CHARLES R. WEBER COMPANY TANKER

REPORT

MARCH 2010

shifting tidesfrom survival to recovery?

“To deal with men is as fine an artas it is to deal with ships.”

Joseph Conrad

Executive SummaryExecutive Summary

The The YYear in Summary 2009ear in Summary 2009

The Shipping MarketThe Shipping Market

“Great Recession” - S“Great Recession” - Stinging the Ttinging the Tail?ail?

WWorld Economic orld Economic Action Action

The Outlook for 2010The Outlook for 2010

Broad Brush Background – The big themes Broad Brush Background – The big themes

Economic Cycles Economic Cycles

The Rise of IraqThe Rise of Iraq

Potential Drivers for TPotential Drivers for Tanker Market in 2010anker Market in 2010

China - Monitoring the Health of the EconomyChina - Monitoring the Health of the Economy

Brazil as an ExporterBrazil as an Exporter

TTanker Market Outlook for 2010anker Market Outlook for 2010

TTanker Supply Prospectanker Supply Prospectss

UnderstUnderstanding the Importanding the Importance of Slippance of Slippageage

Freight Market ScenariosFreight Market Scenarios

Calendar of EventCalendar of Events 2010s 2010

Future VFuture Visionision

ShippingShipping

Russia’Russia’s New Oil Ports New Oil Portss

Oil IndustryOil Industry

TTanker Companker Companiesanies

TTanker Shares Sanker Shares Stuck in the Slow Lanetuck in the Slow Lane

Third/Fourth Quarter TThird/Fourth Quarter Tanker Resultanker Resultss

AppendicesAppendices

Chronology of Oil Market EventChronology of Oil Market Events s

The Role of SThe Role of Speculators in the Futures Marketpeculators in the Futures Marketss

New Crude Oil Production CapNew Crude Oil Production Capacity acity

Exploration and DevelopmentExploration and Development

Refinery ProjectRefinery Projects s

Oil Industry Rationalisation Oil Industry Rationalisation

Shipping NewsShipping News

WWeebbeerr TTAANNKKEERR RReeppoorrttCharles R. Weber Company Inc. Tanker Report is

published four times a year. It reviews important top-

ics within the tanker shipping industry and tanker sec-

tors that are of particular interest. It focuses on

changes in tanker trading patterns and changes in

fleet supply and demand.

SSOOUURRCCEESS::Charles R. Weber Research, International Energy

Agency, Energy Information Agency, Lloyds Maritime

Information Unit, Baltic Exchange, Global Trade

Information Services, OPEC.

EEDDIITTOORRIIAALL BBOOAARRDDJohnny M. Kulukundus - Director of Research

George P. Los - Senior Tanker Markets Analyst

CCOONNTTAACCTT DDEETTAAIILLSSJohnny M. Kulukundis / George P. Los

Charles R. Weber Company Inc.

Greenwich Office Park One

Greenwich, Connecticut, 06831, USA

voice:+1 203 629 2300

e-mail:jmk@crweber.com

e-mail:gpl@crweber.com

web: www.crweber.com

DISCLAIMERWhilst every care has been taken in the production of

this study, no liability can be accepted for any loss

incurred in any way whatsoever by any person who

may seek to rely on the information contained herin.

The information in this report may not be reproduced

without he express written permission of the Charles

R. Weber Comapny, Inc.

COPYRIGHT© 2010 Charles R. Weber Company, Inc.

ESSENTIAL READING FOR THE INTERNATIONAL ENERGY INDUSTRY

Issue 14

www.crweber.com

1st Quarter 2010IN THIS REPORT

Charles R. WeberTanker REPORTThe aim of the Weber Tanker Report is to provide participants in

the tanker shipping industry with an overview into the latest devel-

opments in the tanker market and the oil industry that it serves,

and also to shine a spotlight on the future prospects for these two

markets.

Crude Oil Market

Subjects that are regularly covered are as follows:

-Crude oil supply/demand balances historical and forecast

-Crude oil prices

-OPEC announcements and quota changes -US and global crude

oil import/export trade statistics -Crude oil and product stocks

-Upstream activity and how developments in the E & P sector will

affect tanker shipping -Refinery developments and scheduled

developments

-Monitor “Peak Oil” Debate

-Monitor Delivery Schedule and Investment plans for new crude

oil capacity

Tanker Shipping Market

Subjects that are regularly covered are as follows:

-Tanker earnings trends historical and forecast

-Tanker spot fixtures

-Tanker investor activity in terms of new orders, secondhand

sales and scrapping

-Tanker fleet supply changes historical and forecast

-Tanker fleet demand forecasts – taking into account the impact

of tonmiles

-Listed tanker shipping company results and share performance

This publication also tries to illuminate the differences between

developments in the various tanker sectors during the most recent

period. It also attempts to deliver a snapshot of tanker business for

participants to better understand the forces at work within the

tanker shipping industry. We welcome our reader’s thoughts and

opinions and would be very happy to discuss points raised in this

report with you.

Given the speed of developments within the tanker market and

those markets that support it we take a longer view when compil-

ing this report. In order to offer daily market updates we offer a

daily market update of all sectors of the tanker market on our web-

site:www.crweber.com

For further information please contact the Charles R. Weber

Research Department.

John M. Kulukundis

Director of Research

jmk@crweber.com

George P. Los

Senior Tanker Markets Analyst

gpl@crweber.com

Charles R. Weber Company Inc.Telephone: +1 203 629 2300

Fax: +1 203 629 9101

E-Mail: chartering@crweber.com

Website: www.crweber.com

Mail & Visiting Address

Charles R. Weber Company Inc.

Greenwich Office Park One

Greenwich, CT

06831, USA

Tanker Chartering AOH

James L. Ford: +1 203 550 0706

Michael J. Moore: +1 203 570 3116

Peter Howard-Johnson: +1 203 940 3936

Lawrence P. Jordan: +1 203 550 1695

George T. Eden: +1 203 550 1687

Daniel O'Donnell, Jr.: +1 203 550 1615

Christos Alexandrou: +1 203 550 1618

Keith D. Abbott: +1 203 550 1719

Basil G. Mavroleon: +1 203 213 6427

Halvor H. Kielland: +1 203 550 1612

Chris L. Aversano: +1 203 570 3871

Kevin Breen: +1 203 550 5552

Joseph D. Gross: +1 203 550 1614

Laura Mirabella: +1 203 979 8679

Denis O'Sullivan: +1 203 979 6215

Michael J. Sparks: +1 203 564 3324

Juan Raul Gomez: +1 203 554 9557

Research AOH

Johnny M. Kulukundis: +1 203 550 1720

George P. Los: +1 914 325 1652

Operations AOH

Leonard C. Faucher, Jr.: +1 203 321 5454

Michael P. Alban: +1 914 659 1469

Philip M. Curran: +1 516 398 5059

Gerry F. Helmcke: +1 203 979 6240

WeberSeas (Hellas) S.A.Telephone: +30 210 453 9010

Fax: +30 210 452 6100

E-Mail: Chartering@WeberSeas.com

Website: www.weberseas.com

Mail & Visiting Address

Ygias 1-3 & 2

Akti Themistokleous Str.

Piraeus 18536

Greece

Tanker Chartering AOH

Basil G. Mavroleon: +30 6932 644 983

Dionysios G. Mitsotakis: +30 6944 720 337

Lefteris T. Mystriotis: +30 6946 762 010

George S. Karalis: +30 6948 753 725

Operations AOH

Kimon E. Polikratis: +30 6932 300 590

2010 – Shifting Tides Executive Summary

At the time of the last Weber report in October, tanker owners had just been through a distinctly lacklustre summer and early autumn as the fallout from the “Great Recession” raged on with average earnings for a modern VLCC below breakeven levels for five of six months up to September. In the winter of 2009/2010, there was a modest improvement in rates underpinned by one of the coldest winters in recent years combined with a gradual recovery in the world economy as some of the big countries started to come out of recession. Nevertheless, the performance of tanker rates in recession scared 2009 was in marked contrast to those for the dry bulk sector, which had been able to benefit from the gradual warming in economic sentiment and the takeoff in Chinese commodity imports. A major factor behind this was the IEA estimate that the global recession cut seaborne oil volumes in 2009 by 5% overall while oil demand declined 1.5%. It has been argued that 2009 was about survival and that 2010 will be about recovery and looking to take advantage of opportunities caused by low vessel values and companies fatally weakened by the recession. Certainly, there is an expectation that 2010 will be a better year than 2009 – with demand set to expand for the first time in two years – although forecasters are divided on the strength of this recovery – and fleet supply growth guaranteed to moderate to around 3% from 8% seen in 2009 with 30MnDwt+ single hull tankers scheduled to come to the end of the road. However, optimism for a strong 2010 is in short supply, and this is in part because risks are still on the downside There are two major threats to the tanker sector in 2010 (1) Oil-less recovery from recession - If the third oil shock is to be characterised as a relatively short, deep shock with the global economy continuing to make headway in 2010, the key question for the tanker industry is whether, in the new green era, oil demand recovers at the same pace as the global economic recovery. One analyst, Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC wonders if the US economic recovery could be “oil-less” and “jobless”. Another analyst Oliver Jakob also contemplates whether oil will be excluded from the recovery. He points out that the US Environmental Protection Agency’s new biofuels mandate for 2010, which calls for a 1.85 billion gal increase from 2009 to 2010, “would represent an increase of about 110,000 b/d on ethanol,

Weber Tanker REPORT Edition 4 March 2010

and that means that most if not all of the potential demand increase for gasoline in 2010 will be taken by biofuels rather than by petroleum products”. Much of the pessimism about future crude oil demand growth is centred on the OECD economies where demand is already thought to have peaked, but the emerging economies of the east led by China are still expanding markets. Overall demand is expected to rebound in 2010 after 2 years of contraction. However, there is little consensus about the strength of this rebound (e.g. IEA +1.6Mnbd, OPEC+0.8Mnbd) in a market weighed down by high oil stocks. Even at the top end of the range, oil consumption is set to be much lower than expected when shipowners were fine tuning the orderbook back in early 2008 in preparation for a new era post the 2010 single hull phase out. (2) Potential Mismanagement of Exit from Stimulus – there is good evidence that the world economy is recovering albeit slowly even though unemployment is still a major concern and is hampering consumer demand recovery. In January, the IMF revised up its global forecast to near 4% for 2010, and China is looking stronger than ever with the China Confidential (Feb 11) highlighting “huge productivity growth conferred by infrastructure investments and the acceleration of urbanisation” as reasons to continue to believe in that country’s growth story. However, some believe that the global economic recovery is an artificial and unsustainable creation fuelled by huge government spending (stimulus) that is ultimately unaffordable. There is no doubt that pressure to end the stimulus phase of the recovery is mounting and that this creates a potential catch 22. End stimulus too soon and individuals and corporations won’t have the confidence to take over the strain from government and so spending and investment will fall and economic growth will go into reverse – too late and countries will build up more debt than the market thinks they can bear and eventually it becomes too expensive to service that debt. Greece’s national debt is in the spotlight today and there are fears that if the Eurozone rescue plan does not succeed then the Greek contagion could spread - raising the prospect of a return to recession or even depression. A large part of the success/failure in negotiating the end of stimulus will be the ability of world governments to maintain unity. The G20 has been tasked with managing the recovery from recession and it been very successful in breading confidence based on a coordinated and unified approach. The key next test of this harmony will be the June G20 summit in Canada The two big risks described above will inevitably make shipowners cautious, and there are other risks that could also dampen or even derail the global economic recovery and undermine growth in crude oil seaborne trade volumes. - US/Chinese relations - according to FT.com these are heading for the cooler. The failure of the two countries to see eye to eye at the Copenhagen Climate Change Summit, the saga of Google and the case of cyber hacking, US arms sales to Taiwan, China’s testing of a missile defense system and counter accusations of US “protectionism” v Chinese “currency manipulation mean that the temperature between the two countries is really starting to drop. - Commodity bubbles not necessarily a thing of the past - According to Oliver Jakob (in early January) the price of crude was back to 2006-2007 levels on the basis of a barrel of North Sea oil priced in euros. KBC Energy Economics, a division of KBC Advanced Technologies PLC, London, analysts said, “If prices continue to rise next week, it will be tempting to conclude that we are back in the casino-like oil market conditions we saw in 2008.” Jakob commented - the economy of 2007 did not manage to digest current oil prices, and we will remain cautious in assuming that the subsidized economy of 2010 will be able to do so. The 2009 stabilization of the economy was done with oil at USD60/bbl, not with oil at USD90/bbl.” - Business as usual – Some are concerned that the window of opportunity to forge a new global consensus has passed – that protectionism and national self interest are coming to the fore again and that lessons from the recession have not been learnt. In November, Ambrose Evans-Pritchard remarked that, “markets are still in denial about the structural wreckage of the credit bubble. There are two more boils to lance: China's investment bubble; and Europe's banking cover-up. I fear that only then can we clear the rubble and, very slowly, start a fresh cycle” Notwithstanding the twin threats and other threats described above, it is unlikely that 2010 will be a great year for tanker shipping despite the modest recovery in demand and the clear out of tonnage (30MnDwt+) bringing to an end the era of single hull tankers. The overhang of new deliveries set to enter the market in 2010 (50MnDwt+) will ensure that supply factors in 2010 will offer less benefit than was envisaged a few years ago – although projected fleet growth of 3% is much better than the 8% recorded last year. The relatively weak improvement in supply/demand fundamentals will mean that – in tune with the rest of the world – tanker freight rates are likely to record only a gradual revival in 2010 unless

wildcard events intervene. The most likely wildcard at the moment would appear to be an escalation of the Iranian nuclear stand-off. As already discussed, the luke warm prospects for freight rates were not what shipowners had hoped for in the years leading up to the end of the single hull era. Unfortunately the Great Recession was not on the cards when shipowners made their investment decisions to build new ships for a potential new golden era. Realistically – for most companies - if 2009 was about survival, then 2010 will be about repositioning and strengthening but above all about waiting – waiting to see what the future holds for crude oil demand. The questions shipowners need answering are can oil demand keep pace with the hoped for global economic recovery, and - more specifically - can rising Asian demand offset declining demand in OECD countries? So far Shipowners are still mostly passive. The scarcity of ordering (chart right) means that owners have been able to get used to the phenomenon of a contracting orderbook (down for the 15th consecutive month in December). This unusual situation supports the assertion that shipowners are in waiting mode and are focused on repairing their balance sheets. Of course, not all companies are sitting on the side lines. NATS is one such company looking to aggressively pursue a growth strategy by taking advantages of perceived opportunities caused by the recession. NATS is virtually debt free and so sees itself as a different animal to other companies. However, even NATS is not prepared to dip into the newbuilding market preferring to target “cheap” secondhand tonnage. The single hull 2010 scrapping milestone has dominated the thinking for shipowners for a long time. We are coming to the end of an era for tanker shipping – an era that could unkindly be characterized by bouts of glutinous over investment and environmental vandalism. We are now at the beginning of a new and uncertain era and the time has come to look at what new factors might come into play. There is a fear that long term structural problems are set to undermine the prospects for the tanker sector and its appeal to investors – It seems clear now that regardless of the Copenhagen failure, the world is going green. Green energy is firmly on the agenda with nuclear power seemingly the preferred option for a number of OECD countries. Legally binding targets for green house gas emissions may have eluded COP15 in its attempts to renew the Kyoto treaty, but permanent crude oil demand destruction is no longer a concept it is a fact. In 2010, the G8 is likely to become important player in trying to salvage a green accord from the rubble of Copenhagen, but actions are already starting to speak louder than words. (a) (a) In US - The American Public Power Association (APPA) said a plan for the U.S. Environmental Protection Agency to regulate greenhouse gases (GHG) under the Clean Air Act is an "imperfect, but responsible way to proceed." The group said in comments filed in December that it would prefer for GHGs to be regulated under new legislation, but Congress is unlikely to pass a climate change law in 2010. Therefore, EPA must move under its existing authority – for example the Clean Air Act's prevention of significant deterioration program. The alternative long term view – oil demand to grow for the next 20 years – There is a strong counter argument to the pessimism engendered by the rise of the green agenda. This alternative view defines an east/west split that reflects the very different stages of development of the two regions. The more positive assessment for the future of crude oil demand and tanker shipping points to the phenomenal economic growth prospects for the BRIC and other emerging countries. In these countries, the middle classes are starting to expand and to consume. The car is high in the agenda for this group and even a preference for fuel efficient hybrid cars means this will be a key growth market for oil demand. Major oil companies like BP are committed to a future view of rising crude oil demand, while a recent report by the Cambridge Energy Research Association envisages a future well supplied with crude oil - with oil production capacity growing steadily through 2030 with no evidence of a peak of supply. The future then is uncertain and it always will be. We look forward to charting the shifting tides of the old era and the start of a new era for oil tanker shipping.

Tanker Rates/Prices

With more and more countries pulling out of recession and with China forging ahead, tanker rates showed signs of anaemic recovery during 4Q09. However, (1) earnings are still below 2002 levels - the previous weakest year of the last decade, while (2) concern grows that economic recovery may proceed without a significant revival in oil demand due to factors such as energy switching.

The chart plotting BCTI shows that the product sector moved in unison with the dirty sector in 4Q09.

The rate of fall for both newbuild and secondhand prices has slowed considerably, but it is too early to say if the market has reached bottom. Falling prices mean further damage to shipowner balance sheets, which in turn means that the focus for shipowners remains on repaying debt rather than making new investments.

Demolition prices remain well off the mid 2008 peak although they started to track up from 3Q09 in line with rising steel prices.

Tanker Fleet

The primary reason why tanker rates have been so poor is that fleet growth has been faster than expected, which is primarily a consequence of a much slower increase in the rate of scrapping than expected Year on year fleet growth of 4% in 2008 compares with growth of 8% in 2010. The dramatic surge in fleet size last year was the second in a combination of blows that damaged the market last year. The one two of rising supply and subsiding demand left the market on the floor. A glint of light in 2H09 with fleet growth moderating to 2% from 6% in the first six months of 2009.

Delivery slippage was a hot topic in 2009, and there is no doubt that - with approximately 18% of scheduled deliveries pushed back to 2010 – this factor had an important impact in moderating tanker fleet growth in 2H09. However, tanker slippage was much less dramatic than for the dry bulk sector (38%) last year.

2010 is the regulation enforced end of the line for single hulled tankers. It had been hoped that scrapping might pick up significantly in 2009 ahead of the scheduled cut off year. This eventually proved to be the case with 4MnDwt removed in 2H09 compared with 1.4MnDwt in 1H09. Demolition rates are pre-ordained to get much higher through 2010 with estimated removals of 2-3MnDwt each month. With the certainty of much higher scrapping, slippage will be the key variable impacting on tanker supply in 2010.

Investor Activity Despite the modest uptick in freight rates during 4Q09, the collective of tanker companies appears in no mood to embark on a major new investment chapter. Instead companies are continuing to focus primarily on paying down

debt – as they strive to strengthen their balance sheets.

As a consequence of this introspection, tanker newbuilding investment slumped to just 16MnDwt in 2009 from a peak of 80MnDwt in 2006.

Even if scrapping were to be concentrated in 1H10, it is unlikely that the collective are ready to resume contracting in earnest as conservatism continues to rule - although it may well be that ordering starts to average over 2MnDwt/month.

The scarcity of ordering means that owners have been able to get used to the phenomenon (shown below) of a contracting orderbook (down for the 15th consecutive month in December) .

The Year So Far - Chart Wall

Although not as badly checked as the newbuilding market, secondhand sales remain subdued with consistent but low levels of activity towards the end of 2009. The lack investment in secondhand tanker tonnage is in contrast to the dry bulk sector, which has reported a reasonable revival in the number of sales since the beginning of the recession when transactions almost stopped altogether.

Crude Oil Demand Fears of a double dip recession persist with the recent PIIGS run on the world’s stock markets at the beginning of February – triggered by fears about the state of European countries such as Greece, Spain and Portugal – the latest scare.

However, oil demand forecasters have consistently improved their expectations for 2010 over the last few months. In January, the IEA forecast 2010 demand at 86.3Mnbd (+1.7%, +1.4Mnbd yoy) compared with their initial estimate of 85.2Mnbd made July last year. Nevertheless, fears persist that the recession has left an indelible stain on the oil market with significant permanent demand destruction. In

effect oil demand growth will not match the growth in the global economy due to factors such as energy switching in part inspired by the tightening grip of the environmental lobby. Tellingly in its latest report the IEA said that “oil markets are becoming more difficult to predict and interpret as each year goes by.” Rather than focusing on its headline 2010 demand estimate of 1.4Mnbd, it prefers to draw attention to its 0.8-2Mnbd predicted range.

Crude Oil Production The gradual recovery has given OPEC and non-OPEC producers the chance to increase output with the result that world production increased by more than 1Mnbd over the last 4 months of 2009.

OPEC’s adherence to its quota system continues to be weak despite a call at its latest meeting Dec 22 to improve compliance. In December, OPEC was pumping 1.8Mnbd above its 24.845Mnbd target despite Saudi Arabia’s disciplined approach.

Russia, FSU countries and Brazil were the strongest performers in the non-OPEC grouping in 2009. OPEC countries Angola, Nigeria, and Venezuela all increased output in 2H09. Iran and Kuwait did not.

Also it was noticeable in 2009 that both China and USA were able to maintain an upward trajectory for their respective domestic production.

Crude Oil Exploration As the oil price clawed its way towards USD80Bbl, there was a very clear recovery in exploration activity around the world – although rig counts are still when down on levels seen 2006-2008.

