Paris Briefing. Adapting to the challenge of low oil prices. Thursday 11 th June Trusted commercial intelligence

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1 Paris Briefing Adapting to the challenge of low oil prices Thursday 11 th June 2015

2 Agenda 14:30 15:00 Registration & Coffee 15:00 15:10 Chair s opening remarks Ben Hollins Senior Vice President Head of Research EMEARC 15:10 15:30 Low crude prices, the new normal? Jonathan Leitch Research Director EMEARC Refining and Oil Product Markets 15:30 15:50 Corporate positioning at US$60/bbl Valentina Kretzschmar Research Director Corporate Analysis 15:50 16:10 Refreshment Break 16:10 16:30 Back to the future: fiscal responses to lower prices Graham Kellas Vice President, Global Fiscal Research 16:30 16:50 LNG supply in the new market reality Giles Farrer Research Director Global Gas and LNG Supply 16:50 17:00 Chair s closing remarks followed by Drinks Reception Ben Hollins Senior Vice President Head of Research EMEARC 2

3 Ben Hollins Head of Research, EMEARC T E ben.hollins@woodmac.com Ben joined Wood Mackenzie in 1995, and is Head of Wood Mackenzie s Research division in EMEARC, which numbers approximately 200 analysts covering Upstream Oil & Gas, Refining, Petrochemicals, Gas, Power, Metals and Mining sectors. In the course of his career at Wood Mackenzie, Ben has managed the development of the Gas & Power business with extended periods leading both Research and Consulting divisions. Prior to joining Wood Mackenzie, Ben worked for the UK regional electricity company Eastern Group in strategic planning with specific involvement in the development of the supply company Eastern Natural Gas, and the investment programme in gas-fired power generation, throughout the formative years of the competitive UK gas market. Ben graduated from Oxford University with a MA Honours degree in Natural Sciences in 1988 and holds a subsequent MBA from Imperial College, London. 3

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5 Low crude prices, the new normal? Jonathan Leitch Research Director

6 Jonathan Leitch Research Director Refining and Oil Product Markets T E jonathan.leitch@woodmac.com Jonathan Leitch is a Research Director working on the Product Markets Service, based in London. Jonathan specialises in forecasting products prices and refining margins. He leads our coverage of the short term oil products markets, co-ordinating analysis of regional supply demand balances along with our outlook for prices and margins. He joined Wood Mackenzie in 2008 after working as a research associate at another leading oil consultancy where he spent four years actively involved in analysis of the downstream markets. With a total of 23 years oil market experience, Jonathan has worked in trading for Rhein Oel/RWE Trading dealing with physical crude oil and futures and derivatives. Prior to this he worked for Shell in crude oil operations and shipping. 6

7 $/bbl Annual change in demand (million b/d) Annual GDP change % Market fundamentals are different now to the 2008 price crash Comparison of relative price declines GDP and oil demand changes % 4% 3% 2% 1% % -1% % Days from price peak 2008 crash 2014 crash % Demand change GDP Source: Argus; Wood Mackenzie 7

8 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 '000 b/d '000 b/d US$/bbl Growth in US L48 supply was absorbed by high level of production outages until mid-2014 Unplanned supply outages US L48 growth outstrips outages 2H Other Canada Oil Sands South Sudan Kuwait Saudi Arabia Iraq Yemen Syria Libya Iran Nigeria L48 above outages Outages above L48 US L48 growth Global Outages growth Brent Price (R-axis) 20 0 Source: Wood Mackenzie Oil Supply Tool; historic price data - Argus; 'Lower 48 growth' and 'Outages growth' relative to average in Jan

9 Q Q Q Q Q Q Q Q Q Q year-on-year change (million b/d) global supply (million b/d) Supply: global liquids production to slow substantially in near term Low oil price environment slows non-opec growth dramatically Global supply split OPEC NGLs OPEC crude oil Unconventional Processing gain Non-OPEC Global Supply (right axis) Source: Wood Mackenzie 9

