Alexey GROMOV,

PhD, Principal Director on Energy Studies

Institute for Energy and Finance

a_gromov@fief.ru

HOW LONG WILL LOW OIL PRICES LAST?

Sixth IEA-IEF-OPEC Symposium on Energy Outlooks16 February 2016IEF Headquarters

Riyadh, Saudi Arabia

President of IEF:

Who we are

� Independent center for economic analysis, established at the end of 2004 by Gazprombank and Gazprom export

� Our experts have rich experience of performing a large number of works at the intersection of Economics, Energy and Finance.

Our Expertise

� Macroeconomic and industry analysis

� The modelling of scenarios of world energy development and energy of the Russian Federation (gas, oil, petrochemical industry)

� The analysis of the global oil and gas market

Vladimir FEIGIN

One of the authors of the Energy strategy of Russia up

to 2030, the Roadmap of Energy Cooperation between

Russia and the EU until 2050 and the Project of theRussian Oil Strategy up to 2035 (under finalconsideration by the Russian Government). Has longexperience of managing a large international consultingprojects in the energy sector.

Adviser of Rosneft CEO

Фонд «ИНСТИТУТ ЭНЕРГЕТИКИ И ФИНАНСОВ»www.fief.ru

About Institute for Energy and Finance

2

Principles of our Modelling Work on Scenario Analysis(jointly with IIASA and TEMAPLAN)

Motto To design, maintain and promote the Modeling Framework for Generating Strategic Scenarios

Goal To broaden the vision of experts and policymakers in analyzing scenarios of achieving certain targets

To help reveal invisible or non-trivial outcomes

PurposeAnalysis of the consequences of certain energy policy targets

We try to develop the Integrated Energy Perspective Modelling Environment

3

Today the Oil Markets are in a Zone of an Unpredictable Turbulence

Volatile oil prices in 2015

Source: Bloomberg

World oil supply and demand

Source: EIA

-2

-1

0

1

2

3

89

90

91

92

93

94

95

96

97

98

2013 2014 2015 16

mb/dmb/d

Difference (right)

Demand

Supply

-4

-2

0

2

4

6

8

10

12

14

25

35

45

55

65

01

.15

02

.15

03

.15

04

.15

05

.15

06

.15

07

.15

08

.15

09

.15

10

.15

11

.15

12

.15

01

.16

$/bbl$/bbl

Brent-WTI (right) Brent WTI

• World oil prices experienced two dramatic waves of falling during 2014-2015

• In the mid-February 2016th the world oil prices are locked in a narrow range (around $30-35/bbl Brent)

• The current unpredictable turbulence of the Oil market is enhanced by speculative activity of global financial players

• Global liquids production continues to exceed

consumption.

• The imbalance remains a high level during 2015,

despite the low price level and the acceleration of

growth in demand.

4

Key Drivers for Development of the Oil Markets in the Short Term (2016-2017)

Acceleration in demand growth for liquids at low oil prices

Dynamics of liquids stocks in OECD countries and China

Dynamics of drilling activity and LTO production in the United States

Production in key OPEC countries (Saudi Arabia, Iraq and Iran) and the further organization's policy of quotas

Activity of financial actors

5

Acceleration in Demand Growth for Liquids VS Liquids Stocks

Growth (y/y) liquids consumption for key

countries

Source: EIA Source: IEA

• EIA estimates that global oil consumption grew by 1.4 mb/d in 2015

• EIA expects +1.2 mb/d in 2016 and +1.5 mb/d in 2017.

• The largest increase in consumption in 2015 was observed in Europe and India. In China consumption growth is not accelerated.

OECD Commercial Crude Oil and Other Liquids

Stocks

• EIA estimates that global oil inventories increased by 1.8 mb/d in 2015, marking the second consecutive year of strong inventory builds

• OECD Commercial Liquids Stocks at a record 3 billion barrels

2,70

2,98

2,4

2,5

2,6

2,7

2,8

2,9

3,0

3,1

Jan

Feb

Ma

r

Ap

r

Ma

y

Jun

Jul

Au

g

Sep

Oct

No

v

De

c

bln bbl.

Average 2010 - 2014 2015

range 2010-14

-2,0%

-1,0%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

China India Europe US Others

2013 2014 2015

6

OPEC Production VS LTO Production in the U.S.