In Obama’s state of the Union Speech, there was also a measure of support for the oil industry with the recognition of the need for more offshore oil development in new areas.

Crude Oil Stocks

The collapse in crude oil demand at the end of 2008 allowed a major stock build to occur. However, since March 2009 stocks have been gradually heading back towards the 5 year range and are now towards the top of that range.

The issue of high stocks impacts on demand prospects for the tanker sector – a situation compounded by high product stock levels.

Crude Oil Prices

As confidence in the strength of the global economic recovery took root during 4Q09, crude oil prices – which had been tracking in the rangeUSD65-70Bbl since mid year

– headed up to test the USD80Bbl barrier. However, at the end of January there was a sharp correction in crude oil prices as concerns about the strength of certain European economies took hold. By early February, spot prices were below USD70Bbl.

Although crude oil prices more than doubled in 2009 from less than USD40Bbl to almost USD80Bbl, the commodity to watch remained gold.

China Crude Oil Imports By April, Chinese crude oil imports were back to setting new records.

In contrast to the previous two years, crude oil imports strengthened significantly through the year as though China was trying to make up for time lost wondering whether the western contagion of recession would derail its progress.

The chart below shows what the sense of making up for lost time actually meant. As western export markets ravaged by recession contracted, China was forced to go to plan B to maintain its phenomenal growth. This secondary option involved stimulating the domestic market by pumping in huge amounts of government spending. The domestic market has so far filled the void left by depleted export markets.

There are tentative signs of a recovery in exports, but it is clear that the continued development of the Chinese market is a fundamental factor in China’s rise and the recovery of the global economy.

The Year in Summary 2009 ‘Great Recession’ – Could there be a Sting in the Tail The chart (below) shows the skeleton of ‘news’ events within the financial system that precipitated the current recession, and the key events so far on the long road back to global economic health. It also shows the sometimes contrary path of tanker freight rates, which soared in the summer of 2008 apparently oblivious to the fermenting crisis (of course China crude and product imports were still strong), and then during the middle of 2009 remained depressed even though economic recovery appeared to be taking root as rapid fleet growth, high stock levels and spluttering demand acted as an anchor.

At the time of the last Weber report in October, it was clear that global economic confidence had started to gain real momentum as reflected in the gradual summer build in stock markets around the world – with both non-OECD and, more surprisingly, OCED countries starting to sprout nascent green shoots. China as anticipated by most commentators was providing the most positive signals with industrial output reaching a 12-month high in September. However, several of the leading industrialised nations were also showing signs of life – with Japan, Germany and France all posting GDP growth in 2Q09 and, therefore, technically moving out of recession. However, there were also serious concerns about rising global unemployment and the strength of recovery built on stimulus spending. Today, even though the global economy has continued to puff up and unemployment appears to have bottomed out, concerns remain that the recovery could be tripped up during the transition to the non-stimulus supported phase of the recovery. The pressure on governments to end stimulus spending is mounting as fears grow about whether certain countries can service the levels of debt that have been built up. In the UK, this will be the key election

Apr 8 2008: IMF says the effects are spreading from sub‐prime mortgage assets to other sectors, such as commercial property, consumer credit, and company debt.   Sep 15 2008: Lehman Brothers becomes the first major bank to collapse since the start of the credit crisis 

Oct 3 2008: The fightback begins ‐ The US House of Representatives passes a USD700bn (£394bn) government plan to rescue the US financial sector.  Nov 9 2008: China reacts – China reveals USD586Bn stimulus package. Second announcement (Mar 4, 2009)  beefing up stimulus package  

2nd and 3rd

Quarter 2009:  Tanker freight rates decouple from share prices as structural problems with fleet supply prevents the tanker market from benefiting from the gradual but sustained revival in global economic fortunes.  

4th Quarter 2009: Share prices maintain momentum –and tanker freight rates finally start to improve – even starting to close the gap on share price gains.

Apr 2 2009: G20 London Summit – Depression off the Table – some discord about the balance between increased stimulus and new regulation – but present unified front that injects some much needed confidence not to mention USD1.1Tr of spending pledges. The follow up G20 summit in Pittsburg in Sept reinforced the collective approach 

Dec 2009: Copenhagen Climate Change Conference –fails to achieve agreement.  End January 2010: PIIGS Run – Could fears about the economic health of certain European countries e.g. Greece derail recovery by sapping confidence in the same way that subprime mortgages did

issue in 2010. However, the timing of the transition to a non-stimulus era is critical. Governments can stop spending only when corporations and individuals are confident enough in the sustainability of the recovery to take over from the government and to start spending and investing again. The Japanese recession (1992-2007) shows the problem of ending stimulus spending too soon when on two occasions the Japanese government tried to exit too early and plunged then country back into recession. Of course government resources are not endless and stimulus spending has to stop sometime or the consequences could be equally dire. The recent PIIGS Run caused by concerns about the ability of several European countries to manage their debt requirements is threatening to undermine global confidence in the same way as the subprime mortgage crisis. Much of the success is averting a global depression has been attributed to the rise of the G20 as a force for building a global accord. In the case of the recent PIIGS Run, the international community is working together to put in place rescue measures. However, there are now questions about how long a united front can be maintained. Cracks have already started to appear – notably at the much hyped Copenhagen Climate Change Conference in December when it was not possible to find an agreement. The chart above does give some comfort to tanker owners because 4Q09 freight rates finally started to align themselves with stock market gains. This is important in re-establishing the link between tanker freight rates and economic expansion in the minds of investors, and also in that perhaps the tanker sector is starting to come to terms with its structural problems related to oversupply.

(a) Shipping indices as lead indicators of global activity – Crude oil is the world’s energy feedstock and so in theory should be an ideal lead indicator of economic activity. However, the case for using tanker rates for this purpose is actually quite weak because of the attempts by OPEC to manipulate oil prices by micro managing the amount of crude oil it produces. The Baltic Dry Index is often considered a better lead indicator of economic activity because the absence of pervasive cartel activities and because unlike stock and commodity markets it is devoid of speculators. It is also considered a good lead indicator of where end prices are heading. Of course, the BDI (and any other shipping indicator) works best as a lead indicator of economic activity when vessel supply is consistent – which it rarely, if ever, is. It is also worth noting that shipping rates are of no use whatsoever in spotting financial tsunamis. The chart (right) compares the BDI and BDTI and Dow Jones indices. It is interesting to note that dry bulk rates fell like a stone from mid-year 2008 – much faster than the BDTI and Dow Jones. This reflected in part the dry bulk market’s sensitivity to the rise in counter party risk caused by the profound loss of confidence in the global financial system sometime after the Beijing Olympics in August and the demise of Lehman Bros in September. The major cargo owners in the tanker sector are leading international oil companies with very low perceived risk of default. During 2H08, therefore, the tanker sector may have been in some respects as a more accurate indicator of global economic activity – although the brief rally in tanker rates at the end of the 2008 may be seen to reflect the intrusion of market sentiment over fundamentals. From the start of 2009, the three indices have performed very differently. It would seem that the Dow Jones has provided a good indication of market sentiment throughout the year (gradually building in strength

after a decidedly sticky start). Notwithstanding a mid-year revival, the BDTI has charted a fairly miserable course through 2009 and does not reflect at all the more upbeat mood of global markets or indeed the slightly more optimistic crude oil demand forecasts. This index appears to be dominated by industry specific issues related to excess fleet supply and so it can probably be considered to be an unreliable lead indicator at the moment. The BDI is perhaps the most troubling of the indices in terms of providing a clue to the direction of world economic growth as it seemed to be functioning quite well in this role until mid-year. During 1Q09, the BDI started to revive before the Dow Jones and continued to improve during 2Q09. The recovery in the BDI’s fortunes during 1H09 ties in with the improved fortunes for the world economy and perhaps justifies the BDI’s lead indicator status. However, if the BDI is indeed a good lead indicator then what are we to make of the decline of the index during 3Q09. Although it is by no means as depressed as the BDTI. Perhaps like the BDTI, the BDI is being overwhelmed by its own industry specific issues related to excess fleet supply (with deliveries set to more than double in 2010 to 113MnDwt from 50MnDwt in 2009). and can no longer be considered a reliable indicator of the direction of global economic growth.

A Framework for Understanding the ‘Great Recession’ Richard C. Koo’s ‘The Holy Grail of Macro Economics – Lessons from Japan’s Great Recession’(1) has become required reading for economic policy makers all around the world. Through his studies of the protracted Japanese recession (1992-2007), Koo has provided a new framework for under- standing the global economy not just during this crisis but during all phases of the economic cycle. We included this assessment of his analysis in the last report, but believe his findings are even more relevant today so the discussion is included again. Richard Koo believes the current economic malaise is what he describes as a ‘balance sheet’ recession just like the recent Japanese recession and, indeed, the Great Depression in the 1930s. In each case, the trigger was the bursting of asset bubbles which left company balance sheets in tatters and forced companies to refocus away from maximising profits to repairing their balance sheets. Tanker shipping suffered its own asset bubble burst when vessel values crashed following the onset on the global recession from October 2008 (see chart right). The idea that companies are prepared to change their primary focus from maximising profit to minimising debt is not generally recognised in conventional economics. Koo argues that the lack attention given to resolving balance sheet weakness as the main recovery strategy for companies emerging from a ‘balance sheet’ recession is companies that are affected may have good cash flows and, therefore, it is in no one’s interest to bring the issue out into the open. The CEO of a company with negative net worth that is struggling to pay down debt would never discuss such matters with people outside the company. Nor can management discuss these matters with employees. Creditors do not want to discuss these issues either. With companies focused on repairing balance sheets, investing in the future takes a back seat for many corporations. The lack of corporate spending during a recession is mirrored by ordinary citizens who are more inclined to live within their means having suffered their own burst asset bubble in the form of falling house prices not to mention the potential loss of job security. From his understanding of the changed motivation of corporations and ordinary citizens, Koo identifies two key lessons for governments during a balance sheet recession. Lesson 1 – The importance of stimulus spending – Fiscal policy (rather than monetary policy) is king during a balance sheet recession. Corporations and citizens stop spending and investing in the future, therefore, governments are required to fill the spending and investment void to prevent national economies from shrinking. This of course means that governments start to build up ferocious levels of national debt and this in turn alarms ordinary citizens who intuitively believe that governments should act prudently during a recession. Koo calls this “the fallacy of composition” – the belief held by ordinary citizens that the governments should run the country like they would choose to manage their own affairs in a crisis Lesson 2 – Exit strategy from stimulus spending – The timing of exiting stimulus spending is crucial. The aim is to withdraw stimulus spending at the point when corporations and citizens are sufficiently confident to start spending and investing again. Koo notes that on two occasions the Japanese government tried to exit too early and plunged country back into recession. Using Koo’s analysis it becomes clear that we can view the progress of shipowners in recent months as following a process of rebuilding their strength by repairing their balance sheets. It can be anticipated that those companies that survive this phase of retrenchment will be looking to emerge stronger and wiser. However, with asset values still deteriorating it is reasonable to expect that in the near to medium term most shipowners will continue to focus on paying down debt rather than maximising profits and seeking out new investments. Of course, every great theory has exceptions and the highly international tanker shipping industry probably provides more than most. For example while most listed companies in New York and London are currently lying low and just talking a good fight about how they are looking for investment opportunities (as expected within Richard Koo’s theory), other owners groups e.g. Chinese and Greek owners are quite active investors in the secondhand market – although these two groups have actually favoured dry bulk vessels ahead of tankers in recent months. (1) Richard C. Koo ‘The Holy Grail of Macro Economics – Lessons from Japan’s Great Recession’(1), 2008, John Wiley & Sons, Inc.

Briefing Series

Date   Event   Location  

February 27‐28   Meeting of Finance Ministry and Central Bank Deputies  

Songdo, Incheon, Korea  

March 18‐19   Meeting of G‐20 Sherpas*   Canada  

April 23   Meeting of Finance Ministers and Central Bank Governors  

Washington, D.C., theUnited States  

May   Meeting of G‐20 Sherpas   Canada  

June   Meeting of Finance Ministers and Central Bank Governors  

Busan, Korea  

June   Meeting of G‐20 Sherpas   Canada  

June 26‐27   Fourth G‐20 Summit in Canada   Toronto, Canada  

September   Meeting of Finance Ministry and Central Bank Deputies  

Gwangju, Korea  

September   Meeting of G‐20 Sherpas  To be decided, Korea  

October   Meeting of Finance Ministers and Central Bank Governors  

Washington, D.C., theUnited States  

Meeting of Finance Ministers and Central Bank Governors  

Gyeongju, Korea      October or November    

Meeting of G‐20 Sherpas   To be decided, Korea  

November 11‐12   Fifth G‐20 Summit in Korea   Seoul, Korea  

World Economic Action – G20 – Managing the Exit Strategy

The chairman of the G20 for 2010 is South Korean President Lee Myung-bak. At a speech at the recent Davos Forum (28th January), he set out the tasks confronting the G20 – which has become recognized as the body tasked with coordinating the recovery from the current recession and with preventing such a serious contagion taking hold again. According to Lee Myung-bak the most urgent task facing the G20 in 2010 is to coordinate the transition phase as governments end stimulus spending. When this transition has been accomplished, the G20 will turn its attention to (1) making sure such a crisis can be repeated in the future, and (2) “follow up on the initiatives taken at previous summits on reform of financial regulation for a more resilient global financial system, and the reform of international financial institutions such as the IMF and World Bank”. The new chairman went on to stress the dangers or protectionism and the importance of inclusivity in decision making with countries outside the G20 to be included in discussions. The key G20 meetings for the year ahead are set out in the table below.

One area that is not on the agenda for the G20 is to pick up the pieces of the lost opportunity at the Copenhagen Climate Change Conference in December to formulate a global action plan to combat global warming. It seems that the G8 – now partly sidelined in the arena of economic decision making – will play an important role in trying to find consensus on this issue by trying to find accord between the leading nations. (a) The first G20 leaders’ summit was held in Washington November 14-15, 2008

(b) The first G20 finance ministers’ and central bankers’summit was in 1999

Pulse Series

The Outlook for 2010

Broad Brush Background Economic Cycles – Twin Risks for Tankers - An “Oil-less” Recovery or a Failure of Governments to Manage Exit from Stimulus The chart below (see red line segments) shows how oil demand went backwards (x-axis) as a result of the first oil shock in 1973 and also as a result of the second oil shock in 1979 (oil price spikes shown on y-axis). Although in 2008 the oil price was more of a symptom of the malaise rather than a catalyst for recession, oil demand went into reverse again - with 2008/9 being the first consecutive years of contraction since 1982/3.

Following the first oil shock, demand contracted for two years before recovering strongly from 1976. The impact of the second oil shock was more severe with demand contracting for four years before slowly starting to recover from 1984. Perhaps already at the end of the third shock, all the leading forecasters are predicting that after the two year downturn demand is set to rebound – albeit fairly weakly - in 2010. The IEA in its February 2010 Oil Market Report predicts a 1.6Mnbd (1.8%) recovery in oil demand in 2010 back to the high point for demand in 2007. The tanker sector’s fear of an “oil-less” recovery - If the third oil shock is indeed characterised as a relatively short, deep shock with the global economy continuing to make headway in 2010, the key question for the tanker industry is whether, in the new green era, oil demand recovers at the same pace as the global economic recovery. One analyst, Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC wonders if the US economic recovery could be “oil-less” and “jobless”. Further afield than the US, the McKinsey Global Institute has discussed the prospect of permanent demand destruction in the form of a broadly decarbonised Europe by 2050. According to McKinsey decarboninsing Europe means “essentially, two things. It means electrifying almost all economic activity:

all of transport, much of industrial activity, everything other than agriculture, in effect. And then, it means taking the entire power sector and decarbonizing it through a mix of dramatic expansion in renewables, very significant ongoing reinvestment in nuclear, and then, for the residual fossil fuel part of the power sector, applying carbon-capture-and-storage technology”(c). The world’s fear that a double dip recession lurks – Beyond the oil and tanker sectors, there is of course the wider concern not that the recovery will be “oil-less”, but that the world economic recovery may yet be derailed. On the face of it the threat of double dip set back is receding with some of the key economic forecasting agencies predicting a quicker recovery from recession than first expected. Towards the end of January, the IMF (b) revised up its global economic growth forecast to 3.9% in 2010 and 4.3% in 2011. Nevertheless, there are fears that the world economy is about to face its greatest challenge since the onset of the sub-prime mortgage crisis that triggered the “great recession” in 2008 as world governments attempt to manage the exit from stimulus spending. The fear is that an unwinding of unsustainable debt burdens will drag down growth rates for years to come. So far, reality has been more benign, with economic growth recovering sooner than expected in some countries, even though the financial sector is still cleaning up its balance sheets and consumer demand remains weak. New research from the McKinsey Global Institute (MGI), though, suggests that the deleveraging process may just be getting under way and is likely to exert a significant drag on GDP growth. Much of the success in averting a depression has been attributed to the willingness of governments around the world to work together. The rise of the G20 as the forum tasked to manage the recovery is the greatest symbol of this unity, as power – previously invested in the exclusive G8 club – has been shared within a much wider community. The London forum in April built on the success of the first G20 summit in November 2008 in Washington. The third G20 summit in Pennsylvania maintained the G20’s unity and momentum. However, cracks have started to appear in the global accord as evinced by the Copenhagen Climate Change conference in December, which failed to secure the much anticipated binding agreement on new green house gas emissions to replace the Kyoto agreement. One of the primary stumbling blocks was the failure of China and the US to provide leadership as differences forced them apart. Some argue that once again national interests have started to hold sway, and that the window for forging a new global order based on consensus is now over. Protectionism is again the dark knight threatening globalization, free trade and environmental reinvention. It may be that the economic recovery no longer needs international unity – just as the planet’s well-being may not need collective environmental planning. However, the financial crisis raging around Greece in recent weeks and the threat of a new financial contagion sweeping away other vulnerable European economies such as in Portugal, Ireland Spain, and Italy shows that it is not business as usual just yet. The stimulus phase has placed a huge debt burden on individual economies and it some cases it may not be possible to service that debt. The Eurozone has been forced to rally around Greece in order to put in place a credible rescue package. It seems that the jittery market can be satisfied only by concerted collective effort. The world can’t yet afford discord as it plots the difficult task of timing the exit from the stimulus phase. Keep stimulus spending going too long and the debt burden will be too large to service – not long enough and corporations and consumers won’t have the confidence to believe the economy is back onto a level footing, and it is time for them to start spending and investing again. (a) Recession history goes back a long way - to 1854 in fact - with 32 cycles in the US (averaging 17 months of contraction and 36 months of expansion). History and duration of recent recessions - 1929 to late 1930s, Great Depression, stock market crash, banking collapse in the United States sparks a global downturn. Durations: 43 months, 1937, second downturn of the Great Depression. Durations: 13 months, 1945, Duration: 8 months, 1948-1949, Duration: 11 months, 1953-1954, Post-Korean War Recession - The Recession of 1953 was a demand-driven recession due to poor government policies and high interest rates. Duration: 10 months, 1957-1958, Duration: 8 months, 1960-1961, Duration: 10 months, 1969-1970, Duration: 11 months, 1973-1975, Oil crisis, a quadrupling of oil prices by OPEC coupled with high government spending due to the Vietnam War leads to stagflation in the United States. Duration: 16 months, 1979-1980, 1979 energy crisis, the Iranian Revolution sharply increases the price of oil, 1981-1982, Duration: 16 months, 1982 and 1983, Early 1980s recession, caused by tight monetary policy in the U.S. to control inflation and sharp correction to overproduction of the previous decade which had been masked by inflation, 1980 to 2000, Great Commodities Depression - general recession in commodity prices, 1990 to 1992, Early 1990s recession - collapse of junk bonds and a credit crunch in the United States leads to one quarter of US GDP decline, and therefore not an official recession, 1990 to 2003, Japanese recession -collapse of a real estate bubble and more fundamental problems halts Japan’s once astronomical growth, 1997, Asian financial crisis - a collapse of the Thai currency inflicts damage on many of the economies of Asia, 2001 to 2003, Early 2000s recession - the collapse of the Dot Com Bubble, September 11th attacks and accounting scandals contribute to a relatively mild contraction in the North American economy. Since the US GDP never actually declined in this period it is not considered an official recession. (b) IMF’s World Economic Outlook Update (Feb 2010)

“The global recovery is off to a stronger start than anticipated earlier but is proceeding at different speeds in the various regions (Table 1 and Figure 1). Following the deepest global downturn in recent history, economic growth solidified and broadened to advanced economies in the second half of 2009. In 2010, world output is expected to rise by 4 percent. This represents an upward revision of ¾ percentage point from the October 2009 World Economic Outlook. In most advanced economies, the recovery is expected to remain sluggish by past standards, whereas in many emerging and developing economies, activity is expected to be relatively vigorous, largely driven by buoyant internal demand. Policies need to foster a rebalancing of global demand, remaining supportive where recoveries are not yet well sustained”.