10 Million b/d Global production capacity increases driven by deepwater and US tight oil Global capacity continues to grow strongly Unconventional/processing gain Tight Oil (Other) Tight Oil (US) Deepwater Oil Sands (Canada) Other conventional Source: Wood Mackenzie Oil Supply Tool 10

11 Global demand growth driven by Asia and transportation fuels. Growth slows in the long-term Change in oil demand by region (mb/d) Change in oil demand by sector (mb/d) 8.0 Africa Lat Am Rus/Casp ME Asia North Am Europe Total 8.0 Other Electricity Res/Comm/Agri Petchem Transport Total (2.0) -2.0 (4.0) -4.0 Source: Wood Mackenzie 11

12 US$/bbl Crude prices strengthen sharply in 2017 and 2018 due to lower investments in the short term Oil demand growth resumes and OPEC spare capacity narrows OPEC spare capacity widens and North American production increases strongly Economic problems result in delays to investment in production capacity Low prices necessary to reduce investments and limit output growth Supply/demand balance tightens. Higher cost of developing new supply to meet growing demand 0 Brent real - H Brent real - H Source: History - Argus, Forecast - Wood Mackenzie 12

13 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Crude runs (Million b/d). Stocks (Million barrels). Refiners have taken advantage of low crude prices and stronger products demand but product stocks are building Global crude runs Global total product stocks yr range yr avg 5-yr range yr avg Source: History JODI, EIA, National Statistics, Forecast Wood Mackenzie 13

14 Price, OPEC policy and geopolitics are key global supply risks Key country risks and uncertainties US: possible lifting of US crude export ban and reaction of tight oil to lower price environment Russia: duration and impact of sanctions on long term production Sanctions Unrest Other issues Libya: becoming increasingly volatile Iran: sanctions gradually lifted but rapid return of production is unlikely Brazil: corruption scandal threatens pace of development Iraq: IS and long term infrastructure issues Venezuela: economic risks Colombia: FARC rebel activity potentially escalating Nigeria: unrest and bunkering in delta Angola: uncertainty in Kwanza basin Yemen/Syria: length and outcome of civil war unknown 14 South Sudan: unrest continues with little hope of resolution

15 Conclusions Summary and Conclusions Low crude prices are not the new normal! Investments are being reduced and this will affect production 2-3 years ahead resulting in a steeper increase in crude prices High cost production will be needed in order to meet global demand growth Crude prices to increase above $100/bbl by

16 Corporate positioning at US$60/bbl Dr Valentina Kretzschmar Director Corporate Research

17 Valentina Kretzschmar Director Corporate Research T E Valentina joined Wood Mackenzie eleven years ago and is a Director at Wood Mackenzie s Corporate Research Group. Valentina s extensive energy sector experience includes strategic, operational and financial analysis of leading global energy companies, with a narrow focus on the European and Russian Majors. The breadth and depth of her knowledge of the Russian corporate landscape is underpinned by the wide-ranging experience acquired over the past decade as a regional upstream oil & gas and coal analyst. Previously, Valentina worked as a Petroleum Engineer with Edinburgh Petroleum Services Ltd and Research Fellow in the Energy Group at the University of Edinburgh. She holds a BEng Honours Degree in Engineering from the University of Edinburgh, MSc in Advanced Mechanical Engineering from Imperial College, London, and a PhD in Clean Coal Technology from the University of Edinburgh. She is a Chartered Engineer (MIMechE C.Eng). 17

18 Strong response to the oil price collapse has stabilised the sector Most indicators pointing to an oil price recovery Sector market performance 2014/15 (indexed) 1.3 Indexed MSCI Energy Indexed MSCI Global Indexed Brent Industry reaction to US$60/bbl oil has been fast and deep» Investment slashed; dividends and buybacks cut or suspended» Most are on a firmer financial footing but many remain exposed Market seeking stability» What happens next? Months from peak Brent (19/06/14) Source: ThomsonReuters Datastream. 18

