IHS CERA. Presentation. Latin America Crude Oil Markets Short-Term Outlook. Latin America Crude Oil Market Team 2014 IHS

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1 IHS CERA Presentation Latin America Crude Oil Markets Short-Term Outlook February 2014 ihs.com Latin America Crude Oil Market Team 2014 IHS

2 Contents Key messages for global crude oil market 3 Snapshot of global oil fundamentals and price outlook 4 Global economic outlook 5 Key messages 5 World and regional economic growth outlook in World economic growth outlook to Outlook for world oil demand growth 8 Dated Brent price environment to Expected development of the WTI-Brent spread 10 Key messages for Latin America crude oil markets 12 Latin America crude production short-term outlook 14 Latin America crude price outlook 17 Appendix 1: Methodology 20 Appendix 2: Glossary IHS 2

3 Key messages for global crude oil market: February 2014 Dated Brent price view unchanged. We continue to expect Dated Brent to decline, averaging $104 in 2014 and $99 in 2015, as historically-strong growth in non-opec supply particularly US tight oil reduces the call on OPEC crude. Our updated d global l supply outlook assumes little improvement in Libyan production, resulting in a somewhat tighter global demand-supply balance.* However, we anticipate that the market will likely focus more on the potential for some volumes of oil currently shut-in for geopolitical reasons (e.g. in Libya and Iran) to return to the market, and less on the potential for new disruptions. US crude price discounts widened again. Based on our new, higher US production outlook, we have sharply lowered our differentials for WTI and LLS relative e to Dated Brent, with WTI averaging $8 below Dated Brent in 2014 and $10 below in Evidence continues to build that the US refining system is becoming increasingly constrained in its ability to absorb the growing surplus of US light, sweet crude. Worries over global demand growth resurface. The recent declines in currency values of several emerging market countries has highlighted the risk that growth in non-oecd oil demand may end up weaker than expected. *This balance can be found in the Global Crude Oil Markets Data Center IHS 3

4 Snapshot of global oil fundamentals and price outlook IHS CERA global oil fundamentals and price outlook snapshot, February FUNDAMENTALS World economic growth 2.6% 2.5% 3.3% 3.8% (change from previous year) World oil (total liquids) demand growth 1.0 mbd 1.1 mbd 1.5 mbd 1.6 mbd (volume change from previous year) Non-OPEC liquids supply growth 0.4 mbd 1.1 mbd 1.7 mbd 1.5 mbd (volume change from previous year) OPEC crude spare capacity 29mbd mbd mbd mbd 3.2 (annual average) PRICES Brent $112 $109 $104 $99 (annual average) WTI $94 $98 $96 $89 (annual average) Note: Liquids id supply includes crude oil, condensate, and natural gas liquids id (NGLs). Demand includes refined products, including liquefied petroleum gases (LPG). OPEC spare capacity is for crude oil only. Figures are rounded. Source: IHS CERA IHS 4

5 Global economy: Key messages Global economic growth will strengthen in 2014, led by better performances in North America and Western Europe. The US expansion will gain momentum with faster growth in consumer and business spending, a sustained housing recovery, and reduced fiscal drag. Western Europe will gradually recover, with northern countries leading and southern countries with heavy debt burdens lagging. Asia (excluding Japan) and sub-saharan Africa will achieve the fastest growth. Emerging markets that depend on external finance are vulnerable to the Federal Reserve s withdrawal of extreme monetary accommodation. Source: IHS Global Insight, Monthly Global Economic Outlook Briefing IHS 5

6 World and regional economic growth in 2014 World and regional real GDP growth rates in 2014 North America Europe OECD Asia Pacific Eurasia Non-OECD Asia Pacific (excluding China) China Middle East Latin America Africa World 27% 2,7% 1,5% 2,2% 3,2% 3,4% 3,3% 3,3% 4,8% 5,2% 8,0% 0% 2% 4% 6% 8% 10% Annual percent change Note: Global GDP growth calculated using real local currency growth rates, aggregated using real exchange rate-based weights. North America includes the United States and Canada. Latin America includes Mexico. Source: IHS Global Insight 2014 IHS 2014 IHS 6

