Adam Robinson

Confidential Presentation to:

EIA 30th Anniversary Conference Middle East oil demand and Lehman Brothers oil price outlook

Adam Robinson

April 7, 2008 Middle East oil demand u Three pillars of Middle East oil demand – Petrodollar reinvestment – Purchasing power rise – Power sector constraints u Natural gas shortages for power generation mean balance of risks to any Middle East oil demand forecast are firmly to the upside, adding to summer upside seasonality u Lehman Brothers has pegged 3Q08 as the tightest quarter of the current oil cycle, with a possible turning point coming by the end of the year

1 Putting the GCC economy in global context u GCC = Saudi Arabia, UAE, Kuwait, Qatar, Bahrain, Oman u GDP/capita in 2007: $19,000 – Nearly 3x China and 5x India u At $800 bn, GCC is a top 10 developing economy by size u GCC real GDP grew 3% from 1998-2002, 7% since

Other points: u Saudi equity market larger than China’s as recently as 2005 u Per capita steel consumption now double world average

2 Conclusion up front: ME is critical to global demand growth u GCC 36m people, oil demand now growing ~200k b/d pa u Overall Middle East (ME) growing ~350k b/d pa Middle East now accounts for at least 1/3 of global oil demand growth OECD Middle East China RoW 1.1m 0.9m 100% 1.1m b/d b/d b/d 80% 31% 46% 48% 60% 40% 40% 42% 32%

20% 31% 32% 43% 0% -21% -9% -13% -20%

______2007 2008 2009 Source: Lehman Brothers estimates

3 Pillar 1 Petrodollar Reinvestment The Middle East petrodollar boom is unprecedented Is 300k+ b/d oil demand growth sustainable? Depends on where the petrodollars go…

Oil revenue available for reinvestment $Bn, 2000 constant OPEC GCC OPEC MENA 600

500

400

300

200

100

0 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 ______Source: EIA

4 Population + 1980s oil collapse = desire to diversify

To keep unemployment constant, Middle East as a whole must create 80m jobs over next 15 years Petrodollars Deregulation Energy access

$200 billion ANNUAL public and private investment growth, versus $67 billion in 2003

Petrochemicals Metals Air transport u Saudi investment $100 bn u UAE building world’s u Qatar: $5.5 bn to handle u Saudi global market share largest aluminum smelter 50m passengers by 2015 to rise 4% to 12% by 2010 u China repeat but worse b/c u Dubai: $80 bn to handle u Energy only 7% of costs power for metals output 120m passengers by 2017 in SA, vs 38% in China likely to be met by oil and u Cargo capacity 3x bigger ______gas-fired power gen than FedEx in Memphis Source: National Bank of Kuwait estimates value of regional construction, industrial, energy and infrastructure projects to exceed $1.25 trillion over the next six years

5 How the growth will occur: Economic cities / free zones Highly deregulated environments and preferential tax treatment attracts commerce, real estate investment and financial services u Saudi Arabia building six economic cities – Add $150 bn in GDP to the Saudi economy by 2020, 40% of today’s GDP – Cities to cost $80 bn to build and specialize in steel, aluminum, fertilizer and petrochemicals u King Abdullah Economic City – To create 1m jobs and house 2m residents – 2,500 private industrial firms to have operations there – Requires 6,500 MW of power, a seaport and rail links – 260k apartments, 56k villas, 11k hotel rooms to be constructed u Jizan Economic City – Focus on refining, steel, copper and aluminum. – To create 500k jobs u Abu Dhabi 2030 – Real estate projects alone to cost $180 bn, 40% planned to be from the government

6 Pillar 2 Purchasing Power Increase Rising income…

Middle East GDP per capita taking off with oil prices MENA (LHS) GCC (RHS) 2000 constant $ 2000 constant $ 1,900 21,000 1,800 19,000 1,700 17,000 15,000 1,600 13,000 1,500 11,000 1,400 9,000 1,300 7,000 1,200 5,000 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 ______Source: World Bank

7 Plus energy price subsidies… u Jan 2008 average cost of gasoline in ME was 0.36/L versus 0.77/L in the US u Subsidies are difficult to remove because citizens see cheap fuel as a birthright Gasoline prices in the Middle East in 2008 $/liter 0.50 Regional average 0.45 including oil importers 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 Egypt Iran Iraq Kuwait Libya Oman Qatar Saudi 95 UAE Yemen ______Source: IEA, MEES

