February 29, 2016 Price Forecast Commentary

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1 February 29, 2016 Price Forecast Commentary Sproule s short-term outlook for oil and gas prices is based on information obtained from various sources, including government agencies, industry publications, oil refiners, and natural gas marketers as well as consideration for the New York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE) futures markets. The forecast used in this evaluation was derived as of February 29, The North American oil price forecasts are based on the NYMEX Division Western Texas Intermediate (WTI) futures contract, and the North American gas price forecasts are based on the NYMEX Division Henry Hub natural gas futures contract. International oil prices are based on the ICE Brent futures contract and international gas prices are based on the ICE National Balancing Point (NBP) futures contract. The supply and demand fundamentals, along with the NYMEX and ICE oil and gas futures prices are the foundation of Sproule s energy pricing models in the early years. This data is combined with Sproule s assumptions in respect of long-term prices, inflation rates, and exchange rates, together with estimates of transportation costs and prices of competing fuels, to forecast wellhead and plantgate prices for oil, natural gas, and natural gas byproducts. The following paragraphs briefly describe some of the key considerations included in Sproule s long-term outlook for oil and natural gas prices. Oil Prices The oil price forecasts are in part based on prices for the NYMEX Division light, sweet (lowsulphur) crude oil futures contract, which specifies the WTI crude as a deliverable at Cushing, Oklahoma. International oil price forecasts are based on the ICE Brent futures contract; a light, sweet crude blend produced in the North Sea. Edmonton Par Prices were discontinued as of May 1, 2014 and replaced by the Canadian Light Sweet (CLS) Price. The CLS price at Edmonton is traded daily on the CME s Net Energy index, with prices based on light sweet crude oil (40 to 45 degrees API, having less than 0.5 percent sulphur) delivered in Edmonton from a number of different pipelines. Western Canada Select (WCS) is a heavy, sour crude (20.3 degrees API and 3.43% sulphur) blended at Hardisty, Alberta and transported to refiners in Canadian and US markets.

2 The actual wellhead price of oil will vary with the quality of the crude and the cost of the transportation from the wellhead to the specified terminal. This cost, which is referred to as the price differential, is based on the actual difference between the revenue received at the wellhead and the contract price for the benchmark crude. In the absence of actual crude oil price statistics, the differential is based on the price of similar quality crude in the area. Bolstered by high prices since 2011, unconventional technologies have driven significant production growth principally from the US that has outpaced demand leading to an oversupply in global crude markets estimated at million bbl/d. In an effort to maintain market share, OPEC led by its key producer Saudi Arabia has stepped away from its traditional swing producer role, leaving market forces to rebalance the market. Crude prices have declined by over 50% since their peak in June 2014 as a result. Although a rebound in the price of crude oil will likely take some time given the overhang of inventories, the seeds of convergence in the supply-demand equation have been sown as low prices curtail expensive supply and incentivize increased consumption. Notwithstanding concern over the Chinese growth story, global demand is estimated to have grown at million bbl/d in 2015 and is set to continue growing at a healthy pace into Over the long-term, as the emerging markets of Brazil, Russia, India, China, South East Asia, the Middle East and sub-saharan Africa continue to develop, global energy demand will follow suit. Per capita incomes are still substantially lower in these regions compared to the developed world and energy consumption will increase as living standards improve. On the supply side, a rebalancing act is also taking place with US production now on a steady path of monthly declines. Outside of the US, large global reductions in capital budgets should limit production growth from other non-opec sources of supply in the coming years. This rebalancing will take some time, however, as additional expected supplies from Iran in 2016 and the significant volumes of crude inventories in the US work their way through the market. Sproule anticipates that the market will rebalance in the timeframe. We continue to see North American supply as the marginal barrel given its cost profile and flexibility in responding to prices. It is estimated that WTI prices in the range of $40 to $80 are needed to breakeven in most US LTO plays. The long-term price will therefore to a large extent depend on the ability of US LTO producers to realize cost reductions for their marginal barrel produced. Geopolitical instability in many of the world s major oil producing regions including Russia, Africa and the Middle East may continue to shock crude markets over the forecast period. If February 29, 2016 Price Forecast, Page 2

