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Sustainability vs. Volatility:The New Paradigm in the Petroleum Industry

Dr. Fereidun FesharakiFGE

The 33rd JCCP International SymposiumTokyo, Japan

January 21-22, 2015

This presentation material contains confidential and privileged information.The dissemination, distribution, or copying by any means whatsoever without FGE’s prior written consent is strictly prohibited.

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US$/bbl Brent (2005-2020)

Long-Term Oil Price: A Range to Consider

22005 to December 2014 are actuals, forecasts in $2014 thereafter

$40

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$120

US$/bbl Brent (Jan 2014-Dec 2015)

www.FGEnergy.com

Limited Short-Term Price Impact on US Tight Oil

Total US Tight Oil Output 2013 2014 2015 2016 2017 2018 2019 2020

High Case 2,595 3,394 4,350 4,878 5,213 5,378 5,502 5,594

WTI Prices at $70/bbl (18m Hedging) 2,595 3,381 4,108 4,324 4,456 4,461 4,452 4,431

FGE Forecast of WTI Price (18m Hedge) 2,595 3,381 4,128 4,520 4,713 4,924 5,041 5,069

• US tight oil growth protected in 2015 by inertia of current drilling activity• 2016 output growth at risk however, as weaker prices expectations start feeding in• Prices at US$70/bbl (Brent) seen as low enough to cut growth

2.50

3.50

4.50

5.50

6.50

7.50

8.50

9.50

10.50

11.50mmb/d

$80-100/bbl

$70-80/bbl

$50-70/bbl

$30-50/bbl

$0-30/bbl

Tight Oil Base

GOM

Conventional

FGE ForecastPrice Range

3

29.0

29.5

30.0

30.5

31.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2014 2015 2016 2017 2018 2019 2020

mmb/dmmb/d

N.America Canada Brazil Other Non-OPEC Demand Growth Call-on-OPEC (RHS)

• Call on OPEC will be below 30 mmb/d until 2017• Following 2017, call on OPEC recovers to above 30 mmb/d and has capacity to rise• However, call on OPEC ex Iraq continues to fall until 2020

US Production Growth Pressures on OPEC

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1

2

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5

6

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2010 2012 2014 2016 2018 2020

mm

b/d

Rumaila West Qurna 1 Majnoon Halfaya

West Qurna 2 Other SOC NOC KRG

Iraq Crude Outlook—More Potential Volume

Federal Iraq

Kurdistan Region of Iraq

Iran

Turkey

Syria

Taq Taq650 mmbCurrent - 2015115-220 kb/d

Kirkuk1700 mmb200-250 kb/d

KhurmalaCurrent - 201580-250 kb/d

Tawke750 mmbCurrent-2015120-150 kb/d

Shaikan2700 mmbCurrent-201523-150 kb/d

Atrush650mmbCurrent-201510-50 kb/d

Bijeel2400 mmbCurrent-20155-50 kb/d

Bina Bawi500 mmbCurrent-201510-50 kb/d

Dohuk

Fishkabur

Kirkukconnected toKRG pipeline

KRG pipelinereaching 400kb/d by yearend and 700kb/d in 2015

• Some 400 kb/d of supply due to hit the Med early next year, rising to 700 kb/d

• Southern Iraq output growth moving on, but at a slower pace than Iraq Oil Ministryexpectations

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Russian Production Expected to Decline by up to 150 kb/d

• Previous expectations saw tight oil accounting for over 1 mmb/d by 2025

• Some 300 kb/d of production at risk from horizontal multi-stage frack wells

• About 3% of Russia’s current production exposed to sanctions

• Decline of 50-150 kb/d in 2015 expected

Regional Demand and Refining Update:Certainties and Uncertainties

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Five Key Oil Demand Growth Centers(Year-on-year Oil Demand Growth, kb/d)

5

1

2

34

0100200300400500

2013 2014 2015

China

8

0100200300400500

2013 2014 2015

India

0100200300400500

2013 2014 2015

Middle East

0100200300400500

2013 2014 2015

Latin America

0100200300400500

2013 2014 2015

Africa

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Asian Demand: Moderating into Steady Growth

-3%

-1%

1%

3%

5%

7%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Asia Pacific Product Demand Growth(kb/d)

Demand growth (%) (right axis)

Demand growth (kb/d) (left axis)

Average Annual Growth (kb/d)

2013 20142015-17average

2018-20average

China 335 248 286 295

India 54 92 143 128

Japan (218) (96) (111) (52)

S Korea 4 97 58 15

Rest ofAsia

173 137 165 157

Total 348 478 540 542

Major Refining Projects in the Middle East

Jizan: 372 kb/cd - 2019Saudi AramcoDomestic + Exports

Yanbu: 372 kb/cd - 2015Saudi Aramco/SinopecDomestic + Exports

Ruwais: 388 kb/cd - 2015ADNOCDomestic + Exports

Ras Laffan II: 136 kb/cd - 2016QP (84%), Total (10%), plus othersDomestic + Exports

