PUBLIC SECURITIES GROUPi | ENERGY INFR ASTRUC TURE

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Energy Infrastructure: Crude Oil Prices in a Post-OPEC World

Jeff Jorgensen: Bob, can you give us a synopsis of the main thesis from your book, Crude Volatility: The History and Future of Boom-Bust Oil Prices?

Bob McNally: The book’s thesis is centered around the fact that the volatility seen over the last 15 years for crude oil prices is very unusual in modern times. In essence, this volatility reflects the absence of a swing producer, also known as a supply manager. The history and economic qualities of oil show that oil prices take on one of two patterns of behavior – they are going to bounce around in true boom-bust fashion or they will exist in a range that is governed by a swing producer. The range of crude oil prices we have seen over the last five years tells me that we are back to a world without a swing producer – something that has not existed since pre-1932. The biggest question going forward is will the market have a new swing producer? If it does, I would expect prices to be fairly anchored and governed. If not, we should all be prepared for continued price volatility.

JJ: You discuss in your book that at the heart of price volatility is the fact that both oil supply and demand are inelastic in the short term. A lot of people understand the inelasticity of oil demand, but I’m not sure people understand why oil supply is inelastic. What drives the inelasticity of oil supply? BM: Oil has been marked by big up-front capital expenditures to find and drill for oil, as well as arranging for infrastructure to transport the oil to the next stop on the value chain. What’s more, producers are also spending money on equipment that cannot be used for another purpose. A pipeline, a drilling rig or a refinery – these things exist solely to take crude oil from the ground and turn it into a product that consumers can use. Producers need to make a return, and as they have spent all that capital up front, they’re not going to stop pumping during short-term oil price declines.

An abridged interview featuring Jeff Jorgensen, Portfolio Manager & Director of Research for Brookfield Public Securities Group’s Energy Infrastructure team, and Bob McNally, Founder and President of Rapidan Energy Group, former Energy Advisor to President George W. Bush and author of Crude Volatility: The History and Future of Boom-Bust Oil Prices.

EXHIBIT 1: HISTORICAL SUPPLY MANAGERS IN THE OIL INDUSTRY

Supply Manager Period in Power

John D. Rockefeller and Standard Oil Early 1880s to Early 1900s

The Texas Railroad Commission Early 1930s to Early 1970s

The Organization of Petroleum Exporting Countries (“OPEC”)

Mid-1970s to Mid-2000s

Source: McNally, R . Crude Volat i l i t y : The His tor y and the Future of Boom-Bust Oi l Pr ices , Columbia Universi t y Press , 2017

2CRUDE OIL PRICES IN A POST-OPEC WORLD

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Actual Production (MBPD) EIA 2005 Forecast Crude Price (WTI $/bbl)

Similarly, when you have a sudden supply disruption, producers cannot ramp up production to compensate, as they are already producing to full capacity.

JJ: Effectively, because of the inelasticity of supply and demand, in order to correct behavior and change imbalances, prices have to move dramatically. You discuss in the book that in order to manage this volatility, and be an effective supply manager, you have to have something called spare production capacity. How do you define this and who has it today? BM: Spare production capacity is something that does not naturally exist. As I said earlier, producers are usually producing to capacity. Back in the late 1920s, it became clear to the powers-that-were in the Texas and Oklahoma oil industry that it was necessary to have a regulatory body step in and force producers to cut back on production to stabilize prices. Spare production capacity was created, meaning some production was intentionally held off the market. Our definition of spare production capacity is production that is able to come online within 30 days, be produced for the next 90 days, and is being held off the market by a supply manager. By our definition, we estimate that approximately 2.0 million barrels per day (MMbpd) of spare capacity production currently exists.ii The vast majority is in Saudi Arabia, with some in the UAE and Russia. To put that 2.0 MMbpd into context, the world consumes about 100 million barrels of oil a day.iii Therefore, spare production capacity is only about 2%. I would say to be an effective supply manager you need to have at least spare production capacity of 5%.

