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

Mark_Davis@mckinsey.com Daniel _Cole@mckinsey.com Peter_Lambert@mckinsey.com Presentation to the Energy Club at London Business School 81 participants, plus 3 presenters 25th October 2010

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

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Contents

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Key highlights Main presentation

Printed 27/10/2010 11:30:01

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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
Oct 2009 Price outlooks Oil price at time of presentation 72 83 Compared to 1 year ago: Oil price today is higher First poll October 2011 104 +44% 113 98 +18% 98 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 22 29
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Oct 2010

Key findings

Second poll October 2011

Poll for October 2015

n/a

117

Printed 27/10/2010 11:30:01

Impending crunch to be addressed by: Supply fix

Demand fix

88

81

SOURCE: London Business School Energy Club consensor polling

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Contents

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Key highlights Main presentation

Printed 27/10/2010 11:30:01

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Oil is of course never far from being in the news

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SOURCE: Press articles

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and of course BPs oil spill was the big news of 2010

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Text

Printed 27/10/2010 11:30:01

SOURCE: Press articles

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Globally, how much oil is consumed per day?

Daily consumption

Interactive Poll
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1. 2. 3. 4. 5. 6.

8.4 thousand barrels 84 thousand barrels 840 thousand barrels 8.4 million barrels 84 million barrels 840 million barrels
22%

61%

Printed 27/10/2010 11:30:01

12% 5% 0% 0%

an d th ba ou rr sa el 84 s nd 0 th ba ou rr sa el s nd 8. ba 4 rr m el ill s io n 84 ba m rr ill el io s 84 n ba 0 m rr il l el io s n ba rr el s 84
McKinsey & Company

8.

th o

us

SOURCE: You

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Globally, how much oil is consumed per day?

Daily consumption

Interactive Poll
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1. 2. 3. 4. 5. 6.

8 thousand barrels 80 thousand barrels 800 thousand barrels 8 million barrels 80 million barrels 800 million barrels

64%

i on s es s from 9 sults r 200 Re tobe Oc in

th o us a

Printed 27/10/2010 11:30:01

20% 12% 0% 0% 4%

nd th ba ou rr sa el 80 s nd 0 th ba ou rr sa el s nd ba 8 m rr el ill s io n 80 ba m rr ill el io s 80 n ba 0 m rr ill el io s n ba rr el s

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Global oil consumption has grown almost relentlessly, to some 84 million barrels per day in 2009
90 80 70 60 50 40 30 20 10 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

84 million barrels of oil per day is:

1.5% p.a.

30 times the peak output from the North Seas UK sector 25 times Shells total oil (and gas) output 30,000 large crude oil tanker loads per year The volume of this room every 2 seconds

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10

Since the mid 1980s, growth has averaged 1.5% per year The recent reduction in consumption is reminiscent of prior oil shocks

2
0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 -5

SOURCE: BP Statistical Review of World Energy 2010

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The oil price journey has been a rollercoaster US dollars, nominal

BRENT

140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 Jan-1990

SOURCE: PLATTS

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2009 Jan-1995 Jan-2000 Jan-2005 Jan-2010

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

Oil price for Brent crude in nominal US dollars

Interactive Poll
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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

42%

26%

Printed 27/10/2010 11:30:01

14%

14%

Average 98 USD/bbl
0% 0%

2% 0%

1%

0%

80 -1 00 10 012 0 12 014 0 14 016 0 16 018 0

20 -4 0

40 -6 0

60 -8 0

>1 80

<2 0

SOURCE: You

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

Oil price for Brent crude in nominal US dollars

Interactive Poll
Working Draft - Last Modified 27/10/2010 11:29:57

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

28% 26%

i on s es s from 9 sults r 200 Re tobe Oc in

Average 105 USD/bbl
0% 0% 0%

20%

Printed 27/10/2010 11:30:01

12%

8% 6%

0%

80 -1 00 10 012 0 12 014 0 14 016 0 16 018 0

20 -4 0

40 -6 0

60 -8 0

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>1 80

<2 0

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Contents

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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
Oil consumption Million barrels per day
90 85 80 75 70 65 60 55 50 45 40 35 30 25 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42

1999

2004 2002

2005

2007
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2003

2006 2008

1996 1998 2001 1995 2000 1997 1991 1992 1987 1979 1989 1980 1993 1994 1978 1985 1988 1990 1973 1977 1986 1981 1984 1974 1982 1972 1975 1983 1976 1971 1970 1969 1968 1967 1966 1965

Printed 27/10/2010 11:30:01

Global GDP Trillion USD, referenced to 2005

SOURCE: BP Statistical Review of World Energy; EIU; WDI McKinsey & Company

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However, OECD and Non-OECD demand behaved differently

