1SINOCHEM

Sinochem Petroleum Exploration & Production Co. Ltd. Cui Jianjun

Analysis on the Oil Price Mechanism and its Fluctuation

San Francisco, USAIntercontinental Mark Hopkins

Hotel Sep. 10th, 2007

2

Oil Price Mechanism

Analysis on the Oil Price Fluctuation

Conclusion

3

Financial Institutes

Traders

Producers and consumers

Mutual Agreement between Supplier and Consumer

Independent Price Assessment

Futures Market and Standard Contract

Trading between Supplier-Consumer

Spot Market

Forward Contract

Swap + OTC Option

Futures and Option

1960s-1970s, major participants of the oil market determine long-term price

In1980s,standard oil price is determined by traders in the spot market

1990s-now, standard oil price is inducted by the derivative market

Market Size & Participants

Time

Transformation of theOil Pricing Mechanism

44

Jul-Aug,2003:$27-30Oct-Nov,2004:$49-55

Aug-Sep,2005:$60-69

Jun-Jul,2007:$65-78

Jul-Aug,2006:$70-78

� QCLc1, QLCOc1 2002-9-24 - 2007-7-26 (NYC)

Line, QCLc1, Last Trade(Last)2007-7-12, 72.75Line, QLCOc1, Last Trade(Last)2007-7-12, 75.64

� �USDBbl

.1224

27

30

33

36

39

42

45

48

51

54

57

60

63

66

69

72

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q32002 2003 2004 2005 2006 2007

Historical Fluctuation of the Oil Price

Oil price has experienced much more spikes and slumps, with sharp fluctuation in its history.

5

Three Influencing Factors of International Oil Price

The changing sales

structure inducts oil

priceThe changing

market participants

structure guides oil price

The changing supply-demand

structure dominates oil

price

Monopoly brings both profit and threat to the “7Oil Sisters”. Tempted by huge profit, many oil companies rose. Producers in Latin America, Middle East and Africa established “OPEC”, obtaining much more say of official pricing as their “oil weapon”.

The price fluctuation of oil as a commodity, follows market law

Before 1950s,the” 7 Oil sisters” monopolize the oil pricing mechanism. From 1960s to 1970s and 1980s, the monopoly was gradually smashed up, “Official Selling Price”and ”Reference Price”appeared. In 1978,the oil futures market and its weighted average price became barometer of the spot market.Nowadays, oil price mainly follows the futures price in NYMEX and ICE.

Oil Price

1

32

6

The Oil Price Fluctuates at High Level

2007 2008 2010

High 70.2 75 72.3

Low 56.5 50 43

Mean 62.78 61.22 53.60

Reuters 33 Institutes Forecast for WTI Yearly Average Price ($/bbl）

Since 2003,oil price has almost kept spiking, hitting a record of $78.In 2006, the average price of DTD Brent is $65.14，a 20% increase of that in 2005.

The fundamentals such as supply-demand balance support oil price at a high level. Geopolitics, changeable weather, and speculating funds intensify price fluctuation. In 2006, the price shock exceeds $ 20/bbl.

It is forecasted that the oil price in 2H 2007 will remain high. (WTI $65-75)，and will possibly break a new record. In middle term, price will come down but still at a relatively high level.

7

World Oil Demand

With rapid growth of global economy, world oil demand increasessteadily. According to IEA forecast, world energy demand will increase at the highest speed in 2008.

8

According to “BP Energy Statistics 2007”, in 2006, America imports 671 million tons of oil accounting for 25.9% of world total；Japan imports 257 million tons, accounting for 9.9%;China imports 192 million tons accounting for 7.4%;China exports 23.1 million tons of oil. The importing volume in other parts of the world accounts for 57.8％.

Crude ProductImport Export Import Export

America 502.7 2.7 168.2 60.4 Canada 42.3 88.8 13.5 26.1 Mexico - 97.5 20.1 6.9

Mid-south America 33.7 116.9 24.0 63.8

Europe 533.6 29.2 131.4 75.9 former Sovie - 274.6 5.6 78.5 Middle East 10.1 884.6 7.3 116.7 North Africa 9.1 128.2 8.4 31.1 West Africa 2.9 226.5 7.5 7.5 Australia 25.1 6.6 13.9 4.1

China 145.8 9.6 45.9 13.5 Japan 208.6 - 48.4 5.5

Singapore 52.8 0.9 55.8 58.3 Other parts in Asia-Pacific Region 340.3 43.6 101.5 72.0

World Total 1932.6 1932.6 657.8 657.8

million tons

Figures of Major Oil Importers

Cr ude

26. 01%

7. 54%

10. 79%

55. 65%

Amer i ca Chi na JapanOt her Par t s

Pr oduct

60. 09%

7. 36%

6. 98%

25. 57%

Amer i caChi na JapanOt her Par t s

9

World Oil Reserves could SatisfyLong-Term Demand

World Conventional Hydrocarbon Reserves and Its Increase Potentials

CategoryCrude

(kmm bbl)Crude

(kmm tons)Natural

Gas(104kmm

m3)

Natural Gas

(kmm tons)

NGL(kmm bbl)

NGL(kmm tons)

Undiscovered Conventional Reserves 7320 1002.74 147.04 1186.3 2070 283.56Conventional Reserves Increase 6880 942.47 103.58 835.61 420 57.53Remaining Reserves 8910 1220.55 135.64 1094.52 680 93.15Cumulative Production 7100 972.61 49.58 400 70 9.59Total 30210 4138.36 435.85 3516.44 3240 443.84

Source: USGS, 2000.

