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

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 exact same arguments are used today by sceptics to further growth in shale oil production in the US. •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.”

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

2

More Normal For Oil Prices To Trend Lower Than Higher Oil Prices In Real Terms Formation of OPEC in 1960 • Oil prices politicised • Electronic oil trade – easy access • Oil as a separate asset class • Emerging market economic growth

140

120

100

80

60

100-year period of oil prices trending lower 40

20

0 1861

1881

1901

1921

1941

Historical oil prices in real terms (BP Stats)

1961

1981

2001

2021

Return to lower real term prices?

Source: BP Statistical Review, DNB Markets

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

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

Global Oil Demand - Price Matters 100

250%

Supply shock: • Yom Kippur

90

Global Oil Demand (mbd)

80 150%

70 100%

Demand «shock»: • China and emerging markets • Weak non-OPEC supply growth

60

50%

Oil price change in percent

200%

50 0%

40

Supply shock: • Iran vs Iraq • Revolution in Iran

30

-50%

1965

1970

1975

1980

1985

Oil price change (real terms)

1990

1995

2000

Global oil demand

2005

2010

2015

2020

Fwd looking oil demand DNB

Source: BP Statistical Review, DNB Markets

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

4

IEA Has Massively Revised Down Their Oil Demand Growth - Global oil demand seen up from 90.7 mbd in 2013 to 96.6 mbd by 2020 – That is average growth of only 0.8 mbd per year

Global Oil Demand - Price Matters 130

IEA oil demand forecast WEO 2007 - 1.3% yearly growth

120 110

Global Oil Demand (mbd)

100 90

80 70

IEA oil demand forecast WEO 2012 - 0.5% yearly growth

60

50 40 30 1965

1970

1975

Source: BP Statistical Review, DNB Markets, IEA WEO 2007 ans 2012

1980

1985

1990

1995

2000

2005

Global oil demand BP stats

2010

2015

IEA WEO 2007

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

2020

2025

2030

IEA WEO 2012

5

Oil Demand Growth Has Suffered In The OECD - And we believe this will continue to be the case in the current decade

Oil Price vs OECD Oil Demand Growth - Price Matters 2.5%

100

2.0%

90

Yearly Demand Growth

70

1.0%

60 0.5% 50 0.0%

40 -0.5%

Brent Dated $/b

80

1.5%

30

-1.0%

20

-1.5%

10

-2.0%

0 1991

1993

1995

1997

1999

2001

2003

5-year avg OECD oil demand growth

2005

2007

2009

2011

5-year avg Brent Dated

Source: IEA

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

6

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

OECD Oil Demand Seasonally Adjusted

Million b/d

52

51

•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.

50

•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.

49

48

47

46

45

44 Jan/2002

OECD Oil Demand (kbd) LPG and Ethane Naphtha Motor Gasoline Jet and Kerosene Diesel Other Gasoil Residual Fuels Other Products Total Products Jan/2004

2005 4776 3274 14836 4263 8519 4590 4504 5124 49888 Jan/2006

2012 Change 4787 11 3187 -87 13870 -966 3672 -591 9546 1027 2983 -1607 2779 -1725 4472 -652 45297 -4591 Jan/2008

Jan/2010

Jan/2012

Source: IEA

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

7

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

OECD Oil Demand vs OECD Economic Growth 59 57 40 Advanced Economies - GPD in PPP

55 35

53 51

30 49

25

47 45

20 43

15

41 39

10

37 5

Oil Demand Advanced Economies in Million b/d

45

35 1985

1988

Source: BP BP stats, stats, DNB DNB Markets, Markets, IMF IMF, IEA Source:

1991

1994

1997

2000

2003

2006

2009

2012

GDP -- Purchasing Purchasing Power Power Parity Parity Advanced Economies GDP Economies Oil Oil Demand Demand Advanced Economies

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

8

Negative Correlation Last Years – OECD Economy vs Oil Demand - The larger the size of the economy the lower oil demand in advanced economies – What is happening??

Advanced Economies GDP vs Oil Demand (Yearly data 2006-2012)

Avanced Economies - Oil demand Million b/d

51 50

y = -0.6813x + 73546 R² = 0.5911

49 48 47 46 45 44

43 35000

36000

37000

38000

39000

40000

41000

42000

Advanced Economies GDP - Purchasing Power Parity Source: DNB Markets, BP stats, IMF

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

9

Developed Economies Much Less Energy Intensive - Efficiency improvements hence are explaining much of the reduced oil demand, but substitution also plays its part

OECD Primary Energy Demand vs OECD Economic Growth 6.5

6.3 Advanced Economies - GPD in PPP

40

6.1 5.9

35

5.7 30

5.5 5.3

25 5.1 4.9

20

4.7 15

4.5 4.3

10

4.1 5

3.9 1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

Energy Demand Advanced Economies - Million Tonnes

45

Advanced Economies GDP - Purchasing Power Parity Source: BP stats, DNB Markets, IMF

Primary Energy Demand - Million Tonnes Oil Equivalents, BP stats

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

10

OECD Natgas Demand More Connected To The Economy - Oil is in a loosing game vs Natural Gas consumption; we believe it will continue and probably accelerate in coming years

45

1.5

40

1.4

35

1.3

30

1.2

25

1.1

20

1.0

15

0.9

10

0.8

5

0.7 1985

1988

1991

1994

1997

2000

2003

2006

2009

Energy Demand Advanced Economies - Million Tonnes

Advanced Economies - GPD in PPP

OECD Natgas Demand vs OECD Economic Growth

2012

Advanced Economies GDP - Purchasing Power Parity Advanced Economies Natural Gas Demand In Million Tonnes Oil Equivalents, BP Stats Source: BP stats, DNB Markets, IMF

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

11

Oil’s Market Share Of The Energy Mix Drops On High Oil Prices - The same happened in the 1970’s

Oil Market Share In OECD Primary Energy Mix 40% 35% 30% 25% 20% 15% 10% 1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Source: BP stats

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

12

Not Enough To Hit Correctly On Global Economic Growth - Correlation is weaker than many think (only 37% since 1985) - At 3% to 4% GDP growth, oil demand growth has been in a range from -0.7% to +2.7%

Global GDP vs Global Oil Demand (yearly data since 1985) (t-stat: 3.8)

5%

y = 0.5914x - 0.0055 R2 = 0.3666

4%

Oil demand

3%

2%

1%

0%

-1%

-2% -1% Source: Datastream, IM F, IEA

0%

1%

2%

3%

4%

5%

6%

Gross Domestic Product

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

13

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

Oil Demand Change Per Unit Real GDP Change (oil intensity) vs Oil Burden (Average: last 20 years is 0.4, last 10 years is 0.3 - both excluding 2008-09)

0.7

0%

0.6

1%

Oil Intensity

3% 0.4 4% 0.3 5% 0.2

6%

0.1

7%

0.0

8% 1987

1990

Source: BP stats, IEA, IMF, DNB Markets

1993

1996

1999

2002

Oil Intensity 5-year mavg - LHS

2005

2008

Global Oil Burden

2%

0.5

2011

Oil Burden - RHS

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

14

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.

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

15

US Gasoline Demand Will Continue To Decline - This is the single most important chunk of the global oil market (10% of global oil demand and half of US total oil demand)

mbd

US Historical Gasoline Demand (Monthly Data) 10 9 8 7 6 5 4 3 2 1 0 Jan-45

Jan-55

Jan-65

Jan-75

Jan-85

Jan-95

Jan-05

Source: US DOE

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

16

Efficiency Improvements In The US Car Fleet Already Visible - This is set to improve further in the coming years

YoY Changes In US Car Efficiency (12-month mavg) (VMT divided by gasoline demand) 2.0% 1.5% 1.0% 0.5% 0.0% -0.5%

-1.0% Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

Jul-13

17

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

US CAFE Standards (Source: EIA)

60 55

US CAFE standard

50 45 40 35 30 25 20 15

1978

1983

Passenger cars

1988

1993

1998

Passenger cars new CAFE

2003

2008 Light Trucks

2013

2018

2023

Light Trucks new CAFE

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

18

SUVs Will Not Get Off The Hook This Time - Americans can still drive SUVs but they will also become more efficient in coming years

Number of regular cars in the US currently Fleet size in 2025 assuming 10% increase Annualized new car sales in millions Total million cars sold between 2012 to 2025 New CAFE-cars share in 2025 assuming 10% larger fleet size Replacement per year Improved average efficiency from now to 2025 in MPG ((49.6-27)/2/27) Total average efficiency gain per year for the whole fleet Gasoline demand in 2011 Reduction in demand 2012-2025, based on 9.1 mbd*70%*42% Million b/d gasoline demand in 2025

252 277 15 195 70% 5.4% 42% 2.3% 9.1 2.7 6.4

Real life MPG of the fleet is 22 MPG while the current CAFE standard is 27 MPG

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

19

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

$/MMBTU

WTI & Henry Hub 24 22 20 18 16 14 12 10 8 6 4 2 0 Jan-00

Source: Reuters

Jan-02

Jan-04

Jan-06

Henry Hub

Jan-08

Jan-10

Jan-12

WTI 1st month

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

20

LNG Trucking Corridor Already On It’s Way - On highway diesel demand is about 2.4 million b/d in the US - Railroad demand for diesel is about 230 kbd - Clean Energy is building 150 LNG filling stations in 2012/13 – Shell to build 100 new locations as well

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

21

The “NGV-Ball” Has Started To Roll - Barack Obama quote: “So we’ve got to have an all out, all in, all of the above energy strategy that develops every source of American energy. A strategy that is cleaner and cheaper and full of new jobs. Now a great place to start is with Natural Gas”.