19 Cost cutting has gone deep; 2015 guidance is down US$130 billion Strategic response determined by: 1) ability, 2) need and 3) strategic desire to cut Year-on-year change in upstream capital budgets (%) 60% Major Focused US International Independent Diversified North American Focused Canadian Russian 40% NOC Conglomerate Average 20% Peer group shown has cut US$106 billion year-on-year 0% -20% -40% Peer group average = -28% -60% -80% -100% Source: Wood Mackenzie, Company Reports. Includes exploration. 19

20 2015 cash flow breakevens have been reduced by US$21/bbl Different companies pulling different levers no one size fits all Brent price required for upstream portfolio to be cash flow neutral in 2015: mid-2014 vs. Q (US$/bbl) 140 Buybacks % Dividends Exploration % -15% -22% -25% -26% Development -35% -17% -31% Mid Q Mid Q Mid Q Mid Q Mid Q Mid Q Mid Q Mid Q Mid Q All top-50 companies International Independent Focused Canadian Diversified North American Major Conglomerate Focused US NOC Russian Source: Wood Mackenzie. Breakevens (excluding announced 2015 M&A and other one-off items) calculated for upstream portfolio only, including development, financing and all other costs. Average shown weighted by upstream NPV,10. Dividend and buybacks allocated in proportion between business segments; upstream share only shown. Assumes equity financing for all projects. Includes hedging where applicable. See appendix for more details. 20

21 Gearing Ratio % WoodMac forecast Ave. breakeven but many remain exposed Further action will be required to hold gearing flat through Wood Mackenzie corporate financial stretch at US$60/bbl Brent in Source: Wood Mackenzie. Breakevens (including announced 2015 M&A and other one-off items) calculated for upstream portfolio only, including development, financing and all other costs. Dividend and buybacks allocated in proportion between business segments; upstream share only included. Assumes equity financing for all projects. Includes hedging where applicable. See appendix for more details. Gearing as per last reported. * PTTEP, BG, Rosneft, Newfield, Nobel Energy, Devon, Apache, Cenovus and Encana have a breakeven below US$50/bbl Brent breakeven $/bbl

22 Breakeven (US$/bbl) Net debt (US$ billion) Financial stretch case study: Tullow locked-into intense spend phase Dividend cut; exploration on hold; still needs to do more Cash flow breakeven 2015 (Brent, US$/bbl) Net debt outlook (US$ billion) Dividends Development Exploration US$60/bbl Brent Base Price Debt/Cash Position High Price Debt/Cash Position Low Price Debt/Cash Position Base outlook* as per H US$6.3 billion of debt facilities Q Q Source: Wood Mackenzie. Includes hedging (breakeven price would actually be lessexcluding hedging, as only unhedged production varies with price). 22

23 NPV,10 (US$ billion) Counter-cyclical case study: Shell gains first-mover advantage Acquisition of BG secures industry-leading positions in deepwater oil and LNG NPV,10 by resource theme Group cash flow: Wood Mackenzie projected GTL Unconventional gas Oil sands Deepwater Acid / sour gas Tight oil LNG Conventional Cash flow outlook high Cash flow outlook base Cash flow outlook low (10) 50 (20) 0 Shell with BG Shell XOM Chevron BP Total Statoil Eni (30) Source: Wood Mackenzie. Assumes cash acquisition payment of US$19.6 billion in Exploration spend, Dividends and buybacks (US$25 billion in 2017 to 2020 period) as guided by Shell. 23

24 Gearing Ratio % Ave. breakeven WoodMac forecast The pool of big buyers seems likely to increase Financial health improves for many through 2016/17 80 Wood Mackenzie corporate financial stretch at US$60/bbl Brent in 2016/ Brent breakeven $/bbl Source: Wood Mackenzie. Breakevens (including announced 2015 M&A and other one-off items) calculated for upstream portfolio only, including development, financing and all other costs. Dividend and buybacks allocated in proportion between business segments; upstream share only included. Assumes equity financing for all projects. Includes hedging where applicable. See appendix for more details. Gearing as per last reported. 24