7 World economic growth outlook to 2015 Global GDP growth to pick-up in 2014 and 2015 World real economic growth rates, Percent growth in rea al GDP 5% 4% 3% 2% 1% 0% -1% -2% -3% 43% 4,3% 3,1% 2,6% 2,5% 1,7% -1,9% Outlook 3,3% 3,8% Note: Global GDP growth calculated using real local currency growth rates, aggregated using real exchange rate-based weights. Source: IHS Global Insight 2014 IHS 2014 IHS 7

8 With OECD oil demand no longer in aggregate decline, global demand growth will strengthen in IHS 8

9 North America to drive historically-strong non-opec crude supply growth in near-term Non-OPEC crude oil production change, China Mexico Egypt Oman Norway United Kingdom Azerbaijan Colombia India Russia Indonesia Kazakhstan Brazil Canada United States -0,2 0,0 0,2 0,4 0,6 0,8 1,0 1,2 1,4 1,6 Change over period in million barrels per day Data are for the 15 largest non-opec producing countries in Source: IHS CERA 2014 IHS 2014 IHS 9

10 Dated Brent crude oil price environment to 2015 Prices (in Global Redesign) to decline as historically-strong growth in non- OPEC supply particularly US tight oil reduces the call on OPEC crude Dated Brent crude oil price environment to 2015 rice (US rel) y average pr ars per barr Quarterly doll Metamorphosis scenario Global Redesign (planning scenario) Vortex scenario Historical Three-month outlook Mar 14 Apr 14 May Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q Updated 3 February Disclaimer: Historical oil price data are extracted or derived by IHS CERA from Platts. All rights reserved. All liability for errors and omissions is hereby excluded by Platts and its sources. No representations or warranties are made by Platts or its sources concerning the data or any conclusions tobedrawnfromit it. Source: IHS CERA; Platts, 2014 by the McGraw-Hill Companies, Inc. (historical) 2014 IHS 2014 IHS 10

11 Forecast for US crude price discounts extended WTI-Brent spread expected to be significantly wider than previously projected, owing largely to a higher outlook for US crude production WTI (Cushing) less Brent (FOB North Sea) 0 Outlook Dolla ars per barre el Note: Data points are quarterly averages. Disclaimer: Historical oil price data are extracted or derived by IHS CERA from Platts. All rights reserved. All liability for errors and omissions is hereby excluded by Platts and its sources. No representations or warranties are made by Platts or its sources concerning the data or any conclusions to be drawn from it. Source: IHS CERA, Platts (historical) 2014 IHS 2014 IHS 11

12 Key messages for Latin America crude oil market: February 2014 Mexican oil production totaled million bd in December, a marginal increase of 0.17% compared to November. Despite the recent announcements about energy reform, no increases in production from the new contracts are expected before Brazilian oil production increased 1.35% in December compared to November. Total oil production was million bd, with presalt production achieving a new record of 346,100 bd. US domestic crude pricing continues to strengthen relative to international benchmarks, although it remains weak. Some Latin crude grades are moving into other markets, such as Europe and Asia, to seek higher prices. We continue to anticipate weak US domestic crude oil pricing i throughout h t 2014 and 2015, as US production grows and runs up against the limits of the US refining system s ability to absorb it. As US Gulf crudes strengthen, Latin light sour and heavy sour price formulas have been raised in line. However, these price formulas will likely l need to be adjusted d downward d later this year and 2015 to keep Latin grades competitive as US domestic pricing weakens, especially during refinery maintenance periods IHS 12

13 Latin America demonstrated marginal variations in oil production during 2013 Monthly crude production, December 2012-December 2013 Main Latin American countries 3500 per day Thousa ands barrels December February April June August October December Argentina Brazil Colombia Ecuador* Mexico Venezuela* Peru Source: IHS GEPS, ANH, ANP, CNH, Secretaría de Energía de Argentina, Ministerio de Energía y Minas de Perú IHS CERA. *data available until November, IHS 2014 IHS 13

14 Expected production growth from Brazil and Colombia in will increase overall regional oil output Crude production short-term outlook Main Latin American countries 12 Million barrels per day * 2014* 2015* Venezuela Mexico Brazil Colombia Argentina Ecuador Peru Source: IHS GEPS, ANH, ANP, CNH, Secretaría de Energía de Argentina, Ministerio de Energía y Minas de Perú, IHS CERA IHS 2014 IHS 14

