Charles R. Weber Company Tanker Report December 2010

Contents

• Executive Summary • The Year in Summary 2010 • The Shipping Market - Chart Wall - Tonmile Demand Decelerator – How changes to

the geographical distribution of Chinese and US crude oil imports have dented the fortunes of the tanker market

• ‘Great Recession’ – US Unilaterally Extends Stimulus Phase - World Economic Action – G20 – Passive Aggressive

• The Outlook for 2011 - Broad Brush Background – The big themes - Crunch postponed - On course for continued slow recovery from recession, but still to feel impact of austerity - Peak Oil – Environmental Cost of Oil Exploration Threatens New Cap for Oil Supply

• Potential Drivers for Tanker Market in 2011 – China - Monitoring the Health of the World’s Second Largest Economy - 2010s to be India’s Decade?

• Tanker Market Outlook for 2011 - Tanker Supply Prospects - Slippage Update - Freight Market Scenarios

• Calendar of Events 2011 • Future Vision – Shipping - US Crude Oil Imports – After the BP Oil Spill - Oil Industry • Tanker Companies - Tanker Shares Stuck in the Slow Lane -Analysis of 3Q10 Listed

Tanker Company Results

Appendices

Chronology of Oil Market Events June-December 2010 – and how the oil price was influenced | The Role of Speculators in the Futures Markets | New Crude Oil Production Capacity Coming on Stream | Exploration and Development | Refinery Projects | What a Democratic Presidency Means for US Energy Policy | Oil Industry Rationalisation | Shipping News | IMO Environment Issues

Charles Weber Tanker Report Charles R. Weber Company Inc. Tanker Report is published four times a year. It reviews important topics within the tanker shipping industry and tanker sectors that are of particular interest. It focuses on changes in tanker trading patterns and changes in fleet supply and demand. Sources CRW Weber Research, International Energy Agency, Energy Information Agency, Lloyds Maritime Information Unit, Baltic Exchange, Global Trade Information Services, OPEC.

Editorial Board Johnny M. Kulukundis Director of Research

George P. Los Senior Tanker Markets Analyst

Contact Details

Johnny M. Kulukundis / George P. Los

Charles R. Weber Company Inc. Greenwich Office Park One

Greenwich, Connecticut, 06831, USA Voice:+1 203 629 2300

E-mail:research@crweber.com

Disclaimer Whilst every care has been taken in the production of this study, no liability can be accepted for any loss incurred in any

way whatsoever by any person who may seek to rely on the information

contained herein. The information in this report may not be reproduced

without he express written permission of the Charles R. Weber Company, Inc.

Copyright

© 2011 Charles R. Weber Company, Inc.

The Charles R. Weber Tanker Report The aim of the Weber Tanker Report is to provide participants in the tanker shipping industry with an overview into the latest developments in the tanker market and the oil industry that it serves, and also to shine a spotlight on the future prospects for these two markets. Crude Oil Market Subjects that are regularly covered are as follows:

• Crude oil supply/demand balances historical and forecast

• Crude oil prices • OPEC announcements and quota changes • US and global crude oil import/export trade

statistics • Crude oil and product stocks • Upstream activity and how developments in the

E & P sector will affect tanker shipping • Refinery developments and scheduled

developments • Monitor “Peak Oil” Debate • Monitor Delivery Schedule and Investment plans

for new crude oil capacity Tanker Shipping Market Subjects that are regularly covered are as follows:

• Tanker earnings trends historical and forecast • Tanker spot fixtures • Tanker investor activity in terms of new orders,

secondhand sales and scrapping • Tanker fleet supply changes historical and

forecast • Tanker fleet demand forecasts – taking into

account the impact of tonmiles • Listed tanker shipping company results and

share performance This publication also tries to illuminate the differences between developments in the various tanker sectors during the most recent period. It also attempts to deliver a snapshot of tanker business for participants to better understand the forces at work within the tanker shipping industry. We welcome our reader’s thoughts and opinions and would be very happy to discuss points raised in this report with you. Given the speed of developments within the tanker market and those markets that support it we take a longer view when compiling this report. In order to offer daily market updates we offer a daily market update of all sectors of the tanker market on our website:www.crweber.com For further information please contact the Charles R. Weber Research Department at research@crweber.com John M. Kulukundis Director of Research

George P. Los Senior Tanker Markets Analyst

Charles R. Weber Company Inc. Telephone: +1 203 629 2300 Fax: +1 203 629 9101 E-Mail: chartering@crweber.com Website: www.crweber.com Mail & Visiting Address Charles R. Weber Company Inc. Greenwich Office Park One Greenwich, CT 06831, USA Tanker Chartering AOH James L. Ford: +1 203 550 0706 Michael J. Moore: +1 203 570 3116 Peter Howard-Johnson: +1 203 940 3936 Lawrence P. Jordan: +1 203 550 1695 George T. Eden: +1 203 550 1687 Daniel O'Donnell, Jr.: +1 203 550 1615 Christos Alexandrou: +1 203 550 1618 Keith D. Abbott: +1 203 550 1719 Basil G. Mavroleon: +1 203 213 6427 Halvor H. Kielland: +1 203 550 1612 Chris L. Aversano: +1 203 570 3871 Kevin Breen: +1 203 550 5552 Laura Mirabella: +1 203 979 8679 Denis O'Sullivan: +1 203 979 6215 Michael J. Sparks: +1 203 564 3324 Juan Raul Gomez: +1 203 554 9557 Philip M. Curran: +1 516 398 5059 Research AOH Johnny M. Kulukundis: +1 203 550 1720 George P. Los: +1 914 325 1652 Operations AOH Leonard C. Faucher, Jr.: +1 203 321 5454 Michael P. Alban: +1 914 659 1469 Gerry F. Helmcke: +1 203 979 6240 WeberSeas (Hellas) S.A. Telephone: +30 210 453 9010 Fax: +30 210 452 6100 E-Mail: chartering@WeberSeas.com Website: www.weberseas.com Mail & Visiting Address Ygias 1-3 & 2 Akti Themistokleous Str. Piraeus 18536 Greece Tanker Chartering AOH Basil G. Mavroleon: +30 6932 644 983 Dionysios G. Mitsotakis: +30 6944 720 337 Lefteris T. Mystriotis: +30 6946 762 010 George S. Karalis: +30 6948 753 725 Operations AOH Kimon E. Polikratis: +30 6932 300 590

The Tanker Market’s Battle to Join the Recovery

Executive Summary A review of 2010 Tanker Sport Earnings – Poor second half of the year In July 2010, VLCC spot earnings for Ras Tanura to Loop collapsed from $38,000pd to $17,000pd and continued to slide for the rest of the year. Average earnings are now at their lowest ebb for a decade.

Tanker supply deterioration – the rotten core 2010 was destined to be a great year for tanker supply as single hull tonnage exited the market. As the watershed year approach, its impact was already being down played as the orderbook(1) stacked up and single hull tonnage started to seep away early - finding alternative lives beyond the international markets

Weber Tanker REPORT December 2010

In July 2010, VLCC spot earnings for ME-NAmr collapsed from $38,000pd to $17,000pd and continued to slide for the rest of the year. Spot earnings are now at their lowest over the last ten years.

and bypassing the scrap yard. At the start of the year, it was hoped that fleet growth would be negligible. However, actual fleet growth for 2010 will be close to 4%, and this - on top of 8% growth in 2009 – makes uncomfortable reading. (1) The tanker orderbook is still equivalent to 27% of the trading fleet. Tanker demand conditions slowly improving – but foot lifted off the tonmile accelerator Tanker owners were caught out by the Great Recession. Optimistic ordering plans have been scuppered by falling demand in 2008-9. The impact of supply/demand moving out of line so decisively has now fed through to the freight market. Actually, having fallen by 1.3% in 2009, global crude oil demand(2) iincreased by a respectable 2.8% in 2010. Dispiriting indeed then tanker earnings should crash during the third quarter when demand peaked for the year at 88.5Mnbd, which was 3.5Mnbd higher than the average figure for 2009. (2) Crude oil demand ’07 86Mnbd, ’08 86Mnbd, ’09 85Mnbd, ‘10e 87.3Mnbd, ‘11e 88.5Mnbd – source IEA Tanker supply was a key reason why tanker rates were unable to respond to improved demand. However, weakening tonmile demand growth was another hugely significant factor. Frontline reported that during 3Q10 China shifted the balance of imports towards the Middle East to the detriment of the longer haul West African trades (see chart below left). In the Atlantic, there was a similar story with longer haul Middle Eastern trades to the US contracting while short haul Latin American trades expanded (see chart below right).

Bad news for tonmiles in the Pacific and the Atlantic

World economic recovery slowly underway The struggles of the tanker market are at least set against the back drop of a world economy that has been in gradual recovery throughout 2010. The progress out of the Great Recession has been chequered and uncertain with the Eurozone particularly under pressure. However, despite lagging behind surging developing countries, developed economies have maintained positive growth this year as the recovery appears to have taken root.

Prospects for 2011 Global Economy – Slow ahead With the European Central Bank indicating at the start of December that it will move to buy the bonds of exposed European countries, it seems that a degree of confidence has returned to international markets and dissipated talk of a double dip recession. However, the path out of recession will inevitably be slow. Many companies around the world are still focused on repairing their balance sheets rather than

maximising profits, and as long as this state of play continues investment for growth will be decidedly anaemic. The pressure on tanker owner balance sheets is illustrated by the chart (right), which shows how dramatically asset values dropped and how reluctant they have been to revive Crude Oil Demand – Like the global economy, slow ahead The IEA expects crude oil demand growth to moderate to 1.4% in 2011 reinforcing the idea that the global recovery from recession will be slow. The key concern for the tanker market is whether the foot will still be off the tonmile growth accelerator. Does the 2010 shift in crude oil trading patterns in both the Atlantic and the Pacific to shorter haul routes reflect temporary or structural change in the market. This situation is one to watch closely next year. The tanker market needs the Middle East to look west, West Africa to look east, and Latin America to look for markets further afield than the US. Meanwhile, persistently high crude oil stocks will act as another drag on demand on 2011. Tanker Market Tanker supply will once again be the weak link for the tanker market with around 50MnDwt of newbuildings (equivalent to more than 10% of the trading fleet) scheduled for delivery in 2011. Worse still the safety valve offered by the imminent demise of the single hull fleet will have gone, although the likelihood of continued weak rates should ensure that scrapping levels are relatively high.

Prospects further out – 2012 and beyond It is difficult to be too upbeat about the prospects of the tanker market over the next 12 months. However, there are reasons beyond 2011 to be more optimistic about the long term prospects for the tanker sector. 9 Reasons for optimism 1. China has a better version of capitalism – In recent weeks, China has been venting its anger at the US’s QE2 strategy fearing a wave of inward investment that could trigger asset bubbles. However, the Chinese government appears to have taken decisive action to tighten liquidity thus restraining any over exuberance in its efforts to maintain the Chinese rise and rise. The Chinese government does not have iron control of the economy, but it has enough control of connective tissue to keep speculators in their place. It remains to be seen, as the Chinese economy evolves, whether it has the same control over the general population. 2. Green movement off balance since Copenhagen – We all want a cleaner world but the tanker industry requires an orderly transition to the post peak oil world. The loss of momentum for the green movement following the failure to obtain a global consensus at Copenhagen at the end of 2009, reinforced by questions about the integrity of some leading climate scientists, meant that the recent Cancun climate summit has been little more than a side show. It seems the advent of alternative energy solutions is destined to be adhoc and commercially driven. 3. US Likely to become more dependent on crude oil imports as a result of BP spill – it may be that the rise in US crude oil imports following the BP oil spill – caused in part by the suspension in offshore exploratory drilling – will continue if drilling requirements make exploration more difficult in the future and if the outer continental shelf remains off limits. 4. Reduced tanker deliveries – Scheduled tanker deliveries will fall to 36MnDwt in 2012 – the lowest level since 2008 5. Wild card event overdue – No one wants disaster or war, but such events often work to the benefit of the tanker market in the event of temporary trade dislocation. A wild card event is always just around the corner. 6. India has the potential to grow faster than China over the next decade – India is investing significantly in its port infrastructure and this will provide a huge boost to trade expansion. However, the

Indian industrial machine has so far proved much less cohesive than the Chinese version and its seems that delays and setbacks can be expected. 7. Longer haul product trades on the cards – Clean tanker owners have for some time seen better times ahead due to ongoing structural changes in the refining industry, which will mean refineries are concentrated in the Middle East and Asia and open up longer haul trading opportunities to western markets – the classic tonmile accelerator. 8. Reduced tanker ordering – Tanker ordering is up to 26MnDwt ytd in 2010 from just 16MnDwt in 2009. However, ordering remains relatively low – and certainly low compared with 2006 when 80MnDwt was ordered. 9. The World Cup – Perhaps not a profound reason to be optimistic, but the next three WCs, in Brazil, Russia and Qatar respectively will promote world peace and boost globalisation.

Tanker Rates/Prices

After a desperately poor year in 2009 – 2010 freight rates have not been much better. Indeed, higher operating costs have contributed to earnings falling below 2009 levels during the fourth quarter.

Clean rates have also disappointed in 2010, although the 4Q seasonal upturn has been slightly more robust than for the dirty sector.

The erosion of newbuilding prices was arrested in 2Q10 following their dramatic slide in 2009. There have even been signs of price

recovery taking hold from mid year. The 2009 fall in secondhand prices was even more dramatic than for the newbuild sector, and prices are coming under pressure again with transaction volumes off towards the end of 2010.

It had been thought that newbuild prices would continue to remain subdued (despite rising steel prices) as a result of the significant numbers of cancellations because yards couldn’t discount cancelled berths without having to deal with owners on their orderbooks also looking for discounts on existing orders. However, the phase of cancellations has now passed and it seems lack of newbuilding demand may be the primary factor depressing prices (see chart below).

Scrap prices have done a better job at keeping up with steel prices with the unexpectedly low number of scrap candidates helping to support the market.

Tanker Fleet

Tanker supply has proved to be the factor weighing most heavily on this sector in 2010. Leading up to 2010, the year was hailed as the saviour for tanker supply. It was thought that the 2010 drop-dead date for single hull tankers would expunge the impact of any ordering excess and set the sector on the way to a new era of profitability. By the start of the year, hopes had moderated to an expectation of flat fleet growth in 2010. However, this expectation has also been dashed with fleet growth reaching 4.2% by the end of November. This represents very significant growth, albeit, albeit much lower than the rate recorded in 2009 (8.9%)

Scrapping had looked promising at the start of the year with almost 6MnDwt scrapped in 1Q10, but scrapping number s declined significantly thereafter (12MnDwt scrapped ytd). Delivery slippage was a hot topic in 2009 but did prove to be a factor in 2010 and deliveries overwhelmed removals in from 2Q10.

Dr Martin Stopford got it right when he played down the significance of single hull scrapping. He pointed out that the single hull fleet was actually “something of a mirage” and phase out could ultimately be a “damp squib”. He argued that single hulls have not been appearing in the spot fixture market in significant numbers for some time (1996 5000 fixtures for SH >=60,000Dwt, but 2009 just 425 fixtures = average 2.5 per vessel). There are still 25MnDwt of single hull tankers still classified as trading as at November 2010. It can be assumed that these vessels are employed outside the mainstream international trades.

Investor Activity We commented in our previous report that tanker investors would adopt a wait and see approach because of (1) the uncertain recovery from the Great Recession, and (2) the asset value crash, which had put many shipowner balance sheets underwater. Today the global economic recovery seems to have gained some traction, but most commentators expect this recovery to be very slow indeed. However, tanker owners are not in a position to take advantage of the modest improvement in market conditions, and are still in wait and see mode as shown by the relatively low volume of monthly orders in 2010. Both earnings and asset values remain depressed and owners remain focused on repairing their balance sheets. Shipowners have been further encouraged to keep their heads down by analysts urging business leaders to prepare for future extreme shocks generated perhaps by the current currency wars, or perhaps more likely from commodity price surges which force developing countries to revalue their currency.

2010 - Chart Wall

There were some signs of life in 2010 with tanker secondhand sales surging in May - perhaps in response to news of high scrapping in 1Q10, but activity has petered out as the year has worn on.

The good news supply-side story that has been running for more than two years continues to run. The scarcity of ordering means that owners have been able to get used to the phenomenon of a contracting orderbook (down to 118MnDwt in November from 136MnDwt at the start of the year.

Crude Oil Demand Crude oil demand for 3Q10 set a new record beating the previous highest in 4Q07. Having contracted

by 1.3% in 2009 and 0.4% in 2008, the IEA expects demand to grow 2.8% in 2010 and that momentum will be maintained in 2011 (+1.4%).

Despite the positive news, crude oil demand remains a drag for the tanker sector with demand having effectively stagnated for 3 years.

Crude Oil Production World crude oil production has been steadily rising since early 2009.

Saudi Arabia has given up its role of swing producer for the time being, maintaining stable, relatively low level output for the last two years. The lack of stress

on Saudi output has been an important factor in ensuring spare capacity has remained above a comfortable 5Mnbd during 2010.

Non-OPEC 2010 production has proved strong in a number of countries e.g. Russia, Other FSU countries and China.

In its November report the IEA commented on US production prospects in the light of the BP oil spill – “The moratorium on drilling new offshore wells, in place since shortly after the Macondo disaster in April, was lifted on 12 October, after authorities had determined that new regulations and safety requirements have been sufficiently tightened. Some findings of the ongoing National Oil Spill Commission’s investigations

into causes of the incident are emerging, notably that there is lack of any evidence of cost savings being put above safety concerns. Still, it remains premature to draw any firm conclusions at this stage”.

Crude Oil Exploration World rig activity continued to recover in 2010 after falling back sharply in 1H09.

Mirroring the global picture and despite the impact of the BP oil spill, the US rig count has improved steadily through 2010 – although uncertainty remains about future OCS drilling and even the future shape of the US offshore drilling market in general.

Crude Oil Stocks

A significant concern for demand prospects in 2011 is that stock levels around the world remain high, despite falling consistently in line with normal seasonal patterns from April. The picture is particularly bleak in the US, where the seasonal stock run down didn’t materialise this year.

It was reported that VLCC floating storage was reduced from around 35 vessels in 2Q10 to just 5 vessels in 3Q10. Good news for reducing hidden storage, but bad news indeed for tanker supply.

Crude Oil Prices Crude oil prices have remained within a relatively narrow band throughout 2010. However, the volatility of the previous two years has not been forgotten and prices are once again edging up threatening the USD90Bbl level.

Most commentators do not believe that supply/demand fundamentals justify oil above USD90Bbl, but prices in the futures market point towards further upward pressure.

The World Gold Council reported that the demand for gold worldwide surged 36% in 2Q10, to 1,050-tons.

The Greek debt crisis, instability in Irish and Portuguese bonds, and expectations the Fed would unleash QE2 - flooding the world with a new tidal wave of freshly printed US-dollars, has supported the historic bull-run.

China Crude Oil Imports China’s crude oil imports are running well ahead of 2009 levels. However, changes in the sourcing of its crude oil had a negative impact of tanker demand in 3Q10. Frontline highlighted the change, reporting that during 3Q10 China shifted the balance of imports towards the Middle East to the detriment of the longer haul West African trades.

Chinese GDP grew by almost 12% in 1Q10 and despite slowing through the remainder of the year (2Q10 10.3%, 3Q10 9.6%), it continues to make a pivotal contribution to sustaining the global recovery from the Great Recession. However, international tension surrounding trade have been rising thorough the year particularly between China and the US. China has been angered in recent weeks by the US decision to revisit its policy of quantitative easing

(QE2). It believes QE2 has the potential to unleash an unwanted wave of fresh capital that could build asset spikes. In reality, the US strategy has exposed faults within Chinese economy – itself built in recent months of stimulus spending – such as (1) existing problems of excess liquidity, and (2) structural inflation. Towards the end of November, the Chinese government took decisive action to reign in the twin problems of excess liquidity and rising inflation. It will take several weeks before it becomes clear whether these measures have proved to be effective.

The Year in Summary 2010

‘Great Recession’ – US Unilaterally Extends Stimulus Phase The chart (below) shows the skeleton of ‘news’ events within the financial system that precipitated the current recession, and the key events so far on the long road back to global economic health. It also shows the sometimes contrary path of tanker freight rates, which soared in the summer of 2008 apparently oblivious to the fermenting crisis (of course China crude and product imports were still strong), and then during the middle of 2009 remained depressed even though economic recovery appeared to be taking root as rapid fleet growth, high stock levels and spluttering demand acted as an anchor.

In April 2010, the IMF was able to report that the global economic recovery was proceeding better than expected – albeit at varying speeds with emerging Asia leading the recovery. However, by May 2010 the “PIIGS run” or sovereign debt crisis that started in January of this year in Southern Europe had claimed its first victim with Greece having to be bailed out by the EU and IMF. The Greek bailout and the political divisiveness that transpired putting together the bailout package precipitated a global return to risk aversion and the market endured an uncertain summer. It was feared that the sovereign debt crisis would bring down other countries, and several European countries felt compelled to announce austerity measures designed to address spiralling public debt e.g. Spain declared a €15Bn budget cut under its austerity plan, while Germany and the UK put forward plans to cut €10Bn and £6Bn respectively. Prospects started to look even more difficult for the Eurozone when Ireland first ran into trouble at the end of August and entered the firing line as the next European country to be brought low. At the start of September, the prospect of a double dip recession looked very real indeed. On Sep 8, Joseph Stiglitz, who won the Nobel Prize for Economics in 2001, said the use of deep spending cuts was a

Apr 8 2008: IMF says the effects are spreading from sub‐prime mortgage assets to other sectors, such as commercial property, consumer credit, and company debt.   Sep 15 2008: Lehman Brothers becomes the first major bank to collapse since the start of the credit crisis 

Oct 3 2008: The fightback begins ‐ The US House of Representatives passes a USD700bn (£394bn) government plan to rescue the US financial sector.  Nov 9 2008: China reacts – China reveals USD586Bn stimulus package. Second announcement (Mar 4, 2009)  beefing up stimulus package  

2nd and 3rd

Quarter 2009:  Tanker freight rates decouple due to structural problems with fleet supply.   4th Quarter 2009: Share prices maintain momentum –and tanker freight rates finally start to improve – even starting to close the gap on share price gains. 

Dec 2009: Copenhagen Climate Change Conference –fails to secure deal  May 2010 – Greek bailout: emerging in early 2010, the so called PIIGS run claimed its first victim in May when Greece was bailed out. Fears that the crisis could spread sapping confidence in the same way that subprime mortgage crisis did

Apr 2 2009: G20 London Summit – Depression off the Table – some discord about the balance between increased stimulus and new regulation – but present unified front that injects some much needed confidence not to mention USD1.1Tr of spending pledges. The follow up G20 summit in Pittsburg in Sept reinforced the collective approach 

4Q10 – QE2 makes impact: Nov 3 Fed pumps USD600Bn into the US economy in what FT.com describes as an all out bid to shore up economy. Success uncertain but US stats turning positive. Market shakes off continuing concerns about Eurozone (Irish Bailout) and Chinese inflation

"disaster" adding that Europe was heading towards more economic difficulties if politicians cut back spending rather than calm down the financial markets. On Sep 9 The OECD’s latest Interim Economic Assessment warned that the world economic recovery may be slowing faster than previously anticipated. It was always the case that transition from stimulus to austerity would be difficult to manage. However, the timing of the transition came about faster than expected and it appeared to be threatening to derail the global consensus about how to deal with the crisis. Perhaps most significantly, the Greek bail out so shocked Japan – the supposed role model for the new recovery - that it announced it was reconsidering its policy of spending public funds to extricate the country from its economic slump. Despite the apparently grim prognosis, the chart above shows that from September the WTI and BDTI have been climbing fairly steadily – albeit from very low levels. There are a number of reasons for the steady recovery in recent months. Perhaps the most important was that the US signaled its preparedness to inject another trance of liquidity through quantitative easing. On Nov 3, this intention became reality with Quantitative Easing 2 (QE2) which saw the Fed pump USD600Bn into the US economy in what FT.com describes as an all out bid to shore up the economy. Effectively, then the US has taken the unilateral decision to postpone the start of the austerity phase of the global recovery by extending the stimulus phase. This strategy was reinforced Dec 8 with President Barack Obama’s tentative deal to extend the Bush-era tax cuts at all income levels for two years. The deal surprised economists who didn’t expect all the cuts to be maintained. Goldman Sachs calculates, “In all, this proposal would add USD185Bn in stimulus in 2011 China railed that QE2 would lead to a surge of new inward investment into China which had the potential to accelerate growth to unsustainable levels by creating asset bubbles. It immediately announced a switch to a tighter fiscal policy to control liquidity levels and rein in inflation which has started to climb in part due to food price rises. It seems that by going it virtually alone in continuing stimulus, the US has allowed other countries including China to conclude their stimulus and begin the austerity phase. By adopting this strategy, the US may be considered to have taken a huge weight on its shoulders. So far the US strategy seems to be working. The recovery survived the Nov 12 G20 failure to agree concrete measures to tackle global imbalances – and was buoyed (Nov 5) by the first positive US employment news since May, and (Nov 22) by Ireland finally signing up to a bailout package worth up to Euro 90Bn. Further good news followed when the European Central Bank announced action to shore up confidence in the Eurozone by indicating an appetite to buy European government bonds. However, it remains to be seen if US actions are simply postponing an inevitable post stimulus hang over.

(a) Shipping indices as lead indicators of global activity – Crude oil is the world’s energy feedstock and so in theory should be an ideal lead indicator of economic activity. However, the case for using tanker rates for this purpose is actually quite weak because of the attempts by OPEC to manipulate oil prices by micro managing the amount of crude oil it produces. The Baltic Dry Index is often considered a better lead indicator of economic activity because the absence of pervasive cartel activities and because unlike stock and commodity markets it is devoid of speculators. It is also considered a good lead indicator of where end prices are heading. Of course, the BDI (and any other shipping indicator) works best as a lead indicator of economic activity when vessel supply is consistent – which it rarely, if ever, is. It is also worth noting that shipping rates are of no use whatsoever in spotting financial tsunamis. The chart (right) compares the BDI and BDTI and Dow Jones indices. It is interesting to note that dry bulk rates fell like a stone from mid-year 2008 – much faster than the BDTI and Dow Jones. This reflected in part the dry bulk market’s sensitivity to the rise in counter party risk caused by the profound loss of confidence in the global financial system sometime after the Beijing Olympics in August and the demise of Lehman Bros in September. The major cargo owners in the tanker sector are leading international oil companies with very low perceived risk of default. During 2H08, therefore, the tanker sector may have been in some respects as a more accurate indicator of global economic activity – although the brief rally in tanker rates at the end of the 2008 may be seen to reflect the intrusion of market sentiment over fundamentals. From the start of 2009, the three indices have performed very differently. It would seem that the Dow Jones has provided a good indication of market sentiment throughout the year (gradually building in strength after a decidedly sticky start).

