining opportunity in Europe, but steady in Asia, with little local supply Mars might compete for market share with Arab Medium barrels in Asia NWE Refinery Medium Sour Crude Slate Asia-Pacific Medium Sour Crude Slate

Trusted commercial intelligence 21 A large distillate cut and Saudi Arabia's Asia pricing strategy creates a commercial magnet for Mars crude oil Mars Netback in USGC

Trusted commercial intelligence 22 Takeaways  Oil price risk is more on the upside »Return of chaos in the Middle East; social strife in Nigeria, Venezuela »Impact of Brazil political corruption crisis on ability for Petrobras to execute »Low price risk is tight oil break-evens fall, goes international, and pushes capital intense mega projects off the supply curve  Global GDP relevant to sustain price post-2017 »Without continued growth, emerging world demand growth is threatened »Structurally lower long-term oil price would imply no strong recovery in demand »Emerging world demand growth will increase the pull of a variety of crude oils to Asia  Companies will fail before plays »Producers appear to be taking out $60/bbl hedges; combined with $80/bbl hedges from late could provide price realization above break-even »Cash flow likely is the key financial metric »Consolidation would not reduce production; changes company name on the fence Do not apply conventional wisdom to an unconventional problem

Trusted commercial intelligence 23 Harold “Skip” York  Skip York is the Vice President of Integrated Energy in Wood Mackenzie’s America’s Research Team responsible for cross-segment integration of petroleum market and infrastructure issues for North America. With over 20 years of worldwide experience across the energy value chain, he has deep expertise in petroleum market economics and price-setting mechanisms including valuing non-fungible crudes across a number markets and leveraging technologies for competitive advantage.  Specializing in strategy and commercial optimization he recently has been focusing on the implications of logistic constraints on market-clearing dynamics and prices for Canadian heavy crude oil and production growth from unconventional plays.  Prior to joining Wood Mackenzie, Skip worked for ExxonMobil in a variety of strategic planning assignments. He held roles as the global expert on joint venture negotiation best practices, managing new business development downstream opportunities in Asia Pacific, and leading research teams on studies of the economic impact of large-scale oil investments on the economy of Russia. He also has consulted for clients at McKinsey & Company and Charles River Associates.  Skip holds a PhD Economics from the University of Virginia, as well as, a Masters of Science and Bachelor of Science also in Economics from the University of Wyoming. Vice President – Integrated Energy E T

Trusted commercial intelligence 24 Disclaimer  This report has been prepared by Wood Mackenzie Limited. The report is intended solely for the benefit of attendees, its contents and conclusions are confidential and may not be disclosed to any other persons or companies without Wood Mackenzie’s prior written permission.  The information upon which this report comes from our own experience, knowledge and databases. The opinions expressed in this report are those of Wood Mackenzie. They have been arrived at following careful consideration and enquiry but we do not guarantee their fairness, completeness or accuracy. The opinions, as of this date, are subject to change. We do not accept any liability for your reliance upon them. Strictly Private & Confidential

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