The Coming Oil Price Collapse Presentation By: Ben Brockwell

1. The Coming Oil Price Collapse Presentation By: Ben Brockwell OPIS Director, Data, Pricing & Information Services

2. If it were a multiple choice quiz these would be your choices: • Prophesy • Fantasy • Idiot • Icon • Sage • Fool • Virginia • Virginia Tech • None of the Above

3. Tracing the fall: Magic Six Weeks, Aug. 2, 2006 to Sept. 15, 2006

4. Supply and Futures Market • Gulf Coast Unleaded: $2.40/gal to $1.55/gal, 85cts drop, 35% • Gulf Coast Diesel: $2.65 to $1.75, 90cts drop, 34% • Gulf Coast Ethanol: $4.60 to $2.25, June to Sept., $2.35 drop, 51% • NYMEX Unleaded: $2.41 to $1.60, 81cts drop, 33.5% • NYMEX Heating Oil: $2.27 to $1.70, 57cts, 25% • West Texas Crude: $76 to $63, $13 decline, 17% • Refined product prices dropped twice as much as crude – cutting refining margins

5. Retail Picture • National Retail Unleaded: $2.95 to $2.49, 46cts, 16% • National Retail Diesel: $3.11 to $2.85, 26cts, 9% • Virginia Retail Unleaded: $2.85 to $2.34, 51cts, 18% • Virginia Retail Diesel: $2.95 to $2.71, 24cts, 8% • Retail lagging but will catch up – it always does • Diesel lagging gasoline – Watch Out!!!!

6. Prior to Drop 2006 was heading for new records • National Retail gasoline average came within 2cts of 2005 $3.06 record • By May 2006 – 14 states had set new 2006 gasoline or retail pricing records • Virginia was not one of them so your 2005 post Katrina record still stands

7. What Changed? • BP Prudhoe Bay – biggest U.S. oil field - ignited fears of supply disruption – on top of supply worries that have plagued market all year – hurricane worries, Lebanon, Israel, Iran, Nigeria, Venezuela – global insecurity. • One Event Away from Supply Disruption • London terrorist plot – market really tanked after this. • 911, SARS • One Event Away from Demand Destruction

8. What About Demand? Regionally we can observe the following regarding oil consumption: • 2005 – Demand Growth Slowed in every region of the world for every fuel • North America, including U.S., experienced the weakest growth • Strongest growth, though slower, continues to be Asia Pacific • Chinese oil consumption, which grew by 1 million b/d in 2004, slowed to just 200,000 b/d in 2005. • Growth in world oil consumption fell by 1.8 million b/d from 2.8 to 1 million b/d of growth • U.S. oil consumption dropped 0.2% to 20.7 million b/d. • U.S. total energy consumption in 2005 fell 0.1% – the first time since 1985 that the U.S. experienced higher-than-normal economic growth and lower energy consumption

9. 2006 Year-to-date U.S. demand picture – through Aug. • U.S. oil consumption down 0.8% – greater than 2005 • Residual fuel usage down 19% – victim of natural gas • Jet fuel usage down 1.5% – consolidation, efficient route planning • Gasoline demand growth – less than 1% • Diesel demand growth – most solid 2.1%

10. This Just In! • OPEC trims its estimate of world demand for oil for 2006 – 84.5 to 84.3 million b/d projection • Also says recent data reveals weaker-than-expected first-half 2006 consumption • Remember that global growth rate in 2005 of just 1.3% falling below the 10-year average

11. The China syndrome! • 2006 China demand expected to grow by 8% – still robust • 2005 China energy demand grew by 9.5% – hit 7 million b/d for first time • 2004 China demand grew by 15.5% • A slowing trend is evident but in recent years China demand growth accounts for more than half of the global consumption growth • China has supplanted Japan as world’s second biggest oil consumer • 2000-2005: as oil prices soared, China usage rose 43%

12. What about oil production? Isn’t this part of the problem? • OPEC producers gained crude oil market share, accounting for all the net increase in global production in 2005 – output rose 900,000 b/d. • Oil production outside OPEC was flat, the weakest performance since 1993. • OECD output fell by 950,000 b/d – the largest decline ever recorded • Russian oil production grew but at a reduced rate – up 260,000 b/d – or one-third the growth seen in 2004. • Supply security remains an issue

