Why Would An Investor Be Afraid Of Stranded Oil Assets?

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Cecil Hodges
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1 Why Would An Investor Be Afraid Of Stranded Oil Assets? - Even if global oil demand peaks around 2030 why would you worry as an investor? - 85% of the valuation relates to the cash flow the oil producer achieves before 2035 DNB oil story in pictures & graphs November Torbjørn Kjus

2 Index Index It Has Been Very Profitable To Bet On A Higher Oil Price - Both the oil price and particularly oil shares have massively outperformed the Oslo stock exchange the past 2 years 200 OSEBX vs Brent - E&P - Oil Service Jan2016 May2016 Sep2016 Jan2017 May2017 Sep2017 Index Aker BP, Lundin, DNO, Statoil Index Oil Price Index Index Oil Price Oil Price Index Oil Price Index OSEBX Index OSEBX Index OSEBX Oil Service 2

3 IEA Reports Global Oil Supply Lower Than Oil Demand In This is the first year since 2013 where supply will be lower than demand Million b/d 2.5 IEA World Oil Supply-Demand Balance (Implied global stock change) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 5 year range 5 year avg 2017 Source: IEA, DNB Markets 3

4 Global Onshore Stocks Are Drawing Down In JODI stocks data shows that global trackable onshore stocks are now down at the 5-year average Days of demand coverage Global Oil Stocks In Days Of Demand Coverage (Includes SPR but not for China, demand taken from IEA) 57 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: JODI, IEA 5 year min 5 year average

5 OPEC Waterborne Crude Exports Now Coming Down - OPEC exports from the participating countries is down 2.1 million b/d since October (base line for the agreement) last year Million b/d 27.0 OPEC Waterborne Crude Oil Exports (Algeria, Angola, Ecuador, Gabon, Iran, Iraq, Kuw ait, Qatar, Saudi, UAE, Venezuela, Libya, Nigeria) Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 OPEC 11 OPEC incl. Nigeria/Libya Source: Platts cflow, 3-month moving average 5

6 OPEC Has Until May Cut Production More Than Exports - Some exports has been drawn from inventory, this has not been taken easily by the market who wants to see lower exports Million b/d Diff YOY OPEC Crude Production vs Exports Exports change larger than production change Production change larger than than exports change -2.5 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Source: Platts cflow, IEA 6

7 Total Liquids Supply Cut By 1.9 Million b/d (excl. Libya/Nigeria) Liquids Supply Oct-16 Oct-17 Change Algeria 1,629 1, Angola/Cabinda 1,596 1, Ecuador Gabon Equatorial Guinea Iran 4,680 4,683 3 Iraq 4,675 4, Kuwait 3,240 3, Qatar 1,983 2, Saudi Arabia 12,627 12, United Arab Emirates 3,988 3, Venezuela 2,340 2, OPEC 37,746 36,404-1,342 Russia 11,597 11, Oman 1, Kazakhstan 1,802 1, Mexico 2,399 2, Azerbaijan Bahrain Malaysia Sudan South Sudan Brunei Non-OPEC 18,855 18, Sum: 56,601 54,672-1,929 7

8 Strong Price Response To Demand In OECD Europe - For each $/b Brent price decline OECD Europe demand grows 9 kbd Oil demand growth in kbd European oil demand growth USD/b Million b/d OECD Europe oil demand growth vs Brent price Europe oil demand growth Brent price real terms (RHS, reverse scale) Million b/d Year on Year OECD Europe Gasoline Demand Source: IEA OECD Europe oil demand grows 9 kbd per 1 $/b price decline y = x R² = Brent real USD/b Year on Year OECD Europe Diesel Demand Source: IEA 8

9 Average Stock Draw Of 0.2 mbd Predicted On OPEC Discipline - The case below assumes OPEC average production for 2018 becomes 32.5 million b/d (same as October output) Million b/d 3.5 DNB Markets World Oil Supply-Demand Balance (Implied global stock change) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: IEA, DNB Markets 5 year range 5 year avg

