1. Back to the Energy Future (?) Recurring Elements in the Macro Cycle July 11, 2007 Berkeley Hotel London, U.K. Thomas A. Petrie, CFA Vice Chairman, Merrill Lynch

2. 1 Topics  The Reemergence of “Yesteryear Issues” (A 25-Year Lookback)  Energy Price Drivers  Energy Policy Realities  Environmental Matters  Energy Supply / Demand Challenges – The Quest for Mitigators  Summary / Conclusions

3. 2 The Reemergence of “Yesteryear Issues” (A 25-Year Lookback)  Oil price expectations continue to escalate  Oil field service inflation a problem  Windfall profit taxes regaining appeal in Washington, D.C.  Governmental policy makers rediscover renewables (i.e. solar, wind, etc.)  Confronting OPEC’s anti-competitive behavior is once again in favor  Renewed interest in implementing end use controls for fuels  Consensus develops on “Hubbert’s Peak”

4. 3 Energy Price Drivers ____________________ Source:Ferrill & Associates Price Watch.

5. 4 Energy Price Drivers World Energy Consumption Growth ____________________ Source:BP Statistical Review, June 2007.

6. 5 Energy Price Drivers GDP and Primary Energy Growth ____________________ Source:BP Statistical Review, June 2007.

7. 6 Energy Policy Realities  New tax credits for renewable energy sources  Provision for tax free “clean coal bonds”  Tax credits for coal to diesel plants  Crack down on companies disputing royalty payments on Federal lands  Elimination of “LIFO” tax accounting for inventories  Reversal of previous write-off incentives for drilling activities  Authority to sue OPEC Current Policy Proposals

8. 7 Energy Policy Realities E&P Capex vs. Global Oil Demand ____________________ Source:IEA and Calyon Securities (USA) estimates; (Presented at Enercom February 2007). Development of new energy resources is becoming even more capital intensive.

9. 8 Energy Policy Realities National oil companies control an overwhelming majority of global oil and gas resources. (1) GOCs: A : Saudi Aramco B : NIOC (Iran) C : Qatar Petroleum D : ADNOC (UAE) E : Iraq NOC F : Gazprom (Russia) G: KPC (Kuwait) H : PDVSA (Venezuela) I : NNPC (Nigeria) J : NOC (Libya) K : Sonatrach (Algeria) L : Rosneft (Russia) M : Petronas (Malaysia) O : Lukoil (Russia) P : Pemex (Mexico) Q : Petrochina (China) T : Petrobras (Brazil) Y : ONGC (India) Z : Sinopec (China). IOCs:N : ExxonMobil R : BP S : Chevron U : Royal Dutch Shell V : Total W : ConocoPhillips X : ENI. Legend Government-owned oil companies (GOCs) International oil companies (IOCs) 95% 5% ____________________ (1)Source: Wall Street research. BBoe International major oils have been marginalized by National Oil Companies.

10. 9 Hubbert’s Peak ____________________ Source: Oil and Gas Journal: May 7, 2007. Model with outliner Energy Policy Realities Model works with data similar to model with outliner

11. 10 Hubbert’s Peak ____________________ Source: Oil and Gas Journal: May 7, 2007. Energy Policy Realities Worst Model Good Model

12. 11 Environmental Matters

13. 12 ____________________ Source:Meeting of the American Asssociation of the Advancement of Science (AAAS), February 2001; Earthobservatory.nasa.gov. Environmental Matters

14. 13 ____________________ Source:BP Statistical Review, June 2007. Environmental Matters

15. 14 Environmental Matters ____________________ Source:Energy Information Administration, 2001.

16. 15 ____________________ Source:IEA World Energy Outlook 2006. Environmental Matters

17. 16 Energy Supply / Demand Challenges – The Quest for Mitigators Unconventional oil and gas LNG Alaskan gas pipeline Hybrid vehicles Other efficiency gains

18. 17 Summary / Conclusions Given continuing economic growth, energy is likely to remain a “center-stage” policy challenge throughout the balance of this decade and well into the next There is a distinct risk that some past policy initiatives proven to be counterproductive will be readopted The very character of the traditional petroleum-based energy supply sector is undergoing significant change in terms of technological inputs required and resulting step-ups in capital intensity Markets work; recent price signals are motivating appropriate changes at all levels of the supply chain