Drivers of Demand for Capital in Global Energy Randall S. Wade Managing Director and COO December 2010.

Drivers of Demand for Capital in Global EnergyRandall S. WadeManaging Director and COO

December 2010

Sector Attributes

• Energy is a building block of economic growth

• Benefits from long-term demographic trends that drive demand

• Demand largely caught up with supply in last five years; supply will struggle to keep pace with demand going forward

• Energy supply is comprised of several heterogeneous markets, each with distinct sub-sectors and underlying fundamentals

• Negative correlation with traditional investment classes such as equities, fixed income

• Commodities provide a natural hedge against inflation

• Long-lived, hard assets

• Inherent volatility in commodity prices

2

Source: EIA, CIA World Fact Book, World Health Organization, Bloomberg

Military, 2.4%

Energy, 25.9%

All Others, 61.5%

Healthcare, 10.2%

World GDP by Sector

33

Sector Attributes

Technically complex Complex and interpretive resource evaluation, and sophisticated engineering required for success

One off, purpose specific design

Project cost risk typically carried by owner (not EPC)

Capital intensive Very large capital investment required throughout lifecycle. Ability to ‘protect’ or follow initial investment is crucial

Investment decision heavily reliant on commodity price forecastCommodity price

volatilityOil prices in 2002 were sub $20/bbl, reached a high of ~$147/bbl in July 2008, and hit a low of ~$34/bbl in December 2008

Financial flows increasing volatilityCyclicality GDP growth drives underlying demand

Significant lag in investment cycle, leading to boom-bust profile

Complex demand-supply position

Energy markets are complex and intertwined (e.g. upstream importance to gas transmission, gas price on spark spread)

Structural change driven by:

- Decline of OPEC spare capacity, and rise of NOCs

- Development of unconventional resources

- Impact of the rise of Asia on demand

Drivers of DemandBeginning around 2005, EIG believes the world began a 15-20 year secular trend in energy and energy-related infrastructure requiring massive amounts of investment.

4

1) Developing world continues to industrialize, coupled with population growth and demographic trends

2) Depletion of aging “elephant” fields that have underpinned global supply for decades

3) Higher replacement costs as conventional supplies began to be replaced with higher cost “unconventional” supplies

4) Chronic under-investment in infrastructure caused by the inherent volatility of the sector and the need for long pay-back periods

5) Concerns about climate change and the introduction of price mechanisms for carbon

6) Assertion of market clout by national oil companies and other state actors and the resulting resource nationalism as energy independence takes on increased political importance

7) Security of supply as an enhanced geopolitical consideration as key supply states use energy as an economic weapon to leverage consumer states

8) Market distortions caused by increased government intervention through mandates, subsidies, taxes, and regulation

9) Fragility of the energy supply network and susceptibility to disruption by terrorist activity

10) Increased price volatility due to low reserve margins, correlation to U.S. dollar, and inflation expectations

Underlying Factors that Drive Demand

1) Industrialization of the Developing World is Driving Demand

• World population has more than doubled since 1950

• Urbanization increases demand for energy

• In 2009, for the first time in history, the world’s urban population overtook the rural population

5

Source: Historical data from World Bank (GDP), BP Statistical Review 2009 (Energy), US Census Bureau (Population). Forecasts per EIA International Energy Outlook 2009, IEA World Energy Outlook 2009, World Bank HNP Stats.

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65

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GDP (RH) Energy Consumption (LH) Population (LH)

Actual Forecast

1) Industrialization of the Developing World is Driving Demand

6

Source: BP Statistical Review 2009

China 67.6%

Middle East 39.6%

India 27.9%

Total World 10.9%

US (1.4)%

-10%

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50%

60%

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80%

2000 2001 2002 2003 2004 2005 2006 2007 2008

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0

Oil Consumption

Drivers of DemandBeginning around 2005, EIG believes the world began a 15-20 year secular trend in energy and energy-related infrastructure requiring massive amounts of investment.

7

1) Developing world continues to industrialize, coupled with population growth and demographic trends

2) Depletion of aging “elephant” fields that have underpinned global supply for decades

3) Higher replacement costs as conventional supplies began to be replaced with higher cost “unconventional” supplies

4) Chronic under-investment in infrastructure caused by the inherent volatility of the sector and the need for long pay-back periods

5) Concerns about climate change and the introduction of price mechanisms for carbon

6) Assertion of market clout by national oil companies and other state actors and the resulting resource nationalism as energy independence takes on increased political importance

7) Security of supply as an enhanced geopolitical consideration as key supply states use energy as an economic weapon to leverage consumer states

8) Market distortions caused by increased government intervention through mandates, subsidies, taxes, and regulation

9) Fragility of the energy supply network and susceptibility to disruption by terrorist activity

10) Increased price volatility due to low reserve margins, correlation to U.S. dollar, and inflation expectations

