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WORKING DRAFT Last Modified 27/10/2010 11:29:57 GMT Standard Time Printed 27/10/2010 11:30:01 GMT Standard Time Where next? A perspective on oil supply and demand 25 th October 2010 Presentation to the Energy Club at London Business School 81 participants, plus 3 presenters CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited [email protected] Daniel [email protected] [email protected]
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Page 1: Mck_Oil Market 2010

WORKING DRAFT

Last Modified 27/10/2010 11:29:57 GMT Standard Time

Printed 27/10/2010 11:30:01 GMT Standard Time

Where next?A perspective on oil supply and demand

25th October 2010

Presentation to the Energy Club at London Business School81 participants, plus 3 presenters

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

[email protected] [email protected][email protected]

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Contents

▪ Key highlights

▪ Main presentation

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We have now collected data for the oil price outlook from presentations to LBS MBA students in both 2009 and 2010

SOURCE: London Business School Energy Club consensor polling

Oil price at time of presentation

22

n/a

Second poll October 2011

First poll October 2011

113

72

88

Supply fix

Demand fix

104

Poll for October 2015

+44%

98

83

117

98

81

29

+18%

Oct 2009 Oct 2010

Compared to 1 year ago:

▪ Oil price today is higher

▪ Oil price outlook in 1 year ahead is lower, with a smaller change from today

▪ Our presentation changed their perspective of the price in October 2011 less

▪ Slightly more people think that the upcoming oil shock will be addressed by the supply side

Impending crunch to be addressed by:

Price outlooks

Key findings

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Contents

▪ Key highlights

▪ Main presentation

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Oil is of course never far from being in the news …

SOURCE: Press articles

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… and of course BP’s oil spill was the big news of 2010

Text

SOURCE: Press articles

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Globally, how much oil is consumed per day?

8.4

thousa

nd bar

rels

84

thou

sand

barre

ls

840

thou

sand

barre

ls

8.4

mill

ion b

arre

ls

84

mill

ion b

arre

ls

840

mill

ion b

arre

ls

0% 0%

12%

61%

22%

5%

Interactive Poll

Daily consumption

1. 8.4 thousand barrels

2. 84 thousand barrels

3. 840 thousand barrels

4. 8.4 million barrels

5. 84 million barrels

6. 840 million barrels

SOURCE: You

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Globally, how much oil is consumed per day?

8 th

ousan

d bar

rels

80

thou

sand

barre

ls

800

thou

sand

barre

ls

8 m

illio

n ba

rrel

s

80

mill

ion b

arre

ls

800

mill

ion b

arre

ls

0% 0%

12%

64%

20%

4%

Interactive Poll

Daily consumption

1. 8 thousand barrels

2. 80 thousand barrels

3. 800 thousand barrels

4. 8 million barrels

5. 80 million barrels

6. 800 million barrels

Results from session

in October 2009

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Global oil consumption has grown almost relentlessly, to some 84 million barrels per day in 2009

SOURCE: BP Statistical Review of World Energy 2010

84 million barrels of oil per day is:

▪ 30 times the peak output from the North Sea’s UK sector

▪ 25 times Shell’s total oil (and gas) output

▪ 30,000 large crude oil tanker loads per year

▪ The volume of this room every 2 seconds

-5

0

5

10

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

2

0

10

20

30

40

50

60

70

80

90

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

1.5% p.a.

▪ Since the mid 1980s, growth has averaged 1.5% per year

▪ The recent reduction in consumption is reminiscent of prior oil shocks

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The oil price journey has been a rollercoasterUS dollars, nominal

SOURCE: PLATTS

20090

10

20

30

40

50

60

70

80

90

100

110

120

130

140

Jan-2000Jan-1995Jan-1990 Jan-2010Jan-2005

BRENT

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What will be the oil price on October 25th, 2011?

<20

20-

40

40-

60

60-

80 8

0-100

100

-120

120

-140

140

-160

160

-180

>18

0

0% 0%

2%

14%

0%1%

0%

14%

26%

42%

Interactive Poll

Oil price for Brent crude in nominal US dollars

1. <20

2. 20-40

3. 40-60

4. 60-80

5. 80-100

6. 100-120

7. 120-140

8. 140-160

9. 160-180

10.>180

SOURCE: You

Average98 USD/bbl

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<20

20-

40

40-

60

60-

80 8

0-100

100

-120

120

-140

140

-160

160

-180

>18

0

0% 0% 0%

8%

0%

6%

12%

20%

26%

28%

What will be the oil price on October 25th, 2011?

