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The Oil Slump:
It’s Not Just About Supply
08 April 2015
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Agenda
1. Emerging price environment
2. Response of the upstream industry
3. Impact on the demand side?
4. Potential role for US exports
1
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Oil demand growth weakness and Saudi behaviour are the key
changes compared to our 2013 forecast of 2014
Sep 2013 fcst
Dec 2014 fcst
Global demand
Non-OPEC
Unconventionals
Proc Gains
OPEC crude
OPEC NGLs
Total supply
-0.5
0.0
0.5
1.0
Million Barrels Per Day
Source: Macro Oils Service
2
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1.5
2.0
Growing US tight oil offset unplanned outages…and then came June
US tight oil growth keeping pace with rise in losses
Other
Iran
Nigeria
120
4,000
100
3,000
80
2,000
60
1,000
40
0
Jan-08
Jan-09
-1,000
Source: Wood Mackenzie; EIA
3
140
Iraq
Libya
US Lower-48 Growth
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Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
20
0
Brent oil price ($/bbl)
Visible unplanned outages ('000 b/d)
5,000
Agenda
1. Emerging price environment
2. Response of the upstream industry
3. Impact on the demand side?
4. Potential role for US exports
4
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Upstream companies needed US$90/bbl to cover capital spending
Few companies execute their original capital spending plans in the current environment
Buy-backs
Dividends
Exploration
Development and overheads only
140
120
100
80
60
40
20
Upstream portfolio only, including development, financing and all other costs. Dividend and buy-back estimates allocated in proportion between business
segments, upstream share only shown. Assumes equity financing for all projects.
Source: Corporate Service
5
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Oil Search
LUKOIL
ExxonMobil
Shell
Murphy
EOG
Devon
BG
Encana
Occidental
Denbury
Cenovus
BP
Husky
Talisman
Hess
Marathon
ConocoPhillips
Suncor
Pioneer
Canadian Oil Sands
Chesapeake
Eni
Lundin
Anadarko
Chevron
Statoil
CNRL
Continental
Kosmos
Pacific Rubiales
Apache
Newfield
Noble
OMV
Premier
Total
Repsol
Santos
Tullow
0
Inpex
Price required 2015-2016 to maintain current net debt
(US$/bbl Brent)
Brent price required to retain current net debt levels 2015-2016
Company capital expenditure cuts approaching $120 billion in
capital spending, with potentially more coming
Share of announced capital spending cuts by operator and development type
Change in year-on-year capex (US$ billion)
Mid/SmallCap
Large-Cap
NOC
MLP
Major
7%
(5)
2%
1%
20%
(10)
8%
Offshore
Oil Sands
(15)
Tight/Shale
(20)
Convention
al
LNG
(25)
Midstream
(30)
Refining
29%
11%
(35)
22%
(40)
Source: Wood Mackenzie, company reports
6
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Recent pricing impacts to our base case supply forecast
US oil production forecast

7
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8,000
6,000
4,000
2,000
Alaska
Onshore Oil
Gulf of Mexico
Lost production
Source: Upstream Lower-48 Service
US tight oil
Sep-16
May-16
Jan-16
Sep-15
May-15
Jan-15
Sep-14
May-14
Jan-14
Sep-13
May-13
Jan-13
-
Sep-12

10,000
May-12

12,000
Jan-12

At $100/bbl Brent pricing we would have
expected onshore US oil production to exit
2015 at 8.3-8.5 million b/d.
Under a lower oil price outlook, we now expect
Onshore US oil production to exit 2015 at 7.9
million b/d.
More than 50% of the potential lost supply were
from onshore conventional fields, which we
expect to see greater investment reductions
than tight oil plays.
Production growth to become even more
concentrated to the core areas of the best
plays as companies focus capital to highreturning and high-growth areas
US tight oil volumes will increase 980,000 b/d
in 2015 and 430,000 b/d in 2016 compared to
over 1 million b/d in 2014
000's b/d