Underlying Factors that Drive Demand

2) Depletion of Aging “Elephant” Fields

• There are ~70,000 oil fields in the world

• Bulk of production comes from a small number of very prolific fields, mostly giants and super giants

– World’s 10 largest fields produced 20% of world’s production

– 20 largest fields produced 25%; 16 are post-peak

– Ghawar’s 5.1 million bpd equaled 7% of world total

• Most of the largest fields have been in production for years, and in some cases several decades

8

Source: IEA World Energy Outlook 2008; Cantarell production updated for 2009 per CERA

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1

2

3

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Pro

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Peak Production 2007 Production

Production at World’s Largest Oil Fields

The aggregate production decline (from peak output) at the world’s six largest oil fields equates to 6.6 million barrels per day.

Drivers of DemandBeginning around 2005, EIG believes the world began a 15-20 year secular trend in energy and energy-related infrastructure requiring massive amounts of investment.

9

1) Developing world continues to industrialize, coupled with population growth and demographic trends

2) Depletion of aging “elephant” fields that have underpinned global supply for decades

3) Higher replacement costs as conventional supplies began to be replaced with higher cost “unconventional” supplies

4) Chronic under-investment in infrastructure caused by the inherent volatility of the sector and the need for long pay-back periods

5) Concerns about climate change and the introduction of price mechanisms for carbon

6) Assertion of market clout by national oil companies and other state actors and the resulting resource nationalism as energy independence takes on increased political importance

7) Security of supply as an enhanced geopolitical consideration as key supply states use energy as an economic weapon to leverage consumer states

8) Market distortions caused by increased government intervention through mandates, subsidies, taxes, and regulation

9) Fragility of the energy supply network and susceptibility to disruption by terrorist activity

10) Increased price volatility due to low reserve margins, correlation to U.S. dollar, and inflation expectations

Underlying Factors that Drive Demand

3) Replacement Costs are Increasing as Source of Supply Shifts• Exploration spending increased by 21% in 2008, and has doubled since 2005

• However replacement rates fell to 88% of production (first year since 2004 in which production was not replaced)

• Finding and development costs soared 66% to $25.50/bbl

• Competition for unconventional resources increased sharply

10

US Natural Gas Production by Source

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Conventional onshore Unconventional onshore Offshore

Expected Costs of Production

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ProducedMiddle East / North Africa

Other Conventional Oil

CO

2 -E

OR

Deep Water and Ultra-deep Water

Enhanced Oil Recovery (EOR)

Arctic

Heavy Oil and

Bitumen

Oil Shales

Gas to Liquids

Coal to Liquids

Prod

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2008

)

Reserves (bnbbls)

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ProducedMiddle East / North Africa

Other Conventional Oil

CO

2 -E

OR

Deep Water and Ultra-deep Water

Enhanced Oil Recovery (EOR)

Arctic

Heavy Oil and

Bitumen

Oil Shales

Gas to Liquids

Coal to Liquids

Prod

uctio

n Cos

ts ($/

bbl,

2008

)

Reserves (bnbbls)

1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

Source: IEA World Energy Outlook 2008 (left); EIA Annual Energy Outlook 2009 (right); 2009 Global Upstream Performance Review, IHS Herold/Harrison Lovegrove

Drivers of DemandBeginning around 2005, EIG believes the world began a 15-20 year secular trend in energy and energy-related infrastructure requiring massive amounts of investment.

11

1) Developing world continues to industrialize, coupled with population growth and demographic trends

2) Depletion of aging “elephant” fields that have underpinned global supply for decades

3) Higher replacement costs as conventional supplies began to be replaced with higher cost “unconventional” supplies

4) Chronic under-investment in infrastructure caused by the inherent volatility of the sector and the need for long pay-back periods

5) Concerns about climate change and the introduction of price mechanisms for carbon

6) Assertion of market clout by national oil companies and other state actors and the resulting resource nationalism as energy independence takes on increased political importance

7) Security of supply as an enhanced geopolitical consideration as key supply states use energy as an economic weapon to leverage consumer states

8) Market distortions caused by increased government intervention through mandates, subsidies, taxes, and regulation

9) Fragility of the energy supply network and susceptibility to disruption by terrorist activity

10) Increased price volatility due to low reserve margins, correlation to U.S. dollar, and inflation expectations

Underlying Factors that Drive Demand

4) Under-Investment in Infrastructure

• Infrastructure investment depends on stable political, regulatory, and fiscal regimes

• Energy sector is huge consumer of infrastructure and collectively accounts for 43% of global infrastructure investment

• Energy companies affected by global recession

– Demand growth uncertain, credit constrained, balance sheets stretched

– Deleveraging, postponement/cancelation of major projects

– Global upstream oil and gas budgets cut by 19% in 2009, or ~$90 billion

• Near-term fall in energy investment likely to lead to a medium-term shortfall in supply due to development lag

12

Middle East, 3%

Eastern Europe, 3%

South & Central America, 3%

Africa, 3%

Asia, 20%

Western Europe, 38%

North America, 30%

Expected Geographic Distribution

Communications, 6%

Waste & Water, 12%

Social Infrastructure, 6%

Other, 10%

Utility & Energy, 43%

Transportation, 23%

Expected Sector Distribution

Source: Amundi PEF

Drivers of DemandBeginning around 2005, EIG believes the world began a 15-20 year secular trend in energy and energy-related infrastructure requiring massive amounts of investment.

