54964167-nomura-oil-gas-wk-2011-05-05-434459

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

1/32

5 May 2011Nomura 1

Any authors named on this report are research analysts unless otherwise indicated.See the important disclosures and analyst certifications on pages 29 to 32.

Oil & Gas/Chemicals | G L O B A L

Michael Lo, CFA +852 2252 6225 michael.lo@nom ura.com

ActionWe expect oil prices to peak this summer as the loss of Libyan crude capacity and

increased seasonal demand, alongside a potential increase in Japanese demand,play out. Post the summer peak, prices could moderate as strong fundamentals

face reduced global liquidity, which have partly driven prices higher in recent years.

CatalystsThe MENA crisis remains the key risk to oil prices. Further disruptions, beyond

Libya, could lead to spikes in oil prices. In the longer term, new supply from Iraq

could be a swing factor.

Anchor themes

While we expect fundamentals to remain sound in 2012F-13F, liquidity could dry up

with tighter monetary policies. A potential increase in investments in the sector due

to the current high oil price environment could threaten supply-demand dynamics in

2013F and beyond. As such, oil prices could be capped in the longer term.

Oil on stranger tides

Oil prices could spike in the near termWe expect oil prices to stay volatile with a potential to spike higher this summer.

Fundamentals will likely tighten in the next few months on increased demand and

reduced supply. The potential rise in Japans oil demand for power generation

during its peak power demand season is an added feature to this years seasonal

demand upswing as we head into the summer driving season. Effects of the lost

Libyan crude capacity will likely have a more profound impact on sweet crude asEuropean refiners return from the maintenance season in the coming months.

Demand remains resilientFundamentals will likely remain strong as we move into 2012F and 2013F, driving

OPEC spare capacity down further to average 4.4mmbbl/d in 2013 from the current

5.3 mmbl/d, in our view. On the demand side, we do not expect a significant impact

on demand growth due to current high oil prices. Price elasticity of demand appears

to be relatively inelastic, in particular in the growing non-OECD regions which have

been the drivers of oil demand growth over the past few years.

Emerging supply risksThe current high oil price environment could intensify investments into the sector

which might lead to higher-than-expected supply in 2013 and beyond. As an early

indicator, rig counts have picked up over the past few months and if it is sustained at

current levels, additional supply beyond our current estimates could emerge in 2013

and beyond. Moreover, Iraq could be a major swing factor as the timing of its new

capacity could change the supply landscape. As events unfold, a clearer picture will

emerge but as of current estimates, we see stronger fundamentals through to 2013F,

noting the risk to the downside.

Reduced global liquidity could cap oil pricesExpectations of a stronger US dollar and further monetary tightening measures could

dry out new fund flows into the oil markets in the next two years. As such, oil price

upside is limited, in our view, as negative financial factors could offset strong

fundamentals in the next two years. We are pencilling in a reduction in geopoliticalrisk premium over the coming year, which could lead to lower oil prices after the summer.

N O M U R A I N T E R N A T I O N A L ( H K ) L I M I T E D

Oil price forecast

We are raising our 2011F Brent oil

price forecast to US$110/bbl fromUS$99/bbl and maintaining our 2012F

forecast of US$/110/bbl while

introducing our 2013F oil price

forecast at US$110/bbl.

Nomura Oil price estimates

(US$/bbl) 2011F 2012F 2013F

Brent 110 110 110

Source: Bloomberg, Nomura estimates

NEWTHEME

Analysts

Michael Lo, CFA

+852 2252 6225

[email protected]

Cheng Khoo

+852 2252 6180

[email protected]

Saurabh Bharat

+91 22 3053 2835

[email protected]

Sanat Satyan

+91 22 6723 4076

[email protected]

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

2/32

Oil & Gas/Chemicals | Global Michael Lo, CFA

5 May 2011Nomura 2

Contents

Oil prices to peak in the near term 3The loss of Libyan crude supply to boost sweet crude premium 3Japanese oil demand to increase this summer 5Seasonal demand upswing in US and Europe 6Oil demand from refineries to increase in the coming months 7

Fundamentals continue to remain strong 9Demand growth to remain strong 9Demand destruction likely to be minimal 12

OPEC spare capacity continues to fall 14Iraq supply could be a big swing factor in 2013F & beyond 15Early indicators point to intensifying investments 16Inventory could continue to fall 17

Fund flows to negatively influence oil prices in the longer term 19

OPEC to support higher oil prices 22Long-term price remains at US$75/bbl 23

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

3/32


5 May 2011Nomura 3

Near-term outlook

Oil prices to peak in the near termOn top of stronger demand growth from a recovering global economy and abundant

liquidity in the near term, we foresee several events that could affect oil markets in the

next few months. Sweet light crude, such as Brent, will likely be affected the most. The

loss of sweet Libyan crude supply is a major concern in Europe as most refiners are

not well equipped to take in sour crude. As European refiners come out of the

maintenance season, demand for sweet crude will likely increase. In Asia, Japanese

demand for sweet crude will likely also increase as we move into the peak summer

electricity demand season. Environmental regulations stipulate that oil-fired generators

can only take in sweet crude / fuel oil of below 0.5% sulphur content, which could push

sweet crude benchmark, such as Brent, higher. Also, as we approach summer, the

demand for transportation fuel will likely increase heading into the driving season. On

top of these near-term demand drivers, geopolitical risk remains an uncertainty.

The loss of Libyan crude supply to boost sweet crude premium

The shut-in Libyan crude supply capacity of 1.8mmbbl/d is more significant if quality is

taken in account. Although Libyan crude capacity accounts for only 2% of the worlds

total supply, it represents 7% of the total worlds sweet crude capacity, according to

Eni World Oil & Gas Review 2010.

The loss of Libyan crude is causing European refiners to scramble for alternative crude.

In 2010, Libya exported 73% of its oil to Europe, with Italy being the major importer.

The majority of these European refiners are simple refineries with limited upgrade

facilities and their dependency on sweet crude is particularly high as they are not well

equipped to process sour grade crude.

Exhibit 1. Libya oil infrastructure (2010)

Production mmb/d Exports mmb/d

Production Capacity 1.80 Crude exports 1.31

Production 1.58

Prod by company mmb/d (%) Export by region mmb/d (%)

NOCs-National Oil Corp 0.45 28 Italy 0.38 29

Other smaller NOCs 0.35 22 France 0.21 16

IOCs-Eni 0.12 8 Germany 0.14 11

Wintershal l 0.10 6 Spain 0.14 10

Total 0.06 3 United Kingdom 0.10 7

Marathon 0.05 3 Greece 0.06 5

Conocophil lips 0.05 3 United States 0.05 4

Repsol 0.04 2 Austria 0.03 2

Suncor Energy 0.04 2 Ireland 0.01 1

OMV 0.03 2 Rest of OECD 0.05 4

Hess 0.02 1 China 0.15 11

Occidental 0.01 1 Total 1.31 100

Others 0.28 18

Total 1.58 100

Source: International Energy Agency, Company data, Nomura Research

Exhibit 2. Libya sweet crude production capacity as

percentage of global sweet crude production7%

93%

Libya production capacity

Rest of World sweet crude production

7%

93%

Libya production capacity

Rest of World sweet crude production

Source: International Energy Agency, Eni, Nomura Research

Oil of a similar quality to Libyan crude is getting a boost from replacement demand.

This has caused the price differential between sweet and sour grade crudes to widen

significantly over the past month. As we move into the high summer demand months,

we believe demand for sweet crude will likely increase, causing sweet crude, such as

Brent, to trade at a higher value than its sour counterparts.

Libyan crude capacity represents

7% of total world sweet crudecapacity

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

4/32


5 May 2011Nomura 4

Exhibit 3. World crude production by sulphur

content

(kbbl/d) 2005 2007 2008 2009

World 73,580 73,701 74,003 72,225

Sweet 23,124 23,780 23,269 22,826

Medium Sour 6,681 7,646 8,103 8,382Sour 38,525 37,012 37,531 35,573

Unassigned production 5,250 5,263 5,100 5,443

(Percentage)

Sweet 31.4 32.3 31.4 31.6

Medium Sour 9.1 10.4 10.9 11.6

Sour 52.4 50.2 50.7 49.3

Unassigned production 7.1 7 .1 6.9 7.5

Note: Sweet refers to crude with sulphur content less than 0.5%, Medium sourbetween 0.5% and 1.0% and Sour greater than 1.0%

Source: Eni World Oil & Gas Review 2010

Exhibit 4. Sweet-Sour spread (Brent Dubai crude)

(4)

0

4

8

12

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

(US$/bbl)

Source: Bloomberg

Exhibit 5. World major crudes by quality

Source: Eni World Oil & Gas Review 2010

The strong demand from Japan for sweet crude (for power generation), coupled withthe lower sweet crude supply from Libya, have been the key factors behind the rise in

the sweet-sour price differential. We believe that the spread could widen as we move

into the summer season, as demand for sweet crude further increases.

