May/June 2015

Global Oil and Gas - Volatile Times Ahead Edward L. Morse Global Head | Commodities [email protected] +1 212-723-3871

See Appendix A-1 for Analyst Certification, Important Disclosures and non-US research analyst disclosures Citi Research is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report.. Investors should consider this report as only a single factor in making their investment decision. Certain products (not inconsistent with the author's published research) are available only on Citi's portals. This presentation was approved for distribution on 26 May 2015; the disclosures in Appendix A1 are current as of the same date. c

Oil Prices have been Volatile and are in for a Volatile Ride Ahead North America’s growing oil production (well over 1-m b/d per year), against a background of weak global oil demand, a stronger dollar, with a broad macro sell-off too; bullish geopolitics have been eclipsed for now… Brent crude oil prices broke out of its range to far lower levels ($/bbl) 160

Brent Flat Price

1-yr Avg Price

Min

Max

140

5

Global Supply Disruptions

Non-OPEC Supply

4

120

3

100

2

80

1

60

0

40

-1

20 0 2000

Global geopolitical supply disruptions more than matched by growth in North American oil production (m b/d)

2002

2004

2006

2008

2010

2012

2014

-2 Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

● Volatility will be driven by shut in production coming online, and offline production coming online (i.e. more disruptions given the failure of the petro-state) ● “Call on US” replacing “Call on OPEC” also promises a rougher ride ahead, as reducing US production requires a cold sweat but the rebound can be more rapid Source: Bloomberg, EIA, Citi Research 1

US production growth one of four factors in last year's price collapse US crude production hit 9-m b/d in October 2014 monthly data, as net oil imports have plummeted and net product exports surged as the shale revolution has proceeded. US crude production (m b/d)

Net product exports as high as 2.5-m b/d in Dec-13

11

3.5

10

2.5

9

1.5 0.5

8

-0.5

7

-1.5

6

-2.5

5

-3.5

4

-4.5

2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 2014

Net oil imports (m b/d, crude and oil products)

2001 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Four factors driving price decline 1. Sluggish oil (commodity) demand, due to weakening global economy; rose 650-k b/d vs. expected 1.35-m b/d. 2. Robust oil supply growth (esp. from N America) added ~3x as much supply as demand; turned the Atlantic Basin from being short light/sweet crude to being glutted. 3. Saudi Arabia decided to abandon its role as “central banker: for oil and to push for market share. 4. Highly liquid financial markets led the sell-off.

Source: EIA, Citi Research 2

Despite its Size, Shale has Accounted for the Majority of Oil Supply Growth 2014 Global Oil Supply by Region (m b/d)

Global Y/Y Growth in Oil Supply by Region (m b/d)

2.0

OPEC

Non-OPEC ex-US

US & Canada

1.5 1.0 0.5 0.0 -0.5 -1.0

Source: IEA, Citi Research 3

2011

2012

2013

2014

The Light-Sweet Atlantic Basin Overhang is Palpable West African crudes have been backed out from the US since the advent of shale oil production growth (m b/d) 4.0

Middle East

Latam

Canada

Nigerian crude differentials have moved to increasing discounts to Dated Brent ($/bbl)

Africa

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jan-08 Nov-08 Sep-09 Jul-10 May-11 Mar-12 Jan-13 Nov-13 Sep-14

OPEC OSPs to Asia ($/bbl) 5 4

Arab Light (Saudi) Iran Light

Brent Flat Price and Time Spreads ($/bbl) Basrah Light (Iraq) Kuwait

Brent 1st/3rd Month Spread

Brent Flat Price - RHS 120

2.0

110

1.0

100

1

0.0

90

0

-1.0

80

-1

-2.0

70

-3.0

60

-4

-4.0

50

-5 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15

-5.0 Apr-14

3 2

-2 -3

Source: EIA, Bloomberg, Citi Research 4

3.0

Jun-14

Aug-14

Oct-14

Dec-14

Feb-15

Apr-15

40

Saudi Exports Edging Up and Rig Counts At All Time Highs

Saudi Arabia Crude Exports (m b/d) 8.5

2011

2012

2013

Saudi Arabia Oil Rig Count

2014

90

2015

80

8.0

70 60

7.5

50 40

7.0

30

6.5 6.0

20 10

Jan

Feb

Mar

Apr

May

Jun

Source: JODI, Baker Hughes, Citi Research 5

Jul

Aug

Sep

Oct

Nov

Dec

0

2000 2001 2002 2004 2005 2006 2008 2009 2010 2012 2013 2014

Iran: framework in place but regional actors voicing discontent A deal between P5+1 and Iran by June 30th is now more likely but Saudi Arabia and Israel could be disruptive ● With a framework deal now in place that allows for Iranian sanctions relief after a number of conditions have been met by Iran, the likelihood is growing of a final deal by June 30th.

Iranian crude exports have been hovering around the 1-m b/d mark 1.6

● This remains a “framework” deal and the final technical details will require concessions in some form by both sides, something which may be difficult to sell to US Republicans and hardline Iranian officials. Strong Saudi and Israeli concerns aren’t making the negotiations any easier.

1.4

● Yet even if a deal is reached, it is unlikely that Iranian barrels reach the market near-term. The set-up time for inspections and monitoring likely mean that it should be at least 2016 before any meaningful Iranian oil reaches markets.

0.4

Iranian crude production peaked at over 4-m b/d in 2006 4.3 4.1 3.9 3.7 3.5 3.3 3.1 2.9 2.7 2.5

2000 2001 2002 2004 2005 2007 2008 2009 2011 2012 2014

Source: IEA, JODI, Citi Research 6

1.2 1.0 0.8 0.6

0.2 0.0

Jan-13

May-13

Sep-13

Jan-14

May-14

Sep-14

Jan-15

Iran has a large amount of crude in floating storage Vessel Name Amber Damavand Dan Dena Derya Devon Diamend Diona Dore Dover Hedy Henna Hero Napoli Nobel Nyos Serena Starla Total

Vessel Type VLCC VLCC VLCC VLCC VLCC VLCC VLCC VLCC VLCC VLCC VLCC VLCC VLCC VLCC VLCC VLCC VLCC VLCC 36-m bbls

US Rig Count is Falling Fast but Output Growth Remains Strong US oil rig count – total rig count has fallen sharply but high-grading, productivity gains and uncompleted well backlogs should lessen the output response 10

Crude Production (m b/d)

Oil Rig Count (RHS)