Change in demand Million barrels per day1

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2007-09 OECD US Non-OECD China -3.7 -2.0 2.1 0.9 OECD US Non-OECD China

2009-10 -0.1 0.1 1.6 0.7

Printed 27/10/2010 11:30:01

1 OECD numbers incl. US, non-OECD numbers incl. China SOURCE: IEA Oil Market Report July 2010; BP Statistical Review of World Energy 2010 McKinsey & Company

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We dont expect a long-term departure from the historical direction

Oil consumption Mln barrels per day
120 100

2020 2015

2025

2030

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80

2010 1979

60

1982
40 20 0 10 20 30 40 50 60 70 80 90 100

Printed 27/10/2010 11:30:01

1970

Global GDP Tln USD, referenced to 2005

SOURCE: Worldbank; McKinsey analysis McKinsey & Company

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which implies that demand growth will pick up over the next decade
Mbpd, assuming economic growth

Liquids unconstrained demand forecast

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102 100 98 96 94 92 90 88 86 0 2008 Demand

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2010

2012

2014

2016

2018

2020

SOURCE: McKinsey supply and demand model

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Transport and industry sectors are expected to drive most of the growth in energy
QBTU, Base-case1
Total world energy demand Energy demand per sector Buildings Granular, bottom-up explicit forecast Scenario based extrapolation
0.8% 105 123 0.8% 144 119 92 +38%
Commercial Residential

PRELIMINARY % % CAGR Absolute growth

Transport
Air traffic Light vehicles Trucks Other transport Rail Shipping

1.3% 1.3% 152

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0.7% p.a.
699 652 609 546 481
122

+66%

1.2% p.a.

Industry
0.3%

Power losses2
Chemicals Machinery Other industry Other metals & mining Pulp & paper Steel Power

+45%

2.0% 181 192

0.6%

0.7%

108

121

138
+29%

Printed 27/10/2010 11:30:01

362

+58%

Energy sector
Charcoal production Coal mines Oil and gas extraction Oil refineries Other energy Pipeline transport

Other
Agriculture Food and tobacco Construction Other Textile and leather Wood and wood products

0.7% 30 34

0.6% 38 +30%

1.0% 26 2010 31

0.3% 33 +30%

2000

2010

2020

2030

2040

2050

2010

2030

2050

2030

2050

1 Base-case uses Global Insight GDP forecast, and $75/barrel real oil price 2 New power model not yet shown in results SOURCE: McKinsey Global Energy Insights

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And oil demand growth will be concentrated in China, the Arab Gulf, Latin America and India
MBD
Demand growth Top 4 sectors
Base-case (2010-30)1

Demand growth Top 4 regions

Base-case (2010-30)1
Working Draft - Last Modified 27/10/2010 11:29:57

Chemicals

11.1

China

8.2

Trucks

6.3

Arab Gulf

5.4

Air Traffic

3.2

Latam

3.9

Printed 27/10/2010 11:30:01

Shipping

1.6

India

2.2

1 Base-case scenario, based among others on $75/barrel oil price assumption and Global Insight GDP forecast SOURCE: McKinsey supply and demand model McKinsey & Company

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Where can we realize substantially lower demand?

MBD, Base-case1
130 120 110 100 90 80 70 60 50 40 30 20 10 0 2007

Key questions Other2 Buildings Other Industry Chemicals

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Could feedstock be replaced through shift towards natural gas? At what price will demand for chemicals be substituted?

Other Transport Air Traffic

Printed 27/10/2010 11:30:01

Trucks

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?

Light Vehicles 15 20 25 30 35 40 45 2050

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

SOURCE: McKinsey Global Energy Insights

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Contents

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Oil demand Oil supply Implications

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Our oil supply model is a global bottom-up approach

AM S-AAA1 2 3-2 0 09 09 16 -

UK base case: planned projects and substantial brownfield will slow down decline rate of production to ~5% annually
Liquids production Kbbls/day
2.500

YTF YTD unknown projects YTD known projects Brownfield Deepwater4

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2.000

Assumptions b rownfield1: ? Assumed added brownfield activities raises overall UK North Sea recovery factor from the current 45% to 49%

Text

Assumptions YTD: ? All currently planned projects in WoodMac are taken into production

Existi ng p ro duction
Wo rk i ng Dra ft - L a st M o d i fi d 1 1 /1 0 /2 0 0 2 1:2 1 :0 4 e 9

1.500

Assumptions YTF2 : ? Assumed 80% of discoveries 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

1.000

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

Prin te d 1 2/1 0 0 09 1 1 :0 9 8 /2 :2

Printed 27/10/2010 11:30:01

500

Existing fields
0 02 03 04 05 06 07

Avg. net decline rate of 5% over 08-25 vs. 6.7% over 00-07
08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