8 Equals more cars u GCC vehicle penetration at 22% is twice the rest of the Middle East and 1.5x the global average u But yet, auto fleet size rising twice as fast as globally since 2004 Auto fleet growth: Middle East vs. World MENA % growth World % Growth 7% 6% 5% 4% 3% 2% 1% 2001 2002 2003 2004 2005 2006 ______Source: Ward’s Automotive Group

9 Equals more demand for goods that need power u Increased purchasing power means rising demand for AC, appliances and H2O u Oil-fired generation serves over 1/3 of Middle East power load, 1.1m+ b/d u In Oman, for instance, power is sold at 40% below cost u Electricity demand in the MENA up 6.3% pa 2000-2006, now running 1/3 faster ME power demand climbing w/ income and as energy-intensive industries grow Power Demand Middle East World y-o-y growth 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 ______Source: BP Statistical Review of World Energy 2007, excludes North Africa

10 And thus equals higher oil demand growth

Middle East oil demand growth kb/d 2004-2007 7,500 Oil demand: 5.8% GDP/cap: 3.4% 7,000 1996-2003 Oil demand: 2.7% 6,500 GDP/cap: 2.0% 6,000 5,500 5,000 4,500 4,000 1995 1997 1999 2001 2003 2005 2007 2009 ______Source: IEA, Lehman Brothers estimates

11 Pillar 3 Power Sector Constraints Not enough gas to meet power needs in the summer Until gas output rises, oil use in power gen to spike in summer u It’s critical for oil-rich Middle East rulers to keep the lights on u Natural gas resources taking longer than expected to be developed u Kuwait building regas capacity for summer power needs, asking consumers to conserve u In the meantime, oil demand has spiked higher every summer since 2005

Middle East oil demand in May vs. August and August vs. October kb/d 800 600 400 200 0 -200 -400 -600 -800 2005 2006 2007 2008

______May - August August - October Source: Lehman Brothers estimates

12 ME summer heat could cost the market 50-60m bbls Summer tightness to come from hurricane risks, North Sea maintenance, US fiscal stimulus, ME supply-demand shock Lehman Brothers monthly oil supply-demand balance m b/d Inventory builds and periods of 89 relative price weakness 88 87 86

85 84 83

Jul-07 Jul-08

Jan-07 Jun-07 Oct-07 Jan-08 Jun-08 Oct-08

Feb-07 Mar-07 Apr-07 Feb-08 Mar-08 Apr-08

Sep-07 Nov-07 Dec-07 Sep-08 Nov-08 Dec-08

May-07 Aug-07 May-08 Aug-08

Global Demand Global Supply ______Source: Lehman Brothers.

13 But like everywhere, the ME demand outlook has risks u As gas infrastructure built, power sector oil demand growth in the GCC could slow significantly u Inflation and dollar depreciation – Inflation is rent and food, meaning de-pegging may not help • Petrodollar recycling has been core to US-Saudi alliance since the 1970s – Remittances eroded, causing strikes by ex-pat workers • Governments raising wages, could stoke inflation further u Oil price collapse would undermine subsidies u 40% of Suicide bombers in Iraq are Saudi – what if they go home? u Once the US leaves Iraq, Saudi Arabia and Iran may not be as friendly

For now, however, ME demand growth will likely remain strong as long as oil prices stay above budgeted levels, which are significantly lower than the OPEC basket is priced today

14 4Q08 Turning Point? Why 4Q08 could be a turning point u We think longer-term fundamentals could be on the verge of a turning point – India/China/Saudi downstream capacity – Saudi/West Africa upstream capacity – Costs of F&D showing some flattening – Oil valued in the M&A market hasn’t risen in tandem with WTI – China could turn bearish versus expectations, adding to OECD oil demand malaise u 4Q may also see the reversal of the oil and the dollar/inflation trade, if not before

15 Refinery bottleneck appears to be eroding Refinery investment has stagnated for a generation, but 2009-10 could be a turning point, especially East of Suez In the aftermath of the 2005 hurricanes we ran out of spare refining capacity, but investments made since oil prices began rising early this decade should cause refinery capacity additions to outpace demand growth in 2009 by as much as 2:1

Global CDU Capacity Global Upgrading Additions (k b/d) Capacity Additions (k b/d)(1) 1,648 1,703 2006 1,667 1.6 2007 1,168 1.4

2008 1,459 1.2 1,035 1,079 1.0 2,674 809 2009 739 0.8 713 2010 3,635 0.6

2011 2,401 0.4 0.2 2012 2,383 0.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 2006 2007 2008 2009 2010 2011 2012 China South Asia Middle East Rest of World China South Asia Middle East Rest of World ______Source: Lehman Brothers Estimates. 1. Includes coking, catalytic cracking, and hydrocracking units and expansions.

