Energy Industry Trends Review

Issue 16: April 2011

Editorial Trends snapshot Economic outlook

Editorial
In 2011, the global gas industry seems to have reached another inflection point. This change is being driven simultaneously by market conditions and technology advances and might (some analysts are forecasting) bring the global gas supply/demand situation back into balance, sooner rather than later.

The global gas industry has been in a period of sustained low demand growth and weak prices (excepting Asia) for a few years. Now there are signs that the industry is finally moving toward a recovery, with two recent developments driving the more optimistic outlook. The first development is the situation in Japan, where the earthquake and resulting tsunami has closed around 63 percent of Japanese nuclear power generation capacity1 and have resulted in an increase in demand for liquefied natural gas (LNG) (Japan has been soaking up excess supplies in the Asian market). Second is the growth in demand for gas in Latin America and the Middle East, which is being met through LNG supplied through floating LNG terminals (FLNG). Kuwait and Argentina are now importing LNG using this technology. Argentina, for example, will have two FLNG terminals in operation by the end of 2011 and recently signed an agreement with Uruguay to build a FLNG plant together,
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which will supply the two nations with 10 million cubic meters/day (mcm/d) of natural gasscalable to 15 mcm/dstarting in 2013.2 The combination of these two developments is leading some forecasters to predict that the oversupply in the global gas market could now end sooner than expected possibly even in 2012. Cedigaz, the gas market analysts, are forecasting that LNG demand will rapidly absorb surplus in the global gas market; effectively, the [global] gas bubble could disappear by the end of 2012, leading to the return of a sellers market."3 There are, however, still some complications to this optimistic outlook. At the top of the list is the continued low demand and weak gas price situation in the United States, which has seen a dramatic fall in LNG imports to that market, with the gas market situation in the United States

also contributing to an oversupply of gas in the Atlantic Basin market generally. In addition, there is a still a significant amount of new LNG capacity set to come onstream over the next few years, and it is unlikely that all of that capacity will be absorbed by Asian markets. If the global economy starts to slow down later in 2011 (as higher oil prices affect the recovery), the current positive outlook for the global gas markets might end up being rather short-lived.

Trends snapshot
February 2011
Economic

March 2011

April 2011

Oil supply

Oil demand

Oil price

Gas supply

Gas demand

Gas price

Refining

M&A Rig activity Companies

World real gross domestic product (GDP) growth is forecast to be about 4.5 percent in 2011 and 2012, down from 5 percent in 2010.4 The recovery continues to be uneven, with poor economic data coming out of the United States, the United Kingdom and China this quarter, indicating that the sustained period of high oil prices might be starting to slow down global economic growth. Most regions, however, are still showing some growth, indicating that even if the pace is slowing, the recovery in general is still proceeding. Global oil supply fell by 50,000 barrels/day (b/d) to 87.5 million b/d in April, with combined OPEC crude and natural gas liquids (NGL) supply lower by 260,000 b/d, while non-OPEC production rose by 200,000 b/d.5 Non-OPEC supply growth, however, is starting to look increasingly fragile, which combined with market disruptions in Libya and continued pressure on spare OPEC production capacity, might lead to further upward pressure on the oil price. Global oil demand, which averaged 87.9 million b/d in 2010 (3.3 percent or more than 2.8 million b/d year-on-year), is now projected to reach 89.2 million b/d in 2011 (more than 1.5 percent or 1.3 million b/d versus 2010).6 There is evidence that oil demand growth is slowing, driven in particular by high oil prices hitting American consumers, as gasoline prices reaching $4 per gallon are beginning to affect gasoline consumption in North America. Oil prices over the past quarter have been characterized by extreme volatility, and markets were unsettled by the sharpest fall in two years of the price of oil in early May. Factors such as the crisis in Libya and continued strong growth in Asia are supporting prices, but downward trends including slowing economic growth, a strengthening dollar and a relatively robust supply situation mean the market is seeing price reversals both intraday and from day to day throughout this quarter.7 After two earlier years of decline, the world gas supply is now 4 percent above highs attained before the 2008 recessionsupported by economic growth, a cold Northern Hemisphere winter and a hot summer in Asia. Some analysts are forecasting that the global gas bubble could disappear by the end of 2012, leading to the return of a sellers market.8 Gas supply is forecast to increase by 3 percent in 2011, with a much-reduced gap between spot and long-term prices. Long-term prospects for gas demand remain strong and short-term demand has been tightening due to a cold winter in the Northern Hemisphere, better economic growth and the tsunami in Japan, which has tightened up LNG supply as it fills the gap left by the closure of its nuclear capacity. However, the improvements in short-term demand are still not yet sufficient to offset the global oversupply situation in general. European spot gas prices, notably the United Kingdom, are expected to tighten considerably later this year due to the ongoing situation in Japan. In the United States, the gas price remains weak to the ongoing oversupply situation there. Short-term weakening of LNG prices is expected as new capacity continues to come onstream and arbitrage opportunities with Asia are limited by high charter rates for LNG tankers. Global refinery crude throughputs are averaging 73.8 million b/d in the second quarter of 2011, slightly down due to the disruption in Japan and weakening gasoline demand in North America (Q1 runs were averaging 74.2 million b/d). Overall refining margins continued to remain weak although there were some improvements in northwestern Europe and in some US regions. Concerns about falling gasoline demand in the United States due to high gas prices might continue to affect gasoline cracking margins here.9 M&A activity continued to increase but growth was slower during the first quarter of 2011 than it was in the fourth quarter of 2010. Growth is expected to remain strong during all of 2011, driven by increasing oil prices, continued interest in shale plays, active spending by national oil companies (NOCs) in Asia as well as restructuring by international oil companies (IOCs). With continued social and political unrest in the Middle East and North Africa, the NOCs and IOCs are showing renewed interest in other regions such as Russia and the Caspian. Rigs under operation and utilization saw steady growth in the first quarter of 2011. North America is experiencing a significant drop in gas drilling due to weak gas prices, and gas drilling activity has fallen to the lowest level since 1995.10 Saudi Arabias plan to increase rig activity by nearly 30 percent is being seen by the market either as signal that it is struggling to deliver the 12.5 million b/d of capacity it has claimed is in place or that it thinks the market will need more spare capacity (due to the unrest in Libya).11 Company results for the first quarter of 2011 were strong on the back of higher oil prices, although production fell generally. For the remainder of 2011, companies are expected to continue to generate higher revenues in the backdrop of high crude prices. However, there are concerns among analysts around falling production volumes as the oil majors seem to be focusing on value over volume as the effect of continued divestments and geopolitical unrest start to kick in. Increased activity continues to support the oilfield services companies, and higher oil prices are seeing the US independents switching their focus into more profitable liquid plays.

