February 2013 - Torbjørn Kjus

1. Oil Market Outlook – The Fat Lady Has Started To Sing- “Sad but true” for Norway but not all “Doom and Gloom” - A dream come true for the US “Hey, I’m your life I’m the one who took you there Hey, I’m your life And I no longer care” Quote: Hetfield, Ulrich, Alan – “Sad but true” February 2013 - Torbjørn Kjus

2. The Limit Of Oil Production Is Being Reached - Not- In 1919 the US had produced 4 billion barrels of oil and the US Bureau of Mines though the country would run out of oil by 1930- By 2012 the US has produced about 205 billion barrels • Carl Beal (US Bureau of Mines in 1919): • “The limit of production in this country is being reached, and although new fields undoubtedly await discovery, the yearly output must inevitably decline, because the maintenance of output each year necessitates the drilling of an increasing number of wells. Such an increase becomes impossible after a certain point is reached, not only because of a lack of acreage to be drilled, but because of the great number of wells that will ultimately have to be drilled.» • The statement above could have been stated now about sceptics to shale oil production in the US, but it was written in 1919. • MIT professor Morris Adelman: • “In the United States in 1930, proved reserves were 13 billion barrels. Over the next 60 years, the United States, without Alaska, produced 130 billion barrels. The inventory turned over ten times.”

3. The Fat Lady Has Started To Sing – “Sad But True”- “Hey, I’m your life – I’m the one who took you there - Hey, I’m your life and I no longer care”Metallica – “Sad but true”

4. More Normal For Oil Prices To Trend Lower Than Higher • Formationof OPEC in 1960 • Oil pricespoliticised • Electronic oil trade – easyaccess • Oil as a separate assetclass • Emergingmarketeconomicgrowth 100-year period of oil prices trending lower

5. Trend Line Demand Growth Weakening On High Prices- We do not believe the world is about to return to the latest 30-year long trend line oil demand path which started in 1983 • Supply shock: • YomKippur • Demand «shock»: • China and emerging markets • Weak non-OPEC supplygrowth • Supply shock: • Iran vsIraq • Revolution in Iran

6. Peak Oil Has Already Happened- At least when talking about demand in the developed world – and a large chunk of this looks structural and not cyclical • JBC claims European oil demand would have been 1 million b/d higher now than ten years ago without a 20% efficiency improvement in the car fleet. • Efficiency improvement in the European transportation sector set to knock off a further 0.5 million b/d by 2020 according to the JBC transport model. • In Britain the MPG for new cars on the road has increased from 36 MPG to 47 MPG since 2001.

7. GDP Growth In OECD No Longer Provide Growth In Oil Demand- The high and rising oil price has started irreversible negative effects on demand for refined oil products in advanced economies

8. Overdose"You're a habit I don't wanna break just write on my grave I overdosed on you"(AC/DC - Let there be rock) The US has however been on a very good track in recovering from it's addiction to oil after it's overdose. The country has recently turned into a net oil products exporter.

9. US Fuel Efficiency Standards To Significantly Improve By 2025-CAFE-standards to reach 49.6 MPG by 2025 Source: Annual Energy Outlook – EIA June 27 2012

10. The Huge US Oil-Gas Spread Provides Substitution Possibilities-General Motors will soon produce dual fuel pick ups and trucks that can switch between gasoline and CNG

11. How Large Is This Change In US Crude Output Really?- Last year Texas was still below Norwegian crude oil production – Not anymore…

12. Texas & North Dakota Is Where It Has Happened So Far- Growth in North Dakota started in 2008 while Texas was two years later in the cycle

13. Conventional vs Unconventional- Moving to the “kitchen” instead of the “living room” (Source: USGS)

14. Technology Has Unlocked Gas & Oil In Shale Source Rock

15. North American Shale Crude Production Growing Very Quickly- Total liquids output in US/Canada set to grow from 14.7 million b/d to 21.7 million b/d (up 7 million b/d) – Canadian shale crude up from 0.2 million b/d to 0.6 million b/d – Canadian oil sands up from 1.8 million b/d to 3.0 million b/d

16. Type Curve Have Similar Shapes Across Plays- Source: PIRA Study – Road to US energy independence

17. But Decline Rates Per Well Not Interesting In This Industry- One horizontal rig will increase its contribution even if decline rates per rig is very high – this is like traditional process industry

18. US Recoverable Shale Oil Reserves - 113 billion barrels- Source: PIRA Study – Road to US energy independence

19. US Shale Resources vs Other Resources- US shale resources larger than conventional reserves in Kuwait/UAE/Russia

20. Reserves Growth Set To Accelerate?- There is already visible reserves growth but will the shale oil revolution lead to an acceleration in coming years?

21. We Are Starting To See The Effect On US Crude Imports Now- US crude imports has started to drop but this is just the beginning ?

