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Testing the new oil market ‘consensus’

Platts Middle Distillates Conference Antwerp, January 2014

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Disclaimer

The information contained in this presentation (the “Presentation”) is being provided by Gunvor Group Ltd (the “Company”) and its subsidiaries (together with the Company, the “Group”). The Presentation is for information purposes only and any information made available orally or in writing at the Presentation is strictly confidential and may not be distributed, published, copied or reproduced (in whole or in part) or disclosed by its recipients to any other person for any purpose, at any time or in any form other than with the prior written consent of the Company.

This Presentation does not constitute or form part of and should not be construed as, any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for, any securities to any person in any jurisdiction nor shall it (or any part of it), or the fact of its distribution, form the basis of, or be relied on in connection with or act as any recommendation or inducement to enter into, any contract, commitment or investment decision whatsoever relating to any securities. The information contained in this Presentation, unless otherwise specified, is only current as of the date of this Presentation and is subject to further verification and amendment in any way without liability or notice to any person. The information contained in this Presentation has not been independently verified. The Company, all members of the Group and their respective associates or directors, officers, employees, advisers or representatives expressly disclaim any duty, undertaking or obligation to update publicly or release any revisions to any of the information, opinions or forward looking statements contained in this Presentation to reflect any events or circumstances occurring after the date of this Presentation. No undertaking, representation or warranty or other assurance, express or implied, is made or given as to the accuracy, completeness, sufficiency or fairness of the information or opinions contained or expressed in the Presentation or any information made available orally or in writing at the Presentation (or whether any information has been omitted from the Presentation) and, save in the case of fraud, no responsibility or liability is accepted by any person for any loss, cost or damage suffered or incurred as a result of the reliance on such information or opinions or otherwise arising in connection with the Presentation. In addition, no duty of care or otherwise is owed by any person for any loss, cost or damage suffered or incurred as a result of the reliance on such information or opinions or otherwise arising in connection with the Presentation. Recipients of the Presentation should conduct their own investigation, evaluation and analysis of the business, data and property described in the Presentation. This Presentation contains unaudited financial information in relation to the Group.

This presentation includes statements that are, or may be deemed to be, ‘forward-looking statements’. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms ‘targets’, ‘believes’, ‘anticipates’, ‘expects’, ‘estimates’, ‘intends’, ‘plans’, ‘will’, ‘may’, ‘could’ or ‘should’ or similar expressions or by discussions of plans, objectives, goals, strategies, future events or performance and underlying assumptions. These forward-looking statements include matters that are not historical facts or are statements regarding the Company’s intentions, beliefs or current expectations. Forward-looking statements are based on current plans, estimates and projections, and therefore too much reliance should not be placed upon them. Such statements are subject to risks and uncertainties, most of which are difficult to predict and generally beyond the Company's control. If the assumptions underlying any of these statements prove incorrect, the Company’s actual results of operations, financial condition and liquidity and the development of the industry in which the Company operates may materially differ from those made in, or suggested by, the forward-looking statements contained in this Presentation. The Company expressly disclaims any obligation or undertaking publicly to review or confirm analysts expectations or estimates or to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any changes in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

This Presentation is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of, or located in, any locality, state, country or other jurisdiction where such distribution or use would be contrary to law or regulation or which would require any registration or licensing within such jurisdiction.

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Pump It Move It Refine It Store It Sell It Move It

Gunvor: Providing liquidity along the supply chain

• Origins trading Russian crude into Europe since 2000 • Now more diversified - geographically, across

products and along the value chain • But trading remains central

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Challenges confronting a pure trading model

Challenges facing trading

companies

Low price volatility

Razor thin (0.5-1%) trading margins

Backwardated price structure

Emerging NOC trading

companies

Loss of competitive

advantage in market

intelligence

Regulatory ‘creep’

• Encourages traders to diversify • Seek assets that both benefit from, and complement, the core trading function

• Diversification by geography, product and location in the value chain

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A diversified & balanced trading portfolio

