Memo January 5, 2009

Market Intelligence Service

Gulf Energy Market Dynamics: January 2009

While Saudi Arabia continued to ramp down production, Saudi Aramco formula prices were adjusted
following their usual procedures that led to large increases to North America, but a more mixed pattern to
Europe and the Far East. Turning to a market outlook if there were any doubts that the Gulf states were
immune to the global economic slowdown, those doubts have now been dispelled. While the states of the
GCC will be more capable of financing budget or current account deficits brought about by lower oil prices,
the tightening of global credit is still likely to exert some slowing on development projects in the region. Key
structural elements undergirding support should keep aggregate growth in demand in the region around 200
mb/d in 2009. But with the dissipation of some temporary factors that led to nearly 400 mb/d in demand
growth in 2008, year-on-year comparisons could suggest an even greater impact on regional markets from
the slowing economy than a closer examination of the market dynamics would otherwise suggest.

Saudi Formula Prices

Saudi Aramco adjusted its formula prices for February loadings following its usual methodologies while at the
same time continuing to make cuts to customer allocations in order to meet the latest OPEC production targets.
Compared to the July high point when production peaked at 9.7 mmb/d, December output is preliminary
estimated at 8.25 mmb/d following November’s 8.45 mmb/d. Saudi Arabia’s target output is 8.0 mmb/d.

The most substantial increase was to North America where key grade Arab Medium was increased by $3.55/b
to WTI less $4.20/b off of strongly improved Mars US Gulf prices in the latter part of December compared to
November. Much of this strength came from Gulf Coast markets somewhat delinking from the very depressed
front month WTI Cushing market although improved fuel oil prices probably played some role as well. In Asia,
Arab Light was increased by $0.40/b to the average of Oman and Dubai less $0.45/b presumably reflecting
some improvement in marker grade time structure as Gulf OPEC members reduce output and perhaps some
refinery value gain for Arab Light. For Europe, Arab Light followed moves in Ural prices with Northwest Europe
moving up by $0.20/b to Bwave less $5.45/b while Mediterranean Arab Light prices were left unchanged.

Taking a cue from stronger fuel prices, Arab heavy and medium grades in all enclaves saw larger price
increases than the lighter grades whose values suffered from underperforming light product prices. Fuel oil
has gained strength from cold weather in the US and Europe, a step up in Chinese buying in December, and
from lower global crude runs that has reduced supply. Although naphtha cracks in the Far East have improved,
ASL prices were held constant, but based on current trends we could see an increase in next month’s pricing.

From 10% to 5% Growth

For much of this decade, regional governments in the Gulf have used higher oil revenues to finance an
unprecedented boom in energy-related and energy-intensive industries. Although this development has also
seen the emergence of the Middle East as a key demand center—and a strong support of oil’s price rise over
this same period—it has also been expected to be largely invulnerable to the financial crisis now engulfing
industrialized and emerging market economies alike. To a certain extent, the economies of the GCC are likely
to be in a good position to weather the financial storm: although state budgets will suffer from a precipitous
drop in oil receipts, prudent management of the economy has allowed these states to both pay down debt and
amass substantial reserves. Although fiscal or current account deficits could undermine somewhat the investor
confidence that has been a crucial element of this economic boom, any such shortfalls could be easily
financeable, either through the issuance of new debt or the drawing down of reserves. (The situation in Iran is

Strategic Advisors in Global Energy | www.pfcenergy.com | m&cinfo@pfcenergy.com

Bahrain (973) 1758-0775 l Houston (1 713) 622-4447 l Kuala Lumpur (60 3) 2172-3400 l Paris (33 1) 4770-2900 l Washington DC (1 202) 872-1199
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MIS

far more serious, where profligate spending by President Mahmoud Ahmadinejad has seen the Islamic
Republic accumulate reserves at half of the rate of the GCC, and already by last year worrying signs of capital
flight from Iran had begun to be seen).

Perhaps more worryingly for the GCC, however, is increasing signs that international finance—a key element
supporting the boom—is not likely to re-emerge soon. Although regional governments have already intervened
more directly in local credit markets by safeguarding deposits and lowering key lending rates, the pace of
developments has already begun to slow and could lead, further delays and re-assessments—and even the
potential cancellation of the most ambitious projects. Combined with the easing of several temporary factors in
2008 that led to robust growth in aggregate demand for the region of 0.4 mmb/d (10%), the rate of growth
should ease by half in 2009, netting an increase of 0.2 mmb/d.

