Bernstein EnergyBernstein Energy European and Russian …730926bc1eaea1361e79-997641d029b6764b67dd905fd3aab10c.r8.cf2... · Bernstein EnergyBernstein Energy European and Russian Oil

10 October 2012

Bernstein EnergyBernstein EnergyEuropean and Russian Oil & Gas

The Significance of Unconventionals in the Global Picture

Oswald ClintSenior Research Analyst

Rob WestSenior Research Associate

European & Russian Oil & Gas European & Russian Oil & Gas

Oswald Clint PhD, ACASenior Research Analyst

[email protected]

Iain Pyle, CFA, ACASenior Research Associate

[email protected]

Rob WestSenior Research Associate

[email protected]

BernsteinResearch.com European/Russian Oil & Gas – October 2012

See Disclosure Appendix of this publication for important disclosures and analyst certifications

+44 20 7959 5089 +44 20 7170 0564 +44 20 7170 0589

The acceleration of US shale gas has visibly depressed the US gas price

14

16

60

70

Shale Gas

12

14

50

60

Bcf

d)

Shale Gas

Tight gas

Alaska

8

1040

ces

($/m

cf)

Prod

uctio

n (B

Lower 48 Of fshore

Coalbed MethaneAlaska

6

20

30

Gas

Pric

nnua

l Gas

P

Lower 48 Onshore Conventional

2

4

10

0

An

00

Apr

-90

an-9

1O

ct-9

1Ju

l-92

Apr

-93

an-9

4O

ct-9

4Ju

l-95

Apr

-96

an-9

7O

ct-9

7Ju

l-98

Apr

-99

an-0

0O

ct-0

0Ju

l-01

Apr

-02

an-0

3O

ct-0

3Ju

l-04

Apr

-05

an-0

6O

ct-0

6Ju

l-07

Apr

-08

an-0

9O

ct-0

9Ju

l-10

Apr

-11

an-1

2

BernsteinResearch.com European/Russian Oil & Gas – October 2012 1

Source: EIA, Bloomberg, Bernstein estimates

A Ja O J A Ja O J A Ja O J A Ja O J A Ja O J A Ja O J A Ja O J A Ja

US liquids production is also strengthening due to shale oil output

In the past two years, total US production of crude oil has shown the most sustained increase since the late 1980sWe could see a further 1.1Mbpd from the Bakken and Eagle Ford shale by 2015The Eagle Ford should grow by 200kbpd in 2012 and 300kbpd in 2013, while the Bakken will add 100kbpd each year

12000

g g y p p p y

Peak: 10.8Mbpd in March-1986

2015 = 10Mbpd?

Trough: 6.4Mbpd in Sep-2008

2000 =

1990 = 9.0Mbpd on

average 1995 = 8 3Mb d 200 2010 =

10000

n (k

bpd)

7.8Mbpd on average

g8.3Mbpd on

average2005 =

7.1Mbpd on average

2010 = 7.5Mbpd on

average

6000

8000

ds P

rodu

ctio

n

2000

4000

US L

iqui

d

0

Jan-

82O

ct-8

2Ju

l-83

Apr-8

4Ja

n-85

Oct

-85

Jul-8

6Ap

r-87

Jan-

88O

ct-8

8Ju

l-89

Apr-9

0Ja

n-91

Oct

-91

Jul-9

2Ap

r-93

Jan-

94O

ct-9

4Ju

l-95

Apr-9

6Ja

n-97

Oct

-97

Jul-9

8Ap

r-99

Jan-

00O

ct-0

0Ju

l-01

Apr-0

2Ja

n-03

Oct

-03

Jul-0

4Ap

r-05

Jan-

06O

ct-0

6Ju

l-07

Apr-0

8Ja

n-09

Oct

-09

Jul-1

0Ap

r-11

Jan-

12O

ct-1

2Ju

l-13

Apr-1

4Ja

n-15

Oct

-15


Alaska Gulf of Mexico Other Of fshore Other Onshore Eagle Ford Bakken Other Shale NGLs

2

Source: Bloomberg, Bernstein estimates

Shale spending within the US has surged to more than $50 B annually

Spending on shale development within the US is now greater than total spending within many key hydrocarbon producing nations including Mexico, Brazil, China and Norway. Going forward, we forecast moderating growth in the high single digits

Estimated spending on shale development in the US

$60

$50

he U

S ($

B)

