Oil and Gas U.S. Industry Outlook

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1 Oil and Gas U.S. Industry Outlook VERSION 01 YEAR 13 OUTLOOK: Positive fundamentals & outlook

2 Key points WTI Crude is expected to continue to converge to Brent crude prices, narrowing margins for domestic refineries. Natural gas prices will continue to recover from recent lows, but remain well below their historic averages providing a competitive advantage to domestic industrial production and petrochemical manufacturers for the foreseeable future. Exploration and production companies will continue to shift investment towards oil and natural gas liquids due to the price disparity between oil and gas. The U.S. will become an exporter of liquefied natural gas (LNG) as early as Three terminals have been approved and 25 applications are currently pending approval.

3 Overview The increased adoption of technological advancements in unconventional drilling, namely horizontal drilling and hydraulic fracturing, have led to improved drilling economics and recovery rates for exploration and production companies who target oil and gas-rich shale plays in the U.S. The influx of natural gas supply has contributed to an overall decline in prices, while oil remains elevated due to geopolitical and speculative factors. Companies who operate in energy-intensive industries that use oil or natural gas to power their facilities as well as chemicals and plastics manufacturers who use gas- or petro-based feedstock for their products have benefited from these favorable prices. Since the 76% decline in oil prices amidst the Great Recession, crude oil prices rose in each subsequent year as emerging market economies increased consumption. Geopolitical uncertainty in the Middle East has also contributed to price spikes as fears that the oil supply in large exporting countries will be threatened by the ongoing tension in the region. Prices have climbed from a bottom of $32/bbl during the recession to their recent highs of $108/bbl. The decline in natural gas prices has caused exploration and production companies to shift their focus towards more profitable oil and natural gas liquids. The current total U.S. rig count as of August, 2013, is 1,769, a 7.1% year-over-year decline. A majority of the decline came from natural gas rigs, which decreased 20% year-over-year to 387 rigs. North American Rig Evolution Oil Rigs Gas Rigs 1,600 1,400 1,200 Number of Rigs 1, Jan 02, 2009 Mar 02, 2009 May 02, 2009 Jul 02, 2009 Sep 02, 2009 Nov 02, 2009 Jan 02, 2010 Mar 02, 2010 May 02,2010 Jul 02, 2010 Sep 02, /2/2010 Jan 02, 2011 Mar 02, 2011 May 02,2011 Jul 02, 2011 Sep 02, /2/2011 Jan 02, 2012 Mar 02, 2012 May 02,2012 Jul 02, 2012 Sep 02, /2/2012 Jan 02, 2013 Mar 02, 2013 May 02,2013 Jul 02, 2013 Source: Baker Hughes

4 Oil and Refined Petro Products Historically, West Texas Intermediate (WTI) crude has moved in tandem with international prices. The price differential between WTI and Brent crude largely reflected the cost of transporting Brent to the United States. The shale oil boom has resulted in a supply glut of crude in Cushing, OK, the major delivery terminal for U.S. crude. Oil delivered here is subsequently piped to the major refineries along the Gulf Coast. Pipeline and infrastructure constraints causing the bottleneck have limited takeaway ability and caused the price differential between WTI and Brent that emerged in The WTI-Brent spread dramatically widened in 2012 and continued through much of the first half of 2013, reaching spreads as high as $23 in February Domestic crude producers realized lower oil prices as WTI traded at a discount to world prices. Refiners with access to WTI benefited from widening refining margins ( crack spreads ) as the prices of their internationally traded products remained high while crude feedstock declined. For the first time since 1949, the U.S. became a net exporter of refined products in By mid-2013, WTI moved back towards convergence with Brent as a result of improved takeaway capacity at Cushing via new crude oil rail transportation options and increased pipeline capacity. By July 2013, the spread between WTI and Brent narrowed to below $5 a barrel reducing the competitive advantage of domestic refiners. Weekly Oil Inventory at Cushing, OK Apr 09, 2004 Aug 09, 2004 Dec 09, 2004 Apr 09, 2005 Aug 09, 2005 Dec 09, 2005 Apr 09, 2006 Aug 09, 2006 Dec 09, 2006 Apr 09, 2007 Aug 09, 2007 Dec 09, 2007 Apr 09, 2008 Aug 09, 2008 Dec 09, 2008 Apr 09, 2009 Aug 09, 2009 Dec 09, 2009 Apr 09, 2010 Aug 09, 2010 Dec 09, 2010 Apr 09, 2011 Aug 09, 2011 Dec 09, 2011 Apr 09, 2012 Aug 09, 2012 Dec 09, 2012 Apr 09, 2013 Aug 09, 2013 Thousand Barrels