1 Brownfield acti vities in cl ude all sa tel lite red evel opments, infield drill ing, EOR and IOR activities 2 Producti on from yet to fin d resources 3 Total YTF resource esti mate from DTI i s ~6.2 bln bbls, excludi ng West of Shetlands a nd Scotland leaves ~4 bln bbls 4 Deepwater producti on also avai labl e in spli t between the 4 different we dges (i.e., existi ng, brownfiel d, YTD and YTF) SOURCE: WoodMac, EIA, BP Statistical Revi ew; En ergy Files; McKi nsey an a s lysi McKi nse y & Compa ny | 12

SOURCE: McKinsey analysis

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We expect supply to grow to 2020

Mbpd, assuming economic growth

Liquids unconstrained demand forecast

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102 100 98 96 94 92 90 88 86 0 2008 Supply

Printed 27/10/2010 11:30:01

2010

2012

2014

2016

2018

2020

SOURCE: McKinsey supply and demand model

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Supply capacity per country: 2010 2020

Mbpd
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
2020 Baseline 15.2 3.7 3.8 2.0 2.9 2.4 5.0 2.7 2.5 2.0 2.3 0.4 9.1 8.2 3.5 2.1 3.9 1.6 3.7 0.8 3.2 0.9 0.7 0.9 0.6 7.9 3.0 2.4 97.6 0.1 5.2 -1.2 1.3 -0.1 -0.3 -0.2 0.1 -0.6 1.5 -0.7 1.5 -0.4 -0.7 0.6 -1.1 1.0 -0.1 0.7 0.5 0.2 0.3 -0.6 2.4 -0.7 0.1 -0.8 0.5 Growth, 2010-20 1.6 Comments

OPEC

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

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Non-OPEC

Others

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

SOURCE: McKinsey supply and demand model

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Seven determining factors for supply

Low 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
Historic delays do not reduce; Canada not even developing 3 megaprojects in parallel (below NIB forecast) Another government worsens climate on funding, fiscal terms, access, approvals, etc; GoM moratorium (up to 0.5 mbpd)

realistic possible

Base
1.5 -2.0 -1.0 4.5

High
Learning effects reduce resource claims Canada: 4 megaprojects in parallel (CAPP case +0.5)

0.7 -3.5 -0.3 2

Mexico or Nigeria improve upstream climate

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

2.0 -5 -2.0 5.5

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

Accelerating decline, less IOR 4. Secondary development & EOR Middle East., onshore U.S., Europe

2.0 -8 -2.0

Europe from 10% to 20% addl recovery, and Russia mitigates decline from -0.5% 8 to +0.5%; New IOR technologies

Printed 27/10/2010 11:30:01

5. Saudi Arabia

Higher decline, less oil development -2 2.0 4

New capacity addition program

6. Geopolitical and nature blockers or resolutions E.g., Iraq, Hurricanes 7. Alternatives (Biofuels)

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

2.5 -4 -2.0 5

Iraq new infrastructure and full contract delivery.

Mandates reduced, or lower capacity to deliver

-2.5

1.0 -1.5

Current mandates fully met +2

SOURCE: McKinsey analysis

Compound statistical deviation 2020 assuming factors are independent

-4

+4

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Iraq: Full delivery and export on all contracts would tilt global balance
Liquid production Mln bbl/day 14
13 12 11 10 9 8 7 6 5 4 3 2 1 0 2009
Base case: Execution hampered and contracted fields achieve government required minimum plateaus for 4-7 yrs (not 7-13) with delays Full delivery case: All 11 service contracts awarded in 2009 achieve their stated plateau level and duration with some delays

Full delivery case Base case IEA EIA Saudi Arabia 2010 capacity

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Implication on global balance (capacity vs. unconstrained demand) Mbpd

3 -3

Base

Full delivery

-21 Base

-15 Full delivery

Printed 27/10/2010 11:30:01

2020

2030

2015

2020

2025

2030

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 others earnings)

SOURCE: McKinsey supply and demand model

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Macondos impact will be primarily on cost, lead times (and demand?) not supply volume
Deepwater production is expected to decline up to 29% in Gulf of Mexico GOM production Kboed
2,000 1,900 1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 2010

but offset by acceleration outside GOM New deepwater rigs to come online in 2H 2010-11 28 28 Other 2 3 Australia 1 1 1 North Sea 1 3 West Africa 5 SE Asia 5
6