Economic outlook
Key trendAccording to the latest International Monetary Fund (IMF) World Economic Outlook report,12 the global economy is expected to expand by 4.5 percent in 2011 and 2012 (down from 5 percent in 2010). The uneven economic recovery continues with most advanced economies still reporting output far below potential. In emerging economies, the demand is robust and overheating of key growth economies is an increasing concern. The US economy continues its uneven recovery, with easing financial conditions supporting private demand in the face of higher commodity prices. Though job creation in the United States is picking up momentum, it is nowhere near to filling the gap of the jobs destroyed during the financial crisis of the past few years. At the same time, the US Federal Reserve continues to raise concerns about lack of momentum in the labor market. The more advanced European economies real gross domestic product (GDP) is projected to grow at 1.75 percent in 2011 and 2 percent in 2012. Overall, real activity in the Eurozone remains below its potential level, and unemployment is still high with debt levels in many Eurozone countries a concern (Germany remains an exception). Growth in Japan is expected to slow to 1.5 percent in 2011 in the aftermath of the countrys recent earthquake and tsunami. Emerging economies are expected to grow at 6.5 percent in 2011 and 2012, supported by strong export performance, buoyant private domestic demand and, in some cases, rapid credit growth. Chinas GDP growth is expected to be robust at 9.5 percent this year and in 2012, with the drivers of growth shifting increasingly from public to private demand; however, this growth is slowing. Growth in India is expected to be moderate but remain above trend (Indias GDP growth is projected at 8.25 percent in 2011 and 7.75 percent in 2012). Observation The economic recovery is broadly moving at two speeds, but generally in 2011, it seems to be slowing down, which is causing concerns that the economic recovery has once again stalled. The IMF revision for GDP growth to fall this year is a reflection of the impact of the Japanese earthquake and tsunami, which affected that countrys industrial output significantly, and the impact of higher oil prices, which is starting to affect large economies such as the United States, which is already dealing with high levels of debt. There are appreciable differences among each set of countries in advanced economies. Weak sovereign balance sheets, high funding requirements of banks and declining real estate markets continue to present major concerns, especially in certain Eurozone economies. Also in the Eurozone, concerns about debt defaults continue, with the focus this quarter once again on Greece, as analysts forecast that without another rescue package, Greece will again default on its debt obligations by mid-July 2011.13 In emerging economies, concerns are centered on rising commodity prices (driven by food and energy prices) and geopolitical uncertainty, as well as overheating and booming asset markets. Rising inflation (led by high oil prices in particular) is impacting economic growth in emerging economies. Recently, Goldman Sachs lowered its own GDP growth forecast for China from 10 percent to 9.4 percent, citing a recent run of surprisingly weak data, high oil prices and supply constraints. A Goldman Sachs analyst note on the outlook for China stated, This is both a sharper and more extended slowdown than we had previously projected."14 Global markets are waiting to see whether the slowdown now evident in the global economy will be temporary or longer lasting. There are some signs that it might be temporary; for example, the situation in Japan may already be improving, with data showing Japan's factory output rose in April 2011 as the country seems to be starting to recover from the effects of the earthquake and tsunami. (The 1-percent rise in Japans output was less than forecast, but analysts said the outlook was brighter for the coming months.)15 However, signs of a drop in the oil price are harder to spot. There are continued intraday and day-today spikes in oil and other commodity prices (exacerbated for the oil price by continuing tensions in the Middle East and North Africa) that continue to dampen market confidence and weaken consumer spending, which does not appear to be disappearing any time soon.

Oil supply
Key trendAccording to the International Energy Agency (IEA), global oil supply fell by 50,000 barrels per day (b/d) to 87.5 million b/d in April 2011, with combined OPEC crude and natural gas liquids (NGL) supply lower by 260,000 b/d, while non-OPEC production rose by 200,000 b/d).16 Non-OPEC total oil supply rose by 200,000 b/d in April to 53 million b/d (despite field shut-ins for technical and political reasons in Argentina, Canada and China) on higher production in the North Sea, the Fdration Syndicale Unitaire (FSU), China and Brazil. The 2011 projection for nonOPEC production has been adjusted down by 100,000 b/d by the IEA to 53.7 million b/d on revised Canadian

prospects. Any further growth in nonOPEC production growth for the rest of 2011 is likely to be driven by Brazil, China, Colombia and Ghanabut the projection is currently for a decline in nonOPEC production overall for 2011. US oil independent Anadarko Petroleum recently reported that Ghanas giant Jubilee field is on track to reach peak production of 120,000 b/d by the end of summer 2011.17 In the Gulf of Mexico, business is slowly returning to normal, now that the Bureau of Ocean Management has started to issue new permits to drill new deepwater wells. Nonetheless, according to the latest U.S. Energy Information Administration (EIA) estimates, Gulf of Mexico oil production is expected to fall by 130,000 b/d in 2011 and by a further 190,000 b/d in 2012, due to production declines from existing fields as well as the impact of the 2010 drilling moratorium and subsequent delay in issuing the new drilling permits.18 OPEC production fell to 29.2 million b/d as oil production in Libya remains severely affected by the countrys unrest and civil war. Despite expectations that fellow OPEC producers would increase output to replace lost Libyan supplies, OPECs production remained an estimated 1.3 million b/d below the pre-crisis level of around 30 million b/d posted in January. Significantly higher production from Nigeria, coupled with smaller increases from several other countries, failed to offset reduced output from Libya, Angola, Saudi Arabia and Iraq. However, overall OPEC supply was still at or above trend largely due to increased output from Saudi Arabia since the beginning of 2011. Saudi production averaged 8.88 million b/d in the first quarter of 2011, which is an increase of 310,000 b/d from the 8.57 million b/d average in the fourth quarter of 2010 (although it declined slightly in April). OPEC effective spare capacity is currently estimated at 4.14 million b/d (April
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2011). Libyan crude output is now forecast to remain at around 200,000 b/d through the end of 2011 and, as a result, OPECs available capacity by year-end 2011 is estimated at 33.83 million b/d.19 Observation Global oil supply witnessed an overall drop in the first quarter of 2011, mainly due to the ongoing geopolitical unrest in Libya, which has seen the countrys oil production fall to around 200,000 b/d in April 2011 from precrisis level of 1.6 million b/d. Going forward, the amount of geopolitical uncertainty is expected to increase within the Middle East and North Africa (MENA) region, with Yemen also currently showing signs of significant unrest, which is having an impact on non-OPEC production levels. Despite the supply situation in MENA, the global oil market currently looks well-supplied, with increased output from Saudi Arabia supporting the production shortfall. The increase in oil supply from Saudi Arabia, however, does have some implications. The market is becoming concerned about an over-reliance on Saudi crude, particularly as non-OPEC crude output seems to be slowing, thus increasing the influence of OPEC supply in the market (arguably making the market more vulnerable to further supply shocks). Analysts are also looking for signs of contagion in Saudi Arabia, from the so-called Arab Spring, which has seen protests disrupt the economies of many MENA countries. Some analysts believe that Saudi Arabia could be bringing more oil onto the market, but are in fact restricting output to keep the oil price high to support domestic economic initiatives being put in place to stave off potential unrest in the country. For example, in February 2011, King Abdullah announced a $36 billion package of social benefits mostly aimed at youth, civil servants and the unemployed. This announcement

caused one analyst to comment, It helps explain why, instead of the Saudis cracking open the tap, as they should be doing at the moment, theyre actually being, if anything, maybe a little bit more restrictive to keep oil prices high, because they need it to meet some financial commitments.20 OPEC has chosen not to make any changes to its oil production output at its meeting in June 2011, after widespread speculation that it would be raising its production levels by around 1.5 million b/dwhich would alleviate the pressure on both the supply side and the oil price.21