22. World Population By Country(Sources 2009-2011) • Germany (82m) • France (66m) • UK (62m) • Italy (61m) • Spain (46m) • Poland (38m) • Romania (21m) Russia (142m) Canada (34m) Ukraine (46m) USA (311m) Turkey (74m) Algeria (36m) Iraq (31m) Iran (75m) Morocco (32m) Egypt (80m) Saudi (27m) Mexico (112m) Sudan (43m) Yemen (22m) Nigeria (158m) Ethiopia (80m) Venezuela (29m) Colombia (46m) • 54% of the world: • China (1.34b) • India (1.2b) • Indonesia (238m) • Pakistan (176m) • Bangladesh (150m) • Japan (127m) • Philippines (94m) • Vietnam (87m) • Thailand (67m) • Burma (50m) • South Korea (49m) • Nepal (29m) • Malaysia (28m) • North Korea (24m) • Taiwan (23m) • Sri Lanka (20m) • Cambodia (13m) Kenya (39m) Congo (68m) Tanzania (43m) Brazil (191m) Peru (29m) Australia (23m) Argentina (40m) South Africa (50m)

23. Non-OECD Oil Demand Will Continue To Grow - We do however expect the growth rate to decrease in the current decade

24. Chinese Growth In Oil Imports Stalling??- Where is the accelerating growth in Chinese crude oil imports??

25. Chinese Oil Demand Growth To Favor Personal Consumption- Oil products more tilted towards industrial production and the investment cycle may grow much slower in coming years

26. Look What The Chinese Have Done With Wind Power- Increase from zero to 1 million b/d (211 TWh) in 5 years… • Installed wind capacity to increase by 30% in China in 2013 (from 63GW to 81 GW) • Will equal about 211 TWh (1 million b/d) with a 30% utilization factor • Total German electricity consumption is about 600 TWh

27. OPEC Spare Capacity Reduced Since 2009 - This is the flip side of the increased Saudi production Source: IEA Monthly Oil Market Reports

28. MENA: Sex Ratio – Unemployment - Young Population- A recipe for social unrest Skewed Sex Ratio in The Middel East Low Labor Force Participation In MENA Very Young Population In MENA Source: International Labor Organization, UN Population Division, Gapminder

29. Saudi Requires Higher Oil Prices To Balance The Budget - Saudi exports assumed to be: 2013-2017 in million b/d: 8.3 – 8.0 – 7.8 – 7.5 – 7.3

30. Long Term Oil Price Forecast(The forecast is for the average of the rolling 1st month ICE Brent future contract)

31. Backup

32. Global Supply-Demand Trends-12 month moving average based on the latest monthly data suggest decreasing ‘Call on OPEC’ in coming years- Last year the situation was different (see the graph to the left)

33. The Hydraulic Fracturing Technique

34. The Most Expensive Barrels Risk Being Pushed Out By Shale Oil- How expensive will it be to develop oil projects in the Barents Sea? The most expensive barrels risk being pushed out of the market. The best example of this in real life is Shtokman in the Barents sea.

35. Existing Projects Will Cover Most Of The Oil Need By 2020 • Conclusion: • The gap (23-17-16 ??) by 2020 will be covered by existing projects. No need for new discoveries to cover the gap by 2020. • Net need of new barrels by 2020 in million b/d: 17+6 =23? 11+6 =17?, 10+6 =16? • Lost supply from decline rates: • 17 million b/d (2.5%)- source Rystad Energy • 11 million b/d (1.6%)- Harvard report. • 10 million b/d (1.5%) IEA WEO 1212 (page 102). • Trend line demand growth (1.5%) will almost be cut in half (0.8%): 6 million b/d. • How much can supply increase?: • Rystad Energy: 27 million b/d • GS top 360: Estimated growth in world oil liquids supply from the worlds top 360 projects 2011-2020 (page 41): 38-12 =26 million b/d. (18 million b/d if adjusting for normal project slippage) • Harvard study: 29 million b/d. Source: DNB Markets, IEA, Rystad Energy, Goldman Sachs 360 projects - March 2012, Harvard Kennedy School – Belfer Center

36. Investments Cannot Continue @ 50% Of GDP Growth In China- The consumption part of GDP growth must soon start to climb – Zero growth in China's investments will halve the GDP growth

37. Short Term

38. Fundamental Balances DNB Markets vs IEA, OPEC, EIA

39. Oversupplied Market In 2013 If OPEC (Saudi) Do Not Cut

40. Fundamentals (Supply vs Do Still Matter For Oil Prices

41. 2013 Oil Price Scorecard – Brent Forecast Maintained @ 107 $/b

42. Monthly Oil Price Scorecard-Please read on paper or zoom in on screen

43. Modeled Brent Price Based On Time Spread- Has provided early market signals several times. Weak macro economy, European debt crisis Building risk premium due to Arab spring Iran tensions lead to a risk premium

44. Brent, Forties, Oseberg Ekofisk (BFOE) Loading Programs- Structural production decline still on-going. In addition about 160 kbd (equals 20% of the current BFOE program) on average has left for South Korea in 2012 due to the EU free trade agreement (which gives South Korean refiners a 3% discount). Source: PIRA

45. Modeled Dubai Price Based On Time Spread- Has provided early market signals several times.

46. Dubai Market (Asia) Is Weakening- Is it giving us an early warning signal?

47. Financial Oil Positions NYMEX (WTI, RBOB, Heating Oil)

48. Net 'Money Managers' Exposure on ICE Brent

49. Brent vs LLS Starting To Trade Structurally In Favour Of Brent- Over time this will push more West-African barrels towards Europe. Source: PIRA

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