16 And OPEC capacity to grow faster than demand, for now… Major upstream producers show response to higher prices u Saudi Arabia’s capacity expansion through 2011-12 should underpin capacity additions outpacing demand u Further upside potential from Russia, deepwater, NGLs could leave non-OPEC supply growth underestimated by 300-500k b/d beyond 2010 Global production capacity growth vs. global oil demand growth

k/bd 3,500

3,000

2,500

2,000

1,500

1,000

500

-500 2008 2009 2010 2011 2012

OPEC crude capacity growth OPEC NGL growth ______Non-OPEC supply growth Global demand growth Source: Lehman Brothers estimates

17 That costs have flat-lined is a problem for NYMEX WTI Higher US costs appear to explain much of the rise in long-dated WTI prices until the divergence in October 2007. US monthly PPI data regressed against average monthly 5-yr out WTI prices $/bbl 100 2 - R through Oct-07 is 96% $91.19 90 - Divergence worsens: Dec-13 WTI to average $98 in Mar-08

70 $70.52 60

20 Apr-04 Jun-04 Oct-04 Apr-05 Jun-05 Oct-05 Apr-06 Jun-06 Oct-06 Apr-07 Jun-07 Oct-07 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Dec-04 Dec-05 Dec-06 Dec-07 5-year out Dec avg monthy WTI price Predicted 5-yr out WTI based on PPI cost indices

18 Even deepwater drilling costs are flattening

Deepwater Rig Day-Rates

Avg dayrates in '000 dollars 600

500

400

300

200

100

0 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 May-01 May-02 May-03 May-04 May-05 May-06 May-07 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07

Semisubmersible Dayrates, U.S. GOM, 5,000- to 7,499-Foot Semisubmersible Dayrates, U.S. GOM, 7,500-Foot or More Semisubmersible Dayrates, North Sea, 3,000- to 4,999-Foot Drillship Dayrates, GOM, Dynamically Positioned ______Source: ODS-Petrodata and Lehman Brothers Estimates

19 China could turn bearish versus expectations Via the trade and financial market channels, a period of extended US weakness could spread to emerging markets by 4Q08 u Oil prices at $100+ assume demand growth won’t slow in Asia u While fundamentals of Asian economies look strong now, they may be approaching a tipping point, esp. if US recession deepens u If US recession deepens, effect on Asia ex-Japan likely to be non-linear, with exports and financial market direct effects multiplied and growth dropping from 7.5% to 4-5% u China – Rising RMB, higher taxes, less import demand, higher energy prices = lower profit margins and potential overcapacities in China’s heavy industries – Pollution concerns combined with Olympics could be the catalyst for permanent closures and starting back toward less energy-intensive GDP growth seen in 1990s

20 The vicious cycle between commodities and inflation Strengthening rolling correlations between oil/dollar and oil/inflation expectations have created a self-fulfilling prophecy WTI 1M vs. DXY Index WTI 1M vs. Inflation* 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0.0 0.0 -0.2 -0.2 -0.4 -0.4 -0.6 -0.6 -0.8 -0.8 -1.0 Jun-03 Oct-03 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-03 Oct-03 Jun-04 Oct-04 Jun-05 Oct-05 Jun-06 Oct-06 Jun-07 Oct-07 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08

WTI-DXY 6-mth rolling correlation WTI-10yr Treas/TIPS Breakeven 6-mth rolling correlation

______*Inflation compensation as measured by the difference between 10-year treasuries and 10-year TIPS Source: Bloomberg, Lehman Brothers Estimates

21 Analyst Certification and Disclosures

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22 For use during Q&A Some have argued higher prices are justified by costs

But US PPI Oil Producer Cost Indices are flattening (3-month moving average)