25 Shell with BG ExxonMobil Shell Total Eni BP Chevron Statoil Repsol Murphy Oil ConocoPhillips Noble Energy Hess Marathon Discovery cost (US$/boe) Full cycle IRR WI Net Block Acreage (000 km2) Exploration: is this a golden opportunity for new ventures? Exploration costs could drop by over 30% in 2016 Exploration costs vs. full cycle returns Net deepwater acreage 4 Discovery cost IRR Base 20% 600 Hotspot Proven Frontier Ultra-Frontier % % % 0 0 0% Source: Wood Mackenzie. 25

26 Jan-06 Jan-06 Apr-06 Apr-06 Jul-06 Jul-06 Oct-06 Oct-06 Jan-07 Jan-07 Apr-07 Apr-07 Jul-07 Jul-07 Oct-07 Oct-07 Jan-08 Jan-08 Apr-08 Apr-08 Jul-08 Jul-08 Oct-08 Oct-08 Jan-09 Jan-09 Apr-09 Apr-09 Jul-09 Jul-09 Oct-09 Oct-09 Jan-10 Jan-10 Apr-10 Apr-10 Jul-10 Jul-10 Oct-10 Oct-10 Jan-11 Jan-11 Apr-11 Apr-11 Jul-11 Jul-11 Oct-11 Oct-11 Jan-12 Jan-12 Apr-12 Apr-12 Jul-12 Jul-12 Oct-12 Oct-12 Jan-13 Jan-13 Apr-13 Apr-13 Jul-13 Jul-13 Oct-13 Oct-13 Jan-14 Jan-14 Apr-14 Apr-14 Jul-14 Jul-14 Oct-14 Oct-14 Jan-15 Jan-15 Apr-15 Apr-15 Deal Count Deal Count Oil Price (US$/bbl) Oil Price (US$/bbl) M&A: opportunities for the bold, but timing is everything Deal flow has collapsed, but valuations are holding (for now) Weighted average Implied Long-term Oil Price vs. deal count vs. Brent oil price Corporate deal count Asset deal count Brent Forward Month Implied Long-term Oil Price Shell / BG deal Source: Wood Mackenzie M&A Tool. The Implied Long-term Oil Price is the long-term real oil price that would be required to make Wood Mackenzie s NPV of the acquisition equal to the price paid, after factoring in 36 months of futures prices from the deal effective date. Implied Long-term Oil Price displayed as a three month trailing weighted average. Deal count incorporates; global, asset and corporate deal activity in the upstream sector; involving discovered or known reserves; with a consideration (or assumed) of over US$10 million. Deal Count is displayed as a three month trailing average. Figures may be subject to change, as new information is disclosed. Brent oil price is displayed as a monthly average. 26

27 Indexed Production Will Shell/BG trigger a new wave of corporate consolidation? Who has the financial capacity and appetite to re-engage? Majors: future M&A activity Production growth outlook Asian NOCs vs. Majors Eni 8bn out to Range of Majors CNOOC CNPC ONGC Petronas PTTEP Sinopec ExxonMobil Alert for M&A opps 120 Statoil No specific target 110 Chevron US$9bn out to 2017 Actively screening 100 BP Downstream bias 90 Total Downstream bias 80 Shell Pre-BG deal target First mover ; bold US$82 billion purchase of BG disposals target (US$ billion) 2015 acquisitions expected? Source: Wood Mackenzie 27

28 Long-life resource exposure will guide M&A strategy Asian NOCs still weighted to conventional; Majors increasingly differentiated Weightings of resource themes in upstream portfolios (% of total NPV) 100% 90% 80% 70% 60% 50% Conventional Deepwater LNG Oil Sands Tight Oil Uncon Gas Others 40% 30% 20% 10% 0% Source: Wood Mackenzie 28