Notwithstanding a mid-year revival, the BDTI has charted a fairly miserable course through 2009 and does not reflect at all the more upbeat mood of global markets or indeed the slightly more optimistic crude oil demand forecasts. This index appears to be dominated by industry specific issues related to excess fleet supply and so it can probably be considered to be an unreliable lead indicator at the moment. The BDI is perhaps the most troubling of the indices in terms of providing a clue to the direction of world economic growth as it seemed to be functioning quite well in this role until mid-year. During 1Q09, the BDI started to revive before the Dow Jones and continued to improve during 2Q09. The recovery in the BDI’s fortunes during 1H09 ties in with the improved fortunes for the world economy and perhaps justifies the BDI’s lead indicator status. However, if the BDI is indeed a good lead indicator then what are we to make of the decline of the index during 3Q09. Although it is by no means as depressed as the BDTI. Perhaps like the BDTI, the BDI is being overwhelmed by its own industry specific issues related to excess fleet supply (with deliveries set to more than double in 2010 to 113MnDwt from 50MnDwt in 2009), and can no longer be considered a reliable indicator of the direction of global economic growth.

Tonmile Demand Decelerator – How changes to the geographical distribution of Chinese and US crude oil imports have dented the fortunes of the tanker market

One of the key negative factors undermining tanker freight rates in 2010 was a shift to a reliance on shorter haul trades for both China and the United States. This factor meant that seaborne demand was effectively reduced as fewer ships were required than in the previous year to move the same volume of crude oil. Typically the tonmile factor has been a multiplier for seaborne demand, but in 2010 it was a decelerator. The fortunes of the tanker market in 2011 depend crucially on whether longer haul trades reassert themselves.

2010 has been a reasonably happy year for oil producers, with strong worldwide demand recovery - so why do so many tanker owners have long faces? The first point to make is that the demand story is not as good as it seems - The provisional figures for the year show a 2.8% increase in crude oil consumption on 2009. However, this headline figure masks the phenomenon of almost three lost years of demand growth – with demand contracting in both 2008 and 2009 and only recovering to match 2007 peak levels by mid 2010. However, while crude oil company earnings have started to recover boosted by reviving oil prices, the briefest glimpse at the latest rates for any tanker route in the world will hit you like a wet sponge. Earnings have been desperately poor this year, with a sharp decline since the summer dampening hopes of any substantial improvement in 2011. For example, a modern VLCC trading Ras Tanura-LOOP in October 2010 earned a mere USD2,384pd. Even in October 2008, with a global economy ravaged by the worldwide slump, the same ship on the same route earned USD61,255pd. From the owner’s point of view, this is a swing from a very substantial profit to a loss rendering the later voyage pointless. So why then has the tanker sector apparently become disconnected from fortunes of the oil industry. Some of the factors behind this separation stare us in the face. Caught up in the optimism of the middle of years of a very prosperous decade, tanker companies ordered new vessels, and it is very difficult for them to keep their expanded fleets fully occupied. Another depressing factor - in more ways than one – is the return to the market of vessels previously used by producers such as Iran for relatively long term offshore storage. Frontline estimated that 35 VLCCs returned to the market in 3Q10. In addition the more obvious problems of oversupply, a shift to shorter haul trades is the hidden factor undermining tanker earnings in 2010. The graphs on this page illustrate, while demand for oil remains strong, the structure of the transport market is changing markedly. If we look at China and the USA, which together encompass about a third of world crude consumption, a dramatic change in trading patterns can be observed – both have given preference to shorter haul trade routes in 2010(a).

Briefing Series

China, which accounts for nearly 10% of the world’s oil trade, increased its reliance on Middle Eastern (orange line) suppliers such as Saudi Arabia and Iran, at the expense of Nigeria and other West African sources (purple line). This is very clearly demonstrated in the chart right. Meanwhile the USA, which provides the word’s tanker fleets with nearly a quarter of their business appears to be reducing its dependence on the Middle East in favour of Latin American sources such as Columbia, Brazil, and even its ideologically opposed bête noir Venezuela (see chart next page). These trends, already apparent before the recession, have accelerated since – Middle Eastern imports to the USA dropped for five consecutive quarters from summer 2008, and supplies from West African to China collapsed in late 2010.

Why tonmiles are important - Any ship owners complacent enough to think that any supply route needs a vessel of some sort are ignoring the implications of basic geography. A VLCC plying between Bonny in Nigeria and Shanghai is facing a return trip of nearly 20,000 nautical miles. With an average speed of 14 and a half knots and a four-day turnaround, this will take 38 days – restricting the vessel to five trips a year at the absolute maximum. By contrast, the same tanker working between Ras Tanura and Shanghai - less than 6,000 nautical miles - could quite feasibly complete nine trips in a year. A similar comparison for North American imports is more difficult, as the VLCC is not the workhorse for US imports in the same way as it is for China imports. It is the case that a range of sub-Suezmax vessel types serves the short haul trades from Latin America while VLCCs serve the long haul trades which terminate at LOOP. Latin America routes are more likely to work to conventional onshore ports such as Philadelphia up the River Delaware. But a ship carrying crude from Covenas in Columbia to Philadelphia, a mere 1.873 nautical miles, will obviously be able to make many more journeys than a VLCC restricted to labouring more than 12,000 nautical miles round the Cape of Good Hope to the Persian Gulf. (a)The reasons for this are too complex to analyse in a brief article – there are many different grades of crude oil, each with its own industrial uses, cost matrices, refining techniques, and environmental problems. Geopolitical and diplomatic factors also influence the increasingly complex world petrochemical market. But whatever the reasons, the trends are clear.

Date  Event  Location 

November 11‐12  Fifth G‐20 Summit  Seoul, South Korea 

November 2011  Sixth G‐20 Summit  Cannes, France 

2012  Seventh G‐20 Summit  Mexico 

World Economic Action – G20 – Passive Aggressive

In London, April 2009, the G20 was the institution that united the world in its efforts to fend off economic meltdown. However, this unity has been under increasing strain ever since. Now that the threat of a double dip recession has been averted, at least for the time being, G20 countries have begun to focus on narrow national interests above the interests of the global economy. It was clear that the emergence of the G20 was a watershed moment when the group of leading industrialized nations was forced to open the door to emerging economic powers. It seemed to presage the creation of a new world order. The G20 constituents are now engaged in a process of trying to find out exactly where they fit into the new pecking order.

The imperative to rebalance trade without escalating simmering currency wars were the tasks facing the fifth G20 summit in Seoul (Nov 11-12). The build up to the meeting was characterized by passive aggressive posturing between different overlapping interest groups and philosophies e.g. emerging v industrialized nations, net exporters v net importers etc.

In the end, the meeting was low key and ineffectual. Public unity was maintained but little of substance achieved. In the joint communiqué following the summit, the group asserted that, “Since we last met the global recovery continues to advance but downside risks remain”, and promised to do more to deliver “strong, sustainable and balanced growth” based on “strengthened collaborative and collective policy actions”. However, there was little concrete progress beyond a broad commitment to avoid competitive currency devaluations and to develop indicators to tackle trade imbalances. The meeting was more important in highlighting the power shift taking place within the global economic elite. The US came away without securing a cap on trade surpluses and deficits, and being forced to defend its QE2 stimulus policy against those that claimed it was a cynical ploy to devalue the dollar in order to boost US exports and hobble Chinese imports into the US. This defeat for President Obama comes on the back of failure at the G20 summit in Toronto in June to persuade other countries to join him in a new stimulus package. In Germany there was no crowing but the broadcaster, Deutsche Welle, reported that: "Merkel wins trade surplus duel with Obama at G20". There was also quiet satisfaction in China that it had been able to fend off, at least for now, the pressure on the Chinese yuan to appreciate. However, it is still too early to tell whether the Seoul summit marks a turning point in the balance of power between the China and the US. It is also too early to tell whether Obama will remain isolated on the world stage (like his predecessor George Bush – although for very different reasons).

(a) The first G20 leaders’ summit was held in Washington November 14-15, 2008

(b) The first G20 finance ministers’ and central bankers’summit was in 1999. The G20 was established in the wake of the 1997 Asian Financial Crisis, to bring together major advanced and emerging economies to stabilize the global financial market.

Pulse Series

The Outlook for 2011

Broad Brush Background Crunch postponed - On course for continued slow recovery from recession, but still to feel impact of austerity The chart below (see red line segments) shows how oil demand went backwards (x-axis) as a result of the first oil shock in 1973 and also as a result of the second oil shock in 1979 (oil price spikes shown on y-axis). Although in 2008 the oil price was more of a symptom of the malaise rather than a catalyst for recession, oil demand went into reverse again - with 2008/9 being the first consecutive years of contraction since 1982/3.

Following the first oil shock, demand contracted for two years before recovering strongly from 1976. The impact of the second oil shock was more severe with demand contracting for four years before slowly starting to recover from 1984. Despite continuing fears of a double dip recession, it is likely that the third shock has been consigned to history with 3Q10 exceeding the previous record for quarterly demand set in 2007. Demand is forecast to rise by 2.8% in 2010 and 1.6% in 2011 according to the IEA in its December Oil Market Report. The increased optimism about crude oil demand is reflected in a recent Barclays Capitol Commodities Research reports (Nov 22) which said, “Enough of a sequence of robust and optimistic global oil demand data has come in over an extended period that the oil market appears to us to be starting a process of adapting to some brighter conditions. In particular, there are signs of a better sense of OECD demand recovery complementing the strong growth in non-OECD oil demand, the follow-through of which has seen the rapid burning off in excess inventories. Pre-calamity blues are slowly on their way out, while the mood in the market is finally turning more extravagant. Persistent upward revision to oil demand expectations has drawn a picture something a bit more redolent of a tiger, with global oil demand growth set to breach 2Mnbd for only the second time in over 30 years and market conditions at their tightest in over 2 years. With the removal of the large barrels of floating inventory, the upside surprise in demand is being entirely reflected in the rapid erosion in onshore stocks. The inventory overhang in the OECD

outside the US has fallen well below the 5-year average, while the drawdown in US inventories, although slow in commencing, is flourishing with full vigor.” The latest economic metrics are as positive as at any time since the recession with the US now showing signs that it is ready to join the Asia lead recovery(b). However, despite growing optimism, there are two major factors that cloud the future both emanating from or reinforced by the US QE2 policy: (1) The expected hang-over from the end of stimulus spending has been potentially put off by the US strategy to extend its stimulus phase through QE2, and (2) The collective approach to the crisis – symbolised by the rise of the G20 – no longer working even before QE2, but reinforced by the decision of the US to go it alone by embarking on stimulus when most other countries were electing to start the austerity phase. Crunch postponed - As discussed in chapter 2, it had been expected for some time that 2011 would be a year of austerity following the stimulus spending splurge during 2009/10. It was recognized that this phase would be a significant challenge with the hope that consumer and business spending would be ready to take over from government stimulus spending. Although many governments have already initiated austerity measures, by embarking on a USD600Bn stimulus quantitative easing programme the US has effectively postponed the global austerity phase and potentially also postponed the hang-over from stimulus. The US is signaling that it does not believe we can afford austerity. It believes consumer and business confidence – at least in developed economies – is not ready to take the strain. This position is backed up by a mid 2010 survey of business confidence undertaken by IPSOS-Mori, which showed that only 36% of the US and 43% of the European business elite viewed the economic climate as positive - 70% of the corresponding class in Asia was optimistic about the global economy(c).

Collective approach to crisis in tatters with currency wars a potential consequence – When the US announced its decision to embark on QE2 at the start of November, China complained bitterly at the possible negative consequences on its own economy. It feared a tidal wave of new inward investment and immediately signaled a switch to a tighter monetary policy to control the amount of liquidity in its economy and prevent inflation from rising out of control. The antagonism that QE2 generated opened up existing fault lines caused by the gradual emergence around the world of more and more protectionist measures. The Beijing Review (Nov 4) described a situation where protectionism could escalate into currency wars(d) – “The world economy is at a crossroad where all countries are trying to keep their currencies competitive to spur exports. Already, the scenario bears a striking resemblance to the currency war in the 1930s following the Great Depression—and that currency war only managed to push the world deeper into recession. A currency war, if breaks out now, is likely to play out the same way”. There is no doubt that the rediscovery of international unity would be a key ingredient to maintaining confidence in the recovery. When the recession first hit in September 2009, it was startling to see the high level of cooperation between governments. This unity has been credited with helping to stabilize markets and enable the slow recovery from recession to get underway from March 2009. The G20 became the symbol of the global collective and it is now widely perceived as the body tasked with keeping the upturn going. There will be several opportunities to re-establish a global consensus starting at the World Economic Forum in Davos in January. However, the next G20 meeting is not scheduled until November 2011. Despite the clouds on the horizon, the majority of commentators believe that the most likely outcome remains a gradual if not stuttering path to recovery. However, unless unity between governments is once again demonstrated then global economic confidence could very easily seep away and threaten a return to recession – and there remains a chance (albeit an outside chance) that crude oil demand could again go into reverse. (a) Recession history goes back a long way - to 1854 in fact - with 32 cycles in the US (averaging 17 months of contraction and 36 months of expansion). History and duration of recent recessions - 1929 to late 1930s, Great Depression, stock market crash, banking collapse in the United States sparks a global downturn. Durations: 43 months, 1937, second downturn of the Great Depression. Durations: 13 months, 1945, Duration: 8 months, 1948-1949, Duration: 11 months, 1953-1954, Post-Korean War Recession - The Recession of 1953 was a demand-driven recession due to poor government policies and high interest rates. Duration: 10 months, 1957-1958, Duration: 8 months, 1960-1961, Duration: 10 months, 1969-1970, Duration: 11 months, 1973-1975, Oil crisis, a quadrupling of oil prices by OPEC coupled with high government spending due to the Vietnam War leads to stagflation in the United States. Duration: 16 months, 1979-1980, 1979 energy crisis, the Iranian Revolution sharply increases the price of oil, 1981-1982, Duration: 16 months, 1982 and 1983, Early 1980s recession, caused by tight monetary policy in the U.S. to control inflation and

sharp correction to overproduction of the previous decade which had been masked by inflation, 1980 to 2000, Great Commodities Depression - general recession in commodity prices, 1990 to 1992, Early 1990s recession - collapse of junk bonds and a credit crunch in the United States leads to one quarter of US GDP decline, and therefore not an official recession, 1990 to 2003, Japanese recession -collapse of a real estate bubble and more fundamental problems halts Japan’s once astronomical growth, 1997, Asian financial crisis - a collapse of the Thai currency inflicts damage on many of the economies of Asia, 2001 to 2003, Early 2000s recession - the collapse of the Dot Com Bubble, September 11th attacks and accounting scandals contribute to a relatively mild contraction in the North American economy. Since the US GDP never actually declined in this period it is not considered an official recession. (b) IMF’s World Economic Outlook (October 2010) http://www.imf.org/external/pubs/ft/weo/2010/02/index.htm “Thus far, economic recovery is proceeding broadly as expected, but downside risks remain elevated. Most advanced economies and a few emerging economies still face large adjustments. Their recoveries are proceeding at a sluggish pace, and high unemployment poses major social challenges. By contrast, many emerging and developing economies are again seeing strong growth, because they did not experience major financial excesses just prior to the Great Recession Sustained, healthy recovery rests on two rebalancing acts: internal rebalancing, with a strengthening of private demand in advanced economies, allowing for fiscal consolidation; and external rebalancing, with an increase in net exports in deficit countries, such as the United States, and a decrease in net exports in surplus countries, notably emerging Asia”. (c) Asian confidence comes in part from a perception that debt fuelled western economies have been exposed and weakened by the financial crisis, and a realisation that this has created an opportunity to shake up the old order. Perhaps the time for Asia as a region to rise up has arrived. This view is certainly shared by Dominique Strauss-Kahn MD of the IMF, who argues that Asia has emerged as an economic power house as a result of the banking meltdown. (d) Speculation that the Fed would unleash QE2 triggered pre-emptive currency retaliation around the world. Central bankers in Brazil, China, Chile, Japan, Russia, South Korea, and Thailand, stepped up their interventions to weaken their own currencies to counteract the effect of a depreciating dollar that was set to weaken further. The most significant action was that taken by Japan, which intervened (Sep 16) to drive down the yen exchange rate by selling an estimated 2-trillion yen (USD23Bn). The first such intervention by Japan in more than six years was also the biggest ever one-day currency action, and breached a tacit agreement among the Group-of-Seven industrial powers to avoid unilateral currency interventions. Despite the massive size of the BoJ's injections of yen into the local banking system, it hasn't been able to turn the US-dollar's bearish tide against the yen. Currency traders correctly calculated that QE2 would overwhelm the Japanese pre-emptive strike.

Review of the IMF’s Half Yearly “World Economic Outlook” (October 2010) The IMF was content to report in its latest half yearly update that the “economic recovery is proceeding broadly as expected, but downside risks remain elevated”. However, its recipe for sustained, healthy recovery appears to gloss over the tension between key players within the G20. According to the IMF’s latest estimates global activity is forecast to expand by 4.8% in 2010 and 4.2% in 2011, broadly in line with earlier expectations, and downside risks continue to predominate. It projects that output of emerging and developing economies will expand at rates of 7.1% and 6.4%, respectively, in 2010 and 2011. In advanced economies, however, growth is projected at only 2.7% and 2.2% respectively, with some economies slowing noticeably during 2H10 and 1H11, followed by a reacceleration of activity. The IMF is concerned that the recovery is proceeding too slowly in developed economies and that this is elevating risks on the downside. “Growth in these economies reached only about 3½% during 1H10, a low rate considering that they are emerging from the deepest recession since WWII”. According to the IMF the recovery over the past year or so has been driven by inventory accumulation and fiscal stimulus. It points out that the first is coming to an end. The second is slowly being phased out. It also acknowledges a twin speed recovery with developed countries, weighed down by stubbornly high unemployment, lagging behind developing and emerging economies. The IMF argues that in order for the recovery to gain momentum a wide ranging and painful process of rebalancing is required for almost all economies. “The global recovery remains fragile, because strong policies to foster internal rebalancing of demand from public to private sources and external rebalancing from deficit to surplus economies are not yet in place”. Rebalancing in Developed Economies: “Most advanced economies and a few emerging economies still face major adjustments, including the need to strengthen household balance sheets, stabilize and subsequently reduce high public debt, and repair and reform their financial sectors. Monetary policy should stay highly supportive in most of the advanced economies and should be the first line of defence against any larger-than-projected weakening of activity as fiscal support diminishes. With policy rates already near zero in the large advanced economies, monetary policymakers may have to resort to further unconventional measures if private demand weakens unexpectedly as fiscal support wanes”. Rebalancing in Developing and Emerging Economies: “Although many emerging economies are seeing high growth again, they continue to rely significantly on demand from advanced economies. Emerging economies that relied heavily on demand from these economies will therefore have to rebalance growth further toward domestic sources to achieve growth rates similar to those before the crisis, helping the required external rebalancing. In economies with excessive external surpluses, which are mainly in emerging Asia, fiscal tightening should therefore take a backseat to monetary tightening and exchange rate flexibility. Removing distortions that drive high household or corporate saving rates and deter investment in non-tradables sectors would facilitate the rebalancing of growth to domestic sources. Such rebalancing will require further deregulation and reform of financial sectors and corporate governance, as well as stronger social safety nets in key Asian economies. In many other emerging economies, fiscal tightening can start immediately, because domestic demand recovery is already well under way or public debt is relatively high. In various emerging economies, rising inflation or high credit growth also signal a need for further monetary tightening”. The process of rebalancing described by the IMF in this way seems to indicate a beneficial outcome all round. However, supposed national self interest dominated the November G20 meeting in Seoul with countries adopting policies that pull in very different directions to each other. The Chinese reluctance to move towards exchange rate flexibility could be identified as the primary driver of the current round of ill feeling, although the US strategy of extending the stimulus phase through its QE2 policy has found almost no support, even in Europe where austerity is very much in vogue. The IMF remains positive about the recovery. “The probability of a sharp global slowdown, including stagnation or contraction in advanced economies, still appears low”. However, it seems that the IMF is glossing over the divisions in a conscious effort to avoid exacerbating tensions.

Peak Oil – Environmental Cost of Oil Exploration Threatens New Cap for Oil Supply Before the Deepwater Horizon oil spill the peak oil debate had switched from whether there was enough crude oil left to satisfy demand – to whether producers could get the oil out of the ground quickly enough to maintain sufficient spare capacity to avoid upward pressure being applied to the oil price. After the spill and the US moratorium on offshore drilling the discussion around peak oil was once again turned on its head. The new question was whether environmental concerns would ensure that inaccessible oil stayed in the ground and thus threaten the prospect of supply shortages and high oil prices. The following extracts show how the discussion has developed in the months since the spill. Nov 23 – Raymand James analysts dismiss Venezuela’s forecast production growth of 5Mnbd by 2015 and 6.5Mnbd by 2020 as fantasy. Like Barclays Capital they believe that Venezuela’s under achievement will contribute to further downward pressure on OPEC's already limited excess production capacity. They identify declining spare production capacity as a key element of their structurally bullish long-term stance on oil Nov 22 – Commenting on falling crude oil stocks around the world, Barclays Capital note that an “apparent sense of comfort” of plentiful spare OPEC production capacity “is slowly being challenged, with our own expectations pointing to a continued steady erosion of space capacity to around 4Mnbd by the end of next year, taking global capacity utilization back above the critical 95% level.” Nov 11 – Oliver Jakob questions IEA long term forecasts contained in its 2010 World Energy Outlook. “Either the IEA is very wrong on its price forecast or the market is very wrong in its current pricing of crude…. The IEA sees global oil demand in 2035 at 99 million b/d or 12 million b/d higher than in 2010; that would make an average increase of 500,000 b/d/year.” Jakob claims 2035 “is too far away to make any meaningful forecasts, but a IEA $99/bbl price target in 2020 makes a 13% price increase in 10 years or an average of 1.3%/year and an investment net loss as long as a contango is maintained. Nov 8 – While recovery from the crisis has been faster than previously expected, OPEC’s report into oil demand prospects over the next 20 years still said precrisis demand levels from 2007 were unlikely to be repeated again until 2011. By 2030, OPEC predicted that demand will reach 105.5Mnbd (led by Asia). OPEC does not appear to anticipate that supply will have a problem keeping up with demand. Nov 5 – Brazil’s National Petroleum Agency (ANP) said the country’s offshore Libra subsalt oil discovery could hold as much as 15BnBbls of oil—a figure 2.4 BnBbls greater than the country’s existing reserves. “The volume of recoverable oil belonging to the nation could vary from 3.7-15 BnBbls, with the most likely estimate being 7.9 BnBbls," ANP said, citing a study carried out by certification firm Gaffney, Cline & Associates. Oct 28 – Brazil announced the Libra field reserves (8-15BnBbls) will be even bigger than Tupi (5-8BnBbls). Oliver Jakob commented , “That would make Libra the largest oil discovery in the Americas since Cantarell in 1976 and will contribute to push peak oil a little further back,” Jun 21 - Nobuo Tanaka, executive director of the International Energy Agency in Paris, said global oil production may fall by 800,000-900,000 b/d by 2015 if other new projects in areas besides the US are delayed by 1-2 years. See previous articles about peak oil in Charles Weber Reports: ‘Peak Oil – The Dead Debate – Spare Capacity and Data Transparency the Issues of the Day’ – May 2010 ‘Peak Oil – The Rise of Iraq Pushes Back the Peak Oil Curve” – February 2010 ‘Peak Oil – Here We Go Again – Oil Shortages by the End of the Year’ – Sept 2009 ‘Peak Oil – Underinvestment to Hasten the End of the Age of Oil’ – May 2009 ‘The End of Tyranny of Oil in Our Time’ – February 2009 ‘Temporarily Off the Front Pages’ – October 2008 ‘Just OPEC left to Convince’ – June 2008 ‘Oil Company Executives Going Green’ – March 2008 ‘Spare Supply Capacity Continues to Recover’ – June 2007 ‘Plateau or Peak – the CERA proposition’ – March 2007

Pulse Series

Potential Drivers for Tanker Market in 2011

Positive

Wild Cards Negative

Shipping Slippage – Delivery delays will continue to have a limited positive impact on moderating fleet supply growth. In 2009 it was calculated that 18% of 2009 tanker deliveries were pushed back to 2010. This year slippage is running at less than 10% for Aframax and above and is expected to continue at this level in 2011. Slippage appears to be a much more important factor for dry cargo Hmax (38%) and Hsize (36%). Cancellation has so far proved of limited benefit to this sector. ‘Balance Sheet’ Recession – Low Appetite to Start Building – Shipowners have been focused on minimising debt rather than making new investments. There was a mid-year surge in ordering led by AET, Dynacom and Brightoil, but this rapidly petered out as freight rates fell sharply from mid year. It is anticipated that ordering will stay depressed in 2011 Floating Storage – At mid 2010, 39 VLCCs were reported in floating storage. It was subsequently noted that 35 VLCCs came out of storage in 3Q10. It is a reasonable expectation that floating storage will be a factor again in 2011. Oil Industry Demand to Continue to Recover in 2011(4) – Demand has picked up more quickly than expected after two consecutive years of contraction in 2007-2008 with a number of upward revisions to demand forecasts for 2011 (now f’cast to grow by 1.2.-1.4Mnbd), and 2010 (growth estimated between 1.5-2.4Mnbd). As in 2010, the recovery in demand in 2011 will be led by emerging markets. Tonmile Accelerator – in 2010 China and the US switched imports to a greater reliance on shorter haul trades. A key factor to watch in 2011 is whether longer haul trades reassert themselves. Oil Prices at Sustainable Levels(1) – Oil prices have started to creep up through 2010, but are forecast by the US EIA to average less than USD90Bbl next year and so should not drag on demand growth. However, some expect oil prices to exceed USD100Bbl in 2H11. World well Supplied with Oil - CERA forecast OPEC crude oil capacity is expected to average 6Mnbd in 2010 and 5.5Mnbd in 2011, well above the 2.5Mnbd level seen as recently as 2008. Nearly 4Mnbd of the total OPEC spare capacity of 6Mnbd is in Saudi Arabia, where a number of giant fields are partly shut in (Oct 18) World Economy Fear of double dip easing – The IMF revised its global GDP forecasts slightly up in October to 4.8% in 2010 and 4.2% in 2011 despite ongoing uncertainty surrounding Eurozone sovereign debt. China’s Soft Landing – Despite having a GDP equivalent to 20% of US GDP, the