5 WTI Crude vs Brent Crude vs Henry Hub monthly spot prices Brent Crude WTI Crude Henry Hub Price $160 $16 $140 $14 $120 $12 $ per BBL of Crude $100 $80 $10 $8 $ per MMBTU $60 $6 $40 $4 $20 $2 $ $0 Source: Energy Information Administration, IHS Global Insight, Euler Hermes Natural Gas The abundance of natural gas-rich shale resources and continued efficient production has managed to keep prices at historic lows. Domestic natural gas prices have plummeted since 2010, falling 14.6% in 2011 and 34.1% in In response to weak pricing, producers closed down the number of rigs in operation, reducing supply and resulting in a pricing reversal. Natural gas most recently traded at $3.62/MMBTU, up 22.7% from a year ago. In the past, natural gas prices used to highly correlate to domestic crude oil prices as well as world gas prices, but started to diverge in 2008 due to shale production. Prices have not recovered and remain low due to vast increases in domestic supply. Immense natural gas reserves in the Appalachian Basin particularly in the Marcellus shale region have been discovered. Low natural gas prices have provided domestic manufacturers with an energy cost advantage over their foreign competitors. Coal is now facing stiff competition as technological advancement has allowed natural gas-fired electrical generators to be as cheap as or even cheaper than coal fired generators. Natural gas is also the cleanest burning fossil fuel and emits around half the CO2 of coal, making it more appealing from an environmental standpoint. Petrochemicals producers have also benefited from the low cost natural gas feedstock.

6 World Natural Gas Prices U.S. Japan Korea China Germany UK NBP $20.00 $18.00 $16.00 USD per MMBTU $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 Sep-2006 Jul-2007 May-2008 Mar-2009 Jan-2010 Nov-2010 Sep-2011 Jul-2012 May-2013 Source: Energy Intelligence, IHS Gloval Insight, Euler Hermes Outlook Global demand for oil will continue to grow as emerging economies build out essential infrastructure and growing population creates more demand. China will continue to be a large and important contributor of demand. The Energy Information Administration forecasts petroleum product consumption to increase at an annualized rate of 1.1% through Price differentials between WTI and Brent crude are expected to remain tighter than recent years as new pipelines are completed in Cushing and infrastructure catches up with production capability. Geopolitical concerns that began in Egypt and broadened into the Arab Spring continue to roil the region. Most recently tension in Syria caused a run-up in oil prices as traders look to make short-term profits and customers lock up supply for future delivery. If the conflict in Syria spills over to its neighbors, prices will rise sharply and suddenly. Despite the ongoing disarmament talks, prices have remained at elevated levels that underscore concerns in the region. Domestic natural gas prices should continue to recover from the record low levels in 2012 as global demand improves in both emerging and developed economies. However, prices are still expected to be below their historic long-term average, providing cost advantages to energy-intensive industries such as metals, fertilizer and chemical manufacturers. As manufacturing processes become more automated, and production lines become less reliant on labor, energy costs are expected to be a key area of focus in lowering manufacturing overhead. More and more large corporations will look to use natural gas as the cheaper, more viable solution to generate their own electricity. The U.S. will start exporting liquefied natural gas (LNG) in the coming years. Three LNG export terminals have already been approved. Cheniere Energy s Sabine Pass received approval in 2011 and earlier this year the Freeport LNG and Lake Charles Export projects received approval. Once operational these projects will constitute a total of about 5.6BN cubic feet per day of gas exports. Additional terminal approvals are expected to occur, as there are currently 25 pending applications awaiting approval. However, opposition is mounting due to concern about the possibility that LNG exports will result in higher domestic prices. This is resulting in uncertainty regarding the timing and amount of volumetric export approvals the Department of Energy will ultimately allow.

7 Euler Hermes North America Insurance Company 800 Red Brook Blvd Owings Mills, MD Tel Fax Euler Hermes North America is the oldest and largest provider of trade credit insurance and accounts receivable management solutions. We offer both domestic and export credit insurance policies that insure against commercial and political risk in more than 200 countries worldwide. Euler Hermes maintains a database of proprietary information on more than 40 million companies worldwide and is rated A+ (Superior) by A.M. Best and AA- by Standard & Poor s. KEYS TO SYMBOLS Positive fundamentals & outlook Signs of weaknesses Structural weaknesses Imminent or recognised crisis Published 11/2013

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