29 Pacific Rubiales Lundin Apache ExxonMobil Kosmos EOG Occidental Oil Search CNRL Continental Southwestern Pioneer Marathon Suncor Energy Newfield Anadarko Hess Husky Santos Devon Encana ConocoPhillips Premier California Resources Noble Energy OMV Tullow Oil Denbury Cenovus Eni Chevron Repsol BG Chesapeake BP Canadian Oil Sands Murphy Oil Total Range Woodside Shell Statoil LUKOIL Gazprom Cairn Energy Rosneft Inpex Corporation Implied Long-term oil price (US$/bbl) Limited pool of deeply discounted acquisition opportunities Market valuations imply an average long-term Brent price of US$79/bbl Long-term Brent price implied in current market valuations Major Focused US International Independent Diversified North American Focused Canadian Russian Average Cost deflation could see premiums to our base-case valuation fall 80 Peer Group Average = US$79/bbl Source: Wood Mackenzie Upstream NPV,10 as per Corporate Benchmarking Tool Q Enterprise Value = Market Capitalisation (average May 2015), plus latest reported net debt 29

30 Finely balanced outlook presents a dilemma Industry reaction to US$60/bbl oil has been fast and deep but is it enough? Consensus scenario steady oil price recovery» If this is the bottom, now is the time to move Downside scenario sustained oil price weakness» If there is more pain to come, wait and see 30

31 Back to the future: fiscal responses to lower prices Graham Kellas, VP Global Fiscal Research

32 Graham Kellas Vice President, Global Fiscal Research T E graham.kellas@woodmac.com Graham has 30 years experience, specialising in the analysis of global fiscal systems. He has advised several governments on petroleum fiscal policy; most recently Colombia, Ireland, Newfoundland & Labrador (Canada) and South Africa. He has also advised numerous oil companies on fiscal matters, including assistance to oil industry associations during debates with governments on appropriate terms (e.g. Nigeria and UK). Graham wrote several successful multi-client reports, analysing and comparing global fiscal systems, published by Wood Mackenzie between 2002 and He also has wide experience delivering training courses in petroleum economics and fiscal analysis around the world. Graham previously worked for Petroconsultants/IHS Energy Group, two independent oil exploration companies and as a research Fellow in Aberdeen University s Economics department. Graham has an MA (Hons) in Economics and a masters degree (M Litt) for his thesis on Oil Field Abandonment in the UKCS, both from Aberdeen University in Scotland. Graham is a member of the Association of International Petroleum Negotiators (AIPN) and is a regular speaker at industry conferences. 32

33 Few changes to production terms since last summer.. but terms were already changing in several countries Fiscal terms changed for producing assets since prices started to fall in mid 2014 Other fiscal changes USA (N. Dakota) Extraction Tax Mexico 1 st Round PSC Colombia Royalty Greenland Royalty / equity Trinidad Petroleum Tax Argentina Royalty / Export Duty Ireland Petroleum Tax UK Petroleum Taxes Kazakhstan Export Duty Croatia 1 st Round PSC Sub-Saharan Africa New Petroleum Code / PSC terms Congo (Br.) * Gabon Gambia Guinea Kenya * Liberia Madagascar * Mozambique Tanzania Uganda * Pending final approval (at April 2015) Russia Royalty / Export Duty China Resource Tax / Oil Levy Thailand Equity / bonuses Myanmar PSC terms Malaysia PSC terms Australia Carbon Tax 33

34 Some terms automatically change because fiscal rates are linked to oil price levels China (Special Levy) Venezuela (Windfall Tax) Brazil (PSC Profit Share) Barbados (APT) Florida (Sev. Tax) N. Dakota (Extraction Tax) Alberta (Oil Sands Royalty) Trinidad (SPT) Trinidad (Profit Share) Newfoundland (Super Royalty) Colombia (Surplus Fee) US GoM (Royalty) Kazakhstan (Export Tax) Congo (Profit Share) Pakistan (Windfall Levy) Malaysia (Supp. Payment) Alberta (Royalty) Somalia (Royalty) Argentina (Export Duty) Brit. Columbia (Royalty) Saskatchewan (Royalty) Russia (Export Duty) Russia (MET) Oklahoma (Sev. Tax) Source: Wood Mackenzie Oil Price (US$/bbl) First Trigger Price Highest Trigger Price Source: Wood Mackenzie 34