1700

9

1500

8

1300

7

1100

6

900

5

700

Eagleford rig count 270 250

2012

2013

2014

2015

570

2015

210 190 170 150 130 110 90

Jan Feb Mar Apr May Jun

Jul

Aug Sep Oct Nov Dec

240 220

2011

2012

2013

2014

2015

180

470

160

420

140

370

120

320

100

270

80

Jan Feb Mar Apr May Jun

Jul

Aug Sep Oct Nov Dec

Source: Baker Hughes, EIA, Citi Research 7

2014

200

520

220

2013

Williston Basin rig count

Permian Basin rig count 2011

2012

230

4 500 Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15

620

2011

60

Jan Feb Mar Apr May Jun

Jul

Aug Sep Oct Nov Dec

…but could we be approaching a trough? While the services sector remains cautious on rig activity in 2H, several factors suggest rigs might rebound by more than 100 for horizontal rigs: 1) 25% cost reductions; 2) improving productivity; 3) willingness of equity markets to offer capital

Source: BakerHughes, Citi Research 8

The US Nat Gas Experience of Falling Rig Counts and Rising Supply Gas rig counts have collapsed two times since 2008, yet production continued to increase throughout due to productivity gains and focusing on more productive regions/drilling ● Rig count collapsed in two phases since 2008: (1) Between 3Q’08 and 3Q’09, the gas rig count fell from 1606 to a low of 672; and (2) In 2010 and 2011, rig counts resumed a collapse from those levels down to a low of 310 in 2Q’14.

US natural gas production continued to rise despite the collapse in gas rig counts 80.0 75.0

Gas rig counts experienced two collapses 1800

60.0 55.0

Apr-15

Sep-15

Nov-14

Jan-14

Jun-14

Aug-13

Oct-12

Mar-13

May-12

Jul-11

Dec-11

Feb-11

Apr-10

Sep-10

Nov-09

Jan-09

50.0

Gas rig counts of all types fell in phase 1, but phase 2 was led by a sharp drop in horizontal rig count 800

1600

700

1400

600

1200

500

1000 800

Gas

400

Directional

600

Oil

300

Horizontal

400

Vertical

200

200

100 Sep-14

Apr-14

Jun-13

Nov-13

Jan-13

Aug-12

Mar-12

Oct-11

May-11

Jul-10

Dec-10

Feb-10

Apr-09

Sep-09

0 Nov-08

Apr-14

Sep-14

Nov-13

Jan-13

Source: EIA, Baker Hughes, Citi Research

Jun-13

Aug-12

Oct-11

Mar-12

May-11

Jul-10

Dec-10

Feb-10

Apr-09

Sep-09

Nov-08

Jan-08

Jun-08

0

9

65.0

Jun-09

● Despite these two collapses, gas production grew throughout, save for weather disruptions. Three drivers were crucial to gas production rising so quickly despite a collapse in rig counts to only 20% of its peak: (a) productivity gains, (b) the move to increasingly prolific areas, and (c) the switch from vertical/directional rigs to horizontal.

Bcf/d

70.0

10 $50

200

$40

100

$30

0

$20

D H U

Source: State data, Woodmac, Citi Research V

Initial Production (b/d)

1050

300

950

400

1000

1000

900

0

850

500

0

800

1000

500

750

1500

1000

700

2000

1500

650

2500

2000

600

3000

2500

550

3000

500

3500

450

4000

3500

400

Permian Basin wells (API nos., x-axis), and IP (b/d) 42-041-32225-00 42-127-35490-00 42-255-32948-00 42-127-35711-00 42-283-33670-00 42-283-33694-00 42-255-33185-00 42-311-35599-00 42-149-33282-00 42-507-32989-00 42-177-32900-00 42-185-30803-00 42-041-32126-00 42-255-32359-00 42-479-42316-00 42-185-30815-00 42-013-34605-00 42-479-42039-00 42-479-42203-00 42-331-34764-00 42-177-33056-00 42-127-35478-00 42-127-35498-00 42-127-35475-00 42-163-33704-00 42-493-32659-00 42-287-32605-00 42-127-34914-00 42-283-33423-00 42-127-35809-00 42-311-35594-00 42-127-35764-00 42-311-35110-00 42-255-32211-00 42-255-33147-00 42-177-32863-00 42-051-33713-00 42-479-42224-00 42-013-34805-00 42-283-33823-00 42-255-32873-00 42-127-34352-00 42-255-32686-00 42-127-35114-00 42-311-35391-00 42-041-32213-00 42-177-32749-00 42-255-32836-00 42-013-34715-00 42-255-32706-00 42-283-34196-00 42-255-33193-00 42-283-34048-00 42-255-32799-00

Bakken wells (API nos., x-axis), and IP (b/d)

350

500

900

$110

800

$100

700

$90 12

600

$80 11

$70 10

$/BBL

33-007-01709-00-00 33-025-02197-00-00 33-053-02652-00-00 33-053-05132-00-00 33-061-02719-00-00 33-105-02921-00-00 33-053-03911-00-00 33-053-02160-00-00 33-053-05120-00-00 33-009-02294-00-00 33-061-02295-00-00 33-023-00891-00-00 33-105-02799-00-00 33-053-04893-00-00 33-023-01058-00-00 33-105-03180-00-00 33-025-01296-00-00 33-061-02524-00-00 33-105-02521-00-00 33-053-04515-00-00 33-023-00952-00-00 33-023-01028-00-00 33-053-04738-00-00 33-053-04755-00-00 33-053-04137-00-00 33-053-04431-00-00 33-061-02372-00-00 33-025-02137-00-00 33-061-02558-00-00 33-061-02567-00-00 33-023-01049-00-00 33-053-04080-00-00 33-053-05229-00-00 33-053-04877-00-00 33-025-01746-00-00 33-025-01654-00-00 33-013-01685-00-00 33-023-01027-00-00 33-105-02661-00-00 33-053-04465-00-00 33-025-01672-00-00 33-025-02182-00-00 33-053-04912-00-00 33-105-02960-00-00 33-053-04607-00-00 33-061-02338-00-00 33-089-00745-00-00 33-061-02193-00-00 33-053-04983-00-00 33-105-02584-00-00 33-053-03968-00-00 33-061-02301-00-00 33-061-02542-00-00 33-053-04274-00-00 33-053-04682-00-00 33-053-04318-00-00 33-053-04695-00-00 33-053-05162-00-00 33-053-04172-00-00 33-061-02326-00-00