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

5/32


5 May 2011Nomura 5

Japanese oil demand to increase this summer

The devastating earthquake and tsunami that hit Japan on 11 March has had a

profound impact on Japanese power supply. The lost nuclear power in Fukushima

amounts to 9.7GW of power generation capacity, which is unlikely to be operational

this summer. In Japan, oil-fired power plants have always been used as a swing

supplier. In 2009, only 30% of oil-fired capacity was used, producing just over 100TWh

of electricity with 175kbbl/d of oil.We have attempted to outline the implications for oil demand using the Kobe

earthquake in 1995 and the multiple nuclear generators shutdown in 2007 as

reference points. On our assessment, oil demand will likely increase in the near term

as oil-fired power generators will likely be utilized for shut-in nuclear capacity as a

replacement. We believe the increase should counteract any immediate demand

shortfall. Using fuel substituted in 2007 as a reference, we find oil demand could

increase by 171kbbl/d, or 3.9% of total Japanese annual demand. However, if oil is

solely used as the replacement fuel, oil demand could increase by 248kbbl/d, or 5.6%

of total demand, on our estimates.

Exhibit 6. Japan oil demand for electricity generation

0.0

0.2

0.4

0.6

0.8

J F M A M J J A S O N D

(mmb/d)Prior 5 Year RangePrior 5 Year Average20102011

+0.2mmb/d

Note: Delta denotes average estimates for the quarter

Source: Federation of Electric Power Companies of Japan, Nomura estimates

Exhibit 7. Japan total electricity demand

60,000

70,000

80,000

90,000

100,000


(GWh)

Prior 5 Year RangePrior 5 Year Average20102011

Source: Federation of Electric Power Companies of Japan, Nomura Research

Japanese power demand increased from a low of 73GWh in May to a summer peak of

92GWh by July, representing an increase of 26%. In order to cope with the power

generation lost and the increase in summer power demand, we expect oil demand to

increase. Based on the increase in oil demand for power generation in 2010, an

additional 180kbbl/d could be needed in 3Q11F over 2Q11, on our estimates. This is

on top of what is needed to replace the lost nuclear power generation capacity of some171kbbl/d. We have assumed that Japan would be able to increase power generation

from other thermal sources such as coal and LNG in our calculations. If the entire

summer demand were to be powered solely by oil, the increase would amount to

400kbbl/d in 3Q over 2Q, based on 2010 demand figures. Furthermore, as businesses

regain traction after the earthquake, power demand will likely pick up over the next few

months.

This likely additional demand from Japan will further strain the already stretched

demand and supply fundamentals of sweet light crude, since Japanese oil imports

need to follow the strict environmental regulations, which mandates a 0.5% limit on

sulphur content in fuel oil for burning for power production.

Japan could face difficulties in pursuing the required grade of crude / fuel oil for power

generation. Over the past few years, Indonesia, which used to export the preferred

grade to Japan, has limited exports given stronger domestic demand. As such, low-

sulfur fuel oil (LSFO) that meets government requirements could be difficult to procure.

We estimate oil demand for power

generation of 171kbbl/d due to

lost nuclear capacity in addition

to 180kbbl/d of seasonal growth

in 3Q11 over 2Q11

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

6/32


5 May 2011Nomura 6

We believe there is a possibility that the Japanese government may need to increase

its limit during the current crisis to ensure Japan is fully powered. Even if the Japanese

government relaxes the limit, power plants owners might be reluctant to use higher

sulphur content crude before extensive testing as it could damage the generators. The

process of switching to higher sulphur crude for burning could be a lengthy one.

Moreover, numerous small-scale generators are being installed in Tokyo by a British

company with a combined capacity of 200MW. This could generate additional dieseldemand over the summer should there be a rolling power blackout. We can also

expect to see more installations over the coming months to ensure a regular power

supply to business.

Seasonal demand upswing in US and Europe

The coming summer driving season in the US has historically led to a significant rise in

gasoline demand in the summer. As we move into the US summer driving season in

the coming weeks, we expect to see a rise in gasoline consumption. However, we

believe growth will likely be moderate, as the increase in US gasoline consumption

from the economic recovery could be countered by higher gasoline prices compared

with last year.

Exhibit 8. North America total product demand

20

22

24

26

28

30


(mmb/d) Prior5 Year RangePrior 5 Year Average20102011

+0.3mmb/d

Note: Dotted line denotes 5-year average for the quarter excluding 2008

Source: IEA, Nomura Research

Exhibit 9. OECD Europe total product demand

13

14

15

16

17


(mmb/d) Prior5 Year RangePrior 5 Year Average20102011

+0.4mmb/d

Note: Dotted line denotes 5-year average for the quarter


Despite public outrage in the US on high gasoline prices, gasoline consumption

remains almost inelastic to price changes in the US. Gasoline demand continues to

follow its seasonal pattern with total gasoline demand up by 0.2mmbbl/d from

December 2010 to April this year, while at the same time, oil prices increased by 34%from US$91.8/bbl to US$123.0/bbl. Even during 2008, when oil price crossed

US$100/bbl, gasoline demand increased during the first eight months of the year

before hitting the financial crisis in September. Based on a five-year average, 3Q

demand is generally the highest followed by 2Q with the peak demand coming in

summer months of July and August. On a q-q basis, 3Q demand is, on average, higher

than 2Q demand by 0.4%. Longer term, we do not expect gasoline demand to

increase as much as it did in previous years, as fuel substitutions and rising engine

efficiencies will reduce the actual demand for gasoline, but we believe that the

seasonal demand pattern will likely remain in place.

North America total demand rises

by an average 0.3mmbbl/d in 3Q

over 2Q, while OECD Europe rises

by an average 0.4mmbbl/d

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

7/32

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

8/32


5 May 2011Nomura 8

Exhibit 12. Global refinery turnaround

Source: IEA

Exhibit 13. European refinery turnaround

Source: IEA

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

9/32


5 May 2011Nomura 9

Longer-term demand outlook

Fundamentals continue to remain strongFundamentals will likely remain strong as we move into 2012F and 2013F, and we

estimate OPEC spare capacity will come down further over the next two years.

However, as we move past summer months, prices could moderate, despite stronger

fundamentals, as we could see reduced financial demand for commodities along with a

potentially slow unwinding of geopolitical risk premium. The end of QE-2, the start of

monetary tightening measures and the potential appreciation of the US dollar will likely

weigh on oil prices.

As such, we believe that financial intervention through monetary tightening and

expectations of rate hikes could offset upward pressure on oil prices in 2012F due to

tightening fundamentals.

For 2013F, we believe that rate hikes could further reduce the attraction of

commodities investments. Furthermore, the high oil price environment could intensify

investment into the sector which could increase oil supply, above our current estimates,

in 2013 and beyond. As an earlier indicator, we have seen a pick-up in rig counts over

the past few months and if rig counts are sustained at current levels, it could createadditional supply in 2013F and beyond. As events unfold, a clearer picture will emerge

but as of current estimates, we continue to see stronger fundamentals through to

2013F, noting the risk to the downside.

On the downside, we see support around US$80-90/bbl levels as the recent increase

in the Saudi governments spending has caused their break-even oil prices to move

higher to US$84/bbl from US$60s/bbl levels.

Demand growth to remain strong

Over the past year, since our last forecast revision, we have seen further upward

revisions in GDP forecasts by various agencies including Nomura, despite rising oil

prices. The IMF recently revised its 2011F global growth forecast to 4.4% from 4.3% inApril 2010, while Nomura revised up its in-house forecast to 4.3% from 4.0% in

October 2010.

In addition, global oil demand increased by 2.3mmbbl/d, or 2.6% y-y in 1Q11, despite

a 37.0% rise in oil prices. However, we remain conservative in our estimates and

forecast for an annual increase of only 1.8mmbbl/d in 2011F, up 2.0% y-y.

Exhibit 14. Global oil demand by region, 1Q11 versus 1Q10

Change 1Q11 vs 1Q10 Change 1Q10 vs 1Q09

1Q11 1Q10 1Q09 (mmbbl/d) (%) (mmbbl/d) (%)

North America 24.0 23.6 23.4 0.37 1.6 0.15 0.6

Europe 14.2 14.2 14.9 (0.00) 0.0 (0.75) (5.1)

Pacific 8.1 8.2 8.1 (0.04) (0.5) 0.07 0.9

OECD 46.3 46.0 46.4 0.33 0.7 (0.49) (1.1)

FSU 4.3 4.2 4.0 0.09 2.2 0.22 5.4

Europe 0.7 0.7 0.7 0.00 0.7 (0.05) (6.3)

China 9.9 8.9 7.5 0.92 10.3 1.42 18.9

Other Asia 10.7 10.4 10.0 0.30 2.8 0.38 3.8

Latin America 6.2 6.0 5.8 0.18 3.0 0.24 4.2

Middle East 7.4 7.1 6.7 0.33 4.6 0.37 5.5

Africa 3.3 3.2 3.3 0.14 4.4 (0.07) (2.1)

Non OECD 42.5 40.5 38.0 1.96 4.8 2.54 6.7

Global Demand 88.8 86.5 84.4 2.29 2.6 2.04 2.4

Brent crude price (US$/bbl) 105.21 76.78 45.04 28.43 37.0 31.74 70.5Source: IEA, Nomura estimates

Fundamentals will likely remain

strong as we move into 2012F and

2013F

Oil demand growth over the next

few years could be led by faster

growing non-OECD consumption,with China being the key driver of

rising demand

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

10/32


5 May 2011Nomura 10

Continuing with the trend of past years, we believe oil demand growth over the next

few years would be led by faster growing non-OECD consumption, with China being

the key driver of rising demand.

