An interesting presentation by Energy consultancy upon the impact of shale oil on the oil peak.

1. 1
Steven Kopits
Managing Director
Douglas-Westwood / New York
Oil and Economic Growth
A Supply-Constrained View
Center on Global Energy Policy
School of International and Public Affairs
Columbia University
11th February 2014

2. 2
www.dw-1.com
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Our Business

3. 3
Demand-Constrained Models
Supply-Constrained Models
Supply Growth
Demand Growth
Oil Prices
Oil and Mobility
The Oil Majors
Oil and Economic Growth
Conclusions

4. 4
Demand versus Supply Driven Forecasting
GDP
Growth
Oil Demand
Growth
Oil Supply
Growth
• exogenous • 𝑓(𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ) • 𝑓(𝑑𝑒𝑚𝑎𝑛𝑑 𝑔𝑟𝑜𝑤𝑡ℎ)
Demand-driven Forecasting
Oil Supply
Oil Demand
Growth
GDP
• exogenous • 𝑓(𝑂𝑖𝑙 𝑠𝑢𝑝𝑝𝑙𝑦 𝑔𝑟𝑜𝑤𝑡ℎ) • 𝑓(𝑂𝑖𝑙 𝑠𝑢𝑝𝑝𝑙𝑦 +
𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 𝑔𝑎𝑖𝑛𝑠)
Supply-driven Forecasting

5. 5
Demand versus Supply Driven Forecasting
GDP
Growth
Demand
Growth
Supply
Growth
• exogenous • 𝑓(𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ) • 𝑓(𝑑𝑒𝑚𝑎𝑛𝑑 𝑔𝑟𝑜𝑤𝑡ℎ)
• Traditional forecasting model
• Many forecasters will never see anything but this during their
entire career
• Virtually all forecasters—investment banks, oil companies, and
industry analysts, the US and foreign governments—use
demand-constrained models.
Demand-driven Forecasting

6. 6
Demand versus Supply-Driven Forecasting
GDP
Growth
Demand
Growth
Supply
Growth
• Supply growth is a function of non-OPEC supply and OPEC supply
• OPEC provides the residual: “Call on OPEC”
• OPEC is to stabilize prices with increased production or production
cuts
Traditional Oil Markets Forecasting
Call on OPEC𝑇ℎ𝑒 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙

7. 7
BP / IEA Forecasting
• A demand-driven interpretation.
“Global liquids consumption is projected to reach 104 Mb/d by 2030
but growth slows to 0.8% p.a. (from 1.4% p.a. in 1990-2010 and
1.9% p.a. in 1970-90).”
“Demand growth comes exclusively from rapidly growing non-OECD
economies. China, India and the Middle East together account for
nearly all of the net global increase. OECD demand has peaked and
consumption is expected to decline by 5.6 Mb/d.”
BP Energy Outlook, Jan. 2013 (pp. 33, 39)
From BP’s Energy Outlook, 2013

8. 8
BP / IEA Forecasting
BP Energy Outlook, Jan. 2013 (p. 41)

9. 9
BP’s View of the Residual Call on OPEC
GDP
Growth
Demand
Growth
Supply
Growth
Call on
OPEC
• BP solves oil supply
growth > demand
growth with rising
spare capacity in
OPEC.
• This means purely
Saudi Arabia, barring
unexpected outages in
other countries—on
which more later.
BP Energy Outlook, Jan. 2014 (p. 32)

10. 10
Assumptions of Demand Constrained Forecasting
• Oil demand is weak
- GDP growth is endogenously weak, or
- Social tastes or demographics have changed
• OPEC is central
- OPEC has enormous leverage
- OPEC discipline is key to industry economics
• Oil prices are balanced on a knife’s edge
- Any excess supply or lack of OPEC discipline will tank oil
prices—and with it, the IOCs

11. 11
Demand-Constrained Models
Supply-Constrained Models
Supply Growth
Demand Growth
Oil Prices
Oil and Mobility
The Oil Majors
Oil and Economic Growth
Conclusions