S di h l

$30

$40

Spen

ding

in t Spendingon shale development in the US has increased 10x in just 6 years

$20

mat

ed S

hale

S

$0

$10

2005 2006 2007 2008 2009 2010 2011

Estim


Source: HPDI, Corporate reports and Bernstein

Unconventionals are key to understanding recent movements in different commodities & stock sectors

69%80%

Performance By Sector and Geography from 01-Jan-11 to 30-Sep-12

40%

60%

nce

24%

11%

3% 2% 2% 0% 0% 0%

19%

10%15%

0%

20%

Perfo

rman

-2% -3% -4% -5% -6% -7% -7% -8%-11%-12%-14%

-19%

-4% -6%-13%

-3%

-20%

0%

-41%

-34%

-60%

-40%

ers

ers

ors pe Ps sia ds D

M na ds ca ds sia es

UK Ps ers M es Ps RF

Am ent

WTI BP ub PX 15 ex 00

N.A

. Ref

ine

Ref

ine

Supe

r-Maj

oEu

rop

Euro

pe E

&P

Rus

s

Oil S

and

All D Chi

n

rope

Inte

grat

edN

orth

Am

eric

Inte

grat

ed

Non

Chi

na-A

s

Oil S

ervi

ce U

E&P

Euro

pe R

efin

e

All E

N.A

. Oil

Serv

ice

N.A

. E&P

SUR

LatA Bre W NB

Hen

ry H

u

SP

MSD

LE1

MXE

F In

de

FTSE

10


Source: Bloomberg, Bernstein estimates

Eur N E N

Investor interest in shale gas is broadening

90

100

ns

Cumulative Number of Research Notes Written On "Shale" and "Fraccing"

70

80

90

Publ

icat

ion

40

50

60

Num

ber o

f

10

20

30

Cum

ulat

ive

0

10

Jan

07M

ar 0

7M

ay 0

7Ju

l 07

Sep

07N

ov 0

7Ja

n 08

Mar

08

May

08

Jul 0

8Se

p 08

Nov

08

Jan

09M

ar 0

9M

ay 0

9Ju

l 09

Sep

09N

ov 0

9Ja

n 10

Mar

10

May

10

Jul 1

0Se

p 10

Nov

10

Jan

11M

ar 1

1M

ay 1

1Ju

l 11

Sep

11N

ov 1

1Ja

n 12

Mar

12

May

12

Jul 1

2Se

p 12

C

J M M S N J M M S N J M M S N J M M S N J M M S N J M M S

US Energy Oil Services International Energy Other - Transportation, Industrials, Chemicals


Source: Bernstein Estimates

The Top 15 shale plays globally by recoverable resource / m3 – but it is hard to see all of these international shales making economic sense

Maikop

Schublik

Duvernay

Bazhenov

ShahejieMonterey

Eagle Ford Argiles Radioactive

Bakken

Pabdeh

Kazdhumi

Tanezzuft Najmah‐Naokelekan

V M tVaca Muerta


Source: Neftex, Company Reports, Bernstein Analysis

Development of European shale has faced challenges

200Poland contains 30% of Europe's technically recoverable shale gas

H d f t i

All of Europe’s initial shale plays have met challenges in one form or another

120140160180

me

(Tcf

)

Hydrofracturingbanned in France

Alum Shale but Shell have exited play in Sweden

P l ti

6080

100120

sour

ce V

olu

Governmentsupport ‐delay to

investigate earthquake links

Contract sanctity issues

Population density is 4x Euro average

02040R

es

q

Technically Recoverable Shale Gas Resources Proved Natural Gas Reserves


Source: EIA and Bernstein estimates

Flow rates from the first fracs of Europe’s shale wells were below commercial thresholds in US shale plays

5.0

Haynesville 8‐14.1Production at the Lebienwell was initially 2.2mmcfd before stabilising

2 3

3.1

4.1

3.03.54.04.5

te (m

msc

fd)