Exhibit 15. 2011F global demand change

0.0 0.5 1.0 1.5 2.0

OECD-Pacific

non-OECD Europe

OECD-Europe

FSU

Africa

OECD-North America

Latin America

Middle East

Other Asia

China

Total OECDTotal non-OECD

Global demand

(mmb/d)

Source: IEA, Nomura estimates

Exhibit 16. 2012F global demand change

0.0 0.5 1.0 1.5 2.0

non-OECD Europe

OECD-Europe

OECD-Pacific

FSU

Africa

Latin America

OECD-North America

Middle East

Other Asia

China

Total OECDTotal non-OECD

Global demand

(mmb/d)


Chinese oil demand continues its upwards trajectory

We estimate that Chinese demand will increase by 0.6mmbbl/d in 2011F and a further

0.6mmbbl/d in 2012F on the back of strong GDP growth of 9.8% and 9.5%,

respectively (based on Nomuras economic forecasts). Economic activity continued to

expand in the first two months of 2011 as industrial production growth accelerated to

14.4% y-y in 1Q11 from 13.3% in 4Q10.

We have seen a similar pick-up in Chinese oil demand in 1Q11. Total Chinese oil

demand increased by 0.9mmbbl/d, 10.3% y-y during the quarter, while diesel demand,

which is driven mainly by industrial activities, increased by 0.4mmbbl/d or 13.8% y-y in1Q11. We estimate that diesel demand will increase by 0.3mmbbl/d in 2011 or 9.0% y-

y, which accounts for nearly half of this years Chinese demand growth. Strong

industrial production data as well as a robust Purchasing Managers Index (PMI)

suggest that the recovery is underway. While Chinas PMI fell to 52.9 in April from 53.4

in March, it has stayed above the boom-bust line of 50 for 26 consecutive months,

suggesting that the manufacturing sector is in a solid expansion stage. Also, the output

and forward-looking new orders components remained high at 55.3 and 53.8 in April,

respectively.

Exhibit 17. China oil demand

6

8

10

12

1Q0

7

2Q0

7

3Q0

7

4Q0

7

1Q0

8

2Q0

8

3Q0

8

4Q0

8

1Q0

9

2Q0

9

3Q0

9

4Q0

9

1Q1

0

2Q1

0

3Q1

0

4Q1

0

1Q1

1

2Q11

F

3Q11

F

4Q11

F

1Q12

F

2Q12

F

3Q12

F

4Q12

F

2013

F

(mmb/d)

6

8

10

12

1Q0

7

2Q0

7

3Q0

7

4Q0

7

1Q0

8

2Q0

8

3Q0

8

4Q0

8

1Q0

9

2Q0

9

3Q0

9

4Q0

9

1Q1

0

2Q1

0

3Q1

0

4Q1

0

1Q1

1

2Q11

F

3Q11

F

4Q11

F

1Q12

F

2Q12

F

3Q12

F

4Q12

F

2013

F

(mmb/d)

Source: Nomura estimates

Exhibit 18. China PMI

Source: Nomura Economics Research

We estimate that Chinese demand

will increase by 0.6mmbbl/d in

2011F and a further 0.6mmbbl/d in

2012F

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

11/32


5 May 2011Nomura 11

India demand holds strong

Indias GDP is expected to rise by 8.0% in 2011F and a further 8.3% in 2012F,

according to Nomura economic estimates. We believe demand for transportation fuels,

driven by population growth and rising income per capita, especially in urban areas,

will continue to be the main driver of oil demand growth. In addition, farming and

industrial activities have contributed to support gasoil demand so far this year.

Year-to-date, Indias oil demand growth is up 3.7% y-y on 8.3% growth in gasoline and5.8% growth in distillate demand. Moreover, strong car sales up 19.4% y-y in March

after 21.3% y-y in February could continue to drive strong gasoline demand growth.

Exhibit 19. India gasoline demand

150

200

250

300

350

400


(kb/d) Prior 5 Year Range

Prior 5 Year Average

2010

2011

Source: Thomson Reuters, Nomura Research

Exhibit 20. India distillate demand

600

800

1,000

1,200

1,400


(kb/d) Prior 5 Year Range

Prior 5 Year Average

2010

2011

Source: Thomson Reuters, Nomura Research

Led by India, we estimate Other Asia will see robust oil demand growth of

0.3mmbbl/d in each of 2011F and 2012F, up 2.4% y-y each year, respectively.

Robust Middle East demand

With oil prices remaining at the current elevated levels for an extended period, coupled

with the increasing focus on infrastructure spending following protests in the region, we

believe Middle Eastern demand could pick up significantly over the next few years.

Middle Eastern demand has increased by 0.3mmbbl/d so far this year and we estimate

demand will reach 7.7mmbbl/d and 7.9mmbbl/d in 2011F and 2012F, respectively.

Demand for transportation fuels

and rising income per capita,

especially in urban areas, will

continue to drive oil demand

growth in India

We estimate that Middle East

demand will reach 7.7mmbbl/d

and 7.9mmbbl/d in 2011F and

2012F

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

12/32


5 May 2011Nomura 12

Demand destruction likely to be minimal

In order to estimate demand destruction, we look at studies conducted by the IMF,

both in 2000 and in its recent World Economic Outlook published in April 2011. We

note that the findings of both the studies are quite similar; indicating that the price

elasticity of oil demand remained similar over the past decade, despite the increased

use of substitute fuels. The IMF estimates that a 10% rise in oil price impacts demand

growth by only 0.2% in the current year. Even in the longer term, a 10% permanentincrease in oil prices reduces oil demand by about 0.7% after 20 years. In addition, the

growing importance of emerging market economies appears to have reduced world oil

demand price elasticity (in absolute terms), as the point estimate of the short-term

price elasticity for the Non-OECD group is much lower than for OECD countries,

according to IMF.

On the assumption that oil prices stay at our assumed oil price of US$110/bbl, up 38%

y-y, the IMF formula would suggest that it would knock 0.8% off the oil demand growth

rate vs last year. This would put 2011s growth at 2.7% or 2.4mmbbl/d, which is above

our conservative estimate of 2.0% or 1.8mmbbl/d growth.

Exhibit 21. IMF estimated change in oil demand on 10% change in oil price

(%) Short term Long term

OECD (0.25) (0.93)

Non-OECD (0.07) (0.35)

Combined OECD & Non-OECD (0.19) (0.72)

Source: IMF World Economic Outlook April 2011

Exhibit 22. IMF estimate of oil price impact on GDP in 2000

Scenario: Permanent US$5/bbl (18% of 2000 oil price) increase in oil price from baseline

(Percent deviation from baseline)

2000 2001 2002 2003 2004World GDP (0.2) (0.3) (0.3) (0.2) (0.1)

Industrial Countries (0.2) (0.3) (0.3) (0.2) (0.1)

United States (0.3) (0.4) (0.4) (0.2) (0.1)

Euro Area (0.2) (0.4) (0.4) (0.2) (0.1)

Japan (0.1) (0.2) (0.3) (0.2) (0.1)

Other Industrial Countries (0.1) (0.2) (0.2) (0.2) (0.1)

Developing Countries (0.1) (0.2) (0.2) (0.2) (0.2)

Source: IMF, 2000

According to our economists, in the years leading up to the global financial crisis most

macro-econometric models grossly overestimated the negative impact of rising oil

prices on Asian growth. For example, in 2004 the Asian Development Bank estimatedthat a US$10/bbl rise in the oil price would subtract 0.8 percentage points from Asia

ex-Japans GDP growth. In fact, Asias GDP growth rate steadily rose from 8.4% in

2004 to 10.8% in 2007, despite the oil price surging from an average of US$38/bbl to

US$97/bbl. Asias GDP growth slowed to 7.2% in 2008, but our economics team

attributes that more to the financial crisis than to high oil prices. According to our

economists, models usually simulate supply-side shocks to oil prices, but the demand

side is playing an increasingly important role a dominant role, driven by emerging

economies, according to recent work at the IMF. So while the impact will vary across

countries, the recent rise in oil prices is likely to have a much smaller overall impact on

Asian GDP growth than most models suggest, but a larger impact on CPI inflation, as

firms find it easier to pass on their higher costs to spendthrift consumers without losing

market share, and workers demand higher wages given low unemployment rates.

IMF estimates that a 10% rise in

oil price impacts demand growth

by only 0.2% in the current year

The recent rise in oil prices is

likely to have a smaller impact on

Asian GDP growth, but a largerimpact on CPI inflation

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

13/32


5 May 2011Nomura 13

In Europe, our European economists believe that if oil prices were to hover around

US$120/bbl, that the impact on GDP growth would be limited. But the pain would be

much greater if oil prices jumped to US$150/bbl. They believe that there will only be a

0.1% reduction on Euro Zone GDP on a 10% increase in oil price.

