Canadian Petroleum Products Institute

Canadian Petroleum Products Institute Presentation to: Atlantic Institute for Market Studies Halifax, Nova Scotia - July 20, 2006 Fuel for Thought Petroleum markets: perspectives and outlook Carol Montreuil Vice-President, CPPI Eastern Canada

On understanding the issue Communication on this issue a challenge! Consumers, our clients are frustrated and suspicious Governments under a lot of pressure to do something All sectors of the economy are impacted. High prices & volatility at core of the debate Paradox: retail market volatility is a sign of healthy competition Reputable firms have predicted price of crude above 100$/bbl! Fundamental question: are we facing a structural change? Complicating the communication issue further: Debate politicized Demagogy by certain stakeholders distorting facts for public appeal Today s discussion : Review and understand key facts Page 2 of 39

The issue of predictions When and how much? Predictions CPPI stays away from this mine field Many specialists/analysts take positions Who should you believe? Can anyone help? Let s review their performance In the business world, the rearview mirror is always clearer than the windshield. Warren Buffet (1930- ) Page 3 of 39

Some of the best organizations Agence Internationale de l énergie Energy and Environmental Analysis, Inc. Page 4 of 39

Difficult market to predict EIA GII IEA PEL PIRA NRCan DB EEA NPC SEER CGES Average 2004 actual $40-$42 /bbl depending on crude type 2005 actual $50-$55 /bbl depending on crude type Forecast 2004 $23.57 $22.04 $22.02 $21,23 $24.07 $22,84 $18.14 $21.26 $18.27 $21.35 $24.09 $21.72 /Barrel!!!! Page 5 of 39 2005 $23.30 $21.77 $21.75 $20.96 $23.80 $22.57 $18.13 $20.99 $18.00 $21.08 $23.82 $21.46 /Barrel!!!!! Source: AEO 2002 AEO 2003 AEO 2004

The issue of predictions No How one High predicted Will Crude the trend Oil that Prices started Rise in Before 99! Demand Growth Slows Substantially? Monthly Average WTI Spot Price $60 $50 $60 $50 $70? Dollars per Barrel $40 $30 $20 $20 Midpoint $10 $0 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 $30 Bottom line : So-called experts are good at predicting along trends!!! seemed like $20-$22 crude forever! Source: Reuters Page 6 of 39

Predicting in a complex world OPEC output DOE / API Stocks Iraq Weather / Storms Gasoline Terrorism Refinery fires Nigeria Funds Buying Russia Heating Oil Global Demand Venezuela Norw ay China Natural Gas Israel US Dollar Iran SPR 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Page 7 of 39 Venezuela, 2% Russia, 3% Funds Buying, 4% Nigeria, 5% Refinery fires, 5% Terrorism, 6% Gasoline, 6% Weather, 7% Iraq, 16% DOE / API Stocks, 18% OPEC output, 18% 1 Factors Cited By Analysts For All Price Movements (2004)

160 140 120 100 80 60 40 20 0 Petroleum markets : perspectives & outlook The bottom line for consumers Regular Unleaded Weekly Average Pump Prices Whatever the reasons, consumers must face the end result Pump prices Regular unleaded Canada Quebec Atlantic U.S. Page 8 of 39 Cdn. cents per litre janv-00 mars-00 mai-00 juil-00 sept-00 nov-00 janv-01 mars-01 mai-01 juil-01 sept-01 nov-01 janv-02 mars-02 mai-02 juil-02 sept-02 nov-02 janv-03 mars-03 mai-03 juil-03 sept-03 nov-03 janv-04 mars-04 mai-04 juil-04 sept-04 nov-04 janv-05 mars-05 mai-05 juil-05 sept-05 nov-05 janv-06 mars-06 mai-06 juil-06

120 100 80 60 40 20 0 Petroleum markets : perspectives & outlook The bottom line for consumers However, situation is the same in every market!!! Regular Unleaded Weekly Average Ex-Tax Pump Prices Pump prices ex-tax Regular unleaded Canada Quebec Atlantic U.S. Page 9 of 39 Cdn. cents per litre janv-00 mars-00 mai-00 juil-00 sept-00 nov-00 janv-01 mars-01 mai-01 juil-01 sept-01 nov-01 janv-02 mars-02 mai-02 juil-02 sept-02 nov-02 janv-03 mars-03 mai-03 juil-03 sept-03 nov-03 janv-04 mars-04 mai-04 juil-04 sept-04 nov-04 janv-05 mars-05 mai-05 juil-05 sept-05 nov-05 janv-06 mars-06 mai-06 juil-06