(c) McKinsey’s analysis of an economic recovery without a corresponding recovery in oil demand goes beyond discussing a decarbonised

Europe. McKinsey argues that from Africa and from a number of the less developed countries—and you go all the way up to an Indonesia, in terms of economic development—the conversation is, in part, about how to take advantage of the green assets that they have. And so, the real debate that’s now playing out in those economies is how to take the climate change agenda and use it as a positive discontinuity, leading to much more productive agricultural and land use patterns. So you’ve got economies, in a sense, at the other end of the spectrum, and then, just to complete the picture, there is an absolutely critical group of countries in the middle: the middle-income, rapidly developing, rapidly industrializing countries. And the real question for those economies is, “How do they continue their path of rapid economic industrialization without, at the same time, becoming ever more energy intensive and ever more carbon intensive in their production patterns?” The key driver of decarbonizing these economies will be the speed with which they move from relatively low-value economic activities—which are, themselves, very energy intensive—toward much higher-value, more service- and knowledge-based activities. Require high energy prices + portfolio of policy interventions by government (urban planning – transport – building codes – power sector). Danger is protectionism because there will be winners and losers.

Peak Oil – The Rise of Iraq Pushes Back the Peak Oil Curve Leading industry authorities continue to stress that oil supplies remain plentiful and that the top of the peak oil curve is some way off. In its November report, the Cambridge Energy Research Association envisaged a future where global oil production capacity would grow steadily through 2030 with no evidence of a peak supply. The report, based on analysis of more than 10,000 projects around the globe, predicts that capacity will grow by as much as 115 Mb/d from the current level of 92 Mb/d – a 25% increase. Post-2030 supply could struggle to meet demand, but this would take the form of a decades-long “undulating plateau,” rather than a sharp fall, the report states. The IEA also believes physical oil resources are plentiful. However, it argues that there are valid concerns about the ability of the industry to expand the supply base quickly enough – largely due to above-ground opportunity constraints – if unfettered annual demand growth of 1+ Mb/d reemerges in the post-recession period. For this reason, indications that upstream spending is likely to rebound in 2010, and with it a rise in exploration, are very welcome. Fuelling the argument that supplied are plentiful, 2009 was a year of new giant field discoveries with the Tiber in the US Gulf and Guara in the Santos Basin – both conservatively reported to contain 2 billion barrels of recoverable reserves. However, the major oil supply story of 2009 was that of Iraq – which has the world’s third largest proven reserves – would eventually be able to quadruple its crude oil production from around 2.5 Mb/d to around 10 Mb/d by 2020, according to the Iraqi oil ministry. When the second of two rounds of licensing for new oil blocks was completed in December with seven of the 10 blocks claimed (the first was in June when only one contract was signed), the Iraqi Oil Minister Hassain al-Shahristani indicated that production could be increased to 4.8 Mb/d if the companies who won the fields meet production pledges. Further licensing rounds are still to come. Not everyone is as optimistic about Iraq’s oil production prospects, however. The IEA calculates that production will only reach 3.1 Mb/d by 2014, and notes that Iraq’s own estimates for 2020 are very ambitious. The IEA commented that “…the many political and security risks that continue to challenge the government and industry remain, leaving our outlook extremely vulnerable to future revision.” The IEA also points out that Iraq’s three-track strategy to boost production in the short term has met with mixed success:

1. The enhanced drilling programs by the Southern Oil Company (SOC) and the Northern Oil Company (NOC) have so far failed to increase production as planned.

2. The joint-venture between the Iraq Drilling Company and Mesopotamia Petroleum Company (UK) collapsed for lack of funding, underscoring the difficulties the national companies have had in ramping up production on their own.

3. The two licensing rounds completed thus far were undersubscribed. The IEA also points to infrastructure problems which could limit production unless addressed with urgency. It is estimated that vital infrastructure work in the southern region will not be completed until 2013-14, at the earliest. Of course, although the short- and medium-term prospects related to Iraq’s production prospects are clouded with risk, the latest estimate for spare production capacity of 7 Mb/d – 77% of which stems from OPEC members, per IEA analysis – means that it would appear extra Iraqi oil is largely unneeded, at least in the short term. See previous articles about peak oil in the Weber Monthly: ‘Peak Oil – Here We Go Again – Oil Shortages by the End of the Year’ – Sept 2009 ‘Peak Oil – Underinvestment to Hasten the End of the Age of Oil’ – May 2009 ‘The End of Tyranny of Oil in Our Time’ – February 2009 ‘Temporarily Off the Front Pages’ – October 2008 ‘Just OPEC left to Convince’ – June 2008 ‘Oil Company Executives Going Green’ – March 2008 ‘Spare Supply Capacity Continues to Recover’ – June 2007 ‘Plateau or Peak – the CERA proposition’ – March 2007

Pulse Series

Potential Drivers for Tanker Market in 2010 Positive Wild Cards Negative Shipping Single Hull Drop Dead Date to Scrap is Here – Scrapping of the single hull fleet ahead of the 2010 deadline started early building gradually through 2009 (1Q 1.2MnDwt, 2Q 1.2MnDwt, Q3 2.3MnDwt, Q4 3MnDwt) Scrapping is anticipated to accelerate to 2-3MnDwt per month with 34MnDwt of single hulls to go by the end of 2010. This will guarantee much lower fleet growth next year than in 2009 (8%). Cancellations – If freight rates remain a low levels orderbook cancellations may continue to be a factor which will improve medium/long term fleet supply prospects Slippage – Delivery delays became more important than cancellations last year with an estimated 18% of 2009 deliveries pushed back to 2010 – although this is less than in the dry bulk sector where slippage was 38%. Slippage could work in favour or tanker supply again in 2010 ‘Balance Sheet’ Recession – Low Appetite to Start Building – Shipowners are focused on minimising debt rather than making new investments so do not expect an ordering boom any time soon. Oil Industry Demand to grow in 2010 - (estimates range from +0.8Mnbd to +1.6Mnbd) for the first time since 2007 – driven by transport sector in emerging markets. Oil Price forecast good for economic growth - Adam Sieminsk, chief economist, Deutsche Bank/Global Markets Commodities Research predicts a USD65/bbl average for 2010 compared to the general analysts’ estimates of USD75/bbl. Moderate oil price due to high spare cap/strong Non-OPEC prod/USD strength /high stocks/low demand World well supplied with Oil - CERA forecast spare cap could avg 7-8Mnbd in 2010-12 from 1Mnbd in 2005 (Dec 21) (A4)

Stock Levels Moderate – OECD industry stock levels remain high but have started to move back into balance due to the colder than average winter temperatures and a gradual revival in crude oil demand.

The EIA estimate that end‐November days

of forward cover were at 59.1 days, 1.9 days higher than a year ago. World Economy China Punching Above its Weight – Despite having a GDP equivalent to 20% of US GDP, the continued global recovery from recession continues to depend in large part on China which still forges on with exports up 21% yoy in January. World Set to Return to Growth in 2010 – Despite the uncertainty surrounding Greece and other Eurozone countries, OPEC has revised upwards it global GDP forecast to 3.4% in 2010 after GDP contracting 0.9% in 2009.

Nature Hurricanes – The 2009 hurricane season was the slowest since 1997. 2008 was the worst US hurricane season since 2005 with Gustav (Aug 26) and then Ike (Sep 5) striking. See http://www.nhc.noaa.gov/, and http://hurricane.atmos.colostate.edu/. Hurricane season June-November. Global Warming – The year 2009 is likely to rank in the top 10 warmest on record since the beginning of instrumental climate records in 1850, according to data sources compiled by the World Meteorological Organization (WMO). http://www.metoffice.gov.uk/climate/uk/2009/ http://www.metoffice.gov.uk/weather/world/seasonal/

Geopolitical Hotspots Iran accelerating it nuclear ambitions - Obama reached out to Iran Mar 19, but Iranian leadership cool. The extraordinary election fall out (from June 12) weakened the Iranian leadership, while the exposure at the end of September of a second secret uranium enrichment site seemed to mean that the international community would unite against Iran. However, with its announcement of 10 new uranium enrichment plants in February, it seems that Iran is trying to take advantage of the current disunity in the international community caused in part by the decided cooling in Chinese/US relations. Israel/Palestine – The global economic crisis has meant that the US has prioritised towards it own domestic issues and so a breakthrough in resolving this conflict does not appear close. Relatively quiet at the moment, but could erupt at any time. Russia – May be prepared to take more serious action against Iran following the US decision to end plans to base its anti-missile defence system in Poland and the Czech Republic – not to mention help build more cordial relations with the US. Venezuela – Continues to build up its relationships beyond the US but no immediate signs of a flare up in its antagonistic attachment to the US. Nigeria – In January, the main militant group - The Movement for the Emancipation of the Niger Delta (MEND) – ended a unilateral ceasefire that has held since September because of alledged delays to the amnesty programme. It claims to be watching develoments, but oil pipeline attacks have resumed organised by a coalition of ex-militants and community leaders in the Niger Delta Al-Qaeda – stated aim to drag China into its firing line with a threat to avenge the deaths of Muslims in the Chinese province of Xinjiang in 2009 by targeting China's extensive workforce and projects around the globe, including its oil and gas interests. However, under pressure in both Pakistan and Afghanistan.

Shipping ‘Balance Sheet’ Recession – Debt Burden – All shipowners are focused on paying down debt rather than maximising profit, while small and weaker owners are currently struggling to renegotiate debt covenants which may have been breached due to falling asset values, as a result of bank preference for caution & imperative to recapitalise. In the longer term, a shakeup may benefit the industry – although low interest rates make the current environment more benign in some ways than during the 1980s shakeup. Hitting the Wall of Ships – We are now in the middle of the expected tanker delivery surge – 2009 (55MnDwt), 2010 2010 (55MnDwt) & 2011 (52MnDwt), which compares with annual average deliveries 2004-2008 of 30MnDwt. Even with expected scrapping levels of c. 36MnDwt in 2010, the sector will still be under pressure from rising fleet supply. Floating Storage – Still likely to be an important factor although estimated that down to 40MnBbls in February from 100MnBbls in May 2009. If the economic recovery continues then demand should soak up production and diminish the requirement for floating storage. Oil Industry Demand forecast to be sluggish in OECD countries in 2010(4) – despite the recent cold weather. Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC wonders if the US economic recovery could be “oil-less” and “jobless”. Obama Seeks to End ‘Tyranny of Oil’ (A6) – it is very early days yet but Obama seems intent on bringing an early end to the age of oil. However, the failure of the US and China to forge an alliance in November 2009 to work together as collaborative leaders of the ‘green age’ means this vision may remain just that. Chinese Inflation Concerns – Much World Economy The Risk of Ending Stimulus too soon - In October, the IMF (5) upgraded its world economic growth forecasts for 2010 to 3% (2009 -1%, 2008 3.2%, 2007 5.2%) from an estimate 1.9% in April. Good news, but it went on to highlight the risk to the recovery of ending government stimulus spending too soon. The Global Consensus Wobbling – G20 still seen as the forum for pulling the world out of recession, but the expected international accord on climate change at the Copenhagen Climate Change conference in December failed to materialise mad worse still is pushed China and US apart.

Notes supporting table above outlining potential drivers for the market in 2010

See appendices (A) at the end of the report for additional information outlining potential drivers for the market

(1) Oil Price forecasts – Following the successful G20 April summit in London, oil traded on the basis that ‘depression’ had been averted, that the global economy had probably reached bottom during 1Q09 and that it would now slowly start to recover. Adam Sieminsk, chief economist, Deutsche Bank/Global Markets Commodities Research predicts a USD65/bbl average for 2010 compared to the general analysts’ estimates of USD75/bbl. His forecast of a relatively weak oil price is based on an assessment of high spare capacity/strong Non-OPEC production/USD strength /high oil stocks/low crude oil demand

(2) Crude oil start-ups – what is the new required oil price – Oil companies are being forced to develop oil fields in increasing hostile regions (e.g. deep water projects in the Atlantic and USGulf), and this has driven up the required oil price for project sustainability. The required oil price level for new projects varies enormously depending on exactly how difficult the oil is to extract. However, as a general consensus, it seems that oil prices in the USD50-55bbl are required. At the start of 2008, it was thought that oil companies were basing their budgets on an oil price of around USD60-80bbl. WoodMac Exploration Service Manager Alan Murray told delegates at International Petroleum Week in London that operators now need to assume an oil price of USD70bbl to earn close to 15% on exploration. John B. Hess provides an illustration of rising exploration costs - a deepwater rig that cost USD100,000-200,000pd in 2002 today costs USD500,000-600,000pd—if you can find one available. Oliver Onyewuenyi, program manager of Global Deepwater R&D, Shell E&P talking about the challenges facing those tapping into West Africa’s deepwater resources proposes a well cost of up to USD100Mn/well.

(3) Will West Africa remain the main source of new oil discoveries - According to Adebola Adejumo from IHS Energy, in the last two years, 6 Bboe have been discovered in Africa, mostly offshore West Africa (78%). These finds account for 22% of global resource discoveries, he said. Over the next seven years, IHS projects Africa’s oil production to grow from 11.5Mnbd to 16 Mnbd. This will account for 15% of global production capacity, he said. Abubakar Yar’Adua, group MD, NNPC claims West Africa, the Gulf of Mexico, and Brazil, are estimated to hold 75% of the world’s undiscovered deepwater reserves.

(4) 2010 Demand Forecast – IEA’s February Crude Oil Demand Growth Estimates for 2009 -1.5% (-1.3Mnbd) and 2010 +1.8% (1.6Mnbd) compares with the February forecasts from the US EIA 2009 -1.65MnBd, 2010 +1.2Mnbd, 2011 + 1.6Mnbd, OPEC 2009 -1.4Mnbd, 2010 +0.8Mnbd, and IMF 2009 -1.9Mnbd, 2010 +1.3Mnbd.

(5) IMF Real GDP forecasts (Oct 09) World 07-08-e09-e10 5.2, 3.2, -1.0, 3.0, China 13, 9.0, 8,5, 9.0, India 9.4, 7.3, 5.4, 6.4, USA 2.1, 0.4, -2.7, 1.5, Euro area 2.7, 0.7, -4.2, 0.3, Japan 2.3, -0.7, -5.4, 1.7, Middle East 6.2, 5.4, 2.0, 4.2 (Apr 09) World 07-08-e09-e105.2, 3.2, -1.3, 1.9, China 13, 9.0, 6,5, 7.5, India 9.3, 7.3, 4.5, 5.6, USA 2.0, 1.1, -2.8, 0.0, Euro area 2.7, 0.9, -4.2, -0.4, Japan 2.4, -0.6, -6.2, 0.5, Middle East 6.3, 5.9, 2.5, 3.5 (Oct 08) World 06-07-e08-e09 5.1, 5.0, 3.9, 3.0, China 11.6, 11.9, 9.7, 9.3, India 9.8, 9.3, 7.9, 6.9, USA 2.8, 2.6, 1.6, 0.1, Euro area 2.8, 2.6, 1.3, 0.2, Japan 2.4, 2.1, 0.7, 0.5, Middle East 5.7, 5.9, 6.4, 5.9

China – Monitoring the Health of the World’s Second Largest Economy

This section provides an insight to some of the key recent developments in the seemingly unstoppable rise of China as an economic super power.

China/US Relations Heading for the Deep Freeze

In November, ahead of his trip to China, Obama talked about rare inflection point in history. The implication was that the time has come for China to stop exporting its unemployment overseas by rebalancing its currency. This inflection point did not materialize as Obama was given a cool reception during his Chinese excursion and ever since US/Chinese relations have been heading into the freezer according to the FT.com’s China Confidential. The failure of the two countries to see eye to eye at the Copenhagen Climate Change Summit, the saga of Google and the case of cyber hacking, US arms sales to Taiwan, China’s testing of a missile defense system and counter accusations of US “protectionism” v Chinese “currency manipulation mean that the temperature is really starting to drop.

How Strong is China’s Domestic Market

Nov 15 - China continues to talk about reducing its dependence on exports, still 39% of GDP, by expanding its domestic markets. Measures to achieve this include boosting pensions and extending health insurance to the countryside so that people feel less need to save, but cultural revolutions take time. All we have seen so far are "baby steps", says Morgan Stanley's Stephen Roach. The reality is that much of Beijing's USD600Bn stimulus has been spent building yet more plant and infrastructure so that China can ship yet more goods, or has leaked into property and stocks.

Ambrose Evans-Pritchard is similarly skeptical about the strength of China’s domestic market. He comments “Credit has exploded. Allocated by Maoist bosses for political purposes, it has become absurd. China is rolling as much steel as the next eight producers combined. It is churning more cement than the rest of the world. Fixed investment is up 53% this year. Once you know that Hunan authorities have torn down two miles of modern flyway so that they can soak up stimulus by building it again, or that the newly-built city of Ordos is sitting empty in Inner Mongolia, you know what must come next”.

China Continues Its Quest For Natural Resources

Dec 30 - China and Venezuela signed five oil agreements. These included an agreement between PDVSA and Sinopec to establish a mixed company to develop the Junin 8 Block. CNPC and PDVSA agreed to set up a mixed company to develop a 400,000-b/d refinery in Cabruta that will refine oil from the Junin Block 8. The two countries also signed an oil export agreement, which could see up to 560,000 b/d heading to China in 2010, as well as a deepwater technical advice agreement between CNOOC and PDVSA. Earlier this year, Russia and Venezuela, during Venezuelan President Hugo Chavez's 2-day visit to Moscow, signed a similar package of energy agreements, including one to develop the Orinoco belt and its 235BnBbl of heavy oil reserves.

Nov 20 - China National Petroleum Corp. signed three oil and gas cooperation agreements with the government of Sudan. The agreements consist of a MOU on the second phase expansion of Khartoum refinery, advance payment for crude trading and an agreement to swap equity between CNPC's Block 6 and Malaysia State Oil's Block 5A.

Nov 5 – Petrobras has signed the final agreements with China Development Bank Corp. (CDB) for a USD10Bn loan, which has been under negotiation since May. Petrobras CFO Almir Barbassa, who represented the firm in the signing ceremony, said, “This funding is relevant not only due to the amounts involved, but also because it represents a new phase of relationship between developing countries.” The initial 10-year loan agreement was signed in May on the second day of a 3-day visit to Beijing by Brazil’s President Luiz Inacio Lula da Silva between state visits to Saudi Arabia and Turkey. Since then, the two sides have been negotiating the fine details. Petrobras will use the loan for its 2009-13 business plan. The loan will be received in several tranches, according to withdrawal notices to be issued by the Brazilian firm in the upcoming months.

Pulse Series

Oct 27 - Russia’s state-owned pipeline monopoly OAO Transneft has completed construction of a spur from the Eastern Siberia-Pacific Ocean (ESPO) pipeline to the border with China, according Transneft Pres. Nikolai Tokarev. The pipeline spur stretches 64 km in Russia, from Skovorodino to the Amur River, which marks the border with China. The line will be able to ship 15MnTons/year of oil, rising to a total of 300MnTons/year over the 20-year contract between the two countries.

Oct 20 - Chinese appetite for energy resources remains intact. “The Chinese National Offshore Oil Corp. is reported to be in talks with StatoilHydro ASA to acquire up to five of Statoil’s Gulf of Mexico leases. Prior to this, the Chinese were buyers of all energy resources that were not in North America, and now it appears they are willing to buy all energy resources that are not owned by American corporations. In 2005, the Chinese bid for Unocal was successfully scuttled by Chevron Corp., possibly with some minor help from the government. It is difficult to envision a major correction in crude with this backdrop in place,” said analysts at Pritchard Capital Partners LLC in New Orleans.

Brazil is the largest national economy in Latin America and the world’s tenth largest economy. Though it

did not avoid the world economic down-turn it was amongst those countries that quickly found its way out, implementing a large stimulus package. A return to growth in 2Q09 meant that Brazil’s recession was comparatively short, amounting to just two quarters of negative growth.

For the past 30 years oil production has been constantly rising in Brazil, and where it once imported 85% of its oil is now a net exporter, with 2010 output estimated to be 2.7 Mnbd. The discovery in late 2007 of a new generation of offshore oil fields will have huge implications. The Tupi field in the Santos basin is predicted to contain 5bn-8bn barrels of recoverable oil, which would make it Brazil’s largest field. On its own, Tupi has the potential to increase the country’s oil reserves by more than 50%. Two other large fields Jupiter and Carioca have been discovered, and global oil com-panies are keen to exploit them.

Brazil’s President called the find “a gift from God”. In Nov 2009 it was predicted that oil production from Brazil’s vast off-shore crude reserves could start in five to

six years, which would put it ahead of Iraq if current estimates hold true. The Presi-dent also announced he was trying to boost state control over the oil deposits that could turn Brazil into a major energy exporter.

But Tupi is a pre-salt discovery - held in rocks beneath a salt layer, which in plac-es reaches thicknesses of over 2km. This opens up a new horizon for exploration in Brazil. In order to reach the oil, which lie at depths of around 4-5km below the ocean floor new production technologies have to be developed, and will be expen-sive - USD50-100Bn The goal is to start producing from Tupi in 2010, with a pilot project of 100,000bpd, then increasing to over 200,000bpd in 10-15 years.

Refineries are also being invested in. The Potiguar Clara Camarao Refinery is being upgraded to boost its capacity. It is one of five refining units that aim to increase its overall refining capacity by 1.2Mnbd by 2015.

Trading routes have changed in recent times. Trade to OECD countries is on the decrease with the exception of the UK. De-spite crude oil exports to the US increas-ing in 2009 it is staying closer to home

with Canada its major importer with six times as much trade. It is also increasing its own production. Despite fears about the impact of the crisis exports to China have increased, in part largely thanks to a stimulus package launched by the Chinese government. Brazil’s newly discovered oil fields also offer significant potential to satisfy China’s enormous appetite. In an agreement Brazil would supply 100,000 to 160,000 bd in exchange for USD10Bn loan to help develop its major oil reserves. Long haul trade is now on the increase.

These new oil discoveries now place Brazil amongst the large producers and exporters.

