Money does not perform. People do.

Laurent Milliat, CFASustainability Analyst

Pricing Carbon in Hydrocarbon PortfoliosClimate change risks and opportunities for oil and gas companies

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I. The necessary “decarbonisation” of the economy

II. Increasingly stricter carbon regulations

III. Differentiated carbon profiles of fossil fuels

IV. Pricing carbon in some European upstream portfolios

Content

3The necessary “decarbonisation” of the economy

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Unsustainable energy and emission trendsBetween now and 2030, a dangerous 40-45% rise in energy-related CO2 emissions

Increasing energy demand supplied by fossil fuels

Energy consumption highly correlated with economic growth: x10 over 20th century

80% of current needs supplied by fossil fuels (oil 35%, coal 25%, gas 20%)

Rising combustion of fossil fuels driving up greenhouse-gas (GHG) emissionsOil and gas sector is directly involved in this unsustainable trend, with CO2 emissions from:

its own operations: 5% of global GHG emissions

its products: 29% of global GHG emissions

IEA Reference scenario is unsustainable: role of non-OECD countries (97% of BAU emissions increase)

A “business-as-usual” scenario would take the world to dangerous levels of GHG concentrations

Source: IEA World Energy Outlook (2008)

Energy-related CO2 emissions in the IEA 2008 Reference Scenario

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How to reduce energy-related CO2 emissions?

Lower the energy intensity of the economy

Investing in energy efficiency:IEA: energy efficiency has the largest and cheapest energy-related CO2 emissions abatement potential (65% by 2020 and 57% by 2030)

McKinsey estimates: $170 billion investment per year over the next 13 years will cut world energy demand growth by more than half and generate an average annual rate of return of 17%

Lower the carbon content of our energy

No silver bullet, but energy transition with a range of solutions: coal to gas switching, renewables (hydro, wind, solar, biomass etc.), Carbon Capture and Storage (CCS), nuclear etc.

A required transition towards a low carbon futureDeveloped countries need to cut CO2 emissions by 25% to 40% from 1990 levels by 2020

Energy-related CO2 emissions =

Population * GDP/capita * Energy intensity (Primary Energy/GDP) * Carbon intensity (CO2 emissions/primary energy)

6Increasingly stricter carbon regulations

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“Climate change is the greatest market failure the world has ever seen”

Nicholas Stern, the former chief economist of the World Bank

Global and regional carbon regulatory trends

A post-Kyoto international climate framework is in the process of being defined

Climate regulations are gaining support in many regionsEurope: at the forefront of climate change regulations (20 / 20 / 20 targets by 2020)

North America: Climate bill in the US (passage in 2009/2010?)

Asia-Pacific: Australia’s Carbon Pollution Reduction Scheme, new Japanese government

Specific climate regulatory tools targeting energy companies

Energy companies are likely to face increased scrutiny of their life cycle GHG emissions

A range of climate regulatory tools with profound implications for the energy sectorLow carbon fuel standards (and other energy standards…)

Cap-and-trade regimes (and other carbon taxes…)

Global and regional carbon regulations are crucialA range of carbon regulations will affect energy companies

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EU Emissions Trading Scheme

Caps CO2 emissions at 21% below 2005 levels by 2020

Main burden falls on electric utilities (full auctioning from 2013) but energy-intensive sectors (including refineries) should only receive free allowances up to an industry benchmark

US: a federal cap-and-trade legislation by 2012?An economy-wide federal cap-and-trade legislation including mobile sources

Waxman-Markey bill passed House of Representatives; Kerry-Boxer bill faces Senate hurdle

A range of carbon regulations in other regionsScandinavian countries, France, Australia, New Zealand, Japan, Canada

Lower subsidies or higher fiscal pressure on the oil and gas sector

Pricing carbon should be understood as an insurance premium

Cap-and-trade regimes (and other carbon taxes…)Economic tools are implemented in an increasing number of regions

9Differentiated carbon profiles of fossil fuels

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All fossil fuels are carbon intensive but there are some significant differences:

Full life cycle GHG emissions profilesCoal GHG intensity is twice Natural gas’s GHG intensity

Source: Dexia AM estimates

Median estimates of full life cycle GHG emissions for major primary fossil fuels (gCO2e/MJ)

11Pricing carbon in some European upstream portfolios

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Upstream producers impacted by the full life cycle GHG-intensity of their portfolio

Directly: responsible for the cost of GHG emissions arising from their own operations

Indirectly: benefit or suffer from lower or higher life cycle GHG-intensity of their upstream resources through differentiated demand volumes and pricing trends