Nature Hurricanes – As expected the 2010 season had activity at well above average levels. There were no wild card events for tanker shipping with the US very fortunate to have not experienced any land falling hurricanes this year. (2009 was the slowest season since 1997 - 2008 was the worst US hurricane season since 2005 with Gustav (Aug 26) and then Ike (Sep 5) striking. http://www.nhc.noaa.gov/, and http://hurricane.atmos.colostate.edu/. Hurricane season June-November. Global Warming – According to the UN World Meteorological Organization (WMO), 2010 is en route to becoming the warmest year since the mid-19th century. Summer 2010 produced erratic climate behaviour with a heat wave/fires affecting wheat output in Russia and severe floods devastating Pakistan. Europe and the US were hit by severe winter weather at the end of the year. Doubts about the validity of the phenomenon at their highest for several years. http://www.metoffice.gov.uk/climate/uk/2009/ http://www.metoffice.gov.uk/weather/world/seasonal/

Geopolitical Hotspots Iran’s Nuclear Smokescreen – Iran continues to defy the international community over its nuclear programme whilst insisting that it is for peaceful purposes. In mid August, Iran started fuelling its Bushehr nuclear plant, which triggered further attacks on Iranian nuclear scientists by “anti-Iranian” forces. North Korea – Two provocative acts in November (1) new, previously unknown, uranium enrichment facility, (2) Shelled S.Korea island of Yeonpyeong. South Korea and US responded by conducting military exercises in disputed waters. Israel/Palestine – Palestinian leader Mahmoud Abbas says Middle East peace talks are in crisis following Israel’s refusal to stop building settlements on occupied West Bank. Russia – With GDP contracting by 7.9% in 2009 as its overreliance on oil was exposed, Russia has been keeping its political ambitions on the back burner. It has been further hampered by fires that have decimated grain crop. However, it has been busy modernising its oil transportation system with a view to using it as an economic weapon in the future. Venezuela – Continues to build up its relationships beyond the US but no immediate signs of a flare up in its antagonistic attachment to the US. Like Russia, the recession has knocked its economic power (by cutting oil demand and lowering oil prices). The US Department of State said it will closely monitor recent energy agreements between Venezuela and Iran to ensure that they do not violate international sanctions against the Middle Eastern country. Nigeria –Nigeria has asked for US help to

Shipping Supply Growth to Surge – 2010 was destined to be a great year for tanker supply as single hull tonnage exited the market. However, the event became a damp squib as it turned out that single hull vessels had long ceased to have a significant presence in the international markets having in many cases slipped between the cracks to find alternative lives beyond the international markets and bypassing the scrap yard. This non-event meant that instead of contracting, the fleet increased by around 4% in 2010 building on the 8% growth in 2009. It is anticipated that 2011 fleet growth will be in the range 5-9% as the tanker delivery surge started in 2009 continues – 2009 (48MnDwt), 2010 (52MnDwt) & 2011 (48MnDwt), which compares with annual average deliveries 2004-2008 of 30MnDwt ‘Balance Sheet’ Recession – Debt Burden – All shipowners are focused on paying down debt rather than maximising profit, while small and weaker owners are currently struggling to renegotiate debt covenants, which may have been breached due to falling asset values, as a result of bank preference for caution & imperative to recapitalise. In the longer term, a shakeup in the form of consolidation may benefit the industry – although low interest rates make the current environment more benign in some ways than during the 1980s shakeup. Oil Industry OECD Demand once again the Weak Link – IEA predict a modest increase in OECD oil demand in 2010 and 2011, but highlight the vulnerability of this positive forecast to a double dip recession. Stock Levels High – A significant concern for demand prospects in 2011 is that stock levels around the world remain high, despite falling consistently in line with normal seasonal patterns from April. The picture is particularly bleak in the US, where the seasonal stock run down didn’t materialise this year Obama Shifting Views on the ‘Tyranny of Oil’ – Having entered office on an anti oil platform, Obama then talked about opening up of the US OCS for exploration for the first time. However, the now capped BP Deepwater Horizon oil burst has pushed the oscillating President back the other way with a temporary moratorium on deep water drilling(3). World Economy Recovery too slow elevating risks on the downside. Financial and business market confidence continues to be undermined by the ongoing sovereign debt crisis in Europe, issues surrounding the repair of bank balance sheets, unfinished regulatory reform, and persistently high unemployment in developed economies (210Mn people across the globe are unemployed, an increase of more than 30Mn since 2007).

ongoing global recovery from recession continues to depend in large part on China. Towards the end of 2010, China announced a much more hard line monetary policy in its attempts to keep the threat of inflation in check and prevent rapid, unsustainable growth. Bulls cheered by Basel III – The new rules agreed in September are seen by some as soft on banks, while others argue they make the world a safer place. Stock markets responded positively (despite the range of conflicting economic signals about the direction of the recovery) indicating perhaps a widespread belief that most banks meet the new criteria.

stem violence in the Niger Delta. Jan 2011 Presidential elections will be key event. China/Japan – Tension rising in dispute over South China Sea following Chinese trawler’s collision with Japanese coastguard vessel on Sep 8. In December, Japan announced plans to strengthen its missile defences against the threat from a nuclear-armed North Korea and presumably against the rising threat from China which announced that its own new anti ship missile system was now operational. Generally China is perceived to be throwing its weight around – but it seems unthinkable that it would act militarily against its neighbours.

The markets also fear an escalation of “currency wars” (e.g. US/China tension) if the recovery slows further or stalls. The First Efforts at Austerity – Europe again - as European governments, faced by the euro crisis, start talking tough about reducing national debt. We are now embarking on the key end of Stimulus transition phase. End too soon and the threat of a double dip recession looms. This would be to repeat the mistake of the Great Depression. In early September, the OECD and the IMF warned against over-aggressive tightening of policy, while Joseph Stiglitz argued that governments should focus on calming down the financial markets.

Notes supporting table above outlining potential drivers for the market in 2010

See appendices (A) at the end of the report for additional information outlining potential drivers for the market

(1) Oil Price forecasts – In its Dec 2010, Short Term Energy Outlook, the EIA forecast that WTI oil prices will average USD86.08Bbl in 2011 up from USD78.98Bbl in 2010. However, some commentators believe prices could go higher e.g.. Dec 15 2010 -Goldman Sachs Group Inc. anticipates that falling OPEC spare production capacity will contribute to pushing WTI oil prices over USD100Bbl by mid 2011.

(2) Crude oil start-ups – what is the new required oil price – Oil companies are being forced to develop oil fields in increasing hostile regions (e.g. deep water projects in the Atlantic and USGulf), and this has driven up the required oil price for project sustainability. The required oil price level for new projects varies enormously depending on exactly how difficult the oil is to extract. However, as a general consensus, it seems that oil prices in the USD50-55bbl are required. At the start of 2008, it was thought that oil companies were basing their budgets on an oil price of around USD60-80bbl. WoodMac Exploration Service Manager Alan Murray told delegates at International Petroleum Week in London that operators now need to assume an oil price of USD70bbl to earn close to 15% on exploration. John B. Hess provides an illustration of rising exploration costs - a deepwater rig that cost USD100,000-200,000pd in 2002 today costs USD500,000-600,000pd—if you can find one available. Oliver Onyewuenyi, programme manager of Global Deepwater R&D, Shell E&P talking about the challenges facing those tapping into West Africa’s deepwater resources proposes a well cost of up to USD100Mn/well.

(3) Deep-sea areas will be the main source of new oil discoveries – Despite the major deep water US Gulf spill (BP Deepwater Horizon) some think that now the well has been capped this incident will register merely as a blip in the history of oil exploration. West Africa and Offshore Brazil have reported major finds in the last few years and are expected to be two of the primary locations for future major oil discoveries. Iraq is the major hope for onshore discoveries with recent sales of oil blocks to international oil companies opening up the prospect that Iraqi production could hit 12Mnb.

(4) 2011 Demand Forecast – IEA’s Dec Crude Oil Demand Growth Estimates for 2009 -1.2% (-1.0Mnbd, 85Mnbd), 2010 +2.8% (+2.4Mnbd, 87.4Mnbd), 2011 +1.6% (+1.4Mnbd, 88.8Mnbd) compares with the Dec forecasts from the US EIA 2009 -1.4MnBd, 2010 +2.0Mnbd, 2011 + 1.4Mnbd, OPEC 2009 -1.4Mnbd, 2010 +1.5Mnbd, 2011 +1.2Mnbd, and IMF May Forecast 2009 -1.9Mnbd, 2010 +1.3Mnbd.

(5) IMF Real GDP forecasts (Oct 10) World 08-09-e10-e11 2.8, -0.6, 4.8, 4.2, China 9.6, 9.1, 10.5, 9.6, India 6.4, 5.7, 9.7, 8.4, USA 0.0, -2.6, 2.6, 2.3, Euro area 0.5, -4.1, 1.7, 1.5, Japan -1.2, -5.2, 2.8, 1.5, Middle East & Africa 5.0, 2.0, 4.1, 5.1, (Apr 10) World 08-09-e10-e11 3.0, -0.6, 4.2, 4.3, China 9.6, 8.7, 10.0, 9.9, India 7.3, 5.7, 8.8, 8.4, USA 0.4, -2.4, 3.1, 2.6, Euro area 0.6, -4.1, 1.0, 1.5, Japan -1.2, -5.2, 1.9, 2.0, Middle East 5.1, 2.4, 4.5, 4.8, (Oct 09) World 07-08-e09-e10 5.2, 3.2, -1.0, 3.0, China 13, 9.0, 8,5, 9.0, India 9.4, 7.3, 5.4, 6.4, USA 2.1, 0.4, -2.7, 1.5, Euro area 2.7, 0.7, -4.2, 0.3, Japan 2.3, -0.7, -5.4, 1.7, Middle East 6.2, 5.4, 2.0, 4.2 (Apr 09) World 07-08-e09-e105.2, 3.2, -1.3, 1.9, China 13, 9.0, 6,5, 7.5, India 9.3, 7.3, 4.5, 5.6, USA 2.0, 1.1, -2.8, 0.0, Euro area 2.7, 0.9, -4.2, -0.4, Japan 2.4, -0.6, -6.2, 0.5, Middle East 6.3, 5.9, 2.5, 3.5 (Oct 08) World 06-07-e08-e09 5.1, 5.0, 3.9, 3.0, China 11.6, 11.9, 9.7, 9.3, India 9.8, 9.3, 7.9, 6.9, USA 2.8, 2.6, 1.6, 0.1, Euro area 2.8, 2.6, 1.3, 0.2, Japan 2.4, 2.1, 0.7, 0.5, Middle East 5.7, 5.9, 6.4, 5.9

China – Monitoring the Health of the World’s Second Largest Economy

This section provides an insight to some of the key recent developments in the seemingly unstoppable rise of China as an economic super power.

Outlook for 2011

China has been battling in recent weeks against rising inflation caused in part by rising food prices. As the primary factor underpinning the Tiananmen Square uprising, the Chinese government is taking the threat posed by inflation very seriously. Indeed it has shifted from to what it calls a "prudent" rather than "moderately loose" monetary policy. This means in effect an attempt to limit the amount of liquidity in the system as evinced by action taken on Dec 28 by The People's Bank of China to raise interest rates for the second time in 4Q10. By November 2010, international awareness of China’s struggles with inflation had started to have a significant dampening effect on sentiment relating to the strength of the global recovery from the Great Recession. However, there is now some evidence that China’s efforts to stem to the rise in food prices is working and this combined with the improved condition of the US economy (due to the apparent effectiveness of QE2) have been key drivers in turning sentiment significantly more positive. Indeed, the focus for the Chinese government in 2011 might well be to restrain growth by forestalling over exuberance – although it will keep a weather eye on inflation for the foreseeable future. Despite hang over issues caused by ending of the stimulus phase of the recovery by end 2010, the FT China Confidential identifies three key structural drivers that will underpin the Chinese economy in 2011 and ensure GDP growth in the range 9-9.5%: (1) Rising rural economy (721Mn people) bolstered by rising migrant wages (+30% in 2010) and new land usage rights, (2) Shift of manufacturing to Western provinces in efforts to extend the era of China as low cost manufacturer, (3) Continuing urbanization with another 143Mn new city dwellers projected in 2011 despite the likelihood of the Chinese government failing to meet its targets for social housing as stimulus spending tails off. The end goal of Chinese government policy is to build the Chinese domestic market in order to sustain economic growth but moderate economic dependence on exports. It is likely that China’s consumers (whether rural or urban) – the key driver of the domestic market - will have another good year in 2011 with purchasing capacity and

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ambition strengthened by efforts to maintain a credit friendly environment (with credit rates lower than savings rates and inflation). Exporters are the most likely losers in 2011 with costs set to be adversely impacted by inflation and government’s continued willingness to see the Renminbi appreciate (by perhaps as much as 5%) to stave off the impact of rising commodity prices on the domestic economy and to ward off international criticism about its long standing policy of currency manipulation. Inflation remains the key factor that could derail the positive economic outlook for 2011. However, food price inflation does not look like becoming an unmanageable problem (not withstanding wild card events). The most significant inflationary threat comes from rising commodity prices. For example if oil prices threaten to match the USD150Bbl highs of 2008, then all bets are off with both exporters and consumers coming under pressure. If China does manage on the one hand to keep inflation under control, and on the other to prevent the rate of growth becoming unsustainable, then conditions will remain benign for tanker shipping. In 2010, crude oil imports look set to increase by around 20% yoy to 240MnTons. A similar rate of increase in 2011 would see the requirement for additional demand equivalent to an extra 175 VLCC cargoes. More news and opinion from 2H10 China Confidential – Dec 2, 2010 – Review Editorial

Food price inflation remains the no.1 preoccupation this week. It reported that despite a number of government initiatives put into place to curb food prices in the last 2 weeks of November(a), the struggle against inflation has not yet been won and will take several weeks - pointing out that inflation was partly structural due to such factors as dwindling farm land and rising wages. Nevertheless, CC retains its positive outlook for the Chinese economy in 2011 believing that it might achieve a “golden mean” with controlled inflation running at 4-5% and credit growth restricted to around 14-15%. On the downside, it fears that if inflation is not brought under control then it could be exported abroad as in 2007. If this happens then the health of the global economy would be jeopardized. (a) (i) released state reserves of some farm commodities, (ii) restricted the prices of others, (iii) tightened the supply of liquidity through open market operations, and (iv) campaigned on TV to stress that price control measures were working China Confidential – Nov 18, 2010 – Review Editorial

Reading CC this week, it seems that in their view the Chinese government is in as big a flap as the US government. No longer just concerned with asset bubbles like that in housing, there is now serious concern about food price inflation with its recent historical resonance as the trigger for Tiananmen Square. The official government figures for October suggest around 10.1% mom inflation in the food sector (which has a weighting of around 30% in the Consumer Price Index), but CC’s own research points to runaway inflation e.g. potato prices up 42% since the end of October. The causes of food inflation are partly one off factors such as poor weather and hording, but can mainly be attributed to structural problems: (1) Urbanisation – the rate of city building is exceeding the official statistics and it is eating up large tracks of fertile arable land, which are not being replaced. This is placing a significant constraint on supply (magnifying the impact on supply of other non-structural factors such as poor harvest and hording) (2) Rising costs – All manner of costs are on the rise from rural wages, to seed and fertiliser prices (3) Excess monetary supply – This has led to speculative investment in various sectors e.g. garlic. This factor is considered by the Chinese government to be the most significant culprit behind the inflationary cycle; and intensifies China’s animosity towards the US government’s strategy of extending stimulus measures through QE2 as this is anticipated to send a tidal wave of new funds China’s way. (4) Weakening of State control – traditionally the Chinese government has managed prices by controlling the release of food stuffs from huge government stock piles. However, stock piles are simply not big enough at the moment for this method of control to work effectively. Fear if not panic has set in according to CC. In order to control food inflation, the Chinese government introduced Nov 17 a series of measures to control prices and ensure supplies of key food items. The new measures were taken in conjunction with other measures to exert similar controls over energy. According to CC, “It is likely to take several months to bring the root cause – ballooning money supply – under control”.

China appears to be entering a more serious tightening phase - Nov 17 - According to RGE, China appears to be entering a more serious monetary tightening phase, though inflation is still likely to increase in 2011. The market recognition of this fact caused the Shanghai stock exchange to take loses of 10% over 4 days on fears over monetary tightening. The State Council (cabinet) announced that it will impose a series of measures to control prices and ensure the supply of key agricultural commodities and energy products. FT China Confidential think that although the controls may prove less than fully effective, they may slow surging inflation and buy Beijing some time to restrain money supply growth. China GDP set to grow by 9.5-10% in 2011 – Nov 4 – According to the FT Confidential

China, “2011 is shaping up to be a very robust year” for China with GDP growth in the region of 9.5-10%- very similar to 2010. However, James Kynge editor of the FT China Confidential believes, “In terms of character, 2011 is likely to be very different from this year. This year was all about Beijing trying to coax sustainable growth out of uncertainty. Next year is likely to be about Beijing trying to restrain growth to forestall over exuberance. The government’s posture, therefore, may shift from one of nurture to discipline”. China’s New Five Year Plan – Oct 18 – The Chinese Communist Party (CCP) held the fifth

plenum of the 17th CCP Central Committee on October 15-18. The Five-Year Plan to guide the economy from 2011-15 was at the top of the agenda. Vice President Xi Jinping was promoted to the Central Military Commission, a step that indicates that his path to the presidency and general secretary of the CCP is on track. China's "fifth generation" of leaders will take power at the 18th Party Congress in late 2012. One of the key slogans of the new five year plan will be “inclusive growth” indicating an emphasis on developing China’s domestic market. Xi (whose power base derives from the legacy of Jiang Zemin) is seen as more supportive of interactions with foreign businesses and domestic private enterprises than Hu Jintao, who has sought to champion the "have-nots" in Chinese society along with a state capitalist economy dominated by large, modern state-owned enterprises. The FT warns “It would be rash to expect any concrete expression of Xi's growing stature in the short term. Experience has shown that Chinese leaders-in-waiting keep a studiously low profiles, so as to present as slim a target for their political rivals as possible before they are safely ensconced in the top job”. China and US close to Energy Accord – Sep 17 – The EIA announced that the US and China

are close to a unique energy data-sharing agreement. This accord would cover a spectrum of energy information and help work towards improving transparency in commodity markets in order to limit price swings. Raymond James Analysts commented, “With China being the world's fastest-growing and least transparent energy consumers (the IEA forecasting consumption to grow 9% in 2010 and 4.3% in 2011), this sharing agreement will lead to a better understanding of global demand and prevent excessive fluctuations in oil markets in the future.” China wants reduced rate for Russia's ESPO crude – Sep 15 - Chinese officials believe their

country’s imports of Russian oil via the recently launched East Siberia Pacific Ocean (ESPO) pipeline spur should be purchased at a lower rate due to the shorter distance it travels – just 67km compared with the additional 2000km by rail to the port of Kozmino. The Chinese segment of the ESPO, which will extend 1,000 km from Mohe on the Russian border to Daqing, is still under construction. But deliveries of ESPO blend crude are due in January 2011. Up to now, the sale price was to be determined monthly based on the price of oil at Kozmino, with adjustments for any differential in quality. China Rising Bank Debt could leave Nation Exposed – Aug 30 - Moody's rating agency is

concerned that China is powering its economic growth by raising the gearing of the banking system, leaving the country exposed if the outlook darkens. Moody's said China Investment Corporation (CIC), the country's sovereign wealth fund, borrowed USD8Bn (£5.1Bn) last week to recapitalise three state-owned banks, using debt rather than genuine equity to boost bank capital. China’s Oil Demand Growth Will Tail Off After 2020 – Fereidun Fesharaki, founder and

chairman of FACTS Global Energy and a past president of the International Association for Energy Economics believes the Chinese government wants to stabilize the country’s oil demand growth despite rapid economic expansion by 2020 - “The initial plans are to create a peak demand at 2020 at 12-12.5Mnbd and allow only marginal growth thereafter.” Fesharaki acknowledges that the 2020 demand target might not be achievable, but says, “there will be a major effort on their side to slow down the demand growth” with measures that might include oil taxes, consumption restrictions, rationing, and mandates for use of alternative energy and energy-efficient equipment. In July, the Ministry of Industry and Information Technology ordered 2,087 companies in the cement, steel, and other industries to close production facilities deemed to be using energy inefficiently, according to the official Xinhua news agency. The country is approaching the end of a 5-year effort to cut energy consumption per unit of economic growth by 20%. Fesharaki says limitation of Chinese oil demand to about 13Mnbd in 2020, followed by

growth of 100,000-150,000 b/d/year, might be achievable. The IEA Agency projects oil demand in China at 9.135Mnbd this year and 9.556Mnbd in 2011. Because China does not publish oil-demand figures, IEA estimates Chinese consumption on the basis of refinery output and net oil imports. China Overtakes Japan - Japan's GDP grew just 0.4% annualized in Q2, losing its place as the

world's No. 2 economy—a position it had held since 1968—to China. China's quarterly GDP has surpassed Japan before. However, on this occasion it is unlikely China will relinquish the lead due to the disparity in growth rates between the two countries. Japan is forecast to grow between 2% and 3% in 2010, whereas China is forecast to grow a whopping 10%. While demand from China has been helping many countries, it may not be enough for Japan or other economies.

China’s Stop Start Economic Policy – Red Light, Green Light: China's Monetary Policy Gets Stuck in Traffic - RGE Analysis by Adam Wolfe and Rachel Ziemba: China’s reliance on administrative credit controls and reserve requirements, rather than interest rate adjustments, in setting its monetary policy is becoming increasingly unsustainable. In H1 2010, the open-market operations of the People’s Bank of China (PBoC) exhibited wild swings, and quirks of the domestic financial system and shifts in global capital flows—not macroeconomic fundamentals—were to blame. With these trends likely to continue in the medium term, the PBoC’s monetary policy will remain stuck in the traffic caused by pileups in international currency markets and the domestic interbank market. The longer the central bank alternates between hitting the brakes and the gas, the less likely it will be to raise interest rates, which continue to ease in real terms. After a massive liquidity injection over the past two months, the central bank is set to resume withdrawing liquidity from the interbank market and then, no doubt, put all that liquidity back shortly thereafter. If this prevents the PBoC from hiking interest rates, inflation and asset prices will be difficult to contain once some administrative measures are loosened in Q4 2010.

China Oil Supply to Hit 1Mnboed - China’s worldwide supply of crude oil through its national oil companies should reach a record level of 1 Mnboed this year, according Wood Mackenzie in its July report “Chinese NOCs Step Up International Expansion”. They also identified that “In total the three Chinese NOCs have committed nearly USD25Bn to asset and corporate acquisitions since April 2009, far exceeding previous annual spending.” Until recently the international expansion by the Asian NOCs has been relatively conservative. Acquisitions over the last 12 months have changed the picture. Wood Mackenzie estimate that the three Chinese NOCs alone accounted for nearly 20% of global deal value in the first quarter of 2010. The report points to domestic oil demand growth and concerns of over-reliance on Middle East imports as the key drivers for Chinese NOCs to continue international portfolio expansion.

China’s Mid Year Cooling – The FT.com (June 2010) expects that growth in the Chinese economy will slow in 2H2010 as the Chinese government continues to try to suppress excessive property price rises and slow down investment triggered during the stimulus phase. The concern is that banks have been left potentially exposed to bad loans – particularly those to local governments which are meeting their debt obligations from non-operating revenue such as land sales.

The 12th Five Year Plan (2011-2015) The 12th Five Year Plan (FYP) was on the agenda when the Chinese Communist Party’s Central Committee met for its annual high level meeting in mid October. FYPs are typically not radical game changes but tend to build on policies and trends that are already in play. The final version of the FYP will not be published until next spring, but elements have leaked out. One of the central drivers of the new programme is expected to be the attempt to achieve “inclusive growth” (“baorongxing chengzhang”). The phrase, which is associated with Hu Jintao, has the meaning of disseminating the benefits of economic growth to all elements of society. According to the China Confidential, “it would suggest a boost to migrant workers and the rural economy, thus far the relative losers during three decades of reform and opening”. The China Confidential has identified a number of areas where it expects change: Higher returns to labour: The pay of migrant workers (166mn) has already risen by 20-30% since mid 2009. It is expected that minimum wage levels will be adjusted upwards every two years. Social Welfare enhancement: Healthcare insurance and pension insurance to be expanded in part funded by higher contributions from State-owned Enterprises (SoEs)to the National Council for Social Security. Higher consumer spending: With average incomes potentially doubling during the period of the FYP, the Chinese domestic market is likely to expand significantly as the country seeks to rebalance growth away from its dependence on the export market. Accelerating urbanisation: Official figures, which may be understating the situation, reveal that by the end of 2009 46.6% of the population lived in urban areas representing an annual average rise of 2.6% since 2005. China Confidential believes that the annual rate of urbanisation will rise to 3.5% per annum until 2015 when the urban population will reach 56% (764Mn). A key factor in this acceleration will be the target to develop the Western regions Faster rail connections: Between 2005-10, the rate of rail track expansion increased by 3.6% pa pushing the total track layout to 90,000 km. Between 2011-2012, the rate of expansion will accelerate to 10.6% pa (110,000km) as corridors to the west are completed – thereafter rail expansion will slow. Clean technology boom: The Chinese international commitment to cut carbon intensity by 40-45% from 2005 levels by 2020 will entail rapid expansion in energy generated from on wind and nuclear sources. China Confidential expects electric car takeup to accelerate from 2013. Rise of private enterprise/service sector: Xi Jinping – the likely successor to Hu Jintao – is known as a supporter of the private sector. However, SoEs are unlikely to give up their privileged positions easily. Projected GDP: GDP has been the headline metric for measuring China’s growth in recent years – but now “inclusive growth” measures are likely to assume more importance. During the 11th FYP GDP growth overshot the official target by a considerable margin, achieving an estimated annual growth rate of 11.4% versus a target of 7.5%. During the 12th FYP plan the target growth rate is expected to be 7-7.5% pa, while the China Confidential anticipates average growth of 8% per annum. Downside risks to growth forecasts included (1) the potential for a slowdown in global demand possibly caused by a double dip recession, (2) the after effects of China’s economic stimulus spending in 2009 when local governments borrowed heavily to finance project of questionable quality.

2010s to be India’s Decade?

THE extraordinary expansion of China‘s economy over the last two decades has provided a bonanza for the shipping industry - could India be about to supply a similar boost?