10 $/barrel Longer Term Oil Price Forecast (The forecast is for the rolling 1 st month ICE Brent future contract) Historical Real $/b Price forecast Real $/b Q Q Q Q DNB Markets Brent Price Forecast In Real Terms Normalized range Historical Brent price real terms FWD curve real terms (2% inflation) Global bunker spec change coming at the same time as the effects of shelved projects from the CAPEX cuts becomes visible The Brent price is set to again overshoot Supply respons and demand elasticity to the price overshoot sends the price down again 30 OPEC "cheating" in combination with large US shale growth and OPEC cuts in combination with solid still some ramp up from old investment demand growth sends the price to 60 $/b decisions keeps prices from rising further 10 Jan-2000 Jan-2004 Jan-2008 Jan-2012 Jan-2016 Jan-2020 Normalized range (real terms) DNB Forecast real terms 10

The FID-slump From 2014-16 Will Soon Hit

11 The FID-slump From Will Soon Hit The Oil Market - The lack of FIDs are even more important than the lack of CAPEX, because we will soon run out of large startups 11

12 kbd Net Need For Shale Of 5.1 mbd From Average growth of 1.3 mbd per year required by US shale must grow from 4.3 mbd to 9.4 mbd 95 Net Oil Need Of 11.5 Million b/d Before 2020? (Assuming 2% net decline rate and oil demand growth of 1.2 mbd p.a) Million b/d Source: DNB Markets, Rystad Energy Global output of crude, condensate and NGLs Observed historical 10 year decline rate 4% Global oil demand growth 1.2 mbd per year Forward decline rate 2% per year 2016 vs 2020 Global Oil Balance Global crude, condensate and NGLs output in 2016 (IEA) 7.0 Net decline rate of 2% (half of last ten years) by Non-OPEC projects under development (414) (Rystad Energy) OPEC projects under development (116) (Rystad Energy) 5.1 Required new shale oil to balance World liquids demand by 2020 (1.2 mbd pr year-2016 was 96.6 mbd) 12

The Brent price must then be higher than the 50-60 range to be economical.

13 What Kind Of Brent Price Is Required For Economic Barrels? - Our call on US shale in 2020 is 9.4 million b/d. The Brent price must then be higher than the range to be economical. Source for break even calculations: PIRA Energy - July 2017 (calculation using 10% cost of capital and is showing Brent equivalent prices, not wellhead prices) 13

14 US Shale Wellhead Break Even Prices Below 50 $/b - But has not fallen any further the past 6 quarters 75 Average US Shale Break Even Costs - $/b (Weighed by volume in Bakken, Eagle Ford, Permian, Niobrara) Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 14

15 NPV USD Why Would You Be Afraid Of Stranded Assets As An Investor? - 85% of the value relates to the cash flow before 2035 only 15 % of the value relates to the period 600 NPV of 55 $/b each year to 2035 vs 2060 (10 % discount rate) - Adding 25 years to the cash flow after 2035 (58%) only adds 15% (82 USD) to the valuation - 75 $/b to 2025 and then 55 $/b afterwards is worth more than the loss of the stranded assets after % NPV 2035 NPV 2060 NPV with 75 $/b from , then 55 $/b aftterwards to

16 Energy unit demand growth vs GDP unit growth Growth In GDP & Energy Intensity Seen Lower Than Historicals Global GDP Growth Seen Lower Than Historicals 6.0% Historical average: 3.5% Forward looking: 3.0% 5.0% Global GDP growth 4.0% 3.0% 2.0% 1.0% 0.0% Source: IMF, DNB Markets Global GDP growth Forward GDP growth Energy Intensity vs GDP Growth Seen Lower Historical average : 0.6 Historical averaged : 0.5 Forward looking: Source: IMF, BP stats, DNB Markets Historical Energy intensity vs GDP grpwth Forward energy intensity vs GDP growth 16

17 Million tonnes oil equivalents Primary Energy Demand Growth Much Lower Than Before - Due to lower trend line GDP growth and lower energy intensity the forward growth in total energy demand is weaker than history 20,000 18,000 Total Global Primary Energy Demand (Energy intensity vs GDP seen at 0.4 and average GDP growth assumed at 3%) 1.2% growth (last year was 1.3% growth) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, % growth Source: BP stats, DNB Markets Total primary energy demand Forward looking primary energy demand growth 17

