Achieving Stability Through Hedging

Transcription

1 SHELL TRADING RISK MANAGEMENT Achieving Stability Through Hedging Experience Commitment Kevin Hulsey 1

2 Disclaimer This material has been generated by employees of Shell Trading Risk Management, LLC ( STRM ) who are involved in sales and marketing efforts. Accordingly, it should be considered to be a solicitation of derivatives business generally and not a research report under the rules of the CFTC and under the Commodity Exchange Act. Notwithstanding the foregoing, this material should not be construed as an offer or the solicitation of an offer to sell or to buy or subscribe for any particular product or services (including, without limitation, any commodities, swaps, securities or other financial instruments). STRM is not soliciting any specific action based on this material. It is for the general information of STRM s clients. It does not take into account the particular investment objectives, financial conditions, or needs of individual clients. It does not constit ute a recommendation or a suggestion that any investment or strategy referenced herein may be suitable for your company. These materials are confidential and proprietary to, and may not be reproduced, disseminated or referred to, in whole or in part without the prior consent of STRM. Information presented in this material has been obtained or derived from sources believed by STRM to be reliable, but STRM does not guarantee their accuracy or completeness. STRM assumes no responsibility for verification of the information in these materials, and no representation or warranty is made as to the accuracy or completeness of such information. STRM assumes no obligation to correct or update these materials. These materials do not contain all information that may be required to evaluate any transaction or matter and information may be available to STRM and/or its affiliates that is not reflected herein. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your unique circumstances, or otherwise constitutes an opinion or a recommendation to you. STRM is not providing advice regarding the value or advisability of trading in swaps, commodity interests, including futures contracts and commodity options or any other activity which would cause STRM or any of its affiliates to be considered a commodity trading advisor under the U.S. Commodity Exchange Act. This material is not to be relied upon in substitution for the exercise of independent judgment. Any recipient of these materials should conduct its own independent analysis of the matters referred to herein. The recipient should seek advice based on its particular circumstances from its own independent financial, tax, legal, accounting and other professional advisors.

3 DEFINITIONS & CAUTIONARY NOTE Reserves: Our use of the term reserves in this presentation means SEC proved oil and gas reserves. Resources: Our use of the term resources in this presentation includes quantities of oil and gas not yet classified as SEC proved oil and gas reserves. Resources are consistent with the Society of Petroleum Engineers (SPE) 2P + 2C definitions. Discovered and prospective resources: Our use of the term discovered and prospective resources are consistent with SPE 2P + 2C + 2U definitions. Organic: Our use of the term Organic includes SEC proved oil and gas reserves excluding changes resulting from acquisitions, divestments and year-average pricing impact. Shales: Our use of the term shales refers to tight, shale and coal bed methane oil and gas acreage. Underlying operating cost is defined as operating cost less identified items. A reconciliation can be found in the quarterly results announcement. The companies in which Royal Dutch Shell plc directly and indirectly owns investments are separate legal entities. In this presentation Shell, Shell group and Royal Dutch Shell are sometimes used for convenience where references are made to Royal Dutch Shell plc and its subsidiaries in general. Likewise, the words we, us and our are also used to refer to subsidiaries in general or to those who work for them. These expressions are also used where no useful purpose is served by identifying the particular company or companies. Subsidiaries, Shell subsidiaries and Shell companies as used in this presentation refer to companies over which Royal Dutch Shell plc either directly or indirectly has control. Entities and unincorporated arrangements over which Shell has joint control are generally referred to as joint ventures and joint operations respectively. Entities over which Shell has significant influence but neither control nor joint control are referred to as associates. The term Shell interest is used for convenience to indicate the direct and/or indirect ownership interest held by Shell in a venture, partnership or company, after exclusion of all third-party interest. This presentation contains forward-looking statements concerning the financial condition, results of operations and businesses of Royal Dutch Shell. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements are statements of future expectations that are based on management s current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among other things, statements concerning the potential exposure of Royal Dutch Shell to market risks and statements expressing management s expectations, beliefs, estimates, forecasts, projections and assumptions. These forward-looking statements are identified by their use of terms and phrases such as anticipate, believe, could, estimate, expect, goals, intend, may, objectives, outlook, plan, probably, project, risks, schedule, seek, should, target, will and similar terms and phrases. There are a number of factors that could affect the future operations of Royal Dutch Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this presentation, including (without limitation): (a) price fluctuations in crude oil and natural gas; (b) changes in demand for Shell s products; (c) currency fluctuations; (d) drilling and production results; (e) reserves estimates; (f) loss of market share and industry competition; (g) environmental and physical risks; (h) risks associated with the identification of suitable potential acquisition properties and targets, and successful negotiation and completion of such transactions; (i) the risk of doing business in developing countries and countries subject to international sanctions; (j) legislative, fiscal and regulatory developments including regulatory measures addressing climate change; (k) economic and financial market conditions in various countries and regions; (l) political risks, including the risks of expropriation and renegotiation of the terms of contracts with governmental entities, delays or advancements in the approval of projects and delays in the reimbursement for shared costs; and (m) changes in trading conditions. No assurance is provided that future dividend payments will match or exceed previous dividend payments. All forward-looking statements contained in this presentation are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Readers should not place undue reliance on forward-looking statements. Additional risk factors that may affect future results are contained in Royal Dutch Shell s Form 20-F for the year ended December 31, 2016 (available at and These risk factors also expressly qualify all forward-looking statements contained in this presentation and should be considered by the reader. Each forward-looking statement speaks only as of the date of this presentation, May 9, Neither Royal Dutch Shell plc nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information, future events or other information. In light of these risks, results could differ materially from those stated, implied or inferred from the forwardlooking statements contained in this presentation. We may have used certain terms, such as resources, in this presentation that United States Securities and Exchange Commission (SEC) strictly prohibits us from including in our filings with the SEC. U.S. investors are urged to consider closely the disclosure in our Form 20-F, File No , available on the SEC website You can also obtain this form from the SEC by calling SEC-0330.