India is the only nation with a comparable population to China’s, and its economic fundamentals have proved robust as it emerges from the despond which gripped the West from September 2008 likewise almost unscathed. But any projection of a similar explosion in the world’s largest democracy to the phenomenon which the national People’s Republic experienced after the death of its founder is confronted by a bewildering array of conflicting signposts. India’s optimists are surely right to draw comfort from demographics. Although its population will not match China’s until 2025, the 15-24 age group – crucial for providing an eager workforce, both skilled and semi-skilled, is certain to outstrip China’s much sooner, thanks to the latter's one-child policy, introduced in 1978. Furthermore, nobody expects China to maintain the sort of double digit annual growth figures it has been achieving - least of all its political leaders. They are wise enough to know this would be - even if achievable - undesirable, and are beginning to shake off the unwelcome mantle of global environmental villain, recently inherited from the USA. In a command economy, political will translates to action much quicker than in our sluggish democracies, and coal-fired power plants are already closing, with enthusiastic local officials turning off street lighting. Premier Hu Jintao says growth should serve a “harmonious society”, balanced between the countryside and the coastal cities, and the official annual target for the next five years is a mere 7.5 per cent.

Briefing Series

By contrast, the World Bank believes India’s economy may grow by 8.7 per cent next year, marginally better than its forecast for China. But it would be foolish to ignore a number of factors which will inevitably restrict India’s growth in the near future – politics, inflation, inefficiency and – above all – infrastructure. As a recent McKinsey report makes clear, India’s transport system has enormous problems, which only a massive, sustained effort can overcome. A table compiled by The Economist rates India’s infrastructure 75th in the world, with only a marginal improvement expected in the coming year.

Roads, railways, and ports are all badly congested, with delays costing the national economy millions – if not billions. Well over half – 57% - of its internal freight goes by road, and its rail network less extensive compared to land area than China’s. It is three times less extensive than the national networks of France, the USA, and even South Africa. According to the McKinsey report India’s rail network faces problems of quality as well as quantity, and it identifies room for improvement in areas such as signalling, bridge loads, and truck type. Only half of India’s roads have a proper surface, and its port turnaround times compare badly to competitors. Improvements have recently been made in India’s transport infrastructure, and many more are in the pipeline. Delhi has recently acquired both a new airport and a metro system, while shiny rebuilt railway stations are appearing in major cities across the nation. Non –transport infrastructure is also improving, with internet access about to be extended to millions of potential consumers with a 3-G network. The Government is planning to invest 9% of GDP in future years on infrastructure – a commitment similar to that which has produced speed record breaking passenger trains serving Chinese cities. But political goodwill and money may not be enough. As the Delhi Commonwealth Games illustrated all too graphically, Indian construction is rarely either efficient or speedy, and the insidious influence of corruption is endemic. The extent of corruption at the national level is impossible to gauge, but India’s prime minister Manmohan Singh, hitherto regarded as a principled pragmatist, is currently fighting off accusations of wasting trillions of rupees through ignoring the “2G Spectrum Scam”. At a more local level, where politics is enmeshed in caste, religious, and linguistic rivalry, the regularity of similar allegation, justified or not, is depressing. Other problems India has to address include high inflation – which the Government is arguably over-sensitive about - and the inefficiency of sectors such as agriculture, heavy industry and textiles. Despite complex problems and obstacles, a spectacular economic explosion in India is all but inevitable sooner or later – but it may not be quite as soon as some optimists would have you believe.

Tanker Market Outlook for 2011 The following section looks at whether tanker shipping can benefit from the recovery from recession if it continues into 2011, or if it is strong enough to keep its head above water if the economy plunges into a double dip recession. The primary focus of this analysis is to look at elements of tanker supply in the context of changing demand patterns. (a)

Projecting fleet supply for the tanker sector has become more complicated than in the bull market of recent years. It is no longer sufficient just to factor in scrapping based on the IMO drop dead schedule for single hull tankers, and deliveries from the current orderbook. In the recession era, it is now necessary to take account of a likely acceleration in scrapping triggered by depressed freight rates, and the prospect of orderbook cancellations. The removal (conversion) of vessels for other forms of trading is another important factor although much less so than in 2008 when tankers were in demand to be recycled for the dry and fpso markets. The storage market has long provided an alternative off market form of employment and this continues to play an important (if temporary) part in influencing overall tanker supply. Delivery slippage is the latest factor to have to be considered when forecasting supply.

(a) Background 2010 – Average tanker earnings (USD24,000pd) though still very poor were actually up slightly on 2009 levels, but this achievement masked serious supply side problems. It had been expected that supply would be stable in 2010 as a result of the legislated demise of the single hull fleet. However, many of these vessels had long since left the international trading fleet and the scrapping surge did not materialise. Earnings were actually reasonably strong during 1H10 but despite a strong recovery in crude oil demand in 2010 (up 2.4Mnbd, +2.8%), newbuilding deliveries overwhelmed the market driving rates down to very low levels during the summer. There was a modest recovery in rates at the tail end of the year driven in part by extreme cold weather along the US Eastern Seaboard and in Northern Europe.

Background 2009 – With the global economy fighting the Great Recession, the tanker sector was unable to fend off its own rate collapse for long with rates fairly consistently depressed throughout 2009 as a result of a lethal combination of demand contraction (down 1.1Mnbd, -1.3% yoy), and an acceleration in fleet supply growth (+7.2%). Average tanker earnings (across all sectors) dropped precipitously from around USD62,000pd in 2008 to USD22,000pd in 2009.

Background 2008 - Despite the onset of global recession, average 2008 tanker earnings (USD62,000pd) were on par with record 2004 levels and even held up reasonably well during the latter part of 2008. This respectable performance was the result of reasonably solid supply/demand fundamentals. Despite running out of steam towards the end of the year, average global crude oil demand (86.1Mnbd) was down just 0.7%yoy, while fleet growth of 6%, although high, was close to the five year (’04-08) average of 5.5%. At this point the sector had been able to avoid the catastrophic rate collapse that overtook the dry bulk market, which was engulfed towards the end of the year by a sudden aversion to counter party risk that caused a temporary dislocation in trade.

Tanker Supply Prospects in 2011 In previous reports we have provided different scenarios anticipating different paths for fleet growth. In recent reports these scenarios have been dominated by an expectation that the overhang of single hull tonnage would exit the market by the end of 2010. As we write, it is not yet clear exactly how much of the single hull fleet has been deleted and how much will continue to trade outside regulated international trades.

Our last forecast predicted fleet growth in 2010 in the range 1.4-2.2%. At the close of the year it looks like the final fleet growth figure will be over 4%. It is clear is that the impact of scrapping in 2010 has not been as high as had been anticipated even in our low scrapping case. Early in the year, Dr Martin Stopford described the likely impact of single hull scrapping as destined to be a “damp Squib”. Rather than a high rate of 30MnDwt of scrapping, it is now expected that tanker removals will struggle to reach 15MnDwt in 2010. It is also clear that the unexpectedly high rate of fleet growth had a very detrimental impact on tanker rates in 2010. Next year there is little benefit expected from legislated scrapping, therefore, removals will largely come from the double hull tanker fleet. However, single hull vessels are still not entirely out of the equation. It is the case that single hull vessels that are still operating outside the mainstream trades will eventually come to the end of their useful life and will presumably need to be replaced by vessel currently operating in the mainstream. There are 28MnDwt single hull vessels (>=10,000Dwt, <30 years of age) still designated as operational by Lloyds. In the next report, we will provide an in depth analysis of the trading patterns of the 300 or so vessels that – although not eligible for mainstream trades – are still operational to see exactly how they have managed to survive. Although the life expectancy of the remaining single hull fleet vessels does still matter, Bimco pointed out in their October 2009 study that the single hull fleet (now estimated at 28MnDwt) is dwarfed by the orderbook which stands at 120MnDwt at the end of November 2010. The tanker fleet was hit by a wall of new tonnage totaling close to 100MnDwt in 2009-10, which is equivalent to almost 20% of the trading fleet. There will be no let up in the pace of deliveries in 2011 even though slippage will be a factor once again. It is estimated that deliveries equivalent to a further 10% of the trading fleet could flood onto the market in 2011. It is, therefore, difficult to imagine fleet growth of less than 5% in 2011 unless tanker earnings dip below average 2009-10 levels for a sustained period. In this case, scrapping levels may well pick up significantly.

Slippage Update

Forecasting the Rate of Slippage in 2010 – Taking the example of the VLCC and Suezmax markets, it has been possible to estimate slippage in 2010 based on slippage patterns in the period 2007-2009. The following two charts plot average earnings and percentage slippage rates for the respective sectors.

Forecasting the Deliveries in 2010 for the VLCC Sector – At the start of 2010, we put together a high low forecast for deliveries in each tanker sector based on our understanding of slippage rates. For the VLCC sector, our low case assumed slippage of 15%. The high case assumed no slippage in 2010 (and that remaining unaccounted for 2009 deliveries were delivered in 2009). In the case of the VLCC sector, this means that the forecast range is quite narrow. Looking at the almost complete delivery profile for 2010, it seems that slippage did have a part to play in moderating fleet supply growth in 2010.

Definition of Slippage - Orderbook slippage occurs when earnings deteriorate and owners look to delay their orders to avoid the worst of the market. This happened in each of the last two years. In 2008, deliveries were down 13% on their projected level at the start of the year as the recession started to bite; while in 2009, deliveries were down 18% (provisional) as earnings remained relatively low. Of course, there is also the phenomenon of positive slippage with owners accelerating their deliveries to try and catch a freight market wave. This feature was an important factor for the dry bulk market in the boom year of 2007 when both Handysize (+19%) and Capesize (+23%) deliveries accelerated, but this seemed to be at the expense of other dry bulk sectors.

Briefing Series

Calendar of Events 2011

Autumn

October 2010 IMF’s semi annual World

Economic Outlook World Bank & IMF meet

Washington DC (9-11) IMO MEPC 61 OPEC 157th Ordinary

Meeting (Vienna)

November 5th G20 summit held

Soeul, SKorea (11-12) The Atlantic

hurricane season ends (Nov 30) Congressional

elections US (Nov 2)

December OECD semi annual

world economic review 30 Years since John

Lennon shot dead (8) OPEC 158th

Extraordinary Meeting in Quito World Climate

Summit Cancun (4-5)

Winter

January 2011 Hungary takes over the

presidency of the EU France takes over G8

presidency from Canada World Economic Forum,

Davos, Switzerland Presidential elections in

Nigeria Southern Sudan to hold

referendum on independence (Jan 9)

February Chinese celebrate

the Year of the Rabbit 13 Years since

Osama bin Laden issued a fatwa against all Jews and Crusaders

March China’s National

People’s Congress opens The 33rd League of

Arab States summit CMA- Shipping 2010 EU-Russia summit? Meeting of the (IMO)

MEPC’s Working Group on GHG Emissions from Ships

Spring

April St George’s Day (April

23) IMF’s semi annual World

Economic Outlook Space shuttle

undertakes final voyage before retirement. Pakistan to launch its first satellite

May 10th Arab Energy

Conference

June The Atlantic

hurricane season starts (June 1) OECD semi annual

world economic review OPEC 159th Ordinary

Meeting (Vienna, Jun 2) 37th G8 summit held

Deauville, France

Summer

July Poland takes over the

EU presidency (Jul 1) IEA releases 2012

demand forecast. OPEC releases long range forecast

IMO MEPC 62

August One year to go until

London Olympics

September Ten year anniversary

of 9/11 New Zealand host

2011 World Cup

Future Vision In this section, possible events that will impact the tanker shipping and crude oil markets in the medium to long term are reviewed. Shipping

Carbon Footprint – Shipping has been attracting increasing criticism for its environmental record. To counter this criticism, the IMO published its Second Greenhouse Gas Study in April 2009. This study was presented to the 59th meeting of the Maritime Environmental Protection Committee (MEPC) in July 2009. The report attempts to tackle head on the scale of shipping’s green house gas emissions problem, what will happen if changes are not made, and also the strategy options to reduce shipping’s footprint. The study provides a definitive estimate of shipping’s GHG emissions at 870MnTons in 2007(a) – equivalent to 2.7% of global emissions. It projects shipping emissions

could increase to 6% of the global total by 2020 if nothing is done. It identifies a number of technical and operational options for reducing CO2 emissions from shipping including speed reductions, improved vessel hull and engine design, and the use of renewables. The study estimates that improved ship design alone can reduce CO2 emissions from shipping by between 10-50%, while improved operational arrangements could result in another 10-50% reduction. The two approaches combined could reduce CO2 emissions by as much as 75%. Very substantial emission reductions are not only possible, but a marginal abatement cost analysis in the report concludes that, by 2020, existing ships could, without incurring any additional costs, have reduced their CO2 emissions by 255MnTons: a 20% reduction in emissions without it costing the industry a single euro. The study also identifies market-based instruments as ‘cost effective policy instruments with high environmental effectiveness’ providing ‘strong incentives to technological change’. The failure of the UN Copenhagen Climate Change Conference in December 2009 to achieve an international consensus on the way to deal with climate change means that pressure has been rather taken off the shipping industry. The MEPC, meeting for its 60th session in London in March, concluded rather vaguely that more work needs to be done before it completes its consideration of the proposed mandatory application of technical and operational measures designed to regulate and reduce emissions of greenhouse gases (GHGs) from international shipping. The Working Group was to report back to the Committee’s next session (MEPC 61), in September 2010. However, again nothing concrete was established and a further meeting of the Working Group on GHG Emissions from Ships was proposed for March 2011. At this meeting, the group has been tasked with providing an opinion on the compelling need and purpose of “market based mechanisms” as a possible mechanism to reduce GHG emissions from international shipping. Its finding will be discussed at MEPC 62 in July 2011. See appendix 10 for more details and definitions. (a) Other studies have estimated that shipping’s carbon footprint may be as high as 1.1BnTons How Pipelines will Change Trade Patterns CPC Pipeline to nearly double capacity - Dec. 15 - The Caspian Pipeline Consortium (which includes Transneft, KazMunaiGaz, and Chevron) has unanimously approved a USD5.4Bn expansion of the Caspian pipeline. The capacity of the 900-mile pipeline, which transports oil from Western Kazakhstan to a dedicated terminal in the Black Sea, will increase to 1.4Mnbd from its current capacity of 730,000b/d. Chevron Corp. describes the expansion as a critical step toward enabling expanded development of Tengiz oil field, one of the world’s largest with estimated recoverable reserves of 6-9BnBbls. CPC will carry Tengiz crude oil and also transport oil from other Kazakh and Russian fields. The development will take place in three phases between 2012 and 2015 and includes the addition of a third offshore mooring point at the Black Sea terminal, 6 miles north of the Port of Novorossiysk The 1.2Mnbd Baku-Tbilisi-

Ceyhan pipeline, though used primarily to transport Azeri production, also has agreements to carry oil from Tengiz. State Oil Co. of the Azerbaijan Republic (SOCAR) announced plans to begin a major expansion of its oil export terminal at Kulevi on Georgia’s Black Sea coastline in April, doubling capacity to 20MnTons/year possibly by yearend 2011, at least in part to transport Tengiz crude. Seaborne Trade Route Developments Oct 18 - Venezuelan President Hugo Chavez has promised to supply Belarus with 30MnTons of oil over 3 years starting in 2011, reports Radio Free Europe/Radio Liberty. Chavez met with Belarus President Alyaksandr Lukashenka in Minsk, where he was reported to have said, “The refineries of Belarus will not lack petrol for the next 200 years.” Russia, the traditional supplier of oil and gas to Belarus, raised concerns in Europe last June by cutting gas shipments to Belarus in a price dispute and jeopardizing transit volumes. Belarus has cut its oil purchase from Russia in response to new export duties. Chavez visited Belarus after a stop in Russia. Russian Prime Minister Vladimir Putin urged state-owned Gazprom to reach a deal with Belarus for gas supplies through 2015.

US Crude Oil Imports – After the BP Oil Spill It is too early to say exactly what impact the Macondo oil spill will have on US offshore drilling prospects particularly in the outer continental shelf. In the short term, the IEA expects 60Kbd of lost output in 2010 and 100Kbd in 2011. It is, therefore, too early to say what impact this environmental catastrophe might ultimately have on tanker shipping if any. However, tanker shipping is in need of a wild card event that might work to its advantage and any further disruption to the US drilling programmes would require a greater reliance on crude oil imports and this would obviously benefit tanker shipping.

The chart above shows the recent history of US crude oil imports (actual/blue line and as a moving average/blue dashed line) and VLCC spot earnings on ME-Loop (actual/red line and as a moving average/red dashed line). This reveals a fairly close relationship between imports and earnings during the period 2000-9. From 2Q03, earnings increased somewhat in response to the surge in imports from early 2Q03. Earnings then fell precipitously from 2H08 as the Great Recession started to bite causing crude oil imports to contract sharply. However, in 2010 earnings and imports have disconnected. Crude oil imports have started to recover as a result of the gradual recovery from recession, while tanker earnings have actually deteriorated as the tanker market struggled with significant over tonnaging issues as well as changes to the distribution of imports – as discussed in the section “tonmile demand decelerator”. It seems that US crude oil imports need to increase significantly further in order to start moving tanker earnings back towards respectability in 2011.

Briefing Series

Oil Industry (and alternative energy replacements)

Long Term World Oil Demand Forecast

ExxonMobil Forecasts Global energy demand to rise 35% through 2030 – In its latest long range forecast, ExxonMobil forecasts that overall energy demand will rise by 35% by 2030 as the human population expands by 1 billion to reach 8 billion, but that OECD demand will be virtually unchanged despite average economic expansion of 50%. It expects oil to remain the primary energy source in 2030 with natural gas moving in to second place. It expects that despite efficiency gains global CO2 emissions in 2030 are likely to be about 25% higher than they were in 2005.

Long Term World Oil Supply Prospects

Libra could be a Supergiant - In October, Brazil announced the Libra field reserves (8-15BnBbls) will be even bigger than Tupi (5-8BnBbls). If correct, Libra will be the largest oil discovery in the Americas since Cantarell in 1976. It would also easily make Libra a “super-giant” oil field defined as a field with 5 billion or more barrels of ultimately recoverable oil. Implications of Macondo Oil Spill – On October 12, the moratorium on drilling new offshore wells in US waters, in place since shortly after the Macondo disaster in April, was lifted. It is expected that the first new drilling permits will be issued by the end of 2010. It remains to be seen if the continuing fallout from the incident will have any long term implications for the trajectory of US crude oil production. The IEA expects short term constraints with around 60Kbd of lost output in 2010 and 100Kbd in 2011. It does not foresee any significant impact on production elsewhere although a number of countries are reviewing their own offshore drilling safety regulations.

Managing the Environmental Impact of Crude Oil Space satellites used to gather military intelligence on the ground are proving successful at monitoring carbon dioxide (CO2) stored deep underground

A BP study has found that satellite images are capable of picking up minute surface movements, which when taken over time have been shown to reflect shifts in the CO2 buried below as part of carbon capture storage (CCS) projects.

Satellite image of the earth's surface

The finding comes from a six-year study, involving BP and world-leading technology development organisations, to find a cost-effective way to show that CO2 can be safely stored and monitored at industrial scale.

The study was centered at the In Salah Gas project at Krechba, in the Algerian Sahara Desert – one of four full-scale CO2 capture projects in operation in the world today – operated jointly by BP, Statoil and Sonatrach. The In Salah natural gas field produces high levels of carbon dioxide along with the desired methane, and it is this CO2 which is captured and stored deep underground nearby.

The technology of CCS projects like the one at In Salah could contribute about 20% of carbon dioxide emissions reductions (according to the International Energy Agency), by capturing the CO2 produced by the use of fossil fuels at large, fixed sources, such as power plants and refineries.

Instead of venting the unwanted CO2 into the atmosphere and contributing to climate change, it can be compressed, dehydrated, and re-injected back into deep geological formations.

The satellite or Permanent Scatterer Interferometry synthetic aperture radar (PSInSAR) technique is a remote-sensing system capable of measuring small displacements of the earth’s surface. It has been used to monitor the movements of ancient buildings in Rome and the impact of flooding on the city of New Orleans.

As the satellite passes over the point on the earth’s surface, onboard instruments emit electromagnetic and then record the strength and time delay of the returning signal to produce images of the ground. Repeated passes of the satellite over the same location enable images to be combined to give ‘interferograms’, which can identify any changes in surface deformation to within fractions of millimetres.

The satellite imagery is so sophisticated that it can rule out the natural daily ‘tidal’ movements of the earth’s surface caused by the gravitational pull of the moon, the sun and planets.

The findings from the satellite data gathered from In Salah has been confirmed with findings from a 2009 seismic imaging survey, which up until now, was considered the best way to monitor the movement of CO2 in the deep sub-surface.

However, the terrain and geology of the Sahara makes satellite monitoring ideal. In comparison, seismic imaging is more costly and difficult – several million dollars for one specific set of data, as opposed to around $100,000 per year for satellite imaging. Satellite data is non-invasive and can be updated every couple of weeks when the satellite flies by, allowing for a continuous picture of the movement of the CO2 in the deep subsurface.

Environmentalists downgrade expectations in the US – September 10, 2010 - America's environmental groups have given up on getting climate change legislation through Congress at a time of Republican ascendancy, and have downsized to a series of more modest goals like fuel economy. In a sign of that strategy reshift, 20 environmental groups launched a new campaign today to press Barack Obama to propose far more ambitious fuel efficiency and pollution standards for cars of 60mpg by 2025. Meanwhile, Clean Energy Works, a coalition of 80 grassroots groups that had 45 paid staff in Washington to lobby to get a climate change law through Congress, is shutting up shop. The rethink, which is still a work in progress, gets underway at a dispiriting time for greens. The election of the greenest-ever president in Barack Obama failed to produce the hoped-for sweeping climate and energy legislation in Congress. Democrats are now preparing themselves for heavy losses in November's mid-term elections, which will make it even harder for Obama to get his agenda through Congress.

Alternative Energy Projects and Ambitions

Petrobras gets go-ahead for Ethanol Pipeline Distribution System in Brazil – In early July, the Brazilian government issued the Preliminary License (PL) for the implantation of a USD1.1Bn Ethanol Pipeline Distribution System. The project is being conducted by PMCC Projetos de Transporte de Álcool S.A, a partnership between Petrobras, Mitsui&Co.LTD and Camargo Corrêa S/A. The system is going to transport ethanol from the producing regions in the Mid-West, Minas Gerais and São Paulo to the large consuming centers of São Paulo and Rio de Janeiro. The pipeline will have 542 km in length, with capacity to transport up to 12.9 million cubic meters of ethanol per year, and will be built using existing pipeline sections aiming to minimize the environmental impacts. It will connect more than 30 cities. The goal is to start up the operation of the pipeline in the second half of 2011.

Tanker Companies Tanker Shares Missing out on Gradual Stock Market Recovery The very gradual recovery in global stock markets begun in 2009 continued into 2010. The market overcame 2Q10 jitters relating to the onset of the sovereign debt crisis in Southern Europe and uncertainty about the ability of China’s major banks to complete their debt refinancing. However, jitters have resurfaced during 4Q10 with further uncertainty in the Eurozone centered on Ireland, and concerns about the impact of increasingly antagonistic “currency wars”,

which have seen China embark on a concerted phase of monetary tightening. (a) The turning point for share price fortunes (in early March2009) was the second G20 Leaders’ Summit in London in early April when it became clear in the lead up to the summit that world leaders were determined to act decisively and in unison, and that the G20 and not the G7/8 would be the driving forum for global economic decision making signaling a more inclusive future that mollified the emerging nations. The Consequence of Too Many Ships The charts below reveal a marked difference in the performance of the tanker and dry bulk composite shares indices compared with the container share index. The latter index has improved gradually through 2010, while the two bulk shipping sectors have bumped along close to the bottom. The weakness of the bulk sectors is the consequence of over ordering in recent years with an avalanche of newbuildings now entering the market. The situation is particularly acute in the dry bulk sector. By contrast, the container sector – which has had its own problems with excess tonnage in the past – is currently reaping the benefit of very low ordering levels in 2008 and 2009 with orders remaining relatively modest in 2010.

Tanker Disconnect Now a Reality In recent reports, we have highlighted the underperformance of tanker shares (red line chart right) compared with general financial indices (blue line: FTSE), and crude oil prices (green line: WTI). While stock markets and commodity prices have been gradually recovering since 1Q09, tanker share prices have shown very little improvement. As a result, it will be increasingly difficult for tanker companies to convince investors that the performance of the tanker sector is linked with the fortunes of the global economy, the rise of China or the crude oil demand story. It is crucial that the tanker sector gets fleet supply back on track in order to reconnect with the wider markets and with investors.