1 2

With the discovery of more deep sea oil fields off its coast and increased oil production, Brazil is happening. There are major implications for a changing pattern of trade, with long haul on the increase generating greater opportunities for the tanker industry. Brazil is

now positioned amongst the large producers and exporters.

The Growing Importance of Brazil as Exporter

Brazil Goes Long Haul

Long HaulShort Haul

3 dimensional chart illustrating distance crude oil travels from Brazil (horizontal arrow), % change in trade for 2008/09 (vertical arrows) and 2009 trade volume (vertical arrow width)

Tanker Market Outlook for 2010 The following section looks at whether tanker shipping can keep pace with the recovery from recession if it continues through 2010, or it is strong enough to keep its head above water if the economy slips back into the second trough of a double dip recession. The primary focus of this analysis is to look at elements of tanker supply in the context of changing demand patterns. (a)

Projecting fleet supply for the tanker sector has become more complicated than in the bull market of recent years. It is no longer sufficient just to factor in scrapping based on the IMO drop dead schedule for single hull tankers, and deliveries from the current orderbook. In the recession era, it is now necessary to take account of a likely acceleration in scrapping triggered by depressed freight rates, and the prospect of orderbook cancellations. The removal (conversion) of vessels for other forms of trading is another important new factor impacting on supply, although this has not so far been as important in 2009 as it was in 2008. The storage market has long provided an alternative off market form of employment and this continues to play an important (if temporary) part in influencing overall tanker supply. Delivery slippage is the latest factor to have to be considered when forecasting supply.

(a) Background 2008 - Despite the onset of global recession, overall 2008 tanker earnings were close to record 2004 levels and even held up reasonably well during the latter part of 2008. This respectable performance was the result of reasonably solid supply/demand fundamentals. Despite running out of steam towards the end of the year, average global crude oil demand (86.2Mnbd) was relatively little changed from 2007 (86.5Mnbd), while fleet growth of 6%, although high, was close to the five year (’04-08) average of 5.5%. At this point the sector had been able to avoid the catastrophic rate collapse that overtook the dry bulk market, which was engulfed towards the end of the year by a sudden aversion to counter party risk that caused a temporary dislocation in trade.

Background 2009 - The tanker sector was unable to fend off its own rate collapse for long with rates fairly consistently depressed throughout 2009 as a result of a lethal combination of demand contraction (down 1.3Mnbd, -1.3% yoy), and an acceleration in fleet supply growth (+8%). Average tanker earnings (across all sectors) dropped precipitously from around USD60,000pd in 2008 to USD22,000pd in 2009.

Tanker Supply Prospects

Scenario 1 – Demand Destruction Continues and Scrapping Accelerates This scenario assumes that an event triggers a return to (shallow) recession in 2010. On the demand side, it is anticipated that crude oil demand growth will be less than 1% in 2010, following two consecutive years of negative growth 2008-2009. On the tanker supply-side, it is expected that weak demand growth will speed up the departure of single hulls and generate pressure to scrap or convert double hulls. Fleshing out the broad assumptions outlined above, it is expected that scrapping of single hull tonnage will be concentrated in the first part of 2010 (the IMO’s scheduled big bang year for saying goodbye to single hulls), while there is the expectation of an additional scrapping component in 2010 with double hull tankers scrapping at 20 years. This will not have a significant impact on the rate of scrapping in the larger sizes, but will lead to significant extra Product tanker scrapping. Under scenario 1, fleet growth is expected to increase by 2.4% in 2010, which is a considerable improvement on the 8% growth recorded in 2009. The high rate of growth in 2009 reflected a much later start to the beginning of the long awaited scrapping surge than originally anticipated. In May, it was forecast that 2009 removals would exceed the 20MnDwt removed in 2003 – the last significant year for tanker demolition. However, it turned out that last year scrapping was less than 8MnDwt.

While supply conditions were worse than expected in 2009, the outlook for 2010 has improved as a result because the removal of the rump of the single hull fleet (30MnDwt) under the IMO’s phase out programme will be focused on 2010 rather than being spread across 2009 and 2010. The fleet growth estimate for 2010 (+2.4%) represents a significant decrease from our earlier forecast (May’09) of 5% growth, although slightly up on the 1.7% estimate in September. Slippage – an important factor in 2009 when 18% of scheduled tanker deliveries were postponed until 2010 – has not been taken into account in this forecast. It is unclear whether slippage will have such a positive impact in 2010 although we have looked a little more in depth at this issue separately (see special feature) Storage is another key element in the tanker supply equation. Storage at sea reached 100MnBbls at times during 2009. It is difficult to predict how important storage will be in 2010, although it was reported to have fallen to 40MnBbls at the end of January. The conversion market (which was a key factor in moderating the rate of fleet growth in 2007-8) is unlikely to have a significant impact on moderating supply during 2010. Scenario 1: Tanker Fleet Development 2010-2015 Table shows projected no. of vessels being scrapped from 2010-2015. Charts show cumulative net fleet change 2010-2012 – All figures are in number of vessels.

Scenario 2 – High Case - Scrapping Follows Phase-Out Schedules This scenario assumes that the world economy continues to recover from recession and that crude oil demand follows the improved growth path predicted in the latest IEA forecast (+1.6Mnbd, +1.8%), following two consecutive years of negative growth 2008-2009. It also assumes that scrapping

is limited to that ordained under the phase-out schedule predetermined by IMO and that all vessels on the orderbook are delivered. Under this set of conditions, the fleet is set to expand by 3.2% in 2010. It is interesting to note that this supply forecast produces similar results to scenario 1: +2.4% in 2010. The similarity occurs because the dominant issue to impact on supply in 2010 is the phase out of single hull tonnage. However, it should be noted that slippage and cancellations do add a significant element of uncertainty to the exact path of fleet development. Notes: Additional assumptions used for scenarios: (1) Common trading fleet selection criteria

i. The information in these charts is based on the trading fleet (year of build >1979) ii. Phase-out includes single hull tankers and tankers with double sides or double bottoms, although tankers with double sides or double bottoms are assumed to benefit from life extension from embarking on CAS (condition assessment scheme) iii. Excludes U.S. Flag vessels iv. Excludes Combined Carriers v. Phase-out takes into account vessels sold for conversion to dry bulk carriers or FPSOs and other types (2) Common orderbook (as at September 2009) and delivery schedules. No assumption is made for additional orders

Freight Market Scenarios At the start of 2010, average tanker earnings (USD35,000pd) have outperformed average annual tanker earnings in 2009 (USD22,000pd). This reflects in part the slowdown in fleet growth and the moderate expansion in demand after two consecutive years of contraction. The certainty that more than 30MnDwt will be removed from the fleet through single hull phase out will undoubtedly have a very important positive impact on the market in 2010. However, the ability of the tanker freight market to make a further improvement is dependent on many factors or which three stand out (1) the ability of the international community to manage the transition out of stimulus without triggering a return to recession, which in turn is dependent on the G20 summits in June (Canada) and November (South Korea) perpetuating the unified approach to the crisis that has been so prominent since the first G20 summit in Washington in November 2008, (2) China’s success in sustaining the pace of its own economic growth and in leading the economic development of the Asia region, and (3) the distribution of single hull scrapping through the year and whether supply decelerators such as slippage and storage are as significant as they were in 2009.(b) It should be noted that predictions for the tanker market often prove inaccurate due to the impact of wild card events. In 2004, China burst onto the global economic stage astounding most analysts by its surge in crude oil demand. In 2005, hurricanes Rita and Katrina blew forecasters off course again, while in 2008, the Great Recession meant forecasters stopped forecasting altogether for a little while. On the balance of probability, it would seem that the course for 2010 looks quite predictable both in terms of supply (characterized by high scrapping) and demand (characterized by a gradual recovery from recession and anemic demand growth) – but you just never know what might come along. (b) For a less optimistic perspective on the prospects for the tanker sector, it is worth considering the assessment provided by the IEA (Jan 15 Oil Market Report) – According to its analysis tanker capacity will outpace demand growth in 2010, further depressing freight rates. In 2009, the global recession cut seaborne oil volumes by 5% while oil demand declined 1.5%, IEA says. Westbound shipments from the Persian Gulf fell because of the recession while eastbound shipments from there and West Africa rose because of Asian refinery expansions. IEA cites reports that tanker demand, adjusted for increased floating storage, fell by 2-3% last year. The global oil tanker fleet, meanwhile, grew 7% from delivery of new tankers representing a total of 30-35 million dwt. Fleet additions will remain at 5%/year during the next 3 years, IEA says. Orders in place and due for delivery through 2012 represent about 125 million dwt. “The ability of the industry to negotiate more cancellations of newbuilds will be critical to shipping sector fortunes, although few were obtained during 2009,” IEA says. Scrapping increased to an estimated 6.8 million dwt in 2009 from 2.8 million dwt in 2008, with most of the increase coming in August and later.

Understanding the Importance of Slippage Definition of Slippage - Orderbook slippage occurs when earnings deteriorate and owners look to delay their orders to avoid the worst of the market, or when financial problems cause delays at yards. This happened in each of the last two years. In 2008, deliveries were down 13% on their projected level at the start of the year as the recession started to bite; while in 2009, deliveries were down 18% (provisional) as earnings remained relatively low.

Of course, there is also the phenomenon of positive slippage with owners accelerating their deliveries to try and catch a freight market wave. This feature was an important factor for the dry bulk market in the boom year of 2007 when both Handysize (+19%) and Capesize (+23%) deliveries accelerated, but this seemed to be at the expense of other dry bulk sectors.

Forecasting the Rate of Slippage in 2010 – Taking the example of the VLCC and Suezmax markets, it has been possible to estimate slippage in 2010 based on slippage patterns in the period 2007-2009. The following two charts plot average earnings and percentage slippage rates for the respective sectors.

VLCC Oderbook Slippage History/Forecast

‐30%

‐25%

‐20%

‐15%

‐10%

‐5%

0%

2007 2008 2009 e2010

Suezmax Orderbook Slippage History/Forecast

‐100%

‐80%

‐60%

‐40%

‐20%

0%

2007 2008 2009 e2010

Forecasting the Deliveries in 2010 for the VLCC Sector – By applying slippage rates to the VLCC sector taking into account scheduled 2009 deliveries that have been postponed until 2010, and expected 2010 deliveries that will be postponed until 2011, it is possible to provide a range for future monthly deliveries. The low case assumes slippage of 15%. The high case assumes no slippage in 2010 (and that remaining unaccounted for 2009 deliveries are delivered in 2009).

Briefing Series

Calendar of Events 2010

Winter

January 2010 Spain takes over the

presidency of the EU from Sweden Canada takes over G8

presidency from Italy World Economic Forum,

Davos, Switzerland IMF World Economic

Outlook Update (Jan 26)

February Chinese celebrate

the Year of the Tiger 12 Years since

Osama bin Laden issued a fatwa against all Jews and Crusaders Winter Olympics

Vancouver, Canada (2-28)

March OPEC 156th Ordinary

Meeting, Vienna (Mar 17) World Bank updates

global economic forecast The 32nd League of

Arab States summit CMA- Shipping 2010 EU-Russia summit 7th Green Ship Tech IMO MEPC 60

Spring

April St George’s Day (April

23) IMF’s semi annual World

Economic Outlook 20 Yrs since Hubble

Space Telescope took off for space (Apr 24)

May 70th Anniversary of

Churchill taking helm of coalition government during WWII (May 18) 9th Arab Energy

Conference, Doha (May 9-12) UK General Election

June The Atlantic

hurricane season starts (June 1) OECD semi annual

world economic review 36th G8 summit held

Muskoka, Canada (25-27) 4th G20 summit held

Toronto, Canada (26-27)

Summer

July Belgium takes over the

EU presidency (Jul 1) – first team presidency with Spain and Hungary to follow IEA releases 2011

demand forecast. OPEC releases long range forecast

August Two years to go until

London Olympics 20 years since Iraqi’s

invasion of Kuwait

September OPEC 157th Ordinary

Meeting Czech Republic

scheduled to introduce Euro

Autumn

October IMF’s semi annual World

Economic Outlook World Bank & IMF meet

Washington DC (9-11) 40 Years since first large

oil field discovered in North Sea (19 Oct)

November 5th G20 summit held

Soeul, SKorea (11-12) The Atlantic

hurricane season ends (Nov 30) Congressional

elections US (Nov 2)

December OECD semi annual

world economic review 30 Years since John

Lennon shot dead (Dec 8)

Future Vision In this section, possible events that will impact the tanker shipping and crude oil markets in the medium to long term are reviewed. Shipping Carbon Footprint - As part of the build up to COP15, the UN Climate Change Conference in Copenhagen (Dec 7-18) when shipping will be asked to account for its part in climate change, the IMO published its Second Greenhouse Gas Study in April 2009. This study was presented to the 59th meeting of the Maritime Environmental Protection Committee (MEPC) in July 2009. Shipping has been attracting increasing criticism for its environmental record, and the report attempts to tackle head on the scale of shipping’s green house gas emissions problem, what will happen if changes are not made and also the strategy options to reduce shipping’s footprint. The study attempts a definitive estimate of shipping’s GHG emissions at 870MnTons in 2007(a) – equivalent to 2.7% of global emissions. It projects shipping emissions could increase to 6% of the global total by 2020 if nothing is done. It identifies a number of technical and operational options for reducing CO2 emissions from shipping including speed reductions, improved vessel hull and engine design, and the use of renewables. The study estimates that improved ship design alone can reduce CO2 emissions from shipping by between 10-50%, while improved operational arrangements could result in another 10-50% reduction. The two approaches combined could reduce CO2 emissions by as much as 75%. Very substantial emission reductions are not only possible, but a marginal abatement cost analysis in the report concludes that, by 2020, existing ships could, without incurring any additional costs, have reduced their CO2 emissions by 255MnTons: a 20% reduction in emissions without it costing the industry a single euro. The study also identifies market-based instruments as ‘cost effective policy instruments with high environmental effectiveness’ providing ‘strong incentives to technological change’. Some influential pressure groups are not impressed by the report or the pace of change within the shipping industry on this issue. For example in June 2009, the UK House of Commons Environmental Audit Committee said: ‘There can be no excuse for the lack of progress within the IMO since the Kyoto protocol was signed [in 2005]. That the IMO has yet to reach agreement even over the type of emissions control regime to take forward, let alone decide any details, suggests it is not fit for purpose in this vital area. None of the obstacles … [are] insurmountable. It is perfectly feasible to track the emissions of individual ships.’ The 60th meeting of the Maritime Environmental Protection Committee (MEPC) will be held on March 22-26 in London. The discussion of preventing air pollution from ships will again be high on the agenda despite the failure of Copenhagen to provide any teeth to the requirement for shipping to transform the way it operates. (a) Other studies have estimated that shipping’s carbon footprint may be as high as 1.1BnTons Changing Trade Patterns - It is reported that Saudi Arabia terminated its lease (held since 1995) at the end of 2009 for the 5MnBbl oil storage facility at Statia Terminals on St Eustatius. The announcement is linked to news that Saudi Arabia has accepted an offer for free storage in Japan, and indicates that – with western oil demand having peaked and with growing competition from Brazil and Canada - it is preparing to focus on the expanding Asian markets. The changing nature of trade is further confirmed by the news that Petrochina is poised to take over the lease in St Eustatius. Petrochina could use the facilities as a staging point for a growing slate of South American oil deals or as trading leverage in the US market, which still effectively sets the global price of oil.

Russia’s New Oil Ports Russia has started the process of transforming the geographical pattern of its crude oil exports with the opening in November of a new oil terminal Kozmino in Siberia. This terminal along with a second new terminal at Ust-Luga on the Baltic Sea are designed to serve Russia’s new pipeline network that runs to both its eastern and western seaboards.

Kozmino – On November 12, it was announced that offshore facilities for oil exports have been finished at the Port of Kozmino. News of the port coincided with an announcement that the first trains carrying more than 8,000 tons of oil left the railway station at Skovorodino, endpoint of the first stage of the ESPO, for delivery on to Kozmino.

View of Port of Kozmino (above) December 28 was the official opening of the port, attended by Prime Minister Putin who described the terminal as a “great New Year present for Russia.” He added the project is one of the “biggest projects in contemporary Russia,” not only in “modern Russia,” but “the former Soviet Union too.” Initial output from the new terminal are expected to be in the region of 0.25 Mb/d from January 2010 – but this will rise to more than 1 Mb/d by 2014 when the pipeline link from Skovorodino to Kozmino is completed. The importance of Kozmino is that Russian oil exports - previously focused on Europe – can now target new markets such as Japan, China and South Korea. More than that – due to the scale of the project – Russian exports via Kozmino have the potential to significantly change the pattern of seaborne oil movements with new medium/short haul routes opened up, presenting both opportunity and dangers for the tanker sector.

Ust-Luga – On 29.8.2009, Transneft presented a declaration to the Government of Leningrad region of its intention to build an oil transshipment terminal in Ust-Luga port (aerial view shown below)

Ust-Luga is the site of an existing coal and fertiliser terminal inaugurated by Putin in 2001. The 3,700-metre approach canal is deep and capable of accommodating ships with a capacity of 150,000 tonnes and more. In May 2008, Putin confirmed that Ust-Luga will be the final point of the projected Second Baltic Pipeline, an oil transportation route bypassing Belarus. As of 2005, the population of Ust-Luga did not exceed 2,000, but the port administration expects it to grow to 34,000 by 2025. This would make Ust-Luga the first new town built in Russia after the fall of the Soviet Union. The new oil terminal facilities are to be located on the eastern shore of the

Luga Bay of the Gulf of Finland, north of the Khabalovka river. The terminal will receive oil from the BPS-2 pipeline, its construction having been started by OJSC «Transneft» in July this year. According to the information memorandum for bonds issue, the total volume of investments will amount to 95 bln. rbl. The first stage of the oil transshipment terminal is supposed to be launched in the late 2012. The transshipment volume at this stage may reach 30 mln. tons per year; after the terminal starts work at its full capacity, which is expected in December 2013, the transshipment volume will be 38 mln. tons per year. The berth at the terminal can receive ocean-going oil tankers with the deadweight of 100 ths. tons. The customers of the project are Transneft and LLC «Ust-Luga Refuelling Complex» purchased by the company this year. It is unclear if the final decision regarding construction of the oil transshipment complex has yet been granted, but it is planned that the oil of the BPS-2 will go through the terminal to European consumers and may be farther, it depends on the tankers’ carrying capacity. Ust-Luga could rival Primorsk as Russia’s main Baltic oil port. About 25MnTons of oil and oil products will annually pass through it. It is possible to extend the transshipment capacities to 50MnTons per year, as noted by Sergei Vakhamiev, an analyst of OJSC Bank of Moscow. The pipeline will go along the route Unecha — Ust-Luga (Leningrad region) with a branch to Kirishi oil refinery. Construction of the pipeline about 1170 km long will be carried out by two stages. At the first stage the first start-up complex with the transfer capacity of up to 30MnTons/Yr is supposed to be built. At the second stage the transfer capacity will be brought to 50MnTons/Yr.

Briefing Series

Map Showing the Route of the ESPO Pipeline (right) - The 2900 mile ESPO pipeline is now at the half way point of a two part build schedule. Phase 1 (completed Nov ‘09) –Taishet-Kazachinskoe-Skovorodino with rail link to Kozmino – capacity 80Mntpy – of which around 12MnTons destined for Kozmino. Phase 2 to Kozmino by 2014 – capacity addition 50Mntpy

Oil Industry (and alternative energy replacements)

Long Term World Oil Demand Forecast

ExxonMobil Forecasts Global energy demand to rise 35% through 2030 – Dec 10 – In its latest long range forecast, ExxonMobil forecasts that overall energy demand will rise by 35% by 2030 as the human population expands by 1 billion to reach 8 billion, but that OECD demand will be virtually unchanged despite average economic expansion of 50%. It expects oil to remain the primary energy source in 2030 with natural gas moving in to second place. It expects that despite efficiency gains, carbon dioxide emissions will rise by 0.9%/yr.

IEA Global Energy Demand Forecast Revised Down - Nov 10 - In its 2009 World Energy Outlook (WEO), the International Energy Agency projects in its reference scenario that global energy demand will climb 40% between 2007 and 2030, and the agency says that the world’s energy resources are adequate to meet this projected demand increase through 2030 and well beyond. In last year’s WEO, IEA projected that worldwide energy demand would expand by 45% between then and 2030. Fossil fuels remain the dominant sources of energy worldwide, accounting for 77% of the demand increase to 2030. By far, coal will see the largest increase in demand over the forecast period, followed by gas and oil. But oil will remain the single-largest fuel in the energy mix in 2030, even though its share falls to 30% from 34% now, according to the WEO. Electric power generation, set to climb at a rate of 2.5%/year over the forecast period, will drive gas and coal demand. More than 80% of this growth will take place in countries outside the OECD, according to the WEO, as additions to power generation capacity total 4,800 Gw by 2030 worldwide. The largest additions are set to occur in China.