Marcellus

Barnett

initially 2.2mmcfd before stabilising at 0.5mmcfd

2.3 2.2

1.5 1.5

0.7 0.6 0.6 0.5 0.5 0.4 0 2 0 2

2.3

0 51.01.52.02.5

Flow

Rat

Fayetteville

0.2 0.2 0.1 0.00.00.5

ye-6

Tes

t

2H T

est 1

a 2

Test

4

64 T

est 1

a 2

Test

3

a 2

Test

1

a 2

Test

2

2H T

est 2

2H T

est 4

2H T

est 3

yes T

est 2

e 3

Test

3

e 3

Test

2

e 3

Test

1

e 3

Test

4

Olo

govs

koy

Lebi

en 2

Sied

lecz

k

Miro

cin

Sied

lecz

k

Sied

lecz

k

Sied

lecz

k

Lebi

en 2

Lebi

en 2

Lebi

en 2

Mag

yarb

anhe

gy

Zala

zie

Zala

zie

Zala

zie

Zala

zie

M

Eastern European Unconventional Barnett Initial Production Rate

Marcellus Initial Production Rate Fayetteville Initial Production Rate

Haynesville Initial Production Rate Sandstones Shales


Haynesville Initial Production Rate

Source: IHS, Company Reports, Bernstein Analysis

US gas consumption in power generation has risen by 5Bcfd on average in 2012 as cheap US natural gas displaced coal in 1Q and 2Q

42% 45%40

30 30 29

34 32

30%

41%38%

42%

35%

40%

45%

30

35

40

%on (B

cf/d

ay)

17 17 18 19

23 21

22 22 24

26 30%

25% 25%

30%

20

25

30

ear C

hang

e %

wer

Gen

erat

io

17 17 16

18

20%

12%10%

15%

20%

10

15

20

Year

Ove

r Ye

umed

in P

ow

8%

0%

5%

10%

0

5

10 Y

Gas

Con

su

January February March April May June July August

2011 2012 YoY Change


Source: EIA, ENTEK and Bernstein analysis

As coal prices became cheaper in 2011-2, European coal consumption rose between 4-13% y-o-y, hitting new highs in 1Q12

10%

15%60,000

on (%

)

nds

of

0%

5%

10%

40,000

50,000

Con

sum

ptio

tion

(tho

usan

-10%

-5%

0%

20,000

30,000

ange

in C

oal

al C

onsu

mot

hort

tons

)

-20%

-15%

-10%

0

10,000

ope

y-o-

y ch

a

Mon

thly

Coa s

-20%0

Jun-

09Ju

l-09

Aug-

09Se

p-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10Fe

b-10

Mar

-10

Apr-

10M

ay-1

0Ju

n-10

Jul-1

0Au

g-10

Sep-

10O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb-

11M

ar-1

1Ap

r-11

May

-11

Jun-

11Ju

l-11

Aug-

11Se

p-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Eur o

Euro

pe -

Germany Poland BulgariaGermany Poland BulgariaUnited Kingdom Greece SpainFrance Italy NetherlandsRomania Coal Consumption (y-o-y %)


Source: Eurostat, Bernstein Analysis

“Synthetic shale gas to LNG” – how the US is already a shale gas exporter


Source: Bloomberg, IEA, Bernstein Estimates

Low input and energy costs have increased US refinery competitiveness

90% Past Five Years Refining Capacity Utilization3500

US Refined Product Net Imports

86%

88%

le C

apac

ity (%

)

2500

3000

port

s

82%

84%

put

vs A

vaila

bl

1000

1500

2000

ucts

Net

Imp

80%

82%

finer

y Th

roug

hp

0

500

1000

Ref

ined

Pro

du

76%

78%

06 07 07 08 08 08 09 09 0 0 1 1 1 2

Re f

-1000

-500US

R

Nov

-0

Apr-

0

Sep-

0

Feb-

0

Jul-0

Dec

-0

May

-0

Oct

-0

Mar

-1

Aug-

1

Jan-

1

Jun-

1

Nov

-1

Apr-

1

OECD North America OECD EuropeOECD Pacific OECD Total

-1500

May

02

May

03

May

04

May

05

May

06

May

07

May

08

May

09

May

10

May

11

May

12


NGLs from shale have shifted the US import-export balance & the relative pricing of crude blends on the global market

0.49

0.38

0.60

bpd)

6

8

0

0.12

0.11

03

0.20

0.40

ce 2

010

(Mb

4

6

ead

($/b

bl)

0.

