OIL PRICE COLLAPSE: REASONS AND CONSEQUENCES FOR GLOBAL SUPPLY Historical real oil price development: Four major downturns during the last 35 years

The chart shows historical crude oil Historical real crude oil prices* 1980-2014 prices* since 1980. USD per barrel (real December 2014 terms)

During the past 30 years oil prices 160

have seen large fluctuations. Major Global Financial downturns have largely been driven Crisis by one or more of the following 140 drivers: EU crisis - War relief, eg. The Gulf War, Iraq invasion Iran - Stock market crash, eg. The Dot 120 com bubble, «Black Monday», Lehman financial crises collapse - Recession, eg. Russian recession 100 New volumes from eg North after the dissolution of the Soviet Sea, Alaska and Arab Spring + Union, Asian Crisis, Global Mexico shale oil revolution Financial Crisis of 2008-09 80 - Demand shocks, eg. early 1990s Demand shock from China and other - Supply shocks, eg. Saudi Arabia Emerging Markets increasing production during 1985- Gulf War 60 Saudi Arabia China cuts production stimulus 86 to regain market share, the Surging NA Dot-com North American shale revolution Black shale supply, bubble burst Monday Recession Fed quantitative weaker demand, 40 easing OPEC maintains Russian Asian Crisis production depression

9/11 Iraq Invasion Saudi Arabia Dissolution of 20 increases Soviet Union production

0 1980 1985 1990 1995 2000 2005 2010

* Arabian Light from 01.01.1980-29.03.1983, WTI from 30.03.1983-22.06.1988, Brent from 23.06.1988- Source: Bloomberg, Rystad Energy, US Bureau of Labor Statistics

2 Brent oil price timeline and latest forward curve

2008-10: Extreme volatility ICE Brent crude, historical front month contract price and latest forward curve Oversupply, Global credit crisis and subsequent USD per bbl global recovery. Extreme price volatility. caused mainly 160 by shale productivity 2011: High volatility surprise Supply: «Arab spring», Libya losses and recovery. US LTO takes off. Demand: EU debt crisis. High price 140 volatility. Iran negotiations Iraq supply Weaker EU crisis KSA supply surge risk fears demand 2012: High volatility 120 Greece Supply: Iran sanctions and oil embargo, Libya Weaker growth, Lehman strong supply KSA supply surge into Q2. High non- losses OPEC outages vs. US LTO surge. collapse growth (NAm shale, Geopolitics 100 Iran Libya etc.) Demand: Greece, EU recession, Libya - Saudi Draghi losses Saudi OSP inaction 2013: Low volatility Global “Arab spring” “whatever cuts Supply: Libya II, extreme non-OPEC recovery it takes” 80 outages and surging US LTO. OPEC Demand: US contributing most to growth, meeting not China. Credit crisis US rig count 60 Dec 2014 - Jan 2015: Brent and WTI oil starts to drop prices have dropped below USD 50/bbl in China fiscal January and there is finally a response in stimulus QE1 the weekly US horizontal rig count. The 40 number of active horizontal rigs in the US have dropped ~220 since mid-December.

20 окт07 окт08 окт09 окт10 окт11 окт12 окт13 окт14 окт15 окт16 окт17

Brent front month Forward curve

Source: Bloomberg, Rystad Energy research and analysis

3 Global oil supply growth

Global oil production grew at an exceptionally strong pace in 2014, led by the US Oversupply, caused mainly by shale World liquids supply growth y/y, monthly IEA estimates World supply of liquids (incl. biofuels productivity Million bbls/d and refinery gains) has grown surprise strongly all year (+1.9 MMbbld on 4 average) and reached an Exceptional growth in Sep-Oct to new all- unprecedented 3 MMbbld year-on- time high for global year in Sep-Oct, according to the 3,3 liquids production 3,1 IEA. 3