Exhibit 23. Asia Pacific GDP impact

Model simulation impact of US$10/bbl oil price rise

GDP growth Trade Balance CPI Inflation

Country (% points) (% of GDP) (% points)

China (0.8) (0.1) 0.5

Hong Kong (0.6) (0.8) 0.3

India (0.8) (0.7) 1.7

Indonesia 0.1 0.9 1.3

Korea (0.6) (0.8) 0.8

Malaysia (0.9) 0.3 1.4

Philippines (1.9) (0.9) 1.4

Singapore (1.7) (1.3) 1.3

Taiwan (0.4) (0.6) 0.3Thailand (2.2) (1.2) 1.5

Thailand (2.2) (1.2) 1.5

Asia ex-Japan (0.8) (0.4) 1.1

Nomura economic estimates for 2011F

(% y-y) Real GDP CPI Inflation

Asia ex-Japan,Australia, NZ

+8.1 +5.8

Source: Asian Development Bank, Nomura Economics Research

Exhibit 24. Euro GDP forecast change due to 10%

increase in oil price

Source: Nomura Economics Research

Furthermore, oil prices are not the sole determinate of GDP; various factors such as

stronger-than-expected global economic growth, led our economics team to revise up

its GDP growth forecast to 4.3% for 2011F and 4.6% in 2012F from 4.0% and 4.4%,respectively in October last year, despite an increase in base oil price assumptions.

Similarly, the IMF has increased its global GDP forecast to 4.4% in 2011F from the

April 2010 level of 4.3% while assumptions on oil price (simple average of Brent, WTI

and Dubai) increased to US$107.16/bbl in 2011 from US$83.0/bbl earlier.

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

14/32


5 May 2011Nomura 14

Longer-term supply outlook

OPEC spare capacity continues to fallWhile demand has outpaced supply over the last year, we believe there might be new

supply growth, beyond our estimates, going into 2013F as the high oil prices entice

new investments into the sector. However, based on current estimates, OPEC spare

capacity will likely trend lower in the coming two years as demand growth continues to

exceed supply growth; we estimate that OPEC spare capacity will average 4.8mmbbl/d

in 2012F and fall to 4.4mmbbl/d in 2013F from 5.3mmbbl/d this year.

We expect total OPEC crude production capacity to increase modestly, from

35.1mmbbl/d currently to 35.9mmbbl/d by end-2012F. The capacity growth is driven by

announced projects, which are only expected to mitigate the production decline from

existing fields. As a result, OPEC spare capacity, which reached a peak of 6.7mmbbl/d

in 2009, is expected to fall to average of 4.8mmbbl/d in 2012F before bottoming out in

2013F. We have not factored in the effect of the current Libya crisis in this estimate.

Exhibit 25. Oil supply

(2.0)

(1.0)

0.0

1.0

2.0

3.0

2

005

2

006

2

007

2

008

2

009

2

010

2011F

2012F

2013F

(mmb/d)

(2)

(1)

0

1

2

3

(mmb/d)OPEC NGL growth (RHS)Total OPEC capacity growth (LHS)Non OPEC Production growth (LHS)

Global demand growth (LHS)


Exhibit 26. Peak supply online on line till 2015F

0

1,000

2,000

3,000

4,000

5,000

6,000

2009 2010 2011 2012 2013 2014 2015

(kbbl/d)

Africa Asia China

FSU Latin America OECD Asia Pacific

OECD Europe OECD North America OPECNon O PEC Middle East


If we remove the Libyan capacity from OPEC, it will yield a current spare capacity of

close to 4.0mmbbl/d. If we assume that the Libyan capacity is to remain off line for the

remainder of the year and half of its capacity to resume operation in 2012F before full

production in 2013F, OPEC spare capacity will likely hover around the 4.0-4.5mmbbl/d

mark in the coming few years. On a fundamental basis, we believe this would

effectively lead to a more stable oil price environment as spare capacity remains

almost unchanged.

Exhibit 27. OPEC production & capacity

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

23.0

25.0

27.0

29.0

31.0

33.0

35.0

37.0

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11E

3Q11E

1Q12E

3Q12E

1Q13E

3Q13E

(mmb/d)(mmb/d)

OPEC Crude Production Capacity OPEC Crude Production

OPEC crude capaci ty excluding libya OPEC Spare Capacity

OPEC spare capacity excluding Libya


Exhibit 28. OPEC spare capacity as % of oil demand

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Jan-00

Jun-00

Nov-00

Apr-01

Sep-01

Feb-02

Jul-02

Dec-02

May-03

Oct-03

Mar-04

Aug-04

Jan-05

Jun-05

Nov-05

Apr-06

Sep-06

Feb-07

Jul-07

Dec-07

May-08

Oct-08

Mar-09

Aug-09

Jan-10

Jun-10

Nov-10

3Q11F

4Q12F

Source: IEA, EIA, Nomura estimates

We estimate that OPEC spare

capacity will average 4.8mmbbl/d

in 2012F and fall to 4.4mmbbl/d in

2013F from 5.3mmbbl/d this year

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

15/32


5 May 2011Nomura 15

Exhibit 29. OPECs falling compliance

30

60

90

120

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

25

26

27

28

(mb/d)OPEC 11 complaince Rate (LHS)

OPEC 11 production (RHS)

(%)

Note: Chart includes Libyan crude capacity


Exhibit 30. OPEC crude production (mmbbl/d)

Source: IEA

Iraq supply could be a big swing factor in 2013F & beyond

Seven years after the overthrow of the Saddam Hussein regime, Iraq witnessed

significant interest in its oil sector from international oil companies (IOCs), which have

been keen to grab a piece of the pie and ensure their presence in a country that

possesses the third-largest proved reserves of oil in the world, of about 115bn barrels.

The government undertook two rounds of bidding in 2009-10 and has already awarded

some of its most prolific super giant fields to major IOCs. The two rounds promise to

raise headline production to over 12.0mmbbl/d from the current 2.75mmbbl/d. In the

past, development in Iraq has rarely gone according to plan, and delays have been a

constant feature. While we are optimistic about Iraq becoming a more prominent

producer of oil in the long term, we believe there are significant challenges that would

need to be overcome. For now, we estimate that Iraqs production capacity can reach

3.1mmbbl/d by end-2011, 3.2mmbbl/d in 2012 and 3.4mmbbl/d in 2013 from2.75mmbbl/d currently.

The ramp-up of Iraqs oil production capacity will likely be delayed due to a

combination of political instability, lack of export routes, lack of equipment & personnel

and security issues. However, the current high oil price environment could be an

added incentive for Iraq to align its resources to ensure oil production comes on as

soon as possible. Although we are pencilling in 3.4mmbbl/d by 2013F, we do

recognize that the Iraqi government has a higher expectation of some 6.0mmbbl/d. In

the event that Iraq can deliver production above our expectations, it could alter the

fundamental picture and weigh on oil prices.

Exhibit 31. Iraq production capacity estimates

0

2

4

6

8

10

12

14

2009

2010

2011F

2012F

2013F

2014F

2015F

2016F

2017F

2018F

2019F

2020F

(mmb/d) Iraq prod capacity as per licensing rounds

Nomura Estimates

IEA

Source: IEA, MEES, Nomura estimates

Exhibit 32. Iraq capacity additions by fields

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Current Capacity Round I Round II Kurdistan

(mmb/d)

Najmah

Qayara

Badrah

Others

Garraf

Halfaya

Majnoon

West Qurna - 2

Nassiriyah

Zubair

West Qurna - 1

Rumaila

Source: IEA, MEES, Nomura Research

We estimate that Iraqs

production capacity could reach

3.1mmbbl/d by end-2011F,

3.2mmbbl/d in 2012F and

3.4mmbbl/d in 2013F from

2.75mmbbl/d currently

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

16/32


5 May 2011Nomura 16

Early indicators point to intensifying investments

We believe that rig count is an early indicator of future supply growth and it serves as

an indication of investment level in the oil markets. Over the past few months, we have

seen an increase in rig count, which we believe could be an indication that investments

are picking up in the sector. The global rig count increased to an all-time peak of 2,140

rigs in Feb 2011 and since the MENA crisis started in late January, Saudi Arabia has

added as many as 12 rigs to its portfolio. This has increased its rig count to some 35rigs. Should this be the start of a new uptrend in global and Saudi Arabian rig

deployment, we could see a significant increase in production capacity in the coming

few years.

Since not all drilling efforts are successful, there is no absolute relation between future

oil supply and the number of rigs. Moreover, even if the drilling were to be successful,

the supply condition would not be reflected immediately, as successful wells need time

to come on-stream. Although new drilled wells in an undeveloped field could take

years to start production, wells in developed fields that have ample supporting

infrastructure available (pipelines, etc.) could start producing in a relatively shorter time

frame. We conducted an analysis to gauge the lag at which there is a maximum

correlation between supply and the number of rigs. This would serve as a measure ofhow long it would take for the increasing number of rigs to affect oil supply.