150

140

130

120

110

100

90 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Jan-02 Apr-02 Jan-03 Apr-03 Jan-04 Apr-04 Jan-05 Apr-05 Jan-06 Apr-06 Jan-07 Apr-07 Jan-08 Oil Field, Gas Field Machinery (MA) Rotary oil & gas field drilling machinery & parts (MA) Oil field and gas field production machinery (MA) Support activities for oil & gas operation (MA) ______Source: US Bureau of Labor Statistics

23 US drilling cost rise and fall even more stark

US Drilling cost PPI (3-month moving average)

260

240

220

200

180

160

140

120

100

80 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jan-02 Apr-02 Oct-02 Jan-03 Apr-03 Oct-03 Jan-04 Apr-04 Oct-04 Jan-05 Apr-05 Oct-05 Jan-06 Apr-06 Oct-06 Jan-07 Apr-07 Oct-07 Jan-08 ______Source: US Bureau of Labor Statistics

24 Even deepwater drilling costs are flattening

Deepwater Rig Day-Rates

Avg dayrates in '000 dollars 600

500

400

300

200

100

0 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 May-01 May-02 May-03 May-04 May-05 May-06 May-07 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07

25 That costs have flat-lined is a problem for NYMEX WTI Higher US costs appear to explain much of the rise in long-dated WTI prices until the divergence in October 2007. US monthly PPI data regressed against average monthly 5-yr out WTI prices $/bbl 100 2 - R through Oct-07 is 96% $91.19 90 - Divergence worsens: Dec-13 WTI to average $98 in Mar-08

70 $70.52 60

26 Are fundamentals or flows driving oil prices? The market for US oil assets provides another data point for long- dated crude oil prices, holding US costs and politics constant

US Oil US Tax Regime Global Supply- Production and Political Demand Costs Uncertainty Balance

Value of a US Oil Field These should trend together if fundamentals are behind Value of Long-Dated WTI WTI price changes

Financial Global Supply- Demand for Demand Crude Oil Balance

27 US M&A market also doesn’t buy the recent rise in prices Perhaps the difference is that portfolio diversifiers and dollar hedgers don’t participate in the M&A market Price of US reserves valued through US M&A activity $20.00 Weighted Average Implied Proved $18.00 Reserve Value US$/Boe $16.00

$14.00 $12.00 $10.00 $8.00 $6.00

$4.00 $2.00 $0.00

______2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 Source: John S. Herold Upstream M&A Review

28 The vicious cycle between commodities and inflation Strengthening rolling correlations between oil/dollar and oil/inflation expectations have created a self-fulfilling prophecy WTI 1M vs. DXY Index WTI 1M vs. Inflation* 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0.0 0.0 -0.2 -0.2 -0.4 -0.4 -0.6 -0.6 -0.8 -0.8 -1.0 Jun-03 Oct-03 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-03 Oct-03 Jun-04 Oct-04 Jun-05 Oct-05 Jun-06 Oct-06 Jun-07 Oct-07 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08

WTI-DXY 6-mth rolling correlation WTI-10yr Treas/TIPS Breakeven 6-mth rolling correlation

______*Inflation compensation as measured by the difference between 10-year treasuries and 10-year TIPS Source: Bloomberg, Lehman Brothers Estimates

29 China could turn bearish versus expectations Via the trade and financial market channels, a period of extended US weakness could spread to emerging markets by 4Q08 u Oil prices at $100+ assume demand growth won’t slow in Asia u While fundamentals of Asian economies look strong now, they may be approaching a tipping point, esp. if US recession deepens u If US recession deepens, effect on Asia ex-Japan likely to be non-linear, with exports and financial market direct effects multiplied and growth dropping from 7.5% to 4-5% u China – Rising RMB, higher taxes, less import demand, higher energy prices = lower profit margins and potential overcapacities in China’s heavy industries – Pollution concerns combined with Olympics could be the catalyst for permanent closures and starting back toward less energy-intensive GDP growth seen in 1990s

30 Refinery bottleneck appears to be eroding Refinery investment has stagnated for a generation, but 2009-10 could be a turning point, especially East of Suez In the aftermath of the 2005 hurricanes we ran out of spare refining capacity, but investments made since oil prices began rising early this decade should cause refinery capacity additions to outpace demand growth in 2009 by as much as 2:1