4-0 20

0.00

in 2

012

sinc

0

2

Ble

nd S

pre

-0.1

4

-0.1

6

-0.1

6

-0.1

9

-0.40

-0.20

e In

Impo

rts

-2

0

Cru

de

-0.5

9

-0.80

-0.60

a a t a t a a a a

Cha

nge

-4Jan 10

Apr 10

Jul 10

Oct 10

Jan 11

Apr 11

Jul 11

Oct 11

Jan 12

Apr 12

Jul 12

Can

ada

Saud

i Ara

bia

Kuw

ait

Col

ombi

a

Egyp

t

Ango

la

Rus

sia

Mex

ico

Alge

ri a

Nig

eria

Saudi Arab Light vs Heavy

Bonny Light Vs Brent

Saharan Blend vsMediterranean Strip


Source: EIA, IEA, Company Reports, Bernstein Estimates

S Saharan Blend vs Mediterranean Strip

Lower Fuel & Power Costs can also benefit US chemicals production, with 50% Higher EBIT for energy intensive processes

…creating a substantial shale gas advantage for the US chemicals industry

Gas & electricity represent a large proportion of fuel & power consumption…

90%

100%

Chemical Industry (2008) Fuel & Power Energy Consumption

Others60%

US Chemicals Industry vs EU Chemicals Industry

19%60%

70%

80%

90%

Coal

Oil

50%

40%

50%

36%

30%

40%

50%

60%

Electricity

Gas 20%

30%

41%53%

0%

10%

20%

30%

8%10%

20%

0%EU US

0%US COGS Saving US EBIT Advantage

BASF vs Dow/DuPont: ~1% COGS & ~7% EBIT disadvantage


Source: CMAI, Bernstein estimates and analysis

Δ $10/bbl = Δ $1/mmbtu EU gas = ~50bps BASF EBIT margin change

Demand side impacts of unconventionals: Road usage and diesel demand have been visibly affected by shale development activity

15%

20%

25%

30%

35%

Toll

Roa

d C

usto

mer

s North Texas Tollway Authority Average Toll Road Customers

10%

15%

20%

30%

bpd)

-y

-5%

0%

5%

10%

Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12

YoY

Cha

nge

in T

0%

5%10%

0%

Dem

and

(M

mpo

rts y

-o-

30%

35%

40%

45%

Cou

nt f

rom

Tru

cks

2006 2009/10

Two-Axle Vehicles Three-Plus-Axle Vehicles

10%

-5%

0%

-10%

0%

d Di

still

ate

Cont

aine

r I

5%

10%

15%

20%

25%

Prop

ortio

n of

Tra

ffic

C

-15%

-10%

-20%

US Im

plie

d

Wes

t Coa

st

0%ND 8 ND 22 ND 23 US 85 US 2 Total

Highway

%

10%

15%

h (%

)

Oklahoma Pike Pass Vehicle Miles Travelled

-20%-30%

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12

W

-10%

-5%

0%

5%

Year

-on-

Year

Gro

wth

Container Imports y-o-y %

US Distillate Demand y-o-y %


-15%1Q 05 3Q 05 1Q 06 3Q 06 1Q 07 3Q 07 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11 3Q 11 1Q 12

Two-Axle Vehicles Five-Plus-Axle Vehicles

Source: DOE, Port of Los Angeles, Port of Long Beach, Port of Oakland, PikePass bond-holder reports, North Texas Tollway Association, North Dakota Department of Transport

Will cheap shale gas lead to a rapid escalation in NGV adoption, eroding oil demand? – not any time soon without fairly aggressive assumptions

70%

80%

90%

500

600

700

cle

Flee

t (%

)

n (k

boed

)

Growing NGVs to 80% of Pakistan's Vehicle Fleet has diplaced c200kbpd of oil demand

30%

40%

50%

60%

200

300

400

500

of N

GVs

in V

ehic

Gas

Con

sum

ptio

n

0%

10%

20%

0

100

200

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Prop

ortio

n o

Oil

and

G

Pakistan - NGVs Pakistan Oil - Thousand barrels daily Pakistan Gas - Thousand barrels of Oil Equivalent daily

82%

3,000,000

3,500,000

0%80%90%

hicl

e Top 20 Countries Globally by NGV Penetration OECD

61%55%

23%16% 16% 12%

1,000,000

1,500,000

2,000,000

2,500,000

20%30%40%50%60%70%

mbe

r of N

GVs

f NG

Vs (%

of V

eFl

eet)

16% 16% 12% 8% 7% 7% 5% 5% 5% 3% 3% 2% 2% 2% 2% 2%0

500,000

0%10%20%

Paki

stan

ngla

desh

Arm

enia

Iran

Arge

ntin

a

Boliv

ia

Col

ombi

a

Peru

Mya

nmar

beki

stan

Tajik

ista

n

Braz

il

Egyp

t

Ukr

aine

Indi

a

Thai

land

enez

uela

Italy

rgyz

stan

Bulg

aria

Nu

Pene

trat

ion

o


P

Ban A A C M Uzb T T

Ve Kyr

NGVs Share of Vehicle Fleet TOTAL NGVs in Vehicle Fleet

16

Source: NGVA, IEA, Bernstein Estimates

Constant $110-120/bbl diesel prices would be required to break even on a shale gas-to-diesel project - we don’t expect oil-to-gas switching