35 Several governments have announced plans to review fiscal terms Canada (Alberta) Royalty? Russia Royalty / Export Duty? USA (L48) Royalty (federal); production tax (states)? Mexico 1 st Round PSC terms? Colombia Royalty/tax terms? Bolivia Tax credits? Brazil Equity? Algeria Tax terms? Ghana New E&P Law? Nigeria New fiscal system? Angola PSC terms? South Africa Equity / tax? Iran Service contracts? India Revenue-sharing? Malaysia EOR incentives? Thailand Introduction of PSCs? Indonesia PSC terms? 35

36 to ensure licensing is successful in a highly competitive market and reduced exploration budgets Open Planned 36

37 Six driver for future fiscal changes 1) Are terms making projects uneconomic? Australia (offshore) Norway UK Brazil (concession) Nigeria (PSC) US (Alaska) Indonesia US (GoM) Nigeria (JV) China Angola (PSC) Canada (Alberta) Kazakhstan Iraq (service) Venezuela Egypt Russia Lowest Highest 0% 10% 20% 30% 40% 50% 60% 70% Source: Wood Mackenzie Minim um Government Share of US$60/bbl Source: Wood Mackenzie 37

38 Six driver for future fiscal changes 2) Is the tax rate too high? Canada (Alberta) Australia (offshore) Brazil (concession) US (GoM) UK China Nigeria (PSC) Angola (PSC) US (Alaska) Venezuela Russia Kazakhstan Egypt Indonesia Norway Nigeria (JV) Iraq (service) Lowest Highest 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Wood Mackenzie Maxim um Government Share of US$60/bbl Source: Wood Mackenzie 38

39 Profit Oil ($/bbl) Govt Share (inc. PIT) Six driver for future fiscal changes 2) Is the tax rate too high? Progressive tax rates % 80 90% % 70% 60% 50% 40% 30% 20% 10% % Source: Wood Mackenzie Profit Oil Govt Share (inc. PIT) Source: Wood Mackenzie 39

40 Six driver for future fiscal changes 3) Are there legal constraints on fiscal changes? Fiscal Systems* Concession PSC Concession/PSC Mostly Concession Mostly PSC Service Contract Concession/Service contract PSC/Service contract * Excludes terms for domestic NOCs 40

41 Brent Oil Price (US$/bbl) Six driver for future fiscal changes 4) Is there a history of fiscal changes? 120 Alaska Alberta + + Angola - Australia China - - Indonesia - China Russia - - Kazakhstan Australia - - Kazakhstan UK Russia Russia + + Russia + + / Indonesia - Venezuela - - Venezuela UK + UK Alaska Alberta Alaska Alaska - - Alberta China - - Indonesia - Indonesia + China Indonesia + Kazakhstan Kazakhstan Nigeria - Russia + + Kazakhstan Russia + + Norway - - Kazakhstan Russia US (GoM) - UK + UK Russia + + / - - UK Venezuela Venezuela - - Russia Venezuela Venezuela + + US (N Dakota) positive change that impacts all existing assets negative change that impacts all existing assets + + positive change that impacts some existing asset(s) + positive change that impacts new fields / licences - - negative change that impacts some existing asset(s) - negative change that impacts new fields / licences 41

42 Oil & Gas Tax (US$bn, 2014) Oil & Gas Tax % Total Govt Income Six driver for future fiscal changes 5) Is the government dependent on oil taxation? Russia Alberta Alaska UK 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: Wood Mackenzie Oil & Gas Tax Oil & Gas Tax % Total Govt Income Source: Wood Mackenzie 42

43 Oil Production Index (2015 = 100) Six driver for future fiscal changes 6) What is the production trend? Venezuela Russian Federation United Kingdom Nigeria China Egypt Indonesia Source: Wood Mackenzie 43 Source: Wood Mackenzie