12. 12
Demand versus Supply Driven Forecasting
Oil Supply
Growth
(OPEC + non-OPEC)
Oil Demand
Growth
GDP
Growth
• Exogenous,
OPEC and non-
OPEC considered
together
• Assumes limited
accommodation
from OPEC
Supply-Constrained Forecasting
• A “binding constraint” view of economic growth
• Oil supply growth is insufficient, reducing GDP growth
𝛈
• Inherent Demand
Growth – from
unconstrained
supply
• Observed
demand growth –
Growth actually
observed in the
data, less than
inherent demand
growth
• Efficiency Gain
– Economy
decreases
energy
intensity over
time
• Residual
If efficiency
gains + oil
supply growth
not sufficient,
GDP growth
will be limited

13. 13
Supply-Constrained Pre-Conditions
Need to demonstrate….
Constrained Supply
• Demand is likely higher than demonstrated
• Oil supply growth is constrained
• Oil is a key enabling commodity (can affect GDP)
• Constrained oil supply is materially affecting economic activity
• Efficiency gains are likely not enough
• GDP growth is off trend
Traditional Forecast (Demand-driven)
• “Peak demand” largely unsupported
• Oil prices sustaining in the face of supply growth in excess of
forecast demand

14. 14
Full Cycle Gas Economics
Source: Barclays Capital
• Natural gas prices will continue to rise
• Median required breakeven price is around $8 / mmbtu
E&P Capex per Barrel
80
90
100
110
120
130
140
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Electric Power - Gas
Electric Power Sector - Coal
Demand-Constrained Models
Supply-Constrained Models
Supply Growth
Demand Growth
Oil Prices
Oil and Mobility
The Oil Majors
Oil and Economic Growth
Conclusions

15. 15
80
85
90
95
100
105
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
mbpd
Actual (EIA) - Last Three
Months of Period
Expected Based on GDP
Growth @ 2.5% Eff. Gain
Expected Based on GDP
Growth @ 1.2% Eff. Gain
• Oil demand historically
increases by 0.75 * GDP
growth (inherent demand
growth)
• Implies 23%+ oil consumption
growth from 2004-2013
• Actual oil supply growth was
only 7.5%
• By 2008, the world economy
was missing a quantity equal
to the output of Saudi Arabia
• Today, compared to 2004 Q4,
we’re missing a Saudi Arabia
and an Iraq
• That’s why oil is expensive
Source: EIA. IMF, Douglas-Westwood analysis
Observed Oil Supply; and Oil Demand anticipated
based on GDP growth
39% Global
GDP Growth
7.5% Oil Supply Growth
• Demand growth = GDP growth – 1.2% annual efficiency gain
without oil price pressure
• Demand growth = GDP growth – 2.5% annual efficiency gain with
oil price pressure at recent levels
Inherent Demand

16. 16
Liquids Supply Since 2005
• Total production up 5.8 mpbd
since 2005, of which 1.7 mbpd
is OPEC NGL’s (non-crude)
• OPEC liquids production
(crude + NGL) is unchanged
since 2005
• US unconventional liquids
(shale oil and NGL) up 5.1
mbpd—literally all net crude oil
production growth—since
2005.
• Canadian oil sands up 1.2
mbpd from 2005
• Legacy, conventional system
still peaked in 2005.
• Oil supply growth entirely
leveraged to unconventionals
Source: EIA STEO
World Liquids Production Growth, 2005-2013, Oct-
Dec averages, excludes OPEC NGLs
5.1
1.2
(1.8)
1.3
3.0
0.9
(0.7)
(1.0)
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
US (incl.
Shale Oil,
NGL)
Canada (incl.
Oil Sands)
Opec (incl.
Iraq)
All others
mbpd
Change Dec 2013 vs. Dec 2005
Change Dec 2013 vs. Dec 2010