Analysis of 3Q10 Listed Tanker Company Results Tanker Company Results Suffer in 2010 Evidence of the problems undermining listed tanker companies is provided by the chart (right) showing collective net profit by sector (see orange line for tanker collective net profit). After two negative quarters at the end of 2009, collective net profit for listed tanker companies (a) turned positive in the first quarter of 2010. However, tanker rates deteriorated in the summer causing collective net profit to turn negative once again. The third quarter proved to be especially poor – although, at least results were not as bad as in 3Q08. The fourth quarter seasonal rate surge has been extremely muted thus far, and threatens to consign tanker net profit to another quarter under water. The poor performance of the tanker sector is once again thrown into sharp relieve by comparison with other sectors. While dry bulk collective net profit (green line) has remained subdued, it has remained consistently in the black. Even the container sector (dark red line), which had been having a torrid time since the middle of 2008, has soared back into profit reflecting improved freight rates as discussed in the previous section. Looking at individual tanker companies – only 6 out of the 18 listed tanker companies for which we have obtained full year results returned a profit in 3Q10. Ship Finance International (USD36Mn), Frontline (USD12Mn), Knightsbridge (USD9Mn), DHT Maritime (USD4Mn), Concordia (USD3.5Mn) and Top Ships (USD1.1Mn) made up the first six places in the league table of third quarter net profit. Teekay was furthest adrift at the back of the pack. See the Results Page for a company by company breakdown of quarterly net profit for the last three years. (a) The analysis covers 18 listed tanker companies for which we have third quarter data Defensive Measures Still the Order of the Day – Still “waiting for the markets to recover” Shipping is lagging even the slow recovery underway in most other industrial sectors and its participants are still at bay waiting for the market to turn. While stressing that both GDP and global oil forecasts for 2010 and 2011 have been adjusted upwards throughout the year, tanker owners universally identify adverse tanker supply conditions as the primary factor undermining performance. The long term structural problem of too many newbuildings is seen as the most significant negative supply factor. However, third quarter specific problem such as unwinding tanker storage, and the removal of the tonmile multiplier - as China switches the balance of its imports more to the Middle East from West Africa – are also blamed. The challenging state of freight markets means that the process of rebuilding balance sheets is taking longer than is most other sectors as most owners are forced to concentrate on improving their financial

Briefing Series

strength rather than on their operating or investment strategies. The introverted perspective comes across in a number of different quarterly reports. Commenting in OSG’s 3Q10 report, Morten Arntzen, President and CEO, remarked, “The pace of the global economic recovery remains uncertain, thus continued financial discipline is critical. I am confident that our market‐leading commercial and technical platforms in Crude, Products and U.S. Flag, combined with our strong balance sheet and liquidity position, will enable OSG to emerge at the head of the pack when our markets recover.” Frontline in the “outlook” section of its 3Q10 report chose to emphasis its financial strength, “In this challenging tanker market, Frontline has so far in 2010 secured approximately USD640Mn in new capital, committed new bank financing and release of restricted cash. The recently secured pre- and post delivery financing for the two VLCCs raised USD147Mn of which USD45Mn is available for drawdown based on installments already paid on the newbuildings”. Even the most bullish of the listed tanker companies, Nats, is still waiting for its moment to strike- and fulfill its self styled destiny to be a great consolidator in the tanker sector. In its 3Q10 quarterly report, Nats indicated that it did not believe conditions were quite right for further expansion. “There are now indications in the market that prices for second hand vessels have softened. Should this development continue, we shall be in a position to acquire further vessels inexpensively compared to historical levels. Paying down debt is the most obvious way to strengthen the balance sheet. The series of charts overleaf compare market capitalization v debt for individual companies. These reveal that certain companies like Frontline, Ship Finance International and DHT Maritime have been successful in recent months in cutting their respective debt burdens. In addition to paying down debt, shipowners have a whole range of other defensive strategies in their armory to protect their balance sheets:

Cost Cutting | Enhance Cash Flows through Long Term Timecharters | Sell Vessels | Cancel Newbuidlings | Suspend Dividend | Renegotiate Finance | Raise Equity from Shareholders | Increase value to Shareholders through Stock Buyback

Less than 50 multi-year timecharters have been reported so far in 2010. Therefore, companies with high spot market exposure entering the down turn have been struggling to find secure long term employment at reasonable rates. Genmar and Tsakos Energy Navigation – two companies mainly orientated to the spot market – have managed to secure some timecharter coverage in recent months. Listed tanker owners tentatively returned to the equity market in 3Q10. In November, Scorpio Tankers confirmed an underwritten public offering of 4.575Mn shares of its common stock. The shares will be priced at USD9.80 per share. In August, Capital Product Partners priced its public offering of 5.5Mn common units representing limited partnership interests at a public offering price of USD 8.63 per common unit. Ship Finance International was less successful in the debt capital markets. In November, it announced that due to weakening market conditions in the debt capital markets, it will suspend its public offering of up to USD 400Mn of senior unsecured notes, due 2020. Among those renegotiating their debt was Top Ships, which announced in August that it has entered into a preliminary agreement with DVB Bank pursuant to which the company will obtain waivers for covenant breaches until the end of the year 2010. Investment Strategies Taking a Battering The two charts at right show the development of the tanker newbuilding and secondhand markets respectively. Both these charts show how falling profitability has punctured the fledgling recovery seen in both markets at the start of the year. Activity in the secondhand market has been particularly depressed in recent months. It is unlikely that activity in either market will recover until tanker rates turn up.

Listed Tanker Companies – Results 3Q10

Brostrom delisted 27 Feb 2009

USSP emerges from bankruptcy Nov 2009

Listed Tanker Companies – Market Cap v Debt 3Q10

orange line = market capitalization, blue line = debt

Appendices Chronology of Oil Market Events June-December 2010 – and how the oil price was influenced The Role of Speculators in the Futures Markets

New Crude Oil Production Capacity Coming on Stream Exploration and Development Refinery Projects What a Democratic Presidency Means for US Energy Policy Oil Industry Rationalisation Shipping News IMO Environment Issues

Chronology of Oil Market Events June-December 2010 – and how the oil price was influenced This is a daily record of events in the oil market. Each daily entry starts with the price for WTI. The colour coding is to show the direction of influence on the oil price, where blue indicates a downward impact on prices – while orange indicates a price accelerator. Red text identifies events from the financial markets that spilled over into the oil market. Summary – Prior to the onset of the Great Recession, crude oil traded primarily on fears of supply disruptions, and not a little stupidity (oil prices soared). With the onset of the downturn, crude traded primarily on fears of economic collapse (prices plummeted). Entering 2009, there was a period of uncertainty with crude traded primarily on the belief that demand was falling faster than supply (prices stagnated at low-mid USD40s per barrel). Following the G20 summit in London at the start of April, a belief that depression has been averted emerged. The market believed that the global economy probably reached bottom in 1Q09, and confidence tentatively crept back into stock markets pulling commodity prices up too (oil prices back above USD70Bbl) despite fairly weak S/D fundamentals. Tanker rates bumped along the bottom for most of 2009 before showing some signs of life at the end of the year. In May 2010, sentiment took a decided turn for the worse as oil prices started to trade on fears of a Eurozone meltdown. Tanker rates collapsed. Analysts at the Centre for Global Energy Studies, London, said, “A month ago the oil market was in bullish mood, focused on economic recovery and rising Asian oil demand.” Since then, the sentiment has turned bearish, with the market now “fixated” on risks of a double-dip recession. By November 2010, a new turning point was reached. While concerns over the Eurozone persist, they have taken a backseat with signs that QE2 may be having a positive effect on the US economy and that China growth story is intact (as the Chinese government appears to be getting on top of its inflation problems caused in part by rising food prices). Tanker rates finally started to show some signs of recovery at the very end of 2010 in part due to extreme cold weather along the US eastern seaboard and in Northern Europe.

As it happened

Uncertainty Fear of economic collapse

After G20 Summit in March 2010, a belief took hold that ‘depression’ averted and the worst was over

After Greek bailout the market fixated on double dip recession with onset of “post stimulus” phase of the recovery

Concerns over Eurozone persist but take back seat with signs that QE2 may be having a positive effect on US economy and that China growth story intact

Jan 3 USD – Hungary officially assumed the six-month rotating presidency of the European Union on Jan 1. Estonia becomes 17th Eurozone member on Jan 1. Dec 28 USD91.46 – The People's Bank of China has raised interest rates for the second time in 4Q10, in an attempt to stem rising inflation in the face of excess liquidity and strong capital inflows At its December meeting, the Central Bank of Russia kept the refinancing rate at 7.75% but raised the overnight deposit rate by 25 basis points, a first step toward monetary tightening. Dec 27 USD90.97 – The Reuters/University of Michigan consumer sentiment index reading for December was 74.5, the highest since June, and the expectations index, which more closely projects the direction of consumer spending, also hit its highest point since June, with a reading of 67.5 In line with Richard Koo’s expectation of a very slow recovery, the Japanese government is forecasting 1.5% yoy GDP growth for FY2011 (beginning April 2, 2011), below the rate of 3.1% yoy estimated for FY2010, with private consumption expected to grow 0.6% yoy compared with 1.5% yoy in FY2010. Dec 24 USD90.79 – Dec 23 USD90.79 – US 3Q10 GDP growth revised up slightly from 2.5% to 2.6% Dec 22 USD89.78 – Dec 21 USD89.27 – Moodys places Portugal’s credit rating on review. Dec 20 USD88.66 – North v South Korean tension rising as South Korean conducts war games in disputed waters. Prices for most commonly traded metals in China gained for the third consecutive week this week with the futures price of copper hitting a year high on strong economic data in China and the US. Dec 17 USD88 – The European Central Bank has decided to increase its subscribed capital from €5.76Bn to €10.76Bn “in view of increased volatility in foreign exchange rates, interest rates and gold prices as well as credit risk,” according to the ECB press release Housing starts rose by 3.9% mom to 555,000 in November, in line with expectations, after a sharp 11.1% drop in October Dec 16 USD87.69 – The first regional manufacturing survey for December reversed the surprise deceleration in November, while industrial production for November rose 0.4% mom and manufacturing activity picked up by 0.3% m0m Irish Parliament approves bailout Goldman Sachs Group Inc. expects OPEC overproduction will reduce the group’s spare production capacity and may push crude prices above USD100/bbl in the 2H11. Dec 15 USD88.64 – Federal Open Market Committee, the policy-making arm of the Federal Reserve Bank, reported financial recovery is still too slow and reiterated its bond-buying plan to stimulate the economy. The EIA reported that commercial US crude inventories fell 9.9MnBbls in the week ended Dec 10 well ahead of the Wall Street consensus for 2.5MnBbls decrease. Dec 14 USD88.52 – 40% of US in grip of extremely cold weather. Cold snap due to return to northern Europe.

Dec 13 USD88.6 – OPEC meeting Dec 11 Quito, Ecuador agreed to roll over quota. OPEC revised up it s global economic GDP growth forecast for 2010 and 2011 to 4.3% and 3.8% from 4.1% and 3.6%. OPEC pronounced that it was happy with oil prices (target level = USD70-80Bbl) China good news (1) refineries ran at record levels in November as crude oil imports revived, (2) manufacturing increased for 4th consecutive month, (3) refrained from raising interest rates RGE announces that growth in 2011 will be only marginally lower than in 2011 and that risk of double dip has significantly reduced Weak climate agreement reached at Cancun. Dec 10 USD87.79 – China raises banks' required reserve ratio by 50 basis points as the Chinese government continues to battle inflation. The potential for an increase in Chinese interest rates threatens the outlook for crude oil demand. Japan's GDP rose for the fourth consecutive quarter in Q3, growing by 4.5% yoy and 1.1% qoq (revised up from 3.9% yoy and 0.9% qoq) Initial jobless claims fell 17,000 to 421,000 in the latest week vs. consensus of a decline to 425,000 According to Oliver Jakob everyone is positioning for a large surge in oil demand to end the year. Dec 9 USD88.33 – CC reports that home sales in first tier cities rose this week ending Dec 8 prompting regulators to issue further warnings over loans to developers. EIA reported commercial US crude inventories fell 3.8MnBbls to 355.9MnBbls the same week, exceeding Wall Street’s consensus for a 1.4MnBbl draw. Forecasts for a cold snap along the USEC was partly responsible for the larger than expected drop. Dec 8 USD88.28 – President Barack Obama’s tentative deal to extend the Bush-era tax cuts at all income levels for two years includes proposals for a 13-month extension of emergency unemployment insurance benefits and a 2%

employee payroll tax cut. The result will see an extra US fiscal stimulus of USD1,000Bn during the next two years. The deal surprised economists who didn’t expect all the cuts to be maintained. Goldman Sachs calculates, “In all, this proposal would add USD185Bn in stimulus in 2011 beyond what we have been assuming, not including the corporate tax provisions.” As a result of the changes J.P. Morgan raised its US GDP growth forecast to 3.5% from 3%. The downside is that the changes add to the deficit, which would increase it from an estimated 8.5% to 9.5% of gross domestic product in the 2011 fiscal year and from 6.9% to 9.8% of GDP in 2012The initiative highlights again the preference for stimulus over austerity in the US.

Dec 7 USD88.67 – The arch bears RGE have upgraded their forecasts for U.S. GDP growth and headline inflation, but argue the story they have been telling all along still holds: “The recovery remains rather weak—certainly far from V-shaped—and though the rate of growth is consistent with a pace of job creation that will most likely be enough to absorb increments in the work force, it will not be enough to push down the unemployment rate significantly”. Dec 6 USD89.31 – US payrolls increased less-than-expected in November, and the jobless rate unexpectedly rose to 9.8%. Oliver Jakob is unimpressed by stature of jobs that are being created. “An economy cannot be rebuilt with job

creation concentrated in the $10,000-20,000/year temporary service sector” Cancun Climate Summit: Just 20 heads of state expected to attend the climate summit at Cancun compared with 120 in Copenhagen. The UN's former top climate official Yvo de Boer has accused developing countries, such as India and China, of trying to rewrite the Bali Action Plan Freezing weather continues in Northern Europe James Zhang at Standard New York Securities Inc. said, “Looking ahead, we note the European sovereign debt crisis has been delayed rather than resolved. The Chinese government is now prompting more ‘prudent’ policies rather accommodative policies. US oil demand is still subdued. The oil price has been driven predominantly by the excessive liquidity. We do not believe oil prices above USD90Bbl and the recent backwardation can be sustained for long.” Dec 3 USD88.42 – FT.CC reports that the Central Politburo of the Communist Party of China, the country's top decision maker, made clear today that China will shift to "prudent" rather than "moderately loose" monetary policy and

continue "active" fiscal policy. FT CC also reports that China appears to be getting to grips with food price inflation in the second half of November, although it will take many more weeks to complete the process Significant stock market gains. Market buoyed by record 10.4% increase in pending US home

sales Slow recovery still the most likely recovery trajectory. Federal Reserve Chairman Ben Bernanke acknowledged Dec 5 on CBS’ “60 Minutes” news program the US economy is still fragile and therefore Congress should neither cut spending nor boost taxes. He predicted it may take 4-5 years for unemployment, now at 9.8%, to return to its normal historic level of 5-6%.

Dec 2 USD87.96 – Optimism on rise with prospect that ECB will take action to stop rot in Eurozone by indicating an appetite to buy European government bonds. - Leading indicators and surveys of global manufacturing suggest global activity has improved since mid-2010, with particularly strong improvement in November in China, India and the UK - USD strengthening (see chart) Dec 1 USD86.73 – RGE reports that the Canadian economy grew by a mere 1.0% qoq annualized in 3Q10, well below consensus, as business investment grew 6.5% qoq, private consumption remained steady, government spending slowed and residential investment and net exports declined by 1.3% each, dragging on growth. India's GDP maintained strong momentum in 3Q10 with 8.9% yoy growth—following rates of 8.9% yoy in 2Q10 and 8.6% yoy in 1Q1o—on robust services sector performance and reviving private demand, raising concerns of overheating and excessively loose fiscal and monetary policies. The National Commission on Fiscal Responsibility and Reform laid out a plan to cut the US budget deficit to 2.3% of GDP by 2015 from 9% this year. Nov 30 USD – U.S. home prices fell back by 2% qoq non-seasonally adjusted and 1.5% yoy in 3Q10, according to the quarterly S&P/Case-Shiller National Home Price Index. Nov 29 USD85.09 – According to the National Retail Federation, Black Friday weekend sales rose an estimated 6% yoy in the U.S. with a pickup in discretionary spending and online sales driven by promotions. Sweden's economy grew by 6.9% yoy in 3Q10 on increases in household consumption, general government consumption expenditures, gross fixed capital formation, trade and industrial production, according to Statistics Sweden………. Temperatures in northwest Europe are forecast to be 3-7° C. lower than seasonal average for this week. FT China Confidential reports metal spot and futures prices in Shanghai continued to fall this week ending Nov 29 following on macroeconomic uncertainty over fears that rising inflation may spark further tightening. The price fall was most pronounced for zinc and copper, while iron and rebar held steady. One positive (worthwhile) piece of information from Wikileaks = an indication from China that it might accept a unified Korea under South Korean leadership if North Korea collapses after succession. Nov 26 USD83.85 – German business confidence unexpectedly reached its highest level since German reunification, rising to an index reading of 109.3 in November 2010, up from 107.7 in October 2010, according to the results of a survey of 7,000 executives. Friday after Thanksgiving produced unusually low sales – 36% lower than Black Friday in 2009. According to some reports, traders are concerned about the massive leak of US diplomatic secrets via the WikiLeaks web site over the weekend as it may affect Iran Nov 25 USD83.16 – Thanksgiving. Pressure on China’s central bank, to adopt further "prudence" in its monetary policy heightened this week as liquidity tensions surged and inflation expectations returned. Nov 24 USD83.16 – The Federal Reserve cuts US 2011 growth forecast to 3-3.6% from June forecast of 3.5-4.2%. In turn, unemployment, currently 9.6%, is forecast to only edge lower to 8.9- 9.1%. In June, the central bank had forecast it would dip below 9% in 2011. US 3Q10 GDP revised up to 2.5% from 2%.

Nov 23 USD80.71 – North/South Korea exchange artillery fire after North Korea started shelling the South Korean island of Yeonpyeong. The development comes soon after the North Korea reveal a secret uranium enrichment facility. Metal spot and futures prices in Shanghai fell further this week ending Nov 22 as yet another hike in the required reserve ratio fanned fears that further tightening to counter inflation may curb demand. Declines were most significant for zinc and copper. Nov 22 USD81.19 – Ireland sign up to bail up package worth up to Euro 90Bn. National Weather Service's predictions for below-average temperatures to blanket the Midwest and East Coast Nov. 29-Dec. 5. ………. Barclays Capitol Commodities Research said, “Enough of a sequence of robust and optimistic global oil demand data has come in over an extended period that the oil market appears to us to be starting a process of adapting to some brighter conditions. In particular, there are signs of a better sense of Organization for Economic Cooperation and Development demand recovery complementing the strong growth in non-OECD oil demand, the follow-through of which has seen the rapid burning off in excess inventories. Precalamity blues are slowly on their way out, while the mood in the market is finally turning more extravagant. Persistent upward revision to oil demand expectations has drawn a picture something a bit more redolent of a tiger, with global oil demand growth set to breach 2 million b/d for only the second time in over 30 years and market conditions at their tightest in over 2 years. With the removal of the large barrels of floating inventory, the upside surprise in demand is being entirely reflected in the rapid erosion in onshore stocks. The inventory overhang in the OECD outside the US has fallen well below the 5-year average, while the drawdown in US inventories, although slow in commencing, is flourishing with full vigor.” Nov 19 USD81.63 – Anxiety again dominates market with flat US production reported in October and fears for inflation in Asia. The EIA reported commercial US inventories of crude fell 7.3Mnbbls to 357.6MnBbls in the week

ended Nov 12. China raises bank reserve requirements for second time in month. Beijing announced that it will raise banks’ required reserve ratio (RRR) by 50 basis points from November 29 to a record level of 18% for most banks. FT.com thinks the move, coming just 10 days after it announced the last RRR hike, shows the deep disquiet in policy circles over China’s ballooning money supply and surging inflation. Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “Crude was also supported by the improvement in economic outlook over the next 3-6 months as the index of US leading indicators increased by 0.5% in October, the fourth consecutive increase. Although the improving economic outlook and the recent inventory draws can fundamentally support the current price level, the tepid growth in the Organization for Economic Cooperation and Development regions will limit any sharp appreciation in prices until the major economies start firing on all cylinders.” Nov 18 USD81.86 – Fears over China and Eurozone fade as Ireland looks set to accept the rescue package being offered by the IMF/EU, and the FT notes that “evidence that investors may be getting over the policy implications of Beijing’s inflation battle can be seen in the fact that broad gains in Asia have come in spite of market chatter that the People’s Bank of China may raise interest rates on Friday”. GM raises USD20.1Bn in the largest ever US IPO as the government stake falls to 33% as a result of the restructuring. Nov 17 USD80.41 – According to RGE, China appears to be entering a more serious tightening phase, though inflation is still likely to increase in 2011. Shanghai stock exchange takes loses to 10% over 4 days on fears over monetary tightening. Irish bailout plans taking shape. Talk that QE2 may be set to fail having failed to move the markets. Olivier Jakob commented, “The wealth creation dreamed up by [Federal Reserve Chairman Ben] Bernanke is nowhere to be seen, and it is all the fault of the Irish and the Chinese. Ireland is dragging its feet to accept the European bail-out and that continues to pressure the euro to the downside.” Production was suspended at ExxonMobil Corp.’s 100,000 b/d Oso field in Nigeria due to kidnapping activity by rebels. The State Council (cabinet) announced that it will impose a series of measures to control prices and ensure the supply of key agricultural commodities and energy products. FT China Confidential think that although the controls may prove less than fully effective, they may slow surging inflation and buy Beijing some time to restrain money supply growth. Nov 16 USD82.31 – Stung by criticism of QE2, and concerned that the market believes it will not complete in full asset purchases of USD600Bn thus threatening the benefit of lower interest rates – the fed put up two officials to explain its position. Mr Dudley, President of the NY Fed, dismissed claims that the Fed’s action was aimed at weakening the dollar. “We have no goal in terms of pushing the dollar up or down. Our goal is to ease financial conditions and to stimulate a stronger economic expansion and more rapid employment growth.” Metal spot and futures prices in Shanghai retreated this week ending Nov 15 on recent government auctions of metal reserves and fears that higher than expected October inflation and loan growth data may spark a new round of tightening. Nov 15 USD84.86 – Japanese economic growth accelerated in 3Q10 but government leaders and economists warned the outlook remains difficult. Japan’s recovery from recession has largely been driven by export growth, but growth in the domestic market chipped in during 3Q10. The economy grew a seasonally adjusted 0.9% in the July-September period from the previous quarter, and expanded at 3.9% on an annualised basis as households took advantage of the final months of government stimulus programmes and as capital expenditure rose (e.g. government subsidy on fuel

efficient cars). OPEC revised up its demand estimates for 2010 to 85.78Mnbd

(+1.32Mnbd, +1.6% from +1.3%) , and 2011 to 86.95Mnbd (+1.17Mnbd, +1.4% from +1.2%). US EIA also revised up its demand estimate for 2010 +2Mnbd to be met equally by increases in OPEC and non-OPEC oil production. The EIA expects OPEC members to earn USD840Bn from oil exports in 2011, USD22Bn more than it forecast a month ago. The EIA also increased its previous forecast of OPEC's oil export revenues for 2010 by USD7Bn to USD748Bn. Fears that China may raise interest rates to slow down growth.

Nov 12 USD – G20 currency consensus in Seoul – but failure to agree concrete measures to tackle global imbalances. Leaders of the G20 group of major economies have agreed to avoid "competitive devaluation" of currencies after a second day of difficult talks in the South Korean capital, Seoul. Leaders agreed to come up with "indicative guidelines" to tackle trade imbalances affecting world growth, but South Korea President Lee Myung-Bak admitted that "on the foreign exchange rate issue, principles were agreed at the finance ministers' meeting, but there was no word on when and up to how much we will implement them". It is clear that a deep divide remains between China and the US about what is the main problem with the global economy. For the US the problem is exchange rates. President Obama pointed out that there should be no controversy about fixing imbalances. “Exchange rates must reflect economic realities," he said. "Emerging economies need to allow for currencies that are market-driven. This is something that I raised with President Hu of China and we will closely watch the appreciation of China's currency." For China the general problem is that western economies in their view rely too heavily on debt and are, therefore, living beyond their means. Their specific problem is QE2 and the prospect of a wave of new investment in to China that will allow asset bubbles to pop up and destabilize its economy i.e. fuel unsustainable growth. …………. According to Barclays Capital, “With the gradual acceptance that a very strong and broad-based recovery has ensued in the oil market, sentiment has become less fragile, helping prices to cement itself in the USD85-90bbl range,” Nov 11 USD87.75 – Signs that China determined to keep on top of speculation with announcement by The People's Bank of China, the central bank, of a hike of 50 basis points in bank reserve requirement ratios (RRR) to 17.5% amid rising concerns over domestic inflation, inflows of funds from overseas and a widening trade surplus for October. The FT China Confidential predicted the hike and expect further measures to tighten liquidity and rein in speculation - including RRR hikes, property restrictions and, possibly, interest rate hikes in the coming weeks and months……… The EIA reported commercial US crude inventories fell 3.3Mnbbls to 364.9MnBbls in the week ended Nov 5, surpassing Wall Street’s consensus for a drop of 1.5MnBbls. Nov 10 USD87.75 – One of China’s leading credit rating agencies has downgraded United States of America government debt in response to what it sees as deliberate devaluation of the dollar by quantitative easing and other means. If China, now the second biggest economy in the world, stops buying US government bonds this could have a very negative effect on the global recovery. The Dagong Global Credit Rating Company analysis is highly critical of American attempts to borrow their way out of debt. It criticises competitive currency devaluation and predicts a “long-term recession” G20 negotiators sought to gloss over bitter divisions on global economic policies on Wednesday after a day of heated arguments as their leaders gathered for a summit in Seoul. Expectation that demand for metals such as copper and aluminium may far outstrip supply next year. Nov 9 USD87.02 – Britain's total debt will top £10 trillion by 2015, according to PricewaterhouseCoopers, which warned the burden could slow growth for decades as interest rates eventually rise….. The OECD has identified divergence in the economic recovery trajectory of leading nations. The organization anticipates a "moderate downturn" in the UK, Canada, France, India and Italy while expansion is expected to continue in Germany, Japan, the US and Russia. David Cameron decides not to raise issue of human rights in public on trip to China. KBC Energy Economics noted, “Finance ministers led by the US have been seeking to stop competitive exchange rate devaluations, but it’s difficult to see QE2 as anything but this. Brazil’s finance minister will complain about the Fed’s decision at the upcoming G20 meeting in Seoul on Nov 11-12, saying it could aggravate imbalances in the global economy. China, Thailand, and Mexico have all spoken out against QE2, and Beijing spoke of ‘deep bitterness’ about the dollar weakness.” The Europeans are also unhappy with their export orders being hit by the weakness of the dollar/relative strength of the Euro. Oliver Jakob commented on QE2, “When QE1 was launched, oil prices were at USD40/bbl. Oil prices have doubled since then and then the economy started to stall and the expected job creation never came. QE2 is launched with oil prices at USD85/bbl, and if the new Fed liquidity is pushed into oil futures then the impact on the economy will be quick but not positive as we are starting QE2 with oil prices at too high of a base. [Fed Chairman Ben] Bernanke stated that he is not worried about higher commodity prices translating into high inflation; that might be true for the measurement of core inflation by the Fed, but it does translate into lower disposable income and especially so for emerging countries.” Nov 8 USD86.91 – During his visit to India, President Obama announced, at the U.S.-India Business and Entrepreneurship Summit on October 6, that new deals between American and Indian companies would generate USD10Bn and create more than 50,000 U.S. jobs. QE2 causes further weakening in US dollar. Some argue that QE2 will fuel another bout of speculation in the futures markets. However, Walter de Wet at Standard from the Standard Bank Group argues that the market has already factored in QE2 and believes speculators may be due a period of retrenchment causing the oil price to correct down. Oliver Jakob also believes that QE2 will have a bigger impact on equity markets than commodity markets. Nov 5 USD86.83 – EIA reported commercial US crude inventories increased 2MnBbls to 368.2MnBbls in the same week, surpassing the Wall Street consensus for a 1.5MnBbls gain. On the other hand, gasoline stocks fell 2.7MnBbbls to 212.3 MnBbls in the same week although the market anticipated virtually no change. According the RGE across most of emerging Asia, the last remnants of H1’s terrific trade and manufacturing performance are giving way to a more subdued growth trajectory as base effects finally fade and advanced economies' expansion decelerates. China’s Consumer Price Inflation (CPI) is set to hit a high for 2010 of around 4% in October, year on year, and has continued to be strong in November, statistics suggest. China Confidential think that the persistent strength of inflationary pressures - which may well be understated by official statistics - will prompt Beijing to move to tighten its moderately loose monetary policy and implement measures to mop up liquidity in coming weeks and

months. Positive US employment news as 151,000 jobs added in October, the first increase since May Nov 4 USD86.47 – FT.com China Confidential announces its expectation that Chinese GDP growth will be in the range 9.5-10%

Nov 3 USD83.89 – Fed pumps USD600Bn into the US economy in what FT.com describes as an all out bid to shore up economy. The FOMC has announced that the second phase of quantitative easing will involve the purchase of USD600Bn in longer-term Treasurys by the end of 2Q11, at a pace of about USD75Bn each month. China unhappy with US strategy – some believe that there will be a new wave of speculative funds washing through China that could cause asset bubbles as in 2007. Others in west believe the US is injecting liquidity just at the time when the market is not asking for new liquidity and when US and

other western assets seem well priced. The government’s stated aim is to boost business and consumer confidence by (1) kick starting a surge in stock market values back towards 2007 levels, and (2) stimulating a recovery in house prices. Many believe (3) the other, but unstated aim is to drive down the US dollar in order to boost US exports (by combating China own form of currency manipulation). Nov 2 USD82.92 – Looming QE2 initiative clouding market future. Feared that much of growth in western economies in 3Q10 due to inventory build. Saudi Arabia’s oil minister, Ali Al-Naimi raised the potential ceiling for crude to

$90/bbl, a level that it hasn’t reached for two years. Democrats take pounding in mid term elections losing control of House or Reps but hanging on to Senate. Ahead of the US announcement on QE2, the FT China Confidential anticipates that implementation of a new round of QE will trigger another

growth spurt in China. It sees the role of the Chinese government switching from one of nurturing sustainable growth in an uncertain market in 2010, to trying restrain over exuberance in 2011 Nov 1 USD – Nouriel Roubini argies US economy is close to stall speed. Surprisingly strong Chinese data gave investors around the world something to think about on Monday when most had expected a cautious start to the week ahead of Wednesday’s crucial Federal Reserve policy decision. The official purchasing managers’ index rose to 54.7 from 53.8 in September, beating expectations. Oct 29 USD – Strike ends at France’s refineries. Oct 28 USD – French consumer spending in manufactured goods increased 1.5% mom in September following a fall of 1.6% mom in August, according to the French statistics office INSEE. EIA reported US crude inventories jumped by 5MnBbls to 366.2MnBbls in the week ended Oct 22, far exceeding the Wall Street consensus for a 1MnBbl increase.