15 Production highlights in Latin America Argentinian oil production in December 2013 was 526,290 bd, representing a decrease of 0.43% compared to November 2013 and 0.74% compared to December The main production field was Manantiales Behr, located in the Golfo San Jorge Basin, with an average production of 97,745 bd. Argentinian production continues to decrease steadily, mainly due to low exploration activities and high decline rates at existing fields, but domestic oil consumption is growing. In order to balance supply and demand the Argentinian government, on January 17 th, 2014 authorized the import of light crude oil for the first time in 20 years. Brazilian oil production in December 2013 was million bd, an increase of 1.35% compared to November 2013, and 0.2% compared to December The Marlim Sul field (in the Campos basin) was the most productive with an average of 280,200 bd. Pre-salt oil production was 346,100 bd, originating from 28 wells. Colombian oil production in December 2013 was million bd, a slightly decline of about 0.5% compared to November 2013, and an increase of 1.8% compared to December Colombia s annual average oil production increased 6.5% in 2013 compared to 2012, with an average daily production of mbd. In December 2013, Colombia s ANH ( Agencia Nacional de Hidrocarburos ) announced the next bid round ( Ronda Colombia 2014 ) to be held in July According to press releases, the agency is planning to offer onshore and offshore areas with conventional and unconventional plays IHS 15

16 Production highlights in Latin America Mexican oil production in December 2013 was million bd, representing a small increase of 0.17% compared to November 2013, and a decrease of 1.84% compared to December Offshore oil production averaged million bd, around 75% of total oil monthly production. The main producing offshore fields were the Ku-Maloob-Zaap Complex. The last field was the most productive one with an average of 308,517 bd. In December, the Mexico s energy reform was promulgated by the Congress, modifying articles 25, 27 and 28 of the Mexican Constitution. This will lead to the most transformational ti change in the Mexican energy industry since Currently the congress is debating and preparing the secondary laws that will manage the energy sector in the country. The reform has not privatized Pemex, but it will offer great opportunities to foreign companies investing in Mexico s energy sector. Venezuela (OPEC member) continues to lead the production among the countries in Latin America, with an average oil production of about mbd in IHS 16

17 Latin America light, sour crude pricing Latin light sour price formulas strengthened Isthmus price outlook Dollars per barrel Isthmus premium (discount) Isthmus Mars, market price Isthmus Mars, refining value Source: IHS CERA 2013 IHS Mesa 30 price outlook 10 Do ollars per barrel Mesa 30 premium (discount) Mesa 30 Isthmus, market price Mesa 30 Isthmus, cracking refining value Source: IHS CERA 2013 IHS Source: Platts, IHS. In January, Isthmus crude traded at a steep $5.28 per barrel discount to its refining value relative to competing Mars. The Isthmus price formula was influenced by weak WTS and LLS pricing in the US, as well as a reduction in the Isthmus k-factor. The Isthmus k-factor has been strengthened e ed for February and March (by $1.10 and $0.85, respectively). Along with expected stronger pricing of LLS and WTS, this should allow Isthmus to bring its discount to Mars to within about $1, consistent t with our long-term outlook for Isthmus. In January, Mesa 30 traded at a slight 60 cent per barrel premium to Isthmus crude on a US Gulf Coast cracking refining value basis. We expect Mesa 30 crude to move towards parity with Isthmus in the coming months. *Isthmus OSP formula = 40% (WTS+LLS)+20%(Dated Brent)+K 2014 IHS 17

18 Latin America heavy, sour crude pricing Latin heavy crude price factors increased with stronger US market Maya price outlook Dollars per barrel Maya premium (discount) to cracking Isthmus Maya, market price Isthmus Maya, cracking value Source: IHS CERA Isthmus Maya, coking value Castilla Blend price outlook 10 Do ollars per barrel Castilla Blend premium (discount) to cracking Mars Castilla Blend, market price Mars Castilla Blend, cracking refining value Source: IHS CERA Source: Platts, IHS IHS 2013 IHS In January, Maya traded at almost a $2 per barrel premium to Isthmus crude, relative to its US Gulf Coast cracking refining value. However, on a coking basis, Maya was very competitive, trading at a $2 discount to Isthmus. The Maya k-factor has been further strengthened for March, moving from negative $4.70 per barrel to negative $3.55. This pricing adjustment should bring Maya pricing closer to our long-term forecast of a $1.55 premium relative to Isthmus on a cracking value basis, and near parity on a coking basis. In January, Castilla Blend moved into a more competitive pricing position relative to light sour Mars, trading at just under a $2 premium on a cracking value basis. Gulf crudes remain stronger than 4Q 2013, and we expect Castilla pricing i will move increasingly i towards Mars parity IHS 18