17. 17
OPEC Liquids Supply since 2005
• OPEC crude essentially
unchanged in last three years,
1.8 mbpd less than 2005
• Most growth is NGLs, up 1.7
mbpd since 2005
• Iran, Libya, and Nigeria
together down 2.4 mbpd since
2010
• Saudi up nearly 700 kbpd from
2010, close to 1979 levels
• Iraq up only 1.2 mbpd since
2005—US adds more in a year
now
• US shale oil and NGLs would
be easily the second largest
producer in OPEC
Source: EIA STEO, three month averages ending December
of each year
OPEC Liquids Production Growth 2005-2013
1.2
(3.0)
0.1
(0.0)
1.7
0.5
(2.4)
0.7
0.6
0.3
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
Iraq Iran, Libya,
Nigeria
Saudi
Arabia
Other
OPEC
Crude
OPEC
NGLs
mbpd
Change Dec 2013 vs. Dec 2005
Change Dec 2013 vs. Dec 2010

18. 18
5.1
1.2
(1.8)
1.3
3.0
0.9
(0.7)
(1.0)
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
US (incl.
Shale Oil,
NGL)
Canada (incl.
Oil Sands)
Opec (incl.
Iraq)
All others
mbpd
Change Dec 2013 vs. Dec 2005
Change Dec 2013 vs. Dec 2010
Liquids Supply Since 2005
• Total spend since 2005 on upstream
exploration and production:
$4 trillion
• Of which, $350 bn on US and Canadian
unconventional oil and gas…
• …and another $150 bn on LNG and GTL
• $3.5 trillion was spent maintaining the
2005 legacy oil and gas system
• About $2.5 trillion* was spent on legacy
crude oil production—94% of the
petroleum liquids supply today.
• Result: legacy oil production has fallen by
1 mbpd
• Peak oil for legacy system: still 2005
• For comparison: ‘98-’05, $1.5 trillion
spend added +8.6 mbpd crude
production
• Compared to ‘98-’05 period, vaporized
GDP of Germany
Source: EIA STEO, Barclays, DW Analysis
$350 bn
7% of supply
$2,500 bn
93% of supply
* GDP of Germany is $3.5 trn, Italy $2.0 trn
World Liquids Production Growth, 2005-2013, Oct-
Dec averages, excludes OPEC NGLs

19. 19
Demand-Constrained Models
Supply-Constrained Models
Supply Growth
Demand Growth
Oil Prices
Oil and Mobility
The Oil Majors
Oil and Economic Growth
Conclusions

20. 20
Motorization and Oil in Historical Context
Source: EIA
• Motorization in West: 1.2 bn people, +30 mbpd supply, 12 years
• Motorization in the East: 1.3 bn people, +4 mbpd crude, 8 years
• Based on historical precedent, anticipated growth would be
2.7% per year, not 0.8%
20
30
40
50
60
70
80
mbpd
World Crude Oil Production (C+LC): 1960-2011
World Crude Oil Production, million barrels per day

21. 21
China Key Driver of Oil Demand Growth
• How far? Japan, Korea, Taiwan: 0.5-0.6x US oil consumption per capita
• When? S curve is 20-30 years—about one generation
• Potential is enormous—50 mbpd in 2030 versus 10.5 now (if the oil supply
were available; US is at 18.5 mbpd now)
• Total non-OECD demand growth to 2030 could be 60 mbpd—2/3 as much
as total production today.
• How does this translate in 0.8% growth?
5
10
15
20
25
30
35
40
45
50
55
millionbarrelsperday
China as Japan (1960-1973)
China as Korea (1976-1996)
China - EIA IEO 2010
Source: EIA, Douglas-Westwood Analysis
China Unconstrained Demand
China is here.

22. 22
Petroleum Liquids – 2030 Forecast
• Exxon, BP, EIA: 103-107 mbpd
• Total, IEA: 95-96 mbpd
• Kjell Aleklett (ASPO Europe): 75 mbpd (ex-shales)
• These are all peak oil forecasts—not much changed in last few years
Source: EIA
Oil (Petroleum Liquids)Supply Forecasts to 2030
70
75
80
85
90
95
100
105
110
2030
MillionsbarrelsperDay
Exxon 2040 (2012)
EIA AEO 2012
BP 2030 (2012)
IEA 2011
Total SA 2012
Uppsala 2010

23. 23
• Assuming 100 mbpd supply by 2030, US
consumption would be expected at 14
mbpd—down 1/3 from 21 mbpd in mid
2007
• Rate of long term decrease: 1.5% per
annum, 2.3% on a per capita basis
− Per capita, still puts US in 2030 on par
with Japan, Korea today.
Source: Douglas-Westwood projections
based on EIA data
Global Oil Consumption 2005 - 2030
Determining Demand Trends