Interactive Poll

Oil price for Brent crude in nominal US dollars

1. <20

2. 20-40

3. 40-60

4. 60-80

5. 80-100

6. 100-120

7. 120-140

8. 140-160

9. 160-180

10.>180Results from session

in October 2009

Average105 USD/bbl

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Contents

▪ Oil demand

▪ Oil supply

▪ Implications

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Global GDP is strongly linked to oil consumption– with a downturn in both since the crisis

SOURCE: BP Statistical Review of World Energy; EIU; WDI

25

30

35

40

45

50

55

60

65

70

75

80

85

90

8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42

1994

2000

1999

1993

1991

2001

2003

20042005

2008

2007

2006

Oil consumptionMillion barrels per day

2002

1980

1983

1981

1978

1982

1979

1988

Global GDPTrillion USD, referenced to 2005

1987

1986

1985

1984

1990

1989

1998

1997

19961995

1992

1977

19761975

1974

1973

1972

19711970

1969

19681967

19661965

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|SOURCE: IEA Oil Market Report July 2010; BP Statistical Review of World Energy 2010

OECD

0.9

US

2.1Non-OECD

-2.0

China

-3.7

China 0.7

Non-OECD 1.6

US 0.1

OECD -0.1

Change in demandMillion barrels per day1

However, OECD and Non-OECD demand behaved differently

2007-09 2009-10

1 OECD numbers incl. US, non-OECD numbers incl. China

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0

20

40

60

80

100

120

10 20 30 40 50 60 70 80 90 100

2010

202020302025

2015

1979

1982

1970

Global GDPTln USD, referenced to 2005

Oil consumptionMln barrels per day

We don’t expect a long-term departure from the historical direction…

SOURCE: Worldbank; McKinsey analysis

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2008 2010 2012 2014 2016 2018 2020

98

96

94

92

90

88

86

102

100

0

SOURCE: McKinsey supply and demand model

… which implies that demand growth will pick up over the next decade

Mbpd, assuming economic growth

Demand

Liquids unconstrained demand forecast

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|SOURCE: McKinsey Global Energy Insights

699

652

609

546

481

362

0.7% p.a.

1.2% p.a.

205020402030202020102000

+45%

Total world energy demand

Transport and industry sectors are expected to drive most of the growth in energy QBTU, Base-case1

Granular, bottom-up explicit forecast

Scenario based extrapolation

1 Base-case uses Global Insight GDP forecast, and $75/barrel real oil price2 New power model not yet shown in results

Energy demand per sector

Buildings

Industry

Energy sector

Transport

Power losses2

Other

144

0.8%0.8%

123105

+38%

138121108

0.7%0.6%

+29%

192

0.3%

2.0%

181

122

+58%

38

0.6%0.7%

20502030

34

2010

30

+30%

CommercialResidential

Chemicals

Machinery

Other industry

Other metals & mining

Pulp & paper

Steel

Power

Charcoal production

Coal mines

Oil and gas extraction

Oil refineries

Other energy

Pipeline transport

CAGR%

Absolute growth%

33

0.3%1.0%

20502030

31

2010

26

+30%

Agriculture

Food and tobacco

Construction

Other

Textile and leather

Wood and wood products

152

1.3%

1.3%

11992

+66%

Air traffic

Light vehicles

Trucks

Other transport

Rail

Shipping

PRELIMINARY

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And oil demand growth will be concentrated in China, the Arab Gulf, Latin America and IndiaMBD

Shipping 1.6

Air Traffic 3.2

Trucks 6.3

Chemicals 11.1 China

2.2

Arab Gulf

3.9Latam

5.4

India

8.2

Demand growth – Top 4 sectors Demand growth – Top 4 regions

Base-case (2010-30)1 Base-case (2010-30)1

1 Base-case scenario, based among others on $75/barrel oil price assumption and Global Insight GDP forecast

SOURCE: McKinsey supply and demand model

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20

30

40

50

60

70

80

90

100

110

120

130

20504515 25 35302007 20 40

Where can we realize substantially lower demand? MBD, Base-case1

SOURCE: McKinsey Global Energy Insights

1 Base case uses Global Insight GDP forecast and $75/barrel real crude price; Liquids include conventional crude, NGLs, condensate, refinery gains, biofuels, GTL, CTL, oil sands, extra heavy oil, and other unconventional liquids

2 Agriculture, power, other energy sector demand, and other undefined sectors

Other2

Buildings

Other Industry

Chemicals

Other Transport

Air Traffic

Trucks

Light Vehicles

▪ Could feedstock be replaced through shift towards natural gas?