4 CONTENTS Company Overview What value hedging brings to the business? What s your hedging strategy? Fixed Price Products Options In this uncertain environment, can you afford not to have a hedging program in place? What type of credit support and its impact on execution costs? How do you choose a hedge counterparty? Other Useful Information Contact Details

5 COMPANY OVERVIEW

6 DOWNSTREAM OPERATIONS ROYAL DUTCH SHELL DOWNSTREAM GAS AND ENERGY MARKETING & TRADING SHELL ENERGY C N

7 THE SHELL TRADING NETWORK ROYAL DUTCH SHELL DOWNSTREAM TRADING & SUPPLY GAS AND ENERGY MARKETING & TRADING SHELL TRADING CALGARY STC/SENAC STIL/SEEL London STR Rotterdam SILS The Hague STRU Moscow SJT Tokyo STUSCO/SENA/STRM SNALNG Houston STM Mexico SWST Barbados SITME/SMLNG Dubai SIETCO/SELNG Singapore Crude Oil Trading LPG Trading Products Trading Natural Gas Trading Shipping LNG Trading Power Trading Environmental Products Trading Spot Chartering Barge chartering

8 SHELL TRADING RISK MANAGEMENT LLC* Core Business Markets Shell s Energy Risk Management Services in US Registered Swap Dealer Customer Base Producers Refineries Electric utilities Municipalities Rural electric cooperatives Independent power producers Natural gas and power aggregators Large commercial and industrial endusers MLP and Pipelines Industry Position A subsidiary of Shell Energy North America (US), L.P., one of the strongest balance sheets in the industry A/A3 Broad Commodity Capability Natural Gas Natural Gas Liquids Crude Oil Refined Products Power Expansive Financial Product Offering Swaps Options Costless Collars, 3-ways, index Basis Swaps and options 27 basis locations for NG All major Crude grades Bespoke structured products and credit structures

9 SHELL ENERGY NORTH AMERICA (US) L.P. ROYAL DUTCH SHELL DOWNSTREAM SHELL TRADING Core Business Energy marketing and trading Gas and power asset supply and management Markets Shell s equity natural gas production in the U.S. Industry Position Natural gas marketer in the U.S. with sales volumes of 7 billion cubic feet (Bcf) per day Wholesale and retail power marketer with sales volumes topping 270million megawatt hours (MWh) annually Customer Base Electric utilities Local natural gas distribution companies Municipalities Rural electric cooperatives Independent power producers Natural gas and power energy retailers Large commercial and industrial endusers Producers Shell Energy participates in nearly all organized power markets, with 10,000 megawatts of generating capacity across the U.S. Shell Energy consistently ranks within top three gas and power marketers in North America according to Platts Expansive physical commodity offerings Pricing fixed, index, basis options as well as other structured pricing (cross-commodity, collars, storage, etc.) Balancing, transportation and storage management

10 SHELL TRADING (US) COMPANY Core Business Crude and Products Marketing and Trading Markets the Majority of Shell's (US) Equity Crude Oil Production Industry Position The largest physical crude purchaser in North America Markets more than 13 million bbl/d of crude oil Customer Base Producers Refineries Consumers Markets 3.5 million bbl/d of oil products One of the world s largest spot charterers ~700 crude oil tankers Operates/manages approximately 55 shipping vessels One of world s largest spot charters, transport ~25% of world s LNG Approximately 4,000 energy professionals and 2,500 seafarers

11 STRENGTH IN CREDIT Royal Dutch Shell plc (S&P: A, Moody s: Aa2) Shell Oil Company (S&P: A, Moody s: Aa3) 100% ownership through wholly-owned subsidiaries Shell Energy North America (US),L.P. (S&P: A-, Moody s: A3) 100% ownership through wholly-owned subsidiaries Shell Trading Risk Management, LLC (PG by SENA)

12 What value hedging brings to the business?

13 RATIONALES FOR HEDGING Stabilize cash flows and promote sound corporate governance through effective risk management practices. Maximize shareholder value by shielding revenue streams, profitability, and balance sheets from market price risks and potential losses. Hedging acts an insurance against price risk. A hedging program can aide in forecasting future budgets by locking in continuity of cash flows. Potentially lower tax liabilities.

14 DISADVANTAGES OF HEDGING Potentially limit the upside of cash flows if you have a bullish view on the market if you are a producer or bearish view on the market if you are a consumer. Dodd-Frank Financial Regulation has added multiple layers to onboarding between swap counterparties. Therefore, it can be time consuming to establish and maintain trading relationships between counterparties. If you have never hedged, your shareholders may value the upside to commodity price risk. If you are a Producer and the market is backwardated, you could be locking in lower prices than current spot prices. If you are a Consumer and the market is in contango, you could be locking in lower prices than current spot prices.

