Investment Challenges in the Energy Industry

László VarróSenior Vice President for Strategy Development

MOL GroupOctober 14, 2009

► The cycle: the effects of the global recession on the oil & gas industry

► Long-term challenges facing the energy industry

2

Agenda

A relatively mild crisis for the oil & gas industry

3

► Demand effect was consistent with expectations based on income-elasticity ► Inflexible supply and demand translated into

sudden price and margin drops

BUT► Prices shortly recovered due to OPEC action,

margins will remain depressed until the recovery takes hold

► The oil industry had less exposure to the credit crisis relative to other industries► Less exposure to constrained credit availability► Financing mainly from own cash-flow, separate

financing of different activities not typical ► Most CAPEX cuts due to low oil price (and

deteriorating commercial viability) and not due to the lack of capital

The crisis had a substantial effect on global oil demand

The short-term inelasticity of oil supply and demand

US

D p

er b

arre

l

Million barrel per day

$140

86.5 MMbd

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2003 2004 2005 2006 2007 2008 2009 2010

Global Oil Demand Growth Global GDP Growth

Source: IMF, IEA

Source: PIRA

Upstream: oil price saved by OPEC, long-term gas fundamentals intact

0

5000

10000

15000

20000

25000

30000

35000

2009

.09.

30

2009

.04.

30

2008

.11.

30

2008

.06.

30

2008

.01.

31

2007

.08.

31

2007

.03.

31

2006

.10.

31

2006

.05.

31

2005

.12.

31

2005

.07.

31

2005

.02.

28

2004

.09.

30

2004

.04.

30

2003

.11.

30

2003

.06.

30

2003

.01.

31

2002

.08.

31

2002

.03.

31

2001

.10.

31

2001

.05.

31

2000

.12.

31

0

5000

10000

15000

20000

25000

30000

35000

OPEC-11 production Production quota

4

OPEC compliance level higher than during prior cuts

► OPEC took on the responsibility to limit production in order to stabilize oil prices

► Most adversely affected were small independent upstream players (due to the lack of credit availability)

► Integrated business model proved its viability

Oil Gas

Gas demand outlook in Europe by country

► The crisis left long-term gas demand fundamentals in Europe largely intact

► Gas remains the cheapest low-carbon energy source for power generation

► EU climate policy provides an additional push for increased gas use

Source: Bloomberg Source: CEDIGAZ, EU27 study

Downstream: margins will rebound along with recovery

5

0

50

100

150

200

250

300

350

400

Jan-0

8

Feb

-08

Mar

-08

Apr-

08

May

-08

Jun-0

8

Jul-08

Aug-0

8

Sep

-08

Oct

-08

Nov-

08

Dec

-08

Jan-0

9

Feb

-09

Mar

-09

Apr-

09

May

-09

Jun-0

9

Jul-09

Aug-0

9

Sep

-09

US

D/ton

Diesel (10 ppm FOB ROTT) Gasoline (10 ppm FOB ROTT)

► MOL downstream has an exposure to diesel demand, the most cyclical oil product► Experienced both ups and downs within 12

months► Margins will only improve once economic growth

recovers in MOL’s core markets

BUT► Dieselization trend in Europe has not stopped

due to the crisis

► Complexity proved valuable during the crisis

► More complex refineries fared better during the crisis

► Timing of complexity-improving investments have changed, but their mid-term viability is unquestionable

World gasoline demand World diesel demand

Diesel and gasoline crack spreads

Source: PIRA Source: PIRA

Source: MOL

► The cycle: the effects of the global recession on the oil & gas industry

► Long-term challenges facing the energy industry

6

Agenda

Future challenges facing the energy industry

7

Upstreamreserve replacement

1

Gas infrastructurefinancing

2Alternative energy /

CO2 abatement

3

Upstream reserve replacement

8

► In the next 20 years, more than 2.2 times more oil has to be found than in the past 20 years

► Continuously high oil price is needed to provide enough incentive for investment

► The oil industry faces a long-term skills shortage

► A step change will be needed in petroleum engineering education

Global upstream capital expenditure

Production capacity evolution 1988 to 2008 and 2009 to 2030

Timing of a typical major upstream project

0

50

100

150

200

250

300

350

400

450

500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

bil

lio

n U

SD

Project cancellations since October 2008:Oil: 2.03 mmb/dGas: 8.79 bcm/yTotal value: $ 170 bnProject delays by over 18 months since October 2008:Oil: 4.22 mmb/dGas: 23.6 bcm/yTotal value: $ 70 bn

