OIL & INVESTOR RISK. SUMMARY Oil industry going deeper and dirtier (oil at any cost) IOCs face rising costs & risks Assuming 2 o C will not be achieved.

Oil & investor risk

Summary

• Oil industry going deeper and dirtier (oil at any cost)

• IOCs face rising costs & risks

• Assuming 2oC will not be achieved

• Triad of policy pressures causing demand destruction

• Peak demand could leave IOCs stranded at the wrong end of the production cost curve

• Is RRR a disincentive for change?

Dirtier & Deeper

• Shedding alternatives to concentrate in oil & gas

• More extreme environments (ultra-deep, offshore Arctic)

• Unconventional (tar sands, kerogen, CTL, GTL, tight oil and shale gas)

• EOR

Underlying trends

• High Capex (increasing cost per flowing barrel)

• Escalating operating costs

• Rising operational risk (upstream & down)

• Low or negative growth

• Tighter margins

Industry bullish on Demand

• Population rising

• Middle classes growing in non-OECD

• Few viable alternative transport fuels

• Assumes stagnant policy and tech. progress

• Assume 2oC won’t be achieved

Heading for 6oC

1000ppm – 6oC

Tar sands – inflated ambitions

Scenario Current Policies

New Policies

450 Announced Projects

Mb/d 4.6 4.1 3.3 7.7

2035 tar sands production under different IEA scenarios

Demand: Policy pressures

• Energy Security• Volatile oil prices• Climate change

DEMAND DESTRUCTION

Declining oil demand forecasts

Peak demand?

• IEA (2010) 450S = 2018

High oil price = high volatility

The Breakpoint

Zone (CERA)

a company will not invest in a project that requires a $100/bbl break even if the average oil price is $100/bbl. …the company will require a degree of comfort, which we calculate here is around $25/bbl, to make an investment in a marginal project.(Deutsche Bank: Dec 2010)

Production cost curve

Reserves replacement

Reserves Replacement

Long Term?

Long Term?

Reserves are key

• RRR demands constant reacquisition of a non-renewable and fast disappearing resource

• Can we really expect 100% RRR ad-infinitum?

• Current reserves reporting reveals little about relative exposure to rising risks & costs

• What is the alternative?

WANTED! New Metrics

• Signal that RRR is no longer key

• Enhance risk assessment of reserves additions

• Incorporate climate risk into reserves additions

• Value alternative business models

• Reward alternatives

• Encourage diversification