Among these temporary factors, a shortage of natural gas prompted a significant increase in fuel oil use in
Saudi Arabia, Iran and Kuwait, while Iran’s gasoline market regained much of the ground lost in the months
following the introduction of the rationing scheme in mid-2007. While decreased OPEC output could once
again pressure the availability of associated gas (and thus provide another fillip to fuel oil consumption), the
bulk of demand growth across the region came from diesel, where industrial and commercial projects as well as
the property boom translated into 120 mb/d demand growth, or 30% of total product demand growth. While not
achieving last year’s growth rates, a substantial existing project base and key government developments will
continue to underpin demand increases which PFC Energy estimates in the range of around 70-80 mb/d for
2009. The key downside risk to this forecast could take place towards the second half of the year if sufficient
liquidity to provide the necessary momentum in the industrial and property sectors does not re-enter markets.
On the flip side, an easing of credit or direct government funding of some of the largest projects could set plans
back on track, providing the impetus for higher rates of growth for diesel consumption.

The region’s aviation industry is expected to fare comparatively well throughout 2009, having established a core
and growing base of customers in their higher margin long-haul routes, helped along too by lower jet fuel prices
and newer more efficient aircrafts. While jet fuel markets remain fairly small as a portion of total oil consumption
mix, a lack of hydro-cracking capacity and continued push to maximize the diesel cut from the middle distillates
will likely result in Iran requiring sporadic imports, while the Arab Gulf states will cut exports marginally. PFC
Energy expects total demand growth of 18
mb/d down from 26 mb/d in 2008, with the
UAE, Qatar and Iran making up the bulk of
the increase (regional exports should drop
by approximately 20 mb/d).

Strong demand growth for gasoline partly

reflects heavily subsidized markets but also
steep growth in consumer finance, which
saw car markets boom in recent years.
While PFC Energy sees a demand
slowdown in the Gulf’s smaller countries, the
relative sizes of those markets will net
insignificant changes in regional balances.

There is little to suggest that gasoline demand in Iran—the Gulf’s largest market—should slow materially, as its
market is insulated from international prices and a large share of cars are manufactured domestically (making
them accessible to the middle and lower income households). In fact with oil prices now hovering around 2004
levels, energy subsidy pressures on the government should temporarily abate, potentially postponing a much
needed long-term solution on pricing issues. We expect strong demand growth to continue at around 20 mb/d.
Strategic Advisors in Global Energy | www.pfcenergy.com | m&cinfo@pfcenergy.com
Bahrain (973) 1758-0775 l Houston (1 713) 622-4447 l Kuala Lumpur (60 3) 2172-3400 l Paris (33 1) 4770-2900 l Washington DC (1 202) 872-1199
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While this represents a significant slowing from the 30 mb/d increase seen in 2008, pent-up demand from the
un-winding of Tehran’s unsuccessful rationing scheme helped elevate those levels.

A large population and subsidized gasoline prices (last revised in 2008) in Saudi Arabia, supports expectations
for consumption growth of 15 mb/d this year, down from 23 mb/d in 2008. A principal factor behind the
slowdown in an expected flattening of economic growth in the Kingdom to just 1.5% in 2009 from 4.2% in 2008.

Strategic Advisors in Global Energy | www.pfcenergy.com | m&cinfo@pfcenergy.com

Bahrain (973) 1758-0775 l Houston (1 713) 622-4447 l Kuala Lumpur (60 3) 2172-3400 l Paris (33 1) 4770-2900 l Washington DC (1 202) 872-1199
© PFC Energy, Inc. | License restrictions apply. Distribution to third parties requires prior written consent from PFC Energy
 Memo January 5, 2009

Market Intelligence Service

SUPPLY-DEMAND BALANCE TABLE

Strategic Advisors in Global Energy | www.pfcenergy.com | m&cinfo@pfcenergy.com

Bahrain (973) 1758-0775 l Houston (1 713) 622-4447 l Kuala Lumpur (60 3) 2172-3400 l Paris (33 1) 4770-2900 l Washington DC (1 202) 872-1199
© PFC Energy, Inc. | License restrictions apply. Distribution to third parties requires prior written consent from PFC Energy
 Memo І Page 5
MIS

SUPPLY-DEMAND BALANCE TABLES

Strategic Advisors in Global Energy | www.pfcenergy.com | m&cinfo@pfcenergy.com

Bahrain (973) 1758-0775 l Houston (1 713) 622-4447 l Kuala Lumpur (60 3) 2172-3400 l Paris (33 1) 4770-2900 l Washington DC (1 202) 872-1199
© PFC Energy, Inc. | License restrictions apply. Distribution to third parties requires prior written consent from PFC Energy