JJ: Let’s switch gears to U.S. shale, which has been a big disruptor from a commodity price perspective. While U.S. energy equities have struggled, there is no doubt that U.S. shale has been successful in changing expectations regarding the U.S. energy industry. Has the success of shale and the ability for shale to produce profitably at $50 surprised you?BM: Some things I saw coming, like the 2014 price collapse. I wish I could have seen the shale revolution coming, but I caught on about the same time as everyone else. I am surprised, but I shouldn’t be. We should never be surprised about the ingenuity of the U.S. oil industry. OPEC does remain pessimistic about shale – they think the downturn is just around the corner. Despite shale hitting it out of the park and producing at price levels that no one thought possible, major players in the energy industry, like Saudi Arabia, are still skeptical and betting against shale.

EXHIBIT 2: PRE-SHALE U. S . CRUDE OIL PRODUC TION

42% DECREASE

EXHIBIT 3: U. S . CRUDE OIL PRODUC TION TODAY

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1985 1990 1995 2000 2005 2010 2015 2020 2025Actual Production (MBPD) EIA 2005 Forecast Crude Price (WTI $/bbl)

$80-$100oil incentivizes

shale R&D

$40-$70oil forces efficiency

5.9% CAGR(2005-2018)

Sources for Exhibi t s 2 and 3: U.S . Energ y Informat ion Adminis t rat ion ( “ EIA” ) , EIA Energ y Out look 2005, EIA Energ y Out look 2019

Expec tat ion of cont inued

produc t ion dec l ine

3CRUDE OIL PRICES IN A POST-OPEC WORLD

JJ: Is that why you think OPEC has willingly ceded market share to protect price? BM: Yes, they are always willing to cut a little longer, cede market share a little longer, and there is always a sense, for them, that shale will die down. The key to that is that they believe eventually capital will stop flowing in, but money keeps pouring into the U.S. energy industry.

JJ: Now, you’ve got the supermajors putting money to work in U.S. shale. ExxonMobil and Chevron have come out and said they expect to double their production out of the Permian Basin.ii Do you think this changes the Saudi view of the ability of shale to have permanent staying power? BM: I believe that the supermajors getting into shale actually gives the Saudis some comfort. Typically, the supermajors have historically been more disciplined than the smaller producers, and I think they see these guys as being cautious and predictable, which may help keep prices in check.

JJ: Let’s talk about shale in the context of the thesis from your book. Right now, shale is serving as the marginal producer, but not necessarily the swing producer. As shale relates to inelasticity, shale does appear to be more nimble than historical sources of supply. It is a shorter cycle, as shale does have a steeper decline curve. I’m also going to throw in the current drilled-but-uncompleted (“DUC”) wells in the U.S. This supply isn’t held off the market by a supply manager, but rather by logistics. What does the current DUC inventory mean for spare capacity and how does shale relate to price volatility and the inelasticity of supply? BM: Great questions. Going back to the definition of spare capacity – it’s capacity available within 30 days at a regulator’s command with legal permission, and it’s used for the sole purpose of keeping the global oil market balanced, preventing big inventory increases or decreases. Shale is none of that. It is shorter-cycle – as you said – but shale is in no way, shape or form the Texas Railroad Commission or OPEC. That leads us to the question about its perceived “short-cycleness” and its relative elasticity compared with a large-scale development of an offshore oilfield. I think the jury is still out on whether shale’s relative elasticity will reduce or increase volatility in prices. In recent history, we have seen both cases, but I think it was more about the market circumstances at the time. Going

back to 2010, we had Iran sanctions, the revolution in Libya, and Saudi Arabia had zero spare capacity, and I think if shale had not been as prolific as it was, we would have had much higher prices. While you could make the argument that shale’s arrival reduced volatility, I do think this was more of a function of the dynamics of the oil market at the time. Flash forward to 2014: I think it was a combination of shale’s continued growth and the OPEC decision not to cut production that sent prices on a downward spiral. Going forward, I believe the jury is still out on whether shale will help or hurt when it comes to volatility, and I think a lot will depend on what demand looks like.