Source: Company Reports, Bernstein Estimates

Shell, Statoil &TOTAL produce most shale volumes, as do BG & Repsol relative to group production; BP and Eni are less exposed

250 Total Shale Production By Company (kboed)

.. .12%

14%

200

Shal

e (%

)

n (k

boed

)

. ..

8%

10%150

ctio

n Fr

om S

Prod

uctio

n

.. . .. .. . .. .

4%

6%100

n of

Pro

duc

Shal

e G

as

. . . .. .. .. .. .. .

0%

2%

0

50

Prop

ortio

n

Shal

e O

il /

Shell Statoil TOTAL BG Repsol BP ENI

2010 2012 2015 2020 % of Group Production From Shale


Source: Company Reports and Bernstein estimates

Exposure to low decline rate assets is essential to grow production

Today the Majors are targeting 2-4% CAGR growth to 2015 and even as far as 2020. While investors are fully aware that such forecasts should be taken with a pinch of salt, it is the rapidly rising mix of Low Decline Rate Assets (LDRA) that make us believe that growth will be possible for some. Key to such assets, which include Oil Sands, LNG, and Shales, is that they deliver lower base decline rates than conventional asset portfolios.

Low Decline Rate Project Conventional Portfolio (With 8% D li R t )

2,500

3,000

500

600

M)

j

2,500

3,000

500

600

$M)

)

Decline Rate)

1,500

2,000

300

400

Expe

nditu

re ($

M

ctio

n (k

boed

)

1,500

2,000

300

400

Exp

endi

ture

($

duct

ion

(kbo

ed

500

1,000

100

200C

apita

l E

Prod

u

Total capex: $8.6Bn

0

500

1,000

0

100

200

Cap

ital

Prod

Total capex: $35.5Bn

000 5 10 15 20 25 30 35 40

Years Since First Investment

000 5 10 15 20 25 30 35 40

Years Since First Investment

Production Estimated Capex


Source: Bernstein estimates

Production Estimated Capex

But will a shale oil “flood” break the levee – we don’t think so. The scale of the end market is bigger for shale oil than for shale gas

Sh l A t Sh f P d ti (G 66 BCFD Oil 87 Mb d)

90%

100%

Shale Assets as Share of Production (Gas = 66 BCFD, Oil = 87 Mbpd)

50%

60%

70%

80%

20%

30%

40%

50%

0%

10%

20%

Gas (BCFD) Oil (Mbpd)

Barnett Haynesville Marcellus Fayetteville Bakken Eagle Ford Other Misc Shale Oil


Source: EIA, IEA, and Bernstein analysis

The resource opportunity of shale oil is lower than shale gas and the cost structure for shale oil is not the low end of the cost curve

160

180

200

Marginal Cost Curve for Resource Play Oil ($/bbl versus BBO of oil)

60

80

100

120

140

$/bb

l

0

20

40

60

0 5 10 15 20 25 30 35Billi f B l f OilBillions of Barrels of Oil

9

10

Marginal Cost Curve for Resource Play Gas ($/mcf versus TCF of gas)

4

5

6

7

8

$/m

cf

0

1

2

3

4


0 100 200 300 400 500 600 700TCF

Source: HPDI; Corporate Reports; Bernstein Estimates

Into the low 90s $/bbl Brent, the proportion of OPEC countries approaching budget deficits rises rapidly and we expect cuts

% of World Supply From Oil Producing Countries (OPEC + Russia) In Deficit

50%

60%

ply

(%)

World Supply from OPEC + Russia

30%

40%

ld O

il Su

pp

Deficit Cuts? Surplus

20%

30%

tion

of W

orl

0%

10%

Prop

ort

0%

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100

102

104

106

108

110

112

114

116

118

120

122

124

126

128

130

132

134

136

138

140

Brent Oil Price ($/bbl)


Source: IMF, IEA, Bernstein Estimates

Quality drilling locations are finite – eventually the rocks win

120

Montana production is down 38% from its 2006 peak: Peak rate of Bakken Wells in Richland County, MT decline as you move away from the core (X = 2012 wells):

60

80

100

rude

Oil (

KBO

PD)

0

20

40

Mon

tana

C

0

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Bakken (MT/ND) Horizontal Peak Month Rates (BOPD)

300

400

500

600

0

100

200


Source: EIA, HPDI; Bernstein estimates and analysis

Technology does not always trump geology: Early stage production rates predict later stage production rates.