3 supplies in these regions were to be significantly disrupted, causing prices to rise, both spare capacity from major OPEC producers and the short lead times associated with US LTO could bring on additional crude supplies quickly in response. This will limit the potential for prices to remain elevated over the long-term. In December 2015 US Congress repealed its ban on crude oil exports, which is expected to narrow the price differential between WTI and Brent close to parity. In the past few years, WTI had traded at a discount to Brent due to sharp growth in US crude supply and inadequate transportation infrastructure, creating a capacity bottleneck at Cushing, Oklahoma. Crude exports from the US provide an alternative outlet for US production, eroding any discount to world markets. In recognition of the above factors, Sproule's long-term forecast has been set at $80.00 US per barrel for WTI and $80.00 US per barrel for Brent in 2019 with an escalation rate of 1.5% thereafter. In the near term the Canadian economy faces many headwinds in combination with the US Federal Reserve tightening monetary policy leading to weakness in the Canadian dollar. We expect the Canadian dollar to continue to be correlated to the price of oil over the forecast period. The exchange rate ($U.S. per $Canadian) reflects a long-term projection of Sproule s price outlook for Canadian crudes sees the current differential narrowing over the forecast period. With pipeline infrastructure experiencing delays, rail has proven to be an effective method to improve takeaway capacity. The low capital investment required, short time frame for constructing a new loading terminal and the ability to access key markets flexibly suggest that rail will continue to play an important role in the transportation of crude. While Canadian light oil faces competition from US LTO plays, new market opportunities are arising for Canadian heavy crudes. US Gulf Coast refiners are increasingly seeking Canadian heavy oil as imports from Venezuela and Mexico decline. The dynamics affecting Canadian oil prices are reflected in a narrowing of the CLS differential to 96% of WTI in 2020 and maintaining the WCS differential at 84% of CLS. Natural Gas Prices The NYMEX futures price for gas bought and sold at Henry Hub in Louisiana is the dominant index for North American gas prices. The ICE NBP natural gas futures contract is a benchmark price for natural gas in the UK and continental Europe. In Alberta and Saskatchewan, the AECO price is a reflection of the market price for natural gas sold locally, and the BC Westcoast Station 2 price is critical to the BC producer. Natural gas prices are generally reflective of regional factors affecting supply and demand. February 29, 2016 Price Forecast, Page 3

4 Currently, a mild winter and record high inventories are hampering natural gas prices. However, demand for natural gas in the US faces many positive catalysts over the forecast period. Significant growth in demand is anticipated as the industrial and power sectors increase consumption due to sustained low prices. Additionally, as a clean burning fuel, additional policies are expected that will encourage more natural gas use at the expense of coal. The abundance of natural gas in the US has caused producers to seek new markets. Many proposed LNG export projects in the US have the potential to alleviate pressure on domestic supply and connect North American gas to global prices. The first LNG project on the US Gulf Coast is expected to be commissioned in Q As well, additional pipeline infrastructure is being developed to export natural gas from the US to Mexico. The recent collapse in crude prices is also expected to reduce the amount of associated gas production out of the US in the near term. In the United States, Sproule expects a long-term price of $4.25 US per MMBtu by 2020 for Henry Hub, reflecting long-term full cycle marginal costs, with an escalation rate of 1.5% thereafter. Similar to the US, European gas prices are facing weakness as expectations for a mild winter are combined with above average inventories. The situation is made worse by an influx of LNG supplies finding their way to European markets. As LNG production continues to ramp up from projects in Australia and the US, European markets may continue to face oversupply in the near term. The correlation between European natural gas and crude oil prices is expected to continue to play a role, as roughly half of the long-term natural gas contracts in Europe are linked to crude oil prices. However, increasingly natural gas markets in the EU are experiencing liberalization, suggesting that regional factors affecting supply and demand will have a greater influence on prices. Sproule expects NBP to trade at 5.00 per MMBtu by 2019 with an escalation rate of 1.5% thereafter. Supply growth in the US has put pressure on the future of Canadian natural gas prices as market access becomes more limited for the Canadian producer. In Canada industrial demand growth for natural gas is weak compared to the US. LNG export projects represent a significant opportunity for Canada but face challenges in their development including high costs and lengthy regulatory approval processes. The first LNG projects are not expected to come on stream until However, should Canadian LNG projects move ahead, demand February 29, 2016 Price Forecast, Page 4

5 for LNG from markets in Asia could change the landscape of the Canadian natural gas industry. The long-term price of Alberta AECO-C is expected to be $4.20 CAD per MMBtu in 2020 with a 1.5% escalation rate thereafter. The actual plantgate price will vary with the heat content of the natural gas and the cost of transportation from the plantgate to the trading hub. In the absence of actual natural gas price statistics, the differential is based on the price of natural gas in the area. Natural Gas By-Products Sproule and GPMi are now collaborating to produce Western Canadian Natural Gas Liquids outlooks. The pricing methodology has changed for ethane, propane butane and condensate. Ethane is typically sold under mid to long term, cost plus contracts. The methodology utilized in this outlook is based on shrinkage value and corresponds to the price of gas at AECO. Propane value is a function of gas value as well as differentials from mid-continent markets. Currently, given the glut of product in the U.S., propane in Fort Saskatchewan is priced below shrinkage. Over the medium term, propane prices are expected to recover gas value but not much more. Butane and condensate tend to be priced with reference to crude prices as the dominant demands are refinery and diluent markets. Sulphur prices reflect the current market. February 29, 2016 Price Forecast, Page 5

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