Source: EIA

U.S. Production and Net Imports of Crude Oil

• US oil production growth in 2015 was slowed down twice (+0.7 mb/d) in comparison with 2014

• U.S. crude oil production is projected to decrease from an average of 9.4 million b/d in 2015 to 8.7 million b/d in 2016 and to 8.5 million b/d in 2017

OPEC production (excl. Indonesia) and Call on

OPEC crude

Source: EIA

• Today, OPEC crude production significantly exceeds call on OPEC and its official quota 30 mb/d.

• On January 16, economic sanctions on Iran were lifted, officially allowing Iran to increase its crude oil production and export levels.

6,0

6,5

7,0

7,5

8,0

8,5

9,0

9,5

10,0

2012 2013 2014 2015

mln bbl.

Production Net Import

27

28

29

30

31

32

33

2013 2014 2015 2016

mb/d

OPEC Production Quota Call on OPEC

In the Short Term Oil Market will try to find a New Balance between Supply and Demand

But the oil price will be maintained at a low level

Source: Presentation of I.SECHIN, Rosneft CEO (International Petroleum Week, London 2016)

8

Key Drivers for Development of the Oil Markets in the Medium Term (up to 2020)

Strong oil demand growth

Significant and sustained reduction in drilling and investment in upstream projects

Strong demand growth has been seen since 2010 and 100 million barrels per day could arrive by 2020

According to Goldman Sachs estimates, about $1 trillion planned investment into new upstream projects curtailed as unprofitable at oil prices below $70/bbll

50

70

90

110

130

150

170

2010 2011 2012 2013 2014 2015

Q1 2010 =

100

Upstream Operating Cost Index (UOCI)Upstream Capital Cost Index (UCCI)BrentOil Rigs

Source: Bloomberg, IHS, Baker HughesSource: IEF

9

Key Drivers for Development of the Oil Markets in the Long Term (up to 2035)

Technologies in SUPPLY: production cost reduction- Deepwater oil

- Hard-to-recover resources

- Other High-tech oil

Technologies in DEMAND: changes in oil products consumption

- Conventional Engine Efficiency

- Alternative Fuels (gas fuel, biofuels)

- Electric vehicles

80

112

5238

82101

88

-3

-1

1

3

0

30

60

90

120

150

2010 2015 2020 2025 2030Deficit (-)/ surplus (+) of supply (right)Oil priceTop limit (alternative fuels)

$/bbl (in 2014 USD) mb/d

Source: Presentation of I.SECHIN, Rosneft CEO (International Petroleum Week, London 2016)

Rosneft oil price forecast (till 2030)

6754

4537

30 24

1218

1921

22

1415

1617

1819

49

13 16

2 3 4 4

4 6 5 6 5 53 4 4 5 6 7

0%

20%

40%

60%

80%

100%

2014 2020 2025 2030 2035 2040Existing fields Field development

NGL Non-discovered fields

Recovery factor growth Low permeability oil

Forecast structure of global production of liquid

hydrocarbons, %

Hig

h-t

ech o

ilT

raditi

onal

oil

10

Russia has a Huge Potential to maintain its Key Role in the World Oil Balance up to 2035

However, further dynamics of oil production in Russia depends

on the tax environment more than oil prices

Sustainability of the

Russian oil companies

The effect of large-scale

capital investments 2011-2014

Low cost of production from

oil fields in operation

Tax benefits for oil production for greenfield and depleted

fields

Rouble’sdevaluation

Key factors for sustainability of the

Russian Oil Industry

Source: Presentation of I.SECHIN, Rosneft CEO (International Petroleum Week, London 2016)

Low Scenario - Inertia scenario under continued unfavourable external

conditions

High Scenario contemplates full implementation of the existing license

agreements subject to relatively favorable external conditions, including

transition to new forms of taxation (NFR (taxation of financial result) /Excess-

Profits Tax) for new and depleted fields

“Industry potential” Scenario shows the production potential of the Russian

oil industry if market requires the additional deliveries of petroleum

506491

466455

521 520

524523

557550

551534

567

593 599627

400

450

500

550

600

650

2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035

Low scenario Base scenarioHigh scenario "Industry potential" scenario