Oil demand
Key trendAccording to the IEA, global oil demand, which averaged 87.9 million b/d in 2010 (a 3.3 percent or 2.8 million b/d increase year-on-year), is now projected to reach 89.2 million b/d in 2011 (a 1.5 percent or 1.3 million b/d increase versus the previous year). However, global oil demand only grew by 0.4 percent in March 2011.22 Data on oil demand suggests that persistently high oil prices are starting to have an impact on demand growth, particularly in OECD (Organisation for Economic Co-operation and Development) nations. According to the IEA, total OECD demand contracted by 2.8 percent year-on-year in March 2011, for the first time since February 2010, which was a significant drop. There is evidence that high oil prices are hitting US consumers in particular, with gasoline prices close to $4 per gallon beginning to affect gasoline consumption in North America. Japan showed an overall decrease in oil demand for March 2011 (although direct crude burn rose sharply to offset the partial loss of nuclear power generation, the disruption of economic activity curbed diesel demand sharply). Nevertheless, the Japanese economy should start to recover toward the fourth quarter of 2011 as reconstruction gathers pace.23

Oil demand growth in China accelerated slightly in March (an increase of around 10 percent yearon-year), reversing the slowdown observed in the previous two months, bringing total Chinese oil demand to 9.5 million b/d. Early reports from some analysts are forecasting further growth in Chinese oil demand, despite some views that the Chinese economy is slowing down, as this summer the country looks set to experience its worst power shortages since 2004. This projection is likely to put further pressure on its industrial sector, raising the possibility of China turning into a net importer of diesel as people turn to diesel generators for power generation use.24 Observation The market is currently witnessing competing trends in global oil demand. These trends are supporting a general view that while oil demand continues to increase generally, it might be slowing in some marketsnotably the United States. However, this slowing could be offset by the continued growth in demand in China and other growth economies. The US economy continues to show an uneven recovery that is not yet lifting the economy out of recession. Higher oil prices and rising food costs appear to be affecting any growth in the countrys private sector and, in common with most other OECD nations, public spending in the United States is being heavily cut back. Some economists have cut forecasts for US economic growth in the second quarter of 2011 with industrial production, consumer spending and unemployment all still looking depressed.25 As the US summer driving season begins, it is being predicted that gasoline consumption will be lower than last year, as motorists cut back due to high gasoline prices.

Industry observers are also highlighting the continued oil demand growth from economies like China, where the threat of electricity shortages is expected to lead to a jump in demand for fuel such as diesel. If Chinas power supply is tightly rationed this summer and the Chinese turn to back-up oil-fired generators as they have in the past, oil demand may be significantly higher than previous predictions. Increased use of diesel generators has boosted Chinese oil demand by 400,000 b/d to 600,000 b/d in previous summers, according to some analysts: Chinese diesel shortages could, by themselves, mitigate all of the weakness possibly emanating from the OECD due to higher prices and still tighten global balances further. (Barclays Capital)26

Oil price
Key trendCrude oil prices over the past quarter have witnessed extreme volatility, which has also been seen in other commodity price markets. Markets were unsettled by early Mays sharpest fall in the price of oil in two years, as markets reacted to news of a slowing global economy. However, factors such as the geopolitical crisis in Libya and Yemen and continued strong growth in Asia are also supporting prices on any given day. On May 5, 2011, ICE Brent for June delivery ended the day at $110.80/barrel, falling by $10.39, or 8.57 percent, from $121.96 the previous day.27 As of June 1, futures oil prices for delivery in July were $102.84/barrel for WTI and $116.80/barrel for Brent. US oil prices were being further supported by the closure of a pipeline carrying Canadian crude to the United States after storm-related power outages at the end of May.28

Observation The volatility evident in oil price movements is coming from market reactions to upward and downward pressure on the price that is rapidly changing intraday and day to day. Downward pressure on the price is coming from reports of slower global economic growth (notably in the United States), possible Eurozone debt defaults, a strengthening dollar and because market fundamentals are still showing strong inventories and a generally robust supply situation (despite the situation in Libya). Upward pressure continues to come from the situation in Libya, uneven economic recovery and growth data coming from the larger industrial economies and other non-geopolitical supply disruptions, particularly now that OPEC has chosen not to change its production output and alter quotas.29 In May, the market was also reacting to the end of financial quantitative easing in the United States, sentiments that commodity prices in general had increased too fast (which led to profit taking), with many countries showing a rise in inflationan effect that is continuing into June. Oil consumption also continues to be vulnerable to the high level of retail prices in many industrialized countries. One of the major impacts of rising crude prices has been the re-evaluation of fuel subsidies by various governments. Malaysia recently announced that it will review its fuel subsidies if the crude oil price reaches $110 to $120/ barrel.30 However, crude oil prices are expected to continue to rise in the medium to long term, as investors are anxious about the continuing situation in Libyathe effect of which will be to tighten the supply market further into 2011. Underlying concerns in oil markets are that unrest from the conflict in Libya will widen and eventually disrupt the flow of oil from key exporting countries such as Algeria, Iran, Kuwait and Saudi

Arabia. Analysts are now raising their oil price forecasts for 2011 and 2012, citing that the growth in global oil demand will reduce global inventories and strain OPEC's spare oil output capacity. Goldman Sachs and Morgan Stanley have issued revised 2011 oil price forecasts for Brent crude. Both banks are now forecasting Brent crude to reach $120/barrel by the end of 2011.31

and expect this investment increase to continue for the next two years as gas markets continue to recover, with the company also substantially investing in gas storage.34 In the United States, marketed natural gas production has been growing steadily since 2005, primarily due to the boom in unconventional shale gas production. The EIA expects total marketed production to average 1.4 bcf/d (2.3 percent) higher in 2011, compared with 2010. LNG imports to the United States continue to fall, and although export schemes for LNG are still being discussed, none are yet being implemented. Analysts point out that even if some US LNG exports are authorized, the fact remains that the United States is still one of the higher-cost, gas-producing regions globally, and the industry does not see that exporting natural gas via LNG shipments being enough to push US gas prices higher. Apache CEO Roger Plank was quoted at a US gas conference recently as saying, [US] gas prices will rise only when producers respond to weak prices and pare output.35 Globally, the gas market continues to look well-supplied, with numerous LNG projects continuing to support demand, notably from Qatar. South America is expected to play a larger role in gas supply through LNG exports going forward. In June 2010, Peru began exporting from its 6.4 bcmperyear LNG terminal, and in 2011 will commence contractual deliveries to Mexicos new Manzanillo regasification terminal. Peru LNG shipped a total of 22 cargoes in 2010 to countries in the Atlantic and Pacific basins including South Korea, China and Brazil, and reportedly shipped its first cargo to support gas demand in Japan in May 2011. Peru LNG is likely to continue to focus on shipments to Asia in 2011, but two-thirds of its production will be contracted to Manzanillo.36