Long Term World Oil Supply Prospects

Jan 24 – New CEO says Shell will move away from Tar Sands – Peter Vosner has highlighted a strategic shift away from high-cost “unconventional” oil production (such as Canadian tar sands) with future growth to rely more on the search for conventional oil and gas reserves. Although investment in Canadian tar sands will be maintained, escalating costs mean that ambitions will be scaled back. Nov 17 – In direct contradiction to the story appearing Nov 16, IHS Cambridge Energy Research Associates in its recent report ’The Future of Global Oil Supply: Understanding the Building Blocks” envisaged a future where global oil production capacity would grow steadily through 2030 with no evidence of a peak of supply. The report, based on analysis of more than 10,000 projects around the globe, predicts that capacity will grow to as much as 115Mnbd from the current level of 92Mnbd – a 25% increase. Post-2030 supply could struggle to meet demand, but this would take the form of a decades-long “undulating plateau,” rather than a sharp fall, the report says. Sixty percent of the examined fields have steady or climbing production levels. When taking into account the production, the global aggregate decline rate of all fields currently in production is estimated to be 4.5%, the study finds. Despite recessionary pressures, the first three quarters of 2009 have produced discoveries with collective reserves of more than 8 billion new barrels. This does not include the revisions and extensions important to reserves growth, the report finds. Multi-billion barrel discoveries, such as those of the subsalt Brazil, as well as those in offshore West Africa and offshore East Africa, continue to emerge. New giant discoveries in Iraq may double the country’s production capacity by 2020, the report finds. The peaking of global oil demand—rather than scale and deliverability of below ground resources—could have a major impact on the flow of supply, according to the report. IHS CERA’s analysis finds that oil demand has already peaked in developed countries. Nov 16 – Growing murmurs that the IEA is exaggerating future global oil production—one report suggests oil production in 2030 will be closer to 75Mnbd versus the 105Mnbd b/d estimate.

Managing Greenhouse Gases CO2 Sequestration to Boost Production – Oct 12 - In November, Petrobras will start injecting high-pressure CO2 into the Miranga onshore field to test technologies for the Santos basin’s pre-salt cluster developments. The carbon dioxide produced at the future pre-salt fields will be re-injected into the reservoirs to boost the recovery factor, the company says. The Miranga field project involves the geological sequestration and removal of 370 tons (336 metric tons) of CO2 from the atmosphere per day. According to the company, the technology will considerably increase the recovery percentage of the oil nestled in the field’s reservoir. The technique is based on injecting CO2 under high pressures. In this case, the CO2 works like a type of solvent that changes the properties of the oil and allows it to flow better through the reservoir-rock’s porous system. Other alternatives, such as storage in caves or saline reservoirs, are also under analysis. The Miranga field was chosen for the tests due to its geological characteristics and site logistics.

US Carbon Dioxide Emissions Down 5.9% in 2009 – Oct 6 - The EIA in its October Short Term Outlook estimate that US carbon dioxide emissions are set to fall by 5.9% in 2009 due to the recession and the substitution of natural gas for coal at power stations.

Alternative Energy Projects and Ambitions

Obama Ending the Tyranny of Oil – Feb 16 – In the next stage of his campaign to break the US dependence on oil, President Barack Obama has announced more than USD8Bn of federal loan guarantees to help build the first US nuclear power stations for 30 years. Two new plants are to be constructed in the state of Georgia by US electricity firm Southern Company. US Wedded to Biofuels – Feb 5 - The EIA released its new guidelines for ethanol production targets in 2010, which are 110,000b/d higher than in 2009. Meanwhile, President Barack Obama on Feb. 3 announced a series of steps his administration is taking to boost biofuels production. In May 2009, Obama established the Biofuels Interagency Working Group, cochaired by the secretaries of energy and agriculture along with the EPA Administrator Lisa Jackson. The group released its first report Feb. 4, outlining a strategy to advance the development and commercialization of what it calls a sustainable biofuels industry to meet or exceed US biofuels targets. ExxonMobil Believes in Biofuels from Photosynthetic Algae – Dec 10 – In its latest long range energy forecast, ExxonMobil reiterated its belief that “biofuels from photosynthetic algae could someday play an important role in meeting the world’s growing need for transportation fuels, while also reducing CO2 emissions.” ExxonMobil has entered a project with Synthetic Genomics Inc., a California biotech firm, to research and develop algae-based biofuels which would be commercially compatible with gasoline, diesel, and jet fuel. “Getting these algae fuels from the lab to broad commercial scale at the local gas station will be a tremendous undertaking and could require decades of work,” the forecast said. The company expects to spend more than $600 million in the effort if research and development milestones are met.

Developing More Conventional Crude Oil Reserves

Jan 22 – Green battle lines - Twelve environmental organizations and one Alaska Native group sued in federal court on Jan 20 to block Shell Gulf of Mexico Inc.’s plan to drill three exploration wells in the Chukchi Sea off Alaska. The US Minerals Management Service conditionally approved Shell’s exploration plan on Dec 7. The company paid USD2.1Bn for Chuckchi Sea leases during Outer Continental Shelf Sale 193 in 2008.

Tanker Companies Tanker Share Prices Still Stuck in the Slow Lane After ending 2009 close to year-long highs, the major financial indices (see Dow Jones, Hang Seng, Nikkei 225 below) have slipped back at the start of the year as a result of renewed fears about a return to recession as Greece and other Eurozone countries have started to struggle with servicing their debt burdens built up as a result of government stimulus spending. There have also been concerns about deteriorating China/US relations. Nevertheless, most economic data points to the world’s continued recovery out of recession(a).

(a) The turning point for share price fortunes (in early March) was the second G20 Leaders’ Summit in London in early April when it became clear in the lead up to the summit that world leaders were determined to act decisively and in unison, and that the G20 and not the G7/8 would be the driving forum for global economic decision making signaling a more inclusive future that mollified the emerging nations. The first G-20 Leaders’ Summit (on Financial Markets and the World Economy) was held in Washington, D.C. on 14–15 November 2008. While global financial indices have recovered significantly since their mid-2009 lull, the recovery in tanker share prices has stalled. This divergence is shown in the chart (right) which compares the movement of the FTSE100 with the Tanker Share Index over the last year. Shipping market fundamentals have dictated the poor performance of tanker share prices in recent months with weak crude oil demand and rising fleet supply seriously depressing tanker freight rates. The underperformance of this sector, as measured by share performance, raises the question once again as to whether tanker shipping is in danger of being left behind. As discussed last quarter, it is conceivable that unless both tanker supply and demand fundamentals improve, the strands of connectivity which bind the tanker industry to the fortunes of oil companies and oil prices will be broken in the minds of investors - and tanker shipping could be left behind just as it was in the 1970s. The next section analyses the third/fourth quarter results of listed tanker companies in an attempt to measure the prospects for this sector in its efforts to play catch up. It should also be noted of course that a number of leading economists still see the rise in stock markets of something of a false dawn and believe the risk of a double dip recession are increasing, so there may not be that much catching up for the tanker market to do.

Listed Tanker Companies – Results 3-4Q09

Results Page: Listed Tanker Companies – Market Cap v Debt 3-4Q09

Chronology of Oil Market Events Oct 2009-Feb 2010 and how the oil price was influenced This is a daily record of events in the oil market. Each daily entry starts with the price for WTI. The colour coding is to show the direction of influence on the oil price, where blue indicates a downward impact on prices – while orange indicates a price accelerator. Red text identifies events from the financial markets that spilled over into the oil market. Summary – Prior to the onset of the current global economic crisis, crude oil traded primarily on fears of supply disruptions, and not a little stupidity (oil prices soared). With the onset of the downturn, crude traded primarily on fears of economic collapse (prices plummeted). Entering 2009, there was a period of uncertainty with crude traded primarily on the belief that demand was falling faster than supply (prices stagnated at low-mid USD40s per barrel). Following the G20 summit in London at the start of April, a belief that depression has been averted emerged. The market believed that the global economy probably reached bottom in 1Q09, and since then confidence has tentatively crept back into stock markets pulling commodity prices up too (oil prices back above USD70Bbl) despite fairly weak S/D fundamentals. Tanker rates bumped along the bottom for most of 2009 before showing some signs of life at the end of the year.

Feb 18 USD – Greek worries resurface. Obama meets the Dalai Lama. The UK’s net borrowing was £4.3Bn in January, in what is usually a good month for tax receipts. Economists had forecast a £2.8Bn surplus. Feb 17 USD75.04 – Feb 16 USD75.04 – In the next stage of his campaign to break the US dependence on oil, President Barack Obama has announced more than USD8Bn of federal loan guarantees to help build the first US nuclear power stations for 30 years. Two new plants are to be constructed in the state of Georgia by US electricity firm Southern Company. Feb 15 USD71.77 – Japan’s GDP (+4.6% yoy) rises faster than expected. German Parliament considering throwing Greece out of Eurozone. Confusion about Greece rescue plan. EIA reported that US crude oil stocks increased by 2.4MnBbls in the week ended Feb 5 compared with the consensus expectation of 1.6MnBbls Feb 12 USD71.76 –US eastern seaboard still under several inches of snow. China cooling measure (following 11% GDP jump in 4Q09)- China's Central Bank raised bank reserve requirements by 50 basis points in a measure designed to combat excessive bank lending and the potential for runaway inflation.

Appendices

Uncertainty

Fear of economic collapse

Fear of supply disruption and ‘stupidity’

After G20 Summit, belief that ‘depression’ averted and the worst is over

Feb 11 USD73.09 – EU leaders to back Greek rescue plan – EIA raised its 2010 oil demand forecast by 170Kbd to +1.8% or +1.6 mb/d yoy. However, OPEC went the other way -10Kbd. EIA revises up its forecast for the oil price from USD80Bbl to USD81Bbl in 2H10 due to (1) Unrest Nigeria, (2) Improved China inflation data (3) EU decision to act on Greek debt Feb 10 USD71.44 – China exports up 21% in January – but concerns growing about rising inflation with Jiangsu province having to raise minimum wage by 13% Feb 9 USD70.86 – Greek rescue plan steadies markets. Small improvement in US employment stats. Cold weather returning to US North East and Europe.

Feb 8 USD69.98 – In the game of bluff and double bluff, Iran ratcheted up the nuclear tension. announced immediate plans to step up its nuclear programme, which heightens fears Iran is moving closer to weapons-grade uranium. Its nuclear chief said Iran would start enriching uranium to 20% from Tuesday, and that 10 new uranium enrichment plants would be built in the next year. Ali Akbar Salehi said the enrichment would take place at Natanz, Iran's main uranium enrichment plant. Unwinding carry trade also a factor in lower oil prices.

Feb 5 USD68.42 – Stock markets still falling (although late rally in New York) as fears over Greek economy mount – “PIIGS Stampede”. Energy prices fell sharply in what analysts called a “PIIGS” stampede caused by growing concern that the troubled economies of Portugal, Ireland, Italy, Greece, and Spain could undercut the economic recovery of Europe and around the globe. According to Oliver Jakob better US economic data is bearish for crude because it increases the chances of an interest rate increase; worse economic data is bullish because it reduces the chances of a hike in rates.”

Feb 4 USD71.54 – Stock markets falling Temperature of relations between US and China continues to plummet with Chinese foreign ministry spokesman Ma Zhaoxu commenting that the value of the Chinese yuan was not the main reason for the country's trade surplus with the US. The recent US arms deal with Taiwan, US accusations over cyber attacks and Obama’s plan to meet the Dalia Lama have contributed to the frosty feel with the FT’s China Confidential predicting that US/Chinese relations will have reached a deep freeze stage later in the year. Feb 3 USD75.47 – Shell to shed 1000 jobs as profits fall 75%. Obama promises to take tougher line with China over trade and currency. US crude oil inventories up 2.3MnBbls in the week ending Jan 29 compared with an industrial expectation of a 0.4Mnbbls gain. Progress in relations with Iran as informal talks lead to indication that Iran will be prepared to send its uranium abroad for enrichment – however, debatable whether Iran will follow through. Feb 2 USD75.26 – Cold weather in US north east. The National Weather Service updated its previous outlook for milder weather and now predicts lower-than-normal temperatures across most of the continental US for Feb. Unexpectedly strong report on US industrial production.

Feb 1 USD72.83 – US GDP up 5.7% in 4Q09 in part due to inventory bounce. Oil price responds slowly due to current strength of dollar coupled with reduced demand expectations. In Nigeria, the militant

group MEND ended its indefinite cease-fire. It is estimated that tanker oil storage is down to 40MnBbls from a peak of >100MnBbls in May 2009. Jan 29 USD71.92 – EIA report US demand for January down 25% yoy. Some commentators believe that even a strong recovery in GDP will be accompanied by a tepid recovery in crude oil demand Jan 28 USD71.46 – Obama’s state of the Union Speech – one of measures announced was to end tax cuts for oil industry – also recognized the need for more offshore oil development in new areas. Jan 27 USD72.61 – Further indications that China may take steps to prevent its economy overheating. US inventories of crude fell 3.9Mnbbls to 326.7MnBbls in the week ended Jan 22, counter to the consensus of Wall Street analysts for a 1.6Mnbbls increase. Jan 26 USD72.93 – Obama’s bank reform plans and concerns about Chinese demand prospects still dominating. Oliver Jakob reported, “Oil stock levels and excess capacity both upstream and downstream are still much above the levels of previous years, yet oil is being priced at the equivalent of the boom years when no available spare capacity was available to the system. The fundamental link to current prices is weak, hence oil prices need at least some general optimism that boom times are around the corner to sustain prices above $80/bbl in a contango market. That general optimism depends a lot on China’s consumption saving the rest of the world, and that will be somewhat

challenged by the Chinese government trying to regulate the formation of bubbles.” IMF Revises Up Global Forecast to Near 4% for 2010 Jan 25 USD72.4 – Obama’s banking reform aspiration in spotlight at DAVOS – as markets continue to reverberate to potential break up plans. Jan 22 USD72.63 - Oliver Jakob argues that the CFTC’s implementation of a new rule on position limits will have more impact on energy prices in the short term than Obama’s bank break up plans. US crude oil stocks decreased by 400,000 bbl to 330.6MnBbls in the week ended Jan 15, counter to Wall Street’s consensus for a 2.4MnBbl increase.

Jan 21 USD74.48 – China says its economy expanded by 8.7% in 2009, exceeding even the government's own

initial expectations with GDP growth of 10.7% in 4Q09 – but oil prices unresponsive due to concerns that China will have to cool its economy. The long march back to common sense begins as Obama calls for limits to size and trading activities of banks – wall street shares head lower as Obama declares “If these folks want to fight, it’s a fight I’m ready to have.” US crude inventories decreased by 400,000 bbl to 330.6Mnbbls in the week ended Jan 15, counter to Wall Street’s consensus for a 2.4Mnbbls increase. Jan 20 USD75.31 – Optimism over strong earnings reports in the coming weeks Jan 19 USD75.8 – Jobless total falls in UK for first time in 18 months. More good news for the UK a key bellwether for economic growth, the OECD’s leading indicator, is now at its highest level since 1972, pointing towards a strong recovery. In addition, based in part of the weakness of sterling, Jim O'Neill, chief economist at Goldman, said that he expects the UK economy to lead the recovery - expanding by 3.4% in 2010, compared with 2.4% growth in the US and just 1.9% in the eurozone.. China steps up efforts to curb lending as property market sales volume continues to accelerate. Jan 18 USD76.54 – Martin Luther King Jr. holiday in the US. Negative US job news on top of higher than expected US stock figures and milder weather. Jan 15 USD76.85 – Google to pull out of China following concerted effort to hack e-mail address of Chinese dissidents. Chinese government tries to present as commercial rather than political issue. The API confirm that US demand is strengthening. According to John C. Felmy, API chief economist, “clearly, petroleum demand is mirroring the economic recovery.” US drilling activity up for the third consecutive week. The IEA forecast for crude oil

demand is virtually unchanged for 2009 at 84.9Mnbd (-1.5%, -1.3Mnbd yoy), and 2010 at 86.3Mnbd

(+1.7%, +1.4Mnbd yoy). OPEC much less optimistic for 2010 predicting a 0.8Mnbd rebound in demand. Jan 14 USD77.7 – Obama insists banks should pay back all the money lent by taxpayers. Douglas-Westwood sees offshore spending recovering to USD439Bn in 2010, up 11% from 2009. Spending on production is expected to grow from USD260Bn in 2008 to USD360Bn in 2013. Jan 13 USD78.08 – Cold snap starts to moderate. IEA expects global oil demand to increase by 1.1Mnbd in 2010 and 1.5Mnbd in 2011. China raised bank reserve requirements to prevent its economy from overheating. US crude inventories jumped 3.7Mnbbls to 331MnBbls in the week ended Jan 8, more than double the Wall Street consensus for a 1.5MnBbls build. Jan 12 USD79.34 – Iranian nuclear scientist killed motive unclear, but follows the case of a scientist attached to the Iranian nuclear programme, Shahram Amiri, a physicist for the Iranian Atomic Energy Organisation, who went missing while performing a pilgrimage to Saudi Arabia last year. The Iranian authorities say he was kidnapped by the Saudi authorities and handed over to the Americans. While the cold snap has increased demand for heating oil, the amount of snow (and shortage of salt particularly in Europe) has hit transportation. Nevertheless, KBC Analysts anticipate a 600,000bd net boost in global oil demand could be on the cards. Jan 11 USD80.47 – According to Oliver Jakob the price of crude is now back to 2006-2007 levels on the basis of a barrel of North Sea oil priced in euros. KBC Energy Economics, a division of KBC Advanced Technologies PLC, London, analysts said, “If prices continue to rise next week, it will be tempting to conclude that we are back in the casino-like oil market conditions we saw in 2008.” Jakob commented - the economy of 2007 did not manage to digest current oil prices, and we will remain cautious in assuming that the subsidized economy of 2010 will be able to do so. The 2009 stabilization of the economy was done with oil at USD60/bbl, not with oil at USD90/bbl.” However, there is some support that the market may be turning bullish on the prospects for oil (1) Raymond James & Associates Inc. said growing sales of hybrid vehicles will have “virtually zero” effect on US and global oil demand in the next 3-5 years. “By 2020, under the most aggressive sales growth scenario we can envision, hybrids wouldn't even offset 1% of global oil demand—a drop in the bucket. Simply put, the internal combustion engine isn't going anywhere, and when we look ahead long term, we remain firmly bullish on oil prices,” they said. (2) The imperative to switch away from oil

due to declining oil supplies has been undermined by the rising production prospects for Iraq and the current estimate of 7Mnbd spare production capacity. Jan 8 USD80.9 – The US Department of Labor reported new applications for unemployment benefits increased less than expected, up by 1,000 to 434,000 in the week ended Jan. 2, after falling the previous week to its lowest level since July 2008. The number of continuing claims dropped 179,000 to 4.8 million….. OECD composite leading indicators (CLIs) for November 2009 provide stronger signals of recovery than in last month’s assessment. Jan 7 USD80.9 – Cold snap has caused tanker freight rates to pick up. It is reported that 34 tankers were in storage in December – down from 37 in November. Dahlman Rose (Omar Nokta) lifted his ratings on Frontline, Overseas Shipholding Group and Nordic American Tanker Shipping to “buy” from “hold”. Nokta upgraded products tanker owner Omega Navigation Enterprises to "hold" from "sell". It also raised his price target on "buy"-rated General Maritime to USD12 from USD10. Teekay Tankers, which also has a “buy” rating, saw its price target increase to USD12 from USD11. Nokta said he expects Opec to hike output by the middle of the year, while higher refining margins should push charterers to fix VLCCs “at a more frantic pace”.

Jan 6 USD81.18 – Cold snap on both sides of the Atlantic and China tightens its grip. US North East heating up 11% compared norm. In UK weather described as worst winter for almost 30 years and gas demand pushed up 28% above average. It is reported that Saudi Arabia terminated its lease (held since 1995) at the end of 2009 for the 5MnBbl oil storage facility at Statia Terminals on St Eustatius. The announcement is linked to news that Saudi Arabia has accepted an offer for free storage in Japan, and indicates that – with western oil demand having peaked and with growing competition from Brazil and Canada - it is preparing to focus on the expanding Asian markets. The changing nature of trade is further confirmed by the news that Petrochina is poised to take over the lease in St Eustatius. Petrchina could use the facilities as a staging point for a growing slate of South American oil deals or as trading leverage in the US market, which still effectively sets the global price of oil. Jan 5 USD79.95 – Raymond James analysts said, “Our 2010 oil price forecast remains $80/bbl, which assumes modestly higher demand and falling non-OPEC supply. Since we expect these bullish trends to continue for several years, we are setting an initial 2011 forecast of $95/bbl”………. The latest US government data showed initial jobless claims fell to a lower-than-expected level, while the US dollar weakened against most major rival currencies. The Institute for Supply Management's index of manufacturing activity rose more than expected in November to 55.9 from 53.6. China's manufacturing industry was reported to have expanded at the fastest rate in 20 months; European manufacturing also showed improvement. Unfounded rumours that Russia cutting oil supplies to Belarus. Jan 4 USD79.24 – In its latest US SEC filing Steinberg reported that it had increased its holding in Golar LNG by 1.4Mn shares to 12.3Mn Shares since its last filing in February. Its holding is now up to 18.3% of the company. This development is another example of the increase in private equity/public company partnerships. Jan 1 USD77.2 – Dec 31 USD77.81 – Standard and Poor's index of 24 raw materials has risen 51pc over the last 12 months. Lead +142% (on the London Metals Exchange) was the best performer followed by Copper +140%, while oil was up 78%. Roubini negative about what he sees as potential new bubbles. "Eventually, central banks will need to exit quantitative easing and zero-interest rates, putting downward pressure on risky assets, including commodities - or the global recovery may turn out to be fragile and anaemic, leading to a rise in bearish sentiment on commodities – and in bullishness about the US dollar." Jim Rogers – a commodities guru - was outraged at Roubini’s comments - "I am flabbergasted at Roubini's comment about bubbles because there is not a single market in the world making all-time highs except gold, US government bonds, cocoa, and the Sri Lankan stock market. That's hardly reason to call for a bubble. So I am most perplexed about this alleged bubble which is out there." Dec 30 USD77.36 – Dec 29 USD76.38 – FTSE (5437) hits high for the year (up 22% since the start of the year). Other stock markets around the world are similarly buoyant and are now back to 2008 pre-August crash levels. The first tanker (Moscow University) loads at Kozmino after an opening ceremony to celebrate the completion of ESPO phase 1 attended by Putin who said – who commented “It is a strategic project, which enables us to enter the growing markets of the Asia-Pacific region.” Eventually Kozmino will be Russia’s third largest seaborne oil outlet after Primorsk on the Baltic Sea and Novorossiisk on the Black Sea. Dec 28 USD76.48 – Gordon Brown pushing for another meeting of world leaders to salvage proper global environmental accord. Rather than the public discussions of Copenhagen the meeting/s are likely to be behind closed doors under the guise of G8 forums Dec 25 USD75.37 – Dec 24 USD75.23 – Dec 23 USD74.47 – Even limited climate accord agreed at COP15 starting to crumble with Brazil labeling the accord “disappointing” and South Africa calling the failure to secure a legally binding agreement “unacceptable”. There was harsher criticism from Andreas Carlgren, environment minister of Sweden, holder of the rotating European Union presidency, who proclaimed the Copenhagen accord "a disaster" and "a great failure". These responses contrasted with praise of the accord from India and China, and may presage problems for the United Nations in keeping the fragile

alliances formed in Copenhagen together. The UN wants to sign a legally binding treaty by the end of 2010, but will

struggle if countries repudiate the accord. OPEC meeting leaves quota unchanged. Iranian security forces clash with crowds of opposition supporters in the city of Isfahan Dec 22 USD71.95 – Beijing's foreign ministry spokeswoman Jiang Yu and UK’s Climate Change Secretary Ed Miliband

in war of words about failure to achieve legally binding agreement – WHO HIJACKED THE SUMMIT. Cold weather continues across Europe and US. Dec 21 USD73.07 – China's Foreign Minister Yang Jiechi praised the summit, saying it had been "not a destination, but a new beginning". Others lined up to accuse 4-5 countries (including China) of vetoing any form of legally binding treaty – while others point the finger of blame at the US. Grand Ayatollah Hossein Ali Montazeri - one of Iran’s leading dissident figures – died at weekend. His funeral in Qom presages potential civil disturbance.