▪ At what price will demand for chemicals be substituted?

▪ Could technology enable a large scale shift to new fuel types (H2? LNG?)

▪ What room is there for a shift to rail/boat?

▪ New fuel types for light vehicles?▪ Will regulation (Fuel Efficiency

standards) force a faster transition?

Key questions

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Contents

▪ Oil demand

▪ Oil supply

▪ Implications

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Our oil supply model is a global “bottom-up” approach

SOURCE: McKinsey analysis

Text

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UK base case: planned projects and substantial brownfieldwill slow down decline rate of production to ~5% annually

SOURCE: WoodMac, EIA, BP Statistical Review; Energy Files; McKinsey analysis

500

2.500

2.000

1.500

1.000

0

252423222120191817161514131211100908070605040302

Deepwater4

Brownfield

YTD known projects

YTD unknown projects

YTF

Existing production

Existing fields

Liquids productionKbbls/day

Assumptions brownfield1:? Assumed added brownfield

activities raises overall UK North Sea recovery factor from the current 45% to 49%

1 Brownfield activities include all satel lite redevelopments, infield drill ing, EOR and IOR activities2 Production from yet to find resources3 Total YTF resource estimate from DTI is ~6.2 bln bbls, excluding West of Shetlands and Scotland leaves ~4 bln bbls4 Deepwater production also avai lable in spli t between the 4 different wedges (i.e., existing, brownfield, YTD and YTF)

Assumed natural decline rate of 15% for fields that are in decline

Avg. net decline rate of 5% over ’08-’25 vs. 6.7% over ’00-’07

Assumptions YTD:? All currently planned

projects in WoodMac are taken into production Assumptions YTF2 :

? Assumed 80% of discover ies will come from Central North Sea

? West of Shetland not taken into production within next 15 years

? Assumed discovery rate of ~120

mbbls/year (avg. last 5 yrs) will decline slowly in next 15 years

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2008 2010 2012 2014 2016 2018 2020

94

92

90

88

86

98

96

102

100

0

SOURCE: McKinsey supply and demand model

We expect supply to grow to 2020

Mbpd, assuming economic growth

Supply

Liquids unconstrained demand forecast

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Mbpd

Supply capacity per country: 2010 – 2020

Non-OPEC

OPEC

2020 Baseline Comments

Others

SOURCE: McKinsey supply and demand model

2.4

7.9

0.6

0.9

0.7

0.9

3.2

0.8

3.7

1.6

3.9

2.1

3.5

8.2

3.0

0.4

2.3

2.0

2.5

2.7

5.0

2.4

2.9

2.0

3.8

3.7

15.2

9.1

0.1

1.3

-1.2

-0.1

0.1

-0.2

-0.3

1.5

-0.6

1.5

-0.7

0.6

-0.7

-0.4

1.0

-1.1

-0.1

0.3

0.2

0.5

0.7

2.4

-0.6

0.1

-0.7

0.5

-0.8

1.6

Growth, 2010-20

97.6 5.2

Saudi Arabia

Iran

UAE

Venezuela

Kuwait

Nigeria

Iraq

Angola

Algeria

Libya

Qatar

Ecuador

Russia

US

China

Mexico

Canada

Norway

Brazil

United Kingdom

Kazakhstan

Azerbaijan

Indonesia

India

Malaysia

Other non-OPEC

Bio-fuels

Other

Announced growth program to meet call on crude

Maturing fields

NGL growth (driven by gas development)

Lack of investment and activities

Working hard to stabilize (secure country budget)

Fiscal uncertainty, DW fields start declining

Above the ground limitations to ambitious program

New DW comes onstream

More investment, more development

Investment stalled with onerous fiscals

NGLs linked to gas

High underlying decline, challenging developments

GoM

Underinvestment

Oil sands

From stand-alone to satellites

Sub-salt

The mega fields and next wave

Mandates

Unexpected discoveries (+1) and shut ins (-0.5)