The bottom line for other energy costs Oil, still a significant utility fuel in several parts of the country, is now at record price levels. The prices of oilbased fuels delivered to electric generators have risen 50% between 2003 and 2005 and are now at the highest nominal levels ever recorded. Moreover, the Energy Information Administration (EIA) expects oil prices to remain at these high levels for the foreseeable future. -- Electric Perspectives, July/August 2006 Page 10 of 39

The three markets impacting prices Spending more time understanding instead of predicting International market of crude International and continental markets of finished products Local retail markets Little impact in events of recent years Lesser portion of today s discussion Page 11 of 39

All markets respond to same signals Economic law of supply and demand at the foundation of all explanations Real and speculative supply & demand Supply side: Production & import/export capacity Geopolitics (Iraq, Iran, Nigeria, Venezuela, etc.) Refining issues (hurricanes, shutdowns, etc.) Demand side : Asian growth (China, India) American economy (SUVs, growth) Inventories Critical equilibrium indicator Page 12 of 39

The international market

International market currently driven mostly by geopolitics 60 50 40 NYMEX WTI September 1984-September 2004 ($/bbl) We are living the consequences of a commodity that remained at a lower price for too long 1985-1998 Saudi Arabia "disciplines non-opec" Invasion of Iraq 9-11 30 End of Gulf War I Asian Economic Crisis 20 10 OPEC cuts output 20% Iraq invades Kuwait OPEC quota cuts 0 9/10/1984 9/10/1985 9/10/1986 9/10/1987 9/10/1988 9/10/1989 9/10/1990 9/10/1991 9/10/1992 9/10/1993 Page 14 of 39 9/10/1994 9/10/1995 9/10/1996 9/10/1997 9/10/1998 9/10/1999 9/10/2000 9/10/2001 9/10/2002 9/10/2003 9/10/2004 Source of data :

Petroleum markets : perspectives & and outlook Le premier marché et la géopolitique International market currently driven mostly by geopolitics 60 NYMEX WTI September 1984-September 2004 ($/bbl) In terms of constant 2004 dollars, we are approaching the record high of $80 /barrel 50 40 Saudi Arabia "disciplines non-opec" Invasion of Iraq July 2006 75+ $/b!! 9-11 30 End of Gulf War I Asian Economic Crisis 20 10 OPEC cuts output 20% Iraq invades Kuwait OPEC quota cuts 0 9/10/1984 9/10/1985 9/10/1986 9/10/1987 9/10/1988 9/10/1989 9/10/1990 9/10/1991 9/10/1992 9/10/1993 Page 15 of 39 9/10/1994 9/10/1995 9/10/1996 9/10/1997 9/10/1998 9/10/1999 9/10/2000 9/10/2001 9/10/2002 9/10/2003 9/10/2004 Source of data :

Influence of OPEC World Oil Consumption and Production, 2004, 2020, and 2030 (million barrels per day) 140 120 100 80 82.5 Consumption Mature Market Economies Emerging Economies Transitional Economies 117.8 103.7 Production OPEC Transitional Economies Other 117.8 82.5 103.7 Analysts expecting a lot from OPEC 60 40 20 0 2004 2020 2030 2004 2020 2030 Annual Energy Outlook 2006 Page 16 of 39 Source of data :

Importance of OPEC in projections Persian Gulf Oil Productive Capacity by Country, 2002 and 2025 (million barrels per day) Saudi Arabia 9.2 16.3 Iran 3.7 5.0 Iraq 2.0 6.6 United Arab Emirates Kuwait 2.9 2.1 5.4 5.2 2002 2025 Qatar 0.8 0.8 0.0 5.0 10.0 15.0 20.0 International Energy Outlook 2005 Page 17 of 39 Source of data :

The issue of reserves the wrong issue to focus on! World Oil Reserves by Country, as of January 1, 2006 (billion barrels) Saudi Arabia Canada Iran Iraq Kuwait UAE Venezuela Russia Libya Nigeria United States China Qatar Mexico Algeria Brazil Kazakhstan Norway Azerbaijan India Oman Angola Ecuador Indonesia UK Rest of World World Total = 1,293 Billion Barrels 0 50 100 150 200 250 300 Worldwide Reserves Oil & Gas Journal, Vol. 103, No. 47 (December 19, 2005). Page 18 of 39 BP Statistical Review of World Energy 2005 Source of data :

Enviable Canadian situation thousand barrels per day Canadian Oil Production Conventional, Oil Sands and Offshore 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 Canadian Oil Production Conventional, Oil Sands and Offshore Western Canada Sedimentary Basin Conventional Oil Actual Forecast Oil Sands Oil Sands Growth: 2004 = 1 million b/d 2015 = 2.7 million b/d Offshore 0 1995 2000 2005 2010 2015 Payments to governments in 2005 - $27 billion Oil and gas now accounts for 25% of private sector investment in Canada 30% of value on Toronto Stock Exchange Will invest more than $40 billion in Canada in 2006 Largest single private sector investor in Canada Oil and gas accounts for 81% of Canada s trade surplus Oil and gas accounts for 14.7% of total exports Total employment impact 500,000 in Canada Source: CAPP Page 19 of 39