Strong non-OPEC growth continues in early 2015; then slows as low
oil price trims US momentum and accelerates declines in other areas
Year-on-year change and total non-OPEC supply
2.5
Canada Oil Sands
North Sea
Total Non-OPEC (right axis)
Russia
Mexico
56
54
2.0
million b/d
1.5
52
1.0
50
0.5
0.0
48
-0.5
46
-1.0
-1.5
44
Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014 Q1 2015 Q3 2015 Q1 2016 Q3 2016
Source: Wood Mackenzie
8
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total non-OPEC production (million b/d)
United States
Brazil
Other non-OPEC
3.0
Agenda
1. Emerging price environment
2. Response of the upstream industry
3. Impact on the demand side?
4. Potential role for US exports
9
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Global demand: growth to be slightly higher in 2015 than in 2014.
Limited upside from low prices on global GDP and oil demand
Annual growth in global oil demand (mil b/d)
China
US
Europe
Japan
Other
Global
2.0
1.5
million b/d
1.0
0.5
(0.5)
forecast
(1.0)
2011
2012
Source: IEA, EIA (history), Wood Mackenzie (forecast)
10
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2013
2014
2015
2016
US refinery crude oil runs heading towards all-time high this summer
Storage draws later this year when combined with slowing US crude oil production growth
United States refinery runs
Wood Mackenzie’s Product Markets Shortterm Service is forecasting US refining runs
to rise 1.5 million b/d from a seasonal low in
February to 17 million b/d in July.
 Wood Mackenzie expect a similar seasonal
pick up in global crude oil runs to support
Brent and WTI prices during the 3rd quarter
of 2015.

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Although Cushing is over 80% full, US has ample storage available
EDMONTON
HARDISTY
ST. JOHN
NORTH DAKOTA
(BAKKEN)
PADD V
66%
PADD I
79%
63 mmbbl
19.5 mmbbl
DELAWARE CITY
PADD IV
64%
17 mmbbl
SAN FRANCISCO
Cushing
80%
PADD II
78%
70 mmbbl
LOS ANGELES
$2 - $4 / bbl. import
CUSHING
136 mmbbl
ST. JAMES
Key
Closed arbitrage
Open arbitrage
HOUSTON
PADD III
60%
% full crude storage at
refineries and tank farms
mmbbls Refinery and tank capacity
(millions of barrels)
Source: Wood Mackenzie, EIA,
12
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285 mmbbl
Note: tariffs are Wood Mackenzie estimates
Too early to conclude Asia will run out of spaces to store crude oil…
Filling China’s new SPR capacity in 2015 could remove about 40 million barrels of crude from the
market, or 110,000 b/d if smoothed out over the year.
Planned SPR Completion in China, 2015 – 2017
Planned SPR Completion in India, 2015 - 2017
70
70
Tianjin
Huangdao
Jinzhou
Jintan
Huizhou
Zhanjiang
Vizag
50
40
30
20
10
50
40
30
20
10
0
2015
Source: Wood Mackenzie
13
Mangalore
60
Storage Capacity, million barrels
Storage Capacity, million barrels
60
Padur
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2016
2017
2015
2016
2017
Agenda
1. Emerging price environment
2. Response of the upstream industry
3. Impact on the demand side?
4. Potential role for US exports
14
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US crude oil could reach global markets through a variety of
routes, vessel sizes, and costs
15
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Europe primarily processes its own light-sweet crude oil, while Asia
is exposed to long-haul supplies
USGC tight oil surplus exceeds European light oil imports, so will leave the Atlantic Basin
NWE Refinery Light Crude Slate
KB/D
2500
Asia-Pacific Light Crude Slate
KB/D
6000
5000
2000
4000
1500
3000
1000
2000
500
1000
0
0
Domestic
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Med Basin
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West Africa
Other
Domestic
Middle East
Med/Caspian
Other
Less complex refining configurations in Europe and Asia put a
higher value on LLS than the USGC, even after transportation
$/bbl
LLS Netback in USGC
95
94
93
92
91
90
89
88
87
86
85
USGC
Source: Wood Mackenzie
17
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NWE
Asia
Eliminating US export ban reduces Brent – LLS differential, but US
refiners retain some competitive advantage over other regions
$/bbl
7
6
5
4
3
2
Europe
1
Asia
0
Ban
Source: Wood Mackenzie
18
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No Ban
Condensate gets its best value by splitting the species ans
sending each to its most valuable market
$/bbl
Eagle Ford Condensate Netback in USGC
90
88
86
84
82
80
USGC
Source: Wood Mackenzie
19
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NWE
Asia
Splitter
Medium-sour is a declining opportunity in Europe, but steady in
Asia, with little local supply
Mars might compete for market share with Arab Medium barrels in Asia
NWE Refinery Medium Sour Crude Slate
Asia-Pacific Medium Sour Crude Slate
KB/D
2500
2000
1500
1000
500
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
0
Domestic
Med Basin
Source: Wood Mackenzie
20
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West Africa
Other
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
KB/D
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
Domestic
Source: Wood Mackenzie
Middle East
Med/Caspian
Other
A large distillate cut and Saudi Arabia's Asia pricing strategy
creates a commercial magnet for Mars crude oil
Mars Netback in USGC
$/bbl
96
94
92
90
88
86
84
82
80
USGC
Source: Wood Mackenzie
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NWE
Asia
Takeaways
Do not apply conventional wisdom to an unconventional problem