4000

300

42-165-37829-00 42-103-36054-00 42-497-37458-00 42-135-42391-00 42-461-34388-00 42-497-37679-00 42-235-35099-00 42-105-41758-00 30-015-41583-00 30-005-64160-00 30-015-40522-00 42-383-38369-00 42-235-35509-00 42-235-35403-00 42-235-35483-00 30-005-63698-00 42-033-32230-00 42-135-42470-00 42-317-39092-00 42-431-31686-00 42-461-38981-00 42-353-33371-00 42-135-42430-00 42-135-42026-00 42-033-32246-00 42-227-37372-00 42-227-37578-00 42-173-35696-00 42-317-39014-00 42-173-35980-00 42-173-35417-00 42-317-39012-00 42-227-37289-00 42-317-38867-00 42-329-38965-00 42-173-35580-00 42-353-33400-00 42-317-38355-00 42-317-38339-00 42-173-36045-00 42-461-38851-00 42-173-35371-00 42-173-35818-00 42-003-43656-00 42-329-38154-00 42-227-37472-00 42-317-38488-00 42-227-37483-00 30-015-38546-00 42-329-38433-00 42-329-38441-00 42-317-38390-00 42-135-41798-00

US sector robustness (1): Shale production driven by core areas In a “80-20”-like rule, the majority of production comes from a relative minority of wells, and average initial production rates rise as the weaker-performing wells are cut first from drilling programs, driving productivity gains Eagle Ford wells (API nos., x-axis), and IP (b/d) Oil-targeted wells drilled in Eagle Ford since January 2013 Total number of wells: 2,230 Number of wells yielding less than 400 b/d initial production month: 1,437 Percentile for 400 b/d IP: 64% IP-weighted proportion of all wells: 33%

b/d

Eagle Ford breakeven prices vs IP, well costs ($/bbl) $120

$MM

$60 9

8

7

6

US sector robustness (2): productivity improves competitiveness For both oil and gas drilling, productivity – measured as initial production from a given well – is still increasing steadily. High-grading and lower utilization of service sector assets could further boost productivity in 2015. Drilling productivity gains have remained strong and already show signs of spiking in 2015 (YoY IP improvements)

Initial well production per rig at major play is still rising steadily

100% Oil Gas Total

60% 40%

0.60

1.6 1.4 1.2

0.40

1.0

0.30

0.8 0.6

0.20

0.4

Source: EIA, Baker Hughes, Citi Research

Mar-15

Nov-14

Jul-14

Mar-14

Nov-13

Jul-13

Mar-13

Jul-12

Nov-12

Mar-12

Nov-11

Jul-11

Mar-11

Nov-10

Jul-10

Mar-10

Nov-09

Jul-09

-40%

Oil

Blended (LHS)

Gas

Jan-15

Aug-14

Mar-14

Oct-13

May-13

Dec-12

Jul-12

Feb-12

Sep-11

Apr-11

Nov-10

Jun-10

0.0 Jan-10

0.00 Aug-09

0%

Mar-09

0.2 Oct-08

0.10 May-08

20%

-20%

11

1.8

0.50 Oil (kb/d)

80%

0.70

Gas (MMcf/d)

120%

Shale revolution still at early stages of surging productivity gains In the Big Three plays, new-well production per rig has continued to rise for oil and gas, as initial production (IP) and estimated ultimate recovery (EUR) increase, and days-to-drill a well per rig falls. Similar trends could emerge in frontier basins going forward. Bakken: first month production per standard rig

Eagle Ford: first month production per standard rig

Permian: first month production per standard rig

Bakken: y/y productivity gain

Eagle Ford: y/y productivity gain

Permian: y/y productivity gain

Source: EIA, Citi Research 12

Cost reductions and productivity gains should boost shale IRRs Assuming a 25% reduction in all-in drilling and service costs, combined with current productivity gains holding for 2015, IRRs for “average” shale wells should see a boost. Capital still looks available for drilling. Possible improvements to returns on shale assets given 25% cost reductions and productivity gains (assumes $50 WTI / $2.7 HH) ; some Q1 reporting indicates that “$65 is the new $90” 70%

60%

50%

40%

30%

20%

10%

0% Eagle Ford

Source: EIA, State Data, Citi Research 13

Bakken

Permian

Niobrara

Andarko Mississippian

Utica

Marcellus

Eagle Fordoily

Haynesville Granite Wash

Even in bearish scenario, lower costs keep many wells profitable In major oil plays, cost reductions and productivity gains will likely benefit IRRs. Citi models 2015 returns on drilling given cost reductions of 25% and persistence of current strong productivity gains. Red line is current level of productivity gains in each basin. Eagle Ford

IP Improvement over 2014 Average (%)

IRR (%) 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20%

50%

45%

40%

Niobrara Oil: $75/bbl, Gas: $3.5/MMBtu

Oil: $63/bbl, Gas: $3/MMBtu 2014 costs 2015 costs

Oil: $50/bbl, Gas: $2.7/MMBtu

IRR (%) 140%

Oil: $75/bbl, Gas: $3.5/MMBtu

Oil: $63/bbl, Gas: $3/MMBtu 2014 costs 2015 costs

120% 100% 80% 60% 40% 20% 0%

Source: EIA, Company reports, state data, Citi Research

IP Improvement over 2014 Average (%)

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

-20% IP Improvement over 2014 Average (%)

14

35%

IP Improvement over 2014 Average (%)

Permian Oil: $50/bbl, Gas: $2.7/MMBtu

30%

0%

50%

45%

40%

35%

30%

-20%

25%

0%

20%

0%

15%

20%

50%

10%

100%

5%

40%

0%

60%

150%

25%

80%

200%

Oil: $75/bbl, Gas: $3.5/MMBtu

Oil: $63/bbl, Gas: $3/MMBtu 2014 costs 2015 costs

20%

250%

IRR (%) 100%

15%

Oil: $63/bbl, Gas: $3/MMBtu 2014 costs 2015 costs

Oil: $50/bbl, Gas: $2.7/MMBtu

10%

IRR (%) 300%

Bakken Oil: $75/bbl, Gas: $3.5/MMBtu

5%

Oil: $50/bbl, Gas: $2.7/MMBtu

Drilled-but-not-producing wells – looming production surge? Number of inactive or “drilled-but-not-producing” oil and gas wells by year ● Oil companies are indicating with lower costs, higher prices,

will increasing drilling in 2H

2,000 1,800 1,600 1,400 1,200 1,000 800

Oil

600

Gas

400 200 -

2011

2012

2013

2014

2015

Oil

355

365

701

1,083

391

Gas

507

442

688

1,780

59

“Max” Case - Oil Production from DUCs ~0.7-m b/d oil

● If all drilled-but-uncompleted wells (DUCs) from 2013 to 2015 YTD are drilled would amount to drilling ~2,000 oil wells and ~2,500 gas wells. ● “Max” production cases look at monthly oil production profile if the oil well backlog is cleared in a 12-month period, including possible “dry holes” “Max” Case - Gas Production from DUCs ~5.0-Bcf/d

