Oil market outlook. Tight despite a risky demand side. 9 November 2011

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1 9 November 2011 Oil market outlook Tight despite a risky demand side Sigurd-Erik Nissen-Meyer Direct: Mobile: senm@pareto.no Please refer to important disclosures at the end of this document Thomas Aarrestad Direct: Mobile: taa@pareto.no

2 Summary Tight Q outlook, despite increased risk on the demand side We forecast USD 120/bbl (Brent) in 2012 as spare capacity is close to 2008 levels Oil demand is more robust now than in 2008 In a downside scenario, OPEC cuts are likely to support prices above USD 90/bbl Long term fundamentals are solid We produce more than we discover 80% of the need for new production capacity is due to depletion FSU production accounted for 60% of world production growth in FSU growth looks to me much lower in

3 Spare capacity should be close to 2008 levels in OPEC spare capacity* e OPEC spare capacity* (mbd) Spare capacity is forecasted to decline to around 2.0 mbd in 2011 and 2012 Spare capacity remains fairly low even if demand shows limited growth in Q e Zero demand growth in H2'11 and 2012 Base case** *Capacity in Libya: 0.4 mbd in 2011, 0.8 mbd in 2012; Capacity in Saudi: 11 mbd **Base case: demand growth of 0.6 mbd in H2 11 and 1.4 mbd in 2012 Source: IEA; Pareto 3

4 There should be less downside to OECD demand than in 2008 OECD oil demand e OECD oil demand (mbd) Most of the easy substitutions from oil were taken in Demand forecasts in e are line with the recession level in e 2012e Source: IEA; Pareto 4

5 Supply and demand balance looks tight in Q Call-on-OPEC vs. OPEC production H e mbd mbd 30.5 mbd 30.5 mbd Current OPEC production: 30.2 mbd Q1'11 - Q3'11 Q4'11e 2012e Call-on-OPEC Current OPEC production Call-on-OPEC exceeds current production by 0.4 mbd on avg in Q Asian stockbuilding provides 0.3 mbd upside risk to demand Source: IEA; Pareto 5

6 There is likely downside risk to consensus 2012 supply estimates Non-OPEC production growth 00 12e: Actual vs. IEA forecast Non-OPEC production growth (mbd) IEA tends to overestimate non-opec production growth We believe there is downside risk to IEA s 2012 estimate, considering the decline in production start-ups in e Actual IEA forecast (released January same year) Source: IEA; Pareto 6

7 Saudi and OPEC support prices above USD 90/bbl Government breakeven oil price, Saudi Arabia Government breakeven oil price, Saudi Arabia (USD/bbl) The Saudi/OPEC government breakeven price works as the marginal cash cost level Oil prices are unlikely to spend much time (~1 year) below this level Saudi Arabia government breakeven price Oil price, annual avg (Pareto est. in ) Source: IIF; CGES; IMF; Pareto 7

8 Top picks E&P DETNOR BUY Target NOK 120 STL BUY Target NOK 200 Oil services and rigs PGS BUY Target NOK 110 TGS BUY Target NOK 180 SUBC BUY Target NOK 160 SDRL BUY Target USD 35 SDSD BUY Target USD 2.1 KVAER BUY Target NOK 20 DESSC BUY Target NOK 14 8

9 Appendix 9

10 OECD inventories are already below normal levels Total OECD inventories* (inc. floating) 2011 vs. 5-year range OECD total stocks, inc. floating storage (mbls) 2,950 2,900 2,850 2,800 2,750 2,700 2,650 2,600 2,550 2,500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average at current OPEC prod Over the past three months, inventories have declined by 0.7 mbd relative to 5-year avg *37 mbls from the emergency stock release have been excluded Source: IEA; Pareto 10

11 The world is running out of spare oil production capacity OPEC spare capacity* relative to world demand e OPEC spare capacity* relative to world demand 25% 20% 15% 10% The structural decline in spare capacity continues 5% 0% *Capacity in Libya: 0.4 mbd in 2011, 0.8 mbd in 2012, 1.5 mbd in 2013, 1.6 mbd in 2014 and 2015 Source: IEA; BP; Pareto Research 11

