Table Of Content

Deutsche Bank Markets Research Europe Industry Date United Kingdom Oil & Gas for 25 January 2013 Oil & Gas Beginners Industry Update Integrated Oils Research Team European Oil & Gas Research Lucas Herrmann (+44) 20 754-73636 [email protected] Mark Bloomfield (+44) 20 754-57905 [email protected] Phil Corbett (+44) 20 7545-1202 [email protected] Sebastian Yoshida (+44) 20 754-56489 [email protected] US Oil & gas Research Paul Sankey (+1) 212 250-6137 [email protected] Stephen Richardson (+1) 212 250-8356 [email protected] Ryan Todd (+1) 212 250-8342 [email protected] Mike Urban (+1) 877 250-3113 [email protected] Asian Oil & Gas Research John Hirjee (+61) 3 9270-4318 [email protected] David Hurd (+852) 2203 6242 [email protected] A guide to the oil & gas industry Russian Oil & Gas Research Pavel Kushnir (+7) 495 9339240 [email protected] The basics of the 'Black Stuff' Deutsche Bank's overview of the global oil & gas industry. Structured in three parts, this layperson's guide includes details on the workings of the oil & gas industry, key oil producing countries and a summary of the assets and portfolios of the leading European and US oil & gas companies. ________________________________________________________________________________________________________________ Deutsche Bank AG/London Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012. Deutsche Bank Markets Research Europe Industry Date United Kingdom Oil & Gas for 25 January 2013 Oil & Gas Beginners Industry Update Integrated Oils A guide to the oil & gas industry The basics of the 'Black Stuff' Research Team Deutsche Bank's overview of the global oil & gas industry. Structured in three European Oil & Gas Research parts, this layperson's guide includes details on the workings of the oil & gas Lucas Herrmann industry, key oil producing countries and a summary of the assets and (+44) 20 754-73636 portfolios of the leading European and US oil & gas companies. [email protected] Mark Bloomfield The strategic commodity (+44) 20 754-57905 As the dominant source of our energy needs for the better part of the last 60 [email protected] years, crude oil has held influence over the politics and economic strategies of Phil Corbett nations more than any other commodity, frequently proving the source of (+44) 20 7545-1202 instability, dispute and war. From the birth of Standard Oil through the [email protected] expropriation of Yukos, the oil industry has similarly found itself the subject of Sebastian Yoshida frequent controversy, with the companies involved often achieving profits and (+44) 20 754-56489 wielding power greater than the nations in which they are based. For an [email protected] industry that, at its most basic involves little more than drilling a hole in the ground in the hope of finding the ‘black stuff’, the modern day oil industry is a US Oil & gas Research remarkable amalgam of politics, economics, science and technology. Huge Paul Sankey and diverse, it is also one that can at times prove bewildering, and not just for (+1) 212 250-6137 the uninitiated. [email protected] Stephen Richardson The industry, the countries and the major companies – all in one (+1) 212 250-8356 With this in mind, in January 2008 the Global Oil & Gas Team at Deutsche [email protected] Bank first published a document that we hoped would prove of good use for Ryan Todd beginners and industry old hands alike – Oil & Gas for Beginners. Some five (+1) 212 250-8342 years and several reprints later, we have mustered the strength to update and [email protected] expand our original text. Structured in three parts it contains contributions Mike Urban from Deutsche Bank’s global team of oil & gas analysts, many with (+1) 877 250-3113 backgrounds in the industry as well as drawing on Deutsche Bank’s [email protected] longstanding relationship with Wood Mackenzie, one of the industry’s leading research houses. In the initial Industry Section we look at what shaped today’s Asian Oil & Gas Research industry, the geology of oil, and its applications together with how it’s found, John Hirjee how it’s extracted & refined and how it’s taxed. In the second Countries (+61) 3 9270-4318 Section we review the oil & gas production outlook and histories for the [email protected] leading OPEC and non-OPEC producers including details of the major fields, David Hurd their tax systems, energy infrastructure and, of course, the status of their (+852) 2203 6242 reserves. Finally, in the Companies Section we review the portfolios of the [email protected] leading international oil companies that comprise the bulk of the oil & gas Russian Oil & Gas Research sector’s stock market capitalisation, providing asset value breakdowns and an overview of the major business activities and growth projects. Pavel Kushnir (+7) 495 9339240 For the uninitiated and more learned reader alike [email protected] Although Oil & Gas for Beginners is intended as a beginners guide we hope that it will also find favour with the more experienced reader. Overall, we trust that our audience will find it a useful document and entrust it with a permanent slot on an already overcrowded desk. So for those of you who want to know more about the life cycle of a basin, the Earth’s geologic clock, why an Indian bean has proven key to unconventional extraction or any number of industry relevant themes read on. We hope that what you find will prove both interesting and informative. ________________________________________________________________________________________________________________ Deutsche Bank AG/London Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012. 25 January 2013 Integrated Oils Oil & Gas for Beginners Table Of Contents Section I: The Oil & Gas Industry ................................................... 9 A Brief History of Oil ..................................................................... 10 From biblical times… ........................................................................................................ 10 Setting the scene .............................................................................................................. 11 IOCs and NOCs ................................................................................................................. 15 The IOC Sisters – 100 years in the making ...................................................................... 16 The International Oil Companies ...................................................................................... 19 The IOCs Compared ..................................................................... 21 The major NOCs ............................................................................................................... 23 OPEC ............................................................................................ 27 A brief history ................................................................................................................... 27 How does OPEC work? .................................................................................................... 28 Why is OPEC able to influence prices? ............................................................................ 29 What price does OPEC want? .......................................................................................... 30 The OPEC basket .............................................................................................................. 31 What is the western IOCs exposure to OPEC? ................................................................ 31 In the beginning ….. ..................................................................... 32 A brief summary ............................................................................................................... 32 Geologic time and rock record ......................................................................................... 33 Basic geology ................................................................................................................... 34 Hunting for sand… ........................................................................................................... 36 Working hydrocarbon system .......................................................................................... 38 Source rocks ..................................................................................................................... 39 Migration .......................................................................................................................... 41 Reservoir quality ............................................................................................................... 42 The trap and seal .............................................................................................................. 