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

22

The “NGV-Ball” Has Started To Roll - And it is not only in the US, and it is not only in the car industry

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

23

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

Norway Crude OilCrude Production Texas & Monthly Norway Monthly Oil Production 3.4

Million b/d

2.9 2.4 1.9

1.4 0.9 Jan-00 EA DOE, IEA Source: US

Jan-02

Jan-04

Jan-06

Texas crude oil production

Jan-08

Jan-10

Jan-12

Norway crude oil production

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

24

Texas & North Dakota Is Where It Has Happened So Far - Growth in North Dakota started in 2008 while Texas was two years later in the cycle Year Production Year on on Year Year Texas Texas Crude Crude Production 700 600

b/d Thousand b/d

600 500 500 400 400 300 300 200 200 100 100 0 0 -100 -100 -200 -200 -300 -300

Year on Year North Dakota Crude Production 300

250

Thousand b/d

200 150 100 50 0 -50

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

25

IEA’s Forecasts For US Production Growth Were Far Too Low - IEA’s first take on 2012 US production growth was at 45 kbd - now 2012 growth is estimated to have been 970 kbd

IEA Forecasted YoY Growth In US Liquids Production 1200 1000

Kbd

800

600 400 200 0 Jul-11

Nov-11 Mar-12

Source: IEA Monthly Oil Market Reports

Jul-12

Nov-12 Mar-13

IEA forecast for 2012

Jul-13

Nov-13

IEA forecast for 2013

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

26

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

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

27

Technology Has Unlocked Gas & Oil In Shale Source Rock

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

28

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

US/Canadian Oil Liquids Production Forecast (Source: PIRA Study - Road to US Energy Independence, Sep 2012)

22

Canadian other Canadian NGLs

20

Canadian shale crude Canadian conventional

18

Canadian oil sands US Other

16

US Non-Shale NGL US Shale NGL Uinta

14

Million b/d

Lower Smackover Brown Dense Tuscaloosa Marine

12

Ardmore Woodford Barnett

10

Utica Monterey

8

Anadarko (Cana) Woodford Niobrara

6

Granite Wash

Mississippi Lime

4

Permian Basin Shales Bakken

2

Eagle Ford Ethanol

0 2005

Non-Shale Crude & Condensate

2007

2009

2011

2013

2015

2017

2019

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

29

Learning Curve Still Ongoing In The Shale Plays - Production per well is stabilizing but performance per rig is exploding to the upside Bakken - Number Of Producing Wells

Bakken -Horizontal Rigs In Use 6000

200 180

5000

160 140

4000

Kbd

120 3000

100 80

2000

60 40

1000

20 0 Jan-06

Jul-07

Jan-09

Jul-10

Jan-12

Jul-13

0 Jan-06

Jan-15

Jul-07

Jan-09

Jul-10

Jan-12

Jul-13

Jan-15

Source: North Dakota Industrial Commission

Source: Smith Rig Count

Bakken -Daily Oil Production Per Horizontal Rig

Bakken -Daily Oil Production Per Well 6000

160 140

5000

Barrels per day

120

Barrels per day

100 80

60

4000 3000

2000

40

1000

20 0 Jan-06

Jul-07

Source: North Dakota Industrial Commission

Jan-09

Jul-10

Jan-12

Jul-13

Jan-15

0 Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Aug-15

Source: North Dakota Industrial Commission & Smith Rig Count

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

30

No Predictability For Oil Production In Counting Rigs Anymore - The lower the rig count; the higher production is what we are currently seeing…

Horizontal US Oil Rigs vs US Crude Production ; 2011-today (Source: Smith Rig count )

7.3 y = -7.2305x + 11291 R² = 0.6674

7.1

Million b/d

6.9 6.7 6.5 y = 2.2421x + 4746 R² = 0.6869

6.3 6.1 5.9 5.7 5.5 5.3 280

330

Source: Smiths Rig Count & EIA

380

430

480

530

2011-October 2012 Linear (2011-October 2012)

580

630

680

October 2012-today Linear (October 2012-today)

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

31

Learning Curve Still Ongoing In The Shale Plays - Production per well is stabilizing but performance per rig is exploding to the upside Bakken - Number Of Producing Wells

Bakken -Daily Oil Production Per Well 160

10000

140

9000 8000

Barrels per day

120

7000

100

6000

80

5000 4000

60

3000

40

2000

20 0 Jan-06

1000

Jul-07

Jan-09

Jul-10

Jan-12

Jul-13

0 Jan-06

Jan-15

Jul-07

Jan-09

Jul-10

Jan-12

Jul-13

Jan-15

Source: North Dakota Industrial Commission

Source: North Dakota Industrial Commission

Bakken -Daily Oil Production

Number Of Wells North Dakota - Month on Month

(With production per w ell at 120 b/d and 100 new w ells per month

250 1400 Thousand barrels per day

Number of Wells

200 150 100 50

1200 1000 800

600 400 200

0 -50 Jan-06

0 Jan-06

Jul-07

Source: North Dakota Industrial Commission

Jan-09

Jul-10

Jan-12

Jul-13

Jan-08

Jan-15

Jan-10

Jan-12

Jan-14

Historical Bakken oil production Source: North Dakota Industrial Commission, DNB Markets

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

Theoretical Bakken oil production

32

80% Of Production Comes From 20% Of The Fracking Stages - This suggest large room for improvements. Both geology and completion to blame. Huge prize for companies in identifying the good quality reservoirs prior to Hydraulic fracturing but also in improving the quality of completions. Graph below is from Bernstein Research “A chart that Could Scare the Oil Bulls”.

Source: Bernstein Research, Schlumberger

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

33

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

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

34

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

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

35

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

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

36

Too Low Formal Estimates Of Recoverable US Oil Reserves - Total recoverable resources in the permian basin only seen at 1.26 billion barrels in 2008

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

37

Where Are The Eagle Ford Shale Oil Resources? - USGS saw only about 0.5 billion barrels recoverable shale oil in Texas – While production is now up 0.5 mbd the last two years…

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

38

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

US Shale Reserves Relative To Others (Source BP stats and PIRA shale study) 300

EUR Billion barrels

250 200 150 100 50 0

Saudi

Iran

Iraq

Kuwait

UAE

Russia

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

Brazil

US

US shale (PIRA)

39

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

Historical Assessment Of Proven Oil Reserves (Source BP stats 2012)

Proven reserves billion barrels

1800 1600 1400 1200 1000 800 600 400 200 0 1980

1983

1986

1989

1992

1995

1998

2001

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

2004

2007

2010

40

US Oil Refineries – Centered On The Gulf Coast

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

41

US Will Push Away Imports From PG & West Africa - The top half of the sources below will disappear first from US crude imports. Canada set to continue to grow, others to drop.

US Crude Imports By Source 12

10

Million b/d

Others 8

West Africa (incl. Med) Persian Gulf

6 Columbia Brazil

4

Venezuela 2

Mexico

Canada 0 Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Source: IEA

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

42

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

US Crude imports 4 week mavg 11.0 10.0

Million b/d

9.0 8.0

7.0 6.0 5.0 4.0 Jan-2003

Jan-2006

Jan-2009

Jan-2012

Jan-2015

Jan-2018

?

Source: US DOE

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

43

World Population By Country (Sources 2009-2011)

Canada (34m)

USA (311m)

Mexico (112m)

Colombia (46m)

•Germany (82m) •France (66m) •UK (62m) •Italy (61m) •Spain (46m) •Poland (38m) •Romania (21m)

Russia (142m) Ukraine (46m)

Turkey (74m) Algeria (36m) Iraq (31m) Iran (75m) Morocco (32m) Egypt (80m) Saudi (27m) Sudan (43m) Yemen (22m) Nigeria (158m) Ethiopia (80m) Venezuela (29m) Kenya (39m) Congo (68m) Tanzania (43m)

54% of the world:

•China (1.34b) •India (1.2b) Brazil (191m) Peru (29m) •Indonesia (238m) •Pakistan (176m) •Bangladesh (150m) •Japan (127m) •Philippines (94m) •Vietnam (87m) Argentina (40m) South Africa (50m) •Thailand (67m) •Burma (50m) •South Korea (49m) •Nepal (29m) •Malaysia (28m) •North Korea (24m) •Taiwan (23m) •Sri Lanka (20m) •Cambodia (13m) Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

Australia (23m)

44

We Used To Believe In Exponential Growth In Asian Oil Demand - If the story from other Asian nations should be repeated by China and India – oil demand should grow exponentially – why is it not happening?

