Conference on petroleum supply for the Agencia Nacional de Hidrocarburos, Colombia

1. Conference on petroleum supplyfor the Agencia Nacional de Hidrocarburos, Colombia Investment trends in petroleum upstream sector, a global view and focus on Colombia Roger Tissot M&C Director December 10 2004

2. Supply side: Oil Reserves • The world is not running out of oil, but certain regions/countries are depleting faster than others. • Most regions have been producing considerably more oil than have been found since 1990. • Several key producing regions have reached or exceeded the critical depletion point of 50-60%,. Non-OPEC Countries that are Either in Decline or Currently in a Plateau

3. PFC forecast of Global Non-OPEC Total Liquids Production with Exploration Supply side: Production • Exploration reserve additions in the last 10 years have been much less significant than in previous decades. • A combined forecast of Non-OPEC crude, Non-OPEC natural gas liquids and Canadian Oil Sand production suggests production will grow to between 52 and 55 MMBD • Without a significant reversal of this trend Non-OPEC production is likely to peak after 2010 and begin a long term decline.

4. The Problem – the expected growing gap between global demand and global non-OPEC supply Demand Side: China setting a New Price Paradigm The Growing Differential Between Non-OPEC Supply Capacity and Global Demand

5. And the Price of Oil… • Before, the cartel limited supply, and OPEC’s excess capacity acted as a “Central Bank.” • In 2004, there was a change in fundamentals: Tight market running full capacity & high volatility. • In 2005, strong economic growth in key importing countries will continue, but warmer weather has softened demand. • Geopolitical considerations could push prices higher in 2H 2005 (Iran-US confrontation) • In 2006, weaker economic growth and additional supply from Deepwater and Caspian will soften prices. • After 2009: Back to tight supply/demand fundamentals and increasing dependency on OPEC oil. WTI US$/b WTI average forcast price

6. 1990s the era of the IOCs. Low oil prices, macroeconomic pressures and political considerations resulted in the opening of substantial acreage for E&P and improving fiscal terms. Today, the IOCs suffer from growth obstacles: Production has peaked in traditional (non-OPEC) areas Restricted access to assets, reserves, opportunities Impact on IOC’s: A Changing Landscape Non-OPEC, Non-FSU Reserves Disc – Reserves Prod (annual) NOC Reserves (limited equity access) Full IOC accessreserves NOC reserves(equity access) Reserves held by Russian companies

7. IOC’s Strategy: Keep Cash flow out of Exploration • Exploration cash flow from declining profitable assets are not re-invested at the same rates as previous years. • IOCs are capitalized and organized to invest in a specific risk-reward environment. % of IOCs Upstream Net Income from N. America and Europe 2001-2003 Average Upstream Net Income From North America & Europe Reported and PFC estimates.

8. Fiscal Terms in New Areas offer Less Price Upsides Current fiscal terms reflect lower-risk environments, designed for $15-$25 oil price range and generally favor government’s share of incremental revenues as energy prices rise… Annual Net Cash Flow Thunder Horse, US GOM @$35 Annual Net Cash Flow Plutonio, Deepwater Angola @$22 @$35 @$22 Additional Value to Oil Company

9. Results in Lower E&P Spending Risks have risen and although prices have also risen substantially, exploration activity has not responded. Exploration Spending (costs incurred and unproved property costs) for Average 1991 – 2003 (consolidated results) Unproved Property & Exploration Costs Incurred cost of acquiring Exploration Costs Incurred Only Note 1: Average includes spending data for consolidated operations of BG, BP, ChevronTexaco, ConocoPhillips, ExxonMobil, Hess, Marathon, Oxy, Shell, TOTAL, and Unocal. Note 2: Average unproved property and exploration costs incurred excludes Hess up to 1999 due to data unavailability.

10. 4,500 ExxonMobil Shell BP 3,000 ChevronTexaco PetroChina TOTAL (mboe/d) 2003 Production Petrobras ConocoPhillips Lukoil 1,500 ENI Yukos Repsol Statoil Devon EnCana Sinopec Oxy Unocal Hydro BG Anadarko CNOOC Marathon Talisman Nexen 0 0% 25% 50% 75% 100% Degree of Established International Portfolio (% of 2003 production outside of home regions*) Different strategies for different players Regional Majors Global Competitors Focus Players Note*: Home Region defined by location of corporate headquarters (N. America, S. America, Europe, Asia/Pacific); For Repsol YPF, its Latin American production is considered “home region” for the analysis; for Yukos data refers to 2002 data.

11. The NOC is becoming a formidable competitor • Governments are relying on their own NOC’s to take more risks, most often at home, but sometimes also abroad, competing with IOCs. • However, NOC’s face investment challenges • Government demands for cash • Exploration risk – not a preference of governments • Maturing areas – lower performance • Gas – the new investment sector, not a traditional NOC area home markets & resources • Example of globaliser NOC’s: • Petronas • CNPC • Sinopec • CNOOC • ONGC • Kufpec • Petrobras • Sonatrach • Statoil

12. The other players • Global competitors • Securing the last “land grab” reacting to NOC competition • Becoming energy manufacturers (LNG, Syncrude, etc) • Focus on material addition to their portfolio • Focus Players • Redeploying cash flow from based areas into international/other investment opportunities • Also concerned with materiality but accept lower threshold • More risk adverse to above ground risk • New business models (LNG, domestic gas markets) • Regional majors • Rationalizing geographic balances within their portfolio • M&A • Small companies • Scavengers: developing small fields of no interest to larger operators, could become small scale consolidators • Gamblers: Venturing on exploration activities limited scope

13. A Brief Look at Colombia • Colombia’s risk perception has been high. • Colombian oil withdrawals are higher than its reserve additions. How can this trend be reversed? • On November 27 2003, in Cartagena, the government announced a new petroleum policy. • To be successful, the government needed to achieve 3 priorities: • Shock the system (Fiscal terms) • Drastically improve security • Attract credible investors

14. Shock the systemThe government improved its fiscal terms 100% Venezuela Indonesia Egipto Malasia 90% Noruega Turkmenistán Angola Bolivia Gabón China Tailandia Sudán 80% Colombia Government Take Trinidad & Tob. Australia 70% I Kazakhstan Brasil Ecuador India Argentina 60% Perú 50% 40% 0 5 10 15 20 25 30 35 40 45 50 Prospectivity Source: Agencia Nacional de Hidrocarburos March 10 2004

15. Improve Security‘Democratic Security’ is Beginning to Work • President Uribe’s strategy is working • Guerrilla forces appear to be retrenching in remote areas. • Return of some sense of normalcy to the cities • However, violence is still high when compared to other oil producing countries. • And, although the international business community is noticing positive trends, Colombia’s “brand image” is still a challenge. Source: Ministerio de Defensa Dec. 2004, Colombia

16. Attract credible investors • ExxonMobil entry is a positive signal; but can this trend include onshore Colombia? • Onshore Colombia E&P is attracting numerous firms looking for exploration opportunities • However most of them are small companies facing complex and expensive exploration programs • Colombia must focus its “promotion strategy” attracting larger independents and globalizer NOC’s • A different “marketing strategy is required: • Set minimum selection criteria for companies • Develop a strategy assessing which are the “preferred candidates” • Implement an aggressive “marketing strategy” focus exclusively on targeted companies • Improve security to levels such as foreign companies can send their own expat staff to visit and operate fields • Service companies as integrators of marginal fields?

17. Thank You