Oil price risk is more on the upside
» Return of chaos in the Middle East; social strife in Nigeria, Venezuela
» Impact of Brazil political corruption crisis on ability for Petrobras to execute
» Low price risk is tight oil break-evens fall, goes international, and pushes capital intense mega
projects off the supply curve

Global GDP relevant to sustain price post-2017
» Without continued growth, emerging world demand growth is threatened
» Structurally lower long-term oil price would imply no strong recovery in demand
» Emerging world demand growth will increase the pull of a variety of crude oils to Asia

Companies will fail before plays
» Producers appear to be taking out $60/bbl hedges; combined with $80/bbl hedges from late2014 could provide price realization above break-even
» Cash flow likely is the key financial metric
» Consolidation would not reduce production; changes company name on the fence
22
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Harold “Skip” York
Vice President – Integrated Energy
T +1 713 470 1667
E [email protected]
 Skip York is the Vice President of Integrated Energy in Wood Mackenzie’s America’s Research Team responsible
for cross-segment integration of petroleum market and infrastructure issues for North America. With over 20
years of worldwide experience across the energy value chain, he has deep expertise in petroleum market
economics and price-setting mechanisms including valuing non-fungible crudes across a number markets and
leveraging technologies for competitive advantage.
 Specializing in strategy and commercial optimization he recently has been focusing on the implications of logistic
constraints on market-clearing dynamics and prices for Canadian heavy crude oil and production growth from
unconventional plays.
 Prior to joining Wood Mackenzie, Skip worked for ExxonMobil in a variety of strategic planning assignments. He
held roles as the global expert on joint venture negotiation best practices, managing new business development
downstream opportunities in Asia Pacific, and leading research teams on studies of the economic impact of
large-scale oil investments on the economy of Russia. He also has consulted for clients at McKinsey & Company
and Charles River Associates.
 Skip holds a PhD Economics from the University of Virginia, as well as, a Masters of Science and Bachelor
of Science also in Economics from the University of Wyoming.
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Disclaimer
Strictly Private & Confidential

This report has been prepared by Wood Mackenzie Limited. The report is intended
solely for the benefit of attendees, its contents and conclusions are confidential and
may not be disclosed to any other persons or companies without Wood Mackenzie’s
prior written permission.

The information upon which this report comes from our own experience, knowledge
and databases. The opinions expressed in this report are those of Wood Mackenzie.
They have been arrived at following careful consideration and enquiry but we do not
guarantee their fairness, completeness or accuracy. The opinions, as of this date, are
subject to change. We do not accept any liability for your reliance upon them.
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