24. 24
OECD and Non-OECD Oil Consumption
• OECD consumers providing 50% of new non-OECD oil consumption
since Dec. 2007
• OECD consumers providing 28% of new non-OECD oil consumption in
last year
OECD countries in
systemic crisis: USA, UK,
Ireland, Iceland, Greece,
Spain, Portugal,
Hungary, Italy, France,
Cyprus, Estonia, Latvia,
Lithuania, Netherlands,
Japan
Non-OECD countries in
systemic crisis: ?
-100%
0%
100%
200%
300%
400%
500%
600%
700%
800%
(6.0)
(4.0)
(2.0)
-
2.0
4.0
6.0
8.0
10.0
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13
Percentofnon-OECDOilDemandGrowthfrom
OECDConsumers
ChngeinOilConsumptionsinceDec.2007,
mbpd
Change in non-OECD Demand from Dec. 2007 (lhs)
Change in OECD Demand from Dec. 2007 (lhs)
Share of non-OECD Demand from OECD Consumers (rhs)
Share from OECD Consumers, year on year (rhs)
Source: EIA
Change in OECD and non-OECD Oil Consumption since Start of the Great Recession

25. 25
Demand-Constrained Models
Supply-Constrained Models
Supply Growth
Demand Growth
Oil Prices
Oil and Mobility
The Oil Majors
Oil and Economic Growth
Conclusions

26. 26
Oil price forecasts generally fall into one of three schools:
• Futures Curve: The NYMEX futures curve sees oil prices falling below $90 / barrel by 2020. Underlying this is the
implicit assumption that oil will somehow become cheaper or easier to find and produce, in contrast to the experience
of the last decade.
• “Operators’ Forecast”: Absent a convincing oil price model, a number of oil companies are using a “best guess”
approach, which assumes that oil prices will remain around or above $100 / barrel on a Brent basis. This is not
scientific, but many, if not most, oil company executives think this seems plausible and sufficiently conservative for
investment decisions.
• DW Forecast: Douglas-Westwood uses a unique supply-constrained model which has proved itself successful in both
explaining and predicting oil prices and country level demand. This models assumes the global economy is
constrained by a struggling oil supply, with the oil price rising to the global carrying capacity (similar to the monopoly
price). Global carrying capacity should continue to increase by up to 7% theoretically, and about 4.5%, empirically.
Oil Price Outlook
$50
$70
$90
$110
$130
$150
$170
$/barrelcrude,Brentbasis
"Operator's Forecast"
Brent Oil Price
Brent NYMEX Futures
DW Brent Forecast
Source: EIA, NYMEX, DW Forecast
Brent Oil Prices – Historical and Forecast

27. 27
Source: EIA, BP, Douglas-Westwood analysis
Oil Supply and Demand under Supply- and Demand-Constrained Approaches
Why no price collapse in 2013?
$60
$70
$80
$90
$100
$110
$120
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2013 2014
BrentOilPrice$/bbl
ChangeonPreviousYear
Oil Supply (EIA)
Oil Demand (BP / IEA)
Inherent Demand (DW)
Brent Price (EIA)
Max Brent Price (DW)
• Demand-Constrained : Supply-growth substantially in excess of demand
growth should have crashed oil prices. But that didn’t happen.
• Supply-Constrained: With a global economy starved for oil, economic activity
expanded to absorb excess supply, prices returned to carrying capacity.