Source: IEA

0

50

100

150

200

2008 2030

Yet-to-find oil reserves

Other oil reserves

2.27 x increase

Yet-to-find oil reserves 1988-2008as seen in 1988 compared to actual 2008 demand

Yet-to-find oil reserves 2009-2030as seen in 2009 compared to expected 2030 demand

Source: CERA Source: MOL

3-5 yrs

4-6 yrs

CA

PE

Xhi

ghes

tlo

wes

t

25 yrs

2 yrs

ExplorationApp-raisal

Development Production

Corporate financing of gas infrastructure

9

► Gas import needs in Europe will inevitably increase

► Political push for supply security will lead to improving environment for financing gas infrastructure projects

► Risks of gas infrastructure development

► Uncertain demand

► Exchange rate risk

► Uncertain regulation

► The EU’s energy security agenda has already translated into improved conditions for corporate financing in case of Nabucco

► Approved business model

► Approved unified tariff system

► Approved rules on exemptions

► Investment climate for other crucial infrastructure projects must still substantially improve to attract private capital (e.g. HU-CRO interconnector)

Conditions for financing Nabucco has already been substantially improved…

…but financing conditions for other crucial infrastructure projects are still unfavorable

Source: MOL

Source: Nabucco Gas Pipeline International GmbH

Existing high pressure grid

Ongoing and planned cross-border interconnections

Nabucco

Countries to form the Joint Venture

Observer status

Other interested Countries

“When we hear that a project is strategic priority from the Chinese, then it means construction will start tomorrow; when we hear it from the EU, then it means that the Commission will put out a Green Paper about it.”

By a senior Central Asian policymaker

Alternative energy and CO2 emissions

10

0

10

20

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60

70

2009 2010 2011 2012 2013

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► Alternative energy investments were hit particularly hard by the economic crisis

► Capital-hungry

► Primarily credit-financed

► High exposure to energy prices

► Long-term investment

Strong political determination in the developed world to reduce carbon emissions

► Global green stimulus spending at least partly offsets lost incentives and capital shortage

► Regardless of what happens in Copenhagen, alternative energy sources / energy efficiency will remain a long-term investment opportunity

Global new investment in clean energy2004-2009

Annual global clean stimulus spending2009-2013

Source: New Energy Finance

World energy-related CO2 emissions abatement

450 scenario is a World Energy Outlook 2009 scenario where concentration of greenhouse gases in the atmosphere stabilise at 450 parts per million of CO2 equivalent

Source: IEA

$105-115 bn

$155 bn$148 bn

$93 bn

$60 bn

$35 bn

0

20

40

60

80

100

120

140

160

2004 2005 2006 2007 2008 2009e

bil

lio

n U

SD

Source: New Energy Finance

The cost of CO2 abatement within the EU

11

► Under IEA’s 450 ppm scenario, the EU will have to provide nearly 10% of total additional energy investment and 14% of total global renewable investment

► More than 2/3 of new investment by the EU will occur between 2020 and 2030

► Nearly half of total additional costs will occur in the transportation sector

World cumulative new investment in total energy supply and renewables (2010-2030)

Breakdown of the additional cost of the 450 ppm scenario in the European Union by sector

European Union CO2 abatement cost in the 450 ppm scenario (2010-2030)

Source: IEA

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5

10

15

20

25

30

35

40

45

Total Energy Renewables

tril

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450 ppm scenario

Reference scenario

Total addtional cost:USD 1,800 billionOf which renewables:USD 380 billion

Source: IEA

Source: IEA

Conclusions

12

► Time horizon of projects aimed at solving long-term challenges is longer than that of the capital markets

► Equity investors usually look ahead 3.5 years at most (shorter than the lead time of a typical project in the energy industry)

► Shortsightedness: Projects with long lead time are not valued at their true NPV

► Policy uncertainty increases investment risks and makes it harder to finance strategic projects

13

Thank you for your attention!

László VarróLVarro@mol.hu

Overview of Allowed Return of Regulated Networks Across Europe

7.32%7.85% 7.85%

9.60%

8.00%

7.25%7.60%

6.70%5.49%

9.25%

5.50%

6.90%

9.00%

9.90%10.25%

11.10%

5.88%

7.28%7.36%

7.20%6.86%

6.91%

5.49%5.15%

5.85%5.50%

6.91%

5.99% 5.85%6.25%6.25%

9.70%

11.50%

5.15%

10.50%

6.86%

5.50%

7.00%

5.40%

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

Gas Electricity Other Premium for Development Capex

7.10%7.25%

5.06%5.06%

7.00%

5.44%

Pre-Tax Real Return on Asset (%)

Source National Regulating Authorities

UK ItalyNetherlands Germany France Spain

Average = 6.58%

Portugal

(2)

(2)

Finland

(3)

(1)

14