15 What s your hedging strategy?

16 STANDARD PRODUCTS

17 FIXED PRICE SWAP EXAMPLE Transaction Overview This product is designed for customers who want to buy or sell a fixed volume of an energy commodity without being exposed to the risk of volatile prices. A fixed price can be offered for the entire term. Variation: fixed price can be shaped (seasonally) to suit cash flow needs. Underlying volumes can be shaped (seasonally) to suit operational requirements. Several other variations are also available. Customer Benefits Price and volume assurance Simple, flat price for entire deal term Protection from volatile price swings driven by extreme weather events, transport constraints and market imbalances, etc. Summary Terms Example: Transaction Economics Buyer Seller Product Volume Price Term Customer Shell Trading Risk Mgmt Natural gas 10,000 /d $3.00/ 12 months Fixed Price Spot Market Price Realized Savings $3.00 / $4.00/ +$1.00 / $3.00/ $3.00/ $0.00 / $3.00/ $2.50/ ($0.50) /

18 SHAPED VOLUME EXAMPLE Transaction Overview This product is designed to serve the needs of a producer or consumer that has changing delivery volumes; for example - new production that is ramping up over time. A shaped commodity swap can provide fixed pricing that reflects the expected flow. Customer Benefits Level price assures economics: For a producer can manage well economics through a price that covers fixed costs, helping reduce bank borrowing and/or increase bank borrowing base Level price improves short-term production value: producer can gain the benefit of a contango forward curve (higher prices in later periods) even for prompt production Fixed price: customer achieves price certainty and stability on the balance sheet to better predict financial performance Summary Terms Example: Transaction Economics Buyer Seller Product Volume Price Term Shell Trading Risk Mgmt Customer WTI Initial volume of 1,000 Bbls/d increasing by an additional 1,500 Bbls/d each year thereafter $ 55.00/ Bbl 36 months Period Year 1 Year 2 Year 3 Flowing Volume 1,000 Bbl/d 2,500 Bbl/d 4,000 Bbl/d Market Price (Example) $55.00/ Bbl/d $56.00/ Bbl/d $56.50/ Bbl/d Fixed Price (Example) $55.00/ Bbl/d $55.00/ Bbl/d $55.00/ Bbl/d Averages 2500 Bbl/d $56.13/ Bbl/d $55.00/ Bb/d

19 ODD LOT COMMODITY EXAMPLE Transaction Overview This product is designed to serve the needs of a customer whose loads that are smaller than standard wholesale commodity blocks of 1,000 Bbls or 10,000 nat gas or whose volumes to not match standard lot contracts. Customer Benefits Minimizes risk: customer can increase or change load without being severely over-hedged or under-hedged Odd lot commodity can provide fixed for small to medium loads and will bear the hedging risk. This can be either a fixed volume product, or a shaped product. Customer can add additional loads as needed. Summary Terms Example: Transaction Economics Buyer Seller Product Volume Price Term Customer Shell Trading Risk Mgmt HO 500,000 gals per year $1.75/gal 12 months Volume Price Standard 42,000/gal $1.75/gal Odd Lot 41,667/gal $1.75/gal + Odd Lot Premium

20 OPTIONS

21 CALL OPTION Transaction Overview Consumers can protect their exposure to a rise in prices by purchasing a call option. The call provides upside protection at a predetermined price level. However, unlike a regular swap, it gives the consumer the opportunity to participate on any beneficial downward move in prices. Option premiums are payable (often upfront) regardless how the option settles. Customer Benefits Price protection: provides customer with protection against unexpected price increases Easily adaptable: customer can select the level at which protection is provided (i.e., strike price) Full participation for customer when market price declines below strike price Summary Terms Example: Transaction Economics Buyer Seller Customer Shell Trading Risk Mgmt Volume Provided Market Settle Ceiling Price (Call Strike) Settlement Price* Product Volume Option Type Index Natural gas 5,000 /d Call Option Inside FERC NGPL 5,000 /d 5,000 /d $3.50/ $3.00/ $3.00/ $3.00/ $3.00/ $3.00/ Strike Price Option Premium $3.00/ $0.20/ (paid upfront) 5,000 /d *Not inclusive of option premiums $2.75/ $3.00/ $2.75/

22 PUT OPTION Transaction Overview Producers can protect their exposure to a fall in prices by purchasing a put option. The put provides downside protection at a predetermined price level. However, unlike a regular swap, it gives the producer the opportunity to participate on any beneficial upward move in prices. Option premiums are payable (often upfront) regardless how the option settles. Customer Benefits Price protection: provides customer with protection against unexpected price decreases Easily adaptable: customer can select the level at which protection is provided (i.e., strike price) Full participation for producers when market price increase above strike price Summary Terms Example: Transaction Economics Buyer Seller Customer Shell Trading Risk Mgmt Volume Provided Market Settle Price Floor (Put Strike) Settlement Price* Product Volume WTI Crude 1,000 Bbl/d 1,000 Bbl/d $50.00/ Bbl/d $45.00/ Bbl/d $50.00/ Bbl/d Option Type Index Put option WTI CMA 1,000 Bbl/d $42.00/ Bbl/d $45.00/ Bbl/d $45.00/ Bbl/d Strike Price Option Premium $45.00/Bbl $2.68/Bbl/d (payable upfront) 1,000 Bbl/d *Not inclusive of option premiums $40.00/ Bbl/d $45.00/ Bbl/d $45.00/ Bbl/d