Oliver Jakob said, “US stocks are not being reduced hard enough, and this will be an increasing problem for 2011.” Gasoline stocks fell 4.4Mnbbls to 214.9MnBbls in the same period, counter to analysts’ expectations of a 600,000 bbl gain. Oct 27 USD – Germany's consumer climate is expected to remain unchanged at 4.9 points in November, following strong gains in the three previous months. The GfK Consumer Climate Survey points to a further stabilization of domestic demand as consumers appear to be much more optimistic given the strong rise in business confidence in recent months, the improving labor market and still modest inflationary pressures. Oct 26 USD – Oil prices hit 15 year low against the dollar. Oct 25 USD – After currency tensions flared ahead of the October 22-23 G20 finance ministers' meeting in South Korea, the ministers pledged to avoid competitive devaluations, promote policies to boost global growth, reduce excessive imbalances and submit to peer review processes. The ministers also discussed a proposal from the U.S. to set targets to reduce current account imbalances, but it remains to be seen if member countries will agree to make the difficult adjustments—a topic that will resurface at the G20 leaders' meeting in November.

Oct 22 USD – The Russian government is moving forward with plans to privatize state-owned assets in an effort to raise an estimated US$59 billion between 2011-15 to offset the fiscal deficit. By reducing state control in several industries, the government also sees the privatization plan as a way to modernize the economy and improve foreign investors' perceptions of Russia. According to reports, the government will privatize stakes in around 900 companies and sell minority stakes in several large companies. Asia Focus by Arpitha Bykere, Adam Wolfe, Michael Manetta and Mikka Pineda: Home prices in Hong Kong, Singapore, China and India have touched or surpassed their precrisis peaks, especially in the luxury sector, bringing price-to-rent ratios to their precrisis highs. Oct 21 USD – Statistics Korea’s September employment report showed a 249,000 rise in the number of employed South Koreans and a seasonally adjusted 3.7% uptick in the unemployment rate. New job growth was driven by manufacturing and the private sector. Job loss in the public sector, seasonal factors and technical census issues contributed to the rise in unemployment. Employment numbers are expected to increase by over 300,000 jobs in October as seasonal factors wane and the economy continues to add private sector jobs. UK Government announces austerity measures (government spending cuts + welfare reductions totaling £83Bn over 4 years) as a way of leading country out of recession. The plan includes the elimination of nearly 500,000 public-sector jobs and a levy on banks. He also confirmed that the state pension age will be increased to 66 by April 2020.Some leading economists believe the cuts are too deep. There is also concern at the apparent inflexibility of the Chancellor who seems inclined to stick to his policy even if the country plunges back into recession. The German government has doubled its 2010 GDP growth forecast to 3.4%, up from 1.4% earlier this year, following a 5% contraction in 2009. The sharp rise in growth prospects was largely driven by a faster-than-expected rebound in global demand, as a result of which GDP grew by an annualized 9% in Q2 2010. The German government expects economic activity to cool next year, with GDP growth slowing to 1.8%.

Oct 20 USD – The People's Bank of China's (PBoC) surprise decision to raise interest rates from Wednesday may cool key areas of the economy, reining back surging demand for property investments and damping buoyant retail sales according to the FT.com. The PBoC announced on Tuesday it would raise the one-year lending rate to 5.56% from 5.31% and the one-year deposit rate to 2.5% from 2.25%. The immediate impact on real demand, however, is expected to be limited, given the modest size of the interest rate hike. The move runs contrary to several recent signals, including an injection of Rmb 181bn - the largest since July - by the PBoC of liquidity through open market operations. In addition, the consumer price index for September, though it is expected to show an increase from August's 3.5% year on year rise, is not thought to be spiralling out of control. The trigger for the hike, therefore, appears to have been signs that property prices are starting once more to climb, following a slowdown in the months since April. Beijing is concerned about a significant segment of China's middle income group becoming priced-out of the real estate market in first tier and some leading second tier cities. Oct 19 USD – US industrial production decreased by 0.2% m0m in September, the first monthly contraction in industrial production since June 2009. All 12 refineries are now on strike in France or being shut down gradually by the companies for safety reasons. Oct 18 USD – Battle lines in UK about to be joined with Conservative government about to announce austerity cuts. Letter from 35 CEOs in support of government published in Daily Telegraph. But plenty of opposition e.g. David Blanchflower, a former Bank of England policymaker. ………………………………………………………………………………………………………………………. Sep 22 USD – CBI downgraded its forecast for UK GDP growth to 2% in 2011 from 2.5% in its June forecast pointing to the UK government’s austerity cuts as the primary new negative factor on the horizon. US Vehicle miles reached a new high for July but the growth was not enough to offset the increasing share of ethanol in the gasoline supply mix. RGE assign a higher risk (40%) to a US double dip. Sep 21 USD – According to the OECD, the United States will experience a slow, jobless recovery from its deepest and longest downturn since the 1930s but will avoid a double-dip recession. Sep 20 USD – Suggestion that China and Japan may break off high level exchanges over Chinese trawlerman arrested after collision with Japanese coastguard vessel on Sep 8. The Reuters/University of Michigan preliminary index of consumer sentiment for September fell back significantly, to 66.6 from 69.8 in August, and stands at its lowest level since August 2009. The decline was driven by a 3.8 point drop in the future business conditions index, which fell back to 58.1, the lowest level since March 2009. The US National Bureau of Economic Research declared the longest economic recession since the Great Depression officially ended in June 2009. Sep 17 USD – US and China lock horns over currency manipulation. US anger at Japan’s recent intervention is exacerbated because it lets China off the hook. The EIA report that commercial US crude inventories fell 2.5MnBbls to 357.4 MnBbls in the week ended Sept 10. Gasoline stocks dropped 700,000 bbl to 224.5MnBbls, and distillate inventories declined 300,000 bbl to 174.5 MnBbls. Initial US jobless claims dropped by 3,000 to 450,000 in the week ended Sept 11, the lowest level in 2 months while economists were expecting that the claims would increase to 459,000. The EIA announced that the US and China are close to a unique energy data-sharing agreement. This accord would cover a spectrum of energy information and help work towards improving transparency in commodity markets in order to limit price swings. Raymond James Analysts commented, “With China being the world's fastest-growing and least transparent energy consumers (the IEA forecasting consumption to grow 9% in 2010 and 4.3% in 2011), this

sharing agreement will lead to a better understanding of global demand and prevent excessive fluctuations in oil markets in the future.” Sep 16 USD78 – European and US anger at Japanese currency intervention – the first for six years and against expectations following the reelection of Prime Minister Naoto Kan – aimed at weakening the yen. The sizeable intervention (USD12Bn) signaled that the Bank of Japan was willing to fight deflation. FT report that new home sales in first tier cities reach 2010 peaks although prices look to have remained stable. Sep 15 USD78.81 – According to RGE, nominal retail sales in the U.S. grew by 0.4% m/m in August 2010. The headline number reflects a 0.7% drop in auto sales and a 1.9% pickup in sales at gasoline stations. Meanwhile, sales in the core category—excluding autos, gasoline and building supplies—rose 0.6% in August. This dovetails with an increase in chain store sales in August, driven by deep discounts from retailers during the back-to-school shopping season. Weekly chain store sales indexes still suggest weak sales in Q3 2010. With two massive Category 4 hurricanes churning in the Atlantic, Tropical Storm Karl formed in the Caribbean and is headed straight for oil and gas operations offshore Mexico. Sep 14 USD78.63 – OPEC’s 50th birthday. Naoto Kan, Japan's prime minister, fended off a challenge from Democratic party colleague Ichiro Ozawa to remain leader of the ruling party. Kan is focused on the next generation and is concerned to bring down sovereign debt. The Yen responded positively to the news of his reelection. Mr Kan is regarded in the market as being more reluctant to embark on currency intervention, a stance that is likely to keep the currency strong. He is also seen as being more likely to keep debt issuance under control, which is also positive for the yen. It is reported that Chinese crude oil imports increased by 10% mom in August.

Sep 13 USD78.2 – Latest China data + Basel III cheers bulls as stock markets light up.

Sep 10 USD77.49 – IEA latest global oil demand projection for 2010 is 86.6Mnbd (+1.9Mnbd – marginally up from their August estimate –although expectations for 2010 have

been in the range 86.1-86.6Mnbd for the last 11 months) and 2011 is 87.9Mnbd (+1.3Mnbd). Significant downside risk persists from fears that the world economic recovery could stall. The IEA also commented that the oil market remains in a period of unusual calm that probably won’t last. For 2010, IEA retains its outlook for 4.5% GDP growth worldwide but expects demand growth on an annualized basis to ease from about 2.3Mnbd in the first half to 1.5Mnbd in the second half. Demand growth will slip to 1.3Mnbd next year unless the global economy underperforms current expectations.

Sep 9 USD – The OECD’s latest Interim Economic Assessment warns that the world economic recovery may be slowing faster than previously anticipated. Growth in the Group of Seven countries is expected to be around 1½% on an annualized basis in the second half of 2010 compared with the previous estimate of around 1¾% in the OECD’s May Economic Outlook. Larry Elliot of the Guardian sums up (from an anti austerity perspective): the world economy is clearly slowing; both the OECD and the International Monetary Fund are now warning against over-aggressive tightening of policy; Britain's economy is both unbalanced and weakening; and in less than six weeks' time the government is planning to announce the biggest programme of spending cuts since the 1930s. Osborne has now been given a perfect excuse for moderating his plans. If he carries on regardless, he risks making the biggest economic blunder since John Major took Britain into the Exchange Rate Mechanism. US jobs news better than expected. The Fed Beige Book published on September 8 noted continued growth in economic activity but struck a cautious note by pointing at "widespread signs of a deceleration" in activity. Five of the 12 districts showed modest growth, and two showed "net improvement," while five showed "mixed conditions or deceleration" compared to two districts in the previous report. Consumer spending gained on balance, but consumers remained cautious. Sep 8 USD77.77 – Globalisation powers on with announcement that China plans to build USD2Bn rail link to Iran.

Joseph Stiglitz, who won the Nobel Prize for Economics in 2001, said the use of deep spending cuts was a "disaster" adding that Europe was heading towards more economic difficulties if politicians cut back spending rather than calm down the financial markets. RGE notes that two Japanese government bond auctions and the upcoming DPJ elections appear likely to influence the 10-year yield. If it looks like the DPJ leadership race is swinging in favor of former DPJ leader Ichiro Ozawa, the yield could continue to reverse its flattening trend on fears that he would boost spending. The EIA said commercial US crude inventories dropped 1.9MnBbls to 359.9MnBbls in the week ended Sept 3, while gasoline stocks decreased 200,000Bbls to 225.2MnBbls. Distillate fuel inventories fell 400,000Bbls to 174.8MnBblsl Sep 7 USD76.19 – It is reported that the Chinese government have ordered steel production in Tangshan, one of China's major steelmaking hubs, to be cut to meet energy efficiency targets. President Obama proposes a USD50Bn plan to upgrade US roads, railways, and other infrastructure. Sep 6 USD76.12 – US employment data for August not as bad as expected. But Oliver Jakob pointed out, “At the current pace of job creation, it would take 7 years to reverse the job losses of 2008-09, hence the general picture is not changed: much stronger job creation is required.”

Sep 3 USD75.96 – Brazil GDP data better than expected – up 8.8% yoy in 2Q10, up 2.2% qoq Sep 2 USD76.36 – Eurostat’s second 2Q10 GDP release confirms that the eurozone economies grew 1% qoq, outpacing both consensus (0.7% qoq) and RGE’s expectations (0.4% qoq with upside risks) by a large margin. The breakdown by expenditure identifies final domestic demand as the main growth driver. Fire extinguished on Mariner Energy platform Sep 1 USD76 –East costs bracing for hurricane Earl. “The bounce back in prices was fueled by the release of better-than-expected economic data from China and the US, which were indicative of a moderation in global manufacturing activity rather of a sharp slowdown,” said Barclays Capital analysts. EIA reported commercial US crude inventories gained 3.4Mnbbls to 361.7MnBbls in the week ended Aug 27. Aug 31 USD74.31 – US consumer spending hits a 4 month high. Brazil’s industrial production lower than anticipated for July. India's GDP growth picked up to 8.8% yoy in 2Q2010 from 8.6% yoy in 1Q10. Aug 30 USD73.1 – US drilling activity increases for the 12th straight week. Federal Reserve Chairman Ben Bernanke’s

deliveries message that the Fed “will do all it can” to ensure a continuation of the economic recovery. Despite debt running at 225% of GDP, Japan has launched a fresh monetary and fiscal boost to shore up its faltering recovery (GDP grew by just 0.1% in 2Q10) and stem the slide into deflation, becoming the first major country to inject further stimulus since the Great Recession ended. The Bank of Japan agreed at an emergency meeting to boost its special loan facility by ¥10 trillion to ¥30 trillion (£220.7bn). "We need to watch out more carefully for downside risks to Japan's economy," said Governor Masaaki Shirakawa, who cut off his trip to the Jackson Hole forum in the US. "Several weak US figures came out, while the yen rose and stock prices fell. When we saw this, we decided that we need to take more precautions." Premier Naoto Kan said Tokyo would tap into its reserve fund for a ¥920bn spending package on jobs and investment. "We want to take swift measures as the second pillar of stimulus to support easing by the bank," he said. Commentators have argued that the sums involved are relatively small and reflect Japan’s large sovereign debt and an unwillingness to draw attention to it by taking radical action.

Aug 27 USD – US 2Q10 GDP estimate revised down to 1.6% from an earlier estimate of 2.4% and well below gdp growth of 3.7% in 1Q10. Global economy approaching a “dangerous stall speed” according to research headed by Nouriel Roubini. Aug 26 USD74.37 – Ireland’s Sovereign rating downgraded to AA-. German business confidence unexpectedly continues to climb. Aug 25 USD71.93 – Oliver Jakob points to continued deterioration of US macroeconomic data which means that the oil price is taking its lead from the stock market. The EIA reported that crude oil inventories jumped 4.1MnBbls in the week ended Aug 20. The consensus has been for a modest 0.3MnBbls increase. Aug 24 USD72.1 – Energy prices across the board continue to fall with coal and crude oil leading the descent. Raymond James & Associates Inc. “With the recent slew of weaker-than-expected economic data, investors are becoming increasingly concerned about the stability of the economy.” Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The stock market is under a cycle of outflows, some well-respected large macro hedge funds are calling it a day, volume in equities remains historically low, and we see growing discontent being voiced against the action of high-frequency trading machines. The level of ‘financial engineering’ in the market does not seem to be seriously lower than in 2007-08 and that has not helped to bring confidence in the stock market. In our opinion, this means that the global markets are still exposed to a deleveraging risk, and the current investment outflows are a warning flag in that regard. The experience of 2008 has shown that in an environment of high correlation across asset classes, there is nowhere to hide but in cash as asset classes start to be hit by margin calls one after the other.” He noted, “The oil price collapse of 2008 was triggered by deleveraging but then fueled by consumers [who] had to close down their hedges (long positions) or sell oil futures to protect some of their short option positions that were financing their long call positions.” The price of crude is “starting to approach some of the lows of the year on the long dated positions, where consumers are…on the long side. Therefore we are starting to arrive at an important crossroad where either the consumers start again to add to their long hedges and support a bottoming of the price collapse or start to be exposed to margin calls if the oil market continues to slide down,” Jakob surmised. Aug 23 USD72.96 – S&P500 continues to drift lower following losses last week. Analysts at the Centre for Global Energy Studies (CGES), London, noted, “For the past 10 months crude oil prices have remained remarkably stable, with benchmark grades trading in a range between USD70 and USD80/bbl and showing no sign of breaking decisively in either direction.” Tropical Storm Danielle formed late Sunday approximately 850 miles west of the Cape Verde Islands. Forecasters with the National Hurricane Center predict the fourth named storm of the 2010 Atlantic hurricane season could reach Category 2 Hurricane designation by late Tuesday. There are no US coast weather warnings.

Aug 20 USD73.43 – US Department of Labor report that first-time claims for jobless benefits increased by 12,000 to 500,000 last week, the highest level since November. It marked the third consecutive weekly increase in initial unemployment claims. Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The current macroeconomic data is a serious bearish warning flag both for gasoline (consumer confidence) and for diesel (industry could stay on the cautious side for a little longer). Jakob said, “The fundamentals of oil are not pretty, and crude oil on a stand-alone basis should be priced at levels (i.e. $50-60/bbl) that force the Organization of Petroleum Exporting Countries [to cut production].” He said, “If the poor macroeconomics force some deleveraging, we have to be ready for the risk of sharp downward corrections.” Aug 19 USD74.47 – Stuart Green, economist at HSBC, said the signs of damaged UK confidence were “probably the most explicit so far” of the impact from public sector cuts. Fereidun Fesharaki, founder and chairman of FACTS Global Energy and a past president of the International Association for Energy Economics provides a negative medium-long term forecast of Chinese crude oil demand growth. He argues that Chinese demand growth will increase rapidly from current levels of 9.1Mnbd to around 13Mnbd by 2020 and will then tail off (with growth of no more than 0.1-0.15Mnbd/year). Shell, following attacks on its oil pipelines in the south of the country, declared force majeure on its August and September exports of Nigeria’s benchmark Bonny Light crude. Aug 18 USD73.5 – US may be heading towards additional stimulus is some form. Iran is expected to start fueling its

Bushehr nuclear plant early next week. Will Israel attack? The EIA reported commercial US crude inventories declined 800,000 bbl to 354.2MnBbls in the week ended Aug 13, not quite as low as the Wall Street consensus for a 1MnBbl decrease.

Aug 17 USD76.61 – Talk of a fresh Japanese stimulus package – highlighted as good news but because the world is moving in different directions (stimulus v austerity) and because Japanese economy the model for stimulus is still failing could also be shaded in blue. “Disappointing industrial output and retail sales suggest that Chinese growth may be cooling; meanwhile, data on wholesale prices and machinery orders in Japan came in weaker than expected,” said analysts in the Houston office of Raymond James & Associates Inc. High stocks + weak energy demand prospects for US and China also negative factors to weigh in. Aug 16 USD74.65 – The Japanese economy grew at an annualised, seasonally-adjusted pace of 0.4% in the three months ended June. That was much lower than the revised 4.4% growth rate recorded for the first quarter and well below the 2.3% expected by economists. Darin Newsom, senior analyst with DNT in Nebraska believes that fears over strength of US economy are dominating - “From a technical point of view, the market seems to be indicating it will soon rejoin its longer-term downtrend with a fall/winter target price between $59.80 and $50.50.” Aug 13 USD74.73 – German GDP rises 2.2% in 2Q10 Aug 12 USD75.74 – While advance estimates suggest that the U.S. economy grew at a 2.4% annualized rate in Q2 2010, subsequent data releases indicate that upcoming revisions to Q2 2010 GDP growth will be sharply lower according to RGE. Aug 11 USD78.19 – Chinese crude oil imports reported to have fallen 15% mom in July. Federal Reserve issues a statement that included the idea that the US recovery may be “more modest” than expected. IEA revises up its demand forecasts for 2010 +100Kbd to 86.6Mnbd (+2.2%, +1.8Mnbd) and 2011 +1o0Kbd to 87.9Mnbd (+1.5%, +1.3Mnbd) Aug 10 USD80.25 – In June, German exports recorded renewed robust expansion, rising 3.8% mom. Export volumes now stand at €86.5Bn, their highest level since October 2008.

Aug 9 USD81.48 – Larger than expected drop in US jobs – feeds fear of a jobless recovery. Explosives experts in the United Arab Emirates confirmed a Japanese-owned oil tanker steaming through the Strait of Hormuz last week came under a terrorist attack. Aug 6 USD80.18 – Now thought that 74% of BP oil slick has dissipated. Following an upward-revised decline of 0.1% in May, German manufacturing orders gained 3.2% m/m in June, significantly above the consensus forecast of 1.4%. Aug 5 USD – Market seeing USD80Bbl as the new support level. Olivier Jakob, said, “Pending home sales are falling to a record low, US consumption is flat, and US factory orders are down for the second month in a row. The macro-economic indicators continue to point to an US economy that is flattening, and in that context it should not be a surprise that the Federal Reserve System is getting increasingly worried about the pace of US recovery.” IEA reported Aug. 4 commercial US crude inventories fell 2.8MnBbls to 358MnBbls in the week ended July 30. That exceeded the Wall Street consensus for a drop of 1.7MnBbls. However, offset by an unexpected increase in gasoline inventories and a strengthening dollar Aug 4 USD – RGE expects US consumer spending to be weak in 2H10. RGE also believes that economic data in the last two weeks confirms their view that 2010 will be a year of two halves with sluggish second half

growth. Hurricane season activity revised up. Global weather authority ImpactWeather recently updated its 2010 Atlantic hurricane outlook, forecasting at least one major hurricane to enter the Gulf of Mexico. The revised storm outlook calls for six named storms to enter the Gulf of Mexico over the next few months, of

which three are forecast to be hurricanes and one a major storm. Additionally, the Colorado State University hurricane forecasting team called for a “very active” hurricane season, updating its hurricane forecast for this season to reflect a tropical cyclone activity level 195 percent above average. The William Gray-led team is predicting 10 hurricanes – five of which will be major storms, meaning a Category 3, 4 or 5. The group also expects 18 named tropical storms. The group pinned its prediction on the combining hurricane-friendly factors of warm waters and decreased wind sheer. “The probability of a major hurricane making landfall along the US coastline is 75 percent compared with the last-century average of 52 percent,” said William Gray. The 2010 Atlantic hurricane season has already produced Hurricane Alex and Tropical Storm Bonnie, which shut-in production and required offshore evacuations on oil and gas facilities and drilling rigs. Aug 3 USD82.63 – Raymond James & Associates Inc. reported, “The Institute for Supply Management (ISM) released its index of manufacturing activity [on Aug. 2], which was above expectations, and strong earnings reported by European banks also pleased the market.” Olivier Jakob was more cautious outlook. He pointed out, “The ISM numbers released yesterday show the Purchasing Manager's Index (PMI), new orders, and production falling in July vs. June. The indices are above 50, which is still a positive, but this now makes 3 consecutive months of decline in the main ISM indices.”

Aug 2 USD80.86 – JPMorgan/Markit's global PMI slowed further in July to 54.3, from 55.0 in June, marking the lowest pace of expansion in 2010. While still consistent with strong growth, the pace of output and especially new export orders slowed slightly. Global PMI has been above the neutral threshold for 14 months, and the pace in H1 2010 was the highest since Q2 2004. JP Morgan argues that despite "decelerating from the post-recession boom seen over the past year...rates of expansion in new orders, output and employment all remained above their respective survey averages. The most significant slowing was visible in the U.S. and emerging market economies, especially emerging Asia and China."