3000

1600

1800

Haynesville

2000

2500

000

wel

ls

Haynesville

1200

1400

1600

000

wel

ls

Eagle Ford

1500

2000

ctio

n A

fter

1

Eagle Ford

1000

1200

tion

Aft

er 1

0

Woodford

Marcellus

1000

ecile

Pro

duc

WoodfordMarcellus600

800

age

Prod

uct

Barnett

Bakken

Fayetteville500To

p D

e

BarnettBakken

Fayetteville200

400

Ave

raNiobrara

00 500 1000 1500 2000

Top Decile Production After 10 wells

Niobrara 00 200 400 600 800 1000

Average Production After 10 wells


Source: HPDI, Bernstein Analysis

Unconventional Technology vs Geology – The historical precedent from Russian Horizontals & Fraccing is that eventually the rocks win

12.0 Russia ‐ Learning Curves D i 5 f P d i

Russia ‐ Learning Curve Slows &declines after the mid‐to‐late 2000s

Slowing?Declines?

11.0

on (M

bpd)

Drive 5‐years of Production Gains In Early 2000s

Declines?

9.0

10.0

sate

Pro

duct

io

US ‐ Learning

7 0

8.0

and

Con

dens Curves Drive

5‐year Production Gains In Early 2010s?

6.0

7.0

c-01

y-02 t-02

r-03 -03

n-04

n-04

v-04

r-05 -05

b-06 l-0

6c-

06y-

07 t-07

r-08 -08

n-09

n-09

v-09

r-10 -10

b-11 l-1

1c-

11y-

12 t-12

r-13 -13

n-14

n-14

v-14

r-15 -15

Oil

a

Dec

May Oct

Mar

Aug

Jan

Jun

Nov Ap

rSe

pFe

bJu

lD

ecM

ay Oct

Mar

Aug

Jan

Jun

Nov Ap

rSe

pFe

bJu

lD

ecM

ay Oct

Mar

Aug

Jan

Jun

Nov Ap

rSe

p

United States Russia US Forecast Russia Forecast


Source: IEA, Bernstein Analysis

Russian learning curves have matured with recent wells, fracs, horizontals and sidetracks all yielding productivity below peak

919 1,1481 000

325365

1,000

Wel

l (bp

d)

268139

137.1100w

Rat

e Pe

r W

79 74.0

Ave

rage

Flo

1010 100 1000 10000

Cumulative Wells Drilled

New wells Drilling of horizontal wells Drilling of sidetracks Hydrofracturing, wells


Source: Company reports, Bernstein estimates

Declining Russian Productivity has been countered by rising Capital Intensity

5.0

6.0

7.0

40,000

50,000

60,000

ced

($/b

oe)

Cap

ex ($

M) Russian Upstream Capex

1 0

2.0

3.0

4.0

10,000

20,000

30,000

apex

/ boe

pro

du

ussi

an U

pstr

eam

0.0

1.0

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Ca

Ru

Gazprom LUKoil Rosneft SurgutNG

TNK BP Novatek Russneft

Tatneft Bashneft Other Capex / boe produced

25%

30%

AG

R Russian Upstream Growth By Activity

18.9% 17.7%

10.7% 10.6% 8.8% 8.8% 8.2% 7.9%4.6% 4.5% 2.7% 1 1%5%

10%

15%

20%

25%

2011

Fiv

e-Ye

ar C

A

1.1%0%

FS W

orko

vers

M

arke

t

W. S

iber

ian

duct

ion

Wel

ls

Dril

led

ctio

n D

rillin

g /

Year

Dril

ling M

arke

t

ber o

f Rig

s ye

d in

Rus

sia

of H

oriz

onta

l W

ells

Tech

Ser

vice

s M

arke

t

eism

ic M

arke

t

er o

f Rus

sian

Fr

acs

beria

n Ac

tive

ectio

n W

ells

beria

n Ac

tive

duct

ion

Wel

ls

ngth

Per

Wel

l

2006

- 2


OF W

Prod

Prod

u

OFS

D

Num

Empl

o

Num

ber W

OFS

T

OFS

Se

Num

b

W. S

iIn

je

W. S

iPr

o d Len

Source: Company reports, Bernstein estimates

Learning curves are capital intensive in US shale plays too

1.4h

Haynesville average IP trends have followed average frac stages per well:

1

1.2

tera

l Len

gth

th W

ell

0 4

0.6

0.8

ges,

and

Lat

d to

the

100t

0

0.2

0.4

1 10 100 1000 10000IP, F

rac

Stag

Scal

ed

1 10 100 1000 10000I

Number of Wells Drilled

Average IP Average Frac Stages Average Lateral Length


Source: HPDI, Louisiana Department of Natural Resources; Bernstein estimates and analysis

We think Non-OPEC supply reaches 56Mbpd in 2015, +3Mbpd from 2012 levels, but falling to 54Mbpd in 2020

60

Non-OPEC Production

+1 7 Mbpd +3 9 Mbpd +5 0 Mbpd +4 3 Mbpd+3.2 Mbpd

3 years

50

Global New Adds

Biofuels

Refinery Gains

+1.7 Mbpd4 years

+3.9 Mbpd10 years

+5.0 Mbpd6 years

+4.3 Mbpd8 years

3 years

40

(Mbp

d)

Africa

Middle East

Latin America

20

30

l Pro

duct

ion Asia

Other FSU + E. Europe

Russia

Other OECD

10

Oil Other OECD

Norway

UK

Mexico

0

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

E

2014

E

2016

E

2018

E

2020

E

Canada

USA


Source: IEA, Bernstein Estimates

Our oil price forecasts are calculated as a multiple of marginal cost, driven by OPEC Effective Spare Capacity as per the historical relationship

1 1

1.2

1.3

7%

8%

9%

(Rat

io)

man

d (%

) R‐Squared = 70%

0.9

1.0

1.1

4%

5%

6%

argi

nal C

ost

As

a %

of D

em

0 6

0.7

0.8

1%

2%

3%

4%

Oil

Pric

e / M

a

e C

apac

ity A

0.5

0.6

0%

1%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

WTI

O

Spar

e

2 2 2 2 2 2 2 2 2

Spare Capacity % of Demand WTI / Marginal Cost


Source: IEA, Bernstein Analysis

SCB Oil Price Forecasts versus The Forward Curve Today

180

$142

$153 $158

$153

160

/bbl

)

$111 $110 $111 $113 $120

$128

$123

$138

$149 $153

120

140

orec

asts

($/

$111 $107 $110 $111 $

$95 $97 $102$101

$105 $113

$123

100

Oil

Pric

e Fo

$80

$80

$95 $97 $102

60

80

602010A 2011A 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Brent Crude ($/bbl) WTI Crude ($/bbl) Forward Curve Brent ($/bbl) Forward Curve WTI ($/bbl)


Source: Bloomberg, Bernstein Analysis

Disclosure AppendixDisclosure Appendix


Disclosure Appendix

SRO REQUIRED DISCLOSURES

References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, and Sanford C. Bernstein, a unit of AllianceBernstein Hong Kong Limited, collectively.

Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in or contributions to generating investment banking revenuescompensated based on performance in, or contributions to, generating investment banking revenues.

Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless otherwise specified. We have three categories of ratings:

Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.

Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year aheadMarket-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.

Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.

Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.

As of 02/03/2011, Bernstein's ratings were distributed as follows: Outperform - 42.9% (1.6% banking clients) ; Market-Perform - 49.4% (1.4% banking clients); Underperform - 7.7% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve (12) months.(12) months.

David Vos maintains a long position in Cadogan Petroleum (CAD.LN)

Accounts over which Bernstein and/or their affiliates exercise investment discretion own more than 1% of the outstanding common stock of the following companies BG/.LN / BG Group PLC, PMO.LN / Premier Oil PLC, TLW.LN / Tullow Oil PLC, BP / BP PLC, BP/.LN / BP PLC, FP.FP / TotalFinaElf SA, TOT / Total SA, RDS/A / Royal Dutch Shell PLC, RDS/B / Royal Dutch Shell PLC, RDSA.LN / Royal Dutch Shell PLC, RDSA.NA / Royal Dutch Shell PLC, RDSB.LN / Royal Dutch Shell PLC, RDSB.NA / Royal Dutch Shell PLC.