13

1) Developing world continues to industrialize, coupled with population growth and demographic trends

2) Depletion of aging “elephant” fields that have underpinned global supply for decades

3) Higher replacement costs as conventional supplies began to be replaced with higher cost “unconventional” supplies

4) Chronic under-investment in infrastructure caused by the inherent volatility of the sector and the need for long pay-back periods

5) Concerns about climate change and the introduction of price mechanisms for carbon

6) Assertion of market clout by national oil companies and other state actors and the resulting resource nationalism as energy independence takes on increased political importance

7) Security of supply as an enhanced geopolitical consideration as key supply states use energy as an economic weapon to leverage consumer states

8) Market distortions caused by increased government intervention through mandates, subsidies, taxes, and regulation

9) Fragility of the energy supply network and susceptibility to disruption by terrorist activity

10) Increased price volatility due to low reserve margins, correlation to U.S. dollar, and inflation expectations

Underlying Factors that Drive Demand

5) Climate Change and Price Mechanisms for Carbon

• Atmosphere currently contains ~455 ppm of CO2-equivalent greenhouse gases (“GHG”)

• IEA analyzed one scenario (“450 Scenario”) in which countries take coordinated actions to stabilize GHG at 450 ppm

• A low carbon future requires a major transformation of the sector (both in terms of sources of energy and required infrastructure)

14

Source: IEA World Energy Outlook 2009

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5) Climate Change and Price Mechanisms for Carbon

15

Renewables depend on government subsidies in order to compete against fossil fuel generation

US Renewable Generating Capacity

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Source: EIA Annual Energy Outlook, April 2009 Update (left); California Energy Commission (right)

Generation Cost by Fuel Source

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Drivers of DemandBeginning around 2005, EIG believes the world began a 15-20 year secular trend in energy and energy-related infrastructure requiring massive amounts of investment.

16

1) Developing world continues to industrialize, coupled with population growth and demographic trends

2) Depletion of aging “elephant” fields that have underpinned global supply for decades

3) Higher replacement costs as conventional supplies began to be replaced with higher cost “unconventional” supplies

4) Chronic under-investment in infrastructure caused by the inherent volatility of the sector and the need for long pay-back periods

5) Concerns about climate change and the introduction of price mechanisms for carbon

6) Assertion of market clout by national oil companies and other state actors and the resulting resource nationalism as energy independence takes on increased political importance

7) Security of supply as an enhanced geopolitical consideration as key supply states use energy as an economic weapon to leverage consumer states

8) Market distortions caused by increased government intervention through mandates, subsidies, taxes, and regulation

9) Fragility of the energy supply network and susceptibility to disruption by terrorist activity

10) Increased price volatility due to low reserve margins, correlation to U.S. dollar, and inflation expectations

Underlying Factors that Drive Demand

6) Resource Nationalism

• International Oil Companies (“IOCs”) only own 7% of the world’s oil reserves

• National Oil Companies (“NOCs”) operate as an extension of the government (e.g. Saudi Aramco, Pemex, PDVSA), or as autonomous entities that concurrently support government objectives (e.g. Petrobras, Statoil)

– Activities of NOCs are frequently inefficient and/or not market-oriented

• NOCs produce the majority of the world’s oil and hold most of the world’s proven reserves

• IOCs are increasingly relegated to exploring in high-risk areas in order to secure reserves (Arctic, ultra-deep water, unconventional)

17

OECD, 6.6%

Non-OPEC, 12.9%

OPEC, 70.6%

EU, 0.5%

Former Soviet Union, 9.4%

World Proved Oil Reserves, 2008

Source: BP Statistical Review 2009

World Oil Production, 2008in million bpd

OECD, 18.4

Non-OPEC, 32.3

OPEC, 36.7

EU, 2.2

Former Soviet Union, 12.8

Drivers of DemandBeginning around 2005, EIG believes the world began a 15-20 year secular trend in energy and energy-related infrastructure requiring massive amounts of investment.

