Oslo, 4 October Manager Ryan Salmon Oil and Gas Program CERES 99 Chauncy Street, 6th Floor Boston, MA USA

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1 1 of 10 Oslo, 4 October 2013 Manager Ryan Salmon Oil and Gas Program CERES 99 Chauncy Street, 6th Floor Boston, MA USA Re: Assessment of Carbon Asset Risk by Statoil Dear Sir, Reference is made to your letter directed to Svein Rennemo, Chairman of Statoil, Helge Lund, President and CEO of Statoil and Torgrim Reitan, EVP and CFO of Statoil, dated 9 September The letter was sent on behalf of a number of institutional investors and concerns the carbon asset risk carried by our company. We have been asked to direct our reply in this matter to you. Statoil is glad to be given this opportunity to elaborate on our positions and strategies as far as climate change and climate policy risks are concerned. This is something that our company has been working on, and reporting on, for several years. Our key messages in this reply can be summarized as follows: Statoil is deeply concerned with the challenge of climate change; both in terms of the serious environmental implications and in terms of the impact this challenge will have on our industry; As a consequence, climate change har drawn considerable management attention in recent years, and we expect this situation to continue as science develops further and as political responses continue to be matured and implemented (at both national and international levels); Statoil considers climate change a key corporate risk which will have industry-wide impact. The issue is treated in a systematic way in our management and risk systems (see details below); All in all we consider our portfolio of assets to be fairly robust with respect to future climate regulations and their market implications. This has to do with our current emission performance and with the quality of our reserves and project portfolio; We will be happy to engage in any further dialogue on this issue if requested. 1) Statoil s approach to climate change Our starting position is that we support the ambition of the UN Framework Convention on Climate Change to prevent dangerous anthropogenic (i.e., human) interference of the climate system, and that we recognize that limiting energy related greenhouse gas (GHG) emissions in an important element in that respect. The importance

2 2 of 10 of human activities on global climate change is well documented by science, and recently confirmed by the latest report from the International Panel on Climate Change (IPCC). Statoil supported the establishment of the Kyoto Protocol in 1997, with its common, but differentiated responsibilities and the market based instruments that the Protocol opened up for; such as cross-border carbon trading, the Clean Development Mechanism (CDM) and Joint Implementation (JI). We have later supported the second phase of the Kyoto Protocol (up towards 2020), and we have been consistent in our support for market based climate policy solutions such as the EU ETS, the Californian cap-and-trade system and the Australian market based system for curbing GHG emissions. We are encouraged to see new market based climate policies being pursued in countries such as China, Canada, Mexico, South Korea and Brazil; and we are working to strengthen and increase the flexibility of the EU ETS beyond Similarly, we are active in supporting the policy targets defined at the COP 17 in Durban, where a new platform of negotiations was launched under the Convention to deliver a new and universal greenhouse gas reduction protocol, legal instrument or other outcome with legal force by 2015 for the period beyond This new negotiation critically includes finding ways to further raise the existing level of national and international action and stated ambition to bring greenhouse gas emissions down. It is the opinion of Statoil that the challenge of climate change can only be met by firm international cooperation; and that while industry both has responsibilities and a key role to play (see below) there is need for a global framework that secures a level playing field and incentives for longer term investments into low-carbon solutions. Hence, policies and political decisions are decisive for industry to play its important role. 2) The concept of carbon reserves In the letter reference is made to two specific climate risk challenges for the oil and gas industry; on the one hand the risk of a sudden shift in policy that may undermine energy demand and prices, and on the other hand the risk of reduced value of remaining reserves of oil and gas. In particular, a statement from the IEA s World Energy Outlook 2012 is re-iterated, that no more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2 C goal. We believe it is essential to appreciate what this statement does and does not entail. Also, we believe it is important to recognize some of the details of the IEA 450 Scenario (which corresponds to a strict global policy in order to increase the likelihood of achieving the 2 C goal). The IEA has estimated the total potential emissions from fossil fuel reserves in 2012 to some 2860 Gt CO2. 1 It is from this number the proposition of no more than one-third of proven reserves can be consumed is derived. There are two important observations that need to be underlined in this context. 1 The World Energy Outlook 2012, page 259