Gas supply
Key trendGlobal gas production is expected to increase by 3 percent in 2011, with a much reduced gap between spot and long-term natural gas prices. This growth will be driven by shale gas production in North America, while European indigenous gas production is expected to continue to decline and will continue to be supplemented by supplies from Russia and Norway, as well as increasing amounts of LNG.32 According to Cedigaz, the volume of global marketed gas production grew by 7.3 percent worldwide in 2010 to 3.2 trillion cubic meters (tcm) or 310 billion cubic feet/day (bcf/d). World gas supply is currently around 4 percent above highs attained before the 2008 recession. Economic revival in 2010, a cold Northern Hemisphere winter and a hot summer in Asia have all supported the growth in gas demand. Effectively, Cedigaz is forecasting that the global gas bubble could disappear by the end of 2012, leading to the return of a sellers market.33 Gazprom has reported that its gas exports to Europe showed a significant increase so far in 2011, with figures for May showing an even bigger yearon-year rise. Gazprom production for 2011 is now estimated at 519 bcm (compared to 508.6 bcm in 2010). Gazprom is aiming to produce about 550 bcm of natural gas (a peak reached in 2006) by 2013 and 570 bcm of gas by 2014. The company has also increased its capital investment for 2011 by 50 percent ($42.19 billion)
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Observation The solid global gas supply situation continues to be supported by production from US shale gas plays and new LNG capacity coming onstream. Longer term, the global supply picture is expected to tighten considerably, with the market reverting into a sellers market. While this might ease the pressure on the competitiveness of gas supplies, for markets like the United States it will bring energy policy sharply back into focus (as exporting shale gas as LNG looks too expensive to compete globally). It will now be up to the US power sector to absorb much of the incremental supply, but how much and how effectively it can do that will depend on how government policy and the price situation evolves to support the transition from coal to gas for new power generation. According to US Federal Energy Regulatory Commission (FERC), gas will play a larger role in US power production. At the same time, however, FERC is warning against the United States becoming overly dependent on domestic gas reserves, and infrastructure as bottlenecks are starting to appear in the system. For example, in the Marcellus shale region, pipeline and processing capacity is starting to tighten, and some wells are being started but not completed due to a labor shortage. There are also concerns about a pending U. S. Environmental Protection Agency (EPA) report on the impact of US shale gas drilling (the final report will be released in 2014), which could also slow down the US shale gas revolution. Currently, some specific US states and towns have temporarily banned shale gas drilling. The United States has not yet followed countries like France, where earlier in 2011 the first stage of a law was passed to implement a total ban on exploration drilling for shale gas (as an environmental cautionary measure). What is likely in the United

States is that the EPA will call for new procedures to be followed to support environmental concerns about shale gas drilling, which will certainly add to the cost of US shale gas production and further limit its potential for export.37

Gas demand
Key trendAccording to the Economic Intelligence Unit (EIU), global gas consumption grew by nearly 4.9 percent in 2010, owing to lower prices and strengthening industrial production in the OECD and the emerging world. As 2010 growth was from a low base (in 2009), the EIU forecasts that global demand growth, although remaining strong, will be just under 3 percent this year. Natural gas demand might strengthen as early as 2012, owing to higher oil prices, efforts to reduce carbon dioxide (CO2) emissions and the growing demand for LNG from Asia.38 The EIU expects an increase in gas demand of 2 percent for the United States in 2011, owing to better industrial output, relatively low gas prices and growth of natural gas consumption in the electric power sector. It expects more robust growth in consumption in 2012, at 2.5 percent, as relatively low gas prices and the availability of substantial volumes of unconventional gas should offer greater opportunities for industrial users to switch from coal to gas.39 The EIU outlook for the United States in 2011 is more positive than the current outlook for US gas demand by the EIA, which is forecasting that total US natural gas consumption will grow by only 0.5 percent to 66.5 bcf/d in 2011 (rising by 0.7 percent in 2012 to 67.0 bcf/d). The EIU expects European gas demand to continue to grow in 20112012 at an annual average rate of 3.1 percent, owing to rising industrial production (particularly in Germany) and various

government efforts to reduce CO2 emissions.40 This forecast is now likely to change with the news that Germany will close all of it nuclear power stations over the next decade or so. The country has committed to a substantial program of subsidies and investment in wind, solar and other renewable energy sources. Germany plans to double its use of renewable power generation to 35 percent by 2020 and is also likely to increase its use of gas-fired power generation.41 Gas demand in Asia and the Middle East also continues to increase. The EIU expects LNG demand in Japan to further increase following the March earthquake and tsunami. In the MENA region, natural gas consumption is likely to contract in the very short term as a result of the political unrest, which has damaged businesses and houses and reduced production in oil and gas facilities. However, strong demand from the Gulf nations over the summer is likely to keep consumption at just under an annual average of 7 percent in 20112012. The EIU also forecasts Saudi Arabia to grow in importance as a regional gas consumer, with consumption forecast to rise to more than 100 bcm by 2012.42 Observation While short-term gas demand in Europe and the United States has been supported by colder winter weather, demand in the market generally (outside of the Middle East and Asia) is expected to remain fairly flat in 2011 as economic growth stalls slightly. However, the global return to stronger demand growth is being fast tracked by the ongoing situation in Japan, which is likely to see the supply/ demand balance in the global market tightening up considerably as the year progresses and the economic recovery once again gathers pace. The late2010 IEA forecast was for global gas supply capacity to rise above 200 bcm in 2011, with that capacity exceeding

gas demand for a decade. This forecast, however, is now looking increasingly unlikely. Many gas market analysts are now revising their forecasts, particularly for LNG, with Bank of America/Merrill Lynch stating in a recent research note, The global LNG market is tightening rapidly. In our view, the global gas glut is set to disappear quickly. Bank of America/Merrill Lynch expects Japans 2011 LNG imports to rise 8.5 million tonnes above the 70 million tonnes it consumed in 2010, using up large quantities of LNG at a time when new big consumers such as India are also increasing their use of gas. Although the market is wellsupplied now, we worry that supply could become a constraining factor on demand from 2012, as there are no major supply additions until 2015 ... in the second half of the decade new export projects in Australia and the United States could improve global supplies.43 Longer term in Japan, there is likely to be a rethink of the mix of primary energy, as a result of the power generation crisis brought about by the earthquake and tsunami. Already in June 2011, there is a debate beginning about liberalizing the Japanese electricity market (unbundling generation and transmission services). The Japanese government is considering reshaping the power grid in the hope that competition will bring down electricity charges and spread the use of gas and renewable energy for power generation. While the liberalization of the electricity sector is likely to be very unpopular with Japans electricity companies, it may be the only way to effectively manage power generation and distribution in the earthquake-prone country. When the earthquake struck in March, the fragility of Japans monopolized and nuclear-dependent power grid became obvious. To address the situation,