23 HEAT RATE CALL OPTIONS FOR POWER Transaction Overview This product is designed for customers who want an option to buy heat rate power at a fixed multiple of a gas index. If the market heat rate subsequently falls, the customer is able to procure cheaper power in the market since it is not obliged to take delivery from Seller. Seller can offer heat rate call options for power where: option premiums are paid monthly regardless if power is delivered or not; and Customer Benefits Locked in heat-rate cap Protection against spikes in market heat rates due to weather events, transmission constraints or market imbalances Procure cheaper power when market heat rates are lower customer pays a multiple of gas index if power is delivered. Variation: choice of heat rate strikes (lower strikes would entail costlier option premiums). Summary Terms Example: Transaction Economics Buyer Seller Power Index Gas Index Volume Heat Rate Strike Option Premium Term Customer Shell Trading Risk Mgmt ERCOT Houston GDD HSC 100 MW (delivered into pool) 8.00 /MWh $3.00/kw-month (or $300k per month) 12 months Market Power $50/ MWh $45/ MWh $35 / MWh Market Gas $5.00/ $5.00/ $5.00/ *Not inclusive of option premiums Market Heat Rate Take Delivery if Mkt HR > YES 9.0 YES Realized Price* (8.0 x Gas) $40/ MWh $40/ MWh 7.0 NO N/A

24 PRODUCER COSTLESS COLLAR Transaction Overview This product is suited for producers who are not wanting to lock in current prices with a swap, but would like to have inexpensive protection against unexpected market price increases/decreases. The width of the price band between the floor price (put strike) and the ceiling price (call strike) can be structured to fit the customer s view of the market. No option premiums required. Customer Benefits Price protection: provides customer with protection against unexpected price increases or decreases, but allows the commodity price to decrease until it reaches the floor price Easily adaptable: customer can select the level at which protection is provided; ceiling price can be adjusted to make the transaction costless Additional flexibility: if a customer doesn t mind switching from a costless to slight cost structure, Seller can add considerable flexibility to the width of the bands (floor to ceiling band) Summary Terms Example: Transaction Economics Buyer Seller Product Volume Price Term Customer Shell Trading Risk Mgmt Natural gas 5,000 /d Inside FERC NGPL MidContinent, subject to: Ceiling Price: $4.50/ Floor Price: $3.00/ 24 months Volume Provided 5,000 /d 5,000 /d 5,000 /d Current Market $5.50/ $4.00/ $2.50/ Ceiling Price (Call Strike) $4.50/ $4.50/ $4.50/ Floor Price (Put Strike) $3.00/ $3.00/ $3.00/ Settlement Price $4.50/ $4.00/ $3.00/

25 PRODUCER LOW-COST COLLAR Transaction Overview This product is designed for producers with existing costless collar hedges allowing a choice to pay a small premium to raise the price ceiling. The low-cost collar is suited for producers who are not wanting to lock in current prices with a swap, but would like to have inexpensive protection against unexpected market price decreases. Customer Benefits Maintains price protection: provides customer with protection against unexpected price decreases afforded by their existing costless collar Greater upside participation as compared to a costless collar (up to the revised ceiling price) Summary Terms Example: Transaction Economics Buyer Seller Customer Shell Trading Risk Mgmt Volume Provided Current Market Ceiling Price (Call Strike) Floor Price (Put Strike) Settlement Price* Product Volume Natural gas 5,000 /d 5,000 /d $5.50/ $5.00/ $3.00/ $5.00/ Price Option Premium Inside FERC NGPL MidContinent, subject to: Ceiling Price: $5.00/ Floor Price: $3.00/ $0.05/ (payable upfront) 5,000 /d 5,000 /d $4.00/ $2.50/ $5.00/ $5.00/ $3.00/ $3.00/ $4.00/ $3.00/ *Not inclusive of option premiums

26 THREE WAY COLLAR Transaction Overview A 3-way collar can be constructed for end users or producers by enhancing a collar, but gives up protection in extreme high price environments. The consumer sells a cap above the strike of purchased cap. The value obtained by cap sale is applied to the collar band to make it more attractive. This would be executed in the implied view of the market were that prices might dip somewhat (and you want to be able to benefit from this), but not spike up above the strike of the cap that was sold. The opposite would apply for producers Summary Terms Customer Benefits Can enhance collar price, but give up protection in extreme high price environment Can buy back additional downside potential by adjusting collar levels. Can be structures with no upfront fee. Can guarantee worst-case scenario and increase upside potential. Structured in a way to fit the consumer needs. Example: Transaction Economics Buyer Seller Customer Shell Trading Risk Mgmt Volume Provided Current Market Ceiling Lifted Beyond Interim Ceiling Price (Call Strike) Floor Price (Put Strike) Settlement Price* Product Volume Price Option Premium Natural Gas 5,000 Mmbtu/day Inside FERC NGPL MidContinent, subject to: Ceiling Price: lifted beyond $5.50/ Interim Ceiling Price: $4.50/ Floor Price: $3.00/ No upfront payment 5,000 /d 5,000 /d 5,000 /d 5,000 /d $6.00/ $5.00/ $4.00/ $2.50/ $5.50/ $5.50/ $5.50/ $5.50/ $4.50/ $4.50/ $4.50/ $4.50/ $3.00/ $3.00/ $3.00/ $3.00/ $ $0.50/ $4.50/ $4.00/ $3.00/ *Not inclusive of option premiums