28. 28
Source: EIA
US and China Annual Oil Consumption Growth (3 mma)
But a supply constrained models depends on China
• A demand-constrained model is driven primarily by demand in China
• China sets the price, and causes the oil supply to be rationed
• China has been all but absent from oil markets in recent times
• This has allowed supply growth to increasingly flow to the advanced economies—
US consumption has jumped since Q4 2013
• Without pressure from China, the OECD countries growth may not be constrained
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
USA
China

29. 29
19.2
22.3
20.1
0
0
0
0
0
1
1
1
1
1
1
18
19
20
21
22
23
24
Jan-2000
Jul-2000
Jan-2001
Jul-2001
Jan-2002
Jul-2002
Jan-2003
Jul-2003
Jan-2004
Jul-2004
Jan-2005
Jul-2005
Jan-2006
Jul-2006
Jan-2007
Jul-2007
Jan-2008
Jul-2008
Jan-2009
Jul-2009
Jan-2010
Jul-2010
Jan-2011
Jul-2011
Jan-2012
Jul-2012
Jan-2013
Jul-2013
mbpd
US Oil Cons. (12 mma)
US Cons. at LT Trend
US Cons. Pro Forma Recovery
US Predicted "Peak Oil" Cons.
US Demand Outlook
• Normal US oil consumption growth trend: 1.8% per annum
• Break trend 2005, US off trend twice now in last nine years
• Consumption should be 22.3 mbpd, actual 19.2 mbpd (-14%)
• The US is still a major exporter, but also the fastest growing oil producer.
How does this affect US consumption and GDP growth?
• Does increased US oil production allow the US to consume more oil?
Source: EIA
US Oil Demand – 2000 to 2013
Current Cons.
Normal growth trend:
+1.8% p.a.
Cons. on long
term trend
Trend from
Arab Spring
Constrained trend:
-1.5% per annum

30. 30
Demand-Constrained Models
Supply-Constrained Models
Supply Growth
Demand Growth
Oil Prices
Oil and Mobility
The Oil Majors
Oil and Economic Growth
Conclusions

31. 31
Oil Consumption, VMT and Prosperity are Related
• VMT, oil consumption and GDP growth have historically
been almost directly correlated.
Source: US Department of Transportation, EIA, Douglas-Westwood analysis
Index of US Vehicle Miles Driven and Oil Consumption (1970 = 100)

32. 32
Stay at Home: US Miles Driven
• Peak driving was 2005—not 2007!
• The US has lost mobility as it has lost oil consumption
• New hires in the US cannot use any more oil—and this affects mobility
• 1 in 6 cars missing from the road
Source: DS Short, US Department of Transportation
US Vehicle Miles Driven

33. 33
Vehicle Ownership
• Also, “peak car
ownership”, in 2006
• Predates the recession
Source: Michael Sivak, UMTRI, “The Reasons for the
Recent Decline of Young Driver Licensing in the U.S.”
Car Ownership in the United States

34. 34
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
18-24 25-34 35-44 45-54 55-64 65-74 75+
2007
2011
Not because seniors don’t want to drive
• Relative probability for buying a car for 25-44 year olds has fallen.
• Relative probability of buying a car for age 45+ has risen--substantially
Source: Michael Sivak, UMTRI, “MARKETING IMPLICATIONS OF THE CHANGING AGE
COMPOSITION OF VEHICLE BUYERS IN THE U.S.”
Relative Probability of Buying a Car in the US by Age

35. 35
Driving and Employment
• No car, no job: Only 19% of persons aged 18-39 without a
driver’s license hold a full time job.
• Unemployment represents 80% of the reason young people
are driving less
Source: Michael Sivak, UMTRI, “The Reasons for the
Recent Decline of Young Driver Licensing in the U.S.”
Employment Status of Person’s without a
Current Driver’s License
Source: HDLI, “Drop in teen driving tracks with teen unemployment”,
http://www.iihs.org/iihs/news/desktopnews/drop-in-teen-driving-tracks-with-
teen-unemployment-hldi-study-finds
Ratio of teen drivers to prime-age drivers and unemployment
spread between teens and prime-age workers

36. 36
Evidence of Oil Price Pressures on Behavior
Source: : Michael Sivak, UMTRI, “A Comparison of CAFE Standards and
Actual CAFE Performance of New Light Duty Vehicles”
• Achieved new vehicle fuel economy has exceeded required
standards—suggests price pressures influencing consumer
choice
• However, if oil (gasoline) prices ease, the pressure on the
consumer to conserve rapidly dissipates
Achieved and “Projected Achieved” CAFE Standards -8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Feb-09
May-09
Aug-09
Nov-09
Feb-10
May-10
Aug-10
Nov-10
Feb-11
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Annual Rate of Improvement in New Vehicle
Mileage
Six month moving average
Annual Rate of Improvement in New Vehicle Mileage
Annual Rate of Improvement in Gasoline Consumption

