M A R C H 2 0 0 8 O I L & G A S B A S I C S S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L Katherine Spector (1-212) 834-2031 katherine.b.spector@jpmorgan.com Scott Speaker (1-212) 834-3878 scott.c.speaker@jpmorgan.com Kristi Jones (1-212) 834-2835 kristi.l.jones@jpmorgan.com Sung Yoo (1-212) 834-7045 sung.k.yoo@jpmorgan.com Sachin Kirtane (1-212) 834-8046 sachin.p.kirtane@jpmorgan.com Oil & Gas Basics_20080324 This presentation was prepared exclusively for the benefit and internal use of the client in order to indicate, on a preliminary basis, the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure to any other party. This presentation is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by JPMorgan. Neither this presentation nor any of its contents may be used for any other purpose without the prior written consent of JPMorgan. The information in this presentation is based upon management forecasts and reflects prevailing conditions and our views as of this date, all of which are subject to change. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the client or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the client. The information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects. JPMorgan is a marketing name for investment banking businesses of J.P. Morgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by J.P. Morgan Securities Inc. and its securities affiliates, and lending, derivatives and other commercial banking activities are performed by JPMorgan Chase Bank and its banking affiliates. JPMorgan deal team members may be employees of any of the foregoing entities. O I L & G A S B A S I C S Agenda Page Oil & Gas Basics_20080324 References, Websites and Data Releases to Watch LNG Natural Gas Specifics Geopolitics, policy and economics Interpreting the curve- why market participation matters How oil is priced – terms and conventions The energy investment cycle Where does oil comes from - and where does it go? 1 1 7 11 22 46 54 60 65 O I L & G A S B A S I C S Oil & Gas Basics_20080324 From the well to the tank. . . Source: JPMorgan Energy Strategy 2 W H E R E D O E S O I L C O M E S F R O M - A N D W H E R E D O E S I T G O ? Oil & Gas Basics_20080324 Where are most of the world’s oil reserves? Source: JPMorgan Energy Strategy, BP Statistical Handbook (June 2007) Proved Oil Reserves (end 2006) Proved Oil Reserves (end 2006) 40.5 59.9 117.2 103.5 144.4 742.7 Asia Pacific North America Africa South & Central America Europe & Eurasia Middle East In thousand million barrels 3 W H E R E D O E S O I L C O M E S F R O M - A N D W H E R E D O E S I T G O ? Oil & Gas Basics_20080324 Producer Volume Russia 9396 Saudi Arabia 8423 US 5103 Iran 3983 China 3729 Mexico 3083 UAE 2494 Venezuela 2419 Kuwait 2168 Nigeria 2162 Iraq 2083 Norway 2062 Canada 1930 Brazil 1748 Libya 1743 UK-offshore 1433 Angola 1371 Algeria 1363 Kazakhstan 1289 Azerbaijan 860 Indonesia 843 Qatar 812 Argentina 763 Oman 713 India 699 Malaysia 695 Egypt 633 2.8% 4.7% 4.4% 3.6% 2.9% Share of Global Production 11.0% 9.9% 6.0% 2.5% 2.5% 2.4% 2.4% 1.5% 1.0% 2.3% 2.0% 2.0% 1.7% 0.8% 0.8% 0.7% 1.0% 1.0% 0.9% 0.8% 1.6% 1.6% Who are the world’s top producers of crude oil?  The world’s biggest producers are not necessarily the same as the world’s biggest exporters. For example, the US and China produce a lot of oil, but export very little given high domestic demand  OPEC members Saudi Arabia and Iran are the world’s biggest exporters of crude oil 2007 Averages (kbd) 2007 Averages (kbd) Note: Bold = OPEC members Source: JPMorgan Energy Strategy, IEA 4 W H E R E D O E S O I L C O M E S F R O M - A N D W H E R E D O E S I T G O ? Oil & Gas Basics_20080324 How is crude oil related to other oils, like gasoline and heating oil?  