Oil demand /Capita b/d per thousand

Non-OECD Oil Demand Per Capita 50 45 40 35 30 25 20 15 10 5 0 5000

50000 GDP per Capita $ (Purchasing Pow er Parity)

Source: PIRA, DNB Markets

S. Korea

Taiwan

Thailand

Malaysia

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

45

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

Non-OECD Oil Demand 46 44

Million b/d

42 40 38 36 34

32 30 28 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: IEA

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

46

Chinese Growth In Oil Imports Stalling?? - Where is the accelerating growth in Chinese crude oil imports??

Chinese Net Crude Imports 7.0

Million b/d

6.0 5.0 4.0

3.0 2.0 1.0 0.0 Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

Jan-12

Source: China OGP, Xinhua News, The Chinese General Administration & Customs, National Bureau of Statistics

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

47

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

Chinese Calculated Gasoline Demand

Million b/d

(Adjusted for inventory change since June-2009)

2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

Jan-12

Source: China OGP, Xinhua News, The Chinese General Administration & Customs, National Bureau of Statistics

Chinese Calculated Diesel Demand (Adjusted for inventory change since June-2009)

4.1 Million b/d

3.6 3.1

2.6 2.1 1.6 1.1 0.6 Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

Jan-12

Source: China OGP, Xinhua News, The Chinese General Administration & Customs, National Bureau of Statistics

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

48

Look What The Chinese Have Done With Wind Power - Increase from zero to 1 million b/d (211 TWh) in 5 years…

Chinese Wind Power Output (assuming 30% utilization rate) Oil equivalents, Million b/d

1.20 1.00 •Installed wind capacity to increase by 30% in China in 2013 (from 63 GW to 81 GW)

0.80 0.60

•Will equal about 211 TWh (1 million b/d) with a 30% utilization factor

0.40

•Total German electricity consumption is about 600 TWh

0.20

0.00 1997

1999

2001

2003

2005

2007

2009

2011

Source: BP stats, Global Wind Energy Council

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

49

OPEC Spare Capacity Reduced Since 2009 - This is the flip side of the increased Saudi production

Million b/d

OPEC Spare Capacity (IEA Monthly) 9 8 7 6 5 4 3 2 1 0 Nov-01

Nov-03

Source: IEA, DNB Markets

Nov-05

Nov-07

Nov-09

Core OPEC (Saudi/UEA/Kuwait)

Nov-11

Nov-13

Rest of OPEC

Source: IEA Monthly Oil Market Reports

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

50

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

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

51

The Saudi Royal Family Abdul Aziz (Ibn Saud) •King: 1902-1953 •Founded Saudi Arabia in 1932 •22 wives (4 at a time) •45 sons of which 5 have been kings

King Saud •King: 1953-1964 •Forced out

King Faisal •King: 1964-1975 •Killed

Crown Price Sultan (80) •Died 23.10.2011

King Khalid •King: 1975-1982 •Heart Attack

Crown Price Naif (79) •Ultra conservative •Died 16.06.2012

King Fahad •King: 1982-2005 •Stroke

King Abdullah (88) •King: 2005•Regent since 1995 •Unifying and popular •6 sons

New Crown Price Salman (76) •25th son of Ibn Saud •Defence Minister •Well regarded •Trusted mediator •Had a stroke in 2010

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52

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

$/b

Saudi Break Even Budget Oil Price 200 180 160 140 120 100 80 60 40 20 0 2000 Source: PIRA, IMF

2002

2004

2006

2008

2010

2012

2014

2016

Annual Break Even

4% Spendin g Gr owth ( cu rre nt rate)

12% Spending Gr owth ( 10 year avg)

No spending gr owth

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

53

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

Q1-13 Q2-13 Q3-13 Q4-13 2013 2014 2015 2016 2017 2018 2019 2020

Historical Real (2011) $/b 31.1 31.3 35.3 46.6 62.8 72.7 78.5 101.6 64.7 82.0 110.8 111.7 Forecast Real (2012) $/b 112 109 105 103 107 100 96 92 89 85 81 78

Spot Brent History & FWD looking 200

160

120

$/b

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Historical Nominal $/b 24.9 25.1 28.5 38.1 55.0 66.2 72.7 98.7 62.6 80.4 110.8 111.7 Forecast Nominal $/b 112 109 105 103 107 102 100 98 96 94 92 90

80

40

0 1993

1996

Source: Reuters, DNB Markets

1999

2002

2005

Possible range Forecast nominal Forecast real (2012 USD)

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

2008

2011

2014

2017

2020

FWD (nominal) Historical

54

Backup

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

55

The Fat Lady Has Started To Sing – “Sad But True” - “Hey, I’m your life – I’m the one who took you there - Hey, I’m your life and I no longer care” Metallica – “Sad but true”

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

56

US Shale Crude Production Now Seen Growing Even Faster - Set to rise from 1.6 million b/d to 4.9 million b/d from 2012 to 2020 (increase of 3.3 million b/d of pure shale crude)

US Oil Shale Crude Production Forecast (Source: PIRA Study - Road to US Energy Independence, Sep 2012)

5

Uinta Lower Smackover Brown Dense

Tuscaloosa Marine

4

Ardmore Woodford Barnett

Million b/d

3

Utica Monterey

Anadarko (Cana) Woodford

2

Niobrara

Granite Wash Mississippi Lime

1 Permian Basin Shales Bakken

0 2005

Eagle Ford

2007

2009

2011

2013

2015

2017

2019

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57

Is The Above 4% YoY Oil Demand Growth In Non-OECD History? - We believe other energy sources will take more of the stationary demand growth going forward – on the expense of oil

Year on Year Non-OECD Oil Demand Growth 10.0% 8.0% 6.0%

4.0% 2.0% 0.0% -2.0% -4.0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: IEA

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

58

The Saudi Price Target - Both upwards and downwards pressure

•Internal Domestic Budget •Fighting Taxation In Consumer Countries •Political Pressure From Other OPEC Countries •Weak US Dollar

Upped to 100-110 $/b Brent? Old target 70-80 $/b Brent

Saudi Arabia's Al-Naimi on June 8 - 2011 when asked if Saudi Arabia still favour an oil price of 70-80 $/b: "That was several years ago". The same Al-Naimi in a CNN interview on January 16th - 2012: "Our wish and hope is we can stabilise this oil price and keep it at a level around 100 $/b". … and on Dec 7th in an interview in Doha (Brent trading at 107 $/b):

“The prices are fine and customers are happy”

•Long Term Sustainability •Demand •Non OPEC Supply •New Energy Technology •Political Pressure From Big Consumer Countries

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59

Do We Risk A Repetition Of 1986-1991 From Saudi? Saudi Arabia Total Liquids Production 12 10

Million b/d

8 6

Average Brent Crude Price 1979-1985 & 1986-1991

4 40

2 35

0 1976

1980

1984

1988

1992

1996

2000

2004

2008

30 $/b

1972

Source: BP stats

Saudi Arabia Market Share

25 20

20%

15

18% 10

16%

1979

14%

1981

1983

1985

1987

1989

1991

12% 10% 8% 6% 4%

2% 0%

1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

Source: BP stats

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

60

Core OPEC Spare Capacity Forecast

Million b/d

Core OPEC Spare Capacity (IEA Monthly) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Nov-01

Nov-03

Nov-05

Nov-07

Nov-09

Nov-11

Nov-13

Source: IEA, DNB Markets

61

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

Natural Gas is Eating Into Oil’s Market Share In China As Well - Every NGV vehicle hitting the road represents lost diesel (or gasoline) demand

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

62

Lower Oil Prices Set To Weaken The OSEBX vs S&P 500 Link OSEBX vs S&P 500

Brent vs S&P 500

(Daily data 1995-2012)

(Daily data 1995-2012)

600

120

500

100

400

80

300

OSEBX

$/b

140

60

200

40 100

20

0

0 600

800

1000

1200

1400

1600

600

800

1000

1995-2004

1200

1400

1600

S&P 500

S&P 500

2008-2012

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

1995-2004

2008-2012

63

Global Technically Recoverable Shale Gas Reserves Gigantic Units TCF Quote from Forbes

624 Sum ~5,800

•New fiscal terms in Argentina for crude oil exporters •Export price now increased from 42 $/b to 70 $/b

Source: PIRA, EIA

Russia and Central Asia, Middle East, South East Asia, and Central Africa excluded. Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

64

Current Break Even For US Shale Liquids Mainly From 55-85 $/b - Source: PIRA Study – Road to US energy independence

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

65

Sensitivity of US Shale Oil Production to Oil Prices - Source: PIRA Study – Road to US energy independence

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

66

The Most Expensive Barrels Risk Being Pushed Out By Shale Oil - How expensive will it be to develop oil projects in the Barents Sea? Marginal Supply vs Oil Price (If OPEC spare capacity not large enough to push Non-OPEC marginal supply out of the market) 200 180 160 140

$/b

120 100 80 60 40

20 0 1%

10%

19%

28%

37%

46%

55%

64%

73%

82%

91%

100%

% of Supply OPEC Middle East Supply Non-OPEC Onshore Supply Non-O PEC Of fshore Supply Non-OPEC Deepwater, Oil Sands, GTL, CTL, Biofuel Supply, Arctic (Barents Sea) OPEC Spare Capacity No Shale Liquids Demand

Source. DNB Markets

Marginal Supply vs Oil Price

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.