Dec 18 USD72.92 – Copenhagen Climate Change Conference ends limply with what appears to be an 11th hour non-legally binding agreement between US, China, India, Brazil and South Africa. United Nations Secretary General Ban Ki-moon says the agreement must be made legally binding next year. Dec 17 USD72.19 – Iran's Defense Minister announced successful tests of Sajjil-2, a solid-fuel missile capable of hitting targets 1,200 miles away. Iraq—hailing the successful end (started Dec 11) of its second postwar bidding round and hopeful of boosting output to record levels—has awarded 7 oil field service contracts out of the 10 it offered. "It is a very successful bid round," said Iraq’s Oil Minister Hussain al-Shahristani, adding that current production of 2.5Mnbd eventually could be increased to 4.765Mnbd if the companies that won fields meet production pledges. Dec 16 USD73.43 – Losing streak ended with stronger than expected US industrial figures and an anticipated draw in US stocks in part due to prolonged cold snap. US crude inventories fell 3.7MnBbl to 332.4MnBbls in the week ended Dec 11, exceeding the Wall Street consensus for a 2Mnbbl draw. China reject possibility of international verification of pledged carbon cuts. US House passed a bill strengthening US sanctions against foreign companies that do business with Iran's oil industry, including those that supply Iran with gasoline. This is likely to hit Iran which is chronically short of refining capacity. Dec 15 USD71.98 – Weather conditions may continue to support higher prices as the National Weather Service's 8-14 day outlook for the Dec. 21-27 period is calling for below-average temperatures across the eastern half the country. Futures price down for 9th consecutive session in part due to rising crude oil stocks. Also growing concern about debt mountain built up by governments during stimulus phase with Greece and Ireland coming under pressure. Japan remains the biggest concern. The Japanese government has not only been forced to reduce drastically its estimate of 3Q GDP growth to 1.3% from 4.8% previously, but it has also decided to roll out another USD81Bn stimulus programme —perhaps partly due to fears that even the third quarter’s weaker GDP figure is largely due to inventory restocking. The Centre for Global Energy Studies, London commented, “For a country that has a shrinking workforce and where tax revenue declined by 24% in the first half of 2009, there is a real risk that mounting government debt will destroy the prospects of a return to real growth, particularly if it leads to a rise in interest rates”. Dec 14 USD71.79 – African and Small Island nations stage walkout from Climate Change Conference. Positive China and US sales data reported (US retail sales rose 1.3% in November & The Reuters-University of Michigan consumer sentiment index also showed an unexpected increase to 73.4 in early December from 67.4 in November, adding to the dollar’s strength.). Abu Dhabi provides bailout plan for Dubai. In the largest oil sector acquisition in 20 years,

ExxonMobil Corp. has agreed to buy XTO Energy Inc. in an all-stock deal valued at $41 billion that will be part of a strengthened focus by the energy giant on unconventional resources including Bakkan oil shale. Dec 11 USD71.3 – Iraq auction round 2 (following June round 1). The IEA forecast for 2009 crude oil demand is

virtually unchanged at 84.9Mnbd (-1.4Mnbd yoy), but is revised up by 130Kbd to 86.3Mnbd (+1.5Mnbd yoy) in 2010. Dec 10 USD71.45 – US gripped by cold weather. Houston has snow for the first time in 108 years. Dec 9 USD74.02 – Stronger dollar. US inventories of benchmark crude fell 3.8MnBbls to 336.1Mnbbls in the week ended Dec. 4, compared with the consensus among Wall Street analysts for a 500,000 bbl increase. Gasoline stocks increased 2.2MnBbls to 216.3Mnbbls in the same period, outstripping Wall Street expectations of a 1.6MnBbls gain. Distillate fuel inventories were up 1.6MnBbls to 167.3MnBbls, counter to analysts’ predictions of a 400,000 bbl decline. Dec 8 USD75.31 – Amidst fears of a double dip recession, Japan’s cabinet on Tuesday agreed Y7,200Bn (USD80.6Bn) in stimulus spending intended to shore up a fragile economic recovery with measures including support for employment, easier financing for smaller companies and promotion of environmental protection. Following its historic election victory in August, the DPJ government has struggled to balance the need to find funds to finance its generous manifesto welfare promises, with concerns about the government’s huge debt burden and worries about the sustainability of Japan’s recovery from its sharpest post-war recession. Chinese car sales running at double 2008 levels.

Dec 7 USD76.26 – Copenhagen Climate Conference kicks off amidst air of optimism. Federal Reserve Chairman Ben Bernanke said recent economic improvement remains shaky. Dec 4 USD78.32 – Dec 3 USD77.8 – US economic growth would not be significantly reduced through 2030 if the nation took aggressive action to address climate change according to the US Climate Action Partnership. Dec 2 USD77.66 – Iran freed 5 UK sports sailors to cool mounting tensions somewhat although nuclear standoff

continues against background of Iran’s threat to build a whole slew of nuclear power stations. OPEC output on the rise - Reuter’s news service reported the 11 OPEC members excluding Iraq produced 26.52Mnbd in November from a revised 26.43Mnbd in October, far above their quota target of 24.84Mnbd. US crude oil stocks climbed 2.1MnBbls in week ending Nov 27 against expectations of a 0.5MnBbls draw. Dec 1 USD79.84 – FTSE bounces back. Oliver Jakob commented “In the week ending Nov 18, cash assets hoarded by banks in the US increased by USD30Bn and are still close to USD1 trillion above the levels of the same weeks in 2007. It is that much money that has not worked its way back to the real economy as US bank loans are still in a declining trend.” Somalian pirates seize VLCC Maran Centaurus. Nov 30 USD78.12 – Fall out from Dubai continues with Dubai government refusing to underwrite debts of Dubai World – but currently crisis not thought to threaten world economic recovery.

Nov 27 USD76.34 – The apparently coordinated announcements by China and the US regarding green house emissions gives a lie to the idea that Obama’s visit to China was a failure – indicates the amount of work going on behind the

scenes. Concerns that Dubai may be facing financial ruin send stock markets lower.

Nov 26 USD76.36 – China makes a commitment to slowing the growth of green house gases for the first time (aims to reduce

carbon intensity by 40% by 2020). The EIA reported commercial US crude inventories increased 1MnBbls to 337.8MnBbls in the week ended Nov 20. That is short of the Wall Street analysts’ consensus of a 1.5MnBbls gain and the American Petroleum Institute’s earlier report of a bearish 2.6MnBbls build. Gasoline stocks were up by 1MnBbls to 210.1MnBbls, above expectations of a 300,000 bbl increase. Distillate fuel inventories dropped 500,000 bbl to 166.9MnBbls, while the consensus was for virtually no change.

Nov 25 USD76.81 – Obama commits US to reduce green house gases by 17% by 2020. Japan’s seasonally adjusted exports for November increased for the third consecutive month. In its November statement, The Japanese central bank board strengthened its language on the state of the economy. Rather than saying the economy “is starting to pick up” in the previous month, it said that the economy “is picking up”. Revised UK 3Q GDP still shows a fall (-0.3%).

Nov 24 USD75.98 – UK mortgage approvals at 2 year high. No Supply Crisis - CERA restates its contention that oil supply will increase steadily until 2030 and will plateau thereafter. It points to continuing significant deepwater discoveries off Brazil and West/East Africa and projections for Iraq to quadruple its output. The peaking of global oil demand—rather than scale and deliverability of below ground resources—could have the most important impact on the flow of supply according to CERA Nov 23 USD78.11 – 60 world leaders to attend Copenhagen Climate Change Conference. Dominique Strauss-Khan, MD of the IMF commented that the recovery is fragile, and still largely maintained by extraordinary levels of fiscal and monetary stimulus. A double dip recession is still possible, while there are signs, particularly in the banking sector, of a return to the bad old ways – possibly ahead of a regulatory crackdown. Ceyhan pipeline closed due to saboteurs. Nov 20 USD76.4 – Japan reports that its economy is back in deflation. Russia's Energy Minister Sergei Shmatko and European Union Energy Commissioner Andris Piebalgs have signed an agreement for an early warning of future disruptions of Russian gas supplies to the EU. Adam Sieminski, chief energy economist, Deutsche Bank,

Washington, DC wonders if the US economic recovery could be “oil-less” and “jobless”. It seems that Iran will refuse to embrace the enrichment proposal of the world powers. Nov 19 USD77.27 –UK government debt rises above expectations. Van Rompuy appointed fi rst European President. Nov 18 USD78.07 – US crude inventories declined 900,000 bbl to 336.8MnBbls in the week ended Nov 13, still slightly above average for the time of year. The consensus among Wall Street analysts was for a 300,000 bbl increase.

Gasoline stocks dropped 1.7MnBbls to 209.1MnBbls in the same period, also above average. Finished gasoline inventories increased while blending components decreased. Distillate fuel inventories also declined, down 300,000 bbl to 167.4MnBbls compared with expectations of a 900,000 bbl decrease. Distillate stocks also are above average for this period.

Nov 17 USD77.55 – More bad news from Obama’s trip to China with differences remaining on range of issues including security and human rights – but perhaps most significantly on trade (protectionism v currency revaluation) – nevertheless linkages at all levels of government are improving. Growing murmurs that the IEA is exaggerating future global oil production—one report suggests oil production in 2030 will be closer to 75Mnbd versus the 105Mnbd b/d estimate……… More evidence that the global economy is on the mend with reports that Chinese industrial production increased by 16% in October, while the BDI is on the rise again indicating recovering trade volumes.

Nov 16 USD77.78 – Obama rules out Copenhagen Treaty – after failing to forge an agreement on trip to China (just agreement for a joint clean energy institute with job creation a driving factor). ExxonMobil Corp. CEO Rex Tillerson commented that record-high inventories around the globe will not be dented by winter seasonal demand. Peace in the Nigerian Delta appears to be holding and as a consequence production is estimated to have recovered from 1.9Mnbd in October to 2.4Mnbd by mid November. Speculation that OPEC will leave crude quotas unchanged in December. However, compliance down to 63% with Saudi Arabia signaling that it does not

want the price of oil to rise too fast. Japan extra stimulus probable. Nov 13 USD75.5 – Ahead of trip to China, Obama talks about rare inflection point in history – time for China to stop exporting its unemployment overseas by rebalancing its currency. China is talking about reducing its dependence on exports. Hu Jintao sounded conciliatory last week pointing out that China is taking "vigorous" steps to cut reliance on exports, still 39% of GDP. "We want to increase people's ability to spend," he said. The issue being discussed is who has the power – the US or China – the answer ultimately is the US because it can crush the Chinese political and economic system by closing its markets and retreating behind NAFTA to retool its industries as the UK did in the 1930s under Imperial Preference.

Nov 12 USD75.99 – IEA revises its 2009 oil demand forecast up by 210Kbd (84.8Mnbd) and its 2010 forecast up by 140Kbd (86.2Mnbd, +1.3Mnbd yoy), but market focuses on report of larger than expected increases in US crude oil inventories last week – and reviving dollar. Nov 11 USD77.61 – Tropical storm Ida blows out. Based in part on its upwarding revised forecast that the world

economy will grow 2.9% in 2010 after a contraction of 1.1% this year, OPEC (in its November monthly publication) has revised up its forecast for world oil demand growth in 2010 to 0.8Mnbd (from +0.7Mnbd in its October publication) Nov 10 USD77.79 – Tropical storm Ida (126 of 694 manned platforms in the USG evacuated) – rising equity markets – weakening dollar (lowest point in 15 months and IMF says room to fall further). Expectation that Saudi Arabia and Nigeria will increase production in 4Q. Nov 9 USD77.73 – Obama health care bill gets through House of Representatives. Pritchard Capital Partners believes that oil prices are looking for direction - with concerns over depressed demand being offset by speculation that the US government will increase stimulus spending, leading to further dollar weakness. Nov 6 USD75.22 – US jobless total hits 10.2% - 26 year high. Two storms being tracked in the Gulf of Mexico. US equity markets recover ground. Nov 5 USD78.14 – Larger than expected drop in US inventories of crude oil. The US Senate Environment and Public Works Committee approved a global climate change bill by an 11-1 vote despite a boycott by Republican members. Nov 4 USD78.58 – GM cancels OPEL sale due to improving business environment. Oliver Jakob concerned about the glut of US distillate stocks, which will not be tamed even by a cold winter. Nov 3 USD76.83 – Price of gold nears record high as India purchases 200 tonnes (USD6.7Bn) of gold from IMF. It is thought price might go higher as there are signs of a growing appetite for gold amongst emerging countries – eager to diversify their reserves away from the US dollar. Czech court dismisses Lisbon treaty objections. US Consumer spending fell 0.5% in September after a 1.4% increase in August. Manufacturing activity in China expanded at the fastest pace in 18 months, and the Institute for Supply Management’s US factory index rose to a 3-year high in October. Manufacturing also increased in Europe. OPEC output increased to 28.76Mnbd in October, up 80,000 b/d from September Nov 2 USD74.77 – A raft of positive industrial production reports from Asian countries provided powerful evidence that the region’s rapid recovery from recession is underpinned by a sustainable improvement in manufacturing output. Japan starts to withdraw stimulus measures saying it would stop buying -corporate bonds and commercial paper at the end of the year. However, in a sign that Japan’s central bank remains cautious about the downside risks to the -economy, it extended its programme to provide limitless lending to help corporate financing until the end of the fiscal year, next March. Japan’s jobless rate fell to 5.3% in September, from 5.5% in August and a record 5.7% in July, indicating that an improvement in exports and production is filtering through to employment – but BoJ has revised

down its GDP growth forecast for 2010 from 1% to 0.5%. More worrying some believe that the Japanese government’s decision to stop increasing its borrowing indicates that the model designed to facilitate recovery from a “balance sheet” recession (as advocated by Richard C. Koo) has failed (country about to slip into a debt compound trap having failed to deal with structural problems e.g. (1) dependence on exports (2) suppression of women (3) massively ageing population (4) over investment in 1980s) because the scale of borrowing has become just too high (equivalent to 218% of GDP this year and f’cast to reach 227% in 2010, and 246% by 2014) – in part because of fresh borrowing (USD550Bn) by Japan’s new government (Yukio Hatoyama's neophyte Democrats) who are attempting to build an expensive social safety net.

Oct 30 USD74.46 – US 3Q09 GDP estimated up 3.5% compared with expectation of 3.3% bounce. The IMF published major upgrades to the outlook for most Asia countries. For example, Japan’s gross domestic product growth in 2010 will be 1.7% (vs. 0.5% estimated previously), Australia 2% (vs. 0.7%), China 9% (vs. 7.5%), South Korea 3.6% (vs. 1.6%), and India 6.4% (vs. 5.6%). This is good news for oil demand because all the growth expected in 2010—about 900,000 b/d and possibly more—will come from these countries and the Middle East oil economies. Oct 29 USD77.58 – China’s consumption of oil products is expected to increase 10-13% in the fourth quarter after sluggish demand in the first 9 months of this year, according to state media. Chinese demand growth underpinned in part by booming passenger vehicle sales which, according to the China Association of Automobile Manufacturers, reached 1.02Mn units in September, up 18.27% mom and 83.62% yoy. Saudi Aramco said it is switching from West Texas Intermediate to an index of Gulf Coast sour crudes as the benchmark for pricing its oil for sale in the US. Starting with its January sales program, Aramco will use closely held Argus Media Ltd.’s Argus Sour Crude Index (ASCI) in pricing its Extra Light, Arab Light, Arab Medium, and Arab Heavy crudes, which are heavier and have higher sulfur content than the premium WTI. That index, launched in May, uses the volume-weighted average of daily spot sales of the Mars, Poseidon, and Southern Green Canyon crudes. It is “more of an evolutionary smoothing out of distortions, rather than…a dramatic change in the dynamics of the US crude market,” said Paul Horsnell, managing director and head of commodities research at Barclays Capital in London. He sees it as “a form of insurance” against volatility caused by periods of WTI price dislocations. Paul Horsnell of Barclay Capital said the move should not be interpreted as a rejection of WTI’s general role as market leader. “US gulf crudes tend to be assessed in terms of differentials to WTI, rather than as separate centers of independent price discovery, and we expect that to continue,” he said. “Should an active OTC or futures market based on ASCI eventually arise, then the dynamics could change. However, establishing futures contracts based on delivered US gulf sours has proved very problematic in the past and is still very far from an inevitable development. Indeed, the current regulatory climate is not exactly ideal for any innovative development of new OTC or formal exchange-based oil derivatives.” Horsnell also commented that it may be Brent rather than WTI that suffers. Oct 28 USD75.43 – EIA reported crude inventories increased only 800,000 bbl to 339.9MnBbls in the week ending Oct 23, although this was well below both the earlier API estimate and Wall Street’s consensus for a build of 1.9MnBbls. Gasoline stocks climbed 1.7MnBbls to 208.6MnBbls, counter to analysts’ expectations of a 1MnBbl draw. Distillate fuel inventories decreased by 2.1Mnbbls to 167.8 million bbl, compared with Wall Street’s outlook for a 1MnBbl draw. The import of crude into the US increased 191,000 b/d to 8.9mnbd in that same period. Input of crude into US refineries was up 133,000 b/d to 14.2Mnbd with units operating at 81.8% of capacity. Gasoline production increased to 8.8Mnbd, while distillate fuel production decreased to 3.8Mnbd. Oct 27 USD77.01 – Equity prices stumble as dollar recovers from 14 month low, but unusually (in recent times) the oil prices recovered somewhat despite the strengthening dollar. According to Raymond James the rise in oil price was due to an increase in Middle East tensions as rocket was fired from Lebanon into Israel. Oliver Jakob said: “If we are trading a dollar bubble, it is only normal that after all assets have risen on the falling dollar, they all fall when the Dollar Index goes higher. Lawmakers are wasting a lot of time combating [business executives’] bonuses, but the fundamental problem in 2008 and again in 2009 is rather the breakdown of diversification across asset classes driven by high-frequency algorithmic computers. When the competitive trading advantage comes down to how fast your computer is running, the conditions are created for running from one bubble to another until markets cease to exist. It is not really the dollar traded per se that is too crowded but rather high frequency and algorithmic trading.” Oct 26 USD75.84 – Fear that rising oil prices may strangle recovery Oct 23 USD78.43 – Figures for 3Q (-0.4%) show that UK still stuck in recession. Sterling weakens, but FTSE goes up. Obama sees worst polling rating drop in 50 years. Jonathan Kornafel, Asia director for market maker Hudson Capital Energy in Singapore commented that the “oil price rally isn't based on fundamentals. It's about risk appetite." USD priced oil is attractive to investors because the weak US dollar makes it appear cheap. Oil price rally anticipated to weaken soon as OPEC is expected to activate some of its spare capacity. Nouriel Roubini says the improvement in global risk appetite cannot be underestimated.

Oct 22 USD77.98 – It is reported that the Chinese economy expanded 8.9% in 3Q09 – ahead of Government’s 8% target. Crude oil stocks increased by 1.3MnBbls in the week ending 16th October – although this is slightly below the consensus estimate of 1.5MnBbls. Nigerian government now looking for an official confirmation of ceasefire from MEND. Iran continues discussions over its nuclear programme in Vienna. The governments of Italy, Russia, and Turkey—aiming to reduce oil shipping away from crowded Turkish straits—agreed to build a 550-km oil pipeline from Turkey’s Black Sea port of Samsun to its Mediterranean port of Ceyhan.