44 Conclusions Many governments will wait a little longer to see what happens to the oil price More favourable terms for producing assets will be rare Tax-dependent governments may trade higher share of revenue at lower prices for a lower share under higher prices Fiscal terms for new licences especially challenging projects will improve Emphasis should be on reducing regressive terms and high marginal tax rates Sovereignty vs stability (concession vs PSC) debate very much alive 44

45 LNG supply in the new environment Giles Farrer Research Director Global Gas and LNG Supply

46 Giles Farrer Research Director LNG and Global Gas Research T E giles.farrer@woodmac.com Giles is Wood Mackenzie's senior Global LNG supply expert. He defines Woodmac's view on global LNG supply and LNG contracting and is a key contributor to the LNG Service, LNG Tool and Global Gas Service. Giles has expertise in global LNG supply forecasting, LNG contracting, LNG pricing, LNG plant costs, asset valuations, competitor benchmarking and market analysis. Prior to joining the LNG team in 2008, Giles worked as an upstream analyst on the Middle East and South Asian research group. He has also worked for Evaluate Energy in London. Giles holds a BA (Hons) from Exeter University (UK). 46

47 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 $/mmbtu A soft market, including growing supply competition, has resulted in the loss of the Asia price premium This is before the introduction of a further 130 mmtpa of new LNG over the next 5 years Y-on-Y Change in Pacific LNG Asian and European Prices Asian and European prices have converged Asian Contract (3,3,1) Japan LNG Spot Brent equiv NBP Source: Wood Mackenzie; Argus Media 47

48 External factors are shaping the LNG market reaction to over-supply The change in oil price and its implications will have profound consequences Factors to watch European LNG supply to rise Asian LNG demand growth slowing Russia s response US Ramp Up Reaction to low oil prices Global factors to watch Oil Price impact on gas demand Ramp up of Australian developments Currency Movements Corporate Reactions Impact on costs 48

49 mmtpa mmtpa The outlook for global supply has strengthened and we see more downside to Asian LNG demand We have reduced our Asian LNG demand outlook for a second time following a reduction in 2014 Global LNG Supply Outlook H1 15 vs H2 14 Asia Pacific LNG Demand H1 15 vs H More supply available for Rest of World Existing New USA New Australia New Other H H H Source: Wood Mackenzie Global Gas Service H

50 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 mmtpa $/mmbtu (nominal) consequently NW Europe as the market of last resort will see LNG supply increase This will create further downside risk to European prices European LNG imports European and US LNG prices and economics Other pre-fid Russia LNG US LNG Existing LNG Source: Wood Mackenzie 50 Henry Hub NBP Henry Hub + SRMC Henry Hub + LRMC

51 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 bcm $ per barrel Roubles per US$ Delivered costs to Chinese border (US$/mmbtu) The Rouble devaluation strengthens Russia s ability to compete on cost Supports Russia s push for more pipe gas to China, threatening LNG Russia to Europe Flows Brent vs Rouble/US$ Power of Siberia East Siberia gas to China border Chayandinskoye - 17 tcf - East Siberia Kovyktinskoye - 24 tcf - East Siberia Brent crude oil price Roubles per dollar (right-hand axis) Pre RUB devaluation Post RUB devaluation Source: ThomsonReuters Datastream; Wood Mackenzie Global Gas Service 51

52 mmtpa The Pacific market looks well supplied for now, but could need 95 mmtpa more LNG by 2025 Due to the combination of rising demand, contract expiry and declining legacy LNG Pacific supply/demand outlook (based on post-fid LNG) 350 Qatar and limited portfolio players balancing the market Growing competition for market Additional supply essential mmtpa gap Pacific supply Uncommitted US Uncommited Yamal Qatar + Atlantic flexible Pacific LNG Demand H Pacific LNG Demand H Source: Wood Mackenzie LNG Tool Q2 15, Global Gas Service H1 15