3 3 of 10 Firstly, that the concept of reserves as used by the IEA does not overlap with the reserve concept as it is used by publicly listed oil and gas companies, reporting according to the requirements defined by the Securities and Exchange Commission (SEC). For the latter, a reserve is a quantity of oil and gas that is close to investment decision for development and production; i.e. it represents a well-defined quantity and a commercially viable project. Hence, commercial reserves only represent a subset of the concept of reserves as used by the IEA (most of which would be classified as resources, not reserves, by a listed company). And secondly, that almost two-thirds of the carbon reserves identified by the IEA are from coal, while 22% are from oil and 15% from natural gas, respectively. This puts the coal industry in a situation that is highly different from that of oil and gas companies. In geographical terms, 96% of the carbon reserves in China are from coal, while 93% of similar reserves in the United States are also from coal. In the Middle East, on the other hand, oil accounts for 66% of carbon reserves, while natural gas represents 33%. Similarly, while two-thirds of carbon reserves are located in North-America, the Middle East, China and Russia, the European Union holds only 3.6% of global carbon reserves and Africa (except South Africa) only 2.9% of the total. What this illustrates is that the IEA statement on reserves and production that is allowed under a 2 C scenario represent a static approach to the actual status of the global energy system; both with regards to the existing fuel mix, the status of commercial reserves and the geographical distribution of the various types of energy production. In particular, it is challenging to draw an analogy between the overall carbon reserves calculation done by the IEA and the reserve base of any individual oil and gas company. For an individual company decisions on making new investments into exploration will continue to be based on expected risk-weighted returns; where costs, prices and relevant strategic elements (such as policy, subsurface uncertainties and proximity to infrastructure and markets) are taken into consideration. In recent years the issue of climate change and possible climate policy regulations are indeed incorporated into such decisions (see below). 3) The need for new oil and gas capacity This is further illustrated if we look at the case for oil. In the World Energy Outlook 2012, table 3.4 (page 102), we can see that the world total liquids supply (crude oil, natural gas liquids, unconventional and biofuels) was some 87.9 mb/d in In the 450 (2 C) Scenario the similar supply in 2035 is estimated at 87.2 mb/d; implying that the world will consume almost the same amount of liquids in 2035 as today even in a 2 C Scenario. The main difference between now and 2035 is in the composition of liquids supplies; a decrease in crude oil supplies (from 68.5 to 51.5 mb/d), an increase in the supplies of natural gas liquids (from 12.0 to 14.4 mb/d), an increase in unconventional supplies (from 3.9 to 10.8 mb/d) and an increase in biofuels (from 1.3 to 8.2 mb/d). What this means is that even in the 2 C scenario there is a need to make new discoveries of oil by The IEA itself comments on this in the following way (page 102): The need to add new capacity is much bigger than the projected increase in output, because of the need to compensate for the decline in production at existing oilfields as they pass their peak and flow-rates begin to drop. Crude oil output from those fields that were in production in 2011 falls by close to two-

4 4 of 10 thirds, to only 26 mb/d by 2035 (Figure 3.15). Thus, the projected production of 65 mb/d in 2035 requires almost 40 mb/d of new capacity to be added over the projection period. Of this capacity, 26 mb/d, or 66%, comes from discovered fields yet to be developed, most of which are in OPEC countries, and the remaining 13 mb/d from fields that have yet to be found, mainly in non-opec countries. There is no graphical illustration of the composition of future oil supplies in the 450 Scenario in the World Energy Outlook However, there is one for the New Policies Scenario (a scenario that does not comply with the 2 C target): Here we see that by 2035 a significant share of current capacity needs to be replaced; partly by fields yet-to-be developed and yet-to-be found, partly by natural gas liquids from gas production, and partly by tight oil and other unconventional oils (such as oil sands). In this scenario the world consumes some 104 mb/d of liquids in 2035, but even if that number is scaled back to the 87.2 mb/d of the 450 Scenario there is still need to add substantial new capacity in order to balance the market. Also, it means that current production capacity and even capacity added in the next decade is of little relevance in looking towards emission targets as far ahead as Very few of the assets that are producing today will be operational by 2050, and also a small share of the new capacity that is added towards The main question for reaching a specific emission level in 2050 is therefore how much new capacity that is added beyond the timeframe; and even more importantly how much coal the world is expected to consume. A similar and even stronger story is true for natural gas, where demand in 2035 is expected to be some 20 per cent higher than today. In order to deliver on this, new capacity is certainly needed both to arrest decline in fields under production and to cater for the increased demand as natural gas, nuclear energy and renewable energy substitutes from coal in the global fuel mix. This substitution is essential for the world to meet future electricity demand and at the same time reduce carbon emissions.