Asia & Middle East 20%

WesternEurope

North America

Latin America

AfricaAsia & Middle East 30%

Western Europe

North America

Latin America

Africa

2009: USD $50.4 bn 2012: USD $93 bn

Crude Oil(60%)Fuel Oil

Gasoil

Gasoline

Naphtha

LPG Biofuel

Crude Oil

(30%)

Fuel Oil

Gasoil

NatGas + LNG

Coal

GasolineNaphtha

LPG Biofuel

2009: 110 mn tons 2012: 130 mn tons

Revenue by region

Trading volumes

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Investment strategy – integration along the value chain

• Ust Luga Oil Products Terminal (Russia)

• Ust Luga Crude Oil Pipeline (Russia)

• Novorossiysk Fuel Oil Terminal (Russia)

• Petroterminal de Panama, S.A. (Panama)

• Independent Belgium Refinery BV (Belgium)

• Gunvor Raffinerie Deutschland GmbH (Germany)

• TAL Pipeline (Italy, Austria, Germany)

Signal Peak (United States)

• LLC Kolmar (Russia)

• Keaton Energy Holdings Ltd (South Africa)

• Lagansky Block (Caspian Sea)

• PA Resources (North Sea, North and West Africa)

Midstream

Downstream

Upstream

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New consensus on oil markets deserves testing

1. “2014 marks the beginnings of a bear market”

2. “En route for robust economic recovery”

3. “Emerging markets underpin 1 mb/d+ yearly demand growth”

4. “North American supply revolution will continue apace”

5. “The inevitable rise of Iraq, and a new, bipolar OPEC”

6. “Comfortable mid-term fundamentals”

7. Where does this all leave European refining?

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2014: the return of Libya & Iran will take time

160 kb/d 230 kb/d 110 kb/d

250 kb/d

70 kb/d

90 kb/d

350 kb/d

Libyan exports may struggle to exceed 500 kb/d in early-

2014

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Tighter 2013 fundamentals, and more of the same in 2014?

• Consensus fundamentals - weak 1H14, tighter 2H14

• But ‘hidden’ non-OECD demand for stock…

• …& seasonal OECD stock change raise OPEC call thru’ 3Q14

• Heightened geopolitical risk also at play, at least until mid-2014

• Range-bound prices continue?

Source: IEA Oil Market Report, Jan 2014

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Mid term: evolving macro-economic risks

11.5

22.5

33.5

44.5

55.5

6

Developed economies Emerging markets

% g

row

th

Risk shifts to emerging marketschange in IMF GDP forecast Jan 2013-Jan 2014

2013 2014

2013 2014

IEA/WEO (2013) estimate worldwide fossil fuel subsidies of $544 billion in 2012

IMF sees increased EM financial risk after rapid credit growth, capital flow volatility,

Structural reforms needed, nb subsidies Economic slowdown in EMs has heavier

impact on oil than in developed economies (oil intensity)

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Shift in focus for oil demand risk too?

-5000

0

5000

10000

15000

20000

1970-2000 2000-2012

kb/d

Oil demand growth now an EM story

OECD

non-OECD

-3-2-1012345

-3-2-1012345

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

mb/

d vs

. bas

e ca

se

real

GDP

gro

wth

, %

Economic risks & oil demand

oil demand impact IMF 09/11 IMF 10/12

low growth IMF 4/13

‘09=-0.7mbd ‘10=+0.4mbd ‘11=-0.3mbd ‘12=-0.4mbd ‘13=+0.3mbd

‘14=+0.1mbd?

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A transformed US oil landscape

0

2000

4000

6000

8000

10000

12000

0

500

1000

1500

2000

2500

3000

2005 2006 2007 2008 2009 2010 2011 2012 2013

kb/d

kb/d

Falling US Crude Imports

Light sweet imports total imports (right)

010002000300040005000

J73J75J77J79J81J83J85J87J89J91J93J95J97J99J01J03J05J07J09J11J13

kb/d

US net oil products exporter since mid-2011

Total products imports Total products exports

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Logistical & policy issues hit first WTI, and now LLS?

