Oil Market Outlook

Oslo, September 2017

World economic recovery is gaining pace!

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World economic outlook

Source: IMF, L&S Research

• World GDP growth of 3.5% expected in 2017, up from 3.2% in 2016 (IMF-July 17)

• Broad-based recovery, growth picking up both in industrialized and emerging economies

✓ GDP projections slightly reduced lately for US due to tighter fiscal & monetary policies, while adjusted higher for Euro Area and Japan

• Prospects improving from buoyant financial markets and cyclical recovery in manufacturing

• Trade growth nearly doubling to 2.4% in 2017 from 1.3% in 2016 (IMF)

• Uncertainties/concerns

✓ Rising geo-political tensions✓ Productivity growth slowing✓ Inward looking trade policies posing risk to trade

growth (US, post Brexit)✓ High income inequality✓ Deleverage of Government bonds, US$ 13,000 billion

issued globally since 2008✓ Chinese credit growth and financial market leverage

2015 2016 2017 2018

U.S. 2.4 % 1.6 % 2.1 % 2.1 %

Euro Area 2.0 % 1.8 % 1.9 % 1.7 %

Japan 1.1 % 1.0 % 1.3 % 0.6 %

China 6.8 % 6.4 % 6.7 % 6.4 %

India 8.0 % 7.1 % 7.2 % 7.7 %

World 3.4 % 3.2 % 3.5 % 3.6 %

Oil market rebalancing taking longer than expected

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• Global oil demand grew strongly year on year by 2.3 mb/d (2.4%) in Q217

• World oil demand growth expected to grow by 1.6mb/d in 2017, slowing to 1.4 mb/d in 2018 (IEA, Sept-17)

• Oil demand in 2017 should reach 97.6 mb/d

• World economy picking up speed in 2017

• Broad-based recovery both in industrialized and emerging economies

• Trade growth expected to double to 2.4% in 2017 (WTO 2016: 1.3%)

• US oil production has been growing faster than expected. Production outages caused by hurricanes Harvey and Irma could take weeks to normalize.

• OPEC‘s 1.2 mb/d cuts and Non-OPEC’s 0.6 mb/d cuts rolled over through Q1-18. Ministers discussing extending the agreement to end-18

• OPEC crude production dropped to 32.46 mb/d in Aug-17 (IEA), after renewed turmoil in Libya and reduced output from other members

• Oil price firming on strong demand, reduced OPEC output and production outages (Libya and the US)

• Longer term, depletion of reserves and declining production of large fields need to be addressedOil market outlook

Oil supply

Oil demand

Macroeconomic outlook

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OECD crude & products stocks

• OECD industry stocks fell in June by 19.2 mb to 3021 mb, but are still well above the 5 year average

• OECD total oil stocks in days of forward demand reduced to 63 days in June

• OECD America crude stocks dropped counter cyclically in June by 10 mb to 1606 mb, while stocks of oil products built by 11.8 mb to 774 mb.

• Chinese commercial crude stocks gained 9.6 mb in June to 381 mb

Sources: Lorentzen & Stemoco Research, IEA, China Oil, Gas and Petrochemicals

Lorentzen & Stemoco

North American demand growing a faster pace

• US oil products demand averaged 19.8 mb/d in Q2-17, up 0.82 mb/d y-o-y

✓ Gasoline consumption recovered strongly in Q2-17 due to firm employment data and increased vehicle miles travelled while efficiency gains should keep have some offsetting effects going forward

✓ Gasoil demand, mirroring industrial activity, grew by 0.25 mb/d in May (+6%) y-o-y

✓ Total US demand for 2017 forecasted at 19.85 mb/d up 0.21 mb/d from 2016

• Canadian demand grew by 15 kb/day y-o-y in Q2

• Mexican demand continued to decline by 0.45 mb/d y-o-y in 2017

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North American oil products demand

Source: IEA, Aug-17

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• Chinese demand grew by 0.65 mb/d in the 1H17 and a significant acceleration of growth relative to 2016

• Accelerated gains in industrial activity has resulted in strong growth in LPG and naphtha demand

• Domestic production totaled 3.94 mb/d in June and is expected to slip by 0.15 mb/d both in 2017 and 2018

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Chinese oil product demand growing faster, domestic production slipping

Chinese oil product demand showing strong gains in 1H17, pulled up by industrial activity

Source: Lorentzen & Stemoco Research, IEA Aug-17

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• Impacts of Indian currency reform and withdrawal of 86% of all cash in the economy continues to havenegative impact on the economy

• Products demand expected to grow by 135 kb/d in 2017, mainly driven by LPG and gasoil demand,increasing to 275 kb/d in 2018

• Reduced «Goods and Service Tax» is expected to boost car sales after July

• LPG demand expected to continue growing strongly as the Government aims to switch 5 million newhouseholds to LPG use by 2019

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India oil demand growth slowing

Indian oil products demand to grow by 135 kb/d in 2017

Source: Lorentzen & Stemoco Research, IEA Aug-17

OPEC & Non-OPEC production cuts could be extended through 2018

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• OPEC crude production averaged 32.2 mb/d in 1H-17

• OPEC quota compliance at 86% of the pledged 1.2 mb/d cuts in 1H17

• Recent production increases from “cut-exempt” Libya reversed in August

Source: IEA, Oil Market Report Aug-17

Non-OPEC crude supply commitments

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Source: IEA Oil Market Report April-17