0.80

6.0

0.70

5.0

0.60

4.0 Bcf/d

mb/d

0.50 0.40 0.30

2.0

0.20

1.0

0.10 0.00 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 Year

Source: State Data, Citi Research 15

3.0

1

2

3

4

5

6 Year

7

8

9

10

Prompt oil supplies remain unaffected by price declines for now Russian crude production (m b/d) 10.8

2011

2012

2013

2014

Petrobras Brazilian oil production (m b/d) 2.3

2015

10.7

2014

2015

2.0

10.4

1.9

10.3

1.8

10.2 Jan

Feb Mar

Apr May Jun

Jul

Aug Sep

Oct

1.7

Nov Dec

Canadian oil production (m b/d) 4.6

2011

4.4

2012

2013

2014

Jan

Feb

Mar

Apr May Jun

Jul

Aug Sep

Oct

Nov Dec

West African crude supply (m b/d) 4.2

2015

2011

4.1

2012

2013

2014

2015

4.0

4.2

3.9

4.0

3.8

3.8

3.7 3.6

3.6

3.5

3.4

3.4

3.2

3.3

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Source: CDU-TEK, Petrobras, IEA, Bloomberg, Citi Research 16

2013

2.1

10.5

3.0

2012

2.2

10.6

10.1

2011

Nov

Dec

3.2

Jan

Feb Mar

Apr May Jun

Jul

Aug Sep

Oct

Nov Dec

Investor financial flows are exacerbating volatile price action Combined open interest on Brent and WTI is now at all-time highs as huge inflows of financial interest have entered crude markets. These flows are helping exaggerate price moves whilst also creating some potential distortive effects, such as the big inflows in WTI ETFs despite the large negative roll yield. Combined Net Length for Brent and WTI (k lots) 800 600

Merchant

Swap Dealer

Investor Flows into Crude ETFs

Managed Money

400 200 0 -200 -400 -600 -800 Jan-11 Aug-11 Mar-12

Oct-12 May-13 Dec-13

Jul-14

Feb-15

30-day Daily Correlations with Brent 100% 80%

SPX Gold

Euro MSCI ex US

Dollar Index S&P Energy

Spread positions by speculative investors on ICE Brent pushed the curve into contango (000s lots, $/bbl) 700

60%

Inverse Brent 1st/12th Spread - RHS

20%

400

0%

300

-20%

200

-40%

100

01-Jan

22-Jan

12-Feb

Source: Bloomberg, CFTC, Citi Research 17

05-Mar

26-Mar

16-Apr

0 Jan-13 May-13 Sep-13

15 10

500

40%

-60% 11-Dec

Spec Spreading F&O

600

5 0 -5 -10

Jan-14 May-14 Sep-14

Jan-15

-15

Investor financial flows are exacerbating volatile price action Combined open interest on Brent and WTI is now at all-time highs as huge inflows of financial interest have entered crude markets. These flows are helping exaggerate price moves whilst also creating some potential distortive effects, such as the big inflows in WTI ETFs despite the large negative roll yield.

Open interest by contract month for WTI futures curve Prompt OI = 324K Total OI = 1634K

5/22/2015 5/23/2014

110

Open interest by contract month for Brent futures curve Prompt OI = 309K Total OI = 1583K

5/22/2015 5/23/2014

130 120 110

100

100

90

80

Prompt OI = 419K Total OI = 1624K

Prompt OI = 280K Total OI = 1722K

90 80 70

70

60

60

50 40

50 M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

Source: CFTC, Citi Research 18

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M

High Inventories Could Dampen Oil Price Rises Total US commercial crude stocks (m bbls) 550

2011

2012

2013

2014

2015

Cushing commercial crude stocks (m bbls) 70

2011

2012

2013

2014

2015

60

500

50

450

40

400

30

350 300

20

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

PADD III commercial crude stocks (m bbls) 260

2011

2012

2013

2014

2015

240

Jul

Aug Sep Oct Nov Dec

WTI timespreads widened as crude stocks built-up but now seem to have shrugged of “tank top” fears ($/bbl) 3

2nd/3rd

1 0

200

-1 -2

180

-3

160

-4

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: EIA, Citi Research 19

Jan Feb Mar Apr May Jun

2

220

140

10

-5 2008

2009

2010

2011

2012

2013

2014

2015

Capex cuts should accelerate decline rates, hitting global supply

Global Big Oil Capital Expenditure (bln $)

Source: Company Reports, IEA, Citi Research 20

Citi’s Base Case Supply Expectations (m b/d)

Geopolitics aside, fundamentals point to a W-shaped recovery Global stock draws are expected by 2H’15, but then US shale can kick-start as prices rise, especially with a large backlog of drilled but uncompleted wells, although supply (and stocks) could be bottled-up in the US. Demand OECD Americas OECD Europe OECD Asia OECD Demand Non-OECD Demand Total Demand

1Q15 24.1 12.9 8.7 45.7 47.0 92.8

2Q15 24.0 13.3 7.5 44.8 47.9 92.7

3Q15 24.5 13.8 7.6 45.9 48.5 94.3

4Q15 24.5 13.4 8.3 46.3 48.7 95.0

1Q16 24.0 12.9 8.6 45.5 48.4 93.9

2Q16 23.9 13.2 7.5 44.5 49.3 93.8

3Q16 24.4 13.6 7.5 45.6 49.9 95.4

4Q16 24.4 13.3 8.3 46.0 50.1 96.1

2014 24.0 13.5 8.1 45.6 46.9 92.5

2015 24.3 13.4 8.0 45.7 48.0 93.7

2016 24.2 13.3 8.0 45.4 49.4 94.8

14' -0.04 -0.23 -0.20 -0.47 1.15 0.68

15' 0.24 -0.10 -0.09 0.05 1.15 1.20

16' -0.09 -0.10 -0.07 -0.27 1.37 1.11

Supply US Canada Mexico Brazil North Sea Russia Other Non-OPEC Non-OPEC OPEC Crude OPEC Oil