405060708090

100110120

Bakk

en

Eagl

e Fo

rd

Perm

ian

Full

fund

ing

Bren

t

OPE

C b/

e Br

ent

OPE

C b/

e W

TI

Oil

sand

s SAG

D

Min

ing

& u

/g

Break-even costs & prices, $/bbl WTI

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US LTO: mixed opinion on sustainability of recent growth

Plus points for major growth: • Resource & reservoir behaviour becoming better understood • Transport infrastructure is being built-out, belatedly • High up-front cash flow continues to drive investment if prices stay robust, &

there’s scope for cost reduction • Infill drilling & well spacing improvements • Technology – pad drilling & longer laterals

Risks: • Energy security concerns impede decisions on export policy, logistics • Macro-slow down, oil price risk & refinery tolerance if exports restricted • Sweet spots targeted first, so yields could fall & costs could also rise • Sufficient skilled workforce & supply chain resilience? • Tighter env.reg. – flaring/fracking/rail restrictions, Federal lands • Types of operators & availability of finance

Light tight oil will continue to grow, but more slowly

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Progress in Iraq…

• Major post-war progress in expanding supply already • Production on track to follow more realistic, lower planning case • JV production targets scaled back to reflect the new reality • Disruption-prone Kirkuk-Ceyhan export route to be augmented by

new 300 kb/d KRG link • Recent expansion of Basrah export facilities brings capacity for

6mb/d+ of southern exports

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...but challenges remain

• Infrastructure, water injection, gas processing all remain challenging • Sunni insurgency has seen >3000 civilian deaths in 2013…. • …and sustained outages on Kirkuk-Ceyhan pipeline • Crises in neighboring Syria and Iran will continue to affect domestic

Iraqi politics • 2014 growth affected by elections, worsening Anbar situation • Meanwhile, stand-off between Baghdad and KRG continues • So even a 4-5 mb/d mid-term forecast faces risks to the downside

Source: IEA MTOMR, 2013

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Medium Term: easing market fundamentals on resurgent supply

• Lower-than-expected spare capacity in 2013 was due to supply issues (2-3 mb/d)

• Even an improved, more ample supply scenario doesn’t necessarily equate to sharply lower crude prices

Effective OPEC Spare Capacitymb/d 2013January 3.26February 3.63March 3.59April 3.38May 3.47June 3.23July 3.13August 3.08September 2.94October 3.32November 3.37December 3.33Average 3.31

Source: IEA MTOMR, 2013

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Why a sustained price collapse looks unlikely…

• US light tight oil, big-ticket IOC upstream developments and OPEC budgets all require prices at or above $80/bbl

• Long dated Brent has been steady around $90/bbl, leaving front of the curve to oscillate in a $100-$120 range

Saudi Arabia budget break-even prices Source: Credit Suisse

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…unless Saudi Arabia loses patience

9.8 9.8 9.2 8.5 8.1 8.2 8.3 8.4 8.5

3.0 2.7 2.5 2.5 2.4 2.3 2.2 2.1 2.03.0 3.1 3.3 3.5 3.8 4.0 4.2 4.3 4.5

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2012 2013 2014 2015 2016 2017 2018 2019 2020

mb/

dOPEC output under a constrained 'call'

Saudi Arabia Iran Iraq

Other GCC Other OPEC 'call'

• Sustained demand growth, slow Iranian petroleum decline, plus conservative Iraqi outlook….

• Yet Saudi Arabia is still held below 9 mb/d??

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Major new refining capacity in Asia, Mid.East, Lat.America

• Simple arithmetic: +6 mb/d demand confronts +8-9 mb/d of new refining capacity during 2013-2018.

• Around 1 mb/d of upgrading additions annually too • Much of the new build in Asia, Middle East & Latin America is

designed to improve self sufficiency or to create export hubs • Less likely to cut runs than ‘purely commercial’ capacity elsewhere

Source: IEA MTOMR 2013

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More European downstream consolidation to come?