(Large OPEC Spare Capacity could bring prices down) 160

140 120

$/b

100 80

60 40

20 0 1%

10%

19%

28%

37%

46%

55%

64%

73%

82%

91%

100%

% of Supply

Source. DNB Markets

OPEC Middle East Supply Non-OPEC Onshore Supply Non-OPEC Offshore Supply OPEC Spare Capacity Shale Liquids Non-OPEC Deepwater, Oil Sands, GTL, CTL, Biofuel Supply, Arctic (Barents Sea) Demand

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

67

US Shale Oil To Change The Trade Patterns For Crude Oil - Estimated reduction in tonnes miles is 9% - based on changes in US crude imports volumes (with 1.5 mbd Saudi cut)

 Only 1 mbd of existing import volumes from the PG to the US are expected to be lifted by Asian consumers;  WAF oil (incl. North African oil) is estimated split equally between Europe and Asia;  Existing import volumes to the US from Canada, Mexico and South America are expected to be maintained in the next five years but South America will need to change in a longer time frame.

+ 0.7mbd

+ 1.0mbd - 1.3mbd

- 2.5mbd Increase in volume

+ 0.7mbd

Decrease in volume Unchanged volumes

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

68

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)

Global Oil Supply vs Demand (latest 12-month mavg)

Million b/d

95

90

85

80

75 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: IEA, DNB Markets

Current Trend Line Figures OECD demand Non-OECD demand: Total demand Demand change: Non-OPEC (incl. non-core OPEC) Call on core-OPEC crude Change in Call on core-OPEC crude

Trend Line Growth -0.7% 3.3%

2012 46.0 43.8 89.8

2.2%

75.6 14.2

Total supply historical

Total global oil demand historical

Total supply trend fwd

Total global oil demand trend fwd

2013 45.7 45.3 91.0 1.1 77.3 13.7 -0.5

2014 45.4 46.7 92.1 1.2 79.0 13.1 -0.5

2015 45.1 48.3 93.4 1.2 80.7 12.6 -0.5

2012-15 change -1.0 4.5 3.5 1.2 5.1 -1.6

69

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

Existing Projects Will Cover The Oil Need By 2020 Conclusion:

Net Oil Need Of 17 Million b/d Before 2020?? (Assuming 2% net decline rate and below trend line oil demand growth (0.8% vs old trend line 1.5%)

95

Million b/d

85

75

17 65

55

45 2000

2002

Source: GS top 360 projects, DNB Markets

2004

2006

2008

2010

2012

2014

2016

2018

2020

World Liquid Supply World supply excl. processing gains, Biofuel and top 360 projects Oil Demand Field Decline

•Net need of new barrels by 2020 in million b/d: 11+6 =17 •Lost supply from decline rates: 11 million b/d (2%) •Trend line demand growth of 1.5% will fall to 0.8%: 6 million b/d.

•The gap by 2020 will be covered by existing, known projects. In a 2020 perspective the world does not need to find any new resources to develop. Top 360 projects will cover most of the gap, and the remaining will be covered by smaller projects. Top 360 is 64% of the oil majors development costs, so there are also other smaller projects contributing

•How much can supply increase?: •GS top 360: Estimated growth in world oil liquids supply from the worlds top 360 projects 2012-2020 (page 41): 25 million b/d. (17.5 million b/d if adjusting for normal project slippage)

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

Source: DNB Markets, Goldman Sachs 360 projects - March 2012

70

Key Areas Will Get Much More Take Away Capacity Soon - North Dakota, Permian Basin, Cushing, Eagle Ford (Source: PIRA shale study)

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

71

Example Of Better Efficiency – Pad Drilling - 5 to 10 wells drilled per pad – Drills moved with “hydraulic walking” - Eagle Ford average to drill one well down to 19 days in 2012 vs 23 days in 2011 - New procedure is pad-to-pad moves (reduces the cost of rigging up and down)

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

72

What If The Rig Fleet Becomes Twice As effective?? - Helmerich (one of the largest US rig operators) claims the new rigs it is putting onto the market now can do 24 wells per year

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

73

High Prices Unleash Changes - Below from a recent report by the US Government Accountability Office

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74

The Hydraulic Fracturing Technique

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

75

Too Conservative Not To Assume Oil Production In California?

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

76

West Texas Also Looks To Be Huge On Shale - Some say West Texas will be Eagle Ford “on steroids” – See below

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

77

Non-OPEC Growth Outpacing Global Oil Demand Growth - Using a more sophisticated view of non-OPEC reveals structural supply grows quicker than demand

Non-OPEC Supply Growth vs Global Oil Demand Growth 5000

4000 3000

YoY Change KBD

2000 1000 0 -1000 -2000

-3000 -4000 -5000 Jan-03

Jan-05

Jan-07

Jan-09

YoY change Non-OPEC (incl. non-core OPEC)

Jan-11

Jan-13

YoY change global demand

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

78

DNB Global Oil Demand Assumptions For 2012 Year-on-Year Demand Change (kbd) North America (Canada, Mexico) US Europe Australia, New Zealand, Japan, Korea Total OECD

Q1-12 -76 -647 -471 422 -772

Q2-12 120 -143 -328 562 211

Q3-12 -17 -362 -834 221 -991

Q4-12 108 -35 -352 133 -146

2012 99 220 -261 28 86

Europe/Africa Med & FSU Middle East AG excl. Iran and Saudi Iran Saudi Arabia Asia Pacific/East Africa excl. China and India China India West Africa Latin America (excl. Mexico) Total Non-OECD

255 130 -3 94 77 260 130 82 203 1,228

230 108 63 158 244 116 134 19 200 1,272

257 81 -66 232 242 286 179 36 166 1,413

224 71 -74 59 273 758 105 54 320 1,790

157 85 -42 96 259 1,341 73 35 123 2,127

North America Europe/Africa Med & FSU Middle East AG/Asia Pacific/East Africa Middle East AG Asia Pacific/East Africa West Africa Latin America (excl. Mexico) Total World

-723 -216 1,110 221 889 82 203 456

-23 -98 1,385 329 1,056 19 200 1,483

-378 -577 1,175 247 928 36 166 421

73 -128 1,324 56 1,268 54 320 1,644

319 -104 1,840 139 1,701 35 123 2,213

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

79

DNB Global Oil Demand Assumptions For 2013 Year-on-Year Demand Change (kbd) North America (Canada, Mexico) US Europe Australia, New Zealand, Japan, Korea Total OECD

Q1-13 74 7 -494 -151 -564

Q2-13 105 -100 -341 115 -221

Q3-13 110 -100 -308 -19 -316

Q4-13 46 -100 -437 -44 -535

2013 84 -73 -395 -25 -409

Europe/Africa Med & FSU Middle East AG excl. Iran and Saudi Iran Saudi Arabia Asia Pacific/East Africa excl. China and India China India West Africa Latin America (excl. Mexico) Total Non-OECD

112 81 -54 135 232 1,101 94 33 125 1,860

87 72 -83 79 196 1,039 56 42 96 1,584

52 42 -45 3 234 887 143 39 87 1,443

57 73 -50 135 186 347 70 37 57 911

77 67 -58 88 212 844 91 38 91 1,449

North America Europe/Africa Med & FSU Middle East AG/Asia Pacific/East Africa Middle East AG Asia Pacific/East Africa West Africa Latin America (excl. Mexico) Total World

80 -382 1,438 162 1,275 33 125 1,296

5 -254 1,474 69 1,406 42 96 1,363

10 -256 1,246 1 1,245 39 87 1,126

-54 -380 716 158 558 37 57 376

10 -318 1,218 97 1,121 38 91 1,040

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80

DNB Global Oil Demand – Historicals & Assumptions Demand change in Million b/d North America (Canada, Mexico) US Europe

Change 2008 -70 -1,188 -93

Australia, New Zealand, Japan, Korea Total OECD Europe/Africa Med & FSU Middle East AG excl. Iran and Saudi Iran Saudi Arabia Asia Pacific/East Africa excl. China and India China India West Africa Latin America (excl. Mexico) Total Non-OECD North America Europe/Africa Med & FSU Middle East AG/Asia Pacific/East Africa Middle East AG Asia Pacific/East Africa West Africa Latin America (excl. Mexico) Total World

Change 2009 Change 2010 Change 2011 YoY Last 3 mts Change 2012 2013 YTD Chg: Change 2013 -163 115 84 60 99 34 84 -725 407 -229 79 220 -297 -73 -803 -24 -326 -369 -261 -496 -395

-311 -1,662

-365 -2,056

83 582

28 -444

96 -133

28 86

335 -425

-25 -409

311 154 45 135 -171 328 121 79 316 1,317

-178 152 59 223 387 450 36 4 65 1,195

156 132 -177 221 391 956 224 -108 349 2,142

156 -20 -38 115 54 523 143 128 269 1,330

202 76 -63 71 268 1,039 94 48 254 1,989

157 85 -42 96 259 1,341 73 35 123 2,127

242 98 -20 136 209 355 137 48 222 1,426

77 67 -58 88 212 844 91 38 91 1,449

-1,257 219 299

-888 -981 940

523 132 1,829

-146 -170 805

139 -167 1,581

319 -104 1,840

-263 -255 1,249

10 -318 1,218

333 -34 79 316 -345

433 507 4 65 -862

175 1,654 -108 349 2,724

58 747 128 269 886

84 1,498 48 254 1,856

139 1,701 35 123 2,213

213 1,035 48 222 1,001

97 1,121 38 91 1,040

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

81

Selected Non-OPEC Supply Historicals & Assumptions DNB Year on Year Non-OPEC Output Canada Mexico Norway United Kingdom United States Azerbaijan Kazakhstan Russia Ghana South Sudan Sudan Malaysia China Brazil Colombia Oman Syria Yemen Global Biofuels