27 In this uncertain environment, can you afford not to have a hedging program in place?

28 CRUDE MARKET FUNDAMENTALS

29 Macroeconomics MACRO GEO Q4 - Prelim

30 Annual GDP Growth, % Global GDP WORLD ECONOMY EXPECTED TO GROW BY 3.3% IN 2017, UP FROM 3% IN CHINA, INDIA & US COMBINED REPRESENT 60% OF GLOBAL ECONOMIC GROWTH, WHICH DENOTES A KEY RISK TO THE WORLD ECONOMY. 4.0% World GDP Growth Forecasts at PPP 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% Rest of the World Canada France United Kingdom Brazil Russia Germany Japan India United States China 0.0% -0.5% 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017 1Q2018 2Q2018 3Q2018 4Q2018 Source: IMF

31 Bonds, US$ & Oil Price US Dollar Index Bond yields, % Dollar Index $/bbl 130 AS US BOND YIELDS RISE FASTER THAN ELSEWHERE, SO WILL THE US$. BUT THAT NEED NOT IMPLY THE OIL PRICE WILL BE UNDER PRESSURE. IN FACT, OVER THE PAST 12 MONTHS, US$ AND WTI HAVE SELDOM MOVED IN SYNC. US Dollar Index vs. 10-Y US Government Bonds Yields US Dollar Index vs. WTI Price US Dollar Index (1997=100) 10-Y Gvt Bond Yields US Dollar Index (1997=100) WTI, $/bbl Source: Reuters

32 Global SUVs GLOBALLY WE ARE SEEING A GROWING TREND TOWARDS LARGER SUVS WHILE CAR PLANTS WHICH MAKE SMALL CARS ARE BEING IDLED DUE TO GROWING INVENTORIES. New Passengers Vehicles Sales Breakdown US Source: IEA

33 US Supply Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 WHILE 2017 AVERAGE PRODUCTION IS EXPECTED TO BE FLAT Y-O-Y BUT ENDING HIGHER IN 2H17 THAN 2016, CREATING A PLATFORM FOR STRONGER GROWTH IN U.S. Total Crude/Condensate Production, Kbd 10,000 9,800 EIA STEO PIRA Wood Mac I.H.S. Genscape 9,600 9,400 9,200 9,000 8,800 8,600 8,400 8,200 8,000 Source: EIA, PIRA, Woodmac, IHS, Genscape

34 US Supply Well head BEP, WTI $/bbl Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 WELL BEP S CLOSER TO WTI PRICE IS LIKELY TO DRIVE INCREASED DRILLING ACTIVITY IN THOUGH COST IMPROVEMENTS HAVE PLATEAUED AND ARE LIKELY TO START ESCALATING. Wellhead BEP Hz WTI ? 20 0 Source: Rystad Energy

35 Global Crude Inventory THE MORE VISIBLE OECD STOCKS HAVE BEEN RELATIVELY FLAT WHEREAS MORE DRAWS OF CRUDE HAVE BEEN REPORTED IN THE NON-OECD. SPR AND FLOATING STORAGE HAVE HELPED TO CLEAR BARRELS FROM THE MARKET CommTotal (mb) Source: IEA Global Crude inventories dip back below 2015 levels OECD (mb) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Non-OECD (mb) Source : JODI Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

36 Agencies Stock Draws? WITH AN ALREADY LOW BASELINE IN 2016, AGENCIES BROADLY SEE NON- OPEC SUPPLY DECLINES ARRESTING IN 2017, RELIEVING THE CALL ON OPEC Agency Forecast (MBD) EA OPEC EIA IEA YTD Growth vs kbd Demand Source: IEA, EIA, OPEC, Energy Aspects Non-OPEC Supply (incl. NGLs) Call on OPEC / Inventory OPEC Growth

37 NATURAL GAS MARKET FUNDAMENTALS

38 U.S. EIA STEO SUMMARY OCTOBER 2017 HENRY HUB SPOT PRICE 2016 averaged $2.52/ 2017 to average $3.03/ 2018 to average $3.19/* *revised down from $3.29/ in September 2017 STEO MARKETED PRODUCTION 2016 averaged 77.8 Bcf/d 2017 to average 79.0 Bcf/d 2018 to average 84.4 Bcf/d* *revised up from 84.1 Bcf/d in September 2017 STEO PIPELINE IMPORTS 2016 averaged 8.0 Bcf/d 2017 to average 8.0 Bcf/d* 2018 to average 8.1 Bcf/d R&C DEMAND 2016 averaged 20.4 Bcf/d 2017 to average 20.7 Bcf/d 2018 to average 21.8 Bcf/d* *revised up from 21.7 Bcf/d in September 2017 STEO ELECTRIC POWER DEMAND 2016 averaged 27.3 Bcf/d 2017 to average 24.8 Bcf/d 2018 to average 26.3 Bcf/d* *revised up from 25.5 Bcf/d in September 2017 STEO COMMENTARY The U.S. EIA stated Henry Hub prices declined in early September largely in reaction to Hurricane Irma s impact to gas fired generation in Florida. Most generation in Florida is gas-fired and production was 41% lower on September 11 than the average first 7 days of September. *revised up from 7.9 Bcf/d in September 2017 STEO Source: U.S. EIA Short-Term Energy Outlook, October 11, 2017 This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes no representation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell s view of any market fundamentals.