1Q15 12.6 4.3 2.7 2.4 3.0 11.0 17.3 53.4 30.2 36.7

2Q15 12.8 4.2 2.7 2.4 2.8 10.9 17.0 52.7 30.3 36.9

3Q15 12.7 4.2 2.7 2.4 2.6 10.7 17.0 52.3 30.2 36.8

4Q15 12.8 4.5 2.7 2.4 2.9 10.8 17.0 53.0 30.2 36.8

1Q16 12.8 4.4 2.6 2.5 2.9 10.8 17.2 53.2 30.2 36.8

2Q16 12.9 4.3 2.6 2.5 2.7 10.8 16.9 52.7 30.3 36.9

3Q16 13.1 4.3 2.6 2.5 2.5 10.6 16.9 52.6 30.5 37.2

4Q16 13.3 4.7 2.6 2.5 2.8 10.7 16.9 53.4 30.5 37.2

2014 11.8 4.2 2.8 2.3 2.9 10.9 17.3 52.2 30.3 36.7

2015 12.7 4.3 2.7 2.4 2.8 10.9 17.1 52.9 30.2 36.8

2016 13.0 4.4 2.6 2.5 2.7 10.7 17.0 53.0 30.4 37.0

14' 1.53 0.24 -0.11 0.18 0.03 0.05 -0.13 1.81 -0.17 -0.04

15' 0.96 0.10 -0.10 0.09 -0.10 -0.07 -0.25 0.63 -0.06 0.13

16' 0.30 0.10 -0.04 0.09 -0.10 -0.13 -0.10 0.12 0.15 0.22

Processing Gains Global Biofuels Total Supply

2.2 1.8 94.1

2.3 2.3 94.1

2.3 2.6 94.0

2.3 2.3 94.4

2.3 1.9 94.2

2.3 2.3 94.3

2.3 2.7 94.7

2.3 2.4 95.3

2.2 2.2 93.3

2.3 2.2 94.2

2.3 2.3 94.6

0.04 0.17 1.97

0.06 0.06 0.88

0.02 0.08 0.44

Implied Stockbuild "Call on US Production"

1.3 11.3

1.4 11.4

-0.3 13.0

-0.6 13.3

0.3 12.5

0.4 12.5

-0.7 13.8

-0.8 14.1

0.8 11.0

0.5 12.3

-0.2 13.2

-

-

-

2015 63 56 7

2016 68 60 8

Brent WTI Brent-WTI Source: Citi Research 21

1Q15 55 49 6

2Q15 64 58 6

3Q15 68 61 7

4Q15 63 54 9

1Q16 60 53 7

2Q16 65 58 7

3Q16 70 63 7

4Q16 75 66 9

2014 100 93 7

2017 75 70 5

At what prices do producer countries and firms feel the pain? Marginal full-cycle breakeven costs for projects expected by 2020, versus fiscal breakeven oil prices of selected oil exporter countries, and US shale play half-cycle breakeven costs ($/boe)

Breakeven, (Brent US$/boe)

Iran: 131

120 Iraq: 111 Russia: 105

Kashagan Ph 1

Oman:99 100 Saudi:98

UAE: 79

Corrib Point Thomson QCLNG Mariner Fort Hills Ivar Aasen Aasta Hansteen Joslyn Linnorm Zidane KnarrGoliat GLNG Rosebank Martin Linge Mackay River 2 Nabiye Cold Lake Pike Ph1 West Canada LNG Abadi River FLNGPh1+2 Shah Deniz Ph 2AOSP Debottle MacKay Terre de Grace Kearl Gudrun Valemon Gendalo-Gehem Johan Carstberg Kitimat LNG Carmon Hess Utica Golden EagleBlock 61 Oman APLNG Narrows Lake Sunrise Ph 2Creek Lake Sunrise Ph 1 Bl. 31Christina SE Suzun Block 18PCC LianziKaskida Juniper Y-T Tagul Absheron DominoEgina Moho Nord Kaombo Foster Creek Panoramix Jack-St Surmont PhCVX 2 Utica Tanzania LNG GoM Greenfield LNGExpansion Piracuca Malo CVX Wolfcamp Horizon Stampede Trebs Utica Titov XOM Mocassin ReganneTiber Wolfcamp Bolia-Chota Julia In Salah Rhabab/Harweel Kinnoul Jangkrik Snorre 2040 Bosi Bucksin CVX Bone Springs Termokarstovoe Lucapa KKDJunin ph2 5 COPMalange Permian Permian XOM Bone Springs Chuandongbei Romania FRDs Ph 2 Laggan/Tormore Tubular Bells Yamal LNG Zaedyus Gorgon LNG Incahuasi Uganda Bl.1,2,3 Messoyakha Carabobo Zabazaba Libra COP Eagle Ford CoreMad Dog 2 PelicanPh Lake Ichthys LNG Prelude LNG Hebron Habban 2 Polymer-flood Hess Bakken Bonga SW/Aparo East Nile Delta Hub Stones Shenandoah Bakken CLOV Wheatstone Russkoye Jackdaw Schiehallion Ph 2 HadrianOfon LNG STL Bakken COP Bakken Ekofisk/Eldfisk South Ph2 2 Imilorskoe Filanovsky COPKirby Eagle Ford Expansion Bl. 15/06 Clair Ph 2 Romania FRDs Ph 1EastCardamom Alliance JV XOM Bakken Carabobo 3 West Qurna 2 Gina Krog Vito California Shale Bl. 15/06 West Mozambique LNG KBB Niobrara KizombaHub Stl 2Kirby North XOM Woodford TengizSouth Exp China Sea Oil Eagle Ford North Halfaya Alexandria Western Browse FLNG NAM Liquids Eastern South China Sea Gas REP Miss Lime RDS Tarim Basin Gas Sankofa Mid Continent China Oil Lokichar Bohai Bay Oil Pearls 99 Onshore Ikike Mafumeira China Oil OML EOR Chirag Oil Sul Banda Colombia BGGas Marcellus DryOffshore Marcellus Dry Sunrise FLNG RDS NAM South Sulige Maromba Carcara Bohai Bay Gas China Offshore Oil Block 39 Jupiter Horse Ph 2 Sichuan Basin GasThuder South China Sea Oil Perla Heidelberg WafaAppamattox Ph2 Nene Marine Bonga NW Eastern LNG T1-2 Scarborough FLNG Big Foot Gbaran Ubie Ph2 PNG Malikai TEN Cano Sur Vega Pleyade Ordos Basin Gas Karachaganak 2.1 Carioca IaraItaipu Bina Rossa Bawi Mars BLucius Tempa Edvard Grieg Majnoon Val D'Agri Ph 2 Akacias West Franklin 2 PNG LNG T3 Peregrino S/SW NE Tupi Franco Sergipe Alagoas Nawara Tupi Sul Lula Freedom Bauna/Piracaba CepuFlorim Exp MTAB IaraStrait Horst Western South China Sea Gas Madura Papa-TerraZubair Marcellus WetPao de Acucar Johan Jasmine Sverdrup STL Marcellus Wet West Qurna 1 Kern County Sapinhoa Shah Gas Mehar/Latif Kinteroni India NEC-25 Rumaila Gumust-Kakap SBJ Severenergiya Rospan

80 60

Qatar: 55 Kuwait: 54 Permian (HC) EF/Bakken (HC) 40

India KG-D6

20 0

0

Source: Company reports, IMF, IIF, Citi Research 22

3

6

9

12

15 18 21 2020E Production, Mboe/d

24

27

30

33

36

Cost deflation should occur most in the middle of the cost curve Impact of Cost-Deflation on the Supply-Curve versus Citi’s 2014 Forecasts