Working Draft - Last Modified 27/10/2010 11:29:57

1 2 3 4
Less 165 kboed Less 368 kboed Less 568 kboed

Brazil

8 9

Printed 27/10/2010 11:30:01

2015 DW GOM 8 3 Planned new rigs location Possible new rigs location due to DW GOM moratorium1

1 2 3 4

Base case projection (before Deepwater Horizon accident) Direct impact of moratorium (33 wells-in-progress suspended) New project delays due to moratorium (drilling resumes in 2011) Post-moratorium delays due to mandatory rigs modification (Drilling resumes in 2012)

1 Rigs mobility assumptions based on shipyard location, rigs current location, operators assets portfolio, expert interviews and analyst reports SOURCE: Deepwater KIP, RigLogix, ODS, expert interviews, press-clippings, analyst reports McKinsey & Company

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Contents

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Oil demand Oil supply Implications

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The certainties and uncertainties of oil supply and demand

Certainty Producing fields continuously decline But How will technology continue to increase recovery factor?
Working Draft - Last Modified 27/10/2010 11:29:57

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
SOURCE: McKinsey analysis

How fast can the oil industry develop? (or is allowed to..)
GDP 1969 1979 2030 2008

Printed 27/10/2010 11:30:01

How will the economy grow on the longer term?

Oil consumption

How serious are governments acting on energy efficiency? How will technology push costs of alternatives down?
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Tightness expected to resume before 2015

Mbpd, economic mid-case, $75/bbl

Unconstrained demand and supply capacity for liquids

Working Draft - Last Modified 27/10/2010 11:29:57

102 100 98 96 94 92 90 88 86 0 2008 Supply capacity

0.5%/yr

Unconstrained demand
1.3%/yr

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

Printed 27/10/2010 11:30:01

2010

2012

2014

2016

2018

2020

SOURCE: McKinsey supply and demand model

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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?

1. 2. 3. 4. 5.

Bring more oil to market from non-OPEC countries Bring more oil to market from OPEC countries Reduce activity levels in areas requiring energy Increase energy efficiency Substitute oil with other sources

Working Draft - Last Modified 27/10/2010 11:29:57

31% 30%

15% 14% 10%

Printed 27/10/2010 11:30:01

m ar k. . o oi lt m or e m or e rin g rin g ed R B B

oi lt

29% supply 71% demand

Interactive Poll

In

m ar k. iv . cr it y ea le se ve en ls Su . .. er bs gy tit ef ut fic e ... oi lw ith ot ... ac t

McKinsey & Company

uc e

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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?

1. 2. 3. 4. 5.

Bring more oil to market from non-OPEC countries Bring more oil to market from OPEC countries Reduce activity levels in areas requiring energy Increase energy efficiency Substitute oil with other sources

Working Draft - Last Modified 27/10/2010 11:29:57

44% 33%

i on s es s from 9 sults r 200 Re tobe Oc in

oi lt
22% supply 78% demand

13% 8% 2%
m ar k. iv . cr it y ea le se ve en ls Su . .. er bs gy tit ef ut fic e ... oi lw ith ot ...

Printed 27/10/2010 11:30:01

m ar k. . m or e m or e rin g rin g ed R B B

oi lt

Interactive Poll

uc e

In

ac t

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

Oil price for Brent crude in nominal US dollars

Interactive Poll
Working Draft - Last Modified 27/10/2010 11:29:57

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
11%

49%

31%

Printed 27/10/2010 11:30:01

8%

Average 98 USD / bbl

0% 0% 0% 0%

1%

0%

80 -1 00 10 012 0 12 014 0 14 016 0 16 018 0

20 -4 0

40 -6 0

60 -8 0

>1 80

<2 0

SOURCE: You

McKinsey & Company

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

Oil price for Brent crude in nominal US dollars

Interactive Poll
Working Draft - Last Modified 27/10/2010 11:29:57

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

31%

i on s es s from 9 sults r 200 Re tobe Oc in

Average 104 USD / bbl
0% 0%

20%

Printed 27/10/2010 11:30:01

14%

14%

8%

8%

4% 2%

40 -6 0

80 -1 00 10 012 0 12 014 0 14 016 0 16 018 0

20 -4 0

60 -8 0

>1 80

<2 0

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

Interactive Poll
Working Draft - Last Modified 27/10/2010 11:29:57

32% 31%

Printed 27/10/2010 11:30:01

17%

14%

Average 117 USD / bbl

0% 0% 0%

5%

1% 0%

80 -1 00 10 012 0 12 014 0 14 016 0 16 018 0

20 -4 0

60 -8 0

40 -6 0

>1 80

<2 0

SOURCE: You

McKinsey & Company

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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

Mark_Davis@mckinsey.com Dan _Cole@mckinsey.com Peter_Lambert@mckinsey.com

Presentation to the Energy Club at London Business School 25th October 2010

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