Non-OPEC (including processing gains)

Liquids Supply Canada Mexico Norway United Kingdom United States Azerbaijan Kazakhstan Russia Ghana South Sudan Sudan Malaysia China Brazil Colombia Oman Syria Yemen Sum:

Change 2007 114 -210 -221 0 40 212 58 236 0 0 132 4 33 29 2 -27 -17 -46 338

Q1-2010 Q2-2010 Q3-2010 Q4-2010 Q1-2011 Q2-2011 Q3-2011 Q4-2011 Q1-2012 Q2-2012 Q3-2012 Q4-2012 Q1-2013 Q2-2013 Q3-2013 Q4-2013 -12 -50 -210 -124 +513 +23 +126 +343 +0 +0 +23 +16 +221 +104 +119 +69 -16 -18 +249

+223 -4 -96 -183 +256 -25 +55 +275 +0 +0 -23 +12 +224 +140 +125 +60 -16 -16 +320

+137 +5 -361 -61 +225 -8 +25 +186 +0 +0 -19 -13 +276 +100 +123 +35 -16 -14 +351

+261 -30 -218 -125 +416 -24 +32 +184 +3 +0 -22 -5 +371 +110 +95 +46 -16 -13 +38

+221 -23 -182 -245 +151 -22 +53 +142 +50 +0 -10 -50 +235 +81 +108 +33 +0 +4 +97

-57 -5 -138 -228 +362 -109 +35 +138 +78 +0 -4 -112 +124 +28 +146 +16 -2 -99 -25

+222 -34 +59 -270 +256 -140 -24 +149 +82 +347 -362 -56 -72 +35 +135 +35 -38 -48 +42

+221 -7 -128 -230 +620 -200 -23 +148 +70 +337 -354 -35 -191 +78 +132 +13 -191 -105 +32

+314 -51 -55 -158 +990 -65 -38 +174 +20 +124 -359 +1 -21 +82 +66 +2 -214 -159 +63

+402 -33 -3 -143 +883 -78 -21 +112 -7 +0 -397 +31 -72 -54 +18 +38 -221 -11 -65

+104 +11 -249 -129 +1,049 -37 -25 +114 -7 -347 -35 +1 +123 -91 +10 +30 -182 -35 -42

+184 -21 -207 -212 +1,047 +144 -16 +134 +6 -337 -13 +18 +265 -111 +24 +49 -37 +12 +71

+161 +12 -187 -117 +800 +29 +6 +75 +15 -114 +0 -2 +81 -21 +58 +48 -7 +12 +43

+193 -2 -137 -101 +726 +72 +28 +57 +8 +90 +2 +12 +138 +27 +43 +56 +1 -3 +158

+183 -3 -92 -70 +745 +69 +30 +60 +8 +180 +1 +8 +120 +32 +45 +51 -1 +3 +196

+161 +11 -166 -103 +748 +55 +20 +49 +10 +270 -1 +4 +123 +14 +48 +51 -0 +3 +199

+1,254

+1,420

+1,067

+1,116

+598

-208

+51

+44

+637

+431

+283

+986

+905

+1,434

+1,607

+1,565

Change 2008 -72 -315 -86 -96 -83 44 24 -73 0 0 -15 -3 72 62 58 47 2 -26 -461

Change 2009 -26 -186 -107 -88 456 144 133 196 0 0 14 -39 -7 129 81 55 -5 -9 741

Change 2010 152 -20 -221 -123 352 -9 60 247 1 0 -10 3 273 113 116 53 -16 -15 955

Change 2011 152 -17 -97 -243 347 -118 11 144 70 171 -183 -63 24 56 130 24 -58 -62 288

2012 YTD Change 258 -23 -125 -169 990 -27 -28 128 2 -123 -219 15 59 -38 27 29 -176 -51 702

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

Change 2012 251 -23 -129 -160 992 -9 -25 134 3 -140 -201 13 74 -44 30 30 -164 -48 584

Change 2013 175 4 -145 -98 755 56 21 60 10 107 1 6 116 13 48 51 -2 4 1,182

82

Trend Line Global Oil Supply & Oil Demand World Supply/Demand Trends vs Prior Year -12 months mavg 5% 4% 3% 2% 1% 0% -1% -2% -3% Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Demand

Supply

Source: IEA

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

83

Trend Line Global Oil Supply & Oil Demand World Supply/Demand Trends vs Prior Year -12 months mavg 10% 8% 6% 4% 2% 0% -2% -4% -6% Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 OECD Demand

Non-OPEC Supply incl. proc.gains & biofuels

Non-OECD Demand

Source: IEA

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

84

Production Forecasts Constantly Hiked Higher For Every Update - Bakken shale crude forecast already approximately doubled for 2014

US North North Dakota Dakota Bakken Liquids Production - US 1000 900 800

kbd

700 600 500 400 300 200 100 0 2000

Source: PIRA PIRA

2002

2004

2006

2008

2010

2012

2014

PIRA Estimate Dec-2009 PIRA Estimate Dec-2009 PIRA Estimate Oct-2011 PIRAOct-2011 estimate May-2012 PIRA Estimate Dec-2009 PIRA Estimate

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

85

US Shale Oil Much More Important Than Biofuels & Oil Sands - US shale oil output is growing much quicker than Canadian oil sands or global biofuels - and is also much cheaper Year on Year Growth In Output 700 600

kbd

500

400 300 200 100 0

-100 2001

2003

2005

US Shale Oil

Source: PIRA, IEA

2007

2009

Canadian Oil Sand

2011

Global Biofuels

US Shale Crude vs Canadian Oil Sands & Global Biofuels 4500 4000 3500

kbd

3000 2500 2000

1500 1000 500

0 2000

Source: PIRA and IEA

2002

2004

2006

Canadian Oil Sands

2008

2010

Global Biofuels

2012

2014

2016

2018

2020

US Shale Crude - Historical & PIRA Forecast

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

86

The Gross Decline Rate Is Not As Interesting As The Net Decline -One should focus on net decline rates. Not all fields are in decline, many are in ramp up. Net decline is lower than many are aware of.

Non-OPEC Net Decline Rate (Based on non-OPEC output less addition from GS 360 top projects, March 2012)

2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0%

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: Goldman Sachs Top 360 projects - March 2012

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

87

Will Shale Liquids Costs Fall - Just Like It Did For Shale Gas? - We think it is plausible to assume shale liquids costs will rather be lower than higher in a 5-10 year perspective

US Shale Gas - Well Costs Cut In Half Since 2007 (Fayettesville Shale Gas - Source: Southwestern Energy)

1200

$/drilled foot

1100 1000

900 800 700 600 500 2007

2008

2009

2010

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

2011

88

Chinese Economic Growth & Oil Demand Growth - No statistical significant relationship on quarterly or yearly data, but last three years is a good fit

YoY Chinese Oil Demand Growth & GDP Growth (Demand is refinery runs plus net product imports. Figures are adjusted for inventory changes since Feb 2009)

1.5

16% 14%

Million b/d

1.0

12% 10%

0.5

8% 0.0

6% 4%

-0.5

2% -1.0 Jan-01

0% Jan-03

Jan-05

Jan-07

Chinese oil demand growth

Jan-09

Jan-11

Jan-13

Chinese GDP growth

Source: China OGP, Xinhua News, The Chinese General Administration & Customs, National Bureau of Statistics, ThompsonReuters for Chinese GDP growth

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

89

Less “how to create growth” - more “what type of growth to create” -Likely to abstain from “chasing growth”, and instead maintain housing market controls

Balancing risks: Investments in % of GDP 49 Decreasing risk of declining aggregate demand 45

41 37

Increasing risk of capital misallocation

33 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Thomson Datastream/DNB Markets

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

90

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

China: GDP Percent change y/y 15 12 9 6 3 0 -3 2001

2003

2005

Source: Thomson Datastream/DNB M arkets

2007

2009

Consumption Net exports

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

2011 Investments GDP

91

Short Term

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

92

Financial Oil Positions NYMEX (WTI, RBOB, Heating Oil) Non-Commercial Net Oil Length (Non-Commercial total net length of WTI, RBOB & Heat - Futures & Options)

500

155

400

135

95

$/b

Million barrels

115 300 200 75 100 55 0

35

-100 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

15

Source: CFTC

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

93

Net 'Money Managers' Exposure on ICE Brent ICE London Managed Money Net Brent Oil Length & Brent Price 200 180 160 140 120 100 80 60 40 20 0 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

Source: Reuters

ICE Brent Futures Net Length

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

130 125 120 115 110 105 100 95 90

$/b

Million barrels

(Net length of Brent Futures)

