August 2011

Robert JohnstonDirector, Global Energy and Natural Resourcesjohnston@eurasiagroup.net202-903-0033

Eurasia Group Energy Outlook

Heavy oil: Key “Conversation-Starters”

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Oil sands – finding new markets, managing CSR

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Supply game-changers – Mexico, Venezuela

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New players- Brazil, Colombia heavy exports on the rise

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Beyond the region – OPEC & Saudi Arabia

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“Demand pull” – regional refining dynamics & differentials

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I. CANADA OIL SANDS FINDING NEW MARKETS & MANAGING CSR

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Oil sands: risks shift from environment to price realization

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Environment: 7 of 9 tailings pond management plans under 74 have been approved

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Land use: Lower Athabasca Regional Plan sets aside some rich land for conservation, including existing industry leases

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Carbon: still awaiting action from the Obama administration; Harper moving forward this year

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Reputation: New “ethical oil”

push from government & industry

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Upgrading: BRIK program a political hot potato; upcoming Conservative leadership race a factor

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Markets: this may be the largest risk—how to avoid PADD II being “land-locked in bitumen”

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Market access: Problems at “both ends of the pipe”

•PADD II/Cushing have glut of both heavy light barrels...

•“Middle leg”

of KXL needed to supply Cushing and Wood River

•Keystone XL will solve one, but not both those problems once complete (2H13?)

•Outlook for KXL approval continues to be favorable despite delays

•KXL key battleground in off-oil/climate debate

•Obama shift to “pragmatic”

energy policy

•Gateway debate heating up pre-NEB but political support is growing

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II. UPSTREAM SURPRISES? MEXICO, VENEZUELA

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Venezuela: Down & out but for how long?

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Chavez has sustained NOC & interest in the Faja-

but is it simply “option value”?

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Proven reserves expected to 310 billion barrels by 2012-

20% recovery factor

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Financial burden on PDVSA intense

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PDVSA expansion plans face multiple hurdles-

but could there an upside surprise?

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Completion of upgraders could upstream production boost

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Change of government not necessarily an immediate win for oil sector-

power vacuumSource: PDVSA

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Mexican decline challenge intensifies

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Mexican production decline rate key driver for oil sands opportunity PADD II & III; shaping light-heavy differential

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Mexican decline smaller than expected in 2010, while exports to picked up as well

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Success stems from PEMEX’s ramp-up of the KMZ oil field and EOR efforts in mature shallow-water fields

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Chicontopec still faces problems; earlier forecasts for 660k bpd

by now look more likely to be 100k bpd at best

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Pemex hopes new contracts will trigger 500,000bpd new production

2018

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There is an estimated 30 billion barrel potential and successes on of maritime boundary-

deepwater remains politically controversial

Mexico exports to PADD III recover in 2010

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Source: EIA

III. NEW HEAVY OIL PLAYERS: COLOMBIA, BRAZIL

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Colombia: EOR and heavy oil driving growth

Source: Colombia National Hydrocarbons Agency

Brazil: Heavy oil now, pre-salt later

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Heavy oil: Brazil will add about 1.3mm bpd by 2015-

mostly medium-heavy barrels

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Lack of sufficient heavy conversion refining capacity will swing

supply to US Gulf Coast•

New capex plan sustains trajectory for upstream growth, industrial policy focus

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Pre-salt short-term: slow implementation of the new PSA framework

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Pre-salt medium-term: focus on developing local oil services industry, but the government may ultimately give Petrobras some leeway to keep production targets

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Government will introduce more competition to the framew

ork, through giving up on lead operator clause, as a measure of last resort

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Brazil near-term growth will be heavier barrels

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Floating production units on current delivery schedulePetrobras operated fieldsName Type Capacity (bpd) First oil LocationP‐56 Semisub 100,000 Q2 2011 Marlim Sul field Cidade de Itajai FPSO 80,000 Q2 2012 Trio‐Sidon areaP‐55 Semisub 180,000 Q3 2012 Roncador field Cidade de Sao Paulo FPSO 120,000 Q1 2013 Guara areaP‐61 TLWP Prod. To P‐63 Mid‐2013 Papa‐Terra fieldP‐63 FPSO 150,000 Mid‐2013 Papa‐Terra fieldP‐58 FPSO 180,000 Mid‐2014 Baleia Azul fieldP‐62 FPSO 180,000 Mid‐2014 Roncador field Cidade de Paraty FPSO 120,000 Q1 2014 Lula North‐East areaEight hulls FPSO 150,000 2014‐2017 Lula field and Block BM‐S‐9Total Petrobras 1,260,000

OSX operated fields Name Type Capacity (bpd) First oil LocationOSX‐1 FPSO 80,000 Q4 2011 Waimea areaOSX‐2 FPSO 100,000 Q3 2013 Waimea areaTotal OSX 180,000

Total Petrobras and OSX 1,440,000

Source: Upstream 

Plenty of production growth if pre-salt framework is liberalized

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Source: EIA

Prepared for

IV. REGIONAL REFINING DYNAMICS & DIFFERENTIALS

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Prepared for

Big swings in differentials...