37. 37
50
60
70
80
90
100
110
120
1996
1996
1997
1998
1998
1999
2000
2000
2001
2002
2002
2003
2004
2004
2005
2006
2006
2007
2008
2008
2009
2010
2010
2011
2012
2012
2013
IndexofActivityAug.2005=100
(Peak) 12 mma
Monthly
LT Trend
And it’s not just cars: US Airline Departures
• US commercial airline departures are 16% below their 2005 peak…
• …and departures are 30% below trend (even allowing for recession)
• For every two aircraft taking off from US airports, one is missing
• And the trend continues to decline.
Source: US Department of Transportation, Douglas-Westwood analysis
US Commercial Airlines (System) Departures: Peak = 100 (Aug. 2005)
-16%
-30%

38. 38
• Ethane/Ethylene production growth linked to low natural gas prices and
abundant supplies of natural gas liquids
• Jet fuel down 14%
• Heating fuel down 35%
• But on-road diesel up by 1% and gasoline down by only 4%
• Refutes proposition of reducing driving attributable to changed tastes
or demographics—people are struggling to hang on to mobility
And it’s worse in other sectors
Source: EIA
Product Supplied in the US: Change from 2005 to 2013
-70%
-64%
-46%
-35%
-27%
-14%
-4%
1%
72%
-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%
Residual Fuel Oil
Distillate to Power
Asphalt
Heating Oil
Pet Coke
Jet Fuel
Gasoline
Diesel Fuel
Ethane/Ethylene

39. 39
Demand-Constrained Models
Supply-Constrained Models
Supply Growth
Demand Growth
Oil Prices
Oil and Mobility
The Oil Majors
Oil and Economic Growth
Conclusions

40. 40
Listed Oil Majors: Capex and Crude Oil Production
• Oil production has faltered, even as capex has soared
• Capex productivity has fallen by a factor of five since 2000
• Observed decline trend now approaching 5% per year
Crude Oil Production and Capex
$50
$73
$109
$199
$192
$262
13.8
15.3
16.1
15.4
15.9
14.4
14.0
12.0
12.5
13.0
13.5
14.0
14.5
15.0
15.5
16.0
16.5
0
50
100
150
200
250
300
Crudeoilproduction(mbpd)
US$billion
CAPEX ($Billions) LHS OIL PRODUCTION RHS
Combined data for BG, BP, COP, CVX, ENI, OXY, PBR, RDS, STO, TOT, XOM
Source: Bloomberg via Phibro Trading LLC

41. 41
Upstream Spend Continues Strong
Source: Barclays Capital
• Upstream spend (capex) has risen strongly in the last decade, with industry
expectations, only six months ago, for continued strong gains
Upstream Spend – Actual and Forecast (includes both NOCs and IOCs)

42. 42
Parts of the Industry Look Great
Source: Douglas-Westwood
• Current revenues and backlog are at record levels throughout much of
the industry
• Q1 2013 subsea hardware orders were the best ever—by far
• But profitability has lagged.
Subsea Hardware Orders
0
1,000
2,000
3,000
4,000
5,000
6,000
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
SubseaOrderValue(US$million)
GE Oil & Gas
FMC
Dril-Quip
Cameron
Aker Solutions
12-Month Moving Avg

43. 43
Costs are Rising Fast
Source: Barclays Capital
• Profits have lagged because costs are rising faster than revenues.
E&P capex per barrel has been rising nearly 11% per year.
• Brent oil prices have been largely flat.
• A number of projects have consequently been deferred, cancelled
or return for re-evaluation.
E&P Capex per Barrel

44. 44
Turbulence in the Oil Sector
* Goldman Sachs calculated economic breakeven oil price; Mad Dog breakeven price for Phase I and II together