Global CDU Capacity Global Upgrading Additions (k b/d) Capacity Additions (k b/d)(1) 1,648 1,703 2006 1,667 1.6 2007 1,168 1.4

2008 1,459 1.2 1,035 1,079 1.0 2,674 809 2009 739 0.8 713 2010 3,635 0.6

31 And OPEC capacity to grow faster than demand, for now… Major upstream producers show response to higher prices u Saudi Arabia’s capacity expansion through 2011-12 should underpin capacity additions outpacing demand u Further upside potential from Russia, deepwater, NGLs could leave non-OPEC supply growth underestimated by 300-500k b/d beyond 2010 Global production capacity growth vs. global oil demand growth

k/bd 3,500

3,000

2,500

2,000

1,500

1,000

500

-500 2008 2009 2010 2011 2012

OPEC crude capacity growth OPEC NGL growth ______Non-OPEC supply growth Global demand growth Source: Lehman Brothers estimates

32 Lehman Brothers Oil Outlook

Lehman Brothers Oil Price Outlook

1Q07A 2Q07A 3Q07A 4Q07A 1Q08E 2Q08E 3Q08E 4Q08E 2006A 2007A 2008E 2009E Brent ($ per barrel) 58.62 68.66 74.61 88.53 96.31 90.00 105.00 80.00 66.15 72.60 93.00 83.00 WTI-Brent differential -0.16 -3.45 0.47 1.98 1.51 -1.00 1.00 -1.00 0.34 -0.29 0.00 0.00

Lehman Brothers Oil Supply-Demand Balance 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 2006 2007 2008 2009 Global Demand 85.9 84.8 85.3 86.4 86.9 85.8 86.3 87.6 84.4 85.6 86.7 87.6 OECD 49.4 47.9 48.4 49.4 49.4 47.6 48.2 49.4 49.0 48.7 48.6 48.5 USA 20.9 20.7 20.8 20.8 20.5 20.5 20.5 20.7 20.7 20.8 20.5 20.6 Europe 15.2 15.0 15.4 15.6 15.4 15.0 15.5 15.6 15.6 15.3 15.4 15.3 Non-OECD 36.5 37.0 36.9 37.0 37.6 38.2 38.1 38.2 35.5 36.8 38.0 38.9 China 7.4 7.6 7.4 7.6 7.7 8.1 7.7 8.0 7.0 7.5 7.9 8.2 Middle East 6.6 6.7 7.1 6.6 6.9 7.0 7.4 6.9 6.4 6.7 7.1 7.5 Global Supply 84.5 84.5 84.1 85.5 86.2 86.8 86.7 88.3 84.8 84.7 87.0 89.0 Total Non-OPEC 50.5 50.2 49.7 49.9 50.3 50.5 50.6 51.1 49.7 50.1 50.6 51.4 OECD 20.1 19.9 19.5 19.6 19.7 19.6 19.5 19.8 20.0 19.8 19.6 19.6 N. America 14.3 14.3 14.1 13.9 14.0 14.1 14.0 14.1 14.1 14.1 14.1 14.4 Europe 5.3 5.0 4.7 5.0 4.9 4.7 4.6 4.7 5.3 5.0 4.7 4.3 Non-OECD 28.1 28.0 27.9 28.0 28.2 28.5 28.7 28.9 27.5 28.0 28.6 29.1 FSU 12.8 12.7 12.8 12.8 12.9 13.1 13.3 13.6 12.2 12.8 13.2 14.0 Other (1) 2.3 2.3 2.3 2.3 2.4 2.4 2.4 2.5 2.2 2.3 2.4 2.7 OPEC Crude 29.8 30.0 29.9 31.1 31.2 31.7 31.2 31.9 31.0 30.2 31.5 31.8 OPEC NGLs 4.2 4.4 4.4 4.6 4.6 4.6 4.9 5.3 4.1 4.4 4.9 5.8 Inventory Change -1.3 -0.3 -1.2 -0.9 -0.8 1.0 0.5 0.7 0.4 -0.9 0.3 1.4 Call on OPEC 31.1 30.3 31.2 31.9 32.0 30.7 30.8 31.2 30.7 31.1 31.2 30.4 ______Source: Lehman estimates; (1) Other includes global processing gains, biofuels outside US, Brazil and Europe, GTL, CTL and unaccounted for new projects

33 Analyst Certification and Disclosures