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Abundance of “light & tight” plays- but is there a “next Bakken?”

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“Logistically-constrained” PADD II barrels & Canadian imports finding way to PADD III

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Source: EIA

Refiners processing cheap WTI barrels for gasoline/diesel exports to LatAm & beyond

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Source: EIA

Key Latin America refining projectsCountry Project New Capacity Start DateBrazil RNEST-

Abreuse 230,000 2013

Brazil Comperj 330,000 2014-2018

Brazil Premium I 300,000 2015

Brazil Premium II 600,000 2016-2020

Colombia Cartagena 65,000 2014

Colombia Barrancabermeja 50,000 2016

Mexico Minatitian 47,000 2011

Mexico Hidalgo 300,000 2015

Total 1,922,000

US April 2011 product exports to Latam&Mexico

1.1 million barrels per day

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Source: EIA

Brazil to become net fuel exporter?

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Source: Energy Planning Agency, Brazil

V. BEYOND THE REGION: SAUDI & OPEC SUPPLY OUTLOOK OUTLOOK

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Macro concerns driving oil price: Fed, FX, Mid-East, IEA

Source: EIA, EG 25

Saudi output increase; IEA/SPR uncertainty

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Discord at 8 June OPEC meeting underscored irrelevance near-term of OPEC “headlines”; Saudi/GCC responding to demand trend; not asking OPEC permission

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IEA decision to release stocks essentially for economic stimulus reasons raises troubling questions about future market intervention; 2012 US elections and ‘anti-

sentiment

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Saudi output increase will not be rescinded due to IEA volume appears to still be ramping up into July from June

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What is the true level of OPEC spare capacity?

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Where is the OPEC spare capacity going to come from?

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Saudi incremental production will be heavy-

M

anifa 900,000bpd –

Arab Heavy (28 API)

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Manifa production geared to new Saudi Aramco refineries at home-

and in China

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Optimistic IEA outlook on Angola-

light sour growth

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UAE picking up upstream expansion following “pause” during financial crisis-

Lower/Upper Zakum expansions

39 API)

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But Iraq is the big-changer-

enormous upside for light barrels

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No short-term return for Libyan oil•

Balance of resources gradually turning against Qadhafi forces

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Wide uncertainty about timing of Qadhafi collapse; potential to drag on, but potential for regime vulnerabilities to accelerate this (Qadhafi

death, loss of refinery)

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None of these scenarios would lead to rapid return to pre-war oil capacity

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Partial recovery from rebel held areas in eastern Libya is possible, but not imminent

29Source: IEA MMOTR June 2011

Iraq: progress, but short-term bottleneck

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Paralysis of parliament makes it hard to change policy on oil; opposition to contracts declines on 2011 revenue increase

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Initial well work-overs at Rumaila and Zubair have pushed 2.7 MBD, but limited upside until end-2011

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Completion of additional tanker loading capacity brings loading terminal capacity to 2.6 MBPD in 2012, 4.4 MBPD in 2013

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Some increased capacity at Rumaila, Zubair, and West Qurna I in awaiting export capacity upgrades; potential for substantial KBPD ‘surge’

when this is completed, around Q1 2012

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Kurdish contracts issue likely to remain unresolved in near-term

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Iraqi upstream projects under developmentField name Operators Anticipated

maximum production (b/d)

Developments

Majnoon Shell, 1,800,000 Petrofac awarded EPC 3/11; drilling start 7/11

West Qurna I ExxonMobil, Shell

2,250,000 Hit 10% increase threshold 3/11; currently ~300,000 bpd

West Qurna II Lukoil, Statoil 1,800,000 Behind schedule; initial production now 2012, ~150,000 bpd by 2013

Halfaya CNPC, Total,

Petronas

535,000 EPC award expected Q3 2011

Rumaila BP, CNPC 2,850,000 Reached 10% increase 12/10; reduced due to bottleneck 2/11

Zubair ُEni, Occidental, Kogas

1,250,000 Reached 10% increase in 12/10; constrained by bottleneck

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EOR investments deliver Russian surprise

Source: EIA

Conclusions•

Potential for heavy oil upside surprise in Western may now exceed potential for downside surprise-

at least

terms of market expectations

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Refining and netback dynamics will be driven by (a) Latin American refining capacity growth and (b) continued destruction environment in US

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“Decoupling”

of WTI and Brent underpinned by structural factors-

Brent driven by EM growth, Middle East/West

unrest, North Sea decline

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How much upside for light and tight oil in US (and may be the key question

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Eurasia Group is the world’s leading global political risk research and consulting firm. This presentation is intended solely for internal use by the recipient and is based on the opinions of Eurasia Group analysts and various in-country specialists. This presentation is not intended to serve as investment advice, and it makes no representations concerning the credit worthiness of any company. This presentation does not constitute an offer, or an invitation to offer, or a recommendation to enter into any transaction. Eurasia Group maintains no affiliations with government or political parties.

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