Oil Price Methodologies Crude Price Formation

1. NOT AN OFFICIAL UNCTAD RECORD Oil Price MethodologiesCrude Price Formation Nairobi Kenya May 24, 2007

2. Today’s Agenda • Fundamental oil market behavior • Futures market behavior • Benchmark price formation • Interrelation between financial and physical markets • Recent price performance and the impact of speculative flows • Comparison of Nigerian crudes with other benchmarks • Recent proposals regarding dated Brent price formation

3. Market drivers 2001-2007 • Rampant oil demand growth, particularly in Asia • Background of strong global economic growth • Limited spare production capacity outside Middle East • A constrained refining environment • Speculative investments in energy markets But… There is nothing like high prices to cure high prices

4. Crude oil futures trading volume

5. Crude oil open interest

6. Index Returns S&P GSCI Returns May 24, 2007 Daily -1.65% Month to Date -0.84% Year to Date 4.04%

7. Criteria for benchmarks • Ample production volume • Open trade free of bottlenecks • Fungible quality • Wide equity and customer base • Market liquidity • Price Transparency Market forces determine price Price cannot be dictated by any single party

8. But market price is definitional • Price is a function of key determinants including: • Size of parcel traded • Time of delivery of parcel traded • Quality of parcel delivery • Method of delivery of parcel • Payment and finance details for parcel delivered • Time of price determination • Volume tolerances surrounding parcel delivered • Optionalities attached to parcel delivered

9. Benchmark specifications • Publishers have extensive documentation explaining definition of price • Example with Dated Brent: • Price established at 1630 London time • Parcel size is 600,000 bbls • Method of delivery is FOB for cargo delivery • Delivery to occur in a three day period between 10-21 days from day of publication • Payment is 30 days after bill of lading

10. Responsibilities • Publishers must be accurate, precise and have robust methodology systems • Publishers’ definitions must line up with market practices and best standards including legal and corporate practices • Exchanges have similar responsibilities and need to ensure their processes and settlements meet the high standards expected of a benchmark • Producers must be responsible and transparent • Market makers must meet transparency disclosure requirements

11. Expectations Producers, consumers, futures markets, traders, regulators and all those pricing in or out expect full convergence between market values and published values All expect full transparency and responsible behaviour Benchmarks are expected to reflect market value

12. Most critical benchmark requirement Published/settlement price should converge with the market price = Any market participant should be able to buy or sell at published price

13. Futures Term Contracts OTC Derivatives Spot Use Of Benchmarks In Pricing • Platts benchmarks are used to price term contracts • Futures settlements are often tied to spot market • Derivatives “price out” against Platts spot price assessments or futures settlements Brent/WTI

14. Pricing Structure Futures Derivatives Dated Related Forward Wet

15. Price highlights

16. Dated Brent – Connecting the globe Dated Brent Canadian Crude Latin American Crude North Sea Crude Futures Derivatives African Crude Middle East Crude Russian and Central Asian Crude Dated Brent linked Imports into almost all countries

17. Global oil pricing off Dated BFO

18. Price behaviorNigerian crude, Brent, WTI

19. Nigerian Benchmarks

20. Brent, Forties, Oseberg output Aug 2004-present

21. BFO Daily Production Rates Aug 2004 - present 67 Cargoes 48 Cargoes 63 Cargoes 48 Cargoes

22. BFO Aug 2004 – present (plus Ekofisk) 92 Cargoes 71 Cargoes

23. Production comparisons 2006 180.85m - 33.02% 86.6m - 15.82% 83.1m - 15.18% 197.1m - 35.98%

24. Number of cargoes of BFO by company 2006 580 Cargoes

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