Exhibit 33. Global oil rig count

0

500

1,000

1,500

2,000

2,500

Jan-01

Nov-01

Sep-02

Jul-03

May-04

Mar-05

Jan-06

Nov-06

Sep-07

Jul-08

May-09

Mar-10

Jan-11

Source: Baker Hughes, Nomura Research

Exhibit 34. Saudi Arabia oil rig count

0

10

20

30

40

50

60

Jan-01

Nov-01

Sep-02

Jul-03

May-04

Mar-05

Jan-06

Nov-06

Sep-07

Jul-08

May-09

Mar-10

Jan-11

Source: Baker Hughes, Nomura Research

Our analysis suggests that there is approximately a 24-27-month lag between global

rig count and its peak effect on oil supply. Based on our analysis, if rig counts are

sustained at the current level, it could push 2013 global supply (non-OPEC crude +

OPEC capacity) up by approximately 3.2mmbbl/d from 2010 average. This is aboveour current estimate of 2.6mmbbl/d, (up 1.1mmbbl/d in non-OPEC supply and up

1.5mmbbl/d in OPEC capacity). This analysis serves as a check on potential supply

but it is far from accurate. As such, we do not incorporate this supply analysis into our

demand-supply model as it represents a very simplistic view of the supply picture.

Our analysis suggests that there

is approximately a 24-27-month

lag between global rig count and

its peak effect on oil supply

If rig counts are sustained at the

current level, it could push 2013

global supply up by nearly

3.2mmbbl/d from 2010 average

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

17/32


5 May 2011Nomura 17

Exhibit 35. Rig counts (-2years) vs global oil supply

y = 7.0012ln(x) + 25.53R = 0.8222

70

72

74

76

78

0 500 1000 1500 2000

(OPECCapacity +Non-OPEC

supply)(mmb/d)

(Global Rig Count)

Source: Baker Hughes, IEA, Nomura estimates

Exhibit 36. Non-OPEC Rig count vs. supply

40

50

60

70

80

90

0 5 10 15 20 25 30 35

(Lag in months)

(R Square)

Source: Baker Hughes, IEA, Nomura estimates

Inventory could continue to fall

While both crude and product inventories continue to remain near their five-yearaverages, OECD inventories have shown a downward trend as demand rebounded in

2010, outpacing supply growth.

OECD industry crude inventory currently stands at 979mmbbl, 0.7% higher than its

five-year average but 5.6% lower than its peak in April 2010, while product inventories

are at 1,412mmbbl, 0.6% higher than the five-year average but 5.8% lower than the

peak in September 2009.

Exhibit 37. OECD onshore crude inventory days

(industry + strategic)

35

40

45

50

55

60


(Days ofdemandcover)

Prior5 Year RangePrior 5 Year Average20102011


Exhibit 38. OECD onshore product inventory days

(industry + strategic)

25

30

35

40

45


(Days ofdemandcover)

Prior5 Year RangePrior 5 Year Average20102011


For 2011F, we could see crude inventory drop further as global demand continues to

be the key driver behind the destocking process in 2011F. Furthermore, the

backwardation nature of oil futures curve is also skimming excess inventories from the

storage terminals, especially from the more costly offshore storage.

OECD inventories have shown adownward trend as demand

rebounded in 2010, outpacing

supply growth

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

18/32


5 May 2011Nomura 18

Exhibit 39. Global crude floating storage

-

20

40

60

80

100

Mar-10

Apr-10

May-1

0

Jun-1

0

Jul-10

Aug-1

0

Sep-1

0

Oct-10

Nov-1

0

Dec-1

0

Jan-1

1

Feb-1

1

Mar-11

(mmb)

Mideast Gulf Asia Pacific Med

NW Europe US Gulf Coast West Africa

Source: Bloomberg, Gibson, Nomura Research

Exhibit 40. Global oil product floating storage

-

10

20

30

40

50

60

Mar-10

Apr-10

May-1

0

Jun-1

0

Jul-10

Aug-1

0

Sep-1

0

Oct-10

Nov-1

0

Dec-1

0

Jan-1

1

Feb-1

1

Mar-11

(mmb)

Mideast Gulf Asia Pacific Med

NW Europe US Gulf Coast West Africa

Source: Bloomberg, Gibson, Nomura Research

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

19/32


5 May 2011Nomura 19

Impact of fund flows

Fund flows to negatively influence oil

prices in the longer termBased on an IMF study, the results of their econometric analysis confirm that global

liquidity conditions have some influence on the evolution of crude oil prices. The

impact of excess liquidity with low real interest rates does not necessarily implyfinancial speculation, but it is likely to have magnified the price pressures stemming

from supply-demand imbalances.

Exhibit 41. QE-2 Exit timeline

Source: Nomura economics team

However, as QE-2 draws to an end by June 2011, liquidity could tighten in the market

causing reduced fund flow into commodities. Further monetary tightening measures in

2012F in the US and a possible rate hike by 1Q13 could cause the US dollar to

appreciate and further reduce liquidity and the appeal of commodities investments.

Our in-house FX team is forecasting for the US Dollar Index to appreciate to 76.8 from

the current 73.0, up 5.2% by the end of 2011F.

Exhibit 42. Benchmark policy interest rates expectations

(% end of period) 2010 2011F 2012F

Global 3.08 3.77 4.25

United States 0.13 0.13 0.13

Euro Area 1.00 1.75 2.75

United Kingdom 0.50 1.00 2.00

Japan 0.05 0.05 0.05

China 5.81 6.81 7.56

India 6.25 7.75 7.75

Source: Nomura Economics estimates

In fact, barring the US and Japan, most major economies, including the Euro Area,

China and India, have already begun the monetary tightening by raising their

benchmark policy interest rates in a bid to curb the rising inflation. Globally, oureconomics team expects benchmark policy rates to rise from 3.08% at the end of 2010

to 3.77% by the end of 2011 and rise further to 4.25% by the end of 2012. As such, we

believe that the reduced liquidity as well as the potential appreciation of the US dollar

will likely reduce investment into commodities and could cause funds to withdraw from

the oil market over the coming two years. This will likely weigh on oil prices.

As QE-2 draws to an end by June

2011, liquidity could tighten in the

market causing reduced fund flow

into commodities

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

20/32


5 May 2011Nomura 20

Exhibit 43. Commodity ETP AUM

70

90

110

130

150

170190

210

230

250

270

Jan-09

Mar-09

May-09

Aug-09

Oct-09

Dec-09

Mar-10

May-10

Jul-10

Oct-10

Dec-10

Feb-11

Apr-11

($bn)


Exhibit 44. Commodity ETP fund flow

$0

$10

$20

$30

$40

$50

$60

$70

$80

-$3.0

-$1.0

$1.0

$3.0

$5.0

$7.0

Jan-0

9

Mar-09

May-0

9

Jul-09

Sep-0

9

Nov-0

9

Jan-1

0

Mar-10

May-1

0

Jul-10

Sep-1

0

Nov-1

0

Jan-1

1

Mar-11

(bn)(bn)

Weekly ETP Fund Inflows

Cumulative Inflow(rhs)


Since our last report dated 12 October, Oil Never Sleeps, QE-2 has led to a

significant increase in funds inflow into the oil markets. We continue to track fund flowsthrough commodities exchange-traded-products (ETP). Based on our ETP fund flow

analysis, some US$20bn has entered the commodity market since the beginning of

QE-2. Also, as many as 20 new ETP have been launched since the beginning of this

year, compared to 66 launched in 2010. Moreover, the Commodity Futures Trading

Commission (CFTC) net long managed money has continued to increase rapidly YTD,

as the rising inflation and increasing geopolitical tension prompt investors to favour

buying commodities over other asset classes.

Exhibit 45. CFTC net long managed money contracts on WTI crude oil

40,000

80,000

120,000

160,000

200,000

240,000

280,000

320,000

J

an-10

F

eb-10

M

ar-10

A

pr-10

M

ay-10

J

un-10

Jul-10

A

ug-10

S

ep-10

O

ct-10

N

ov-10

D

ec-10

J

an-11

F

eb-11

M

ar-11

A

pr-11

M

ay-11

(Contracts)

65

75

85

95

105

115

(US$/bbl)Managed money net long (LHS)

WTI price (RHS)

Source: CFTC, Bloomberg, Nomura Research

The continual weakness in the US dollar has helped as investors seek to hedge

against the decline. As such, the correlation between the US dollar index and oil prices

has remained strong. The strong correlation is further evidence, we believe, that if the

US dollar appreciates, oil prices could weaken.

Some US$20bn has entered the

commodity market since thebeginning of QE-2

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

21/32


5 May 2011Nomura 21

Exhibit 46. US$ index

70

75

80

85

90

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Source: Bloomberg, Nomura FX team estimates

Exhibit 47. 60-day rolling correlation between oil

price and currencies

(1.0)

(0.5)

0.0

0.5

1.0

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Feb-10

Apr-10

Jun-10

Aug-10

Oct-10

Dec-10

Feb-11

Apr-11

Dollar Index Euro World ex-euro

Source: Bloomberg, Nomura Research

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

22/32


5 May 2011Nomura 22

OPEC budget break-even

OPEC to support higher oil pricesWith the political crisis in the MENA region impacting many of the OPEC members, we

have seen announcements and pledges of increased government spending on

infrastructure. In particular, Saudi Arabia has pledged to spend a total of US$130bn in

the two packages that it announced on February 24 and March 18 this year. We note

that majority of the additional expense is on building 500,000 homes, which could take

two to three years. As a result, we allocate US$45bn of the expense to 2011. This has

led to a steep rise in the break-even oil price for the oil-dependent economy of the

country to balance its budget from our earlier estimate of US$63/bbl to US$84/bbl.