44 Reservoir volumetrics ....................................................................................................... 46 Getting it out ................................................................................ 48 The Life Cycle of a Basin .................................................................................................. 48 Field Operations ................................................................................................................ 53 Land Seismic .................................................................................................................... 53 Offshore seismic ............................................................................................................... 55 Assessing risk and reward ............................................................................................... 57 Benchmarking exploration success rates ........................................................................ 58 Field Operations - Drilling ................................................................................................. 61 Directional (incl. horizontal) wells .................................................................................... 65 Land and offshore rigs ..................................................................................................... 66 Field Operations - Evaluation ........................................................................................... 68 Field Operations - Development ....................................................................................... 72 Onshore – oil is usually straight-forward… ...................................................................... 72 Offshore – as usual, deeper is tougher ............................................................................ 73 Peering deeper .................................................................................................................. 75 Extending the field life ...................................................................................................... 77 Recovery factors ............................................................................................................... 78 Primary recovery ............................................................................................................... 78 Depositional controls on recovery factor ......................................................................... 79 Secondary recovery… waterflood .................................................................................... 80 Tertiary recovery techniques ............................................................................................ 80 Oil Field Service Companies – where do they fit? ............................................................ 81 Global oil service chain – representative competitive landscape .................................... 82 Key sector drivers & leading indicators ............................................................................ 85 Rig Counts ........................................................................................................................ 86 Day-rates........................................................................................................................... 86 Page 2 Deutsche Bank AG/London 25 January 2013 Integrated Oils Oil & Gas for Beginners Table Of Contents (Cont'd) Sizing the global service market ...................................................................................... 87 So what is in the cost of a barrel of oil? ........................................................................... 88 How much does it cost to extract a barrel of oil? ............................................................ 90 Where to from here? ........................................................................................................ 93 Oil & Gas reserves ........................................................................ 95 A cautionary tale ............................................................................................................... 95 A company’s lifeblood ...................................................................................................... 95 The industry view: SPE definitions – Reserves & Resources; Proven, probable and possible ............................................................................................................................. 96 The accounting view: SEC Reserves – Proven developed and proven undeveloped. ..... 98 Reserve revisions ............................................................................................................ 101 Reserves: What do they actually tell us? ....................................................................... 102 Reserves Accounting– FAS 69 ................................................... 104 Disclosure of proved oil and gas reserves ..................................................................... 104 Disclosure of capitalised costs relating to producing activities ..................................... 104 Disclosure of costs incurred in oil and gas property additions ...................................... 104 Disclosure of operational results .................................................................................... 105 Disclosure of discounted future net cash flows ............................................................. 105 Disclosure of current cost information ........................................................................... 105 So how do analysts use FAS 69 information? ............................................................... 106 Reserves - Where and what? ..................................................... 109 So how much oil has been extracted? ........................................................................... 109 What is Peak Oil? ........................................................................................................... 111 A critical weakness - simple economics ignored ........................................................... 111 So when will a peak occur and does it matter? ............................................................. 112 Oil & Gas Taxation ...................................................................... 113 Concessions & contracts – An overview ........................................................................ 113 Tax & Royalty Concessions ............................................................................................ 115 Production Sharing Contracts (PSCs) ............................................................................. 117 Working through an IRR based PSC .............................................................................. 122 Buy Backs ....................................................................................................................... 126 World Oil Markets ...................................................................... 129 Fundamentals, physical and financial ............................................................................ 129 Key exchanges and benchmarks .................................................................................... 129 The oil price .................................................................................................................... 130 Oil Demand ..................................................................................................................... 132 Oil Supply ....................................................................................................................... 135 Inventories ...................................................................................................................... 137 OPEC Spare Capacity ..................................................................................................... 138 Product Prices ................................................................................................................. 139 Physical vs. Financial ...................................................................................................... 139 World Gas Markets..................................................................... 143 In a state of flux .............................................................................................................. 143 Global Gas Demand ........................................................................................................ 144 Global Gas Supply .......................................................................................................... 146 Gas Pricing - US .............................................................................................................. 