Oct 21 USD78.13 – Improved conditions in Nigerian Delta could mean even lower compliance with OPEC’s overall quota level. Oct 20 USD75.88 – Concern that much of the oil price momentum is due to optimism caused by artificial factors such as low interest rates and fiscal stimulus. It is as though some are regarding the credit crunch as no more than a bad dream. The exit from stimulus remains a critical phase. US plans for an aggressive crackdown on energy speculation are in danger of unravelling, with leaders at the US commodity regulator raising doubts about proposed reforms. Two of the Commodity Futures Trading Commission’s five commissioners have voiced worries that proposals to cap investors’ holdings in oil and commodities futures could drive trading from US exchanges. At an “Oil and Money” conference in London, Sec. Gen. Abdalla El-Badri of OPEC told reporters an USD80/bbl oil price is too high, considering the 125MnBblsl of crude and fuel still in floating storage. He blamed rising prices on a robust equities market, the falling dollar, and speculators—OPEC’s usual suspects. However, Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The blame on speculators can not really be contested given that the Commodity Futures Trading Commission is showing large speculators holding close to record-high long positions in West Texas Intermediate Oct 19 USD76.29 – Developed countries are preparing to relent on their demand that developing countries agree to long-term cuts in greenhouse gas emissions in a concession that could form the basis of a global deal on climate change at Copenhagen in December. This would mean abandoning the US/Europe target of cutting emissions by 50% by 2050. Gordon Brown “Success at Copenhagen is still within reach. But if we falter, the earth itself will be at risk.” The biggest deal breaker could be developing countries demands that rich countries help them reach climate targets. Ben Bernanke said today that it was “extraordinarily urgent” that the US and Asia adopt policies that prevent a revival of global economic imbalances as the financial crisis ebbs Oct 16 USD76 – Olivier Jakob believes fundamentals do not support oil price rally. He points out that with plenty of excess supply capacity and that rising oil prices will create an imbalance on the supply side with further deterioration in OPEC quota compliance. Oct 15 USD74.61 – WTI front month crude oil contract closed above USD75Bbl for the first time this year. US crude oil inventories grew by 0.4MnBbls in the week ended Oct 9, but this was better than market expectation for a 1MnBbls increase. However, gasoline stocks fell further than anticipated. The US House Financial Services Committee approved a bill that would regulate over-the-counter trades in commodity markets for some—but not all—participants. Energy producers and consumers using commodity hedges to control prices apparently would be exempt. Oct 14 USD72.84 – Chinese imports down from highs of July/Aug but up 0.53Mnbd in September yoy. OPEC slightly increased its forecast for 2010 global oil demand for the second consecutive month. OPEC is now forecasting global oil demand of 84.9 million b/d next year, up 1% from 2009. Nouriel Roubini believes stock market recovery is happening too fast. Oct 13 USD71.49 – China economy continues to flame on with reports that Chinese iron imports reached a record 64.6MnTons in September up from 49.7MnTons in August. Pritchard Capital Partners LLC said, “Oil also gained support from reports that the China National Offshore Oil Corp. may unite with the Ghana National Petroleum Corp. to outbid ExxonMobil Corp.’s USD4Bn offer for Kosmos Energy LLC’s [30%] stake in the Jubilee oil field off the Ghana coast. Oct 12 USD71.05 – Forecasts for below-normal temperatures in the eastern US over the next 6-10 days following record cold temperatures in the West this past weekend.

Oct 9 USD69.49 – IEA has revised upward its forecast for global oil demand for 2009 +0.2Mnbd (84.6Mnbd, -1.7Mnbd yoy) and 2010 +0.35Mnbd (86.1Mnbd, +1.4Mnbd yoy). Dollar dropped to a 14 month low. Oct 8 USD68.85 – Lloyds Bank considers £15Bn rights issue to complete exit from UK asset protection scheme Oct 7 USD66.87 – Falling dollar continues to exert downward pressure on oil price. The dollar’s latest fall was triggered by press reports that a broad group of nations, including the Gulf States, have discussed replacing the dollar with a basket of currencies for oil transactions. US crude oil inventories decreased by 1Mnbd - against expectations (American Petroleum Institute) of a 2.7Mnbd draw. Stock levels still above average. Oct 6 USD68.96 – Australia becomes first of G20 to begin its exit from stimulus (raises interest rates) – big question as to whether corporations and individuals have the confidence to return to normal spending and investment patterns, but Australia one of the countries to have faired reasonably well during the recession because of the surge in Chinese commodity imports. EIA Short Term Energy Outlook revised up its estimates for 2009 and 2010 crude oil demand by 0.2Mnbd for each year to 83.67Mnbd and 84.77Mnbd respectively from 85.46Mnbd in 2008. Oct 5 USD65.96 – Expiry of the Nigerian governmental amnesty on Oct 4. Quality of Nigerian crude much more difficult to replace than those from Iran. Tome Ateke, a very key leading militant, accepted the amnesty yesterday and was quickly flown by helicopter to the capital to be thanked by the president – an indication that the remaining militants may become marganalised.

Oct 2 USD67.19 – The news that the US unemployment rate hit 9.8% in September (the highest level for 26 years) spooked the markets.

Oct 1 USD67.92 – 60th Anniversary of Communist rule in China. IMF reports that the world economy is recovering, but that the revival will be weak and there are risks. Negotiators from the US, UK, France, Russia, China, and Germany (including President Obama) meet in Geneva to confront Iran over its nuclear program and to resume talks.

The Role of Speculators in the Futures Markets Summary - US politicians have struggled in recent months to evaluate the role of speculators in determining the movement of commodity prices. Obama’s inaugural address makes it clear that he believes that left unchecked speculators with bring markets down. The following chronology plots recent discussions on the subject. Currently the politicians and Commodity Futures Trading Commission (CFTC) are singing from different hymn sheets

Michael Martins – St Croix – Fund Manager (doesn’t trade food and oil on principle) – testified against Commodity Index Funds in front of Congress – 0.5% of market but pushing one way (either up or down) – used to be S/D, now S/D+Demand Jan 22 – Oliver Jakob argues that the CFTC’s implementation of a new rule on position limits will have more impact on energy prices in the short term than Obama’s bank break up plans. He said, “The CFTC is putting the Street up against the wall with rules on limits that should force some of the largest banks to choose between speculative trading and being a swap provider in commodities, and this will not be dependent on the broad reforms in the banking sector wanted by President Obama. The CFTC proposal covers many potential loopholes and if we thought the proposal was pretty harsh for the business line of some of the large Wall Street commodity banks, after hearing the president yesterday we are more convinced than ever that the CFTC is for real. We will therefore increase our risk factor for liquidation and de-leveraging of positions in commodity indices in the fourth quarter 2010 [or] the first quarter of 2011.” Jan 15 – In its latest Oil Market Report for Januarym the IEA commented, “The polarised debate on fundamental versus financial drivers of commodity prices continues to rage, though a number of recent studies continue to struggle to discern a direct causal link between speculative trades on the oil futures markets and prices, in anything other than the very short term. That said, visibility of OTC derivatives trades remains obscure at best. Regulators on both sides of the Atlantic continue to mull position limits for energy futures exchanges and the migration of derivatives trades towards mandatory clearing. However, international regulator consensus on the best way to improve transparency, reduce the risk of market manipulation but sustain liquidity remains some way off. Jan 11 – According to Oliver Jakob the price of crude is now back to 2006-2007 levels on the basis of a barrel of North Sea oil priced in euros. KBC Energy Economics, a division of KBC Advanced Technologies PLC, London, analysts said, “If prices continue to rise next week, it will be tempting to conclude that we are back in the casino-like oil market conditions we saw in 2008.” They reported, “The latest weekly data from the Commodity Futures Trading Commission…shows that in the run-up to the end of the year a wave of money has moved into oil. There is no reason for this other than a belief that the medium and long term direction for oil is up. Even this long cherished—and valid—belief is under threat because of the damage to world oil demand from the recession and the prospects of rising oil production from Iraq and elsewhere that will probably offset falling output from other countries, at least for this decade. Add in an existing 7 million b/d of spare production capacity available today and it is very difficult to see a supply problem inside the next 5 years.” Dec 7 – As the CFTC considers consider tighter regulation of derivatives trading, a new study by Hilary Till, research associate of the EDHEC-Risk Institute in Nice, France suggests excessive speculation wasn’t to blame for a record-breaking surge in oil prices in first-half 2008 Oct 20 – US plans for an aggressive crackdown on energy speculation are in danger of unravelling, with leaders at the US commodity regulator raising doubts about proposed reforms. Two of the Commodity Futures Trading Commission’s five commissioners have voiced worries that proposals to cap investors’ holdings in oil and commodities futures could drive trading from US exchanges. A third commissioner, who had been the most outspoken supporter of new limits, now says they should be set at generous levels, in effect softening any clampdown. The concerns echo those raised by the exchange industry and banks this year when they warned about the risk of regulatory arbitrage – the move by traders to a more benign regime

Oct 16 - The US House Financial Services Committee approved a bill on Oct 15 that would regulate over-the-counter trades in commodity markets for some—but not all—participants. Energy producers and consumers using commodity hedges to control prices apparently would be exempt. CFTC Chairman Gary G. Gensler said following the vote that the House FS committee’s action “represents historic progress toward comprehensive regulatory reform of the over-the-counter derivatives marketplace,” adding, “The committee’s bill is a significant step toward lowering risk and promoting transparency.” Sept 3 - The US CFTC said it will begin releasing more detailed data in its weekly commitments of traders reports as it implements new market transparency efforts on Sept 4. The commission also plans to start releasing quarterly reports of data collected from an ongoing special call on swap dealers and index traders in the futures markets. Aug 20 - The CFTC and Britain’s Financial Services Authority have agreed to strengthen cross-border supervision of energy markets, the chairmen of the two countries’ agencies announced.

New Crude Oil Production Capacity Coming on Stream Jan 28 – Oil production from Mangala field in Rajasthan, India, has reached 20,000 b/d Dec 15 - Oyo oil field has started production from two subsea wells in 400 m of water about 75 km off Nigeria. Italy’s Eni SPA, whose affiliate Nigerian Agip Exploration Ltd. holds a 40% interest in the production-sharing contract and is the operator, said initial production capacity is 25,000 b/d. The field produces through the Armada Perdana floating production, storage, and offloading vessel, which has treatment capacity of 40,000 b/d of liquids plus gas treatment and reinjection facilities. The FPSO can store as much as 1MnBbls of crude. Nov 12 - Offshore facilities for oil exports have been finished at the Port of Kozmino. News of the port coincided with an announcement that the first trains carrying more than 8,000 tonnes of oil left the railway station at Skovorodino, endpoint of the first stage of the ESPO, for delivery on to Kozmino. The capacity of this stage of the ESPO project is estimated at 80Mntpy. Oct 9 – Shell’s CEO indicated that Shell anticipates that natural gas will account for 50% of its total production by 2012. “This is not merely a shift in our portfolio. Increasing natural gas production and transportation by liquefying it and shipping the LNG to global markets means that more natural gas will be available to displace coal as the fuel for power plants,” Sep 10 - Crude oil production has begun from the Tombua-Landana project, 50 mi (80 km) offshore Angola, according to Cabinda Gulf Oil Co. (CABGOC) and its partners. Located in approximately 1,200 ft (366 m) of water in block 14, the USD3.8Bn development is expected to achieve peak production of 100,000 b/d of crude oil in 2011. Recoverable resources for the two fields are estimated at 350 MnBbls, CABGOC says.

Exploration and Development Summary – The dramatic collapse of the oil price during mid 2008 is starting to have a significant impact on E&D spending in future months. Most telling is Saudi Aramco’s decision to delay new E&D projects, and reports Feb 9 that OPEC has delayed 35 of 150 planned oil drilling projects by at least 4 years.

Market already making adjustment to take account of changing supply demand balance to bring e&d costs down (e.g. rig hire rates falling – steel prices) with IEA having already cut its estimate for 2030 production by a staggering 10 million bpd (9 percent) since WEO2007 (when it thought 113.7 million would be needed by 2030).

Feb 15 – Exxon Mobil Corporation said that additions to its proved reserves in 2009 totalled 2.0Bn oil-equivalent barrels, replacing 133% of production Feb 10 – Petrobras, YPF, and Petrogal (Galp Energia) have signed an agreement with Ancap, the Uruguayan national oil company, for oil and natural gas exploration and production on the Uruguayan continental shelf. Feb 2 - To meet the increasing complexity of drilling and completing wells in higher pressure and temperature environments that are deeper and have longer deviations, Scott Sigurdson, vice-president of drilling and completions for BP PLC said the company's focus now is on training and development of engineers as specialists rather than its previous emphasis on generalists. Jan 28 - A group led by PetroChina Co. Ltd. has signed its service contract for development of supergiant Halfaya oil field in Iraq. The 20-year contract, with state-owned Missan Oil Co., calls for an increase in production to a plateau of 535,000 b/d from 3,100 b/d at present. Jan 28 – In Obama’s state of the Union Speech, one of the measures announced was to end tax cuts for oil industry. However, there was also a measure of support with the recognition of the need for more offshore oil development in new areas. Jan 27 - Chevron is to proceed with the development of the Papa Terra project, its second deepwater field off Brazil. Petrobras is the project's operator and had announced in January 2009 the suspension of the development because of uncertain market conditions and excessive costs Jan 22 – Green battle lines - Twelve environmental organizations and one Alaska Native group sued in federal court on Jan 20 to block Shell Gulf of Mexico Inc.’s plan to drill three exploration wells in the Chukchi Sea off Alaska. The US Minerals Management Service conditionally approved Shell’s exploration plan on Dec 7. The company paid USD2.1Bn for Chuckchi Sea leases during Outer Continental Shelf Sale 193 in 2008. Jan 14 – A “delicate recovery” is predicted for the global offshore E&P business going forward, according to Steven Kopits, MD of Douglas-Westwood/NY, speaking to the Society of Underwater Technology in Houston. He identified several factors that will affect how the upstream business performs in the near future e.g the price of oil, Iraq’s pace of new production, and a possible renaissance of natural gas in the United States, and Chinese oil consumption. Douglas-Westwood sees offshore spending recovering to USD439Bn in 2010, up 11% from 2009. Spending on production is expected to grow from USD260Bn in 2008 to USD360Bn in 2013. Jan 14 - Stone Energy Corp., Lafayette, La., announced a USD400Mn capital expenditure budget for 2010. The independent’s 2009 budget was USD300Mn. Jan 11 - Talisman Energy Inc., Calgary, outlined a USD5.2Bn (Can.) budget for 2010—an increase of more than 10% from its 2009 budget. Jan 11 – McMoRan makes major shallow-water, deep-well GoM discovery - A deep well discovery in 20 ft (6 m) of water in South Marsh Island block 230’s Davy Jones prospect could be one of the largest shelf discoveries in the Gulf of Mexico in decades, according to James R. Moffett, co-chair of McMoRan. Jan 5 – Mariner Energy Inc. plans capital spending of USD660Mn for 2010 compared with a 2009 budget of USD431Mn. The 2010 budget includes Mariner’s USD260Mn acquisition of bankrupt Edge Petroleum Corp. of Houston. Mariner, an independent based in Houston with operations in the Gulf of Mexico and the Permian basin, expects its deepwater Balboe discovery will begin production in the third quarter and its deepwater Wide Berth will come on stream in the first quarter 2011. Onshore, Mariner expects to operate 8-10 rigs in the Permian basin during 2010. The company expects to participate in 140-170 onshore wells. Dec 30 – Snorre Field in the North Sea will see its life expectancy stretch out to 2040 with partners committing to spend NOK5Bn (USD867Mn) by the end of 2010. Dec 17 - Iraq—hailing the successful end of its second postwar bidding round and hopeful of boosting output to record levels—has awarded 7 oil field service contracts out of the 10 it offered. "It is a very successful bid round," said Iraq’s Oil Minister Hussain al-Shahristani, adding that current production of 2.5Mnbd eventually could be increased to 4.765Mnbd if the companies that won fields meet production pledges. Dec 15 - Hess Corp. has budgeted USD3.9Bn in capital and exploratory spending for 2010, USD700Mn more than it budgeted for 2009. Husky Energy Inc., Calgary, has set a capital budget of USD3.1Bn for 2010, up 20% from 2009 and focused on areas with the highest potential returns, particularly Western Canada heavy oil and oil sands, Eastern Canada offshore developments, and Southeast Asia developments. Dec 14 - Chevron Corp. announced a USD21.6Bn capital and exploratory spending program for 2010, down 5% from projected 2009 spending. Dec 11 – Iraq Oil Field Sell off Part 2. The Iraqi oil ministry awarded service contracts for development of giant Majnoon and Halfaya oil fields in the first of 2 days of bidding by 45 companies. Shell and Petronas won the contract for Majnoon field in southern Iraq. The contract for Halfaya field, between Majnoon and the city of Amara, went to a consortium led by China National Petroleum Corp. The second round sell off follows the first round in June.

Dec 10 – David Phillips, an equity analyst with HSBC commented that global project finance across all sectors of the industry is down 50% in the first half of this year on the corresponding period in 2008. Oil and gas was the worst hit – down 78% in this period – with the sector raising less in funds than renewable energy. Dec 2 – ConocoPhillips approved a USD11.2Bn capital program for 2010, representing a 10% decrease from estimated 2009 expenditures. Nov 26 – BP PLC Chief Executive Officer Tony Hayward commented that by 2030 the world will need at least 45% more energy than it consumes now and that to meet this increase in demand, BP projects it will require an investment of USD25-30 trillion, or an average of “more than USD1 trillion/yr for the next 20 years.” Hayward said natural gas is becoming increasingly important in dealing with the energy and environmental challenges facing the world and as the developing economies continue to expand, demand for power is set to grow exponentially. In a stance similar to that adopted by Shell, he commented “we believe the best way of meeting this demand growth, while lowering carbon emissions, is through a switch from coal to gas.” Renewable energy will eventually be important but it will take several decades to become a significant part of the power generation mix. Very long lead times apply to nuclear power as well. “In the short term, the main choice for expanding generation capacity is between coal and gas. And until clean coal technology has been developed for use at scale—which is still some ways off—gas should be the clear choice,” he said. Hayward admitted though that clean coal technology will have to be improved and coal will return as part of the sustainable energy mix. Nov 25 – Offshore operations and maintenance expenditure could total more than USD330Bn over the next five years – with the largest share allocated to North America during that time, according to Douglas-Westwood’s Offshore Operations and Maintenance Management Report 2010-2014. Nov 20 – OGJ report that Mexico’s state-owned Pemex and the Secretaria de Energia (Sener) are preparing risk contracts that will be offered to oil companies—international and domestic—in order accelerate the search for oil and gas in order to replace dimishing output from the giant Cantarell oil field. At its peak in 2005, Cantarell was producing at 2.2Mnbd. By December 2009, expected output is 0.55Mnbd, and by 2017 output is forecast to fall to 0.255Mnbd. Nov 18 - New Zealand’s Energy and Resources Minister Gerry Brownlee has unveiled the government’s plan for unlocking and maximizing the country’s petroleum potential, with a specific focus on exploration of deepwater basins. Currently the petroleum sector accounts for around USD3Bn per annum of New Zealand’s export revenue. This could increase to USD30Bn per annum by 2025 through development of resources in the country’s unexplored basins. Nov 17 - Drilling and workover expenditure across the Middle East and North Africa may increase by more than USD10Bn to reach USD27.9Bn by 2014, according to Douglas-Westwood’s “Middle East & North Africa Oilfield Services Market Report 2010-2014”. Nov 16 - IHS Cambridge Energy Research Associates in its recent report ’The Future of Global Oil Supply: Understanding the Building Blocks” envisaged a future where global oil production capacity would grow steadily through 2030 with no evidence of a peak of supply - thereafter, supply would follow an undulating plateau. The report points out that despite recessionary pressures, the first three quarters of 2009 have produced discoveries with collective reserves of more than 8 billion new barrels. Multi-billion barrel discoveries, such as those of the subsalt Brazil, as well as those in offshore West Africa and offshore East Africa, continue to emerge. New giant discoveries in Iraq may double the country’s production capacity by 2020, the report finds. The peaking of global oil demand—rather than scale and deliverability of below ground resources—could have a major impact on the flow of supply, according to the report. Nov 5 - The realistic scenario in the latest Canadian Energy Research Institute outlook expects Alberta oil sands production to increase to 1.7Mnbd by 2015, 2.5Mnbd by 2020, 4.5Mnbd by 2030 before reaching a peak of 5.3Mnbd in 2041. Oil sands production was 1.3Mnbd in 2008. Nov 4 – FPSO prospects improving. According to Tony Mace, CEO of SBM Offshore there is potential for five total FPSO awards by the end of this year, which is up from zero during the previous year or so. About 78 FPSO projects are possible in the next 5-10 years, with 50% of them in Brazil, Nigeria, and Angola. One challenge in these countries is the requirement for increasing local content, Mace says. Petrobras in a recent tender is targeting 65% local content, he says. This is one factor driving up the price of projects, he says. Meanwhile, shipyard, supplier, and contractor pricing is coming down. Another trend is increasing water depth per FPSO. This is expected to increase with the pre-salt discoveries. One technical challenge is the development of cost-effective risers for greater than 2,000 m (6,562 ft) water depth, Mace says. Another technical challenge is development of a swivel system to handle 800 bar for high temperature/high pressure fields. This is currently under development, he says. Nov 3 – Total offshore spend is forecast to grow from USD260Bn in 2008 to USD360Bn in 2013, according to John Westwood with the majority of the investment targeted at offshore and deepwater. Oil production from deepwater, one of the cheapest sources of liquid fuels, Westwood explains, is expected to exceed 10Mnbd by 2015. Deepwater wells will account for 61% of total wells by 2015, and the deepwater FPS market is estimated to be USD30Bn over the period 2010-2014. Meanwhile, Westwood forecasts the FLNG sector will grow to about USD23Bn over the period 2010-2016. Nov 3 – BP PLC and China National Petroleum Corp. have signed the technical service contract with the Iraqi government that will enable them to nearly triple oil production in supergiant Rumaila field to 2.85Mnbd. The contract is with Iraq’s South Oil Co. BP and CNPC bid for the work in a June auction of agreements covering eight Iraqi fields. BP and CNPC plan to invest USD15Bn over 20 years and expect to reach plateau production in the second half of the