Crude oil is what gets pumped out of the ground. Very little crude oil is consumed directly — it is a raw material that has to be refined into other products, such as gasoline and heating oil  Oil refining is the process of turning crude into the fuels that we use every day, such as gasoline, heating oil, and jet fuel. Though refining processes differ according to the desired product, all begin by heating crude at increasing temperatures to separate it into component parts Source: JPMorgan Energy Strategy Re Refining process Alkylation Catalytic Reforming Hydrocracker Catalytic Cracker Coker/Thermal Cracker Hydrogen Chemicals Gasoline Gasoline Kerosene Gasoline Gasoil/Diesel Naphtha Gasoline Heavy Gas Oil Coke Gasoline Blending Components 5 W H E R E D O E S O I L C O M E S F R O M - A N D W H E R E D O E S I T G O ? Oil & Gas Basics_20080324 Top Oil Consumers (2006) Top Oil Consumers (2006) Where are the world’s top consumers of oil? FSU 5% Japan 6% China 9% United States 25% Other 49% India 3% Germany 3% Source: JPMorgan Energy Strategy, BP Statistical Handbook (June 2007) 6 W H E R E D O E S O I L C O M E S F R O M - A N D W H E R E D O E S I T G O ? Agenda Page Oil & Gas Basics_20080324 References, Websites and Data Releases to Watch LNG Natural Gas Specifics Geopolitics, policy and economics Interpreting the curve- why market participation matters How oil is priced – terms and conventions The energy investment cycle Where does oil comes from - and where does it go? 7 1 7 11 22 46 54 60 65 O I L & G A S B A S I C S Oil & Gas Basics_20080324 Energy markets cycle through periods of over- and under-investment Low prices discourage investment all along the supply chain. As demand grows, spare capacity falls and prices rise. High prices spur new investment. The lead-times for energy industry investment means that periods of over-and under-capacity don’t go away over night…. But the market always does it’s job eventually! 1,000 2,000 3,000 4,000 5,000 6,000 7,000 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 # Rigs $- $20 $40 $60 $80 $100 $120 $140 $/bbl (real) Global Rig Count (Left) Real Price of Crude (Right) Source: JPMorgan Energy Strategy Baker Hughes World Oil & Gas Rig Count and Crude Price Baker Hughes World Oil & Gas Rig Count and Crude Price 8 T H E E N E R G Y I N V E S T M E N T C Y C L E [...]... Product vs product spreads — e.g gasoline-heating oil Interfuel spreads — e.g natural gas- heating oil Oil Crude — WTI — Brent — Tapis — Dubai Refined products US market: — NYMEX heating oil — US Gulf Coast heating oil — US Gulf Coast jet fuel — NYMEX gasoline European market: — IPE gasoil — Gasoil 0.2% CIF NWE — Jet fuel cargoes CIF NWE — EN590 cargoes CIF NWE — 1% and 3.5% fuel oil cargoes FOB NWE Asian... Singapore jet fuel Natural Gas: NYMEX natural gas European natural gas priced as oil- referenced formula 17 Oil & Gas Basics_ 20080324 Some futures curves are seasonal Gasoline vs Heating Oil Gasoline vs Heating Oil $/gallon $3.20 NYMEX Heating Oil NYMEX Gasoline $3.00 $2.80 O I L I S P R I C ED – T ER M S AN D C O N VEN T I O N S $2.60 HO W Some futures curves assume a more or less standard seasonality $2.40... thereof, is also cyclical and tends to over-shoot in both directions 35 30 25 20 0 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 Source: JPM Energy Strategy , IEA, EIA 9 Oil & Gas Basics_ 20080324 Energy infrastructure/distribution capacity is