Tokyo Electric Power Company (TEPCO) had to resort to the emergency step of temporary rolling blackouts in the regions covered by its service, which included the densely populated Tokyo area.44 It is not only energy policy that is likely to have an effect on gas demand growthtechnology is also playing its part. South America and the Middle East are expected to play a bigger role in LNG markets going forward as a direct result of technology advances like floating LNG (FLNG) ships (FLNG systems combine LNG and cryogenic-fluid processing on a ship with a storage system). Countries that import higher quantities of gas are starting to use FLNG ships for their cost effectiveness and flexibility in managing gas demand. Kuwait and Argentina have invested in FLNG systems over the past few years. Argentina, for example, started experiencing natural gas shortages in 2004, when heavy government intervention and price caps discouraged investment in exploration and production. Its domestic gas production peaked in 2004 at just over 52 million cubic meters a day (mcm/d), but dropped to about 45 mcm/d in 2010. Since that time, gas demand has increased substantially as the economy has grown, forcing the government to import gas. In 2011, Argentina is set to increase LNG imports when the Escobar FLNG plant comes onstream. The country expects that the new 5.2bmc terminal will allow it to import between 45 and 50 LNG cargoes in 2011twice as many as in 2010.45 In February 2011, Argentina signed an agreement with Uruguay to build a shared FLNG project that will supply the two nations with 10 mcm/d of natural gas starting in 2013. The plant will be located along the Uruguayan coast near the Arroyo Solis Grande river.46

Gas prices
Key trendGenerally, gas prices are recovering from the low of previous years, as demand starts to tighten due to a relatively stronger economic outlook and following a harsh winter in the Northern Hemisphere and Japans situation, which has drawn down excess gas in the market. This situation is expected to continue, with European gas prices forecast to tighten considerably due to the ongoing crisis in Japan continuing to support demand for LNG in Asia. As a result, there may be a diversion of cargoes into the region and away from Europe. In the United States, the gas prices are expected to remain weak due to ongoing oversupply situation in the market. In the United States, the Henry Hub spot price averaged $4.25/million btu in April 2011 (28 cents higher than the March average) and the EIA expects that the Henry Hub price will average $4.24/million btu in 2011, a decline of 15 cents from the 2010 average. The EIA expects that the forecast decline in production will contribute to a tightening domestic market next year in the United States, with the Henry Hub price averaging $4.65/million btu in 2012.47 Europe could experience gas price shocks this coming winter (2011/2012) as increased Japanese demand for Qatari LNG continues to tighten the gas market. Initially, the situation in Japan was met by spare capacity in the rest of Asia and by Qatar; however, the closure of another nuclear power station in Japan is likely to tighten the global supply market considerably if European winter demand is strong. Spot LNG prices were strong in March and April, with maintenance in Qatar and increased demand from Japan tightening the market. Qatars RasGas planned a 35-day maintenance program on RasGas plant Train 3 from early May, which involved supply

disruptions at the 4.5-million-tonne/ year facility. Japan was estimated to have imported a record 2.138 million tonnes of LNG in March to supplement its power generation. The situation in Japan saw spot prices to Asia for May and June delivery of LNG rise to around $12 to $13/million btu.48 Observation Currently the gas market continues to be in a phase of oversupply, resulting in stable spot gas and LNG prices. This is a continuing consequence of the global economic crisis and its negative impact on industrial gas demand, combined with the start of production at new large gas facilities. This shortterm situation is not expected to last, as excess capacities are likely to disappear supported by extra demand in Asia (notably Japan), Latin America and the Middle East. Analysts now expect the global gas market to tighten sooner than expected, leading to growing competition between Europe and Asia for access to gas resources. This situation is already forecast to have an impact on the European gas market by next winter. LNG prices generally look robust, and have been supported by the situation in Japan, which has reduced that countrys power generation capacity. Japan lost the capacity of two of its nuclear plants and several coal and oil-fired thermal plants shut after the earthquake and tsunami. The countrys main power utility, TEPCO, reported that it generated 9.6 percent less power in March; during the period of March 11 to 31, it generated 17 percent less power.49 Spot prices of Japan-bound LNG have risen nearly 30 percent to just below $13/million btu from the beginning of 2011.

Currently LNG prices are not rising rapidly, as global LNG supplies according to analysts are tight but adequate. The general good supply situation is reflected by the fact that current Japanese LNG spot prices are still 20 percent below LNG prices under long-term supply contracts, which are linked to Japans average crude oil import price. This situation, however, is likely to change if the gas supply/ demand situation starts to further tighten.50

Observation Many refineries in the OECD region are expected to come out of maintenance shutdowns during second quarter of 2011, with some European refineries expected to extend their downtime as they are confronted with weak margins, exacerbated by the disruption of supply of sweet light crude from Libya. However, in the non-OECD region, many refiners are expected to delay maintenance to take advantage of any product supply shortfall in Japan, although there has been a sharp decrease in demand for oil products after the earthquake and tsunami, with demand falling 12 percent in April 2011 from a year earlier.53 Some refiners continue to see some improvement in margins due to better economic activity and strengthening demand in the short term. In the longer term, global refining margins are expected to remain under pressure as recovering global demand is met by another wave of new refining capacity construction. This new capacity is expected to see global refining utilization rates at around 85 percent of nameplate capacityat least through 2015according to energy analysts KBC. In Asia, KBC sees both China and India continuing to add refining capacity. China is expected to build new capacity in line with its surging domestic demand for transport fuels and petrochemical feedstock. Middle Eastern refiners are also expected to add refining capacity above their domestic requirements, with 1.6 million b/d of firm new capacity expected by 2016 in Saudi Arabia and the United Arab Emirates, and more than 1 million b/d of potential capacity to be built elsewhere. With declining export markets for surplus gasoline, a functioning carbon market from 2013 (which is seeing cost rises for heavy industry) and a swing to cleaner marine fuels in the North Sea/Baltic corridor, both US and European refiners face the greatest pressure in the global scenario.54

Refining
Key trendGlobal refinery throughputs averaged 74.2 million b/d in the first quarter of 2011, below previous IEA estimates, with lower throughput in OECD Europe in particular as well as in Latin America and the Middle East. In Europe, planned maintenance peaked in March, whereas a total of 620,000 barrels/day (b/d) of Japanese refining capacity was still shut in by end of March due to the earthquake and tsunami. Refining margins are generally improved in North America, but remain weak in northwest European markets.51 The IEA expects global oil-refining output to rise sharply in May and June ahead of the US summer driving season, after seasonal maintenance and weak margins held back refining activity in the first four months of 2011. Refining margins generally improved throughout the quarter, notably in North America on the back of higher product prices and recovering demand. European margins, however, continue to deteriorate. According to the IEA, in northwest Europe cracking margins fell in April and Brent margins were negative for the month on averagea situation not seen since November 2009. Refining margins in most regions remain under pressure due to uneven demand and factors such as increasing prices for sweet, light crude in the wake of shortage of Libyan supplies.52