45. 45
• Costs have outpaced revenues by 2-3% per year. Profitability is down 10-20%.
• The vast majority of public oil & gas companies require oil prices of over
$100/bbl to achieve positive free cash flow under current capex and dividend
programs
• Nearly half of the industry needs more than $120/bb. The 4th quartile, where
most US E&Ps cluster, needs $130/bbl or more.
Source: Goldman Sachs
Oil Price Required by Oil Companies to be Free Cash Flow Neutral After Capex and Dividends
The Industry Needs $100+ Oil Prices

46. 46
-80,000
-60,000
-40,000
-20,000
0
20,000
40,000
60,000
80,000
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
IntegratedOilsFreeCashFlow($mn)
Oil price increase
greater than E&P Cost
Oil price
increase
less than
E&P Cost
Recession
&
recovery
Integrated Oils Free Cash Flow Post Working Capital, Dividends and Capex
Source: Goldman Sachs
Shell: “Sharper focus on
fewer projects.”
“Shell said it was dropping its oil
and gas production growth targets,
in a sign of how difficult it is
becoming for supermajors to
increase output.”
The Majors Respond
• Shell: Discontinue production guidance and focus on increased cash flow generation.
• Shell: No Alaska 2014
• Major divestment programs

47. 47
The Oil Cost Curve
Approval threshold
Based on anticipated oil price levels
Cost inflation
Projects
at Risk
of being canceled
or delayed with
Cost Inflation
Projects
at Risk
of being canceled
or delayed
without Cost
Inflation
Iraq, most other
Middle East
Most GoM Fields,
Pre-Salt Brazil
GoM Lower Tertiary,
Cheaper Shales
Marginal Shales,
Heavy Oil,
Russian Greenfield
Increased CapEx to
OFS providers Increased CapEx +
Bespoke Technology
Innovation
Innovate or
eliminate as a class
Govt take
becomes
central issue
• Some high cost projects will be abandoned. More will be “pushed to the right” as operators use their current capex
budgets to pay for earlier years’ cost overruns.
• Operators will begin to take a closer look at their budgets, particularly related to deepwater exploratory drilling. Cost-
effective solutions will be in demand, opening a new chapter on technology development.
• Reducing government take (tax and royalties) will be a key focus of operator efforts. Governments will respond in an
attempt to keep the operators in play, as they have been or are doing in US, Russian and Norwegian Arctic.

48. 48
Conventional Oil Production
• The conventional oil system—including Iraq, excluding Canada, US unconventionals
and NGLs—peaked in 2005
• Oil systems normally follow symmetrical advance and decline around a peak.
• Crude production has been maintained primarily by a massive increase in upstream
spend, bringing production to the left from inherently lower “natural” levels
• How does oil production regain trend? Fast? Slow? Or at all?
Source: BP Statistical Review 2013, EIA STEOs 2008, 2013; smoothed data
Change in Legacy Crude Oil Production from 2005 to 2012
66
68
70
72
74
76
78
80
82
84
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Mbpd
Crude Production Forward
Iraq
Crude Oil Normal Decline

49. 49
E&Ps Cutting Capex One after Another
Capex Set to decline
Statoil to Postpone 2020 Production Target
• Statoil Chief Executive Helge Lund -- cut costs $1.3 billion a year starting in 2016 in a bid to
counter escalating oil sector costs.
• Chevron -- 5% decrease in 2014 Capex from $42 billion in 2013.
• Hess capex down 30% over two years
• Shell capex down 20% for 2014.
• BG expects 2015-2016 capital expenditure to fall to $8-10 bn from $12 bn(BG est.) in 2013.

50. 50
Listing Oil Majors: Capex
• Capital discipline now a key theme at oil majors
• Cash flow growth over production growth
• Implies unraveling
• Substantial deterioration in outlook since October 2013
• Oil majors face a very challenging climate
Historical and Forecast Crude Oil Production and Capex (Provisional, subject to Revision)
Combined data for BG, BP, COP, CVX, ENI, OXY, PBR, RDS, STO, TOT, XOM
Source: Bloomberg via Phibro Trading LLC
273
193
$0
$50
$100
$150
$200
$250
$300
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
UpstreamSpend,USDollars,billions
Historical Capex
Current Forecast Capex
Forecast Capex based on Hess
DW Oct. Provisional Forecast
Industry "Consensus"

51. 51
Demand-Constrained Models
Supply-Constrained Models
Supply Growth
Demand Growth
Oil Prices
Oil and Mobility
The Oil Majors
Oil and Economic Growth
Conclusions

52. 52
Supply-Constrained Oil and Economic Growth
• In order to argue for a supply-constrained model, there must be a
residual prepared to adjust up or down for increased or decreased oil
supply.
• This must be GDP growth, assuming the efficiency gains are
bounded.
• What do we need to demonstrate if this is true?