12 Discoveries are struggling to keep pace with production World oil* discoveries and production Billion bbls per year Million bbls Annual discoveries (lhs) Annual production (lhs) Avg size of discovered fields (rhs) Replacing production with new discoveries is becoming increasingly difficult Annual discoveries have increasingly fallen short of production since the 1980s As a result, adding new production capacity becomes harder, and more marginal and high cost resources have to be developed to meet demand *Crude and NGLs Source: IEA; Pareto 12

13 Former Soviet Union met 60% of world demand growth over the past decade, but will not contribute materially going forward Growth in world demand and FSU prod: vs e* Growth (mbd) e Former Soviet Union production growth World demand growth Over the past decade, FSU increased production by 5.5 mbd, and met 60% of the growth in world demand Over the next decade however, FSU s contribution will be marginal Who can step up? Key candidates are deepwater, Iraq, shale oil and oil sands *Crude and NGLs (i.e. excludes biofuels and processing gains) Source: BP; IEA; Pareto 13

14 World oil demand would increase by 67% if consumption per capita in China and India reach EU levels Oil consumption per capita in 2010: India, China, EU, US Oil consumption per capita (bbls/year) *Global consumption growth %* +33%* India China EU US Oil consumption per capita in Non- OECD countries is marginal compared with OECD levels If China and India were to reach EU levels, world oil demand would increase by a staggering 67% from the 2010 level The corresponding figures for other commodities such as coal, aluminium, and grain are in the 25-40% range, illustrating oil s high exposure towards growth in developing economies Source: BP; IMF; Pareto Research 14

15 The need for new oil production is driven by decline in existing production and not growth in demand Decline in existing production vs. demand and prod. growth mbd Annual decline in existing production: ~5 mbd * World annual demand growth 0.5 Chinese annual demand growth 0.1 Brazil annual production growth '10-'15e** 9.1 Saudi Arabia crude production Decline* in existing production is equivalent to 5 times world demand growth Demand growth from 9 "Chinas" Net production growth from 35 "Brazils" One Saudi Arabia every second year *6.7% decline rate (net of avg maintenance and reinvestments), **IEA forecast Source: IEA; Wood Mackenzie; IHS Cera; Pareto Research 15