39 HENRY HUB NATURAL GAS PRICE FORECAST Note: Confidence interval derived from options market information for the 5 trading days ending Oct. 5, Intervals not calculated for the months with sparse trading in near-the-money options contracts. The U.S. EIA stated that Henry Hub natural gas prices are expected to average $3.03/ in 2017 and $3.19 in The U.S. EIA also stated that Henry Hub natural gas spot prices averaged $2.98/ in September, up $0.08 from its July average. Source: U.S. EIA Short-Term Energy Outlook, April 11, 2017 This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes no representation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell s view of any market fundamentals.

40 U.S. NATURAL GAS PRICE COMPARISONS Source: U.S. EIA Short-Term Energy Outlook, October 11, 2017 Note from EIA regarding residential price peaks in the summer and troughs in the winter: Residential prices have two components: the variable cost (cost of gas) and the utility s fixed costs (operating/infrastructure/etc). The fixed costs are very high and they re spread out over consumption. Since there s more consumption in the winter, the fixed costs are spread out much more. Winter heating bills will be higher because the increase in consumption outweighs the lower price. Copyright of Shell Energy North America This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes no representation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell s view of any market fundamentals.

41 Jan-16 Mar May Jul Sep Nov Jan-17 Mar May Jul Sep Nov Jan-18 Mar May Jul Sep Nov U.S. NATURAL GAS DRY PRODUCTION EIA Actual EIA Forecast Actual Forecast Source: U.S. EIA Short-Term Energy Outlook, October11, 2017 According to the U.S. EIA, dry natural gas production is expected to average 73.6 Bcf/d in 2017, a 0.7 Bcf/d increase from The U.S. EIA also stated that dry gas production averaged 75 Bcf/d in September, 3.1 Bcf/d greater than the same time last year. This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes no representation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell s view of any market fundamentals.

42 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Pipeline Imports in Bcf/d U.S. NATURAL GAS PIPELINE GROSS IMPORTS EIA Actual EIA Forecast Actual Forecast 6.0 Source: U.S. EIA Short-Term Energy Outlook, October 11, 2017 According to the U.S. EIA, pipeline gross imports will average 8.1 Bcf/d in 2018 and 8.0 Bcf/d in The U.S. EIA expects that growth in natural gas exports and growth in consumption will contribute to Henry Hub Natural Gas spot price increasing to an annual average of $3.19/ in 2018 from $3.03/ in 2017 Copyright of Shell Energy North America This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes no representation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell s view of any market fundamentals.

43 Jan-16 Mar May Jul Sep Nov Jan-17 Mar May Jul Sep Nov Jan-18 Mar May Jul Sep Nov Supply in Bcf/d U.S. GAS DRY PRODUCTION + LNG & PIPELINE GROSS IMPORTS EIA Actual EIA Forecast According to the U.S. EIA, February 2017 natural gas prices were higher than February 2016 prices because of higher exports and lower production, leading Pipeline to lower Gross Imports inventory LNG Gross Imports levels. 70 Dry Production 65 According to the U.S EIA, LNG export capacity is expected to increase in 2018 with exports exceeding 3 Bcf/d, 66% more than the 2017 projected average. Copyright of Shell Energy North America Source: U.S. EIA Short-Term Energy Outlook, October 11, 2017 This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes no representation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell s view of any market fundamentals.

44 Jan-16 Mar May Jul Sep Nov Jan-17 Mar May Jul Sep Nov Jan-18 Mar May Jul Sep Nov Natural Gas Demand in Bcf/d U.S. NATURAL GAS DEMAND RESIDENTAL & COMMERCIAL EIA Actual EIA Forecast Actual Forecast Source: U.S. EIA Short-Term Energy Outlook, October 11, 2017 The U.S. EIA expects residential and commercial consumption to average 20.7 Bcf/d in 2017 and 21.8 Bcf/d in Copyright of Shell Energy North America This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes no representation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell s view of any market fundamentals.

45 Jan-16 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan-17 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan-18 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Natural Gas Demand in Bcf/d U.S. NATURAL GAS DEMAND INDUSTRIAL EIA Actual EIA Forecast C 19 Actual Forecast 18 Source: U.S. EIA Short-Term Energy Outlook, October 11, 2017 Copyright of Shell Energy North America This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes no representation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell s view of any market fundamentals.

46 Jan-16 Mar May Jul Sep Nov Jan-17 Mar May Jul Sep Nov Jan-18 Mar May Jul Sep Nov Natural Gas Demand in Bcf/d U.S. NATURAL GAS DEMAND POWER GENERATION 40 EIA Actual EIA Forecast Actual Forecast Source: U.S. EIA Short-Term Energy Outlook, October 11, 2017 According to the U.S. EIA, consumption in the electric power sector should decrease 9.1% in 2017 and increase 6.2% in This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes no representation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell s view of any market fundamentals.

47 Jan-16 Mar May Jul Sep Nov Jan-17 Mar May Jul Sep Nov Jan-18 Mar May Jul Sep Nov Demand in Bcf/d U.S. NATURAL GAS DEMAND BY SECTOR EIA Actual Residential & Commercial Power Generation EIA Forecast Source: U.S. EIA Short-Term Energy Outlook, October11, 2017 Copyright of Shell Energy North America This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes no representation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell s view of any market fundamentals.