150 Gas Pricing - Europe ....................................................................................................... 152 Gas Pricing – Asia & LNG Markets ................................................................................. 156 Oil & Gas Products ..................................................................... 159 What is crude oil? ........................................................................................................... 159 Definitions ....................................................................................................................... 159 Key global crude blends & resultant product slates ...................................................... 160 Deutsche Bank AG/London Page 3 25 January 2013 Integrated Oils Oil & Gas for Beginners Table Of Contents (Cont'd) Trends in the crude oil slate ........................................................................................... 161 Refining Overview ...................................................................... 163 The Black Sheep of the family ........................................................................................ 163 The curse of the investment cycle ................................................................................. 166 What is Refining? ....................................................................... 167 What do refineries make? .............................................................................................. 167 The stream of oil products ............................................................................................. 168 How does a refinery work? ............................................................................................ 169 Key variables impacting refinery performance .............................................................. 173 Configuration and complexity ........................................................................................ 173 Choice of Crude – Heavy, sour, sweet and light ............................................................ 176 Location .......................................................................................................................... 178 Other factors ................................................................................................................... 178 Regional balances and market structure ....................................................................... 180 Measuring Refining Profitability ..................................................................................... 182 US margins ($/bbl) .......................................................................................................... 183 NWE margins ($/bbl) ...................................................................................................... 183 Asian margins ($/bbl) ...................................................................................................... 183 Gasoline/fuel oil crack spreads US/Europe .................................................................... 184 What drives refining margins? ....................................................................................... 184 Petroleum Administration for Defence Districts (PADDS) ............................................. 185 Refining Industry Structure ............................................................................................ 186 Summary statistics – Capacity and players 2012 .......................................................... 187 Marketing ................................................................................... 188 Stability in a cyclical world ............................................................................................. 188 The wholesale/retail chain .............................................................................................. 190 Removing capital, containing costs ............................................................................... 191 What’s in a litre of fuel? European Retail Data .............................................................. 192 What’s in a litre of fuel? US Retail Data ......................................................................... 192 Biofuels ....................................................................................... 193 What are biofuels?.......................................................................................................... 193 Why use biofuels? .......................................................................................................... 194 Where are biofuels produced and used? ....................................................................... 194 The policy & legislative framework ................................................................................ 195 Bioethanol ....................................................................................................................... 196 Biodiesel ......................................................................................................................... 198 Criticisms of biofuels ...................................................................................................... 199 Long-term developments in biofuel ............................................................................... 200 Petrochemicals ........................................................................... 202 Part of the integrated chain ............................................................................................ 202 The olefin plant (cracker) ................................................................................................ 203 Petrochemical Industry profitability ............................................................................... 205 Olefin and Aromatic Building Blocks and their Chains .................................................. 206 Ethylene – C2 Olefin ....................................................................................................... 206 Propylene – C3 Olefin ..................................................................................................... 207 Butadiene – C4 Olefin ..................................................................................................... 208 Benzene – C6 Aromatic .................................................................................................. 208 Paraxylene – C8 Aromatic .............................................................................................. 209 The Major Plastics or Polymers ...................................................................................... 209 Conventionals & Unconventionals ............................................. 214 Conventionals ................................................................................................................. 214 Unconventionals ............................................................................................................. 214 Page 4 Deutsche Bank AG/London 25 January 2013 Integrated Oils Oil & Gas for Beginners Table Of Contents (Cont'd) Liquefied Natural Gas (LNG) ....................................................... 215 Overview ......................................................................................................................... 215 Atlantic Basin vs. Pacific Basin ...................................................................................... 218 LNG - The process and the chain ................................................................................... 219 Costs of LNG Production ................................................................................................ 219 LNG – returns across the chain ...................................................................................... 221 Pricing of LNG ................................................................................................................ 222 US exports – a potentially significant new supply source ............................................. 225 Cargo flexibility – FOB and DES (or CIF) ........................................................................ 227 Shipping of LNG ............................................................................................................. 227 Re-gasification of LNG – facilitating access ................................................................... 229 Floating LNG (FLNG) – Exactly what it says on the tin .................................................. 230 Existing LNG facilities and facilities planned 2013-18 ............... 231 LNG - The IOCs Portfolios and Positions ........................................................................ 233 Comparing and contrasting the LNG majors – Side by Side ......................................... 