Brent 1st Month

94

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

Modelled Brent Price Based On Time Spread (1 vs 3) (Based on daily correlation since 2009) 150 140

Weak macro economy, European debt crisis

130 120

110

$/b

100

Building risk premium due to Arab spring

90 80 70 60 50

Iran tensions lead to a risk premium

40 30 20 Nov/2008

Nov/2009

Nov/2010

Nov/2011

Modeled Brent Price, 20 days rolling avg

Nov/2012

Nov/2013

Real Brent Price

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

95

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

4 3 2 1 0 -1 -2 -3 -4 -5 Jan/06 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13

Source: Platts

Dubai 1st vs 3rd

160

140 120

100 80 60 40

Brent Dated - $/b

Dubai time spread - $/b

Dubai 1-3 Month and Brent

20

0

Brent

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

96

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

Modelled Dubai Price Based On Time Spread (1 vs 3) (Based on weekly correlation since 2006) 150 140 130 120

110

$/b

100 90 80 70 60 50 40 30 20 Nov/2008

Nov/2009

Nov/2010 Modeled Dubai price

Nov/2011

Nov/2012

Nov/2013

Real Dubai Price

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

97

Fundamental Balances DNB Markets vs IEA, OPEC, EIA DNB Markets World Oil Supply-Demand Balance:

2008

Change

2009

Change

2010

Change

2011

Change

2012

Change

2013

OECD Demand Non-OECD Demand Total Demand

48.1 37.7 85.8

-2.1 1.2 -0.9

46.0 38.9 84.9

0.6 2.1 2.7

46.6 41.1 87.7

-0.4 1.3 0.9

46.2 42.4 88.5

-0.4 1.4 1.0

45.7 43.8 89.5

-0.4 1.4 1.0

45.3 45.3 90.6

Non-OPEC Supply OPEC NGL's and non-conventional oil Global Biofuels Total Non-OPEC supply

49.2 4.5 1.4 55.1

0.6 0.4 0.2 1.2

49.8 4.9 1.6 56.3

1.0 0.5 0.2 1.7

50.8 5.4 1.8 58.0

0.1 0.4 0.0 0.5

50.9 5.8 1.9 58.5

0.6 0.4 0.0 1.0

51.5 6.2 1.9 59.5

1.2 0.3 0.1 1.7

52.7 6.5 2.0 61.2

Call on OPEC crude (and stocks) OPEC Crude Oil Supply (Last known number dragged fwd) Implied World Oil Stock Change

30.6 31.6 1.0

-2.0 -2.5

28.6 29.1 0.5

1.0 0.1

29.6 29.2 -0.4

0.4 0.6

30.0 29.9 -0.1

0.0 1.5

30.0 31.4 1.3

-0.6 -1.0

29.4 30.3 1.0

IEA World Oil Supply-Demand Balance (Feb 2012):

2008

Change

2009

Change

2010

Change

2011

Change

2012

Change

2013

OECD Demand Non-OECD Demand Total Demand

48.4 37.9 86.2

-2.1 1.2 -0.8

46.3 39.1 85.4

0.6 2.1 2.7

46.9 41.2 88.1

-0.4 1.2 0.8

46.5 42.4 88.8

-0.4 1.4 1.0

46.0 43.8 89.8

-0.4 1.2 0.8

45.6 45.1 90.7

Non-OPEC Supply OPEC NGL's and non-conventional oil Global Biofuels Total Non-OPEC supply

49.2 4.5 1.4 55.1

0.6 0.4 0.2 1.2

49.8 4.9 1.6 56.3

1.0 0.5 0.2 1.7

50.8 5.4 1.8 58.0

0.1 0.4 0.0 0.5

50.9 5.8 1.9 58.5

0.6 0.4 0.0 1.0

51.5 6.2 1.9 59.5

0.9 0.3 0.1 1.3

52.4 6.4 2.0 60.8

Call on OPEC crude (and stocks) OPEC Crude Oil Supply (Last known number dragged fwd) Implied World Oil Stock Change

31.1 31.6 0.5

-2.0 -2.5

29.1 29.1 0.0

1.0 0.1

30.0 29.2 -0.8

0.2 0.6

30.3 29.9 -0.4

0.0 1.5

30.3 31.4 1.0

-0.5 -1.0

29.8 30.3 0.5

OPEC World Oil Supply-Demand Balance (Feb 2012):

2008

Change

2009

Change

2010

Change

2011

Change

2012

Change

2013

OECD Demand Non-OECD Demand Total Demand

48.4 37.7 86.1

-2.1 0.8 -1.3

46.3 38.5 84.8

0.6 1.7 2.3

46.9 40.2 87.1

-0.4 1.3 0.9

46.5 41.5 88.0

-0.4 1.2 0.8

46.1 42.7 88.8

-0.2 1.1 0.9

45.9 43.8 89.7

Non-OPEC Supply (Incl all Biofuel) OPEC NGL's and non-conventional oil Total Non-OPEC supply

50.4 4.1 54.5

0.7 0.2 0.9

51.1 4.3 55.4

1.2 0.7 1.9

52.3 5.0 57.3

0.1 0.4 0.5

52.4 5.4 57.8

0.6 0.3 0.9

53.0 5.7 58.7

0.9 0.3 1.2

53.9 6.0 59.9

Call on OPEC crude (and stocks) OPEC Crude Oil Supply (Last known number dragged fwd) Implied World Oil Stock Change

31.6 31.2 -0.4

-2.2 -2.5

29.4 28.7 -0.7

0.4

29.8 29.2 -0.6

0.4

30.2 29.9 -0.3

-0.1

30.1 31.4 1.3

-0.3

29.8 30.3 0.5

EIA World Oil Supply-Demand balance (Feb 2012):

2008

Change

2009

Change

2010

Change

2011

Change

2012

Change

2013

OECD Demand Non-OECD Demand Total Demand

47.6 38.2 85.8

-2.2 0.7 -1.5

45.4 38.9 84.3

0.7 2.1 2.7

46.1 41.0 87.1

-0.3 1.5 1.2

45.8 42.5 88.3

0.2 0.7 0.9

46.0 43.2 89.2

-0.3 1.3 1.1

45.8 44.5 90.2

Non-OPEC Supply (Incl all Biofuel) OPEC NGL's and non-conventional oil Total Non-OPEC supply

49.7 4.5 54.1

0.8 0.3 1.1

50.5 4.8 55.2

1.3 0.8 2.1

51.8 5.5 57.3

0.2 -0.3 -0.1

52.0 5.3 57.2

0.5 0.3 0.8

52.5 5.6 58.0

1.2 0.2 1.4

53.7 5.8 59.5

Call on OPEC crude (and stocks) OPEC Crude Oil Supply (Last known number dragged fwd) Implied World Oil Stock Change

31.7 31.3 -0.4

-2.6 -2.2

29.1 29.1 0.0

0.7 0.1

29.8 29.2 -0.5

1.3 0.6

31.1 29.9 -1.2

0.1 1.5

31.1 31.4 0.2

-0.4 -1.0

30.8 30.3 -0.4

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

98

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

DNB Markets World Oil Supply-Demand Balance Tim e Phased 3.0

Million b/d

2.0 1.0 0.0 -1.0

-2.0 Jan

Feb

Mar

Source: IEA, DNB Markets

Apr

May 5 yea r ra nge

Jun

Jul

Aug

5 yea r a vg

Sep

Oct 20 12

Nov

Dec 20 13

99 Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

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

Million b/d

Global Oil Supply vs Demand 94 92 90 88 86 84 82 80 78 76 74 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: IEA, DNB Markets

Glob al sup ply

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

Glob al de mand

100

Fundamentals (Supply vs Do Still Matter For Oil Prices Call on OPEC vs Price Change 2.0

36

1.5

26

16

0.5 6 0.0

-5 -0.5 -15

-1.0 -25

-1.5

Brent Price Change - $/b

Call on OPEC Change - Million b/d

1.0

-35

-2.0 -2.5

-45 2000

2001

2002

Brent Price Change

2003

2004

2005

2006

2007

IEA Call on OPEC Change

2008

2009

2010

2011

2012

2013

DNB Markets Call on OPEC Change

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

101

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

Comments

Oil Price

There will be powerful forces working in different directions for the oil market in 2013. Geopolitics and increased liquidity poured into the system from central banks should pose positive elements for oil prices but fundamentally the market will not look strong. After the change of the millennium we have seen two incidents of a decreasing 'Call on OPEC' (2000-02 and 2008-09). Oil prices fell back in both cases. Since we believe the 'Call on OPEC' will decrease significantly in 2013 the average oil price should be falling compared with 2012. We do however still believe it will trade above 100 $/b, supported by the mentioned geopolitical and liquidity factors.

Average price 107 $/b

Global Fundamental Balance

We forecast 'Call on OPEC' will decrease by 0.7 million b/d on a combination of strong growth in non-OPEC supply (particularly from North-America) and weaker net oil demand growth.

BEARISH

HIGH

Crude vs Product Balance (Margins)

More refinery capacity will be added next year than net growth in global oil demand. IEA estimate that more than 4 million b/d of capacity will be added in 2013 if we include desulphurization capacity, upgrading units and CDU expansions. Most of the additions will be in Asia, the Middle East and Former Soviet Union (FSU).