48 Jan-16 Mar May Jul Sep Nov Jan-17 Mar May Jul Sep Nov Jan-18 Mar May Jul Sep Nov Natural Gas in Bcf/d U.S. NATURAL GAS DEMAND VS. SUPPLY* EIA Actual EIA Forecast Demand Demand Forecast Supply Supply Forecast Source: U.S. EIA Short-Term Energy Outlook, October 11, 2017 * Supply = Dry Production + LNG Imports + Pipeline Gross Imports This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes no representation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell s view of any market fundamentals.

49 What type of credit support is required and its impact on execution costs?

50 ISDA WITH CSA Bi-lateral credit limits are established based upon the credit assessments of the Producer and Shell Trading ISDA with a CSA Collateral (cash or LoC) required if daily mark-to-market exposures from financial trades exceed credit thresholds in contract Producer with external credit rating issued by a rating agency, credit thresholds are tied to a credit grid (i.e. a credit line tied to rating) Aggressive pricing but could fill up derivative lines.

51 UNSECURED NO-MARGIN PROGRAM Used to compete with bank syndicates, where bank s hedging affiliates are secured and producer is not able to post collateral outside bank facility ISDA with no CSA. No posting of cash, LCs, or security interest in reserves is required (thus STRM s credit exposure is unsecured ) Covenants generally used for sub investment grade rated Producers to mitigate risk of credit deterioration. Dynamic or static covenants pulled from existing credit agreement Credit charge based on internal adjusted credit rating and recovery rate 60 month + balance of current year hedge tenor allows STRM to compete for essentially all the hedges Credit reports weekly exposure by CP and credit reserve applied to P&L

52 UNSECURED NO-MARGIN DUE-DILIGENCE Producer Review Company assessment typical credit underwriting review augmented by analysis of 3 rd party engineering reserve reports Credit determines an adjusted credit rating and recovery rate that is used to determine credit charge Credit monitors and adjusts individual credit ratings on a periodic basis

53 SECURED NO-MARGIN PROGRAM Used in situations where a Producer s lender allows STRM to share in collateral on a first lien basis to secure hedging obligation. If recovery rate is high, pricing can be aggressive. Credit exposure under the ISDA is secured via a mortgage on the Producer s reserves and other collateral and guarantees securing the Producer s lenders. Bank and STRM share in the collateral and guarantees on a pari passu (i.e. ratable ) basis. Producer credit review includes financial statements and review of 3rd party engineering (potentially evaluated by STRM contract reservoir engineer) Contracts include 1) an ISDA with Producer and 2) An Intercreditor Agreement with STRM, Lender and Producer STRM legal due diligence required including reviewing all closing documents from financing.

54 SECURED NO-MARGIN DUE-DILIGENCE Secured Deals are handled with a Deal Team approach; Credit, Structuring, Commercial, Legal & Contracts Lender Review E&P portfolio and experience lending to E&P companies Is the Lender well capitalized? Credit Agreement, ICA and security docs Producer Review Company assessment management and track record Analyze 3 rd party engineering and production reports Financial review historical and pro-forma Hedging strategy and PFE Collateral coverage assessment debt and MtM

55 How do you chose a hedge counterparty?

56 CHOOSING A HEDGE COUNTERPARTY Questions to consider when choosing hedge providers: What is the credit quality of the hedge provider? Are they financially stable enough to pay if I settle or unwind in the money? What is the reputation of the hedge provider? Do they plan to price aggressively? Can they offer the specific underlyings and financial structures I require for my risk management program? What type of credit support is required? Am I interested in no margin or margining to improve pricing?

57 CHOOSING A HEDGE COUNTERPARTY CONTINUED Questions to consider when choosing hedge providers: If I am hedging with my bank group only, do they have the capacity to fulfill all my hedging requirement? How many hedge providers do I need? Weigh the time constraints of adding and maintaining those hedging relationship in the new Dodd-Frank financial regulatory world. How do I want to handle the onboarding process with those hedge counterparties? Should I consider adding Shell to increase competitiveness, spread counterparty risk, and help fulfill all my hedging needs?

58 OTHER USEFUL INFO Copyright of Shell International B.V.

59 SAMPLE LIST OF NATURAL GAS INDEX POINTS Gas Daily ANR ML7 ANROK CARTHAGE HUB CHEYENNE Chicago LDCs CIG ROCKY CNG NorthPoint CNG SouthPoint CNSPWR COLGAS APP COLGULF MAINLINE DAWN DRACUT ELP BONDAD ELP NonBondad ELPPerm Emerson Viking HHC HSC IROQUOIS KERN DELIVERED KERN RIVER OPAL MALIN MichCon LEU NGPL MDCT NGPLTxOk E NIAGARA Gas Daily NNG DEM NNG VIA NW S GRN RIVER NW STANFIELD NW WYOMING POOL NWPCB Sumas PAN PGE CITYGATE PGE LP QUESTAR CENTERPOINT EAST SOCAL CG SOCAL LP Sonat TENN Z6 TET ELA TETM3 TGTSL TRNSWST PERM TRZ3 TRZ6 NY WAHA Inside FERC Inside FERC ANRLa TENN 500 ANROK TENN 800 CanNig TENN Z6 CIGRocky TENNTxZ0 CNGAppl TETCOETx ColGasAppal TETCOSTx ColGfLa TETELa COLGULF ML TETM3 DAWN TGTSL ELPPerm TGTZ1 ELPSanJuan TRMissAlab ETx KATY TRUNKLa TRZ2 FGTZ3 TRZ3 HHC TRZ6 NON-NY HSC TRZ6 NY MICHCON LEU WILLTxOkKs NGPLMC WTXWaha NGPLSTx NGPLTxOk NNGDe NNGVIowa NWPCB SUMAS NWRoc ONGOk PAN CENTERPOINT EAST SONATLa Natural Gas Intelligence CHICAGO MALIN PGE CITYGATE SOCAL SOCAL CG SOCALBRDR PGE Last Day EHRENBERG GOSHEN HERMISTON LANC DA BID NGPL GAGE NWPL CG PSCO CITYGATE RATTLESNAKE CRK REX WEST SWGAS AZ SWGasSJ IPE Brent Canadian Gas AECO Canadian Gas Dollar AECO EMP ARG Formula WTI WTS WTD NYM HH WTI