An upstream portfolio analytical frameworkEuropean companies have various exposures to lower or higher GHG-intensive projects

Source: Dexia AM estimates

European companies’ exposure to different hydrocarbonsin terms of potential reserves from the Top 230 projects

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Key question is the burden sharing of carbon cost along the energy value chainCompanies will bear the direct cost of their operations but are likely to pass a significant part of it to end

customers

GHG liabilities are not high enough to be a major short term financial risk. But, more widely priced GHG emissions will have a material impact on the energy sector

Significant GHG liabilities associated with 2020e productionGHG liabilities ranging in average from <1% to 68% of companies’ 2008 operating income

Source: Dexia AM estimates

European companies’ GHG liabilities associated with 2020e production from 230 projects

14Takeaways

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Takeaways

The issue for energy companies is not anymore to deny climate change but to do better than their competitors in integrating life cycle GHG analysis in their standard business activities

There is a need to move from low quality voluntary environmental disclosures towards the full financial reporting of GHG liabilities embedded in upstream portfolios

Despite the current economic downturn affecting oil prices and energy demand, we think that long term investors should factor the carbon constraint in their energy investment decisions

Carbon free energies and energy conservation will have a sustainable competitive advantage that is not sufficiently reflected yet

Copenhagen: the next milestone on the road to a low carbon future

The transition to lower carbon business models

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Disclaimer

Le présent document a un caractère purement informatif, il ne comporte aucune offre de vente ou d'achat d'instruments financiers, il ne constitue pas un conseil en investissement et ne confirme aucune transaction, quelle qu'elle soit, sauf convention contraire expresse. Les informations reprises dans ce document nous ont été transmises par différentes sources. Dexia Asset Management apporte le plus grand soin dans le choix des sources de données ainsi que dans la transmission de ces informations. Toutefois, des erreurs ou omissions dans ces sources ou dans ces processus ne peuvent pas être exclues à priori. Dexia AM ne peut être tenue responsable de dommages directs ou indirects résultant de l'utilisation du présent document. Le contenu de celui-ci ne peut être reproduit que moyennant l'accord écrit préalable de Dexia AM. Les droits de propriété intellectuelle de Dexia AM doivent être respectés à tout moment.

Attention : Si le présent document mentionne des performances passées d’un instrument financier ou d’un indice financier ou d’un service d’investissement, fait référence à des simulations de telles performances passées ou comporte des données relatives à des performances futures, le client est conscient que ces performances et/ou prévisions ne sont pas un indicateur fiable des performances futures. De plus, Dexia AM précise que :

dans le cas où il est précisé qu’il s’agit de performances brutes, la performance peut être influencée par des commissions, redevances et autres charges. dans le cas où la performance est exprimée en une autre monnaie que celle du pays de résidence de l’investisseur, les gains mentionnés peuvent se voir augmentés ou réduits en fonction des

fluctuations du taux de change.Si le présent document fait référence à un traitement fiscal particulier, l’investisseur est conscient qu’une telle information dépend de la situation individuelle de chaque investisseur et qu’elle est susceptible d’être modifiée ultérieurement.

Le présent document n’est pas une recherche en investissement telle que définie à l’article 24, §1 de la directive 2006/73/CE du 10 août 2006 portant mesures d'exécution de la directive 2004/39/CE du Parlement européen et du Conseil.Si la présente information est une communication publicitaire, Dexia AM tient à préciser qu’elle n’a pas été élaborée conformément aux dispositions légales arrêtées pour promouvoir l'indépendance de la recherche en investissements, et qu’elle n'est soumise à aucune interdiction prohibant l'exécution de transactions avant la diffusion de la recherche en investissements.

Dexia AM invite les investisseurs à toujours consulter le prospectus avant d'investir dans un de ses fonds. Le prospectus et d'autres informations relatives aux fonds sont disponibles sur le site www.dexia-am.com.

Mention importante concernant l'analyse de durabilité

L’analyse de durabilité de Dexia AM se fonde sur différentes sources d’informations développées au sein de l'équipe IRD de Dexia AM, entre autres : les études sectorielles et les analyses de sociétés réalisées par des analystes de durabilité de Dexia AM, "Dexia AM's Sustainability Analysis Research Methodology 2006", "Methodology Guidelines November 2005" par Franca Morroni, "Dexia AM SRI Business Case 2004", les principes directeurs IRD de Dexia AM et les diverses recherches menées depuis 1996, ainsi que sur les informations de fournisseurs de données IRD sélectionnés.

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