The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment banking-securities related services and received compensation for such services g p g p ( ) , p g pBG/.LN / BG Group PLC, BP / BP PLC, BP/.LN / BP PLC, FP.FP / TotalFinaElf SA, TOT / Total SA.

In the next three (3) months, Bernstein or an affiliate expects to receive or intends to seek compensation for investment banking services from OGZD.LI / Gazprom OAO, LKOD.LI / LUKOIL, ROSN.LI / Rosneft Oil Co, NVTK.LI / NovaTek OAO, SGGD.LI / Surgutneftegaz, BG/.LN / BG Group PLC, CNE.LN / Cairn Energy PLC, GALP.PL / Galp Energia SGPS SA, PMO.LN / Premier Oil PLC, TLW.LN / Tullow Oil PLC, BP / BP PLC, BP/.LN / BP PLC, E / ENI SpA, EAD.FP / European Aeronautic Defense, ENI.IM / ENI SpA, FP.FP / TotalFinaElf SA, TOT / Total SA, RDS/A / Royal Dutch Shell PLC, RDS/B / Royal Dutch Shell PLC, RDSA.LN / Royal Dutch Shell PLC, RDSA.NA / Royal Dutch Shell PLC, RDSB.LN / Royal Dutch Shell PLC, RDSB.NA / Royal Dutch Shell PLC.

This research publication covers six or more companies For price chart disclosures please visit www bernsteinresearch com you can also write to either: Sanford C Bernstein & Co LLC Director ofThis research publication covers six or more companies. For price chart disclosures, please visit www.bernsteinresearch.com, you can also write to either: Sanford C. Bernstein & Co. LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105 or Sanford C. Bernstein Limited, Director of Compliance, Devonshire House, One Mayfair Place, London W1J 8SB, United Kingdom; or Sanford C. Bernstein, a unit of AllianceBernstein Hong Kong Limited, Director of Compliance, Suite 3401, 34th Floor, One IFC, One Harbour View Street, Central, Hong Kong.


12-Month Rating History as of 02/06/2011

Ticker Rating Changes BG/.LN O (IC) 01/22/09 BP M (IC) 08/03/10 O (DC) 08/02/10 O (RC) 05/10/10 M (RC) 03/03/09 BP/.LN M (IC) 08/03/10 O (DC) 08/02/10 O (RC) 05/10/10 M (RC) 03/03/09 CNE.LN O (IC) 01/22/09 ( )E O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 11/21/08 EAD.FP O (RC) 12/17/09 ENI.IM O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 11/21/08 FP.FP O (IC) 08/03/10 M (DC) 08/02/10 M (RC) 02/16/10 O (IC) 05/30/03 GALP.PL O (RC) 05/26/10 M (IC) 01/22/09 LKOD.LI U (IC) 01/15/09 NVTK LI O (IC) 01/15/09NVTK.LI O (IC) 01/15/09 OGZD.LI O (RC) 07/16/09 PMO.LN O (RC) 02/19/10 M (IC) 01/22/09 RDS/A O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 02/16/10 M (RC) 03/16/09 RDS/B O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 02/16/10 M (RC) 03/16/09 RDSA.LN O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 02/16/10 M (RC) 03/16/09 RDSA.NA O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 02/16/10 M (RC) 03/16/09 RDSB LN O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 02/16/10 M (RC) 03/16/09RDSB.LN O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 02/16/10 M (RC) 03/16/09RDSB.NA O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 02/16/10 M (RC) 03/16/09 ROSN.LI U (IC) 01/15/09 SGGD.LI U (IC) 01/15/09 STL.NO M (IC) 01/22/09 TLW.LN O (IC) 01/22/09 TOT O (IC) 08/03/10 M (DC) 08/02/10 M (RC) 02/16/10 O (IC) 05/30/03 Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change

OTHER DISCLOSURES

A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and when coverage of securities commences and ceases. Bernstein has A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and when coverage of securities commences and ceases. Bernstein has no policy or standard as to the frequency of any updates or changes to its coverage policies. Although the definition and application of these methods are based on generally accepted industry practices and models, please note that there is a range of reasonable variations within these models. The application of models typically depends on forecasts of a range of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flows and risk factors that are subject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts carrying out this valuation.

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CERTIFICATIONS

I/(we), Oswald Clint, Ph.D., ACA, Senior Analyst(s)/Analyst(s), certify that all of the views expressed in this publication accurately reflect my/(our) personal views about any and all of the subject securities or issuers and that no part of my/(our) compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views in this publication.

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