According to “BP Energy Statistics 2007”, world remaining proven reserves in 2006 is 1200.9 billions barrels , an increase of 8% compared with 1114.7 billion barrels in 2000, and an increase of 15% in 1996. Over decades, world oil reserve-production ratio is over 40 years，the remaining recoverable reserves still could satisfy long-term supply-demand balance.World oil and gas reserves are rich. Due to the hydrocarbon reserves analysis of USGS in 2000，world ultimate recoverable reserves is 413.8 billion tons (not including 44.4 billion tons of NGL)，conventional reserves increase is 94.2 billion tons，undiscovered conventional crude reserves is 100.3 billion tons.It was said that human beings only have consumed 4500 billion barrels of crude oil, accounting for 18% of the total reserves. With the current consuming level, world oil reserves could be used for 140 years from now on. There is no need to worry about world crude reserves exhausting in the future decades.

10

The Oil Price Divorces from Oil Producing Cost

Per barrel cost $ 3.96, in which

exploration $0.96,developme

nt $1.07, production $1.93

Russia

Per barrel cost $11.92，in which exploration $3，

development $ 3.87, production $5.05

North Sea（UK, Norway）

Per barrel cost $10.95，in which exploration $2.47，development

$3.54，production $4.94

Deep water in west Africa

Per barrel cost $9.87，in which exploration

$1.93,development $4.40, production $3.54

Mexico Gulf

Per barrel cost $ 9.02,in which

exploration$1.50，development $3.01 production $4.51

Latin America（Brazil, Columbia,

Bolivia） Per barrel cost $ 8.48,in which

exploration$1.93，development $3.01 production $3.54

Middle Europe

Caspian Sea

Per barrel cost $ 9.02,in which exploration$1.50，

development $3.01 production $4.51

OPEC in Middle East

Per barrel cost $ 9.02,in which

exploration$1.50，development $3.01 production $4.51

OPEC in North Africa

Other OPEC Members (onshore oilfields)

Per barrel cost $ 4.93, in which

exploration$0.96,development

$1.50,production $2.47

11

Oil Producing Cost

Operating Cost Capital Cost Producing Cost

Heavy Oil in Califonia 6－10 3－4 12

Heavy Oil in West Canada 7－10 3－4 13

Oil Sand in Alberta 9－12 3－5 15

Heavy Oil in Orinoco, Venezuela 8－10 5－7 15

Heavy Oil in Mexico 2 5－6 8

Mexican Gulf in America （water depth more than 200m） 4 4－6 9

Brazil （water depth more than 200m） 4 3－5 8

Angola（Girassol Oilfield） 3 4 7

Alaska 4－-5 3－4 8

Low-production Well in America 12－24 2－3 20

Offshore oilfield in Malysia 5－6 8

North Sea （BP and other 7 oilfields） Average 4 3－4 8Notes：Besides oilsand in Alberta and heavy oil in Orinoco，there is additional $2-3 of discovery cost.Resource：Dr.Leonidas P. Drollas，(deputy director of GES and chief economist)，”We have plenty of Oil, only need more investment”. 2006.1.25.

12

NYMEX Option Position and WTI Oil Price

Based on recent years’ analysis, the long strength of oil funds in NYMEX is in high positive correlation with WTI price trend.

The main cause of oil pricing hiking since 21st century is major banks, hedging funds and other investment capital swarming into oil futures market. Oil futures has already became a speculation tool. International oil price has seriously divorced from supply-demand law.

Derivatives Trading Pushing Up Oil Price

13

Geopolitics Influencing Oil Price in a Long-Term

Geopolitics has always been an important influencing factor of oil price. The upheavals in Iran, Iraq etc. once drove oil price to great volatility.

Source: BP Energy Statistics 2007

14

Conversion Rate for US Dollar Influencing Oil Price

The depreciation of US dollar provides the thrust for oil price soaring up. After

remaining at $62-68 in the second quarter, crude price finally made a break

through, and climbed up steadily. Actually since June 14th, the US dollar effective

exchange rate index (EERI) has been declining from the high level of 83.27 to 80.

Many funds are

manipulating futures

market as a hedging tool

to tackle US dollar

depreciation. The net

long position keeps

increasing until making a

record of 127491 lots.

15

With rapid development of global economy, world demand for oil energy keeps rising, and oil exploration and production costincreases accordingly. Moreover, the upheavals in main oil producers and speculation funds in oil futures market drive international oil price soaring up, which will affect the sustainable development of world economy and petroleum industry.

It is forecasted that the oil price will keep fluctuating at a relatively high level, which requires profound study on the oil price, and deep communication .

Conclusion

16

Thank You!