BEARISH

MEDIUM

OECD Stock levels

OECD stock levels are high when measured in days of demand coverage. Unless OPEC cuts back output next year, OECD stocks will continue to grow.

BEARISH

LOW

OPEC Spare Capacity

Since we believe there will be a need for OPEC to cut production next year and since we believe Saudi Arabia will defend oil prices in the 80-100 $/b range, the implication of lower output from OPEC is higher spare capacity. In addition the production capacity is expected to grow in Iraq, Libya and Angola. US oil demand is expected to fall 0.1 million b/d next year while liquids supply is expected to grow 0.7 million b/d on the back of the new shale liquids industry. This means US crude imports should continue to decrease, hence making more crude oil available for other consumers. We believe global oil demand growth will be weak also in 2013. A high oil burden normally provides less "bang for the buck" with respect to the intensity factor vs economic growth. Instead of growing 0.5 percent for every percent growth in global GDP, we believe 2013, just as 2012, will offer significantly lower oil demand growth per unit GDP-growth than the long-term average of 0.5. Chinese oil demand growth has been weak so far in 2012 and with expectations of weaker economic growth next year there is probably no reason to expect trend-line growth of Chinese oil demand in 2013 either. We think net global oil demand will grow only 0.7% in 2013 which is very similar to 2012. Chinese oil demand is expected to grow 366 kbd next year vs 271 kbd in 2012. This is meaningfully weaker than the ten-year average growth of 500 kbd. European oil demand will continue to fall, next year by 0.4 million b/d, slightly less than in 2012. OECD Asia oil demand growth, which has been so strong in 2012 (+358 kbd ytd) due to oil used in the power sector in Japan, is expected to fall to about zero in 2013. That could even prove to be optimistic as the 2012-numbers have been inflated by all the nuclear outages (and if many of these reactors return to service next year, oil demand in Japan will start falling). Total OECD demand is expected to fall 0.5 million b/d next year while total non-OECD demand is expected to rise by 1.2 million b/d, providing net global oil demand growth of 0.6 million b/d. We still forecast decent demand growth in Asia, Latin America and most of the Middle-East, but the expected weakness in OECD offsets much of the demand growth in nonOECD. We think OPEC will reduce its production meaningfully in 2013, both since Saudi Arabia will cut its output to balance the market but also since the Iranian conflict is not set to be resolved and hence Iranian capacity is not set to be fully restored in 2013.

BEARISH

MEDIUM

BEARISH

MEDIUM

BEARISH

MEDIUM

Overall Outlook

Weight

Fundamentals

US Oil Statistics - Fundamentals

Global Demand Growth

OPEC Supply

Non-OPEC Supply

BULLISH

LOW

Non-OPEC production including biofuels is expected to increase by 1.1 million b/d in 2013. 70% of this growth is expected to come in North-America, due to the shale liquids revolution. OPEC NGLs production is expected to increase by 0.3 million b/d. This is normally added to the non-OPEC supply category since it is not part of OPEC's production target system. This means total non-OPEC production including OPEC NGLs is expected to increase by 1.4 million b/d. We do not expect unplanned supply outages caused by accidents, strikes, security issues, technical problems and weather to be as high in 2013 as we have seen in 2012. The largest part of the unplanned outages in 2012 was due to reduced production in Sudan/South-Sudan, Syria, Yemen and the UK (the Buzzard field). The largest reduction in outage is expected from South-Sudan which we estimate will see a gradual return during 2013 starting in February to reach pre-conflict level if above 300 kbd by the end of next year.

BEARISH

MEDIUM

The largest risk is connected to Iran's nuclear program and the fact that EU has decided an oil embargo vs the country and US has imposed financial sanctions. Officials in Iran have threatened to close the strait of Hormuz where 35-40% of the worlds traded oil passes through. We do not think Iran will choose to close the strait. It is rational to threat to close it but irrational to carry through with it. Iran does not have the military muscles to match the US fifth fleet which is based in Bahrain. We always believed there was only a very small chance that Israel would attack Iran in 2012, even though it seemed several players placed some bets on that to happen. Now after the US elections there is however a larger chance for a physical attack since the US will need to be part of this to make any action successful. There is also constant risk for output disruptions in the whole of Middle-East/North-Africa as the "Arab spring" is not at all over in our view. The continuous demonstrations in Egypt illustrate the point. The on-going unrest in Syria, which some view as a proxy war between Iran and Saudi, risks spilling over in a wider sunni-shiite conflict that could threaten stability in the whole region. We hence believe geopolitical risk still justifies a sizeable price premium in the oil market for 2013.

BULLISH

HIGH

The US has had its quantitative easing (QE) nr 1, nr 2 and nr 3. All have been supportive for oil prices. Also the European LTRO-program launched last December was positive for oil prices. Generally any increased liquidity is short term positive for oil prices. The final solution to the European debt crisis could end up being that the ECB will have to help European countries inflate out of the debt problem. This could be serious trouble for the real economy and physical oil demand but could still (temporarily) support oil prices through financial demand for oil (both through increased investment in paper oil and as a hedge vs inflation). We believe the US "fiscal cliff" will be "solved" by last minute compromises between republicans/democrats and that could cause a liquidity rally as we start 2013. The rally will however be relatively short lived as weak global oil fundamentals start making their negative impact on the market.

BULLISH

MEDIUM

Political Risk

Iraq, Iran, Nigeria, Venezuela, US, Russia, Israel, MENA, etc

Other Factors Financial Money Flow

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

102

Monthly Oil Price Scorecard -Please read on paper or zoom in on screen Monthly Scorecard Overall Outlook

Comments Tight North-Sea fundamentals compete with weak global oil fundamentals. At the same time the geopolitical risk related to Iran’s nuclear ambitions are very high, as the EU this week tightened sanctions. Also the Syrian civil war is adding to the contagion risk for the Sunni-Shiite conflict in the Middle East. Speculative positions are however again very high and there is a risk that players soon might take profit on the large Brent-WTI spread. If such a profit taking on the spread becomes large it risks pushing the flat price of Brent into profit taking modus where machine trade kicks in. If that happens we could see another flush out similar to the one we saw in May-June earlier this year.