Such additional spending, in our view, will lead the OPEC countries to remain more

inclined towards maintaining higher oil prices.

Exhibit 48. Break-even oil price of middle-east OPEC producers

84

65

88

70

85

101

0

20

40

60

80

100

120

Saudi Arabia Qatar Kuwait UAE Iran Iraq

(US$/bbl)


Announcements and pledges in

the MENA region have increased

government spending on

infrastructure, raising break-even

oil prices

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

23/32


5 May 2011Nomura 23

Long-term oil price outlook

Long-term price remains at US$75/bblIntense short-term demand/supply inelasticity implies that other factors can intervene

with oil prices, such as inventories, speculators, etc. However, a sustainable or long-

term price level should be set largely by fundamentals. We look at the upstream oil

and gas field machinery and the equipment index as well as the support activities for

oil and gas operations index of the US Bureau of Labor Statistics (BLS) as one of the

indicators for upstream costs. In addition, we track the IHS CERA upstream capital and

operating cost indices as another indicator of upstream costs.

While the upstream costs showed a constant rise from 1985 to 2008, both capital and

operating costs declined at the end of 2008. Although all these costs have begun to

recover, we note that upstream costs of oil and gas drilling and extraction remain well

below their 2008 peak levels. Also, while field machinery and equipment costs have

increased in 2011 YTD, support activity costs have remained flat since June 2009,

after dropping by 10% in 1H09, coinciding with the low oil prices prevailing in the

period. Moreover, IHS CERA cost indices also indicate that costs remain well below

their peak 2008 levels.

Using these inputs, we estimate that a Brent price of US$75/bbl is needed to earn a

mid-cycle 10% to 12% nominal return on capital. However, we are cognizant that we

have used historical averages rather than forecasts for the input data and a change in

the economic scenario could lead to changes in input prices.

Exhibit 49. US PPI sub-indices for oil & gas industry

0

100

200

300

400

500

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

(Index) Oil & Gas extraction

Drilling oil & gas wells

Support activities for oil and gas operations

Oil & gas field machinery & equipment

Source: US Bureau of Labour Statistics, Nomura Research

Exhibit 50. IHS CERA cost indices

100

120

140

160

180

200

220

240

1Q00

3Q00

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

Upstream Capital Costs Index

Upstream Operating Costs Index

Source: IHS CERA, Bloomberg

As such, we have also looked at some of the recent major M&A deals in the oil andgas space over the past few years as we believe that this is one of the best indicators

to ascertain what the industry perceives as the value of a barrel of oil. Looking at some

of the recent M&A deals, such as CNOOC and Totals acquisition of Tullow Oils

Uganda assets and Totals acquisition of a stake in Novatek, we estimate that the

long-term implied oil price could be between US$70/bbl and US$80/bbl in order to give

the companies fair 10-12% returns on capital.

Upstream costs of oil & gas

drilling and extraction remain well

below their 2008 peak levels

Based on recent M&A deals, we

estimate that long-term implied oil

price could be US$70-80/bbl in

order to give the companies a fair

10-12% return on capital

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

24/32


5 May 2011Nomura 24

Exhibit 51. Estimated long-term oil price from recent M&A deals

0

20

40

60

80

100

120

140

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

(US$/bbl) Break-even price

Brent price

Source: Nomura estimates

In addition, we estimate that the majority of probable new developments have a break-

even oil price below US$70/bbl for a 10-15% IRR, although there are wide differencesin breakeven prices between the projects which could range from US$15 to

US$120/bbl, under current development plans. This reflects the variations in the cost

of the developments and the differences in fiscal terms, which depend on the project

and its location.

Exhibit 52. Break-even oil price for deepwater oil

exploration

Source: Woodmac

Exhibit 53. Estimated Break-even oil price

0

20

40

60

80

100

120

140

0 2000 4000 6000 8000 10000

Break-even price,$/bl

Resources (bi llion barrels)

Produced MENA

EOR

OtherConventional

Oil

CO2 -EOR

Oil ShaleDeep Waterand Ultradeepwater

Arctic

HeavyOil andBitumen

Coal to Liquids

Gas to Liquids


8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

25/32


5 May 2011Nomura 25

Appendix

Exhibit 54. Nomura Real GDP growth forecast

Real GDP (% y-y) 2010 2011F 2012F

Global 4.9 4.3 4.6

United States 2.9 2.6 2.6

Western Europe 1.7 2.1 2.3Euro Area 1.7 2.1 2.2

United Kingdom 1.3 1.7 2.6

EEMEA 4.6 4.6 4.3

Asia Pacific 8.0 6.5 7.2

Japan 3.9 (0.5) 3.1

Australia 2.7 3.4 4.0

China 10.3 9.8 9.5

India 8.6 8.0 8.3

South Korea 6.2 3.5 5.0

Source: Nomura Economics team

Exhibit 55. Nomura FX forecast(end of period) 1Q11 2Q11F 3Q11F 4Q11F 1Q12F End 2012F

US Dollar Index DXY 75.9 76.2 75.1 76.8 75.1 75.6

Rest of World Index=2008 95.0 94.4 94.6 93.9 93.9 93.6

G10 Euro EUR 1.42 1.43 1.40 1.45 1.45 1.45

Japanese Yen US$/JPY 83.1 82.5 85.0 87.5 87.5 92.5

British Pound GBP 1.60 1.64 1.63 1.71 1.73 1.77

Swiss Franc CHF 0.92 0.93 0.98 0.97 0.99 0.98

Australia Dollar AUD 1.03 0.98 1.00 1.02 1.02 1.02

Norwegian Krone EUR/NOK 7.84 7.60 7.60 7.70 7.70 7.70

Swedish Krona EUR/SEK 8.95 8.60 8.70 8.70 8.78 9.00

Asia Chinese Renminbi CNY 6.55 6.40 6.32 6.22 6.14 5.90 Indian Rupee INR 44.6 44.1 43.5 43.2 42.8 41.6

Korean Won KRW 1,097 1,060 1,040 1,020 1,005 960

LatAm Brazilian Real BRL 1.63 1.65 1.65 1.62 1.62 1.60

Mexican Peso MXN 11.90 11.90 11.70 11.50 11.35 10.90

Source: Nomura FX team estimates

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

26/32


5 May 2011Nomura 26

Exhibit 56. Major OPEC crude capacity coming online until 2015 (kbbl/d)

Year Project Country Peak capacity Total

2009 Shaybah Phase I Saudi Arabia 250

Khurais Saudi Arabia 1,200

Khursaniyah Saudi Arabia 250

Akpo Nigeria 180

Others 295

2009 total 2,175

2010 Kushk-Hosseinieh Iran 300

Rhourde El Baguel Algeria 125

Hassi Messoud EOR Algeria 200

Nasr/Umm Loulou UAE 190

Upper Zakum UAE 200

Others 664

2010 total 1,679

2011 Gbaran/Ubie Phase I Nigeria 160

Pazflor (Block 17) Angola 200

Others 801

2011 total 1,161

2012 PSVM (Block 31) Angola 150Pazflor (Block 17) Angola 200

Kizomba D-Satellites (Block 15) Angola 125

Rumaila Iraq 275

Usan Nigeria 180

Bosi Oil Nigeria 120

Junin Block 2 Venezuela 200

Others 572

2012 total 1,822

2013 Block 208 Algeria 165

Burgan, PNZ Kuwait 240

Manifa Saudi Arabia 900

Zakum expansion UAE 175Junin Venezuela 640

Others 345

2013 total 2,465

2014 - 2015 total 6,922

Source: IEA, OPEC, Thomson Reuters, Nomura estimates

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

27/32


5 May 2011Nomura 27

Nomura Oil supply-demand balance

Exhibit 57. Global Oil supply-demand table

2009 2010 2011 2012Change, 10

vs 09Change, 11

vs 10Change, 12

vs 11Change, 13

vs 12

mm bls/d 2006 2007 2008 Q1 Q2 Q3 Q4 2009 Q1 Q2 Q3 Q4 2010 Q1 Q2F Q3F Q4F 2011F Q1F Q2F Q3F Q4F 2 012F 2 013F mmb/d % mmb/d % mmb/d % mmb/d %

Demand

North Am eri ca 25.4 25.5 24.2 23.4 22.9 23.3 23.6 23.3 23.6 23.8 24.2 2 4.0 23.9 24.0 24.0 24.3 24.1 24.1 24.1 24.1 24.4 24.3 24.2 24.3 0.6 2 .6 0.2 0.8 0.1 0.5 0.1 0.4

Europe 15.7 15.5 15.4 14.9 14.3 14.5 14.4 14.5 14.2 14.1 14.8 14.7 14.4 14.2 14.2 14.7 14.8 14.5 14.3 14.4 14.8 14.8 14.6 14.7 (0.1) (0.4) 0.0 0.3 0.1 0.4 0.1 0.7