Enviable Canadian Situation Dependence on imports in other OECD countries Oil Import Dependence for Selected OECD Countries, 2003 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 99% 95% 91% 89% 56% 56% 77% South Korea Japan Germany France Page 20 of 39 International Energy Agency, Monthly Data Service, February 10, 2005 Italy United States OECD Europe OECD Total

The key issue: limits of worldwide infrastructures World Oil Spare Production Capacity (million barrels per day) 6.0 5.0 History Projections 4.0 3.0 2.0 1.0 0.0 1991-1997 Average 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -Lowest level in 30 years! - Key Page variable 21 of 39fueling speculation Short-Term Energy Outlook, February 2006 Source of data :

The key issue: limits of worldwide infrastructures Required investments - $3 Trillion until 2030 - $103 Billion per year - 72 % exploration/dev - non-conv. = Canada/Venez. - Refining = $412 Billion A major challenge!!! Page 22 of 39 Source of data :

Harsh reality for some Quadrillion Btu 300 250 200 150 World Marketed Energy Use by Fuel Type, 1980-2030 History 38% Projections 24% Natural Gas 100 24% Renewables 50 8% 9% Nuclear 6% 5% 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 Coal Oil 33% 27% 26% Share of World Total In 2030, fossil fuels are 86 % of total energy balance (more than 90% in developed countries). Source: EIA, IEO2006 Page 23 of 39 Source of data :

China : a major challenge China GDP - 1970-2025 6.0 History Projections 7.0 2001-2004 growth in China = all Canadian tar sands development of next 15 years! Chinese Oil Demand 5.0 5.0 6.5 6.0 Trillion 1997 U.S. Dollars 4.0 3.0 2.0 1.0 0.0 3.9 3.0 2.2 1.6 1.2 0.8 0.1 0.1 0.2 0.3 0.4 197019751980198519901995200120052010201520202025 M illion B/d 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1Q1995 3Q1995 1Q1996 3Q1996 1Q1997 3Q1997 1Q1998 3Q1998 1Q1999 3Q1999 1Q2000 3Q2000 1Q2001 3Q2001 1Q2002 3Q2002 1Q2003 3Q2003 1Q2004 3Q2004 Hydrocarbon demand since 1995 Page 24 of 39 :. Source of data

China : a major challenge Rate of industrialization US - 1900/1970 from 1 to 27 bbl/pers-yr Japan - 1950/1970 from 1 to 17 bbl/pers-yr S-Korea- 1965/2000 from 1 to 17 bbl/pers-yr China currently at 1,3 bbl/pers-yr India currently at 0,7 bbl/pers-yr U.S. has 2 people per car China & India have 280 people per car! Page 25 of 39

China : a major challenge 30 USA Petroleum Supply, Consumption, and Imports, 1970-2025 (million barrels per day) History Projections 14 History China Projections 25 12 20 15 10 Consumption Domestic supply 54% Net imports Million Barrels per Day 70% 10 8 6 4 Exports Imports 5 2 Domestic Production 0 1970 1980 1990 2000 2010 2025 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 Two economic superpowers that will rely on imported oil for 2/3 of their consumption! Page 26 of 39 :. Source of data

The continental market

Wholesale prices reflect continental market Open continental market Québec NAFTA Free products movement Cargo, pipelines, trucks, rail No trade restrictions Favorable to Canada (trade balance) Montreal Ottawa!! Boston Canadian market =10% of US market Hence, a price-taker Similarity of racks demonstrates this! Toronto Buffalo! New York from Chicago! Detroit Page 28 of 39 Sarnia From Gulf of Mexico! Philadelphia

Key issues impacting our continental market American transportation sector growth (despite higher cost of energy ) Increases in U.S. Petroleum Use for Transportation Million Barrels Per Day 5 4 3 2 1 0 Total Transportation Demand 14.4 MMB/D in 2005 2005 2010 2015 2020 LDV Demand Total Transportation Page 29 of 39 Source of data :

Key issues impacting our continental market Electricity generation sector also showing impressive growth Net Electricity Consumption, 2003-2030 18,000 Billion Kilowatthours 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Non-OECD OECD 2003 2010 2015 2020 2025 2030 2003-2030 period showing a 100% increase!!! Source: EIA, IEO2006 Page 30 of 39 Source of data :