18

1) Developing world continues to industrialize, coupled with population growth and demographic trends

2) Depletion of aging “elephant” fields that have underpinned global supply for decades

3) Higher replacement costs as conventional supplies began to be replaced with higher cost “unconventional” supplies

4) Chronic under-investment in infrastructure caused by the inherent volatility of the sector and the need for long pay-back periods

5) Concerns about climate change and the introduction of price mechanisms for carbon

6) Assertion of market clout by national oil companies and other state actors and the resulting resource nationalism as energy independence takes on increased political importance

7) Security of supply as an enhanced geopolitical consideration as key supply states use energy as an economic weapon to leverage consumer states

8) Market distortions caused by increased government intervention through mandates, subsidies, taxes, and regulation

9) Fragility of the energy supply network and susceptibility to disruption by terrorist activity

10) Increased price volatility due to low reserve margins, correlation to U.S. dollar, and inflation expectations

Underlying Factors that Drive Demand

7) Geopolitical Considerations

19

Geopolitical influence on sector evident at an increasing rate in the daily news

Drivers of DemandBeginning around 2005, EIG believes the world began a 15-20 year secular trend in energy and energy-related infrastructure requiring massive amounts of investment.

20

1) Developing world continues to industrialize, coupled with population growth and demographic trends

2) Depletion of aging “elephant” fields that have underpinned global supply for decades

3) Higher replacement costs as conventional supplies began to be replaced with higher cost “unconventional” supplies

4) Chronic under-investment in infrastructure caused by the inherent volatility of the sector and the need for long pay-back periods

5) Concerns about climate change and the introduction of price mechanisms for carbon

6) Assertion of market clout by national oil companies and other state actors and the resulting resource nationalism as energy independence takes on increased political importance

7) Security of supply as an enhanced geopolitical consideration as key supply states use energy as an economic weapon to leverage consumer states

8) Market distortions caused by increased government intervention through mandates, subsidies, taxes, and regulation

9) Fragility of the energy supply network and susceptibility to disruption by terrorist activity

10)Increased price volatility due to low reserve margins, correlation to U.S. dollar, and inflation expectations

Underlying Factors that Drive Demand

10) Oil vs. US Dollar and Inflation

• Oil has been a strong hedge against inflation (0.86 correlation)

• Oil has provided a similarly strong hedge against the US dollar (-0.80 correlation)

21

Source: EIA, Bloomberg

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Drivers of Demand

22

$26 Trillion of Investment Required Through 2030

Source: IEA World Energy Outlook 2009

Oil$5,900 billion

Gas$5,100 billion

Biofuels$200 billion

Coal$700 billion

Electricity$13,700 billion

23%

20%

53%

3% 1%58%

33%

9% LNG chain

Transmission& distribution

Exploration &development

79%

17%

4%Transport

Refining

Exploration &development

14%

86%

Mining

Shipping &ports

48%

52%Generation

Transmission& distribution

Capturing the Market Opportunity

23

Investment demand is growing across the entire energy value chain on a global basis

Upstream Infrastructure Midstream Gas to Liquids Transportation Gas to Electrons

Reserve-based DevelopmentProduction

PaymentsForward Oil Sales

PipelineGathering Systems

Processing FacilitiesGas StorageBunkering

LNG TankersSpecialty TankersVLCC Vessels

Production PlatformsDrill ShipsFPSOs

Drilling Rigs

LNGSynfuels

Processed Gas(methanol, fertilizer, DME)

LNG Regasification TerminalsGas Sales, Pipelines,

Gas-Fired Power Plants,Electricity T&D

Renewables

WindSolar

BiofuelsGeotherm

al

Capturing the Market Opportunity

24

Opportunity Current Dynamic EIG Portfolio Examples

Energy-related Infrastructure

• Pipelines, gathering systems, compression, processing, and rigs for energy companies looking for growth capital or to recycle capital currently tied-up on their balance sheet

Oil versus Gas • Onshore and offshore primary and tertiary oil recovery plays recognizing the relative value of oil versus gas on a BTU equivalent basis in the current market

Renewable Energy • Wind, geothermal, solar, and biofuels primarily in the US and Europe in response to the implementation of carbon regimes

Recapitalization of Mature Assets

• Operating assets with significant existing cash flow as a source of liquidity for large energy companies in a credit constrained environment

China/Asia Energy Demands

• Enhanced activity in existing EIG Austral-Asian platform recognizing continuing resource nationalism and demand for energy and resources

LARCHMONT

PINON~

PINON~

COOGEE

RESOURCES

COOGEE

RESOURCES

Impact of the Credit Crisis

• Contraction in global GDP took pressure off near-term supply/demand fundamentals and caused one to two year “time out” in the otherwise dominant secular trends in the industry

• Two key impacts of the credit crisis:

– Re-pricing of risk across the credit spectrum, particularly for illiquid assets

– Contraction in suppliers of capital: “survivors” continue to be price makers, not takers

25

Source: Bloomberg (Merrill Lynch data)

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US Corporate Bonds, B-rated