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5 May 2011 Nomura 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 [email protected]

Action We 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.

Catalysts The 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 term

We 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 Japan’s oil demand for power generation during its peak power demand season is an added feature to this year’s 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 as European refiners return from the maintenance season in the coming months.

Demand remains resilient Fundamentals 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 risks The 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 prices Expectations 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 geopolitical risk 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 forecastWe are raising our 2011F Brent oil price forecast to US$110/bbl from US$99/bbl and maintaining our 2012Fforecast of US$/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]

Oil & Gas/Chemicals | Global Michael Lo, CFA

5 May 2011 Nomura 2

Contents

Oil prices to peak in the near term 3 The loss of Libyan crude supply to boost sweet crude premium 3

Japanese oil demand to increase this summer 5

Seasonal demand upswing in US and Europe 6

Oil demand from refineries to increase in the coming months 7

Fundamentals continue to remain strong 9

Demand growth to remain strong 9

Demand destruction likely to be minimal 12

OPEC spare capacity continues to fall 14 Iraq supply could be a big swing factor in 2013F & beyond 15

Early indicators point to intensifying investments 16

Inventory could continue to fall 17

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

OPEC to support higher oil prices 22

Long-term price remains at US$75/bbl 23


5 May 2011 Nomura 3

Near-term outlook

Oil prices to peak in the near term On 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 world’s total supply, it represents 7% of the total world’s 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

Wintershall 0.10 6 Spain 0.14 10

Total 0.06 3 United Kingdom 0.10 7

Marathon 0.05 3 Greece 0.06 5

Conocophillips 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 production

7%

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 crude capacity


5 May 2011 Nomura 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 8,382

Sour 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 sour between 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-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

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 with the 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.


5 May 2011 Nomura 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 some 171kbbl/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


5 May 2011 Nomura 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 diesel demand 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



+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


5 May 2011 Nomura 7

Exhibit 10. North America gasoline demand versus price in 2008

0

100

200

300

400

500

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

9.8

10.2

10.6

11.0

(mmb/d)US Regular Grade MotorGasoline retail price

North America Gasoline Demand

(cents/gallon)

+0.3mmb/d

Impact of financial crisis

Note: Dotted line denotes average for the months Jan-Mar & Apr-Aug


Exhibit 11. North America gasoline demand

9.5

10.0

10.5

11.0

11.5

12.0



+0.1mmb/d

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


Furthermore, looking at North American demand in total, 1Q11 North America oil demand is up 0.4mmbbl/d or 1.6% y-y (primarily led by diesel), despite oil prices rising 37.1% y-y. The recovering economy is driving demand growth despite higher prices. Moreover, in the Energy Information Administration’s (EIA) latest Summer Fuels Outlook released in April 2011, the US EIA expects this summer’s gasoline consumption to increase by 0.5% y-y to 9.3mmbbl/d, despite an expected gasoline price increase of 40% y-y to US$3.86/gallon. The EIA also believes that the US economic recovery will likely boost gasoline and diesel fuel consumption this season.

In addition, we foresee a similar pickup in OECD Europe demand. Based on a five-year average, European demand picks up from the seasonal low of 14.4mmbbl/d in May to the peak of 15.5mmbbl/d in September, representing an increase of 1.1mmbbl/d. On a quarterly basis, 3Q demand for OECD Europe is on an average 430kbbl/d higher than 2Q demand. The seasonal swing in demand, particularly in Europe, could increase the demand for sweet crude. This will likely keep Brent oil prices high during the summer season.

Oil demand from refineries to increase in the coming months According to the International Energy Agency (IEA), refinery turnaround this year peaked in March and some 2.0mmbbl/d of refining capacity will slowly resume operation from April to July. As more refiners come out from a turnaround, we could see a further boost in crude demand in the near term. Europe is of particular interest as some 1.0mmbbl/d of refining capacity will come back on line from April to July. This represents approximately 8% of total refinery throughput in Europe and could further increase demand for light sweet crude, in our opinion.