Source: Citi Research estimates. Breakevens reflect NPV zero (full cycle, post-tax) using a 10% discount rate 23

Operating costs of production are in the $30s and below Cash costs of oil production by country and production type 40 Canada - Oil sands

35 United States - Conventional onshore

30

Average Cash Cost ($/bbl)

United States - Heavy oil

25

United States - Tight oil Canada - Tight oil Canada - Conventional onshore Canada - Heavy oil United States - Conventional shelf Canada - Conventional shelf

20

15

Norway Russian Federation - Conventional shelf Mexico

10

Qatar United Arab Emirates Kuwait

5

0

Source: Woodmac, Citi Research 24

Venezuela - Conventional onshore

Venezuela - Conventional shelf Russian Federation - Heavy oil United States - Deepwater

Russian Federation - Conventional onshore

Saudi Arabia

Iran

0

Iraq

Venezuela - Heavy oil

10

20

30 40 Liquid Production (million b/d)

50

60

70

80

Oil company returns were already struggling in a $100/bbl world Citi Global Oil Vision – Group ROE at 29-Year Lows

Source: Company Reports, Citi Research 25

…Yet shale returns have improved, even at lower prices

EOG Resources Western Eagle Ford Current Returns vs. 2012

Source: EOG Resources 26

EOG Resources Eagle Ford Completed Well Cost ($ mln)

2020 Targets Point to Huge Incremental Supplies but Will Likely Fall Short Citi’s Medium-term forecast points to a more stable balance (m b/d) Potential Global Supply Capacity Increases (m b/d) Capacity Inceases (m b/d) 2014 2015 2016 2017 2018 2019 2020 14-17 Iraq (Baghdad Target)

3.5

-

-

6.0

-

-

8.5

14-20

2.5

2014 2015 2016 2017 2018 2019 2020 11.8

12.8

13.0

13.8

14.4

15.0

15.6

Canada

4.2

4.3

4.4

4.5

4.6

4.7

4.8

5.0

Mexico

2.8

2.7

2.6

2.6

2.6

2.7

2.8

Brazil

2.3

2.4

2.5

2.7

2.8

2.9

3.0

Iraq

3.5

3.9

4.1

4.2

4.3

4.5

4.7

0.7

1.2

Kuwait (KNOC Target)

2.8

-

-

-

-

-

4.0

-

1.2

UAE (ADNOC Target)

2.8

-

-

3.5

-

-

-

0.8

-

Canada

4.2

4.3

4.4

4.5

4.6

4.7

5.0

0.3

0.8

Brazil

2.3

2.4

2.5

2.6

2.8

3.1

3.4

0.3

North Sea

2.9

2.8

2.7

2.6

2.6

2.6

2.5

Russia

10.9

10.9

10.7

10.6

10.6

10.5

10.5

Other Non-OPEC

17.3

17.1

16.9

16.6

16.5

16.4

16.3

1.1

Non-OPEC

52.2

52.9

52.9

53.4

54.1

54.8

55.5

OPEC Crude

30.3

30.2

30.4

30.7

30.9

31.1

31.3

OPEC Unconventional

0.3

0.3

0.3

0.3

0.3

0.4

0.5

OPEC NGLs

6.1

6.3

6.5

6.6

6.6

6.6

6.6 38.4

US GoM (L48 Offshore)

1.5

1.6

1.8

1.9

2.1

2.2

2.2

0.4

0.7

Mexico (PEMEX Crude)

2.4

2.3

-

-

2.8

-

-

0.4*

-

Source: KNOC, ADNOC, EIA, Platts, IEA, Citi Research Estimates 27

Supply US

OPEC Oil

36.7

36.8

37.2

37.6

37.8

38.1

Processing Gains

2.2

2.3

2.3

2.3

2.4

2.4

2.5

Global Biofuels

2.2

2.2

2.3

2.3

2.4

2.4

2.4

Total Supply

93.3

94.2

94.7

95.6

96.6

97.7

98.7 98.8

Total Demand

92.5

93.7

94.8

95.8

96.8

97.8

Implied Stockbuild

0.8

0.4

-0.1

-0.2

-0.2

-0.1

-0.1

"Call on US Production"

11.0

12.4

13.1

14.0

14.6

15.1

15.7

Citi Price Forecast ($/bbl)

100

58

69

75

75

75

75

Oil prices should have a stimulative effect on oil demand The ~50% drop in oil should have net positive effects on global GDP growth and oil demand growth

Estimated oil demand sensitivity to falling oil prices in advanced economies

0.18 0.16 0.14 0.12 0.10 0.08 0.06 0.04 0.02 4Q18

3Q18

2Q18

1Q18

4Q17

3Q17

2Q17

1Q17

4Q16

3Q16

2Q16

1Q16

4Q15

3Q15

2Q15

0.00 1Q15

– Second-order effects as lower oil prices boost GDP growth, which in turn boosts product demand. We estimate that a 10% drop in oil prices can lead to a 0.1-0.2% boost in global GDP growth in 2015-16. Yet this is not a cumulative impact and other macro pressures can counteract this positive effect.

0.20

4Q14

– Direct effect of lower prices; as the price of a good decreases then demand should go up. A 10% gasoline price slide should yield a 1% increase in gasoline demand globally. Yet FX moves, taxation, regulation and supply chains can lessen the benefit to the consumer.

Estimated impact of a $10 oil price decline on global GDP % Change in GDP for 10$ Decrease in WTI

● Lower oil prices should feed through to a recovery in oil demand growth via:

Oil importers have been shielded from some of the drop due to USD weakness 20% 10%

Brent Brent - Yen

Brent - Euro Brent - Won

Brent - Rupee

Oct-14

Feb-15

0% -10% -20% -30% -40% -50% -60% Apr-14

Source: Bloomberg, BLS, Energy Intelligence, IMF, Oxford Economics, Citi Research 28

Jun-14

Aug-14

Dec-14

Apr-15

US Demand is on the Up, Driven by Structurally Stronger Gasoline Consumption

US Oil Demand Y/Y Growth (m b/d) 1.5 1.0

Other Jet/Kerosene

Fuel Oil Gasoline

Diesel Total

0.5

Vehicles Miles Travelled Y/Y Growth vs. Efficiency Gains Y/Y Growth 10%

6% 4%

-0.5

2% 0% -2%

-1.5

-4%

-2.0 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15

-6% Jan-09 Nov-09 Sep-10

Source: Company Reports, IEA, Citi Research 29

VMT Y/Y

8%

0.0

-1.0

Efficiency Gains Y/Y

Jul-11

May-12 Mar-13 Jan-14 Nov-14

Is India the new China for oil demand? India is seeing demand increase across the board for petroleum products and is trending higher ● In February, Indian oil demand grew 340-k b/d y/y, its highest growth rate for four years, as a reforming economy continues to flourish. Citi expects 7.5% GDP growth this year and 8+% in the following two years with significant picks ups in fixed investment and private consumption. ● The deregulation of retail diesel prices is also starting to take effect as diesel demand has been awakened from its slumber as consumers are benefitting from weaker global oil prices.