53. 53
Supply-Constrained Oil and Economic Growth
• Need a plausible model showing the mechanism of constraint.
• Need to see some empirical evidence.

54. 54
Oil Efficiency and GDP
• In normal times, oil efficiency in GDP increases by 1.2% / year
• In “stressed” times, 2.0% is possible
• For six recent quarters, US efficiency up 3.8% -- 2.3% GDP growth
• OECD GDP growth probably capped at 1.0-2.0%
• A constrained oil supply is reducing OECD GDP growth by 1-2%
1.2%
2.0%
2.5%
3.8%
4.5%
8.0%
-0.3% 0.5% 1.0% 2.3% 3.0%
-1.0%-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
"Normal"
unstressed
"Stressed" Max
Sustainable
New Vehicle
MPG
Improvement
Required
efficiecy gain
for 3% GDP
growth
Max
efficiency
gains in
recession
Efficiency Gains
Implied Max GDP Growth

55. 55
GDP Growth Forecasting Errors
• Fed and CBO forecasts: Consistently over-estimated the pace of
GDP growth
• We seem to have some sort of unexplained factor holding back
growth
US Federal Reserve GDP Growth Forecasts
Source: Wonkblog ,
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/19/
this-graph-shows-how-bad-the-fed-is-at-predicting-the-future/
CBO GDP Growth Forecasts
Source: Wonkblog ,
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/19/
this-graph-shows-how-bad-the-fed-is-at-predicting-the-future/

56. 56
Unexplained Weak Recovery

57. 57
Dire Long-term Growth Forecasts
Source: IMF WEO 2013, Statoil Energy Perspectives 2013
• Statoil sees a much darker future than the past
• Long-term growth rates down 1% compared to pre-recession period
• Why such pessimism?
• Failed states?
Advanced Country / OECD GDP Growth Rates
Source: IMF WEO 2013, Statoil Energy Perspectives 2013
EU / Europe GDP Growth Rates
2.4%
0.9%
1.4%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Avg.AnnualFiveYearGDPGrowthRate
EU (IMF)
Europe (Statoil)
EU Avg '90-'07 (IMF)
EU Avg '10-'13 (IMF)
EU Avg '11-'40 (Statoil)
2.7%
1.8%
1.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
AverageFiveYrGDPGrowthRate
IMF Advanced Country
OECD (Statoil)
OECD Avg '90-'07 (IMF)
OECD Avg '10-'13 (IMF)
OECD Avg '11-'40 (Statoil)

58. 58
Demand-Constrained Models
Supply-Constrained Models
Supply Growth
Demand Growth
Oil Prices
Oil and Mobility
The Oil Majors
Oil and Economic Growth
Conclusions

59. 59
• Demand-constrained models dominate thinking about oil demand,
supply, prices and their effect on the economy
• The data have not supported these models in recent years; the data do
fit a supply-constrained model
• A supply-constrained approach will not be applicable if China falters, US
short term latent demand is sated, and oil supply growth is robust.
• For a supply-constrained model to be valid, oil must be holding back
GDP growth as an implicit element of model construct.
• If the supply-constrained approach is right, then GDP growth depends
intrinsically on increasing oil production.
• Without such increases, OECD GDP growth will continue to lag
indefinitely, with a long-term GDP growth rate in the 1-2% range entirely
plausible, and indeed, likely.
• In turn, if this is true, then current national budget deficit levels and debt
levels will prove unsustainable, and a second round of material and
lasting adjustment will be necessary.
Conclusions

60. 60
Thank you
Steven Kopits
Managing Director
New York, NY
steven.kopits@douglaswestwood.com