Refinery turnaround this year peaked in March and some 2.0mmbbl/d of refining capacity will slowly resume operation from April to July


5 May 2011 Nomura 8

Exhibit 12. Global refinery turnaround

Source: IEA

Exhibit 13. European refinery turnaround

Source: IEA


5 May 2011 Nomura 9

Longer-term demand outlook

Fundamentals continue to remain strong Fundamentals 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 create additional 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 government’s 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% in April 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 70.5

Source: 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


5 May 2011 Nomura 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-Pacificnon-OECD Europe

OECD-EuropeFSU

AfricaOECD-North America

Latin AmericaMiddle EastOther Asia

ChinaTotal OECD

Total non-OECDGlobal demand

(mmb/d)


Exhibit 16. 2012F global demand change

0.0 0.5 1.0 1.5 2.0

non-OECD EuropeOECD-EuropeOECD-Pacific

FSUAfrica

Latin AmericaOECD-North America

Middle EastOther Asia

ChinaTotal OECD

Total non-OECDGlobal 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 Nomura’s 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 in 1Q11. 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 year’s Chinese demand growth. Strong industrial production data as well as a robust Purchasing Managers’ Index (PMI) suggest that the recovery is underway. While China’s 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

72Q

07

3Q0

74Q

07

1Q0

82Q

08

3Q0

84Q

08

1Q0

92Q

09

3Q0

94Q

09

1Q1

02Q

10

3Q1

04Q

10

1Q1

12Q

11F

3Q11F

4Q11F

1Q12F

2Q12F

3Q12F

4Q12F

2013F

(mmb/d)

6

8

10

12

1Q0

72Q

07

3Q0

74Q

07

1Q0

82Q

08

3Q0

84Q

08

1Q0

92Q

09

3Q0

94Q

09

1Q1

02Q

10

3Q1

04Q

10

1Q1

12Q

11F

3Q11F

4Q11F

1Q12F

2Q12F

3Q12F

4Q12F

2013F

(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



India demand holds strong

India’s 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, India’s oil demand growth is up 3.7% y-y on 8.3% growth in gasoline and 5.8% 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 RangePrior 5 Year Average20102011

Source: Thomson Reuters, Nomura Research

Exhibit 20. India distillate demand

600

800

1,000

1,200

1,400


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

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



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% permanent increase 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 2011’s 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 2004

World 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 estimated that a US$10/bbl rise in the oil price would subtract 0.8 percentage points from Asia ex-Japan’s GDP growth. In fact, Asia’s 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. Asia’s 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 larger impact on CPI inflation



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) 0.3

Thailand (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.



Longer-term supply outlook

OPEC spare capacity continues to fall While 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

2005

2006

2007

2008

2009

2010

2011

F

2012

F

2013

F

(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 ChinaFSU Latin America OECD Asia PacificOECD Europe OECD North America OPECNon OPEC 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

1Q11

E

3Q11

E

1Q12

E

3Q12

E

1Q13

E

3Q13

E

(mmb/d)(mmb/d)

OPEC Crude Production Capacity OPEC Crude Production

OPEC crude capacity 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

No

v-00

Ap

r-01

Sep

-01

Feb

-02

Jul-

02

Dec

-02

Ma y

-03

Oct

-03

Mar

-04

Au g

-04

Jan

-05

Jun

-05

No

v-05

Ap

r-06

Sep

-06

Feb

-07

Jul-

07D

ec-0

7

Ma y

-08

Oct

-08

Mar

-09

Au g

-09

Jan

-10

Jun

-10

No

v-10

3Q11

F4Q

12F

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



Exhibit 29. OPEC’s falling compliance

30

60

90

120

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

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 Iraq’s production capacity can reach 3.1mmbbl/d by end-2011, 3.2mmbbl/d in 2012 and 3.4mmbbl/d in 2013 from 2.75mmbbl/d currently.