13. This Just In! • Jack II discovery by Chevron • Size – 3 billion to 15 billion barrels of oil • Significance – could add 50% to U.S. crude reserves • Impact – great news from the tertiary level, investment stakes raised • Calming effect on prices • New dimension to peak oil debate

14. Growth in oil refining capacity vs. growth in oil consumption • Oil consumption continues to grow at a faster rate than refining capacity but the gap is closing • 2005 world oil consumption grew by 1.3% • 2005 refining capacity grew by 0.8% • 2004 world oil consumption grew by 3.8% • 2004 refining capacity grew by 0.7% • As capacity creep grows and oil demand calms – spare capacity ought to return to market • Lack of spare capacity blamed for 5-year price rise

15. Closer Look At U.S. Capacity Creep Refiner Location Increase ------- --------- --------- ConocoPhillips Alliance, La. 40,000 b/d Giant New Mexico 17,000 b/d Holly New Mexico 13,000 b/d Marathon Garyville, La. 180,000 b/d Motiva Louisiana & Texas 325,000 b/d Valero Pt. Arthur, Texas 75,000 b/d Valero Houston, Texas 25,000 b/d Valero St. Charles, La. 6,000 b/d Valero Texas City, Tx. 20,000 b/d Western Ref. El Paso, Texas 5,000 b/d ConocoPhillips Wood River, Ill. 21,700 b/d Ergon Miss., W.V., and Ark. 23,000 b/d Giant Yorktown, Va. Uncertain Marathon Detroit, Michigan 26,000 b/d Sinclair Tulsa, Okla. 40,000 b/d Sunoco Various plants 100,000 b/d Wynewood Ref. Wynewood, Okla. 15,000 b/d Sinclair Sinclair, Wyo. 12,000 b/d ConocoPhillips Wilmington, Calif. 40,000 b/d Valero Wilmington, Calif. 35,000 b/d Valero Quebec, Canada 50,000 b/d TOTAL CREEP: 1,094,700 B/D

16. International Projects are More Rampant Refiner Location Increase Timeframe Petrobras Brazil 150,000b/d 2011 Saudi Arabia Jubail 100,000b/d 2009-2010 Saudi Arabia Yanbu 100,000b/d 2009-2010 PetroChina China 90 mil tonnes 2010 S-Oil S. Korea 440,000b/d 2010 Thai Oil Thailand 50,000b/d 2008 Abu Dhabi Oil Abu Dhabi 300,000b/d 2010 Iran Abudan 55,000b/d 2010-2014 Iran Bandar Abbas 100,000b/d 2010-2014 Pertomina Jakarta 175,000b/d delayed Nigeria National Nigeria 600,000b/d 2007 Repsol Spain 150,000b/d 2009 MOL Hungary 250,000b/d 2010 CNOOC S. China 7.3 mil tons 2008

17. Closer look at refining capacity growth versus demand growth Country Year Demand Capacity Trend World 2005 82.459 85.702 +3.243 2004 81.444 85.023 +3.579 2003 78.655 83.807 +5.152 2002 77.280 83.504 +6.224 2001 76.339 82.798 +6.459 1999 75.087 81.788 +6.701 U.S. 2005 20.655 17.335 -3.320 2004 20.732 17.125 -3.607 2003 20.003 16.894 -3.109 2002 19.761 16.757 -2.976 2001 19.649 16.785 -2.864 1999 19.519 16.512 -3.007 China 2005 6.988 6.587 -0.401 2004 6.772 6.289 -0.483 2003 5.803 5.487 -0.316 China 2002 5.288 5.479 +0.191 2001 4.872 5.643 +0.771 1999 4.477 5.401 +0.924 Europe 2005 20.350 25.030 +4.680 2004 20.195 25.070 +4.875 2003 19.903 25.055 +5.152 2002 19.726 24.929 +5.203 2001 19.743 24.622 +4.879 1999 19.742 24.695 +4.953

18. Capacity versus demand observations • U.S. refining capacity grew 1.2% to 17.13 million b/d. • U.S. oil demand dropped 0.2% to 20.7 million b/d. • This is a net gain in refining capacity of 300,000 b/d of refining capacity. • China refining capacity grew by 4.7% to 6.6 million b/d. • China oil demand grew by 2.9% to 7 million b/d. • This is a net gain of 82,000 b/d. • Worldwide trend remains a concern - tighter capacity - but the difference was the smallest in years. • Europe was the single spot in the world that had negative growth in refining capacity in 2005. • XOM projects by 2011 10 million b/d of new capacity.