next decade. BP holds a 38% interest in the project venture, CNPC 37%, and the Iraqi government through State Oil Marketing Organization 25%. Oct 30 – OPEC Sec. Gen. Abdalla Salem El-Badri told the Wall Street Journal that OPEC is restarting some projects. In February, about 35 OPEC projects were being shelved because of fallout from the recession. In an Oct. 20 interview with WSJ, El-Badri said seven of the projects, totaling 1.2Mnbd in capacity, had restarted development in past weeks. The projects are expected to enter service in 2-4 years. El-Badri declined to identify or provide specifics on the projects that are being restarted. El-Badri also said OPEC members still have concerns about longer-term demand. Separately, the National newspaper on Oct. 30 reported that Abu Dhabi National Oil Co. told customers it will raise exports from two big offshore oil fields in December. Oct 29 – Energy investment a casualty of the recession? Brookshire Advisory and Research. The oil and gas industry indeed has universally been affected by and reacted to the downturn in crude pricing. In addition to cutting non-critical expenditures, capital investments have taken a toll. The data reveals that across virtually all geographies, capital expenditure spending has increased a paltry 4.7% in 2009 compared to the prior year. Fiscal year 2009 will continue to exhibit marked decreases in earnings, revenues, and cash flows. While the industry continues to cut costs and react to what is the new normal, capital investment spending is a casualty of the crude oil slump as cash flow pressures prevail. Oct 21 – According to Sec. Gen. Abdalla El-Badri, speaking at an “Oil and Money” conference in London, higher oil prices (now broken through the USD75Bbl) some cancelled oil projects are now being revived. Oct 20 – The US Minerals Management Service (MMS) has approved Shell Offshore Inc.’s exploration plan for two Beaufort Sea leases with stringent conditions. Environmental groups immediately protested the action. MMS said Shell obtained the two leases during US Outer Continental Shelf Lease Sales 195 and 202 in 2005 and 2007, which were part of the 2002-07 5-year leasing programme. They were not affected by the recent federal court decision which sent the 2007-12 program back to MMS for additional analysis under Section 18 of the OCS Lands Act, MMS said. Oct 15 - In its latest report, “The first hints of recovery in global upstream spending”, Wood Mackenzie predicts that investment in the upstream sector will return to growth by 2011, reaching around USD350Bn in 2012. The report stresses that upstream spend will be restored on a modest upward trend in 2011. In 2010, investment will remain at levels similar to this year, at around USD325Bn, down from a five-year peak of USD370Bn in 2008, although there will be some notable exceptions. “There will be a few, major new capital projects implemented through 2010, such as Gorgon in Australia, Rumaila in Iraq, blocks 17 and 31 in Angola, and the Kearl project in the Canadian oil sands sector,” says Iain Brown, VP of upstream energy research for Wood Mackenzie. “But, overall, we expect such commitments to be balanced by the prevailing caution in the industry, as companies await convincing evidence that the recovery will be sustained.” Oct 14 - Following agreement on two new oil service contracts, Iraq’s oil minister said he expects his country to increase its oil production to 10-12Mnbd over the next 6 years from the current 2.5Mnbd. "What we expect from the first bid round and what we hope for from the second round is that Iraqi production will be between 10 to 12Mnbd, and this will make Iraq equal to the world's biggest oil producers," said Hussein al-Shahristani, referring to one auction in June and another due in early December. Oct 12 - Russia’s OAO Transneft will begin operating a railroad oil terminal on Oct. 15 in Skovorodino, end point of the first phase of the East Siberia-Pacific Ocean (ESPO) pipeline Sept 24 – It has been confirmed that Elm Coulee field, Montana’s primary Bakken shale oil producing field discovered in 2000, is a giant with recoverable reserves of more than 200MnBblsd.

Refinery Projects Summary - The dramatic collapse of the oil price during mid 2008 is starting to have a significant impact on refinery projects in future months. Most telling is Saudi Aramco’s decision to delay new refinery projects. Instead of building new refineries certain leading national oil companies have refocused on acquiring stakes in existing refineries Feb 5 – The French refining industry faces a “critical” situation as part of a European system in which “between 10 to 15% of the 114 refineries should be shut down to restore a demand-supply

balance,” according to Jean-Louis Schilansky, president of Union Francaise des Industries Petrolieres (UFIP). Refinery runs for all of last year fell to 72MnTons from 84MnTons in 2008 as margins diminished. Feb 1 - Sunoco Inc. has made permanent its closure of the 150,000-b/d Eagle Point refinery at Westville, NJ, and is selling its polypropylene business to Braskem SA Jan 21 - Saudi Aramco is to build and finance the USD10Bn Jazan refinery. Its capacity will be 250,000-400,000 b/d, said Minister of Petroleum and Mineral Resources Ali Al-Naimi. Jan 20 - BP-Husky Refining LLC will undertake a $400 million equipment upgrade at its 155,000 b/d Oregon, Ohio, refinery outside Toledo. Owned in equal parts by BP PLC and Husky Energy Inc., Calgary, the company plans to start work later this year and complete it in 2012, according to a company statement. BP operates the refinery. Jan 14 – Shell Canada Products plans to halt operation of its 130,000-b/d Montreal East refinery and to convert the facility into a terminal for gasoline, diesel, and aviation fuel. Dec 30 – CNPC and PDVSA agreed to set up a mixed company to develop a 400,000-b/d refinery in Cabruta that will refine oil from the Junin Block 8. Dec 11 - Citing global refinery margins “remaining under pressure” in this year’s second half from depressed demand and “expected growth in global surplus refinery capacity,” Caltex Australia announced it will close its 105,500-b/d Caltex Lubricating Oil Refinery at Kurnell in Sydney. Dec 10 – Shell reported it has withdrawn from talks with China Petroleum & Chemical Corp. (Sinopec) and Kuwait Petroleum Corp. that were to lead to construction of a USD9Bn, 300,000-b/d refinery in China’s Guongdong province. Shell is seen as pulling away from new downstream ventures in favor of more oil and natural gas exploration and production. A MOU is in force between state-run KPC and Sinopec to build the refinery and petrochemical complex that will produce 1MnTons/Yr of ethylene. Kuwait is to supply all the oil for the project. Chinese government approval for the project is expected in first-quarter 2010. Nov 20 - Valero Energy Corp., San Antonio, will permanently close its 210,000-b/d Delaware City, Del., refinery, citing financial losses caused by “very poor economic conditions, significant capital spending requirements, and high operating costs.” Nov 19 - Ecopetrol’s Refineria de Cartagena SA has hired CB&I, Houston, to provide engineering, procurement services, and construction for a new 165,000-b/d refinery adjacent Reficar’s refinery in Cartagena, Colombia. CB&I's scope of work also includes revamping the existing 80,000-b/d refinery. The project targets completion in 2012. Nov 19 - Brazil’s Petroleo Brazileiro SA (Petrobras) and the Rio Grande do Norte state government signed the final contract for expansion works at the Refiniaria Potiguar Clara Camarao, aiming to boost its installed capacity and deploy a gasoline production unit. Following the upgrade, the 30,000-b/d refinery, which already produces LPG, diesel fuel, and aviation kerosine, will also produce petrochemical naphtha and other products, along with enough gasoline to make Rio Grande do Norte self-sufficient. After completion of the construction work, Refiniaria Potigar Clara Camarao also will have new loading facilities capable of mooring 50,000-gross-ton vessels, in addition to the new automotive gasoline production unit. On completion of the upgrade, Rio Grande do Norte’s refinery will produce 21,000 cu m/month of gasoline, 45,000 cu m/month of diesel, 7,500 cu m/month of aviation kerosine, 11,700 cu m/month of LPG, and 3,000 cu m/month of chemical naphtha. The Guamare industrial hub, where the Refinaria Potiguar Clara Camarao is located, has received USD1.65Bn in investment so far. Petrobras said it is investing an additional USD191Mn for expansion of the refinery, bringing the total to just under USD1.85Bn. According to Petrobras, the Refiniaria Potiguar Clara Camarao is one of five refining units designed by the firm to increase its overall refining capacity by 1.2Mnbd by 2015. Nov 16 – Saudi Aramco’s head of refining revealed that two new refineries which will each process 400,000 b/d of Arab Heavy crude oil—Jubail, where Total is Aramco’s partner, and Yanbu, where ConocoPhillips is the partner—will go ahead having been postponed a year ago. In the meantime, there were tough negotiations between Saudi Aramco and the majors which yielded reported cost cuts of USD2Bn for Jubail and a figure thought to be even higher for Yanbu. OGJ noted that the revised project costs are about USD10Bn each, still big bucks of course, but the recession has provided an opportunity for sponsors of big projects to force project-hungry bidders to cut their bills. Nov 11 - The Fujian Integrating Refining and Ethylene Joint Venture Project in Quanzhou, China, has reached full operation. The USD4.5Bn project tripled the capacity of a refinery to 240Kbd and added a petrochemical complex, which encompasses an 800,000Tn/yr ethylene steam cracker, an 800,000Tn/yr polyethylene unit, a 400,000Th/yr polypropylene unit, and a 700,000Tn/yr paraxylene unit Nov 11 - Three refineries with a total capacity of 465Kbd “are in the pipeline,” Pakistan Minister for Petroleum and Natural Resources Naveed Qamar told the National Assembly. Included are the 250Kbd Khalifa Coastal refinery and the 115Kbd Bosicor Oil Pakistan Ltd. facility, both in Hub, Balochistan Province; and the 100Kbd Trans-Asia Refinery Ltd. facility at Port Qasim in Karachi. Existing refineries in Pakistan include the 100Kbd Pak-Arab refinery; the 62Kbd National refinery; the 47Kbd Pakistan Refinery Ltd. facility; the 42Kbd Attock refinery; the 30Kbd Bosicor Pakistan facility; the 2.5Kbd Dhodak Refinery Ltd. facility; and the 2.6Kbd Enar Petrotech Services Ltd. facility. Nov 3 - After several months of delays, PDVSA has completed its purchase of a 49% stake in the Dominican Republic’s state refiner Refineria Dominicana de Petroleo SA (Refidomsa), which owns a 34,000-b/d facility in Haina.

Oct 27 - Russia and Turkey, building on earlier discussions, have moved forward with plans to construct a refinery as part of their recent agreement to jointly build the Samsun-Ceyhan pipeline. Oct 9 - Suddenly reversing an earlier decision, Venezuela’s Petroleos de Venezuela SA withdrew from a project for the construction of a 200,000 b/d refinery at Long Son in Vietnam. Oct 8 - Brazil’s Petrobras said it has resolved all outstanding issues with Venezuela’s PDVSA SA over development of the Abreu e Lima refinery planned for Suape, near Recife in northeastern Brazil. There had been several obstacles holding up the refinery agreement, including the rising cost of the project, which has escalated to about USD12Bn from a preliminary estimate of USD4.06Bn. On Nov 3, the tie up was finalized with a announcement that the Abreu e Lima refinery will be able to process 230,000 b/d of heavy oil, supplied equally by Petrobras and PDVSA. The refinery’s main product will be low-sulfur diesel. Oct 7 – Despite the ongoing civil war, the government of Southern Sudan approved plans to build a USD2Bn refinery. Energy Minister John Luk said the southern government plans to build the 50,000-b/d refinery in Akon, Warap state, to serve all seven states west of the Nile. Luk said construction will take 36 months, and the refinery will process crude from the fields of Unity state. An Italian company is working on details of the facility, which will be open to tender soon. Sept 11 - Irving Oil announces that it will spend USD220Mn to upgrade its 250,000-b/d refinery at St. John, NB.

Oil Industry Rationalisation Jan 20 - Chevron Corp. plans to restructure its global downstream business in an attempt to leave the organization smaller and less complex. Jan 7 – Analysis: 2010 transactions outlook - Ernst & Young's outlook on 2010 transactions – “While 2009 deal volumes were down considerably compared to 2008, with 1,916 energy and power deals completed in 2009 versus 2,351 in 2008, there are clear signs that a new wave of oil and gas transactions is emerging. These will be much less debt reliant and will include IPOs and equity raisings. At this point, potential buyers are concerned about missing compelling opportunities on the upside. The oil majors are cautiously appraising M&A opportunities that could add high-quality reserves. At the same time, these companies are undertaking portfolio restructuring measures — divesting noncore assets and directing investment to long-term growth projects or regions. Foreign players are becoming more significant in contrast to the fairly stagnant US transactions environment, particularly as China continues to shore

up its energy production capabilities. Energy M&A is expected to accelerate going into 2010; however, it is unlikely that deal volumes and values will return to the levels of 2006-07 and the first half of 2008 in the near term”. Source:Oil & Gas Financial Journal Dec 14 - ExxonMobil Corp. has agreed to buy XTO Energy Inc. in an all-stock deal valued at USD41Bn that will be part of a strengthened focus by the energy giant on unconventional resources such as large interests in major US shale, tight gas, and coalbed methane plays as well as the Bakken oil shale. Dec 11 - BP PLC has divested its interest in the Chevron Corp.-led Tengizchevroil (TCO) consortium and the Caspian Pipeline Consortium (CPC) pipeline, which carries oil between Kazakhstan and Russia, by selling its 46% stake in Lukarco to Russia’s OAO Lukoil. Oct 6 - Kazakhstan President Nursultan Nazarbayev and French President Nicolas Sarkozy, eyeing broader geopolitical engagement between Europe and Central Asia, have announced the signing of 24 separate agreements between their two countries involving oil and gas – including agreeing France’s participation in the project to construct the main export oil pipeline from the Caspian Sea to Baku and Europe. July 21 -- Global upstream mergers and acquisitions (M&A) deals nearly doubled in the second quarter, up from a 10-year low in the first quarter, spurred by a resurgence in oil prices and a thaw in equity and credit markets, according to IHS Herold Inc., an IHS company.

Shipping News Feb 12 – BLT Convertible Bond Issue – (Feb 3) BLT has announced that it intends to issue, and has priced its private placement of, USD 100Mn 12% guaranteed convertible bonds due 2015. The bonds will be placed with international professional and institutional investors outside of the US. (Feb 12) Bond issue closed. Proceeds are earmarked to pay down debt and to invest in the Indonesian cabotage trade. Feb 11 - Kayne Anderson Capital Advisors Increases CPP Stake - Kayne Anderson Capital Advisors, a Los Angeles investment firm, has increased its stake in Capital Product Partners to nearly 2.59Mn shares, a 10.9% share of the company. Feb 10 - Ocean Tankers Re-Plans Loan With ABN Amro Bank - The board of directors of Ocean Tankers has announced the signing of a term sheet between the company and ABN Amro Bank as agent of the remaining six mortgage banks, for the re-planning of its existing loan Feb 8 - OSG Announces Quarterly Dividend - OSG has announced that its board of directors has declared a regular quarterly dividend of USD 0.4375 per share on the common stock outstanding, payable on March 9, 2010 to stockholders of record on February 25, 2010. Feb 5 – Franklin Resources Reveals OSG Stake - Franklin Resources, a Californian-based mutual fund manager, has revealed that as of the end of 2009, the company had acquired 1.35Mn OSG shares, a stake of 5%. Feb 2 – Asset management firm, BlackRock, has revealed minority stakes in a number of shipping companies following its takeover of Barclays Global Investors last year. These include a 5.3% stake in Eagle Bulk Shipping. Feb 1 – D/S Torm Newbuilding Financing – D/S Torm has entered into a financing agreement for six 52,000 dwt newbuildings to be delivered between 2010 and 2012. The agreement, for USD 170Mn, has been concluded with the Export-Import Bank of China and runs for eight years. Jan 27 – Teekay Corp Closes Public Offering – Teekay has announced the closing of its previously announced public offering of USD 450Mn of senior unsecured notes due 2020 which will bear interest at a rate of 8.5% per year. Jan 22 – TEN Facing Impairment Charge - Preliminary results from TEN's most recent cash flow tests indicate that a current impairment charge related to certain of the older vessels in the company’s fleet is likely. The total estimated impairment charge for these vessels would amount to approximately USD 20 to USD 25Mn based on the difference between current book values of the vessels and their fair values. Jan 22 – NATS Announces Public Offering - NATS has announced an underwritten public offering of 4Mn common shares. The proceeds of the offering are expected to be used to fund future acquisitions and for general corporate purposes. Nats has mooted that 4 vessel acquisitions may be on the cards using the offering proceeds. Dec 23 – Omega Navigation Changes its Newbuilding Portfolio - Omega announced it has formed an equal partnership (50/50) joint venture company with Topley Corporation, a wholly owned subsidiary of Glencore International AG (Glencore). The name of the joint venture company is Megacore Shipping Ltd. Companies owned by Omega and the Glencore group have novated their respective original shipbuilding contracts entered into with Hyundai Mipo Dec 8 – TEN Plans to Issue Shares - TEN has entered into a distribution agency agreement with Credit Suisse following which the company may issue and sell, from time to time, up to 3Mn shares of the company through Credit Suisse as sales agent or to Credit Suisse as principal. Dec 7 - MMI Acquires DHT Stake - MCM Capital Management, through its MMI Investments partnership, has teamed up with former OceanFreight CEO, Robert Cowen, and acquired 3.95Mn shares in DHT Maritime at a cost of approximately USD 3.96 per share. This equates to a stake of 8.1%. Dec 4 - BLT Bond Sale Cancelled - It is reported that securities regulators in Indonesia have announced their opposition to BLT's planned mandatory exchangeable bond sale. The company had planned to use funds from the bond sale towards its potential takeover of CECO. Dec 4 – D/S Torm Secures Financing Agreement for Six Newbuildings - D/S Torm has entered into a financing agreement for six of its MR newbuildings to be delivered between 2010 and 2012. The USD 167Mn agreement has been concluded with Bank of China, Societe Generale and the Chinese export credit insurer Sinosure. Nov 30 – TEN Confirms Charters - TEN has confirmed that it has fixed four 2005-built products tankers on two year profit sharing charters worth a minimum of USD 32Mn. The deal also includes an option for a third year. Nov 30 - OSG Agrees in Principle To Settle Lawsuits - On November 25, 2009, OSG entered into an agreement in principle to settle the previously reported purported class action lawsuits. The parties have agreed to enter into a stipulation of settlement as soon as practicable.

Nov 26 - Nordic Tankers and Clipper Group Join Forces - Nordic Tankers has signed a conditional agreement under which the company will acquire parts of the chemical tanker operations of Clipper Group and Clipper will become a major shareholder of Nordic Tankers. Nov 23 – Further Allegations Added to OSG Lawsuit - Balanced Beta Fund has filed an amended class action complaint against OSG regarding its takeover of OSG America, which purports to assert a claim for breach of fiduciary duties, against all defendants except OSG, and two further new claims. Nov 20 - D'amico Announces Final Cancellation - Glenda Int'l Shipping, Glencore and D'Amico Int'l Shipping's JV, has given notice to SLS Shipbuilding of its cancellation and termination of the new building contract relating to the 51,000 dwt product/chemical tanker vessel bearing hull n° S513. Nov 20 – China has confirmed its intentions to ban single hull tankers from its ports effective from the start of 2010 Nov 19 - TEN Joins SEAaT - It is reported that TEN has become the first Greek shipowner to join SEAaT (Shipping Emissions Abatement and Trading). SEAaT was formed in 2002 to raise awareness of and encourage the reduction of harmful emissions. Nov 16 - USSP Emerges From Bankruptcy - On April 29, 2009 U.S. Shipping Partners filed voluntary petitions for reorganization relief under Chapter 11 of the US bankruptcy code The bankruptcy filing was made with a pre-arranged restructuring plan. Nov 13 - Genmar Declares 3Q09 Dividend - Genmar has announced the company's board of directors declared a quarterly dividend for the three months ended September 30, 2009 of USD 0.125 per share. The dividend is payable on December 4, 2009 to shareholders of record as of November 23, 2009. Nov 12 – It is reported that Fujairah will ban single skin tankers from the start of next year Nov 6 – OSG Commences Tender Offer for Common Units of OSG America - OSG has commenced, through its subsidiary OSG Bulk Ships, the previously announced tender offer for all of the outstanding publicly-held common units of OSG America that it does not currently own at USD 10.25 per unit in cash. Sep 9 – OSG Announces Credit Agreement with China Exim Bank – OSG announced it has entered into a USD389Mn, 12 year secured facility with The Export Import Bank of China (China Exim Bank). The facility is the first financing arrangement that China Exim Bank has extended to a U.S. company.