July 30 USD77.25 – US 2Q10 GDP growth slows to 2.4% as a swelling trade deficit and weaker consumer spending dragged on the recovery –fourth consecutive Q of expansion + 1Q figures revised up from 2.7% to 3.7%, but figures slightly lower than expected (2.5%) and caused the sale of risk to quicken July 29 USD76.62 – FT.com report that real estate transaction volumes in first tier cities rose to their highest level in almost three months during the week ending July 28. Meanwhile, iron ore prices increased for the second consecutive week following a declining trend that has persisted for almost three months. July 28 USD75.44 – South Korea posted strong growth rates of 7.2% yoy and 1.5% qoq in 2Q10, though these rates marked a slowdown from 1Q10 8.1% yoy and 2.1% qoq. Conference Board reported its US Consumer Confidence Index slipped to 50.4 in July, down from the revised 54.3 in June and below the 51 reading expected by economists. The EIA reported that commercial US crude inventories jumped 7.3MnBbls to 360.8MnBbls in the week ended July 23. Wall Street’s consensus was for a 1.7MnBbls draw. July 27 USD75.7 – All but 7 European banks pass stress tests – but are stress tests too weak. US June home sales rebounded 23.6% from May lows July 26 USD77.25 – Following the passage of Tropical Storm Bonnie, BP reported that the rigs drilling the two relief wells have returned to the Macondo site in the deepwaters of the Gulf of Mexico and begun hook-up procedures. July 23 USD77.1 – UK economy grew by 1.1% in 2Q10. Oil and gas operators evacuate offshore workers, shut-in production in the path of Tropical Storm Bonnie. July 22 USD76.89 – A consortium led by ExxonMobil Corp., and including Chevron Corp., ConocoPhillips, and Royal Dutch Shell PLC, is pooling USD1Bn to form the Marine Well Containment Co., a nonprofit joint venture to provide rapid response to major oil spills in the Gulf of Mexico. There are currently two major storms threatening the Gulf of Mexico. While one is strengthening in the Bay of Campeche, the other is organizing near the Dominican Republic. Both are threatening offshore oil and gas exploration and production operations.

July 21 USD75.83 – Barack Obama signed into law the most sweeping overhaul of Wall Street regulations since the 1930s, less than two years after the collapse of Lehman Brothers. The new law was endorsed by Ben Bernanke, Federal Reserve chairman, who said it made “significant progress” towards reducing the

likelihood of another crisis and placed the US financial system on a “sounder foundation”. Bernanke does not believe double dip is a high probability event, but comments about “unusually uncertain” US economy unsettle investors - Fed Chairman Ben Bernanke reiterated in his semi-annual testimony to Congress that while moderate growth remains the Fed's main scenario, the risks to growth were seen as weighted to the downside. Bernanke stated that while the economic outlook remains unusually uncertain, "we remain prepared to take further policy actions as needed" – implying that further stimulus was an option…… Potential tropical cyclone brewing in the USGulf ------ The EIA reported that commercial US crude inventories increased 400,000 bbl to 353.5MnBbls in the week ended July 16, counter to Wall Street’s consensus for a drop of 1.2MnBbbls. July 20 USD75.25 – The IEA reported China has taken over the US’ century-long position as world's largest consumer of energy. According to IEA data, in 2009 China consumed 2.25BnTons of oil equivalent, which includes all forms of energy consumed, compared to 2.17BnTons for the US. The US remains the largest energy consumer on a

per-capita basis and the biggest oil consumer, however. US Department of Commerce reported construction of new homes and apartments fell 5% in June to a seasonally adjusted annual rate of 549,000—the lowest level since October. May's figure was revised downward to 578,000. July 19 USD74.67 – WTO releases annual World Trade Report. Weak US economic data weighs on market e.g. the US Department of Labor reported July 16 the Consumer Price Index sagged 0.1% in June. July 17 the IMF and EU suspended their review of Hungary's current US$25.1 billion loan program, in place since late 2008, and called for tough action from the government to meet this year's 3.8% of GDP budget deficit target. Commodity and equity markets fell on reports that US consumer confidence hit a 12-month low. Analysts at the Centre for Global Energy Studies, London, said, “With the oil market receiving no clear signals from the fundamentals of supply and demand, oil prices are reacting to sentiment about the pace and robustness of the global economic recovery, which is buffeted by each new piece of data and every new forecast. Ample spare capacity throughout the oil supply chain is effectively keeping a lid on price rises. Price support is coming from the structural shift that is concentrating oil’s use in the high-value transport sector and the belief that the Organization of Petroleum Exporting Countries will act to prevent prices from falling much below USD70/bbl.” July 16 USD74.25 – Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston., said, “Despite the hotter-than-normal summer, we expect oversupply concerns to come back to dog the market as inventories are well over the 5-year average and only 33 bcf below last year’s level.” July 15 USD74.57 – BP finally caps leak from Deepwater Horizon. The EIA said commercial US crude inventories fell 5.1MnBbls to 353.1MnBbls in the week ended July 9, far exceeding the Wall Street consensus for a 1.5MnBbls draw. This may have been due in part to the impact of hurricane Alex.

July 14 USD77.01 – China reports 2Q10 growth of 10.3% - Although the slowdown was expected, other figures released on Thursday indicated that the economy could be cooling more quickly than forecast. Industrial production posted 13.7 per cent year-on-year growth in June, compared with a 16.5 per cent increase in May.

July 13 USD75.68 – Moodys cuts Portugal’s credit rating. IEA made its first estimate for 2011 growth with a projected rise of 1.6% or 1.3Mnbd year-on-year to 87.8Mnbd. Its estimate for global oil demand for 2010 almost unchanged at 86.5Mnbd (+2.1% or +1.8Mnbd versus 2009). OPEC 2010 demand growth forecast (from June) is much less optimistic at 0.95Mnbd. According to the IEA growth in 2011 will entirely be driven by non-OECD countries. According to the IEA global refinery crude throughputs are estimated at 73.5 mb/d for 2Q10, 1.3 mb/d above year ago and 0.7 mb/d higher than in 1Q10. A year-on-year recovery in US runs, plus continued expansions in non-OECD Asia, drive growth. OECD Europe, Pacific and Latin American runs remained weak due to maintenance and operational problems, though a rebound is expected in 3Q10. July 12 USD73.5 – According to Oliver Jakob the problem with oil is that there have been no significant stock draw downs in 2010. July 9 USD74.84 – July 8 USD74.87 –

July 7 USD72.32 – IMF release July update of its “world Economic Review”. It revised up again its forecast for world economic growth in 2010 to 4.5% from 4.2% in April, 3.9% in January and 3.1% in October 2009. However, it hedges its bets saying that downside risks had increased. OPEC releases annual World Oil Outlook. Also boost from strong US retail sales figures as did falling stocks - the EIA reported commercial US crude inventories fell 5Mnbbls to 358.2MnBbls in the week ended July 2, well below the Wall Street consensus for a 2MnBbls decrease. July 6 USD70.91 – Hurricane Alex disrupts Mexican crude oil exports to US. July 5 USD71.24 – The mention of the word “storm” will lead to USG offshore producers taking a shut down safety first approach. This could potentially boost US crude oil imports during the hurricane season up to November. July 2 USD71.21 – Leading indicators and surveys of global manufacturing suggest that activity continued to expand in Q2, but the pace of expansion has slowed markedly: JP Morgan/Markit's global PMI for June was 55.0, down from 57.0 in May. While still consistent with strong growth, the pace of output and especially of new orders slowed slightly. July 1 USD71.71 – In Brazil, economic indicators for Q2, such as industrial production for May and trade figures and PMI for June suggest growth is consolidating at a slower pace -- Oil prices continue to slip after the EIA reported total petroleum inventories rose by 1.4MnBbls, compared with the Wall Street consensus for a 500,000 bbl withdraw. --

After seven years, India removed its subsidies on gasoline and diesel. The move is aimed at cutting a 6.9 percent budget deficit. The decision, announced by India’s Oil Secretary S. Sundareshan on June 25, will stoke inflation by almost a percentage point, the finance ministry said, adding to pressure on the central

bank to raise interest rates. The IEA projects Indian oil consumption at 3.3Mnbd this year, up 1.9% from 2009, when consumption grew 5.6%. ……………………………………………………………………………………………………………………………………………………… June 22 USD – Court grants preliminary injunction to lift moratorium on deep sea drilling. June 19 USD – China announces that will “flexibilize” its USD FX peg. In the short term at least this will lead to strengthening in Yuan. The move is being interpreted as a sign that Chinese policy makers believe the economic recovery will prove sustainable. June 4 USD – Stock market jitters on poor US jobs news and fears Hungarian debt crisis fears. June 3 USD -

June 2 USD73.95 – US green shoots give markets a boost - May Consumer Sentiment index increased to 73.6 from 72.2 in April, while the consensus was an increase to 73.3 - also positive figures for US construction and manufacturing. Japanese Prime Minister Yukio Hatoyama announced his resignation just 8 months after taking office. He was under growing pressure to quit after failing to make good on earlier campaign pledges. His successor indicated that he would review Japan’s policy of spending its way out of trouble following the shock of Southern Europe’s sovereign debt crisis. June 19 USD – BP shares in meltdown. Tension mounts in Middle East after Israel mismanaged Gaza convoy Intervention.

The Role of Speculators in the Futures Markets Summary - US politicians have struggled in recent months to evaluate the role of speculators in determining the movement of commodity prices. Obama’s inaugural address makes it clear that he believes that left unchecked speculators with bring markets down. The following chronology plots recent

discussions on the subject. Currently the politicians and Commodity Futures Trading Commission (CFTC) are singing from different hymn sheets Michael Martins – St Croix – Fund Manager (doesn’t trade food and oil on principle) – testified against Commodity Index Funds in front of Congress – 0.5% of market but pushing one way (either up or down) – used to be S/D, now S/D+Demand Nov 5 – Not everyone feels that the injection of fresh liquidity from QE2 will boost oil prices as the market has already factored in QE2. Walter de Wet at Standard New York Securities Inc., the Standard Bank Group, said, “We believe that the Commodity Futures Trading Commission data released later today is likely to show that noncommercial long positions have increased from already high levels last week.” The weekly CFTC report last week showed net speculative length in crude pushed higher last week, while net speculative length in oil products declined. De Wet said, “The current level of the speculative length in oil could cause oil prices to pull back very sharply despite the Fed’s QE2 program. To highlight the risk of such a correction, there were two previous big drops in oil prices when net speculative length had reached current levels. One was in January-February, another was April-May. We believe that commodity markets are pricing in QE2 already, and commodities will not necessarily continue to rally. We need new data to support higher prices.” Nov 3 - Fed pumps USD600Bn into the US economy in what FT.com describes as an all out bid to shore up economy. It is feared that this could lead to another round of asset speculation encompassing the commodities futures markets. Feb 26 - CFTC member Scott D. O’Malia speaking at a conference in Tokyo noted the importance of spare capacity and its role in determining oil prices. “The price of oil peaked in 2008 at USD147Bbl, in part, because the global demand had virtually eliminated any spare capacity in the global oil markets. In fact, during the price spike, there was less than 2Mnbd of spare capacity”. He argued that the problem of limited spare capacity could creep back by 2015 because most future demand is amongst developing countries and these countries (like China) aren’t always transparent in reporting oil data. However, he also singled out traders and the shadowy world of oil-in-transit as another factor in masking the true supply/demand picture in the oil market. O’Malia argued, “We must call into question the practices of certain oil traders that buy oil and put that oil into storage, if such practices are designed to extract money from consumers and producers.” Jan 22 – Oliver Jakob argues that the CFTC’s implementation of a new rule on position limits will have more impact on energy prices in the short term than Obama’s bank break up plans. He said, “The CFTC is putting the Street up against the wall with rules on limits that should force some of the largest banks to choose between speculative trading and being a swap provider in commodities, and this will not be dependent on the broad reforms in the banking sector wanted by President Obama. The CFTC proposal covers many potential loopholes and if we thought the proposal was pretty harsh for the business line of some of the large Wall Street commodity banks, after hearing the president yesterday we are more convinced than ever that the CFTC is for real. We will therefore increase our risk factor for liquidation and de-leveraging of positions in commodity indices in the fourth quarter 2010 [or] the first quarter of 2011.”

New Crude Oil Production Capacity Coming on Stream

Dec 15 -- Production from Jubilee oil and gas field off Ghana has started, and partners expect output to reach 55,000 b/d of oil by yearend and 120,000 b/d during the first half of 2011 when additional wells are completed. The first tanker of oil from Jubilee field is expected to leave in January 2011. The field in the Gulf of Guinea came on stream 42 months after the 2007 discovery. Oct 28 – Production testing is under way at the FPSO Cidade Angra dos Reis, stationed in the deepwater Tupi area in the Santos Basin pre-salt cluster in the BMS-11 block. The FPSO is connected initially to the RJS-660 well, which will undergo technical testing until Petrobras issues a Declaration of Commerciality (DC) for the Tupi field, expected in late December. By that point, connection of the floater to other producing wells will be completed, and the Tupi area will enter the production development phase. To date, nine wells have already been drilled in the Tupi accumulation. The latest (ninth) well, completed last week, confirmed Petrobras’ reovery estimate of 5-8 BBoe. Sep 15 – Shell began production from the Athabasca Oil Sands expansion project, adding 100,000 barrels per day to its oil sands operations in Canada. Aug 27 – Production of light oil is approaching 10,000b/d from the newly on stream Hengam field in the Strait of Hormuz between Iran and Oman according to Iran’s petroleum minister. Aug 26 – Sudan expects to increase its oil output by 33% in 2011 to 600,000b/d up from 450-470,000b/d currently. Aug 3 –Oil and gas production has begun from Shell Petroleum Development Co. of Nigeria’s five-field Gbaran-Ubie project in the Niger Delta of Nigeria. At capacity next year the project will be able to produce 1 bscfd of gas and 70,000 b/d of oil. Aug 2 – Norwegian major Statoil (NYSE:STO) started production from its Morvin oil and gas field on November 1, 2010, via a subsea tieback. Located on Block 6506/11 in the Norwegian Sea, about 20 kilometers west of the Asgard B platform on the Halten Bank, Morvin was developed with two subsea templates and four production wells. The development is tied to the Asgard B production platform for processing via a 20-kilometer-long pipeline. The Morvin reservoir is located at a depth of 4,500 meters. Contributing to production on the Norwegian Continental Shelf, initial production rates at Morvin will reach 24,000 barrels of oil equivalent a day. After the start-up of the second Morvin production well, production rates are expected to jump to 51,000 barrels of oil equivalent a day. Boasting estimated recoverable reserves of 70MnBbls of oil equivalent, Morvin is expected to have a 15-year production life. Jul 23 – Production from the North West Shelf oil redevelopment project should start by end-March 2011, according to Woodside Energy. All topsides modules and the rigid arm/turret have been installed on the Okha FPSO at Keppel’s shipyard in Singapore. Refurbishment of subsea infrastructure should get under way towards year-end. Jul 14 - Petrobras has begun producing Well Urugua 6 to the Cidade de Santos floating production, storage, and offloading vessel, moored 160 km off Brazil in the Santos basin. The company also has connected wells Urugua-8 and Urugua-10 to the FPSO and expects production to reach 25,000 b/d later this week. At full capacity, Petrobras expects the field to produce 35,000 b/d after connecting a fourth well to the FPSO by yearend. The FPSO is in 1,300 m of water and will handle production from both Urugua and Tambau fields. The FPSO is designed to handle 10 million cu m/day of gas, and 35,000 b/d of oil and condensate, as well as to store up to 740,000 bbl of oil.

Exploration and Development Summary – Following the dramatic collapse of the oil price during mid 2008, E&D spending was severely impacted with even Saudi Aramco deciding to delay new E&D projects. In Feb 2009, it was reported that OPEC had delayed 35 of 150 planned oil drilling projects by at least 4 years. However, at the start of 2010 E&D spending is once again on the rise despite a much less inflated oil price than at the start of 2008. Deepwater drilling is considered the main future growth segment for this industry with Asia at the forefront led by Indonesia, Malaysia and India.

see John Kemp ft.com 24.11.08 Market already making adjustment to take account of changing supply demand balance to bring e&d costs down (e.g. rig hire rates falling – steel prices) with IEA having already cut its estimate for 2030 production by a staggering 10 million bpd (9 percent) since WEO2007 (when it thought 113.7 million would be needed by 2030).

Dec 11 – Petrobras has taken exception to earlier claims by BG Group concerning the estimated volumes of recoverable oil equivalent, as well as the capital and production costs of the Tupi and Guara fields in the Santos basin off Brazil. It reiterated the estimates that have already been announced, of 5-8 BnBoe recoverable in Tupi and Iracema (Block BM-S-11), and 1.1-2 BnBoe recoverable in Guara (Block BM-S-9). Dec 10 – US drilling activity continues to rise as a result of increased land based drilling. Effective moratorium in place for offshore drilling with US Bureau of Ocean Energy Management, Regulation, and Enforcement still sitting on drilling permit applications Dec 10 – Chevron Corp. plans a USD26Bn capital spending budget for 2011 (up from USD21.6Bn in 2010), of which USD22.6Bn is targeted for oil and gas exploration and production projects worldwide with USD5.4Bn going to US projects and USD17.2Bn going to projects elsewhere. Major 2011 upstream investments include development of natural gas resources in Western Australia and development of assets in the Gulf of Mexico, West Africa, and the Gulf of Thailand. Dec 9 – OGJ reported - Upstream capital and operating costs rose in the 6 months ending in the third quarter of 2010, according to indexes compiled by IHS CERA. The IHS CERA Upstream Capital Cost Index rose 3% to 207 between the first and third quarters of the year on a scale in which costs of the year 2000 are assigned the value 100. The index had fallen since 2008. The IHS CERA Upstream Operating Cost Index, against as similar scale, rose 1% to an index score of 173. The firm said the index shows the federal moratorium on offshore drilling imposed after the Macondo blowout in the Gulf of Mexico in April “had a significant impact in the gulf.” A press release noted six departures of deepwater rigs from the gulf and a sharp reduction in the number of new wells drilled in shallow water. “The subsequent lifting of the moratorium does not mean a return to business as usual, however,” it said. “The return to drilling will be slow as operators and rig owners move to meet newly enacted certification processes.” Although deepwater activity elsewhere hasn’t shown a similar decline, said IHS CERA Chairman Daniel Yergin, “increased certification regulations will likely push up total project costs globally in the future.” The capital cost index assessment included increases in 6 of the 10 markets it tracks. But only steel had an increase above 2%. Its increase was 7%. The increase in the operating cost index “was driven by higher onshore well service (2% increase) and material costs (3% increase), though both remain below 2008 levels,” IHS CERA said. Other markets tracked in the calculation were mostly unchanged. Dec 3 – Brazil’s lower house of congress has approved long-awaited oil industry legislation granting the federal government greater control over deepwater reserves off the nation's coast. The legislation passed this week replaces the current concession-based system with a production-sharing scheme that gives Brazil’s Petrobras a minimum 30% operating stake in all new subsalt fields. Under the legislation, Petrobras will be the operator of the fields under the production-sharing deals, but other oil companies will have the right to bid for stakes by guaranteeing the government a large percentage of oil output. The new production-sharing agreements will not cover presalt areas previously auctioned off under the concession system. The agreements also will not affect onshore or shallow-water areas, which will be auctioned off under the current concession-based system.

Nov 5 – Brazil’s National Petroleum Agency (ANP) said the country’s offshore Libra subsalt oil discovery could hold as much as 15BnBbls of oil—a figure 2.4 BnBbls greater than the country’s existing reserves. “The volume of recoverable oil belonging to the nation could vary from 3.7-15 BnBbls, with the most likely estimate being 7.9 BnBbls," ANP said, citing a study carried out by certification firm Gaffney, Cline & Associates. Nov 3 - BG Group raised its estimate of economically recoverable gross resources by 2.7Bnboe for Tupi, Iracema, and Guara fields in the Santos basin, off Brazil. Its new estimate is 10.8Bnboe compared with 8.1Bnboe previously. The company's current best estimate is 7.34Bnboe for Tupi, 1.65Bnboe for Iracema, and 1.76Bnboe for Guara. However, Petrobras inferred that BG's revisions were premature. Petrobras believes that the revised estimates should be made after completing the wells currently being drilled in the Tupi evaluation plan area and the drilling of additional delineations wells and an extended well test on Guara. Oct 28 – Brazil announced the Libra field reserves (8-15BnBbls) will be even bigger than Tupi (5-8BnBbls). Oliver Jakob commented , “That would make Libra the largest oil discovery in the Americas since Cantarell in 1976 and will contribute to push peak oil a little further back,” Oct 27 –Brazil's Senate is holding a bill that would increase state control over recent oil discoveries and ensure that the proceeds help bankroll state investments in areas like infrastructure, education and poverty-reduction programs. These measures would reduce competition in Brazil’s energy sector, boosting Petrobras’ role and limiting opportunities for foreign investors. According to RGE, if Dilma Rousseff wins the presidential election on October 31, this initiative is likely to be approved; if Jose Serra wins, it may be abandoned. Oct 14 – The US Bureau of Ocean Energy Management, Regulation, and Enforcement released a draft supplemental environmental impact statement (SEIS) of Chukchi Sea Lease Sale 193 on Oct. 12 that the agency said addresses issues a federal district court in Alaska raised in a July 21 ruling. An environmental organization immediately said the draft SEIS still doesn’t answer important questions about the February 2008 lease sale’s impacts. Oct 13 – Total E&P Borneo, drilling offshore Brunei, claim to have completed the deepest exploration well in South East Asia at 18582ft Oct 12 - The moratorium on drilling new offshore wells, in place since shortly after the Macondo disaster in April, has been lifted, after authorities had determined that new regulations and safety requirements have been sufficiently tightened. Some findings of the ongoing National Oil Spill Commission’s investigations into causes of the incident are emerging, notably that there is lack of any evidence of cost savings being put above safety concerns. Still, it remains premature to draw any firm conclusions at this stage. Meanwhile, oil companies are queuing up to submit requests to recommence drilling, including many of those previously active in the area. The new regulator, the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) has said it hopes that first permits will be approved at the end of the year. The regulator and oil companies acknowledge that this will mean further delays in drilling

programmes, as well as planned field start‐ups, but the question remains what this will mean for production volumes.

Sep 20 – Barclays Capitial commented that it expects growth in crude oil exploration to be particularly pronounced in 2011 in Brazil, Iraq, and Russia. Sep 13 – Speaking at the World Energy Congress in Montreal, Shell CEO Peter Voser spoke positively about the impact of natural gas and oil shale plays in North America and South Africa. However, he was less optimistic about the development of European shale assets because he said that Europeans would not agree to the type of land use prevalent in North America and South Africa because of the population density and cultural differences. Aug 28 – USGulf drilling costs are expected to rise from proposed regulatory changes. Proposals include higher civil and criminal penalties for an oil spill, greater redundancy in drilling safety equipment, additional federal inspectors, and more-stringent requirements for deepwater drilling permits. Insurance premiums will also leap up. It is also possible that the entire structure of players operating in the field will change. Regulatory proposals also include increasing the federal cap on economic liability for an oil spill to USD10Bn or possibly removing the cap altogether. That change alone is likely to prompt consolidation because only large integrated oil and gas companies could afford to operate in the deepwater gulf. Aug 24 - An estimated 1.5 trillion bbl of oil in place lies in Western Colorado’s Piceance basin oil shale, the US Geological Survey said in the first comprehensive assessment published since 1989. The amount represents a 50% jump from the previous 1 trillion bbl of oil in place estimate because about twice as many oil yield data points were used, it added in a new report. The Piceance basin is one of three large western US basins that contain significant oil shale resources. The Uinta basin, in eastern Utah and westernmost Colorado, and the Greater Green River basin, in southwestern Wyoming, northeastern Utah, and northwestern Colorado, also contain large amounts, and will be assessed separately, USGS said. Aug 18 – Afghanistan’s ministry of mining announced the discovery of an oil deposit in the northern region of the country, estimating reserves of 1.8BnBbls. Aug 10 - A federal judge in Anchorage clarified his order enjoining Shell Gulf of Mexico Inc. from exploring its Chukchi Sea leases by allowing permitted seismic surveying to start, Alaska state officials said. US District Judge Ralph Beistline ruled on July 21 that the US Minerals Management Service did not adequately analyze environmental impacts when it awarded the offshore leases in Alaska to the Royal Dutch/Shell subsidiary in February 2008. He ordered the US

Department of the Interior agency, which was renamed the US Bureau of Ocean Energy Management, Regulation, and Enforcement, to study other potential impacts from exploration and production. Aug 2 – The governments of Canada and the United States have embarked on a five-week marine seismic survey in the icy waters of the Arctic's Beaufort Sea. Starting on Aug 2, 2010, the Canadian ice-breaker vessel CCGS Louis S. St-Laurent and the US ice-breaker vessel Healy have teamed to conduct a joint seismic survey of the Continental Shelf in the western Arctic. Both the governments of Canada and the US claim territorial rights to the Arctic, and this project is an effort to establish the extent to which the countries claim. According to international law, bordering countries can claim up to 200 nautical miles from their shorelines. Jul 29 – Norwegian Exploration Veers to North. Frontier drilling is picking up offshore Norway, according to the latest review by the Norwegian Petroleum Directorate (NPD). Shell is active in production license 326 in the Norwegian Sea, drilling appraisal well 6604/10-1 on last year’s Gro discovery, in 1,354 m (4,442 ft) of water. The well should reach the reservoir some time this month. On completion, Shell plans to retain the semisub Aker Barents to spud the Dalsnuten prospect in the same deepwater area in PL 392. Jul 27 – Asked about the risks from the exhaustion of non-OPEC fields, IEA Executive Director Nobuo Tanaka told MNI it is “inevitable” that oil supply from non-OPEC countries will decline and that even the added injection of supplies from Canada’s oil sands exploration will not be enough. “The dependency on the Middle East countries, especially OPEC countries, will increase from the medium to long term,” he said. Meanwhile, Tanaka painted a gloomy picture of current oil production, telling MNI that each year output from existing oil fields declines by 3 million bbl, while demand increases by 1 million bbl. To keep pace, the oil sector will require “massive” investment of some $5 trillion from now to 2030. However, Tanaka said that even with a “radical revolution” in energy resources, the world's reliance on fossil fuel will remain at 46% by 2050, a fact that makes investment in both the conventional and non-conventional oil sector “very, very important” for future economic growth. Jul 23 – Douglas L. Becker - a Bank of America analyst - asserts that the deepwater Macondo well blowout will not prove as detrimental to drilling in the Gulf of Mexico as the Three Mile Island accident proved for the nuclear industry. Jul 21 –Oman plans to invest USD3.5Bn in the coming 5 years in an effort to boost the country’s oil production by 18% to 1Mnbd, according to the finance ministry. Jul 14 - Estimates of oil production declines resulting from the moratorium on deepwater drilling in the US, imposed in response to the Apr 20 blowout of the Macondo well are beginning to come into focus. In its July Short Term Energy Outlook, the US EIA estimated production declines resulting from the moratorium at 31,000 b/d in 4Q10 and 82,000 b/d in all of 2011. It says the deficit will start at about 10,000 b/d in September and reach 100,000 b/d by December. Those estimates represent increases from EIA’s numbers a month earlier of 26,000 b/d in the fourth quarter and 70,000 b/d in 2011. EIA forecasts US crude production of 5.37Mnbd this year, down 26,000 b/d from 2009. It sees an increase in total liquids supply—including crude, condensate, gas plant liquids, biofuels, other liquids, and refinery processing gains—to 9.35Mnbd this year from 9.05Mnbd last year. The International Energy Agency’s July Oil Market Report, meanwhile, said delays to new projects in the gulf “have already shaved 30,000 b/d off both 2010 and 2011 US crude production.” Jul 12 – Italian major Eni has discovered a massive oil reservoir with its Cabaca South East-1 exploration well in the deepwaters offshore Angola, West Africa. Along with concessionaire state-owned Sonangol, Eni reports that the Cabaca South East-1 discovery well on Block 15/06 reached its multi-target objectives in the Miocene age, proving oil-bearing reservoirs measuring 450 meters thick. Initial evaluations of the discovery point to high-quality oil in place. Jul 9 - A federal appeals court in New Orleans rejected the Obama administration’s request to reinstate a 6-month deepwater drilling moratorium, which a federal district judge blocked on June 22. The July 8 ruling is not final since the same appeals court is expected to hear arguments in the case in late August or early September. Jul 8 - The Obama administration’s 6-month deepwater drilling moratorium will reduce US crude oil production by an estimated 31,000 b/d during this year’s fourth quarter, the US Energy Information Administration predicted in its latest short-term energy outlook. This latest estimate was notably higher than the 26,000 b/d figure in EIA’s June monthly forecast. Jul 7 - Vietnam National Oil and Gas Group (PetroVietnam) has signed a deal to explore for oil in Venezuela's Orinoco oil belt with Venezuela Petroleum Corporation in Caracas. Vietnam will invest USUSD3.2Bn in the oil exploration project making it Vietnam's biggest foreign investment project to date. Jul 1- Oil and gas resource estimates for Tullow Oil’s acreage offshore Ghana are moving up. According to Tullow Oil, the estimated Jubilee resource potential is 1.5 BBoe (up from 0.6-1.6BBoe), while the estimate for Tweneboa resource is 1.4 BBoe (up from 0.3BBoe), which could be as much as 70% oil. Jun 23 – The IEA now expects spare capacity of oil to remain at a comfortable 3.5Mnbd in 2015, with consumption edging up by an extra 1Mnbd each year to around 90Mnbd (or 92Mnbd if global growth is stronger). All this is quite manageable. It talked of a “gentle nominal price escalation through mid-decade, with prices rising from USD77 to USD86″. Jun 22 - Court grants preliminary injunction to lift moratorium on US deep sea drilling.