19. Impact of Alternative Fuels • Role of Alternative Fuels in U.S. Fuel Slate • Petroleum – 40% • Natural Gas – 23% • Coal – 22% • Nuclear – 8% • Renewable Energy 8%

20. Closer Look at Renewable Energy • Solar – 1% • Wind – 2% • Hydro-electric - 45% • Biomass – 40% • Geothermal – 6%

21. Shift to ethanol, bio-diesel accelerating – driven by government mandates • Land use issues • Engine performance issues • Weather issues • Food versus energy issues

22. Long way to go – stay focused on oil • Consumer demand – more efficient vehicles • Beware of past transformations • Coal to kerosene light • Kerosene light to electric light • Automobile and airplane transformed oil business to gasoline and transportation fuels

23. Now our existing transportation fuels are being re-invented • E-85 • Synthetic Jet Fuel • Bio-butanol in gasoline • Bio-diesel – various blends • Hydrogen fuel cells • Hybrid Cars

24. A chain reaction is taking place that looks something like this: From the Oil Side: Record oil prices > Record Refining Margins > Record Profits > Expanded Refining Capacity > Greater investments in E&P > Desire for New Markets > Desire to maximize profits > Produce and market more oil

25. A chain reaction is taking place that looks something like this: From the Consumer Side: Record oil prices > Slump in Demand Growth > Conservation > Fuel Efficient Cars > Desire for other forms cheap energy

26. A chain reaction is taking place that looks something like this: From the Political Side: Energy Independence > Balancing the energy equation > Incentives for finding new oil > Strategic Reserves > Programs to Promote Alternate Fuel > Fresh look at new policies

27. Boom to Bust Oil Cycle • 1986 – Expansion of Markets by OPEC following backlash of 1973 and 1979 • 1999 – Soviet Union Collapse, SARS Virus, Venezuelan oil find • 2002-2006 – Record oil prices, Rapid growth in Chinese Demand, Influx of investment capital, capacity shrinks as demand climbs, no spare capacity, supply security issues dominate, speculative bubble crests

28. Production Rising Faster Than Demand - Exxon forecast • New Energy Technologies To Slow Oil Growth - Sweden • Crude Oil Storage Runs Out - Really? • Global Recession Cuts Oil Demand - Weak US dollar and roaring deficit - $100 crude - where is the price point? • What about the bird flu?

29. The Tipping Point • Shift in Public Policy – "We are addicted to oil“ • Global Warming - A new public awareness - Time Magazine • Younger Generation - how are they reacting? • Shift in Supply/Demand Balance • Shift Away from a Petroleum Economy

30. The Transition is Unstoppable • High Prices makes the transition economical • Political Confrontation makes it practical • Energy Independence makes it a necessity

31. Away From Oil Underway • U.S. Air Force testing new kind of jet fuel derived from coal and natural gas, setting the stage for the U.S. military to burn a new type of fuel not derived from crude oil. • BP and DuPont partner to develop, produce, and market a next generation of bio-fuels, including "bio-butanol", a gasoline bio-component that will be introduced into BP gasoline in London in 2007. • Korean oil refiners switch to 0.5% bio-fuels-blended diesel. This just started July 1, 2006 and is aimed at lowering oil imports. The goal is to use a B-20 bio-blend, but there have been some issues with engine performance. • Magellan Pipeline adds bio-diesel storage and blending facilities along its service route through Midwest - Iowa, North Dakota, Minnesota at about ten terminals that are capable of blending 2 to 20% at the rack. • Sinclair adds bio-diesel to Las Vegas stations. • Louisiana mandates greater ethanol use and sets goals for in-state production of alternative fuels. • Florida bio-fuels bill signed into law. • Thailand to replace MTBE with ethanol. • Automakers pledge 2 million E85 Vehicles by 2010 - although the battle around E85 is going to center on "energy value." • Currently, 101 ethanol bio-refineries nationwide have the capacity to produce more than 4.8 million gallons annually. There are 34 ethanol refineries and 7 expansions that will add another 2.2 billion gallons. • EIA projects that bio-fuels will displace 10% of global oil usage by 2025.