Strong supply growth from Non- Average 2014 = OPEC countries, incl. the US, was +1.9 MMbbl/d 2,0 2,1 complemented by rebounding output 2,1 2 2,0 from OPEC in Iraq, largely offsetting declines in Libya amid growing 1,5 tensions. 1,4 1,4 1,4 1,2 1,2 1,3 1,3 1,2 OPEC Crude 1,1 1 OPEC NGLs 0,8 0,7 0,7 Non-OPEC 0,5 World 0,1 0 -0,1 -0,3 -0,4

-1

-2

янв13 ноя13 янв14 ноя14

мар13 апр13 сен13 мар14 апр14 сен14

май13 май14

июн13 авг13 окт13 июн14 авг14 окт14

дек14 фев13 дек13 фев14

июл13 июл14

Source: IEA OMR January 2015

4 Shale productivity increase: Main drivers are sand injection increase and PAD drilling Shale productivity Number of wells per rig per year surprise Permian Midland: type curves for 20 horizontal wells Eagle Ford 500 18 Bakken Increased Permian Midland 450 use of sand 16 Permian Delaware 400 14 350 12 300 2010

2011 10

250 2012 boe/d 2013 8 200 Increased PAD drilling (multiple well site)

6 150

100 4

50 2

0 0 0 1 2 3 4 5 6 7 8 9 10 11 2008 2009 2010 2011 2012 2013 2014 Months after first month of production

Source: Rystad Energy North American Shale Well data

5 Oil demand growth Global demand not accelerating, despite lower oil prices Weaker World demand in 2014 grew by 620 World liquids demand growth y/y demand kbbld on the year earlier – a five-year Thousand bbls/d low for growth amid sharp declines in 1800 OECD Europe, OECD Asia and decelerating Chinese economy. 1600 Despite the price slide of 25% since the previous IEA OMR report, the y/y demand growth for 2015 has been 1400 kept unchanged at +0.9 MMbbld in 2015 y/y growth January. unchanged from 1200 December 2014 Quarterly, the demand growth is report projected to modestly accelerate 1000 throughout 2015. World Jan 2014 800 World Dec 2014 World Jan 2015 600

400

200

IEA Actual IEA Forecast 0

Source: IEA OMR January 2015 6 Oil demand growth US, China and to a lesser extent other non-OECD will remain drivers of demand growth Weaker The U.S. and China remain the main World liquids demand growth y/y demand drivers for demand growth in 2015. Thousand bbls/d Forecast for the former remains, 2000 however, uncertain as demand increase during the first half of 2015 will be followed by a contraction in the second half due to efficiency 1500 gains and lowering price effect on consumption.

OECD demand keeps decreasing. This trend is reflected in the current 1000 RoW issue of OMR. Relative to the previous issue, January release Russia applied significant cuts on November Brazil demand to France (-105 kbbld), 500 China Mexico (-100 kbbld), Japan (-95 kbbld), Korea (-80 kbbld) and US Germany (-50 kbbld). Additionally, Japan Brazil’s demand was cut by 100 France kbbld. 0 Germany

The cuts are justified by both World efficiency gains, weak economic growth and under-evaluation of many -500 currencies relative to the U.S. dollar

IEA Actual IEA Forecast

-1000

Source: IEA OMR January 2015

7 Oil supply, demand and implied stock changes Tremendous stock builds in H1 2015 still on the cards Weaker demand According to the chart, world market World liquids supply and demand, quarterly is in structural oversupply since the Million bbls/d Million bbls/d beginning of 2014. 96 3,00

This oversupply is projected to widen Implied stock change, rhs in Q1 and Q2 of 2015 due to 94 seasonally weaker global demand. Total Supply The 1.7 MMbbld and 2.1 MMbbld of Total Demand 2,00 supply-demand surplus will have to 92 be absorbed by stocks. 1.9 MMbbld oversupply Hence, stocks are forecasted to post 90 in H1 1,00 an increase for the 5th quarter in a row, fueling industry concern about oil hitting against storage limits. 88

The 2015 imbalances were slightly 0,00 reduced, due to lower forecasted 86 supply growth, compared to previous release of OMR: by 100 kbbl/d in Q1, by 300 kbbl/d in Q2 and by 500 84 -1,00 kbbl/d in Q3.