JJ: Let’s dig in a bit more on demand. You’ve vocally opposed the concept that the world is rapidly approaching peak oil demand. You’ve said that you don’t believe electric vehicles (“EVs”) will penetrate as fast as people think. What is your underlying thesis in regard to this? BM: Last time we had “peak demand” was about 120 years ago. It was peak horse-and-buggy demand, and it happened very quickly. You took a picture of Manhattan in 1905 and it was all horses and buggies. You took that same picture in 1915, and the horse and buggy were replaced with Model Ts. This shift was brought to us by technological innovations that presented consumers with a far superior source of transportation. Electric cars have been around since the early 1900s, but the entrepreneurial community has not yet developed an electric car that can effectively compete with the traditional internal combustion engine in terms of consumer satisfaction. I think even the most pro-EV person would admit that, today, they have not produced a vehicle that can broadly compete. To me, the question is whether policymakers will step in and entice consumers with subsidies to buy EVs when they wouldn’t otherwise. We’ve seen limited examples of that in Norway and the state of Georgia, but government budgets are limited. China is starting to reduce the subsidies they have in place, and we have started to see sales of EVs fall off. In my opinion, there is insufficient political will to make consumers buy electric cars at the level that would be required to meet peak oil demand in the next 5 to 10 years. This does not mean that EVs won’t continue to grow or that climate change concerns are going to go away – not at all. It just means that I don’t think we are going to get into the kind of peak demand estimates as quickly as many forecasts suggest.

4CRUDE OIL PRICES IN A POST-OPEC WORLD

JJ: Great answer there. Before we move on, I want to go back to supply management and the concept of a swing producer. Today we have what I call “TROPEC”; or Trump + Russia + OPEC. We’ve had Trump applying downward pressure on prices, something a Republican administration has never done. We have OPEC continuing to cede market share, and as a result, putting a price floor in the market. As the shale industry has matured, are these two factors enough to create some stability around prices?

BM: I love the “TROPEC” reference. And the answer to your question is: potentially it is, and at the heart of “TROPEC” is (R)OPEC, the combination of Russia and OPEC. OPEC really lost its position as the swing producer/supply manager back in 2008. The reason that OPEC refused to cut production, crashing prices in the fall of 2014 (when they refused to cut production), was because Russia won’t cooperate with them. When oil fell to $26 a barrel back in early 2016, Russia was spooked into cooperating with OPEC. To me, the most important question for the oil market is will OPEC and Russia formalize their association and continue to act jointly by leading collective cuts. From the U.S. perspective, Trump must at least tolerate Russia and OPEC trying to do their job. I think that is a necessary – but not sufficient – condition for price stability, at least in the short term. Long-term, I think (R)OPEC is going to lose control of keeping prices in check because it will not be able to meet demand.

EXHIBIT 4: (R)OPEC: AC TING TO PROTEC T THE DOWNSIDE

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OPEC Defends Market Share –11/27/14

>1.0 MMBPD Production Cut – 9/28/16

Production Cuts Extended – 5/25/17

1.2 MMBPD Production Cut – 12/7/18

$85Average 2018

fiscal breakeven for OPEC countries

Sources: OPEC, B loomberg

5CRUDE OIL PRICES IN A POST-OPEC WORLD

JJ: I personally don’t think that crude oil prices would get too high simply because of the success of the U.S. energy industry. If prices got to a certain level, let’s say in the $70s, I think capital would pour into the industry in quick fashion and the amount of drilling that would take place would put a cap on prices. BM: I think in the long term it all goes back to demand. I do not believe the world is currently producing enough to meet growing demand, and with spare capacity so low I think at some point it will get to be too burdensome for Russia and OPEC and there will be some kind of price shock.

JJ: Crude prices are moving around quite a bit, and we do not disagree with your thesis. Before we wrap up, I want to discuss why we do what we do here at Brookfield. We invest in midstream companies with fee-based cash flow and our bet is on volumes, not price. Our investment thesis is centered around the view that the volumes moving through the energy infrastructure we invest in will continue to increase. We invest in companies that have proven their ability to generate stable cash flows, regardless of where we are in the commodity cycle. Since 2007, midstream cash flow has continued to grow, and we believe that the stability of cash flows should provide outperformance over the long-term.

