March 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 you 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” March 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. 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

4. 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.

5. 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

6. High Oil Pain Equals Lower Payback Per GDP Growth Unit- When the oil burden becomes high, then GDP-growth yields less oil demand growth

7. 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.

8. 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

9. 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

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

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

12. 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

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

14. 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

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

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

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

18. 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 ?

19. 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)

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

21. 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

22. 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

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

24. 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

25. 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

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

27. Backup

28. Global Supply-Demand Trends-12 month moving average based on the latest monthly data suggest decreasing ‘Call on OPEC’ in coming years- In 2011 the situation was different (see the graph to the left)

29. 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

30. 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.

31. The Hydraulic Fracturing Technique

32. 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

33. Short Term

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

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

36. Net 'Money Managers' Exposure on ICE Brent

37. 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

38. 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

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

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

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

42. DNB Markets Global Fundamental Oil Balance- If OPEC continue to produce at the latest known level (from the IEA-database)

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

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

45. 2013 Oil Price Scorecard – Brent Forecast Maintained @ 107 $/b

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