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20 Disclaimers and disclosures Appendix A Disclosure requirements pursuant to the Norwegian Securities Trading Regulations section 3-10 (2) and section 3-11 (1), letters a-b Pareto Securities AS does not alone or - together with affiliated companies or persons own a portion of the shares exceeding 5 % of the total share capital in any company where a recommendation has been produced or distributed by Pareto Securities AS. Pareto Securities AS may hold financial instruments in companies where a recommendation has been produced or distributed by Pareto Securities AS in connection with rendering investment services, including Market Making. Please find below an overview of material interests in financial instruments held by employees in Pareto Securities AS, in companies where a recommendation has been produced or distributed by Pareto Securities AS. By material interest is meant holdings exceeding a value of NOK Company Analyst Total Analyst Total Company holdings holdings holdings holdings ALGETA ODFJELL ARCHER OLAV THON EIENDOM ATEA ORKLA AVOCET MINING PETROLEUM GEO-SERVICES BONHEUR QUESTERRE ENERGY BW OFFSHORE RENEWABLE ENERGY CORP BWG HOMES S.D. STANDARD DRILLING CERMAQ SALMAR DNB NOR SANDNES SPAREBANK DNO INTERNATIONAL SEADRILL DOF SHIP FINANCE EITZEN CHEMICAL SIEM OFFSHORE EOC SOLSTAD OFFSHORE FARSTAD SHIPPING SONGA OFFSHORE FRED OLSEN ENERGY SPAREBANKEN NORD-NORGE FRONTLINE SPAREBANK 1 SR-BANK GJENSIDIGE FORSIKRING SPAREBANKEN ØST HAVILA SHIPPING SPECTRUM INMETA CRAYON STATOIL KONGSBERG GRUPPEN STATOIL FUEL & RETAIL LERØY SEAFOOD GROUP STOREBRAND MARINE HARVEST ASA SUBSEA MORPOL TELENOR NORSK HYDRO TGS-NOPEC GEOPHYSICAL NORSKE SKOGINDUSTRIER TTS GROUP NORTHLAND RESOURCES VEIDEKKE NORWEGIAN AIR SHUTTLE WILH. WILH. HOLDING A NORECO YARA INTERNATIONAL Appendix B Disclosure requirements pursuant to the Norwegian Securities Trading ST Regulation 3-11, letters d-f, ref the Securities Trading Act Section 3-10 Overview over issuers of financial instruments where Pareto Securities AS have prepared or distributed investment recommendation, where Pareto Securities AS or related companies have been lead manager/colead manager or have rendered publicly known not immaterial investment banking services over the previous 12 months: - Aker Drilling - DOF Subsea - PA Resources - Akva Group - Equinox Offshore - Pacific Drilling - Altona Mining - Floatel - Panoro Energy - American Shipping Co - Gjensidige - Pareto bank - Archer - Global Tender Barges - PGS - Asia Offshore Drilling - Golden Close Maritim Corp - Polarcus - Austevoll Seafood - Havila Shipping - Prosafe Production - BassDrill - Hoegh LNG - Prosafe - Bergen Group - Inmeta - Prospector Drilling - Bjørge - Krillsea - Rocksource - Blom - KrisEnergy Holding Co - Saga Tankers - BOA Group - Marine Subsea - Sandnes Sparebank - Camillo Eitzen & Co. - Maritim Industrial Services - Sevan Drilling - Color Group - Morpol - Sevan Marine - Cultivos Marinos - Noreco - Spbk Sogn & Fjordane - Det Norske Oljeselskap - Norse Energy Corp - Standard Drilling - Discover Offshore - Northland Resources - Statoil - DNO International - Norway Royal Salmon - Swedbank - DOF - Ocean Rig - Troll Drilling & Services - DOF Installer - Odfjell Drilling - TTS Group This overview is updated monthly (this overview is for the period ). Appendix C Disclosure requirements pursuant to the Norwegian Securities Trading ST Regulation 3-11 (4) Column I shows the overall ratio of Trading Buy, Buy, Hold, Sell and Trading Sell in Pareto s Recommendations in financial instruments. Column II shows the ratio of Trading Buy, Buy, Hold, Sell and Trading Sell in Pareto s Recommendations in financial instruments where Pareto Have provided investment banking services to the issuer the previous 12 months. Column I Column II Buy 65.80% 93.20% Hold 26.80% 6.80% Sell 7.40% 0.00% This overview is updated monthly (last updated ). This overview is updated quarterly (last updated ). 20

21 Disclaimers and disclosures Appendix D This part applies to research reports prepared by Öhman. Disclosure of positions in financial instruments The beneficial holding of the Pareto Group is 1% or more of the total share capital of the following companies included in Öhman s research coverage universe: Isconova, and Ruric. The Pareto Group has material holdings of other financial instruments than shares issued by the following companies included in Öhman s research coverage universe: RusForest and PA Resources. Disclosure of assignments and mandates During the past 12 months, members of the Pareto Group have been lead manager or co-lead manager of publicly disclosed issues or offers of or with regard to securities of the following companies included in Öhman s research coverage universe: Africa Oil, Isconova, Shamaran Petroleum and Trigon Agri. During the past 12 months, members of the Pareto Group have provided other investment banking services to and received compensation for such services from the following companies included in Öhman s research coverage universe: Africa Oil, BlackPearl Resources, Isconova, JLT Mobile Computers, RusForest, Trigon Agri and Shamaran Petroleum. Members of the Pareto Group provide market making or other liquidity providing services to the following companies included in Öhman s research coverage universe: 2Entertain, Africa Oil, Beijer Electronics, Black Pearl Resources, Cloetta, Coastal Contacts, Episurf, Fastighets AB Balder, G &L Beijer, Isconova, JLT, NAXS, Partnertech, Prevas, Ruric, Shamaran Petroleum, Tethys Oil and Trigon Agri. Members of the Pareto Group have entered into agreements concerning the inclusion of the company in question in Öhman s research coverage universe with the following companies: Africa Oil, Coastal Contacts, Isconova, RusForest, Trigon Agri and Shamaran Petroleum. This overview is updated continuously. Previous rating system (up to 16 Sep 2011) Rating OUTPERFORM NEUTRAL UNDERPERFORM Expected total return in six to twelve months The stock is expected to outperform the return on our Nordic sector universe The stock is expected to perform in line with the return on our Nordic sector universe The stock is expected to underperform the return on our Nordic sector universe 21