19 Brazilian crude pricing Brazilian grades remain discounted relative to international grades Marlim price outlook Dollars per barrel Marlim premium (discount) Marlim Maya, market price Marlim Maya, coking refining value Source: IHS CERA 2013 IHS Roncador Light price outlook 10 Do ollars per barrel Roncador Light premium (discount) Bonny Light Roncador Light, market price Bonny Light Roncador Light, refining value Source: IHS CERA 2013 IHS Marlim crude remained relatively stable in January, trading at about a $1.70 per barrel discount to Maya on a US Gulf Coast coking parity basis. We are assuming Marlim pricing will remain at roughly this level relative to Maya as Brazilian output ramps up. Roncador crude remained deeply discounted to Bonny Light in January, at roughly $9 per barrel below its refining value on a US Gulf coast cracking basis. Roncador prices continue to follow the US Gulf Coast market, which is weaker than international prices. However, a strengthening of Gulf crudes since 4Q should improve Roncador pricing relative to Bonny. Source: Platts, IHS IHS 19

20 Appendix 1: Crude oil pricing methodology Market parity Calculated refining value: This is the value of a crude oil calculated in the Purvin & Gertz proprietary refining model. This calculated value is based on the yield and price of products from processing the crude in marginal refining capacity, which is typically a cracking refinery. The product prices used in this calculation are from the region in which the crude oil is processed and are consistent with our Products & Refining Market outlooks. Market price: This is the price of the crude oil as reported to a pricing agency and includes transportation costs to the region in which the crude oil is processed. Brent Urals, Market Price Brent Urals, Refining Value Urals Premium / (Discount) Blue Dotted Line: This is the difference between the market prices of a benchmark crude oil, Brent in this case, and another crude oil, which is Urals in this case. Green Solid Line: This is the difference between the calculated refining values of a benchmark crude oil, which is Brent in this example, and another crude oil, which is Urals in this example. Gray Bars: This is the difference between the green and blue lines. When the market price exceeds the calculated refining value (a negative value for the gray bar), this means that the crude in question, (Urals in this example) trades at a discount to the benchmark (Brent in this example). When the calculated refining value exceeds the market price, Urals trades at a premium to Brent IHS 20

21 Appendix 2: Glossary ANH ANP bd Castilla Blend CNE CNH FARC IHS GEPS Agencia Nacional de Hidrocarburos (Colombia) Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (Brazil) Barrels per day Colombian heavy, sour (18.8 API, 2.0% sulfur) Comisión Nacional de Energía (Chile) Comisión Nacional de Hidrocarburos (Mexico) Fuerzas Armadas Revolucionarias de Colombia (Revolutionary Armed Forces of Colombia) IHS Global Exploration & Production Service Isthmus Mexican light, sour (32.7 API, 1.6% sulfur) LLS LSW Louisiana Light Sweet crude oil Light, sweet crude oil Marlim Brazilian high TAN (21.6 API, 0.7% sulfur) Mars Light, sour (29 API, 1.8% sulfur) Maya Mexican heavy, sour (21.5 API, 3.4% sulfur) mbd Mesa 30 PDVSA Roncador Light S/D TAN USEC USGC WTI WTS YPF YTD Million barrels per day Venezuelan light, sour (30.0 API, 1.1% sulfur) Petróleos de Venezuela, S.A. Brazilian light, sweet (28.3 API, 0.6% sulfur) Supply and demand Total acid number US East Coast US Gulf Coast West Texas Intermediate (light, sweet crude oil; 39 API, 0.3% sulfur) West Texas Sour (light, sour crude oil; 33 API, 2% sulfur) Yacimientos Petrolíferos Fiscales (Argentina) Year to date 2014 IHS

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