Pacific 8.5 8.4 8.0 8.1 7.3 7.2 8.0 7.7 8.2 7.3 7.6 8.0 7.8 8.1 7.3 7.6 8.1 7.8 8.2 7.5 7.7 8.1 7.9 7.9 0.1 1.7 0.0 0.1 0.1 0.8 0.0 0.6

OECD 49.6 49.3 47.6 46.4 44.5 45.0 45.9 45.5 46.0 45.2 46.6 46.7 46.1 46.3 45.5 46.6 47.1 46.4 46.6 46.0 46.9 47.2 46.6 46.9 0.7 1.5 0.2 0.5 0.3 0.6 0.2 0.5

FSU 4.0 4.1 4.2 4.0 3.9 4.1 4.0 4.0 4.2 4.2 4.4 4.4 4.3 4.3 4.2 4.5 4.5 4.4 4.4 4.3 4.6 4.5 4.4 4.6 0.3 7.0 0.1 1.8 0.1 2.0 0.1 2.3

Europe 0.7 0.8 0.8 0.7 0.8 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.8 0.7 0.8 0.7 0.8 0.8 0.8 0.8 (0.0) (3.4) 0.0 2.8 0.0 4.9 0.0 5.2

Ch ina 7 .2 7 .6 7 .7 7 .5 8 .5 8 .7 8 .8 8 .4 8 .9 9 .4 9 .2 10.0 9 .4 9 .9 10.0 9 .8 10.4 10.0 10.4 10.6 10.4 11.1 10.6 11.1 1.0 12.1 0.6 6.8 0.6 6.0 0.5 4.8

Other Asia 9.0 9.5 9.6 10.0 10.2 9.9 10.2 10.1 10.4 10.5 10.1 10.6 10.4 10.7 10.8 10.4 10.8 10.6 10.9 11.0 10.6 11.0 10.9 11.1 0.3 3.4 0.3 2.4 0.3 2.4 0.2 1.6

Lati n A meri ca 5 .4 5.7 6.0 5 .8 6 .0 6 .1 6 .1 6 .0 6 .0 6 .3 6 .4 6 .4 6 .3 6 .2 6 .5 6 .7 6 .5 6.5 6.3 6.6 6.9 6.6 6.6 6.8 0.3 4.8 0.2 3.2 0.1 1.9 0.2 2.3

Middle East 6.4 6.6 7.0 6.7 7.2 7.7 7.1 7.2 7.1 7.5 8.0 7.4 7.5 7.4 7.7 8.2 7.7 7.7 7.6 7.8 8.4 7.9 7.9 8.1 0.3 4.1 0.2 3.2 0.2 2.2 0.2 2.4

Africa 2.9 3.1 3.2 3.3 3.2 3.2 3.1 3.2 3.2 3.3 3.2 3.3 3.3 3.3 3.3 3.3 3.4 3.3 3.4 3.4 3.5 3.5 3.5 3.5 0.1 1.8 0.1 2.8 0.1 3.6 0.1 1.6

Non OECD 35.7 37.3 38.6 38.0 39.7 40.4 40.0 39.5 40.5 41.8 42.1 42.7 41.8 42.5 43.2 43.5 44.0 43.3 43.8 44.4 45.0 45.6 44.7 45.9 2.3 5.7 1.5 3.6 1.4 3.2 1.2 2.7

Total demand 85.3 86.7 86.1 84.4 84.2 85.4 85.9 85.0 86.5 87.0 88.7 8 9.4 87.9 88.8 88.7 90.2 91.1 89.7 90.3 90.4 91.9 92.8 91.3 92.8 2.9 3 .5 1.8 2.0 1.6 1.8 1.5 1.6

% i nc rease y -y 1 .3 1 .6 -0 .6 - 3. 2 -2 .5 -0 .6 0 .9 -1 .3 2 .4 3 .4 3 .9 4 .1 3 .5 2 .6 1 .9 1 .6 1 .8 2.0 1.8 1.9 1.9 1.8 1.8 1.6

Supply

North America 13.9 13.9 13.3 13.5 13.5 13.7 13.8 13.6 13.9 14.0 14.1 14.4 14.1 14.4 14.1 14.2 14.4 14.3 14.3 14.0 14.1 14.3 14.2 14.1 0.5 3.7 0.1 1.0 (0.1) (0.7) (0.1) (0.7)

Europe 5.3 5.0 4.8 4.9 4.5 4.3 4.5 4.6 4.5 4.2 3.8 4.2 4.2 4.3 4.1 4.0 4.2 4.1 4.1 4.0 3.9 4.0 4.0 3.8 (0.4) (8.5) (0.0) (0.9) (0.1) (3.2) (0.2) (5.0)

Pacific 0.6 0.6 0.6 0.7 0.6 0.7 0.6 0.7 0.6 0.6 0.6 0.6 0.6 0.5 0.6 0.6 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.6 (0.0) (5.9) (0.0) (0.8) (0.0) (1.1) 0.0 5.0

OECD 19.8 19.5 18.7 19.1 18.6 18.7 19.0 18.8 19.1 18.9 18.5 19.2 18.9 19.2 18.8 18.8 19.2 19.0 19.0 18.6 18.6 18.9 18.8 18.5 0 .1 0 .4 0 .1 0 .6 (0.2) (1.2) (0.3) (1 .4)

FSU 12.3 12.8 12.8 13.0 13.3 13.4 13.5 13.3 13.5 13.5 13.5 13.7 13.6 13.7 13.8 13.6 13.7 13.7 13.8 13.8 13.7 13.9 13.8 13.7 0.3 2.1 0.1 1.0 0.1 0.8 (0.1) (0.7)

Europe 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 ( 0.0) (2.1) (0.0) (1.4) (0.0) (25.6) 0.0 0.0

Chi na 3.7 3.7 3.8 3.8 3.9 3.9 3.9 3.9 4.0 4.1 4.1 4.2 4.1 4.2 4.3 4.3 4.3 4.3 4.4 4.4 4.4 4.4 4.4 4.4 0.2 5.4 0.2 4.3 0.1 2.8 0.0 0.0

O ther A si a 3 .7 3 .6 3 .6 3 .6 3 .6 3 .6 3 .6 3 .6 3 .7 3 .6 3 .7 3 .6 3 .7 3 .6 3 .6 3 .6 3 .5 3.6 3.6 3.6 3.6 3.6 3.6 3.6 0.1 1.7 (0.1) (2.0) 0.0 0.4 (0.1) (1.4)

Lati n A meri ca 3 .6 3.6 3.7 3 .8 3 .9 3 .9 4 .0 3 .9 4 .0 4 .1 4 .1 4 .1 4 .1 4 .2 4 .4 4 .5 4 .5 4.4 4.5 4.6 4.6 4.6 4.6 4.7 0.2 5.1 0.3 7.7 0.2 4.2 0.1 1.6

Middle East 1.8 1.7 1.7 1.6 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.6 1.6 1.6 1.6 1.6 1.6 0.0 2.2 0.0 0.8 (0.1) (6.7) 0.0 0.0

Africa 2.5 2.6 2.7 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.7 2.7 2.7 2.7 2.7 2.7 (0.0) (1.0) 0.0 1.4 0.1 3.1 (0.1) (1.9)

Non OECD 27.8 28.2 28.4 28.7 29.0 29.2 29.4 29.1 29.6 29.7 29.9 3 0.0 29.8 30.2 30.4 30.4 30.6 30.4 30.7 30.8 30.7 30.9 30.8 30.7 0.8 2 .6 0.6 2.0 0.4 1.2 (0.1) (0.4)

P rocess ing gai ns 2 .1 2 .2 2 .2 2 .2 2 .2 2 .3 2 .3 2 .3 2. 3 2 .3 2.3 2 .3 2 .3 2 .3 2 .3 2 .4 2 .4 2.3 2.4 2.4 2.4 2.4 2.4 2.4 0.1 2.4 0.0 1.9 0.1 2.2 0.0 0.0

Other Biofuels 0.8 1.1 1.4 1.1 1.6 1.8 1.7 1.6 1.4 2.0 2.1 1.8 1.8 1.5 1.9 2.3 2.1 1.9 2.2 2.2 2.2 2.2 2.2 2.3 0.3 16 0.1 7 0.3 14 0.1 5

Non OPEC 50.5 50.9 50.8 51.1 51.5 51.9 52.4 51.7 52.4 52.8 52.8 5 3.3 52.8 53.2 53.5 53.9 54.2 53.7 54.3 54.0 53.9 54.4 54.2 53.9 1.1 2 .2 0.9 1.6 0.4 0.8 (0.3) (0.5)

OPEC 11 crude 28.8 28.2 28.8 26.3 26.1 26.2 26.4 26.2 26.7 26.7 26.9 27.0 26.8 27.1

Iraq crude 1.9 2.1 2.4 2.3 2.5 2.6 2.5 2.4 2.4 2.4 2.4 2.4 2.4 2.7

OPEC NGLs 4.3 4.3 4.4 4.7 4.7 4.9 5.0 4.8 5.1 5.2 5.4 5.5 5.3 5.7 5.7 6.0 6.0 5.9 6.1 6.2 6.3 6.4 6.3 6.6 0.5 10.0 0.6 10.7 0.4 6.8 0.3 4.8

Total supply 85.5 85.5 86.4 84.4 84.6 85.6 86.2 85.2 86.5 87.1 87.4 88.2 87.3 88.7

Call on OPECcrude*

30.6 31.5 30.9 28.7 28.0 28.6 28.6 28.5 29.0 29.0 30.5 30.6 29.8 29.8 29.5 30.3 30.9 30.1 29.9 30.2 31.7 32.0 30.9 32.4 1.3 4.7 0.3 1.1 0.8 2.7 1.5 4.7

Implied stockchange - m bls/d

0.2 (1.2) 0.3 (0.1) 0.5 0.2 0.3 0.2 0.1 0.0 (1.3) (1.2) (0.6) (0.0)

Implied stockchange - m bls

15 (108) 104 (7 ) 43 16 24 80 5 3 ( 115) ( 113) (55) (2)

OECD stockchange - m bls

94 (62) 73 58 (34) (45) (6) (28) 42 20 (50) 37 49

Note: Demand estimates are Nomura estimates and 2011 supply estimates are IEA estimates.