235 Deepwater .................................................................................. 236 Peering into deepwater .................................................................................................. 236 NGLs and condensates .............................................................. 240 A valuable by-product .................................................................................................... 240 Canada’s Oil Sands .................................................................... 241 A huge unconventional resource ................................................................................... 241 Methods of Extraction – Mining ..................................................................................... 243 Methods of Extraction – In-situ ...................................................................................... 243 Upgrading ....................................................................................................................... 245 Costs – The highest marginal cost barrel on the globe ................................................. 246 Gas to Liquids (GTL) ................................................................... 248 An expensive alternative to LNG .................................................................................... 248 Background .................................................................................................................... 248 Commercial GTL plants are limited ................................................................................ 249 There are positives .......................................................................................................... 251 An uncertain future at this time ..................................................................................... 251 Coal Bed Methane ...................................................................... 252 Exactly what it says on the label .................................................................................... 252 Tight & Shale Gas ....................................................................... 254 Huge potential resource ................................................................................................. 254 Extracting the gas ........................................................................................................... 256 Economics – quick out, low depth, at current gas prices .............................................. 258 Tight Oil ...................................................................................... 261 Changing the fundamentals of oil supply ...................................................................... 261 Extraction Process .......................................................................................................... 262 US at the Forefront ......................................................................................................... 263 Production ...................................................................................................................... 264 US Logistics and Infrastructure ...................................................................................... 266 Economics ...................................................................................................................... 267 Active Companies ........................................................................................................... 268 A look outside the US ..................................................................................................... 269 Deutsche Bank AG/London Page 5 25 January 2013 Integrated Oils Oil & Gas for Beginners Table Of Contents (Cont'd) Section II - The Countries Major Non-OPEC producers ....................................................... 270 Argentina .................................................................................... 271 Australia ..................................................................................... 277 Azerbaijan ................................................................................... 283 Brazil ........................................................................................... 289 Canada – Oil Sands .................................................................... 295 Kazakhstan ................................................................................. 301 Mexico ........................................................................................ 307 Norway ....................................................................................... 313 Russia ......................................................................................... 319 United Kingdom ......................................................................... 327 US Alaska ................................................................................... 333 US Deepwater Gulf of Mexico .................................................... 339 Major OPEC Producers ............................................................... 345 Angola ........................................................................................ 347 Iran ............................................................................................. 353 Iraq ............................................................................................. 359 Kuwait ........................................................................................ 367 Libya ........................................................................................... 373 Nigeria ........................................................................................ 381 Qatar ........................................................................................... 389 Saudi Arabia ............................................................................... 395 United Arab Emirates ................................................................. 401 Venezuela ................................................................................... 407 Page 6 Deutsche Bank AG/London 25 January 2013 Integrated Oils Oil & Gas for Beginners Table Of Contents (Cont'd) Section III: The Major Companies .............................................. 415 The European BP ............................................................................................... 417 Royal Dutch Shell plc ................................................................. 421 Total SA ...................................................................................... 425 ENI .............................................................................................. 429 Statoil ......................................................................................... 433 BG Group .................................................................................... 437 OMV ........................................................................................... 441 Galp Energia ............................................................................... 445 Repsol ......................................................................................... 449 Tullow Oil .................................................................................... 453 The US ExxonMobil ................................................................................. 457 Chevron ...................................................................................... 461 Conoco ....................................................................................... 465 Anadarko .................................................................................... 469 EOG Resources ........................................................................... 473 Sector Investment Thesis ........................................................... 476 Outlook ........................................................................................................................... 476 Valuation ......................................................................................................................... 476 Risks ............................................................................................................................... 476 Deutsche Bank Energy Coverage List ........................................ 477 Companies by sub-sector and coverage analyst ........................................................... 477 Glossary ...................................................................................... 480 Deutsche Bank AG/London Page 7 25 January 2013 Integrated Oils Oil & Gas for Beginners This page has been intentionally left blank Page 8 Deutsche Bank AG/London 25 January 2013 Integrated Oils Oil & Gas for Beginners Section I: The Oil & Gas Industry Deutsche Bank AG/London Page 9