Indian y/y demand growth has been at multiyear highs to start the year (m b/d) 0.5 0.4

Other Jet/Kerosene

Fuel Oil Gasoline

Diesel Total

0.3 0.2 0.1 0.0 -0.1 -0.2

Indian oil demand growth has been impressive but volumetrically it will struggle to match Chinese historic growth (m b/d) 2.0

India Y/Y Growth

China Y/Y Growth

1.5

Retail diesel prices falls are now more in line with gasoline price declines (INR/Liter) 80

Diesel

Gasoline

75 70

1.0

65

0.5

60 55

0.0

50

-0.5 -1.0 Jan-09 Nov-09 Sep-10

-0.3 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15

45

Jul-11

May-12 Mar-13

Jan-14 Nov-14

Source: Indian Ministry of Natural Resources, Indian Oil Corporation, Citi Research 30

40 Jan-14 Mar-14 May-14

Jul-14

Sep-14 Nov-14

Jan-15 Mar-15

…Tertiary stockbuilding can over exaggerate oil demand growth

German Consumer Heating Oil Stocks

German Gasoil Demand (m b/d) 1.4

2011

2012

2013

2014

2015

1.3 1.2 1.1 1.0 0.9 0.8

Source: Company Reports, IEA, Citi Research 31

Jan

Feb Mar

Apr May Jun

Jul

Aug Sep Oct

Nov Dec

Oil Exporters Have to Been Key to Bolstering Oil Demand Growth

2010-14 Oil Demand Growth by Region (m b/d) 2.0

Oil Net Exports by Region in 2014 (m b/d) 25

1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5

20 15 10 5 0

Source: IEA, Research 32

Latin America

Africa

FSU

Middle East

Geopolitical Risks Remain Aplenty Geopolitical disruptions have been a key support for oil prices over the last few years and despite the collapse in oil prices the list of geopolitical risks hasn’t shortened. Lower prices if anything are likely to make this list longer. Bullish Risks ● Venezuela: The government is fighting to avoid default as lower oil prices dent government revenues. (exports ~1.5m b/d) ● Russia: Tensions in Eastern Ukraine show no sign of easing. Ukraine claims that Russia has under-delivered on prepaid gas deliveries as the conflict threatens to spiilover further into energy markets. (exports ~4.5-m b/d) ● Iraq: Lower oil prices have helped improve KRG-Baghdad relations but ties are far from strong. ISIS remains a significant threat in the north. (exports ~3-m b/d) ● Nigeria: A victory for Buhari could lead to increase violence in the Niger Delta, with a particular focus on targeting the oil sector. (exports ~2.1-m b/d) Source: Citi Research 33

Bearish Risks ● Libya: Crude exports slowed to essentially zero and the risk now is that exports return, hitting the Atlantic Basin light sweet market.. ● Iran: Nuclear talks are underway again with the situation broadly unchanged; progress is being made but on several key points, such as centrifuge numbers, the sides remain far apart. ● Grexit: The potential of Greece leaving the Eurozone could be a speedbump in a global economic recovery.

The Relationship between GDP Growth and Oil Demand is Fading The last decade saw impressive oil demand growth but this is expected to moderate in this decade, even as global GDP growth returns 5%

GDP Growth IEA MTOMR 2014

4%

The oil intensity of GDP Growth continues to decline meaning every unit increase in GDP growth is translating into less oil demand growth 1.2

Citi Demand Growth EIA IEO 2014

Non-OECD

OECD

1.0

3%

0.8

2% 1%

0.6

0%

0.4

-1%

0.2

-2% -3%

0.0 2001

2003

2005

2007

2009

2011

Source: EIA, IEA, BP, Citi Research estimates. 34

2013

2015

2017

2019

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Fuel-Efficiency & Fuel-Substitution Remain A Threat To Oil Demand Growth Natural gas substituting for oil, coupled with the increasing car and truck fuel economies already in play, is enough to mean an end to global oil demand growth is closer than the market seems to think Oil demand growth – the end is nigh?

Transportation is only 1/3 of oil demand

Business As Usual

100

Cars

After vehicle efficiency gains

98

Other industrials

After gas substitution

Trucks

96

Residential Petrochemicals

94

Electricity Aviation

92

Other transport

90 88 2012

Shipping Rail 2013

Source: Citi Research 35

2014

2015

2016

2017

2018

2019

2020

0

5

10

15

20

25

Increasing Efficiency Is a Threat to All Forms of Energy Demand

Global fuel economy mandates should drive improvements in efficiency.

As improvements are made in demand management and efficiency, US electricity demand growth is decoupling from GDP growth. 6% 5%

Electricity Demand Growth

Real GDP Growth

4% 3% 2% 1% 0% -1% -2% -3% -4%

Source: EIA, The International Council for Clean Transportation, Citi Research 36

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Spillover Effects: Oil Linkage Has Crashed Global Gas Prices The majority of global gas contracts are linked to oil prices, often by a 15% slope and a 3-month lag. Spot LNG and 3-month-out oil-linked prices at ~$8/MMBtu make Australian and even some US projects uneconomical. But much like oil, weak demand and impending new supply will keep near-dated prices down.

2011

2012

2013

2014

20 15 10 5 0

Jan Feb Mar

Apr May Jun

Jul

Source: EIG, WoodMackenzie, Citi Research 37

$20.00

2015

$18.00

FOB Breakeven Price (US$/mmbtu)

25

LNG Project Breakevens ($/MMBtu)

Aug Sep Oct Nov Dec

$16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00

RasGas I RasGas II ADGAS Arun Brunei LNG Qalhat LNG Atlantic LNG 4 Golden Pass Export Darwin NLNG Base Damietta ELNG 1 Leviathan FLNG Brass LNG Tangguh Phase 2 DS LNG Angola LNG PNG LNG LNG Canada Kitimat LNG Browse Sakhalin 2 Australia Pacific LNG PETRONAS FLNG 1

Spot Asian LNG Price ($/MMBtu)

Contracted Asian Supplies Should Keep Spot LNG Prices Subdued

Premium Asian LNG market contracts vs demand

Source: Platts, Citi Research 38

JKM premium vs NBP and HH has closed recently

LNG Oversupply is Expected to Persist this Decade Global LNG supply/demand, supply by project progress, showing many projects in FEED face delays