5 5 of 10 The scenarios in the IEA World Energy Outlook depict possible futures, and no one can say for certain how a specific demand level for either oil or gas will be met. That is ultimately decided by the economics of availability and commercial competitiveness of the various alternatives; for instance growth in unconventional production versus the economics of new discoveries. What is certain is that even in a 2 C Scenario there is need for new capacity both for oil and gas. In terms of primary energy supplies the IEA World Economic Outlook 2012 has the following illustration for developments towards 2035 in the 450 Scenario: According to this, global oil demand will decrease by an average of 0.4% in the timeframe, while the demand for natural gas will increase by 0.7% on an annual average. Bioenergy (including biofuels) will increase with an average of 2.3% and other renewables with 9.8%. Nuclear energy will grow with an average of 3.1%, while coal demand decreases by 1.6% per year on average towards Hence, according to the IEA, in 2035 the world will be consuming somewhat less oil than today, significantly less coal and some 700 BCM/y more of natural gas. The last number corresponds to almost seven times the gas production of Norway, which is currently the third largest gas exporter in the world. 4) Statoil s Energy Perspectives The 450 Scenario of the IEA is based on an assumption of climate policies being implemented globally within the next few years and that global GHG emissions from energy starts to decline before It is Statoil s view that such a development would be desirable and important. It is unfortunately not a realistic outcome. We see very few policy signs that would indicate the establishment of a strict, transparent and verifiable global climate agreement before 2020.

6 6 of 10 In Statoil we present our view on the most likely trajectories of global and regional energy markets and associated CO2 emissions in our annual Energy Perspectives document. The most recent document was made public in June Some key findings in that report are the following: We expect annual economic growth worldwide to average 2.8% towards 2040; however, we highlight that this is an uncertain estimate that must be continuously re-evaluated; We expect energy efficiency to pick up compared with the last years, with an improvement of some 35%- 40% in the period; We expect global energy demand to grow at 1.3% on average, with substantial variation between different energy sources (0.5% growth per annum for oil, 8.9% growth for new renewables); We expect oil demand to peak at around 2030 and energy related GHG emissions to peak at approximately the same time (in contrast to the IEA 450 Scenario where both peaks before 2020); We expect natural gas to grow by an annual average of 1.6%, - slowly increasing the share of gas in the global fuel mix; We expect climate and environmental policies to be the main drivers behind the strong growth in renewable energy, in addition to cost improvements. The main reasons why we believe that oil demand will peak around 2030 are a combination of relatively high oil prices, stricter environmental policies, technological change and efficiency gains in the transport sector and competition from other fuels. There is a need to underline the difference between Statoil s normative approach to climate change, where we support a fast development towards efficient policies and reduced emissions, and our estimation of what is the most likely development. Like any other commercial actor Statoil must base its decisions on our best available knowledge and analysis of current trends; - and these are reflected in our Energy Perspectives. In the same way the IEA holds a New Policies Scenario as the base case. And that scenario is very similar in results to Statoil s own analysis in our Energy Perspectives, and also to the projections provided by other institutions (EIA), oil and gas companies (BP/ExxonMobil), consultancies (WoodMac) and research institutions (MIT). 5) Statoil s climate strategy Statoil s general expectation is that climate regulation will become stricter worldwide, even if not at the speed that is assumed in the 450 Scenario of the IEA. We take this into consideration in making new investments, by adding a carbon cost to every project in order to make them more robust. In particular, we expect carbon costs to increase quite substantially from current levels beyond 2020, and also to have a much wider geographical range than today (including, among other areas, North-America, China and Russia). This will affect both costs and demand, and we need to be prepared for that. Statoil is one of the most efficient upstream producers in the conventional oil and gas industry when it comes to carbon emissions. In the 2011 benchmark from The International Association of Oil & Gas Producers (OGP), the average emission intensity was 133 tonnes CO2 per 1000 tonnes production (23 kg CO2/boe), while Statoil's average was 46 tonnes CO2 per 1000 tonnes production (9 kg CO2/boe). These numbers represent emissions