53 US$/mmbtu US$/mmbtu Improvements in technology and understanding of plays are driving a reduction in US costs, forcing a lower US price outlook A second wave of lower priced US LNG appears inevitable Henry Hub (history and Woodmac forecasts) Oil indexed vs Henry Hub indexed (DES, Japan) H2 14 H1 '15 H1 '15 0 Oil ( %) Oil ( %) US link (HH, $3-5) Source: Wood Mackenzie North American Gas Service (H1 15) 53

54 In this lower cost world, cheaper and easier LNG projects will be favoured New low cost supply options East Russian options Use of existing pipe capacity for Pacific coast LNG Brownfield Tangguh Onshore PNG Small-scale stranded resource Australian backfills/ brownfields 54

55 Capital Spemd to first gas (US$ bn) In Mozambique, technical and commercial progress is good but sanction could be impacted by corporate manoeuvring High capex greenfield projects look challenged in the current environment Tanzania/Mozambique LNG Capex to first LNG by project 25 Two co-ordinated two train projects Joint two train project Area 4 (onshore LNG) Area 1 (onshore LNG) Block 2 Block 1 & 4 Area 4 (Coral FLNG) Initial upstream capex Initial LNG capex Source: Wood Mackenzie LNG Tool, Global Gas Service 55

56 Gearing Ratio % WoodMac forecast Ave. breakeven With oil prices low, companies are struggling to hold gearing flat through 2015 The resulting capex deferrals, divestments and consolidation impacts supply growth 80 Wood Mackenzie corporate financial stretch at US$60/bbl Brent in Source: Wood Mackenzie. Breakevens (including announced 2015 M&A and other one-off items) calculated for upstream portfolio only, including development, financing and all other costs. Dividend and buybacks allocated in proportion between business segments; upstream share only included. Assumes equity financing for all projects. Includes hedging where applicable. See appendix for more details. Gearing as per last reported. * PTTEP, BG, Rosneft, Newfield, Nobel Energy, Devon, Apache, Cenovus and Encana have a breakeven below US$50/bbl Brent breakeven $/bbl

57 mmtpa and buyer fragmentation means securing long term contracts for new supply projects is more difficult More supply will need to be encouraged, strengthening the hand of portfolio players LNG buyers LNG sellers Incumbents New Entrants Source: Wood Mackenzie LNG Corporate Service (forthcoming) 57

58 The fall in oil price has delayed some projects but there are still projects being sanctioned in North America in 2015 Projects where FID is envisaged in 2015 Tax breaks and lower steel prices support late 2015 FID Sabine Pass T5 (Cheniere) and Douglas Channel (Altagas/Exmar/EDF) most likely of other N.American proposals to take FID in 2015 Pacific North West Douglas Channel Woodfibre Jordan Cove Corpus Christi T1&2 Southern LNG Corpus Christi T3 Freeport T3 Sabine Pass T5 Golden Pass Lake Charles Cheniere two train sanction at Corpus Christi Freeport Train 3 sanctioned Shell modular facilities already being built. FID expected H2 15 Various small FLNG projects are being pursued in West Africa Anadarko targeting FID for late 2015 but could slip Mozambique Area 1 LNG Mozambique Area 4 LNG Coral FLNG Browse FLNG Tangguh Train 3 Source: Wood Mackenzie LNG FID Tracker 58 Expected FID in 2015 Wildcard FID in 2015 FID scheduled for 2015 but delayed Sanctioned in 2015

59 Conclusions We are now in a period of LNG over-supply. Asian LNG demand growth is disappointing which will lead to an increase in LNG supply into the European market. The devaluation of the rouble and a lower outlook for US gas prices signify a structural shift downward in the global gas cost curve Lower cost, smaller LNG projects are better positioned to compete in this environment Buyer fragmentation is strengthening the hand of LNG portfolio players 59

60 Disclaimer Strictly Private & Confidential This presentation has been prepared for Wood Mackenzie s clients in Paris. The presentation is intended solely for the benefit of our clients. 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 is based comes from our own experience, knowledge and databases. The opinions expressed 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. 60

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