still a constraint Global Oil Demand Supplied By International Trade Global Oil Demand Supplied By International Trade Oil Trade :Oil Demand 2002-06: 60% 60% 1997-01:... Sep08 Feb09 Jul09 Dec09 May1 Oct10 Mar11 Aug11 Delivery Month Source: JPMorgan Energy Strategy Natural Gas Natural Gas $/MMBtu 11 10 For example, the heating oil and natural gas curves always reflect the expectation that heating oil and natural gas will be more expensive in the winter The gasoline curve reflects the expectation that gasoline will be more expensive in the summer Traders look for opportunities... additions? Cost? Location? Type of crude? AN D Macro economy Oil Supply Oil Supply Refined product yields Source: JPMorgan Energy Strategy 21 Oil & Gas Basics_ 20080324 Agenda Page Where does oil comes from - and where does it go? 1 The energy investment cycle 7 22 Geopolitics, policy and economics 46 Natural Gas Specifics 54 LNG 60 References, Websites and Data Releases to Watch 65 O I L & G AS 11 Interpreting... I S P R I C ED – T ER M S Singapore Source: JPMorgan Energy Strategy 14 Oil & Gas Basics_ 20080324 How oil (gas, etc.) trades Formal Exchanges (futures) Int’l Petroleum Exchange (London) West Texas Intermediate (‘Light, Sweet’) Crude Brent Crude 1 lot = 1,000 bbl 1 lot = 1,000 bbl Heating Oil Variety Of Regional Benchmark Crudes and Refined Products Gas Oil 1 lot = 42,000 gallons = 1,000 bbl Swaps/Options... Jul11 Dec11 Delivery Month Source: JPMorgan Energy Strategy 18 Oil & Gas Basics_ 20080324 Conventions of the oil market Benchmarks Benchmarks Quote Unit 1,000 barrels US$/barrel Gasoline (US) 42,000 gallons cents/gallon Heating oil (US) 42,000 gallons cents/gallon Gas oil (Europe) 100 metric tons US$/metric ton Jet fuel (Europe) 100 metric tons US$/metric ton Natural gas (US) 10,000 MMBtu US$/MMBtu Parcel... Brent, NY Harbor gasoline vs US Gulf gasoline Crude vs refined product spreads — ‘Cracks’ (e.g crude-gasoline; crude-heating oil) — Refinery margins Crude grade differentials (physical trade only) — e.g West Texas Intermediate vs West Texas Sour; Bonny Light vs Brent Product vs product spreads — e.g gasoline-heating oil Interfuel spreads — e.g natural gas- heating oil 16 Oil & Gas Basics_ 20080324 Price... Energy Strategy 26 Oil & Gas Basics_ 20080324 Crude Oil Price History & Forwards Crude Oil Price History & Forwards In US$/bbl $105 WTI Brent $95 $85 $75 $65 $55 $45 $25 $5 I N T ER P R E T I N G C U R V E- $35 T HE WHY MAR KET P AR T I C I P AT I O N MAT T E R S The crude oil market today $15 1988 1991 1994 1997 2000 2003 2006 2009 2012 Source: JPMorgan Energy Strategy 27 Oil & Gas Basics_ 20080324 I.. .Oil & Gas Basics_ 20080324 The cycle of investment OECD Oil Demand vs Refinery Capacity OECD Oil Demand vs Refinery Capacity In million b/d 55 50 Refined Products Import Gap Refinery Capacity Oil Demand 45 C Y C LE I N V E ST M EN T EN ER G Y There’s no reason to think that this investment cycle won’t — eventually — be the same OECD demand exceeds OECD refinery capacity . eventually! 1,000 2,000 3,000 4,000 5,000 6,000 7,000 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 # Rigs $- $20 $40 $60 $80 $100 $120 $140 $/bbl. 83 4-3 878 scott.c.speaker@jpmorgan.com Kristi Jones ( 1-2 12) 83 4-2 835 kristi.l.jones@jpmorgan.com Sung Yoo ( 1-2 12) 83 4-7 045 sung.k.yoo@jpmorgan.com Sachin Kirtane ( 1-2 12) 83 4-8 046 sachin.p.kirtane@jpmorgan.com Oil &. S Oil & Gas Basics_ 20080324 From the well to the tank. . . Source: JPMorgan Energy Strategy 2 W H E R E D O E S O I L C O M E S F R O M - A N D W H E R E D O E S I T G O ? Oil & Gas Basics_ 20080324 Where