EXHIBIT 5: REL ATIVE CA SH FLOW STABILIT Y SETS MIDSTREAM APARTIndexed Cash Flow Grow th Per Share Comparison(2007-18)

A s of Apr i l 4 , 2019. Graph takes top 5 current cons t i tuent s by weight or marke t capi tal izat ion for representat i ve indices and calculates average indexed cash f low per share grow th using B loomberg. Cons t i tuent s are: (Mids t ream / AMNA Index) EPD, TRP, ENB , KMI , E T; (Ser v ices / OSX Index) SLB , HAL , NOV, HP, R IG; (Broader Energ y / I XE Index) XOM, C V X , COP, SLB , EOG; (Re f ining / S15OILR Index) PSX , MPC, VLO, HFC , PBF; (E&Ps / Top 5 Independent producers in SPSIOP Index) ; COP, EOG, OX Y, PXD, APC. For i l lus t rat i ve purposes only. Pas t per formance is not indicat i ve of future resul t s . Sources: B loomberg , Brook f ie ld Publ ic Secur i t ies Group LLCA s of June 30 2019, the Center Coas t Brook f ie ld MLP F ocus Fund ’s top 5 ho ld ing s were as fo l low ing : Enterpr ise Produc t s Par tners LP (9.75%) , Energ y Trans fer LP (9.69%) , P la ins A l l A mer ican P ipe l ine LP (9.4 8%) , W i l l iams Cos Inc ( 7.87%) , and EnL ink Mids t ream LLC (6 .28%) . Current and fu ture por t fo l io ho ld ing s are subjec t to change. A fu l l l i s t of ho ld ing s as of the mos t recent publ ic f i l ing can be found in the EDG A R Por t a l on the SEC Websi te.

6CRUDE OIL PRICES IN A POST-OPEC WORLD

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I N D E X D E F I N I T I O N SAMNA Index: The Alerian Midstream Energy Index is a broad-based composite of North American energy infrastructure companies. The capped, float-adjusted, capitalization-weighted index, whose constituents earn the majority of their cash flow from midstream activities involving energy commodities, is disseminated realtime on a price-return basis (AMNA) and on a total-return basis (AMNAX).OSX Index: Philadelphia Stock Exchange Oil Service Sector Index is designed to track the performance of a set of companies involved in the oil services sector.IXE Index: Energy Select Sector Index is a component of the S&P 500® which seeks to track the energy segment. Stock classifications are based on the Global Industry Classification Standard (GICS®).SPSIOP Index: S&P Oil & Gas Exploration and Production Select Industry Index comprises stocks in the S&P Total Market Index that are classified in the GICS oil & gas exploration & production sub-industry.S15OILR Index: S&P Oil & Gas Refining & Marketing Select Industry Index. The index comprises stocks in the S&P Total Market Index that are classified in the GICS oil & gas marketing & refining sub-industry.Quasar Distributors, LLC is the distributor of Brookfield Investment Funds and Brookfield Public Securities Group LLC is the Investment Adviser. ENDNOTESi Brookfield Public Securities Group LLC (“PSG” or “the Firm”) is an indirect, wholly owned subsidiary of Brookfield Asset ManagementiiSources: Bloomberg, U.S. Energy Information Administration iiiSource: U.S. Energy Information AdministrationF O R W A R D - L O O K I N G S T A T E M E N T SInformation herein contains, includes or is based upon forward-looking statements within the meaning of the federal securities laws, specifically Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include all statements, other than statements of historical fact, that address future activities, events, or developments, including without limitation, business or investment strategy or measures to implement strategy, competitive strengths, goals, expansion and growth of our business, plans, prospects and references to the future of our success. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other similar words are intended to identify these forward-looking statements. Forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining our actual future results or outcomes. Consequently, no forward-looking statement can be guaranteed. Our actual results or outcomes may vary materially. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

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