18 Oil Set To Loose Market Share But Will Still Grow Until Oil growth in barrels and tonnes until 2025 despite global GDP growth at 3.0% and decreasing energy efficiency Million tonnes oil equivalents Oil Market Share In World Primary Energy Mix 49% 44% 39% 34% -0.3% -1.5% -2.0% 29% 24% Source: BP stats, DNB Markets World Oil Demand 5,000 4, mbd growth 4,000 3,500 3,000 2,500 2,000 1, Source: BP stats, DNB Markets 18

19 Electric Vehicles Are Almost One Third Of Sales In Norway - But Norway car sales are less than 0.2% of the world 45% Norway Electric Vehicles Sales Market Share (Includes plug-in and Battery electric) 40% 35% 30% 25% 20% 15% 10% 5% 0% Jan2012 Jan2013 Jan2014 Jan2015 Jan2016 Jan2017 Source: Bloombertg Intelligence 0.3% Norway Global Car Sales Market Share 0.2% 0.1% 0.0% Jan2012 Jan2013 Jan2014 Jan2015 Jan2016 Jan2017 Source: Bloombertg Intelligence 19

20 Thousand units Sold per month Million units sold per year For The Motor Vehicle Fuel Market It Is Asia That Really Matters - It is not like the key motor vehicle market is in USA/Europe anymore What kind of fuel will be preferred in Asia? 4,500 Motor Vehicle Sales 100 Global Motor Vehicle Sales (Annualized) 4,000 3, , ,500 2, ,500 1, Jan2005 Jan2007 Jan2009 Jan2011 Jan2013 Jan2015 Jan2017 Source: Bloomberg Intelligence USA Europe Asia China 40 Jan2007 Jan2009 Jan2011 Jan2013 Jan2015 Jan2017 Source: Bloomberg Intelligence 20

21 Still More Than 95% Of Cars Sold In China Runs On Gasoline - This just means that it will take some time to make an impact on the oil market 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% China Automobile Sales Market Share By Fuel Type 0% Jan2006 Jan2008 Jan2010 Jan2012 Jan2014 Jan2016 Gasoline Diesel CNG Battery and Plug in Electric Source: China Automotive Information 21

22 Miles Per Gallon Driving Distance On The Rise As Gasoline Prices Drop - Lower oil prices are incentivizing more driving, and at the same time the fuel efficiency of new car sales are dropping Total US Vehicle Miles Travelled - Billion Miles, 12 month mavg 6.0% Year on Year Change In US Driving Distance % 2.0% 0.0% -2.0% -4.0% 2930 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan % Jan-07 Jul-08 Jan-10 Jul-11 Jan-13 Jul-14 Jan-16 Jul-17 Source: US Federal Highway Administration - Traffic volumes collected from 4000 roadside monitoring stations across the US, published with a two-month delay Source: US Federal Highway Administration - Traffic volumes collected from 4000 roadside monitoring stations across the US, published with a two-month delay Total US Vehicle Miles Travelled - Billion Miles, 12 month mavg US Car Efficiency In MPG For New Car Sales (Average fuel economy for a new light-duty vehicle in the US) Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18 Source: US Federal Highway Administration - Traffic volumes collected from 4000 roadside monitoring stations across the US, published with a two-month delay Oct-07 Oct-09 Oct-11 Oct-13 Oct-15 Oct-17 Source: University of Michigan - Transportation Research Institute 22

23 Million b/d Fuel Demand From LDVs Will Increase For Another 10 Years - This is despite an expected immense growth in sales of electric vehicles 29 Global Fuel Demand From LDV's (average global driving length) Rule of thumb: If average MPG = 40 and average driving length = 12,000 km, Replacement per 1 million EVs will be 20 kbd You would then need 50 million electric vehicles on the road to kill of 1 million b/d of oil demand from this sector Source: Bloomberg New Energy Finance, DNB Markets, PIRA Energy 23

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