Oil Price Weight

BEARISH

Fundamentals Global Fundamental Balance

Even with Iranian production down by almost 1 million b/d since last year to 2.63 million b/d (and 0.6 million b/d down since May) the global fundamental balance is looking over supplied. The key mitigating factor is that Libya is currently producing 1.4 million b/d more than a year ago and Iraq is up more than 0.4 million b/d since last year. It is easy to imagine how weak the balance would look if the shut in Iranian barrels should come back into the market. Saudi would then need to cut output significantly if the kingdom wants to protect prices above 100 $/b. It is however not our base case that the Iranian barrels are returning to the market within the next half a year and our methodology is to keep the last known OPEC production level flat in our forward looking supply-demand model. Both complex and simple margins saw an astonishing rally from August into September. Refiners have struggled with financing inventory levels this year (Banks are increasingly sceptical to refiners in Europe) and have as a consequence drawn down product stocks to very low levels. This has happened on both sides of the Atlantic. When we then had the Hurricane Isaac shutting down a lot of US refinery capacity in September just after the big accident at Venezuela’s largest refinery on August 25 (the Amuay refinery with a capacity of 645 kbd) margins rallied. Refineries in both US and Europe are however now in the process of returning from planned maintenance and margins are quickly deteriorating. Cracking margins in Rotterdam based on Brent have already fallen from 13 $/b to 8 $/b the last three weeks while Hydro Skimming margins are down from 11 $/b to 5 $/b in the same period. In Europe the gasoline crack spread based on Brent is down from 22 $/b to 10 $/b the latest two weeks. Margins in the US GOM have also collapsed in recent weeks. A Brent based cracking margin in the GOM is down from 13 $/b to only 3 $/b during the last two weeks. Singapore margins have also seen some weakness recently but have not fallen as much as in US/Europe. We are still not at run cut levels in any region but the extreme margin strength is gone for now. Total oil stocks in the OECD based on forward demand coverage was estimated at 58.8 days in last week’s IEA monthly report. This is higher than last year and close to the top of the 5-year range. Crude stocks have drawn down since June but are still above both last year and the 5-year range. Product stocks have on the other hand built since June but are still below both last year and the 5-year range. OECD gasoline stocks are lower than last year but almost spot on the 5-year average, while middle distillate stocks are below the 5-year range. Crude stocks in Europe have built from extremely low levels at the start of 2012, but have according to Euroilstocks built 16 million barrels so far this year and are now much higher than last year and are again into the 5-year range. In Europe there are however still low inventories of gasoline, middle distillates and residual fuel, according to the latest Euroilstocks data. In the US we are still in a situation with low gasoline and middle distillate stocks, while crude stocks are above the 5-year range. As mentioned above US crude stocks are still very high. This is mainly a consequence of the shale oil revolution that is taking place in the US. This summer US crude stocks were at the highest level since 1991, but have since drawn somewhat down, mainly due to the Hurricane Isaac which shut in 14 million barrels in the GOM that would otherwise have been produced. US domestic oil production is up 0.7 million b/d vs last year based on a 4week moving average on the weekly US production data from the EIA. If we use the latest monthly fully revised production data, which is from July, the year on year growth is 0.8 million b/d of crude oil output. Texas output growth is up 0.5 million b/d vs last year while North Dakota is up 0.25 million b/d. Last week the August number for North Dakota production was reported by the state authorities and production was up 27 kbd from July to stand at 701 kbd in August. The monthly growth rate in output of 27 kbd is the 4th highest growth month recorded. The average number of horizontal rigs working in the Bakken field decreased from 183 in July to 179 in August, so there are in other words no visible signs that fewer rigs are limiting production growth so far. As we have earlier emphasized the August data confirms that each rig is still becoming gradually more efficient. We are still early in the learning curve in the shale oil industry. US oil demand is currently down 464 kbd vs last year in the latest weekly data set (using a 4-week moving average). This is down 2.45% vs last year. To put it short, the US fundamental balance continues to weaken and the country will need gradually lower imports of oil. Year on year crude imports into the US is currently down 517 kbd on a 4-week moving average basis and we believe it will continue to decrease in the coming years. IEA released its yearly Medium Term Oil Market Outlook last Friday. The report, as before, focuses on the medium term oil market outlook (the next five years). The agency revised down its estimated demand growth and now expects larger growth in both North American and Iraqi production than last year’s report. Quote from the report: “The result is a noticeable more comfortable oil supply/demand balance by the end of the forecast period than previously expected and than has been the case through most of the last decade. The ‘call on OPEC and stock changes’ is expected to average below current OPEC production levels, while OPEC spare capacity is forecast to return to more comfortable levels than the sometimes razor-thin cushion that had worried market participants in recent years.” As our regular readers will know, we have advocated this view of a weaker medium to longer term supply/demand balance since April. The Chinese oil trade data was recently reported and crude imports increased from 4.4 million b/d in August to 4.9 million b/d in September. By face value that could look like a strong number, but the fact is that the August imports was exceptionally low, and we have to go back to October last year to find a number as low as 4.9 million b/d which was the September imports number. Year on year growth in crude imports was hence negative also for September, despite the large growth vs August. It is worth remembering that Chinese crude imports were above 6 million b/d in April/May, just to put things in perspective. According to a Reuters poll the top 12 Chinese refineries are set to cut runs by 4 percent in October vs September due to planned maintenance and slack demand. The 12 refineries represent a third of Chinese capacity and plan to run 130 kbd less crude in October according to the survey. Hence we should not expect strong oil demand growth numbers to be reported from China in the coming month (the detailed October oil demand numbers for China can be calculated around 22 November). Total OPEC crude production fell from 31.7 million b/d in August to 31.2 million b/d in September according to the latest IEA monthly report posted last Friday. Production in Iraq and Libya was up 110 kbd but that was not enough to offset a drop in Nigeria (-240 kbd), Iran (-220 kbd) and Saudi Arabia (-100 kbd). We expect all OPEC countries except Saudi Arabia to continue to maximise their production in the coming months. Moving into next year we believe Saudi will have to start throttling back output if the kingdom wants to maintain crude prices above 100 $/b. Year on year total non-OPEC supply was only up 0.1 million b/d in September. South-Sudan was down 347 kbd, Syria down 130 kbd, Norway down 265 kbd, UK down 227 kbd, Azerbaijan down 128 kbd, Kasakhstan down 128 kb, Indonesia down 105 kbd. Many of these lost barrels are caused by outages/maintenance and not by structural decline. We expect to see lower decline in UK/Norway in 2013 and South-Sudan and Kazakhstan are probably on the positive side by the end of 2013. It is also probably worth looking at non-OPEC in a more sophisticated way that the IEA classification. The split between OPEC and non-OPEC makes sense in order to separate countries that constantly produce as much as they can from countries that sometimes cut output to protect prices. However, the only countries that should be included among countries that are real swing producers are Saudi/UAE/Kuwait (which we call core-OPEC). If we look at non-OPEC this way (that is all the countries that do not voluntarily cut output from time to time) one can note that year on year output is up about 1.5 million b/d in September and that is including the almost 1 million b/d lost Iran production. This means that non-OPEC production growth (including the OPEC countries that are not a part of core-OPEC) is twice as strong as global oil demand growth in September which came in at 0.7 million b/d.

BEARISH

HIGH

NEUTRAL

MEDIUM

NEUTRAL

MEDIUM

BEARISH

HIGH

BEARISH

MEDIUM

NEUTRAL

MEDIUM

BEARISH

MEDIUM

NEUTRAL NEUTRAL

MEDIUM MEDIUM

The Buzzard field which is part of the Forties stream which again normally sets the Brent quote is still in maintenance and is set to return 3-4 days later than expected (October 19 or 20) according to a Reuters source. Forties production started the year at almost 0.5 million b/d but scheduled loading for November is just 0.28 million b/d which is in fact 30 kbd lower than in October. The total loading program for BFOE (Brent/Forties/Oseberg/Ekofisk) in November is a low 0.78 million b/d, which is down 90 kbd vs an already low October program. To illustrate how low this number is it is worth mentioning that in November 2011 the loading program for BFOE barrels was 1.06 million b/d. It adds to the low supply in the North Sea that cargoes are still leaving the region for Korea due to the trade agreement with that country (3% lower tax).

BULLISH

HIGH

The EU decided on Tuesday to tighten the sanctions vs Iran’s shipping, banking and industry sectors. EU’s foreign policy chief Catherine Ashton said she hoped that turning up the heat vs Iran would persuade the country to make concessions and that negotiations could resume. The new sanctions mark one of the toughest moves against Iran to date. The widening sanctions are already doing significant damage to the Iranian economy. According to Reuters, riots have broken out in Tehran this month in protest at the collapse of the rial currency which has lost two thirds of its value against the dollar during the last 15 months. This has created accelerating inflation which is said to now be about 25%.

BULLISH

HIGH

Hot Money Net Exposure (Speculators)

Non-Commercial net oil positions on the NYMEX were 410 million barrels in the first week of May. Then the WTI price was 106 $/b. By the first week of July the net positions had been sold off by 164 million barrels to 246 million barrels and the WTI price fell to 87 $/b. Since then the net positions have been rebuilt to 372 million barrels (+126 million barrels) and the WTI price has risen by 5 $/b to 92 $/b. For the Brent market the same numbers were 115 million barrels net long positions for Money Managers on ICE London in the first week of May. The Brent price was then 120 $/b. These net positions were reduced to only 53 million barrels by the first week of July and the Brent price dropped to 100 $/b. Since then the Money Managers on ICE London have rebuilt their positions to 106 million barrels and the Brent price has risen to 114 $/b. Bottom line is that financial players have rebuilt almost all their positions in the Brent market and have also rebuilt a large chunk of the net length on the NYMEX. This fact adds to the downside risk for oil prices. For the Brent market there is extra downside risk connected to the fact that the Brent-WTI spread has risen from 12 $/b to 21 $/b since July. The risk is that some players who have large gains on this spread in their books may decide to take profit (before it is too late) and then Brent would be pushed lower, maybe to such an extent that it could unleash a flat price sell-off (machine trades kicking in) similar to what we saw in May.

BEARISH

MEDIUM

Market Psychology/Sentiment

The market sentiment is very unstable at the moment. We are in a struggle between weak global oil fundamentals that competes with strong north-sea fundamentals and geopolitical risk. Also the QE3 in the US adds to the appetite for investor money entering the oil market. It however looks like much of this QE3-effect was taken out in front of the actual money printing this time, a bit unlike what happened during QE1 and QE2.

NEUTRAL

Technicals/Price Trends

MEDIUM 103

The crude contracts are looking ok and are hovering around their short term moving averages. There is however downside risk related to the NYMEX gasoline contract which has fallen below all its moving averages.

Refinery Margins (Crack Spreads)

OECD Oil Stock Levels

US Oil Statistics - Fundamentals

Other Important Factors And News

OPEC

Non-OPEC

Seasonals Temperature Outlook Hurricanes & Other Weather North Sea Field maintenance and outage

Normal, or warmer than normal temperatures forecasted in the key heating oil regions for next week. The tropical storm Rafael might hit the US northeast later this week, but is forecasted to head outwards in the Atlantic.

Political Risk Iraq, Iran, Nigeria, Venezuela, US, Russia, Israel, China, etc

Other factors

Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

NEUTRAL

LOW

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).

Million b/d

BFOE Loadings 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Apr-09

Oct-09

Source: DNB Markets, Reuters

Apr-10

Oct-10

Apr-11

Brent

Oct-11

Forties

Apr-12

Oseberg

Oct-12

Ekofisk

Source: PIRA Torbjørn Kjus – [email protected] – Telephone: +47 24 16 91 66

104

CONTACTS & DISCLAIMER Oslo, Sales & Trading Nils Fredrik Hvatum Fredrik Sagen Andersen Jesper Meyer Hatletveit Nils Wierli Nilsen Ane Tobiassen Erik Warren

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London, Sales André Rørheim Singapore, Sales Seng Leong Ong New York, Sales Kenneth Tveter

+44(0) 20 7621 6082

Oslo, Research Torbjørn Kjus Karl Magnus Maribu

+47 24 16 91 66 +47 24 16 91 57

+65 622 480 22 +1 212 681 3888

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