Sohar: 56 kb/cd - 2017ORPICDomestic + Exports

Duqm: 214 kb/cd - 2021OOC (50%) and IPIC (50%)Domestic + Exports

Al-Zour: 572 kb/cd - 2021KPCDomestic + Exports

Karbala: 130 kb/cd - 2021Iraq NOCDomestic

Persian Gulf Star Phases II & III:223 kb/cd - 2017NIORDCDomestic + Exports

Persian Gulf Star Phase I: 112kb/cd - 2016NIORDCDomestic

Sitra: 93 kb/cd - 2020BAPCODomestic + Exports

Nasiriyah: 279 kb/cd - 2025Iraq NOCDomestic + Exports

Fujairah: 186 kb/cd - 2022IPICDomestic + Exports

Jubail: 372 kb/cd - 2013Saudi Aramco/TotalDomestic + Exports

Key: Firm and likely projects by 2020 Likely/possible projects post-2020 Ongoing upgrade projects

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Mina Al-Ahmadi & Mina AlAbdullah Upgrade:Combined 744 kb/cd - 2018KPCDomestic + Exports

Condensate Park (SIRAF): 56kb/cd each - post-2020NIOC and Private sectorDomestic + Exports

Crude Arb—Increased Latin American Crude ConsumptionLeading to Lower Average API slate in EoS

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500

1,000

1,500

2,000

2,500

3,000

3,500

Africa FSU LatinAmerica

MiddleEast

kb/d

Chinese Crude Imports by Region

2011

2012

2013

-

500

1,000

1,500

2,000

2,500

3,000

Africa FSU LatinAmerica

Middle East

kb/d

Indian Crude Imports by Region

2011

2012

2013

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China Capacity Expansion Slows…But Still a Wild Card

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0

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kb/d

China CDU Capacity vs Demand Growth

Incremental CDU Capacity Incremental Refined Products Demand

Note: Data for 2014-2020 is based on probability-adjusted additions

China Refinery Utilization: How Hard Will They Run?

65%

70%

75%

80%

85%

Util. %

Note: Data for 2014-2020 is forecast.

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150

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250

kb/d Gasoline Gasoil

13

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Refinery Closures: Potential Realized?Japan Leads Refinery Closures in Asia Over 2009-2020

Potential Closures

Confirmed Closures

0100200300400500600700800900

1,0001,1001,200

Japan

kb/d

0100200300400500600700800900

1,0001,1001,200

Australia

kb/d

0100200300400500600700800900

1,0001,1001,200

Others

kb/d

Closures (2009-2014)

Naphtha Gasoline Kero/jet Gasoil Fuel Oil

East of Suez Net Surplus to Rise

Net Imports/Exports (kb/d)

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(2,000)

(1,500)

(1,000)

(500)

0

500

1,000

2014 2017 2020

Asia Pacific

(1,000)

(500)

0

500

1,000

1,500

2014 2017 2020

East of Suez

(500)

0

500

1,000

1,500

2014 2017 2020

Middle East

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Past and Projected Refining Margins for Dubai CrudeSingapore Market

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US$/bbl

Hydroskimming Residual catalytic cracking Hydrocracking

Actual prices for 2013. Forecasts in $2014 thereafter.

www.FGEnergy.com

Naphtha Gasoline Kero/jet Gasoil Fuel Oil

SE Asia Will Remain the Key Regional Export Outlet

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(200)

0

200

400

2014 2020

South Asia

(1,500)

(1,000)

(500)

0

500

1,000

2014 2020

East Asia

(750)

(500)

(250)

0

2014 2020

Southeast Asia

Net Imports/Exports (kb/d)

Australia: Asia’s Emerging Product Sink

• Shell closed its 76 kb/d Clyde refinery inSeptember 2012.

• Caltex winding down operation at its 125kb/d Kurnell refinery and BP to close 95 kb/dBulwer refinery in 2015.

• Potential closure at Shell Geelong (105 kb/d).

• Australia will emerge as Asia’s largestimporter of non-bunker transport fuels.

Potential Australia Import Totals (kb/d)

ProductPre-ClydeClosure

2011

Post Clydeclosure

2013

Post Clyde +Kurnell +

Bulwer closure2016

Post Clyde +Kurnell +Bulwer +

Geelong closure2020

Gasoline 58 85 161 184Kero/Jet 39 58 96 112

Diesel 178 226 294 326Total 275 369 551 622

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Clyde closed in September 2012

Kurnell closingin Q4 2014Geelong to close post-2016?

Bulwer to close in mid-2015

Indonesia: Asia’s Dependable Product Sink• Indonesia is one of the largest net importers of

products in Asia; main imports are gasoline,gasoil, and LPG.

• Demand is growing and outstripping domesticsupply.

• Energy reforms expected and will impactgasoline and diesel demand to varying degrees.

Projected Indonesia Imports (kb/d)

Product 2014 2015 20162017-18average

2019-20average

Gasoline 251 256 258 273 305

Diesel 155 141 116 119 129

Total 406 397 374 392 434

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• New refineries have been proposed, but recent decisions of the Ministry ofFinance make it unlikely any Pertamina-international joint ventures will succeed.