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1. Supply factor

constraints▪ E.g., Canada,

Kazakhstan, Brazil

2. Political

circumstances▪ E.g., Nigeria, Mexico,

Venezuela, USA

3. New discoveries▪ Brazil, US, Angola,

East Africa, Libya, Unknown

4. Secondary

development & EOR▪ Middle East., onshore

U.S., Europe

7. Alternatives (Biofuels)

5. Saudi Arabia

6. Geopolitical and

nature blockers or resolutions▪ E.g., Iraq, Hurricanes

0.7

-0.3-3.5

2.0

-2.0

2.0

-2.0

2.0

1.5

-1.0-2.0

2.5

-2.0

1.0

-1.5

Low High

Historic delays do not reduce; Canada not even developing 3 megaprojects in parallel (below NIB forecast)

Learning effects reduce resource claimsCanada: 4 megaprojects in parallel (CAPP case +0.5)

Another government worsens climate on funding, fiscal terms, access, approvals, etc; GoM moratorium (up to 0.5 mbpd)

Mexico or Nigeria improve upstream climate

No new unknown of 1 mbpd; creaming curve extrapolation too optimistic; Brazil sub-salt 25% of announced volume;

New Brazil sub-salt success;+1 mbpd more new unknown; or ANWR

Accelerating decline, less IOR Europe from 10% to 20% add’l recovery, and Russia mitigates decline from -0.5% to +0.5%; New IOR technologies

Higher decline, less oil development New capacity addition program

Iraq back in war, not reaching to 1979 peak of 3.6 mbpd

Iraq new infrastructure and full contract delivery.

Mandates reduced, or lower capacity to deliver

Base

-5 5.5

4.5

possible

realistic

Current mandates fully met

8-8

4-2

Compound statistical deviation 2020

assuming factors are independent +4-4

2

-2.5 +2

5-4

Seven determining factors for supply

SOURCE: McKinsey analysis

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|SOURCE: McKinsey supply and demand model

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

202020152009 20302025

IEA

Base case

EIA

Saudi Arabia2010 capacity

Full delivery case

LiquidproductionMln bbl/day

Implication on global balance (capacity vs. unconstrained demand)

For 2020▪ Oil price drops from “demand

destruction” to “supply reinvestment”level or OPEC budget balance▪ Oil sands, renewables and ultra-deep

water investments are at risk▪ Pressure within OPEC (Iraq would

become the second biggest producer, and cannibalize other’s earnings)

3

-3

Full delivery

Base

2020 2030

Full delivery

-15

Base

-21

Mbpd

Iraq: Full delivery and export on all contracts would tilt global balance

Full delivery case:

All 11 service contracts awarded in 2009 achieve their stated plateau level and duration with some delays

Base case:

Execution hampered and contracted fields achieve government required minimum plateaus for 4-7 yrs (not 7-13) with delays

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Macondo’s impact will be primarily on cost, lead times (and demand?) -not supply volume

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1,900

2,000

20152010

GOM production Kboed

1

2

3

4

Less 165 kboed

Less 368 kboed

Less 568 kboed

9

8

6

5

2 3

8

28

Planned new rigs location

11

Other

Possible new rigs location due to DW GOMmoratorium1

Australia

North Sea

West Africa

SE Asia

Brazil

DW GOM

28

3

5

3

11

New deepwater rigs to come online in 2H 2010-11

1 Rigs mobility assumptions based on shipyard location, rig’s current location, operator’s assets portfolio, expert interviews and analyst reports

SOURCE: Deepwater KIP, RigLogix, ODS, expert interviews, press-clippings, analyst reports

1 Base case projection (before Deepwater Horizon accident)

2 Direct impact of moratorium (33 wells-in-progress suspended)

3New project delays due to moratorium (drilling resumes in 2011)

4Post-moratorium delays due to mandatory rigs modification (Drilling resumes in 2012)

Deepwater production is expected to decline up to 29% in Gulf of Mexico…

…but offset by acceleration outside GOM

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Contents

▪ Oil demand

▪ Oil supply

▪ Implications

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GDP

Oil consumption

2030

20081979

1969

The certainties and uncertainties of oil supply and demand

Producing fields continuously decline

New, sizeable reservoirs are out there (e.g., Iraq, Arctic, Nigeria, Brazil, Canada, Saudi)

World population keeps growing, and GDP keeps growing…

Substitution of oil will continue in light vehicles and non-transport applications

… How will technology continue to increase recovery factor?