82 -2,00 80 IEA Actual 2015

78 -3,00 1Q2009 1Q2010 1Q2011 1Q2012 1Q2013 1Q2014 1Q2015

Source: IEA OMR January 2015

8 Oil market balance in 2015 Geopolitics 1.4 MMbbld of oversupply in 2015 if OPEC keeps production steady - Saudi inaction Market forces would need to work to OPEC liquids supply and call-on-OPEC* restore oil market balance for the first Million bbls/d time in decades. 32,0 Call-on-OPEC crude OPEC crude production 2015 balances: Severe over-supply OPEC output target Current OPEC production (inventory builds) of 1.7 MMbbl/d 31,5 Potential inventory build if OPEC in Q1 and 2.1 MMbbl/d in Q2 if produces 30 MMbbld OPEC keeps crude production steady at current levels. 31,0

Provided that OPEC keeps commitment to its output target of 30 30,5 30,5 MMbbld market will witness severe oversupply in the first 6 months of 30,0 2015. This oversupply may be even higher as OPEC has continuously produced above its target. The 29,5 group’s crude production rose to 30.48 MMbbld in December 2014. 29,0 Low oil prices will take effect in the second half of 2015 as non-OPEC production will decrease, and the call 28,5 on OPEC increase to 29.9 MMbbl/d, just short of OPEC output targets, 28,0 according to IEA forecasts.

27,5

27,0 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015

Source: Rystad Energy research and analysis, International Energy Agency OMR January 2015, UCube

9 Six reasons for Saudi Arabia not to defend the oil price Geopolitics - Saudi inaction

US Russia • Shale revolution main cause • Will suffer most from low oil prices behind oil oversupply and • US and Saudi joint interest in price decline giving a geopolitical signal to • SA will test downside – Russia (Ukraine, Iran, Syria, ..) learn from supply response to weak oil prices Sheiks vs Shale*

Other OPEC countries Iran • Venezuela; Ecuador, • Enemy number 1: Shia versus Nigeria. do not take any Sunni responsibilities • Will suffer from low oil price, • Need to feel pain for future • Regional power balance – OPEC discipline defense budgets etc. Saudi Arabia • Competing for Asian markets – • Can sustain low oil prices for a strengthened after sanctions while for a longer term goal – others to suffer more • Geopolitical pressure – joint Deep water and Oil Sands agenda with US against Russia Global economy boosting • Postpone sanctioning of • Internal OPEC discipline • In particular EU, China and new large projects – • Test downside and cost levels India will benefit a lot from a reducing supply towards • Maintain market shares in Asia lower oil price, which in term 2020 will lead to a stronger global economy in a few years

Source: Rystad Energy research and analysis; *The Economist

10 Supply at risk in USD 50/bbl and USD 70/bbl oil price scenarios

1. Lower North American shale activity 2. Shut-in of mature producing fields 3. Reduced infill drilling on mature offshore fields 4. Delays in development projects 5. Non-sanctioning of marginal discoveries 6. Curbing of exploration activities

11 Thank you from Rystad Energy

Rystad Energy Rystad Energy is an independent oil and gas consulting services and Fjordalléen 16, 0250 Oslo business intelligence data firm offering global databases, strategy advisory and www.rystadenergy.com research products for E&P and oil service companies, investors and +47 24 00 42 00 governments. Rystad Energy is headquartered in Oslo, Norway, with additional [email protected] business center locations in UK (London), USA (New York & Houston), Russia (Moscow) and South East Asia (Kuala Lumpur). Anton Sungurov, Moscow Head of Representation, Russia & CIS, + 7 (499) 3911783 Selected Rystad Energy Products [email protected] UCube Global and complete, field-by-field database

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