7 7 of 10 from fields under operational control. We believe carbon efficiency will give Statoil a competitive advantage as we expect higher carbon costs and stronger regulatory requirements in the future. We work systematically to improve our performance to keep our own GHG emissions (including not only CO2 and methane) at a minimum. We have made our ambitions for emission levels in 2020 public segmented into the various types of production we are engaged with and we report annually on our progress in reaching these targets. Internally, we have established metrics for emission performance as part of our management system in order to ensure a systematic approach and follow-up throughout the organization. Sustainability including climate change is also incorporated into Statoil s risk management system. Statoil believes that new energy technology is essential to solving the challenge of climate change. For our part, we have had a strong position in carbon capture and storage (CCS) for years, being one of the world s most experienced innovators and operators of this technology. After the Norwegian government this month decided to stop the ongoing full scale CCS project at Monstad refinary, Statoil still continues to capture and store CO2 on two fields off shore Norway as well as emphasize CCS as a key part of our R&D portfolio, while looking for ways to engage in new commercial enterprises involving CCS both in Norway and in other countries. Being primarily an upstream oil and gas company Statoil still believes it is important to engage in the fast growing area of renewable energy. This also contributes to reducing the carbon intensity of our assets. Based on our competencies and experiences we have identified offshore wind as an area in which to develop projects. We are today partner in some of the world s largest offshore wind projects and exploring new business opportunities globally. At the same time, development of new designs to increase efficiency and reduce costs of offshore wind is part of our R&D portfolio. Statoil agrees with the IEA and other respected observers that natural gas will become an increasingly important fuel, also in the context of climate change. Already, Statoil has a unique position in natural gas (being the second largest gas supplier in Europe) and our gas portfolio is developing rapidly in North America. In East Africa we are engaged in a highly promising exploration campaign, with world-class gas discoveries already being made offshore Tanzania. Significant discoveries of natural gas in this particular region will have meaningful implications not only for the energy situation in East and South Africa, but also with respect to representing a realistic alternative to increased burning of coal in important and fast growing markets such as the Middle East, Pakistan, India and China. For coal to gas substitution to be possible, gas must be available and new discoveries in this region secures exactly that. Ultimately, a stricter climate policy will imply lower demand for oil and gas and lower prices. This goes directly to the economic robustness of the project portfolio of the oil and gas industry, and adds a significant uncertainy that must be actively managed. In Statoil we are of the opinion that we have a fairly robust project portfolio, even in the event that global or regional climate regulations were to become much stricter than what we currently expect.

8 8 of 10 It is our experience that a continuous and focused effort to reducing costs and developing new technology pays off in the longer term. For instance, on the Norwegian Continental Shelf where Statoil still maintain the bulk of our production and reserves, we have numerous examples of discoveries that have been deemed uneconomical for a number of years, but that have eventually become commercial due to technological and operational progress. For instance, the Gudrun field, which will be set in production in 2014, was discovered as early as in This illustrates that project and portfolio robustness is something that is highly dynamic and that a conscious attention to improving technology and reducing costs is a significant part of dealing with the challenge that climate change represents to the oil and gas industry. 6) Physical adaptation The oil and gas industry has always been confronted with the challenge of designing and maintaining long-lived infrastructure that is able to withstand exposure to extreme weather conditions. This is particularly true for the offshore; where Statoil has its primary operational responsibilities. Hence, as a company we are familiar with confronting harsh environments. Some of the elements of being prepared for the physical impacts of climate change include: All facilities are designed so that the main load bearing structure survive a year storm, i.e. an extreme storm that is only expected to occur once every year; Statoil requests that metocean design basis is updated every 5 years, and we have experienced that the design waves have increased for some areas based on more available data. Based on updated metocean design basis we have re-analyzed all our bottom fixed platforms and tension leg platforms to ensure that we have sufficient airgap to survive; The design criteria for our facilities are covered by required project documentation. Every project is required to produce Technical and Operational Requirements and Guidelines (TORG) document for all technical facilities. The TORG is the collection of standards, technical and professional requirements and guidelines necessary for design, fabrication, assembly and operation, - covering all relevant discipline areas, including surrounding conditions that must be planned for; The operational process which establish and maintain emergency preparedness and response plans covers among other elements a plan for mitigating action for all relevant Defined Situations of Hazards and Accidents (DSHA) for the actual location and geography. There is a specific DSHA for Extreme weather conditions or natural phenomena (waves, wind, temperature, earthquake). Any change in risks context; changes in the facility/asset, surroundings, etc., will trigger an update of the plan if necessary, - this is an on-going process throughout the facility life cycle. For Norway specifically a recent report ( Klima i Norge 2100 [Hanssen-Bauer et al. (2009)]) gives a description of expected changes in climate in Norway and surrounding waters through the 21 st century. The climate models used in the report predict little or no change in mean wind speed. The frequency of higher wind speeds is expected to increase, but this is uncertain.