60 DISCOVER MORE youtube.com/shell flickr.com/photos/royaldutchshell shell.com/inside_energy facebook.com/shell

61 CONTACT DETAILS Shell Trading Risk Management offers a wide range of Risk Management solutions Our experienced team welcomes the opportunity to speak to you about how our services can help you achieve your business goals Contact us: Name: Kevin Hulsey Number: Kevin.Hulsey@shell.com Hotline Number:

62

63 APPENDIX

64 INDEXED PRICE HEAT RATE POWER Transaction Overview This product is designed to allow customers to convert power exposure into gas terms by purchasing a fixed volume of power priced on a gas index. Heat rate power is offered at a fixed multiple to a gas index. Variation: choice of preferred gas index, e.g. Henry Hub or Houston Ship Channel. Customer Benefits Locked in fixed heat-rate Protection against spikes in market heat rates due to weather events, transmission constraints or market imbalances Simple, transparent pricing based on published gas index Low credit costs, compared to transacting fixed price power Summary Terms Example: Transaction Economics Buyer Seller Power Index Gas Index Volume Heat Rate Term Customer Shell Trading Risk Mgmt ERCOT Houston GDD HSC 100 MW 8.0 /MWh 12 months Fixed Heat Rate Gas Index Settle Realized Price 8.0x $6.00/ $48/MWh 8.0x $5.00/ $40/MWh 8.0x $4.00/ $32/MWh

65 COMMODITY PRICED AS A PERCENT OF NYMEX Transaction Overview This product provides commodity pricing at a preferred point (including basis), with the price expressed as a percent of NYMEX Henry Hub. As an alternative to fixing the basis differential, the product allows for transparent, markettracking with minimum complexity. Customer Benefits Provides customer a market based price with a transparent way to understand and explain price changes Delivered price (including basis) moves with NYMEX Summary Terms Example: Transaction Economics Buyer Seller Product Volume Price Customer Shell Trading Risk Mgmt Natural gas (NGPL MidContinent Inside FERC) 5,000 /d 96% of NYMEX Henry Hub Volume 5,000 /d 5,000 /d NYMEX Settled Price $3.40/ $3.50/ NGPL- Midcon Basis ($0.135)/ ($0.140)/ Contract Billed Price - % of Nymex 96% 96% Term 12 months 5,000 /d $3.60/ ($0.145)/ 96%

66 GAS PRICE BASED UPON CRUDE OR POWER PRICES Transaction Overview This product is designed for producers with both crude and gas production, who would like to understand their production in terms of a single index price. Option to purchase or sell gas production based upon a percentage of a crude oil marker price (NYMEX WTI, Louisiana Light Sweet, etc). Customer Benefits Simplify economics: customer can understand and report changes in production value based upon a single index Price flexibility: gas price does not necessarily need to be based upon a single point, but could be a weighted average of multiple points Variation: gas purchase or sale price can be based upon a power price index, or a basket of oil marker prices. Summary Terms Example: Transaction Economics Buyer Seller Shell Trading Risk Mgmt Customer Average Crude Price Gas Price as % Crude Realized Gas Price Product Volume Price Term Natural gas 10,000 /d 6.67% NYMEX WTI 12 months $45.00/Bbl $48.50/Bbl $52.45/Bbl 6.67% NYMEX WTI 6.67% NYMEX WTI 6.67% NYMEX WTI $3.00/ $3.25/ $3.50/

67 STORAGE LOOKALIKE COMMODITY Transaction Overview This product is designed for customers interested in the ability to produce natural gas in one period, and for it to be marketed in a different period or at a different location. Buyer pays a premium for a fixed price and opportunity to market fixed volumes at later dates or different locations. Seller can purchase natural gas in one period, hold or trade it, and later provide an equivalent volume of product at a different time period to the customer. Customer Benefits Price advantages: enables buy-side customers to secure better pricing when the current monthly price is expected to move downward as compared to later purchases Market-time flexibility: customer can market commodity at later dates and/or at different delivery points Geographic flexibility: can provide the storage equivalent for commodity in difficult markets Helpful for associated gas production that must be marketed. Summary Terms Example: Transaction Economics Buyer Seller Product Volume Received/ Redelivered Price Term Customer Shell Trading Risk Mgmt Natural gas Summer: 20,000/10,000 /d Winter: 20,000/30,000 /d Demand fee: $0.12/ per month Gas price: $3.22/* *(pre-agreed fixed price) 12 months (April through March) Fixed Volume Supply From Buyer 20,000 20,000 20,000 Summer Volume/ Winter Volume from Seller 10,000/30,000 15,000/25,000 30,000/10,000 Premium for Storage Lookalike $0.12/ per month of total capacity $0.08/ per month of total capacity $0.05/ per month of total capacity