*Call on OPEC crude from Q2 2011 onwards is total demand minus Non OECD supply and OPEC NGLs, such that the implied stock change in forecast years is zero.


Exhibit 58. Brent crude price forecast

(US$/bbl) 1Q11 2Q11F 3Q11F 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F 2010 2011F 2012F 2013F

Brent 105 123 110 103 105 113 113 110 80 110 110 110


8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

28/32


5 May 2011Nomura 28

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

29/32


5 May 2011Nomura 29

Any Authors named on this report are Research Analysts unless otherwise indicated

Analyst CertificationWe, Michael Lo, Chiew Cheng Khoo, Saurabh Bharat and Sanat Satyan, hereby certify (1) that the views expressed in this Research reportaccurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of ourcompensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3)no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,Nomura International plc or any other Nomura Group company.

Important DisclosuresConflict-of-interest disclosuresImportant disclosures may be accessed through the following website: http://www.nomura.com/research/pages/disclosures/disclosures.aspx .If you have difficulty with this site or you do not have a password, please contact your Nomura Securities International, Inc. salesperson (1-877-865-5752) or email [email protected] for assistance.Online availability of research and additional conflict-of-interest disclosuresNomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG andTHOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS andBLOOMBERG.Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research orrequested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please [email protected] for technical assistance.The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues,

a portion of which is generated by Investment Banking activities.Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for thesales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content ofresearch reports in which their names appear.Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarilyresponsible for marketing Nomuras Equity Research product in the sector for which they have coverage. Marketing Analysts may alsocontribute to research reports in which their names appear and publish research on their sector.Distribution of ratings (Global)The distribution of all ratings published by Nomura Global Equity Research is as follows:49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 37% of companies withthis rating are investment banking clients of the Nomura Group*.40% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies withthis rating are investment banking clients of the Nomura Group*.

11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 16% of companieswith this rating are investment banking clients of the Nomura Group*.As at 31 March 2011.*The Nomura Group as defined in the Disclaimer section at the end of this report.Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America forratings published from 27 October 2008The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock.Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited managementdiscretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriatevaluation methodology such as discounted cash flow or multiple analysis, etc.STOCKSA rating of 'Buy',indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months.A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months.A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months.

A rating of 'Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable regulationsand/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transactioninvolving the company.Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks(accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology.SECTORSA 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months.A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months.A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months.Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCIEmerging Markets ex-Asia.

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

30/32


5 May 2011Nomura 30

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan publishedfrom 30 October 2008 and in Japan from 6 January 2009STOCKSStock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock,based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc.A 'Buy' recommendation indicates that potential upside is 15% or more.A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%.A 'Reduce' recommendation indicates that potential downside is 5% or more.A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulationsand/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transactioninvolving the subject company.Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entityidentified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/orcompanies.SECTORSA 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positiveabsolute recommendation.A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutralabsolute recommendation.A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) anegative absolute recommendation.Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in

Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008)STOCKSA rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next sixmonths.A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over thenext six months.A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5%over the next six months.A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% overthe next six months.A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months.Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additionalresearch reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or otherinformation contained herein.SECTORSA 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months.A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months.A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months.Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector -Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE WEurope;Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus:Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan publishedprior to 30 October 2008STOCKSStock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price,subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value ofthe stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn'tthink the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ fromthe intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and ourestimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within thishorizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downsideimplied by the recommendation.A 'Strong buy' recommendation indicates that upside is more than 20%.A 'Buy' recommendation indicates that upside is between 10% and 20%.A 'Neutral' recommendation indicates that upside or downside is less than 10%.A 'Reduce' recommendation indicates that downside is between 10% and 20%.A 'Sell' recommendation indicates that downside is more than 20%.SECTORSA 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positiveabsolute recommendation.A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutralabsolute recommendation.A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) anegative absolute recommendation.Target PriceA Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may beimpeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if thecompany's earnings differ from estimates.

8/6/2019 54964167-Nomura-Oil-Gas-wk-2011-05-05-434459

31/32


5 May 2011Nomura 31

DisclaimersThis publication contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or,with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1herein or elsewhere identified in the publication. Affiliates and subsidiaries of Nomura Holdings, Inc. (collectively, the 'Nomura Group'), include:Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), United Kingdom; Nomura Securities International, Inc.('NSI'), New York, NY; Nomura International (Hong Kong) Ltd. (NIHK), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. (NFIK),Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIAIntranet at http://dis.kofia.or.kr ); Nomura Singapore Ltd. (NSL), Singapore (Registration number 197201440E, regulated by the MonetaryAuthority of Singapore); Capital Nomura Securities Public Company Limited (CNS), Thailand; Nomura Australia Ltd. (NAL), Australia (ABN

48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial serviceslicence number 246412; P.T. Nomura Indonesia (PTNI), Indonesia; Nomura Securities Malaysia Sdn. Bhd. (NSM), Malaysia; NomuraInternational (Hong Kong) Ltd., Taipei Branch (NITB), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited (NFASL),Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India;SEBI Registration No: BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034).THIS MATERIAL IS: (I) FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT; (II) NOTTO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTIONWHERE SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL; AND (III) BASED UPON INFORMATION THAT WE CONSIDERRELIABLE.NOMURA GROUP DOES NOT WARRANT OR REPRESENT THAT THE PUBLICATION IS ACCURATE, COMPLETE, RELIABLE, FIT FORANY PARTICULAR PURPOSE OR MERCHANTABLE AND DOES NOT ACCEPT LIABILITY FOR ANY ACT (OR DECISION NOT TO ACT)RESULTING FROM USE OF THIS PUBLICATION AND RELATED DATA. TO THE MAXIMUM EXTENT PERMISSIBLE ALL WARRANTIESAND OTHER ASSURANCES BY NOMURA GROUP ARE HEREBY EXCLUDED AND NOMURA GROUP SHALL HAVE NO LIABILITY FORTHE USE, MISUSE, OR DISTRIBUTION OF THIS INFORMATION.Opinions expressed are current opinions as of the original publication date appearing on this material only and the information, including theopinions contained herein, are subject to change without notice. Nomura is under no duty to update this publication. If and as applicable, NSI'sinvestment banking relationships, investment banking and non-investment banking compensation and securities ownership (identified in thisreport as 'Disclosures Required in the United States'), if any, are specified in disclaimers and related disclosures in this report. In addition,other members of the Nomura Group may from time to time perform investment banking or other services (including acting as advisor,manager or lender) for, or solicit investment banking or other business from, companies mentioned herein. Furthermore, the Nomura Group,and/or its officers, directors and employees, including persons, without limitation, involved in the preparation or issuance of this material may,to the extent permitted by applicable law and/or regulation, have long or short positions in, and buy or sell, the securities (including ownershipby NSI, referenced above), or derivatives (including options) thereof, of companies mentioned herein, or related securities or derivatives. Forfinancial instruments admitted to trading on an EU regulated market, Nomura Holdings Inc's affiliate or its subsidiary companies may act asmarket maker or liquidity provider (in accordance with the interpretation of these definitions under FSA rules in the UK) in the financialinstruments of the issuer. Where the activity of liquidity provider is carried out in accordance with the definition given to it by specific laws andregulations of other EU jurisdictions, this will be separately disclosed within this report. Furthermore, the Nomura Group may buy and sellcertain of the securities of companies mentioned herein, as agent for its clients.Investors should consider this report as only a single factor in making their investment decision and, as such, the report should not be viewedas identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Please see the further disclaimersin the disclosure information on companies covered by Nomura analysts available at www.nomura.com/research under the 'Disclosure' tab.Nomura Group produces a number of different types of research product including, among others, fundamental analysis, quantitative analysisand short term trading ideas; recommendations contained in one type of research product may differ from recommendations contained inother types of research product, whether as a result of differing time horizons, methodologies or otherwise; it is possible that individualemployees of Nomura may have different perspectives to this publication.NSC and other non-US members of the Nomura Group (i.e. excluding NSI), their officers, directors and employees may, to the extent it relatesto non-US issuers and is permitted by applicable law, have acted upon or used this material prior to, or immediately following, its publication.Foreign-currency-denominated securities are subject to fluctuations in exchange rates tha

54964167-nomura-oil-gas-wk-2011-05-05-434459

Documents