Given this scenario, there is a continued trend of major oil companies selling refining assets in OECD nations, including the United Kingdom, France, Germany, the United States and Australia, as companies are restructuring their global refining portfolios to deal with the changing outlook for oil and product demand. This quarter Chevron announced that it is selling its UK refinery at Milford Haven to Valero Energy for $730 million, with a further $1 billion being paid by Valero for the stocks of oil, petrol and other products onsite. Shell also announced the sale of its UK refinery at Stanlow to Essar Energy of India, in addition to the news that it will convert its Australia refinery near Sydney (Clyde) to product storage, citing increasing competition from Asian refiners as a primary reason. This is the result of increased competition from mega-refineries in Asia, supply and demand in our region, and Clyde refinerys small size these refineries can provide Australianspecified product, which wasnt always the case in the past.55

Mergers and acquisitions

Key trendDuring the first quarter of 2011, global merger and acquisition (M&A) activity in the oil and gas industry continued to grow, although at a slower pace than the previous quarter. Overall M&A activity is expected to remain strong through 2011driven by increasing oil prices, continued interest in shale reserves, active spending by NOCs and continued restructuring by international oil companies. What is becoming increasingly clear in 2011, however, is that the major oil companies are turning into net sellers of oil and gas assets, while many of the NOCsparticularly those from Chinacontinue to spend large amounts of capital on new assets. While many major oil companies have been pursuing new asset deals in growth areas this quarter

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(notably in the Arctic), these deals have had variable success. In March, French major Total agreed to buy a 12 percent stake in the Russian gas company Novatek, and join the Yamal LNG project in a deal worth about $4 billion.56 BP entered into an unsuccessful $16 billion deal with Russian oil company Rosneft, which would have involved a 5 percent transfer of BP ownership to Rosneft and would have given BP a 9 percent stake in Rosneft (with the two companies agreeing to concentrate on developing reserves in the Russian Arctic). The deal came under attack by BPs existing Russian partner, AAR, on the grounds that it violated an existing agreement and looks to be undoable in its current form.57 In contrast, many NOCs are managing to expand their reach and are now starting to focus on assets in North and South America, in contrast to a focus on Africa and the Middle East. For example, in February, Sinopec bid $5.4 billion for Encana Corporations 50-percent stake in a Canadian heavy oil and gas project, making it one of Chinas overall largest oil and gas investments in North America as well as the largest investment outside of China that Sinopec has undertaken to date.58 In another large deal, also in Canada, Petrochina has again teamed up with Encana in a $5.43 billion deal to develop hard-to-reach natural gas reserves in the Cutbank Ridge area of British Colombia and Alberta.59 This Chinese NOC spending trend shows no signs of abating. Under Chinas new Five-Year Plan (2011 2015), which, despite having a focus on creating a more sustainable future for China, still has a considerable focus on investing in the exploration and development of oil and gas (including shale gas) and the downstream sector for Chinas future energy needs. For example, under the terms of the plan, one of Chinas largest oil companies, CNOOC, has stated that
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it plans to spend almost $160 billion to buy foreign oil groups and invest in new production, with the majority of the spending to be on offshore oil exploration. CNOOCs 2010 gas production was 64.1 million tonnes, which its CEO highlighted, marked a milestone that China has become one of the worlds largest offshore oil producers after the United States, the United Kingdom and Norway.60 Observation M&A deal activity continues to be supported by the high oil price, but has substantially decreased from the fourth quarter of 2010. Activity remains focused on US shale plays and continued divestments by the oil majors. Attention is switching to deals for long-term frontier plays with BP and Total pursuing deals focused on the Russian Arctic this quarter. BPs negative experience reveals the difficulties of conducting deals of this nature (BPs deal involved a share swap, which was declared illegal by its partners in TNK). There may be many lessons to learn from BPs experience including not to underestimate the current political and market situation in Russia, but primarily not to risk a relationship with an existing partner. The importance of strategic partnerships is being played out between the Chinese NOCs and Canadian oil companiesnotably Encana. The partnership between China and one of Canadas largest oil companies looks like a good match so far, with the Chinese looking for access to new reserves and production as well as building their technical expertise in unconventional production. At the same time, Canada is looking to develop trade with China and export its own resources to Chinese markets. The move by the Chinese oil companies into Canada comes soon after the first significant deal by a Chinese NOC in the United States, when CNOOC announced it was buying one-third of Chesapeake Energys south Texas

shale assets for $1.1 billion at the end of 2010.61 With the formal backing of Chinas current Five-Year Plan, the only question is: where will the next large deal by a Chinese NOC be done, with some analysts betting on them to take a more significant stake in the US Gulf of Mexico. Opined Peter OMalley, head of HSBC Resources and Energy practice for Asia Pacific, I posit the Chinese will acquire significant stakes in the Gulf of Mexico in the next 12 to 24 months.62 Most would agree, particularly as new regulations for the current environment in the Gulf of Mexico will make life more difficult for some of the energy independents and operations there more expensive, that a deal by a Chinese NOC for a large asset there must surely be in the cards. Chinese oil companies continue to be important drivers of oil and gas M&A. In 2009 and 2010, Chinese oil companies undertook nearly $50 billion of deals outside their borders, roughly 5 percent of the industry total, and 2011 looks like being another record year for overseas acquisitions. Increasingly in 2011, however, the deals being done are in more traditional oil and gas sectors, such as the United States and Canada. Analysts have noted this switch in M&A strategy by the Chinese oil companies, with analysts stating, For decades, major players like PetroChina, Sinopec and CNOOC focused on building out their operations in politically volatile regions like Sudan, Venezuela and Iran. Now, they are competing with the multinational giants on their own turf, striking partnerships and joint ventures in the United States, Canada and Latin America.63

Rig activity
Key trendRigs under operation and utilization witnessed steady growth in the first quarter of 2011. North America is witnessing a significant drop in gas drilling due to weak gas prices, and gas drilling activity has fallen to the lowest level since 1995, as many operators switch their focus into the liquid shale plays.64 According to some analysts, the US natural gas rig count, which has been steady for about two years, is down 100 rigs in the past six months, and should continue to deteriorate over the next few years. Although the gas rig count is expected to continue to decline, onshore oil rig activity is poised to grow substantially. Deepwater drilling rig utilization is expected to continue to increase and analysts are closely watching Brazils plans to build new rigs; any delay would lead to an increase in demand for existing rigs and considerably tighten the deepwater rig market. Brazil is supposedly constructing 21 new rigs for use in its deepwater basins. Elsewhere, there is a trend post-Macondo (referring to the Macondo incident in the Gulf of Mexico), for deepwater operators to use newer, more technologically capable rigs to lessen risk in response to pending regulatory changes, which could lead to a generally tighter market for deepwater rigs.