9 9 of 10 Climate models predict an increase of about 6 8 % in extreme significant wave heights in the Eastern North Sea and Skagerrak. A slight increase in extreme wave heights is expected in the Barents Sea, but this is also uncertain [Debernard and Røed (2008), Hanssen-Bauer et al. (2009)]. Otherwise little change in extreme wave heights is expected in Norwegian waters. An increase in water levels may be due to climatic effects; e.g. thermal expansion of the oceans and melting of glaciers. The sea level rise through the 21 st century is expected to be about 0.7 m in Norwegian waters. The present rate of sea level rise is about 3 mm/year. 7) Transparency and reporting Statoil has been concerned with increasing the transparency and reporting standards of the oil and gas industry for years. For instance, we were founding supporters of the Extractive Industries Transparency Initiative (EITI). Statoil reports extensively on our environmental and sustainability performance. We have an Annual Sustainability Report and a special annual report on our Canadian oil sands projects, we report to EITI and the Carbon Disclosure Project, we report benchmarking data to the International Association of Oil and Gas producers (OGP), and also to the Dow Jones Sustainability Index and FTSE4Good. Reporting helps us to identify performance gaps and drive improvements. It also helps us in our dialogue with stakeholders at all levels and in all regions. There is currently a trend towards making sustainability reporting mandatory through legislation. Statoil welcomes this; both because we believe it is right and because such legislation creates a more level playing field in the industry. 8) Management attention to climate risks Statoil has a holistic approach to its risks, using both Risk Issue Radar and Risk Maps to illustrate the uncertainty about future outcomes. The climate dimension is addressed both on the Risk Issue Radar as an important factor that could influence future uncertainties, as for example increased production volumes related to reserves influenced by climate decisions. Both the Issue Radar and Risk Map are discussed in the Board of Directors and the Corporate Executive Committee on a regular basis, for the time being three times per year. In addition to this the Board of Directors has its own Safety, Sustainability and Ethics committee where issues such as climate change are addressed on a regular basis. In April this year Statoil established a new Corporate Sustainability Unit, incorporating units that had up until then dealt with different sustainability and environmental issues. The Corporate Sustainability Unit is the hub of a company wide network of Sustainability and Safety Units (SSU) covering all Business Areas and all major corporate staff organizations. This move is a reflection of a felt need to improve and strengthen Statoil s sustainability performance in the face of uncertainties and challenges; - of which climate change is a major one. In parallel a sustainability strategy update has been launched, involving not only each Business Area in Statoil, but also the Board of Directors and the Corporate Executive Committee. Among other things, the strategy process will result in a revised and updated

10 10 of 10 management system, including requirements for management of climate performance and climate risks. According to current plans, the strategy update is to be completed by first quarter of We hope this answers the questions and concerns you raised in your letter to Statoil. A lot of more detailed information related to Statoil and how we deal with the climate change challenge can be found at our web site. If you have any further questions or issues you would like to bring to our attention, we will be more than happy to assist so please do not hesitate to make further contact. With kind regards, Hilde Merete Nafstad Senior Vice President Investor Relations Statoil ASA