Source: Woodmac, Citi Research 39

Global LNG supply/demand, supply forecast by country, North American proposed exports dominate the landscape

Solar is becoming increasingly competitive globally Developing Asia LCOE ($/MWh) 300 250

US LCOE ($/MWh)

Coal with CCS

Gas CCGT

Large Hydro

Large Solar PV

Nuclear

Wind Onshore

250

200

200

150

150

100

100

50

50

0 Dec-09

Jul-10

Feb-11 Sep-11 Apr-12 Nov-12 Jun-13

Jan-14 Aug-14 Mar-15

European LCOE ($/MWh) 400

Coal with CCS Large Solar PV

350

Gas CCGT Nuclear

Large Hydro Wind Onshore

Gas CCGT

Large Hydro

Large Solar PV

Nuclear

Wind Onshore

0 Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12

Jul-13

Feb-14 Sep-14 Apr-15

700

Coal with CCS Large Hydro Nuclear

600

Gas CCGT Large Solar PV Wind Onshore

500

250

400

200

300

150

200

100

100

50 0 Dec-09

Coal with CCS

Japanese LCOE ($/MWh)

300

Jul-10

Feb-11 Sep-11

Source: EIA, Citi Research 40

300

Apr-12

Nov-12

Jun-13

Jan-14 Aug-14 Mar-15

0 Dec-09

Jul-10

Feb-11 Sep-11 Apr-12 Nov-12 Jun-13

Jan-14 Aug-14 Mar-15

Petroleum Products Outlook

41

Refinery overcapacity is set to grow further in 2015 Global refining capacity is set to outpace demand growth in 2015 with large-scale additions in the Middle East and Asia and a number of smaller projects in the Americas. Deferred refinery margins are already compressed due to oil structure but project deferrals and cancellations could point to a potentially brighter 2016. Global refinery net additions (m b/d) vs. global oil demand growth (m b/d) 1.6 1.4 1.2

North America

1.0

FSU East

0.8

Europe

0.6

Middle East

0.4

Asia

0.2

C&S America

0.0

Africa

-0.2

Demand

-0.4

2014

2015

2016

Source: ESAI, ENT, Reuters, Company Reports, FGE, Citi Research 42

Complex refinery margins by region ($/bbl)

The crude surplus should shift downstream in 2H’15 Oversupply in oil markets has so far mainly been manifested in crude stock builds. Product stocks in Europe and Asia have seen modest rises YTD but 2Q’15 sees refinery output drop during turnarounds. Strong margins encourage refiners to run hard in the summer which should build product stocks, particularly in Europe demand is tepid. Robust 2H’15 refinery hedging could see strong runs even with declining margins. Singapore hub total product inventories (m bbls) 53

2010

51

2011

2012

2013

2014

Asian refinery margins ($/bbl)

2015

49 47 45 43 41 39 37 35 33

Jan

Feb Mar

Apr May Jun

Jul

Aug Sep Oct

Nov Dec

ARA hub total product inventories (m bbls) 48

2010

2011

2012

2013

2014

2015

43 38 33 28 23

Jan

Feb Mar

Apr May

Jun

Jul

Aug Sep Oct

Nov Dec

Source: International Enterprise, PJK International, Citi Research 43

NWE Brent cracking margins ($/bbl)

The distillate pool is under pressure from Mid-Eastern refineries Large refinery additions in the Middle East (Jubail, Yanbu, Ruwais) are in the process of ramping up and are designed to produce a high distillate cut. The region is longer distillates, targeting Europe’s distillate deficit. Refinery additions in the Middle East (m b/d) 1.2

Saudi Arabia

Kuwait

Iran

UAE

Iraq

Oman

300

2011

2012

2013

2014

200

1.0

100

0.8

0

0.6

-100

0.4

-200

0.2 0.0

Saudi Arabia gasoil net exports (k b/d)

-300

2013

2014

2015

2016

2017

2018+

Jan Feb Mar

Apr May Jun

Jul

Aug Sep Oct Nov Dec

Key regional distillate balances (k b/d) are loosening 1,500

Source: ENT, Company Reports, Reuters, JODI, Citi Research 44

NAM LATAM

0

ASIA MIDEAST

-500

Sep-15

Nov-15

Jul-15

May-15

Jan-15

Mar-15

Nov-14

Jul-14

Sep-14

-1,000

Mar-14

● Meanwhile, China is also moving to be a surplus middle distillate exporter as well as the US.

500

May-14

● 2018+ refinery additions in the Middle East include Kuwait’s 615-k b/d Al Zour project and Saudi Arabia’s 400-k b/d Jizan project.

1,000

Jan-14

● 2017 could see Iran’s 120-k b/d Bandar Abbas refinery

Summer Gasoline Strength May Already Be Priced In Gasoline demand has been impressive YTD, led by the US, India and China, which has lifted gasoline cracks along with seasonality and a low crude price. EU stocks remain low despite impressive run rates but in the US stocks are already quite high ahead of what is expected to be a very strong summer for crude throughput. Summer N.W.E Gasoline Cracks ($/bbl) 15

Jun-14 Crack (1-year Prior)

Jun-15 Crack

14

Y/Y Gasoline Demand Growth (m b/d) 1.0

13

Argentina Mexico Brazil Thailand

ARA Gasoline Stocks (m bbls) 2011

2012

2013

2014

2015

Mar-15

Jan-15

Apr-14

Feb-15

Jan-14

Dec-14

Oct-13

Oct-14

Jul-13

Nov-14

Apr-13

US

Sep-14

6 Jan-13

Japan

Jul-14

-0.4

South Korea

Aug-14

7

UK

Jun-14

-0.2

Apr-14

8

India

May-14

0.0

Mar-14

9

China

Jan-14

0.2

Feb-14

10

Total

US Gasoline Stocks (m bbls) 250

2011

2012

2013

2014

2015

240

9 8

230

7 6

220

5

210

4

200

3 2

Russia

0.4

11

10

Italy

0.6

12

11

Australia

0.8

Jan

Feb Mar

Apr May Jun

Jul

Aug Sep Oct

Nov Dec

Source: Bloomberg, EIA, International Enterprise, Citi Research 45

190

Jan Feb Mar Apr May Jun

Jul

Aug Sep Oct Nov Dec

A Reduced Pull From Asia could Soften Naphtha Cracks in 2H’15 East of Suez and Atlantic Basin Naphtha Balances (k b/d) 300

Atlantic Basin

200 100 0 (100) (200) (300) (400)

Source: ESAI, Citi Research. 46

East of Suez

N.W.E Naphtha Cracks ($/bbl)

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