Other realities from market volatility Electricity markets are particularly volatile because, unlike most other commodities, electricity cannot be stored and its demand is highly price inelastic (demand is relatively unresponsive to price). This makes electricity prices particularly sensitive to sudden changes in market conditions. -- Electric Perspectives, July/August 2006 Page 31 of 39

The transportation sector challenge Energy efficiency improvement in fleet didn t resist America s love affair with SUVs Weight (LBS) 4500 0-60 Time (Sec) 15 0-60 Time (Sec) 14 4000 13 12 3500 Weight (LBS) 11 10 3000 9 1975 1980 1985 1990 1995 2000 2005 U.S. Car & Light Truck Sales Shares 100% 90% 80% 70% 20% 53% Fuel Economy (Miles Per Gallon) 40 35 30 25 20 15 10 CAFE Estimates (Adjusted EPA) Trucks Cars Total LDV 1970 1980 1990 2000 2010 60% 50% 40% 30% 20% 10% 0% 1976 1980 1985 1990 1995 2000 2003 Cars Light trucks Page 32 of 39 Initial success followed by arrival of bigger/less efficient vehicles Source of data :

The refining sector Refining capacity evolution Million Barrels Per Day 20 18 16 14 12 10 8 U.S. Refining Capacity & Inputs 6 4 2 0 * Unfavourable economic environment * Enormous environmental costs Refining infrastructure pushed to the limit janv-81 janv-83 janv-85 janv-87 janv-89 janv-91 janv-93 Page 33 of 39 janv-95 janv-97 janv-99 janv-01 janv-03 janv-05 Source of data :

A sometimes fragile refining sector Loss of capacity reached 30% in a matter of days Page 34 of 39

The debate around refining margins Refining margins on regular gasoline (note: a refinery produces more than 10 other products) Regular Unleaded Gasoline Weekly Average Refining Margins 50,0 45,0 record margin for 3 days (media frenzy) 40,0 35,0 30,0 25,0 20,0 15,0 10,0 5,0 0,0 janv-00 avr-00 juil-00 oct-00 janv-01 avr-01 juil-01 oct-01 janv-02 avr-02 juil-02 oct-02 janv-03 avr-03 juil-03 oct-03 janv-04 avr-04 juil-04 oct-04 janv-05 avr-05 juil-05 oct-05 janv-06 avr-06 juil-06 Cdn. cents per litre U.S. Canada Quebec Atlantic No media calls! MJ ERVIN Associates &MANAGEMENT CONSULTANTS Continental market conditions, NOT refiners, decide refining margins! Page 35 of 39 Source of data :

Local markets

Retail gasoline market The quest for higher efficiency Less retail sites hence, more throughput per site Over longer period, regulation tends to impede this process Page 37 of 39

Retail gasoline market Local regulation (no matter how complex) is chasing an Regular Unleaded Weekly Average Pump Prices even more complex world Major Events and World Oil Prices 1970-2005 160 140 Pump prices Regular unleaded Canada Quebec Atlantic U.S. dollars per barrel 80 60 40 20 0 Oil Embargo Iran-Iraq War Begins Saudis abandon "swing producer" Operation Desert role Storm Iranian Revolution Iraq Invades Kuwait Strong Demand Growth Venezuela Unrest OPEC cutbacks Asian Economic Crisis Hurricanes Katrina and Rita Strike U.S. Gulf Coast 9/11 attacks 1970 1975 1980 1985 1990 1995 2000 2005 Refiner Acquisition Cost of Imported Crude Oil (Saudi Light Official Price for 1970-73) Cdn. cents per litre 120 100 80 60 40 20 0 janv-00 mars-00 mai-00 juil-00 sept-00 nov-00 janv-01 mars-01 mai-01 juil-01 sept-01 nov-01 janv-02 mars-02 mai-02 juil-02 sept-02 nov-02 janv-03 mars-03 mai-03 juil-03 sept-03 nov-03 janv-04 mars-04 mai-04 juil-04 sept-04 nov-04 janv-05 mars-05 mai-05 juil-05 sept-05 nov-05 janv-06 mars-06 mai-06 juil-06 Inefficiencies of these regulations in trying to mimic real markets yield higher prices to consumers on average Page 38 of 39

Conclusions Current global market dynamics Characterized by a strong demand-side while the supply-side is struggling to balance a fragile equilibrium Prone to volatility and speculation Perspectives Geopolitics surrounding producing countries is/will be the leading factor to follow (Iran, Iraq, Nigeria, Venezuela) Second key factor to follow will be economic growth of developing countries (demand-side) Will industry succeed at delivering infrastructure projects (supply-side)? Elements of solution Demand-side management will be key Better incentives to manage the consumers energy portfolio In summary, energy efficiency as a top priority in all sectors of our economies. Page 39 of 39