The ramp-up of Iraq’s 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

200

9

201

0

2011

F

2012

F

2013

F

2014

F

2015

F

2016

F

2017

F

2018

F

2019

F

2020

F

(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 Iraq’s 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



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 35 rigs. 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 of how 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-0

3

May

-04

Mar

-05

Jan-

06

Nov

-06

Sep

-07

Jul-0

8

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-0

3

May

-04

Mar

-05

Jan-

06

Nov

-06

Sep

-07

Jul-0

8

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 above our 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



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

y = 7.0012ln(x) + 25.53R² = 0.8222

70

72

74

76

78

0 500 1000 1500 2000

(OPEC Capacity + 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-year averages, 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 of demand cover)

Prior5 Year RangePrior 5 Year Average20102011


Exhibit 38. OECD onshore product inventory days (industry + strategic)

25

30

35

40

45


(Days of demand cover)

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 a downward trend as demand rebounded in 2010, outpacing supply growth



Exhibit 39. Global crude floating storage

-

20

40

60

80

100 M

ar-1

0

Ap

r-10

May

-10

Jun

-10

Jul-

10

Aug

-10

Sep

-10

Oct

-10

No

v-10

Dec

-10

Jan

-11

Feb

-11

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

Ap

r-10

May

-10

Jun

-10

Jul-

10

Aug

-10

Sep

-10

Oct

-10

No

v-10

Dec

-10

Jan

-11

Feb

-11

Mar

-11

(mmb)

Mideast Gulf Asia Pacific Med

NW Europe US Gulf Coast West Africa

Source: Bloomberg, Gibson, Nomura Research



Impact of fund flows

Fund flows to negatively influence oil prices in the longer term Based 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 imply financial 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, our economics 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



Exhibit 43. Commodity ETP AUM

70

90

110

130

150

170

190

210

230

250

270

Jan-

09

Mar

-09

May

-09

Aug

-09

Oct

-09

Dec

-09

Mar

-10

May

-10

Jul-1

0

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

-09

Mar

-09

May

-09

Jul-

09

Sep

-09

No

v-09

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-10

Jan

-11

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 flows through 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

Jan-

10

Fe

b-10

Ma

r-10

Ap

r-10

May

-10

Jun-

10

Jul-1

0

Au

g-10

Se

p-10

Oct

-10

No

v-10

De

c-10

Jan-

11

Fe

b-11

Ma

r-11

Ap

r-11

May

-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 the beginning of QE-2



Exhibit 46. US$ index

70

75

80

85

90

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

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

Ap

r-09

Jun

-09

Aug

-09

Oct

-09

Dec

-09

Feb

-10

Ap

r-10

Jun

-10

Aug

-10

Oct

-10

Dec

-10

Feb

-11

Ap

r-11

Dollar Index Euro World ex-euro

Source: Bloomberg, Nomura Research



OPEC budget break-even

OPEC to support higher oil prices With 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



Long-term oil price outlook

Long-term price remains at US$75/bbl Intense 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 and gas 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 Total’s acquisition of Tullow Oil’s Uganda assets and Total’s 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



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

0

20

40

60

80

100

120

1401Q

07

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 differences in 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 (billion barrels)

Produced MENA

EOR

Other Conventional

Oil

CO2 -EOR

Oil ShaleDeep Water and Ultra deepwater Arctic

Heavy Oil and Bitumen

Coal to Liquids

Gas to Liquids




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 2.3

Euro 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



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 150

Pazflor (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 175

Junin Venezuela 640

Others 345

2013 total 2,465

2014 - 2015 total 6,922

Source: IEA, OPEC, Thomson Reuters, Nomura estimates



Nomura Oil supply-demand balance

Exhibit 57. Global Oil supply-demand table

2009 2010 2011 2012

Change, 10 vs 09

Change, 11 vs 10

Change, 12 vs 11

Change, 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 2012F 2013F mmb/d % mmb/d % mmb/d % mmb/d %

Demand

North America 25.4 25.5 24.2 23.4 22.9 23.3 23.6 23.3 23.6 23.8 24.2 24.0 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

China 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

Latin America 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 89.4 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

% increase 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

China 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

Other Asia 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)

Latin America 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 30.0 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)

Processing gains 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 53.3 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 OPEC crude*

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 stock change - 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 stock change - m bls

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

OECD stock change - 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 2013FBrent 105 123 110 103 105 113 113 110 80 110 110 110




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