… How fast can the oil industry develop? (or is allowed to..)

… How will the economy grow on the longer term?

… How serious are governments acting on energy efficiency?… How will technology push costs of alternatives down?

Certainty But…

SOURCE: McKinsey analysis

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Tightness expected to resume before 2015

Mbpd, economic mid-case, $75/bbl

▪ In the base-case scenario, we see tightness to the June 2008 levels around 2012-2013

▪ This tightness could lead to high (demand abating) and volatile prices as we saw in 2008

Unconstrained demand and supply capacity for liquids

SOURCE: McKinsey supply and demand model

2008

94

90

98

96

2010 2014 2018

100

86

2012 2016 2020

0

88

102

92 Unconstrained demand

Supply capacity

1.3%/yr

0.5%/yr

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Which of the following levers do you think will be the most important driver to bring supply and demand into balance over the next decade?

Bri

ng m

ore o

il to

mar

k..

Bri

ng m

ore o

il to

mar

k..

Red

uce

activ

ity le

vels

...

Incr

ease

ene

rgy

effic

...

Subst

itute

oil

with

ot..

.

15% 14%

30%31%

10%

Interactive Poll

1. Bring more oil to market from non-OPEC countries

2. Bring more oil to market from OPEC countries

3. Reduce activity levels in areas requiring energy

4. Increase energy efficiency

5. Substitute oil with other sources

29% supply71% demand

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Which of the following levers do you think will be the most important driver to bring supply and demand into balance over the next decade?

Bri

ng m

ore o

il to

mar

k..

Bri

ng m

ore o

il to

mar

k..

Red

uce

activ

ity le

vels

...

Incr

ease

ene

rgy

effic

...

Subst

itute

oil

with

ot..

.

8%13%

33%

44%

2%

Interactive Poll

1. Bring more oil to market from non-OPEC countries

2. Bring more oil to market from OPEC countries

3. Reduce activity levels in areas requiring energy

4. Increase energy efficiency

5. Substitute oil with other sources

Results from session

in October 2009

22% supply78% demand

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What will be the oil price on October 25th, 2011?

<20

20-

40

40-

60

60-

80 8

0-100

100

-120

120

-140

140

-160

160

-180

>18

0

0% 0% 0%

11%

0%1%

0%

8%

31%

49%

Interactive Poll

Oil price for Brent crude in nominal US dollars

1. <20

2. 20-40

3. 40-60

4. 60-80

5. 80-100

6. 100-120

7. 120-140

8. 140-160

9. 160-180

10.>180

SOURCE: You

Average98 USD / bbl

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What will be the oil price on October 25th, 2011?

<20

20-

40

40-

60

60-

80 8

0-100

100

-120

120

-140

140

-160

160

-180

>18

0

0% 0%

8%

14%

2%

4%

8%

20%

14%

31%

Interactive Poll

Oil price for Brent crude in nominal US dollars

1. <20

2. 20-40

3. 40-60

4. 60-80

5. 80-100

6. 100-120

7. 120-140

8. 140-160

9. 160-180

10.>180Results from session

in October 2009

Average104 USD / bbl

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What will be the oil pricein 5 years time, i.e. October 25th, 2015?

<20

20-

40

40-

60

60-

80 8

0-100

100

-120

120

-140

140

-160

160

-180

>18

0

0% 0% 0%

5%

1%0%

14%

32%31%

17%

Interactive PollOil price for Brent crude in nominal US dollars

1. <20

2. 20-40

3. 40-60

4. 60-80

5. 80-100

6. 100-120

7. 120-140

8. 140-160

9. 160-180

10.>180

SOURCE: You

Average117 USD / bbl

Page 36: Mck_Oil Market 2010

WORKING DRAFT

Last Modified 27/10/2010 11:29:57 GMT Standard Time

Printed 27/10/2010 11:30:01 GMT Standard Time

Where next?A perspective on oil supply and demand

25th October 2010

Presentation to the Energy Club at London Business School

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

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