Saudi Arabia reportedly has plans to boost the countrys rig count this year and in 2012 to 118 rigs, from around the current 92. This month, Saudi Arabia increased its oil production to around 9 million b/d to help compensate for the disruption of supply from Libya. In theory, that leaves a 3.5-million b/d cushion to protect against any further supply outages on the global market. Saudi Arabia supposedly completed production expansion plans in 2009, which it said took its capacity to 12.5 million b/d and stated that the rig expansion is to maintain current production not to increase it.65 Observation The investment increase in the upstream means a good year to date for the oilfield services sector, with very buoyant activity in most regions. The slowdown in the US gas shale sector is being offset by a switch to drilling in the liquid plays. This shift means that, generally, activity in the unconventional sector along with the deepwater sector is driving good growth for oilfield services companies. Conventional oil and gas areas are also boosting oilfield services companies returns. While there has been considerable disruption to oilfield services company operations generally in the MENA region, the good news for these companies is that Saudi Arabia is reportedly planning to considerably boost the countrys rig count by nearly 30 percent. The market, however, is generally less impressed with this news, which is being seen either as a signal that Saudi Arabia is struggling to deliver the 12.5 million b/d of capacity it has claimed is in place or that Saudi Arabia thinks the market will need even more than its 3.5 million b/d of spare capacity. Oilfield services companies like Baker Hughes have stated that they expect drilling activity to pick up in both Saudi Arabia

and Iraq from the second half of 2011. This increase in activity is likely to be driven by the restart of delayed projects in Iraq and while Saudi Arabia looks for more services from the oilfield services sector as it continues to boost production to compensate for the fall in production from Libya. This movement generally signals a very positive outlook for the rest of 2011 for the oilfield services sector.66

Companies
Key trendMost oil companies generated higher revenues and profits on the back of increasing crude price and improving refining performance this quarter. The leading majors saw nearly $35 billion in adjusted profits across the group during the first three months of 2011, thanks to high international oil prices (averaging more than $95/barrel). However, all of them saw a decline in production volumes as many continued to divest noncore assets and dealt with some disruptions to their global production profiles.67 Observation The 2011 outlook appears promising as companies are expected to continue to generate higher revenues in the backdrop of high crude prices. There are concerns among analysts regarding falling production volumes; the oil majors seem to be focusing on value over volume as the effect of continued divestments and geopolitical unrest in the MENA region increases. The fall in production volumes is also being pressured by the fact that certain governments (keen to boost their budgets deficits) are starting to tax oil company profits at a higher rate. If oil prices start to decline, the fall in production will have a much sharper effect.

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In the United Kingdom this quarter, for example, the government announced an increase in supplementary tax on production from 20 percent to 32 percent for all North Sea assets,68 with other countries such as the United States considering alleviating tax concessions for oil companies (there is legislation pending in the US Senate that would cut tax breaks to the top oil producers by $21 billion over 10 years). The US government is indicating that the approximately $4 billion saved by closing the oil industry tax breaks could be invested in clean energy, which would help to ease US dependence on foreign oil.69 Most of the major oil companies, however, are unlikely to be too concerned with current market dynamics and government policies, as they have their focus on the longer term. Most of the companies are working their way through a significant rationalization of their portfolios as they focus on their core operations and future growth from larger-scale projects, rather than peripheral assets that they believe would be of more value to other companies. The fall in production volumes is not likely to last, and most companies are using the cash from divestments to supplement their capital expenditure for future growth. ConocoPhillips, for example, has announced that it will sell up to $10 billion of assets up to 2013, and will increase its production by 2 to 3 percent a year starting in 2013 after it completes its divestments. The companys CEO has stated that he expects a waterfall of cash to be fed by these divestments, with the company estimated to spend $13.5 billion on capital projects in 2011, increasing to $15 billion by 2015.70

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Endnotes
1 Japan nuclear plant operations (Chubu agrees to shut Hamaoka), May 9, 2011, Reuters News, via Factiva, 2011 Reuters Limited. 2 "Argentina, Uruguay ink LNG regasification pact, February 25, 2011, Dow Jones News Service, via Factiva, 2011 Dow Jones & Company, Inc. 3 Global gas rebounds, Cedigaz finds, May 11, 2011, World Gas Intelligence, Energy Intel 2011. 4 Tensions from the two-speed recovery unemployment, commodities and capital flows, International Monetary Fund, World Economic Outlook (WEO) April 2011, 2011 International Monetary Fund. 5 IEA Oil Market Report, May 12, 2011, OECD/IEA, http://omrpublic.iea.org/ currentissues/high.pdf. 6 Ibid. 7 Brent crude ends down $10 as commods battered, May 5, 2011, Reuters News, via Factiva, 2011 Reuters Limited. 8 Unprecedented rise in global natural gas production: Cedigaz, April 28, 2011, Agence France Presse, via Factiva, Agence France-Presse, 2011. 9 IEA Oil Market Report, OECD/IEA, May 12, 2011, http://omrpublic.iea.org/ currentissues/high.pdf. 10 US rig counts poised to flip as drillers seek oil, April 8, 2011, Dow Jones News Service, via Factiva, 2011 Dow Jones & Company, Inc. 11 Saudi plans to boost oil rigs by 28 percent, March 30, 2011, Misr News, via Factiva, 2011 Misr Information Services and Trading. 12 Tensions from the two-speed recovery unemployment, commodities and capital flows, International Monetary Fund, World Economic Outlook (WEO) April 2011, 2011 International Monetary Fund.
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13 Back to the drachma, May 31, 2011, The Wall Street Journal Europe, via Factiva 2011, Dow Jones & Company, Inc. 14 Goldman cuts China, Asia forecasts, May 24, 2011, The Wall Street Journal Online, via Factiva, 2011 Dow Jones & Company, Inc. 15 Japans economy begins weak recovery from quake, May 31, 2011, Agence France Presse, via Factiva, Agence France-Presse, 2011. 16 IEA Oil Market Report, May 12, 2011, OECD/IEA, http://omrpublic.iea. org/currentissues/high.pdf. 17 Anadarko Jubilee seen at peak output this summer, May 25, 2011, MarketWatch, via Factiva, 2011 MarketWatch, Inc. 18 EIA Short-term Energy Outlook, May 10, 2011, www.eia.gov/steo/contents.html. 19 IEA Oil Market Report, OECD/IEA, May 12, 2011, http://omrpublic.iea.org/ omrarchive/12may11full.pdf. 20 Saudi unlikely to lift oil output quickly, May 3, 2011, Agence France Presse, via Factiva, Agence France-Presse, 2011. 21 OPEC to consider up to 1.5 million b/d output hike, June 2, 2011, Reuters News, via Factiva, 2011 Reuters Limited. 22 IEA Oil Market Report, OECD/IEA, May 12, 2011, http://omrpublic.iea.org/ omrarchive/12may11full.pdf. 23 Ibid. 24 China sees tight fuel supply amid ongoing power shortage," May 30, 2011, Reuters News, via Factiva, 2011 Reuters Limited. 25 Higher food, oil prices weigh on US economy," May 26, 2011, Agence France Presse, via Factiva Agence France-Presse, 2011.