• Non-Opec countries (Russia, Azerbaijan, Kazakhstan, Mexico and Oman) pledged cuts of 558 kb/d to be phased in gradually from Jan-17

• Decision on May 25th to roll over cuts through Q1-2018 in agreement with OPEC and the ministers are contemplating to extend the cuts through 2018

• The compliance rate for the first seven months of 2017 has been about 60% and was 67% for the month of July

Global E&P spending (onshore and offshore)

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• E&P investment bottomed in 2016

• Decline rates of existing fields is lower than first believed due reduced E&P costs as it is a function of both geology and reserve characteristics as well as economics

• Annual decline rates have been estimated in the 4.5% (Cera 2016, based on study of 811 fields) to 8% rate cited in many other studies

• As a result, we expect that investors will find attractive investment opportunities in the oil sector both onshore and offshore

• Increasing offshore sector interest follows dramatically lower break-even levels for new projects in the North Sea and in the Gulf of Mexico with reductions of up to 50% since 2014

• A stronger upward trend in investment is expected from 2018 onwards

Barclays expect spending to increase 7.3% over 2016

Lorentzen & Stemoco

How quickly will US crude and NGLs production recover from Hurricane impacts?

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US oil production shows strong recovery since mid-2016

Sources: Lorentzen & Stemoco Research, Reuters, EIA, IEA, Baker &Hughes

• US oil production more resilient to low oilprices than expected due to production of“fracklog” as well as sharply lower drillingcosts and efficiency gains

• US energy sector capital spending totaledUS$ 19.8 bn in Q1-17, a near treblingcompared to Q1-16

• US oil rig count has increased from 300units in May-16 to 763 units in August-17

• US crude production was 9.5 mb/d inAugust, versus 9.3 mb/d expected forcalendar 2017 (EIA)

• US crude production dropped by 0.75mb/d in week 36 due to impact ofHurricanes

Lorentzen & Stemoco

OECD crude & product Industry stocks were 165mb above 5-year avg.

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OECD commercial stocks of crude & products

• OECD commercial stocks fell by 19.2 mb in June to 3021 mb

• OECD America crude stocks drew by 10.7 mb in June

• Chinese commercial oil stocks increased by 9.6 mb/d in June to 381

• Preliminary data suggest a draw in OECD commercial stocks in June of 9.2 mb/d

• Stock draws expected to accelerate in 2H17

Sources: Lorentzen & Stemoco Research, EIA, IEA

Oil market balance is tightening

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• Global oil demand in Q2-17 was 0.4 mb/d greater than supply• Oil supply may develop slower than expeced due to

✓ Saudi Aramco planned offering in 2018, urgent need to boost valuation through higher prices✓ US production could be lower than expected due to hurricane impact and lower E&P Capex

• Global oil demand expected to remain well above supply for the rest of year

Source: Lorentzen & Stemoco Research, EIA

Oil price forecast

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Source: Lorentzen & Stemoco Research, Indexmundi

• L&S base case forecast for 2017 was US$ 55.7 • L&S base case forecast for 2018 is US$ 58 bl (average) and US$ 60 bl by year end

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2017

• Global oil demand growth set to be stronger than projected (IEA)

• OECD commercial stocks were 3016 mb in July and the surplus reduced to 190mb above the 5 year average reference point

• Rapid US shale production growth (EIA: 9.3 mb/d in 2017, 10.0 mb/d in 2018), but Aug-Sept production and demand reduced due to Hurricane impact

• ME Gulf political tension seems to be easing

2018-

• US producers may need over US$ 50 bl to maintain production

• Environmental concerns slow down transportation sector demand growth (diesel ban/restrictions in large cities through substitution (LNG/CNG fuel, electric propulsion)

• Renewable energy (wind and solar) becoming profitable without subsidies at current oil prices

• Depletion of reserves and decline in production from large oil fields have been “off the agenda” for some time, but needs to be addressed through a sharp increase in E&P spending

• Recent declines in large oil fields masked by boost in production from many small fields incl. shale, where decline rates tend to be higher

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Oil market outlook summary

Short/medium term oil price outlook firming

Source: Lorentzen & Stemoco Research

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2017

• Global upstream E&P spending expected to grow by 5%, boosted mainly by sharp gains in US on-land activity

• Renewed sector interest following break-even levels reductions of up to 50% for new projects in North Sea and Gulf of Mexico since 2014

• Spot day rates for certain types of offshore support vessels have improved while others still under pressure

✓ PSVs (production support vessels) > 900 m2 have made solid spot market rate gains over 2016 levels

✓ AHTs (anchor handling tugs) > 20k bhp have seen spot rates coming under pressure

• TC rates for most types of offshore support vessels have been fairly stable at low historical levels

• Rates for drilling rigs, both Jack-Up and Floaters are still under pressure

• Ongoing industry consolidation will ease price competition

2018 onwards

• Global upstream E&P spending is expected to increase by 7% in 2018 (SEB spending Survey) assuming of crude prices in the mid-US$ 50’s bl

• Pick-up in activity in the North Sea and Gulf of Mexico where investments appear more interesting based on firming oil prices and sharply lower operating costs

• Depletion of reserves and decline in production from large oil fields have been “off the agenda” for some time, but needs to be addressed through increased offshore E&P spending in the next 2-3 years

• The expected increase in E&P spending will boost demand for drilling rigs and offshore supply ships

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Offshore market review & outlook

Source: DNB Markets, Lorentzen & Stemoco Research

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