Teesside

Grangemouth(Petrochina)

Stanlow:Essar -> Shell

Milford Haven

WhitegateCoryton

Gothenburg:Shell -> St1

Harburg

Heide:Shell -> Klesch

Wilhelmshaven

Vlissigen (Lukoil)

Gonfreville-l’Orcher

Antwerp: Petroplus -> Vitol; Petroplus GunvorGelsenkirchen (Rosneft)

Dunkirk

Ingolstadt:Petroplus -> Gunvor

Karlsruhe (Rosneft)

Lavera (Petrochina)

Berre-l’Étang

ReichstettPetite-Couronne

Priloi & Melilli (Lukoil)

Milazzo (Kuwait Petroleum)Saras(Rosneft)

Rome

Cremona

CressierPetroplus -> Vitol

Ballshi

Fieri

Szazhalombatta(Surgutneftegaz)

Brod (Zarubezneft)

Novi Sad (Gazprom)

Pancevo (Gazprom)

Gibraltar(IPIC)

Huelva(IPIC)

Capacity

ReductionTerminal

Closure For Sale

Sale

(Part)Owned Russian/Indian/

Chinese/ Middle Eastern

Burgas (Lukoil)

Mantova

• Simply regaining 2006-2008 utilisation rates suggests 1 mb/d more European closures

• …but, changing ownership profile, and refinery specific operating regimes

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Regulatory changes on top of competitive pressures

• Refiners, traders confront a raft of new physical, financial market regulation • Do new environmental regs. disproportionately raise European refiner costs? • Laudable post-2008 G20 policy goals to a) minimise systemic financial risk & b)

encourage lower, more stable energy prices – but these can sometimes conflict • Evolving and diverse supply chains require flexible risk hedging tools • Proposals for position limits, benchmarks/PRAs, swapsclearing, one-size-fits-

all disclosure & risk management requirements all contain risks • Issues: proportionality, recognition of market specifics, international consistency • Risk of undermining participation, transparency, liquidity, market function, and

may ultimately raise costs to energy consumers

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Challenges & opportunities in European distillates

source: Gunvor estimates

-600

-400

-200

0

200

400

600

800

Crude west Crude east Diesel Fuel oil Hydrocracking additions

kb/d

Potential change in Russian export flows 2012-2020

• Will US distillate exports surge to Europe or Latin America/Asia?

• Up to 600 kb/d middle distillate supply from new MEG refineries

• Changing Russian export flows, including 300 kb/d+ diesel, depends on pace of refinery upgrading programme

• But rising demand too: new bunker sulphur regs could add 250-400 kb/d marine diesel demand short/mid term

Rosneft & Petromarkets estimates, 2013

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Not all bad news in European downstream

• New refining hubs in N.America, Middle East and other producing areas, emergence of India and China as exporters of key products

• Global products trade to grow faster than crude in the next decade, much of it on new routes

• Products tanker order book is rising (86% of new orders in 2013) • Opportunities for the new refiner-traders: Access to flow, diversified

arbitrage opportunities, aggressive crack hedging strategy

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Summing up

• Oil traders are diversifying across products, geographies and along the value chain

• Libya + Iran, and tight early-year fundamentals, suggest prices range-bound in 2014

• Macro-economic risk shifting to Emerging Markets and might undermine cosy 1 mb/d-plus demand consensus forecasts

• US oil picture transformed, but supply growth could now slow • Growth in Iraqi supply may underwhelm vs. ambitious plans • Easier mid-term fundamentals on healthy supply, but no price

collapse, unless Saudi Arabia rejects swing supplier role • Competitive pressure for European refiners, - surge of new EM

capacity, regulatory uncertainty & new distillate export hubs • But opportunities too - expanding distillate bunker demand • New refiner-traders target expanding products trade flows,

new arbitrage routes and aggressive hedging strategies

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• Thank you for your attention

David.fyfe@gunvortrade.ch