Back to the Energy Future (?) Recurring Elements in the Macro Cycle July 11, 2007 Berkeley Hotel London, U.K. Thomas A. Petrie, CFA Vice Chairman, Merrill Lynch 1 Topics The Reemergence of Yesteryear Issues (A 25-Year Lookback) Energy Price Drivers Energy Policy Realities Environmental Matters Energy Supply / Demand Challenges The Quest for Mitigators Summary / Conclusions 2 The Reemergence of Yesteryear Issues (A 25-Year Lookback) Oil price expectations continue to escalate Oil field service inflation a problem Windfall profit taxes regaining appeal in Washington, D.C. Governmental policy makers rediscover renewables (i.e. solar, wind, etc.) Confronting OPECs anti-competitive behavior is once again in favor Renewed interest in implementing end use controls for fuels Consensus develops on Hubberts Peak 3 Energy Price Drivers ____________________ Source:Ferrill & Associates Price Watch. 4 Energy Price Drivers World Energy Consumption Growth ____________________ Source:BP Statistical Review, June 2007. 5 Energy Price Drivers GDP and Primary Energy Growth ____________________ Source:BP Statistical Review, June 2007. 6 Energy Policy Realities New tax credits for renewable energy sources Provision for tax free clean coal bonds Tax credits for coal to diesel plants Crack down on companies disputing royalty payments on Federal lands Elimination of LIFO tax accounting for inventories Reversal of previous write-off incentives for drilling activities Authority to sue OPEC Current Policy Proposals 7 Energy Policy Realities E&P Capex vs. Global Oil Demand ____________________ Source:IEA and Calyon Securities (USA) estimates; (Presented at Enercom February 2007). Development of new energy resources is becoming even more capital intensive. 8 Energy Policy Realities National oil companies control an overwhelming majority of global oil and gas resources. (1) GOCs: A : Saudi Aramco B : NIOC (Iran) C : Qatar Petroleum D : ADNOC (UAE) E : Iraq NOC F : Gazprom (Russia) G: KPC (Kuwait) H : PDVSA (Venezuela) I : NNPC (Nigeria) J : NOC (Libya) K : Sonatrach (Algeria) L : Rosneft (Russia) M : Petronas (Malaysia) O : Lukoil (Russia) P : Pemex (Mexico) Q : Petrochina (China) T : Petrobras (Brazil) Y : ONGC (India) Z : Sinopec (China). IOCs:N : ExxonMobil R : BP S : Chevron U : Royal Dutch Shell V : Total W : ConocoPhillips X : ENI. Legend Government-owned oil companies (GOCs) International oil companies (IOCs) 95% 5% ____________________ (1)Source: Wall Street research. BBoe International major oils have been marginalized by National Oil Companies. 9 Hubberts Peak ____________________ Source: Oil and Gas Journal: May 7, Model with outliner Energy Policy Realities Model works with data similar to model with outliner 10 Hubberts Peak ____________________ Source: Oil and Gas Journal: May 7, Energy Policy Realities Worst Model Good Model 11 Environmental Matters 12 ____________________ Source:Meeting of the American Asssociation of the Advancement of Science (AAAS), February 2001; Earthobservatory.nasa.gov. Environmental Matters 13 ____________________ Source:BP Statistical Review, June Environmental Matters 14 Environmental Matters ____________________ Source:Energy Information Administration, 2001. 15 ____________________ Source:IEA World Energy Outlook Environmental Matters 16 Energy Supply / Demand Challenges The Quest for Mitigators Unconventional oil and gas LNG Alaskan gas pipeline Hybrid vehicles Other efficiency gains 17 Summary / Conclusions Given continuing economic growth, energy is likely to remain a center-stage policy challenge throughout the balance of this decade and well into the next There is a distinct risk that some past policy initiatives proven to be counterproductive will be readopted The very character of the traditional petroleum-based energy supply sector is undergoing significant change in terms of technological inputs required and resulting step-ups in capital intensity Markets work; recent price signals are motivating appropriate changes at all levels of the supply chain