26 US, China pull oil market in opposite directions, May 26, 2011, The Wall Street Journal Online, via Factiva, 2011 Dow Jones & Company, Inc. 27 Source Brent crude ends down $10 as commods battered, May 5, 2011, Reuters News, via Factiva, 2011 Reuters Limited. 28 Crude extends gains, focus on US oil industry data, June 1, 2011, Reuters News, via Factiva, 2011 Reuters Limited. 29 OPEC considers hike in oil output target, June 2, 2011, Reuters News, via Factiva, 2011 Reuters Limited. 30 Malaysia Min: will review fuel subsidy if crude oil tops $110/barrel, May 26, 2011, via Factiva, 2011 Dow Jones & Company, Inc. 31 Big banks sway over oil markets, May 26, 2011, The Wall Street Journal Online, via Factiva, 2011 Dow Jones & Company, Inc. 32 Gas Outlook, May 16, 2011, The Economist Intelligence Unit, via Factiva, 2011 The Economist Intelligence Unit Ltd. 33 Unprecedented rise in global natural gas production: Cedigaz, April 28, 2011, Agence France Presse, via Factiva, Agence France-Presse, 2011. 34 Gazprom to accelerate production boost, June 2, 2011, The Wall Street Journal Europe, via Factiva, 2011, Dow Jones & Company, Inc. 35 Ibid. 36 Ibid. 37 Gas increasingly edging out coal as major generation source: FERC, April 29, 2011, Inside FERCs Gas Market Report, via Factiva, 2011 McGraw-Hill, Inc. 38 Gas Outlook, May 16, 2011, The Economist Intelligence Unit, via Factiva, 2011 The Economist Intelligence Unit Ltd.

39 Gas Outlook, May 16, 2011, The Economist Intelligence Unit, via Factiva, 2011 The Economist Intelligence Unit Ltd. 40 Gas Outlook, May 16, 2011, The Economist Intelligence Unit, via Factiva, 2011 The Economist Intelligence Unit Ltd. 41 Germany reverses on nuclear power; all plants will shut down by 2022 as Berlin hunts for other energy sources, May 31, 2011, International Herald Tribune, via Factiva, 2011 The New York Times Company. 42 Gas Outlook, May 16, 2011, The Economist Intelligence Unit, via Factiva, 2011 The Economist Intelligence Unit Ltd. 43 Global gas glut drying up fast BoA Merrill," June 1, 2011, Reuters News, via Factiva, 2011 Reuters Limited. 44 Japan debates electricity reform but power companies opposed Kyodo, June 2, 2011, Kyodo News, via Factiva, 2011 Kyodo News. 45 Excelerate confirms details of second liquefied natural gas facility in Argentina, September 20, 2010, Dow Jones News Service, via Factiva, 2010 Dow Jones & Company, Inc. 46 Argentina, Uruguay ink LNG regasification pact, February 25, 2011, Dow Jones News Service, via Factiva, 2011 Dow Jones & Company, Inc. 47 EIA Short-term Energy Outlook, May 10, 2011, www.eia.gov/emeu/steo/pub. 48 "Asian LNG prices hold steady ahead of summer, May 6, 2011, Reuters News, via Factiva, 2011 Reuters Limited. 49 "Japan March nuclear run rate at 28-month low after quake, April 15, 2011, Reuters News, via Factiva, 2011 Reuters Limited.

50 New technology prompts shale gas boom, keeps LNG prices stable, May 30, 2011, Nikkei Weekly, via Factiva, 2011 Nihon Keizai Shimbun, Inc. 51 IEA Oil Market Report, OECD/IEA, May 12, 2011, http://omrpublic.iea.org/ currentissues/high.pdf. 52 Ibid. 53 Japans JX sees June crude refining down 11 pct year-on-year, May 31, 2011, Reuters News, via Factiva, 2011 Reuters Limited. 54 Consultancy KBC predicts global refining margins under pressure through 2015, May 6, 2011, Hydrocarbon Processing, Hydrocarbon Processing Inc. 55 Asia forces Shells hand on refinery, April 13, 2011, The Age, via Factiva, 2011 Copyright John Fairfax Holdings Limited. 56 Total deal positive For Novatek, March 3, 2011, Dow Jones International News, via Factiva, 2011 Dow Jones & Company, Inc. 57 BP: Rosneft deal is dead, June 9, 2011, The Wall Street Journal Europe, via Factiva, 2011 Dow Jones & Company, Inc. 58 Chinas biggest overseas investments since 2000, February 9, 2011, Reuters News, via Factiva, 2011 Reuters Limited. 59 PetroChina to invest in Canada gas project, February 11, 2011, The Wall Street Journal Asia, via Factiva, 2011 Dow Jones & Company, Inc. 60 China plans 100 billion oil spending spree, January 6, 2011, The Daily Telegraph, via Factiva, 2011 Telegraph Group Limited, London. 61 Chesapeake, CNOOC strike second shale deal for $1.3 billion, January 31, 2011, Reuters News, via Factiva, 2011 Reuters Limited.

62 The Chinese hunt for oil intensifies, January 4, 2011, The Wall Street Journal Asia, via Factiva, 2011 Dow Jones & Company, Inc. 63 China's energy industry makes a bold push into developed markets," March 15, 2011, The New York Times, via Factiva, 2011 The New York Times Company. 64 US rig counts poised to flip as drillers seek oil, April 8, 2011, Dow Jones News Service, via Factiva, 2011 Dow Jones & Company, Inc. 65 Saudi plans to boost oil rigs by 28 percent, March 30, 2011, Misr News, via Factiva, 2011 Misr Information Services and Trading. 66 Baker Hughes sees Saudi, Iraq drilling boost, May 18, 2011, Reuters News, via Factiva, 2011 Reuters Limited. 67 Oil CEOs warn senators of downside to axing industry tax breaks," May 12, 2011, The Christian Science Monitor, via Factiva, 2011 Christian Science Monitor. 68 North Sea oil tax rise unlikely to be lasting blow, March 25, 2011, Reuters News, via Factiva, 2011 Reuters Limited. 69 Oil CEOs warn senators of downside to axing industry tax breaks, May 12, 2011, The Christian Science Monitor, via Factiva, 2011 Christian Science Monitor. 70 ConocoPhillips cash flows to buybacks, capital projects, March 23, 2011, MarketWatch, via Factiva, 2011 MarketWatch, Inc.

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