Vietnam: Asia’s Other Product Sink

• Vietnam is a growing importer of oil products.

• Imports will rise swiftly until realization of the 200 kb/d NghiSon refinery, which is under construction and expected tobegin operations by Q2 2018.

• Domestic refineries should meet two-thirds of the oilproduct demand by 2018 and remainder will be servicedthrough imports.

• Overall, supply-demand gap is forecast to remain stable while160 kb/d Vung Ro project remains a wild card.

Projected Vietnam Imports (kb/d)

Product 2014 2017 2020

Gasoline 75 84 38

Kero/Jet 27 32 24

Diesel 136 160 122

Total 238 276 184

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Malaysia: Net Products Exporter after RAPID Start-up

• PETRONAS finally took the FID for RAPID in April.Recently, it awarded the PMC and major EPCCcontracts.

• Malaysia’s product balances will shift with the start-upof RAPID end 2019.

• It will remain a net importer of gasoline, but importrequirement will decline.

• Middle distillate exports are expected to increase.

Projected Malaysia Net Imports/Exports (kb/d)

Product 2013 2015 2020 2022

Naphtha 30 30 87 40

Gasoline 112 119 100 94

Kero/Jet 35 33 33 42

Diesel 6 15 62 87

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• India

– June 2010: UPA government deregulated gasoline prices. Annual demandgrowth remained subdued in 2011-2012 before recovering in 2013.

– January 2013: Progressive increase in retail gasoil prices, curtailing demand.Current government to delay any moves to October 2014, after key stateelections.

– The next product targeted for subsidy removal is LPG. The previousgovernment made various attempts to change subsidized quota. Currentgovernment expected to make a move in 2015, which will dampen demandgrowth in the short term.

• Indonesia

– Incoming president to take gradual approach over 5 years.

– Gasoline and diesel prices were last increased in 2013. Demand growth fellfrom around 10% and 14%, respectively, in 2011 and 2012, to nearly flat in2013.

– Policy change could curtail demand in the short term, but still maintain anupward growth trajectory in the long term due to rising income levels andvehicle ownership.

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Major Shifts to Pricing/Subsidies in the Region

• Malaysia

– In September 2013, government reduced RON95 and diesel subsidy byRM0.20/liter each. Gasoline sales have grown on average about 3% annuallysince 2000, but could slow down marginally in the short term as a result of thesubsidy cuts.

– Malaysia will introduce a 6% GST in April 2015, although it is still unclear iftransport fuels will be taxed or exempted.

– The government plans to revamp the subsidy scheme. A multi-tiered subsidystructure has been mooted.

• Thailand

– New Thai government considers fuel price restructuring a priority.

– August 2014: Revamped the fuel pricing structure by reducing gasoline pricesand increasing gasoil prices.

– Gasoil: First hike since 2011, progressive increases are unlikely.

– LPG remains partially subsidized. If deregulated, negative impact on demandwill be short lived.

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Major Shifts to Pricing/Subsidies in the Region

New Condensate Splitter Projects in Asia Pacific

Additional 355 kb/d capacity in 2014

Firm/Likely

Possible

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Country Site Operator Year Capacity (kb/d)

Korea Daesan Samsung Total Q3 2014 145

Korea Incheon SK Energy Q3 2014 100

Korea Daesan Hyundai Oilbank Q1 2017 100

Singapore Jurong Jurong Aromatics Q3 2014 110

Timor Leste Timor PTT/Timor Gap Q4 2016 40

Total Asia Pacific 495

Country Site Operator Capacity (kb/d)

Brunei Seria Hengyi 100

China Zhejiang PetroChina/QPI 180

Challenges from Bunker Sector—ECA Switch and Global Cap

• Bunker specification changes: 2015 ECA and global cap (2020 or 2025) will result in asignificant drop in fuel oil demand

• SOx and particulate matter emissions inside ECA zones will be limited to 0.1% fromJanuary 1, 2015

• On a global scale, we expect a decline of 550 kb/d in residual (fuel oil demand) and a670 kb/d jump in distillate (gasoil/diesel) by end of 2015

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2002 2006 2010 2014 2018 2022 2026 2030

Fuel Oil

Gas Oil

mm

b/d

Gasoil

Fuel Oil

-300 -200 -100 0 100 200 300

North America

South America

Europe

Africa

FSU

Middle East

Asia Pacific

ResidualDecline

kb/d

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Diesel and Gasoline Yields Have Been Creeping Up in Asia Due toNew Secondary Units Being Built, at the Expense of Fuel Oil

0%

5%

10%

15%

20%

25%

30%

35%

40%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Product Yields of Asian Refiners

LPG

Naphtha

Gasoline

Jet/kero

Gasoil

Fuel oil

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As a Result, Total Gasoil and Gasoline Supplyhas Increased Sharply

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2

4

6

8

10

12

14

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

mmb/dProduct Output of EoS Refiners

LPG

Naphtha

Gasoline

Jet/kero

Gasoil

Fuel oil

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Thank You

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