Jun 21 - Nobuo Tanaka, executive director of the International Energy Agency in Paris, said global oil production may fall by 800,000-900,000 b/d by 2015 if other new projects in areas besides the US are delayed by 1-2 years. Jun 18 - Following offshore moratorium on new drilling, US land based drilling is on the rise.

Refinery Projects Summary - The dramatic collapse of the oil price during mid 2008 is starting to have a significant impact on refinery projects in future months. Most telling is Saudi Aramco’s decision to delay new refinery projects. Instead of building new refineries certain leading national oil companies have refocused on acquiring stakes in existing refineries Dec 16 – A study by FGE-FACTS Global Energy, Honolulu concluded that while Japanese refiners are heading into a second round of capacity reductions, Refineries for national oil companies (NOCs) in China and India continue to expand capacities as 2010 closes. The study also said up to 5 years will pass before any new major capacity will be commissioned by Asian refiners, securing crude from the Middle East is becoming more important for Asian refiners (as Middle Eastern refineries come on stream and soak up Middle Eastern crude), and conversion capacity is added far more quickly than primary distillation capacity in the Asia Pacific. The Dec 15 – Valero Energy Corp. said its Aruba refining subsidiary is ready to restart the 235,000-b/d refinery it idled in July 2009 because of poor economics. The 200,000 b/d Delaware refinery is expected to come back to service in 2Q11. Nov 23 - Venezuela’s state-owned Petroleos de Venezuela SA and Italy's Eni SPA have agreed to invest USD17Bn in two separate joint venture projects aimed at producing and refining from the Latin American nation's Orinoco belt. Nov 11 - Indian Oil Corp. has commissioned the expansion of its Panipat refinery in Haryana, India, to 300,000 b/d from 240,000 b/d. The project included capacity revamps of crude and vacuum distillation units, a once-through hydrocracker, and delayed coker and installation of second-stage reactors in a diesel hydrotreater. The company operates eight refineries in India with total capacity of 1.29 million b/d. Nov 10 - Essar Oil Ltd., Mumbai, has decided to further expand distillation capacity of its 300,000-b/d refinery at Vadinar, Gujarat, India. It reported that it was on course to increase capacity to 375,000-b/d by March 2011, and to 415,000-b/d by September 2012. Nov 5 - PDVSA said it has secured the USD400Mn it needs as an initial guarantee for the construction of the Abreu e Lima refinery in Brazil. Oct 21- Petroplus Holdings AG, Zug, Switzerland, has taken the first step toward closing its 84,800-b/d refinery at Reichstett, France. Sep 9 – PetroChina has started the new massive refinery in the Guangxi region of China, reports Reuters. With a daily capacity to refine 200,000 barrels, the Qinzhou refinery required an investment of USD2.2Bn to construct. The principle facilities at the refinery include a 70,000Bpd heavy residue catalytic cracker, a 44,000Bpd continuous reforming unit and a 44,000Bpd hydrocracking unit, the report said. Located near Vietnam in the port city of Qinzhou, the new refinery took 33 months to build. Aug 20 - Essar Energy, Mumbai, says an expansion and upgrade of its 300,000-b/sd refinery at Vadinar, India, is mostly on schedule except for two of nine processing units, including a delayed coker. The expansion, which might be followed by another, will take total throughput capacity to 375,000 b/sd and is due for completion next March. Aug 19 - The Mozambican Government might cancel the project to build a 350,000b/d oil refinery in the district of Nacala-a-Velha in the northern Nampula province, according to the paper "O Pais". Energy Minister Salvador Namburete lamented that no construction work has taken place since the signing of the agreement to build the refinery in October 2007. The minister assumed that this was due to the world financial crisis, which affected the banks that would fund the USD5Bn project. Aug 13 - The Vietnamese government has approved plans to raise capacity of the 148,000-b/sd Dung Quat refinery to 200,000 b/d. The refinery, Vietnam’s only such facility, went on stream in February 2009. State-owned Petrovietnam, through Binh Son Refining & Petrochemical Co. Ltd., took over operation of the refinery from main contractor Technip last May. It is believed that Petrovietnam is considering selling off 49% of the refinery’s total stake to foreign firms after the plant becomes fully operation and stable. Aug 9 - Western Refining Inc. is suspending operations at its 70,000-b/d Yorktown refinery in York County, Va. citing “the poor outlook for East Coast refining margins.” Aug 3 – Shell Canada Products and Delek US Holdings, Inc. have agreed to end negotiations regarding a potential sale of the Shell Montreal East Refinery. July 30 - Indonesia’s state-owned PT Pertamina and Kuwait Petroleum Corp. plan to invest USD9Bn in a joint venture 300,000 b/d refinery in Balongan, West Java. In January, Indonesia unveiled a long-term oil and gas management

plan to attract USD32Bn in investments for oil and gas facilities in 2010-14. About 70% of the spending budget is targeted for investment in gas facilities, while the remaining 30% is for oil facilities, including rigs and refineries Jul 23 – Murphy Oil Corp. plans to sell its three refineries to exit the refining business and concentrate on exploration and production and US retailing. Jul 22 - ConocoPhillips reported the cancelation of plans to upgrade its 260,000 b/d refinery at Wilhelmshaven, Germany. In November 2009, ConocoPhillips confirmed plans to delay an upgrade at the facility. The company had planned to add a coker, hydrocracker, and hydrogen units to the refinery Jul 14 –New mandates for upgrading capacity might accelerate a restructuring of the Japanese refining industry, says the IEA. Beset by rapidly falling domestic demand for oil products and growing competition from China and elsewhere in Asia, Japanese refiners are struggling with excess distillation capacity. But of 1.1Mnbd of capacity cuts announced last year, less than 400,000 b/d has been assigned to specific facilities and can be considered firm, IEA says in its July Oil Market Report. But that might change following a regulation introduced July 5 by the Japanese government. By March 2014, Japanese refineries must increase their heavy-crude upgrading capacity to 13% of distillation capacity from the current 10%. Refiners must submit plans for increasing their upgrading ratios by Oct. 31. “Refiners not willing to invest in expensive upgrading units in the current weak-margin environment could instead reduce crude distillation capacity, speeding up industry consolidation in progress,” IEA said. Jul 8 - Bharat Oman Refineries Ltd. (BORL) is starting up a 120,000-b/d grassroots refinery in Central India. The company started the crude unit at Bina, Madhya Pradesh, on June 29 then shut it down within a few days to tie in the vacuum distillation unit. It expected to restart the crude unit in synchronization with the vacuum unit before shutting down again to start up gasoline production units later this month. The refinery has a 20,000-b/d naphtha hydrotreater a 10,000-b/d continuous catalytic reformer. It last will start up a hydrocracker in late July or August. BOPL expects full commissioning by the end of September. The refinery receives crude via a 935-km, 24-in. pipeline linking Bina with Vanidar, Gujarat, which was commissioned in June. State-owned Bharat Petroleum Corp. owns 84% of the new refinery. Oman Oil Co. AOSC owns 26%. Jun 29 – Iraq, seeking to double its domestic refining capacity and reduce expensive imports, has offered discounted oil and acreage to companies willing to invest $20 billion on four refineries. “The investment in the new refineries will be around $20 billion. Each one will cost around $5 billion,” said Iraq’s Oil Minister Hussain al-Shahristani, referring to facilities at Karbala, Kirkuk, Maysan, and Nassiriyah. “Refinery investments in Iraq are guaranteed more than anywhere else in the world,” said al-Shahristani, adding that his country “wants real partners, at any percentage.” Jun 28 - Saudi Aramco proved new reserves close to at least three of its offshore fields last year, according to the company’s 2009 annual report. Positive results came from the offshore Lawhah-46 well, which flowed 30 MMcf/d of gas from the Khuff B reservoir; the Arabiyah-101 offshore delineation well that flowed 11.7 MMcf/d and 20 b/d of condensate from the Jilh reservoir; and the Hasbah-17 offshore delineation well (47.5 MMcf/d from the Khuff B reservoir). On the offshore development front, the company has been working on several major offshore greenfield and life extension projects. Its newest large-scale program is Karan, Aramco’s first-ever non-associated gas increment, due to be completed in 2013. Jun 23 - The cost of designing and building refineries and petrochemical plants rose by 1.5% in the 6 months ending at the end of this year’s first quarter, according to IHS Cambridge Energy Research Associates (IHS CERA). The increase was the second straight half-year increase for the index. The IHS CERA Downstream Capital Costs Index, with a 2000 benchmark of 100, increased to 175 from 173 from the previous 6 months. According to the index, downstream construction costs now are 6.5% below peak levels of 2008. They had fallen in 2009 to 9% below the peak. Jun 21 – SOCAR & TURCAS Refinery AS, Istanbul, has let a contract to a Foster Wheeler AG subsidiary for early work on a 214,000-b/sd grassroots refinery to be integrated with a petrochemical complex at Aliaga, Turkey. The refinery will supply naphtha to the Petkim Petrochemical AS complex, which is on the Aegean Sea, and fuels for sale in Turkey. In addition to crude and vacuum distillation units, the refinery will have naphtha hydrotreating facilities, a 40,000-b/sd delayed coker, a 66,000-b/sd hydrocracker, kerosine and diesel hydrotreaters, LPG caustic treatment units, a 28,000-b/sd continuous catalytic reformer, a saturated gas unit, an amine and sour-water stripper, sulfur and tail-gas treatment units, and a 160,000-normal-cu-m/hr hydrogen unit. Jun 2 – PBF Energy Co. LLC plans to restart the 190,000-b/d refinery at Delaware City, Del., formerly owned by Valero Energy Corp. in the first half of next year after performing major maintenance work. Jun 2 – The Iraqi Ministry of Oil has advanced longstanding plans to build a world-scale refinery at Nassiriya in southern Iraq. It has let a contract to Foster Wheeler AG for a feasibility study and front-end engineering design of a refinery with capacity of 300,000 b/d.

What a Democratic Presidency Means for US Energy Policy – A Shift Away from Fossil Fuels Oct 12 – Secretary of the Interior Ken Salazar has determined it is appropriate that deepwater oil and gas drilling resume, provided that operators certify compliance with all existing rules and requirements, including those that recently went into effect, and demonstrate the availability of adequate blowout containment resources, according to a statement released today. Sept 17 - The Obama administration’s deepwater drilling moratorium could cut net oil and gas spending on the Gulf Coast by USD1.8Bn and temporarily cost 8,000-12,000 jobs, an administration official told the US Senate Small Business and Entrepreneurship Committee. Sept 14 – Two studies under way by the National Petroleum Council will be crucial to developing a long-term energy, environmental, and economic strategy for the US, Obama administration officials told council members at the group’s Sept 14 meeting. US Sec. of Energy Steven Chu asked the council on Sept 16, 2009, to evaluate new transportation fuel prospects through 2030, and to consider North American conventional and unconventional energy fuels and ways they can be responsibly developed. July 15 - The US House Natural Resources Committee approved by a vote of 27-21 the Consolidated Land, Energy, and Aquatic Resources (CLEAR) Act, HR 3534. Introduced by Chairman Nick J. Rahall (D-W.Va.) in September 2009, the CLEAR Act addresses the Deepwater Horizon oil rig explosion and spill in the gulf as well as implements reforms in the country’s offshore and onshore oil and gas leasing program. Rahall said, “While the incident in the gulf does not signal the end of drilling off America’s coasts, it certainly is a game changer and is proof positive that broad reforms are needed to ensure that oil and gas development on federal lands and waters is done efficiently while protecting human safety and the environment.” The legislation would abolish for good the US Minerals Management Service and divide it into three separate entities: the Bureau of Energy and Resource Management, to manage leasing and permitting and conduct necessary environmental studies; the Bureau of Safety and Environmental Enforcement, to conduct all inspections and investigations related to health, safety, and environmental regulations; and the Office of Natural Resource Revenue, to collect all offshore and onshore oil and gas and renewable energy-related revenues. May 27 – Obama halts deepwater drilling in Gulf. The Deepwater Horizon looks set to have a profound impact on the US administration’s approach to the oil industry with Obama set to change his stance on OCS development. Feb 16 - Continuing US offshore oil and gas leasing moratoriums from 2009 through 2030 would decrease US oil production by 9.9BnBbls —or an average 15%/year—and natural gas production by 46 tcf—or 9%/year—a study commissioned by the National Association of Regulatory Commissioners concluded. June 23, 2008 – Making clean energy profitable. Obama comments ahead of progress of Waxman-Markey climate change bill through the legislature - ‘This week, the House of Representatives is moving ahead on historic legislation that will transform the way we produce and use energy in America. This legislation will spark a clean energy transformation that will reduce our dependence on foreign oil and confront the carbon pollution that threatens our planet.

Oil Industry Rationalisation See earlier article about India trying to play catch up to China Dec 16 - The US Department of Justice and Environmental Protection Agency jointly file suit against BP to recover damages from the Apr 20 Macondo well accident. Nov 26 – BP sells stake in Pan Am Energy for USD7Bn, bringing total sales since oil spill to USD21Bn Nov 9 – An inquiry ordered by US President Barack Obama into the BP oil spill has given support to many of the company's own findings, challenging claims BP sacrificed safety to save money. Nov 2 - BP PLC said its costs related to the Gulf of Mexico oil spill have reached USD39.9Bn through the end of the third quarter. Executives speaking during an earnings conference call said the cost figure was a current best estimate of spill costs that can be reliably measured at this time. Despite a third-quarter pretax charge of USD7.7Bn related to the spill, BP’s financial results showed a third-quarter profit of USD1.79Bn, which was well below its USD5.2Bn profit for the third quarter 2009. Oct 18 – BP PLC said it has agreed to sell its upstream businesses and associated interests in Venezuela and Vietnam to TNK-BP for a total of USD1.8BN. Aug 23 - Korea National Oil Corp. launched a hostile takeover bid Aug. 20 for Dana Petroleum PLC, Aberdeen. Dana Petroleum, which operates mainly in the North Sea and Egypt, has declined to recommend the offer, worth USD2.9Bn at valuation last week. Several of Dana Petroleum’s large shareholders backed the offer, and the South Korean state energy company said it had received support for 48.62% of the British company’s shares. KNOC is seeking at least 90% of the stock.

Aug 11 – Apache Corporation completed a portion of its USD7Bn asset acquisition from BP. The USD3.1Bn acquisition of the West Texas and New Mexico Permian Basin oil and gas properties has been completed, the independent reported. The acquisition contains 10 Permian Basin oil and gas fields, including Block 31, Empire/Yeso, SELea, Brown Bassett, Block 16/Coy Waha, Spraberry, Wilshire, North Misc, Pegasus and Delaware Penn. The Permian Basin area holds an estimated 141MnBbls of oil equivalent in proved reserves, 65% of which is liquids. Aug 3 – BP has agreed to sell its Colombian oil and natural gas exploration, production and transportation business for USD1.9Bn to a consortium consisting of the Colombian state oil company Ecopetrol (51 percent) and Canadian producer Talisman (49 percent) Jul 27 – BP reports USD32Bn charge related to gulf oil spill Jul 20 - Adding 385MnBoe in proven reserves, Apache agreed to pay USD7Bn to acquire BP's oil and gas assets in the Permian Basin and Egypt, as well as substantially all of BP's upstream natural gas business in western Alberta and British Columbia. BP is also considering asset sales in Vietnam and Pakistan having revised its projected asset sale requirement to USD30Bn up from USD10Bn in June.

Shipping News Two tanker shipping companies launched ipos in March 2010 – Crude Carriers Corp, Scorpio Tankers Dec 27 – Genmar Announces Amendments to Credit Facilities - Genmar has announced that the company has entered into agreements to amend its USD 372Mn senior secured credit facility and USD 750Mn revolving credit facility. Nordea Bank and DnB NOR Bank acted as the lead arrangers of the facilities. Dec 16 - Genmar Secures Bridge Loan Amendment - Genmar has entered into an amendment to its bridge loan credit facility. The amendment revises the sale of assets covenant to extend the date by which Genmar must sell assets to repay the loans from December 15, 2010 to January 15, 2011. Dec 15 - TEN Awarded Two 15-Year Shuttle Tanker Contracts - Tsakos Energy Navigation has announced two 15-year TCs with a national oil major for two DP2 Suezmax shuttle tankers with delivery within 2012. These charters are expected to generate revenues of at least USD 520Mn over their corresponding periods. Dec 15 - Golden State Noteholders Approve Consent Solicitation - Independent Tankers Corp reports that 92.90% of the Golden State Petroleum Transport Corp holders approved all the suggested amendments in the consent solicitation. The minimum requirement was 50% Dec 6 – Kayne Anderson Increases Knightsbridge Stake - US investment company, Kayne Anderson Capital Advisor has revealed a stake of 6.67% in Knightsbridge Tankers. The company has almost tripled its holding of Knightsbridge shares from 561,898 in August 2010 to its current ownership of 1.58Mn. Dec 3 – Scorpio Tankers Underwriters Exercise Option to Purchase Shares - The underwriters in Scorpio Tankers' follow-on public offering, completed on November 22, 2010, have fully exercised their over-allotment option and will purchase 686,250 additional common shares at the offering price of USD 9.80 per share. Dec 2 - D/S Torm Secures 5-Year COA - It is reported that D/S Torm has secured a 5-year contract of affreightment with China Nickel Resources to transport 6.5Mn tonnes of coal and iron ore from Indonesia to China commencing in January 2011. The financial details were not disclosed. Nov 23 - SFI Suspends Senior Secured Notes Offering - Ship Finance Int'l has announced that due to weakening market conditions in the debt capital markets, it will suspend its previously announced (Nov 15) public offering of up to USD 400Mn of senior unsecured notes, due 2020. Nov 16 - Scorpio Tankers Launches Public Offering of Its Common Stock - Scorpio Tankers has confirmed an underwritten public offering of 4.575Mn shares of its common stock. The shares will be priced at USD9.80 per share. Nov 15 - Genmar Fixes Four Vessels to Shell - Genmar has fixed four of its MR products tankers, the Genmar Concord, Stena Concert, Stena Consul and Stena Contest to Shell on four year deals at USD 10,000 pd according to analysts and brokers. Nov 15 - QVT Financial Reveals GOGL Stake - US hedge fund, QVT Financial, has accumulated a stake of over 5% in Golden Ocean. Since the end of June, QVT has bought 22.85Mn GOGL shares, an investment worth approximately USD 33Mn. QVT also owns shares in Top Ships, Diana Shipping and DryShips. Nov 8 – Nats is circling – Appearing on CNBC, CEO Herbjørn Hansson argued that despite missing target earnings and share price down 6% over 12 months, Nats along with Frontline have far out performed other listed tanker companies when dividend payout is taken into account. Hansson stressed that the company’s zero debt position means that it is still breaking even and believes highly leverage competitors are sitting ducks. Nats sees itself as the wouldbe consolidator ready to pick off distressed sales. Nov 5 - Teekay Tankers Declares Dividend - Teekay Tankers has announced that its board of directors has voted to declare a cash dividend of USD 0.31 per share for the quarter ended September 30, 2010, payable on November 30, 2010 to all shareholders of record on November 16, 2010. Nov 5 – Scorpio Tankers Prepares Follow-On Offering - Scorpio Tankers is seeking to raise up to USD 50Mn from a follow-on offering and believes that its strong balance sheet, financing capacity and future access to capital will allow it to make opportunistic vessel acquisitions at attractive prices. Nov 4 - D/S Torm Revises FY10 Forecast - As a result of the expectations for the freight rate development for product tankers in 4Q10, D/S Torm has revised its forecast for 2010 from an expected loss before tax of USD 40-60Mn to an expected loss before tax of USD 75-85Mn. Sep 21 - Eight Iranian VLCCs ‘on dedicated shuttle route’ – According to LLI none of the 28 very large crude carriers owned by Iranian national carrier NITC are available for spot market business — and they appear to be chartered to Iran’s national oil company, as it attempts to sell off its crude surplus. Nine VLCCs controlled by recently rebranded NITC are moored in the Middle East Gulf in floating storage, holding an estimated 2.4MnTons of Iranian crude. This is considerably less than the peak seen at the end of May, when 25 NITC-owned VLCCs were storing 6.9MnTons of crude for National Iranian Oil Co.

Sep 20 - SFI Contemplates Bond Issue - Ship Finance Int'l has announced that it intends to issue a new bond loan in the Norwegian credit market with maturity in April 2014 and a minimum loan amount equivalent to approximately USD 50Mn. Sep 17 - Frontline Announces Restructuring of VLCC Newbuilding Contracts - Frontline has announced that it has agreed with Zhoushan Jinhaiwan Shipyard to re-structure its VLCC newbuilding program at the yard. In April and May 2008, Frontline ordered six VLCC newbuildings at Jinhaiwan. Sep 8 - Frontline Adjusts Bond Conversion Price - On August 27, 2010 Frontline announced a dividend of USD 0.75 per share. The conversion price of Frontline's USD 225Mn 4.5% convertible bond issue 2010/2015 has been adjusted from USD 38.0895 to USD 37.0483 per share. Sep 1 - Teekay Corp Announces Signing of Shuttle Tanker Contracts - Teekay Corp's subsidiary Teekay Offshore Operating (OPCO), has signed a master agreement with Statoil that replaces an existing volume-dependent, life-of-field CoA, and covers fixed-rate, life-of-field TC contracts for seven dedicated shuttle tankers Aug 25 - Top Ships Announces Preliminary Agreement with DVB Bank - Top Ships has announced that it has entered into a preliminary agreement with DVB Bank pursuant to which the company will obtain waivers for covenant breaches until the end of the year 2010. Aug 20 - OSG and Maersk Oil Qatar Sign New Agreement for FSO Africa - OSG has announced that it has signed a new service agreement with Maersk Oil Qatar for the FSO Africa, an FSO service vessel. The duration of the contract is for three years beginning the end of August. Aug 10 - Ridgebury Plans Vessel Acquisitions - It is reported that proceeds from Ridgebury Tankers' IPO, details of which are yet to be announced, will be used to finance four 159,000 dwt Suezmax tankers from Teekay Corp for USD 300Mn. The vessels will operate in the Blue Fin Tankers Pool. Aug 10 - Capital Product Partners Prices Common Units - Capital Product Partners has priced its previously announced public offering of 5.5Mn common units representing limited partnership interests at a public offering price of USD 8.63 per common unit. Aug 10 - Capital Product Partners Announces Public Offering - Capital Product Partners has announced plans to offer 5.5Mn common units in a public offering. The partnership expects to grant the underwriters a 30-day option to purchase an additional 825,000 common units to cover over-allotments. Aug 6 - NATS Refuses Vessel Delivery - NATS reports that it has not accepted delivery of a 163,000-dwt newbuilding from Fred Olsen unit Clune because the vessel has not been demonstrated to comply with the specifications and the contract. Aug 6 - Omega Navigation Announces Capital Injection by Founder and CEO - Omega Navigation Enterprises has announced that it has agreed to a capital infusion of USD 5.25Mn through a loan by its founder, CEO and largest shareholder, Mr. George Kassiotis Aug 5 - DHT Names New CEO, President & COO - DHT Holdings has announced that Svein Moxnes Harfjeld has joined DHT as President and CEO, and Trygve P. Munthe has joined the company as COO both effective September 1, 2010. Jul 14 - Genmar Announces Amendment to Credit Facility - Genmar has announced that it has amended its USD 750Mn revolving credit facility dated as of October 20, 2008. Jul 9 - Omega Announces Fleet Employment and Financial Developments - Omega Navigation and Glencore International have entered into an equal partnership JV, Megacore Shipping, and taken delivery on July 8, 2010 of one newbuilding 47,000 Dwt double hull product/ chemical tanker named Alpine Marina. Jul 9 - Scorpio Tankers Announces Stock Buyback Program - The board of directors of Scorpio Tankers has authorized a share buyback program of USD 20Mn. Scorpio Tankers expects to repurchase these shares in the open market, at times and prices that are considered to be appropriate by the company. Jun 30 - Genmar Announces Commencement of Exchange Offer - Genmar has commenced an offer to exchange up to USD 300Mn of newly issued 12% senior notes due 2017 (series B) for a like amount of its privately placed outstanding 12% senior notes due 2017 sold in November 2009 (series A). Jun 29 - BLT Plans Further Vessel Acquisitons - It is reported that BLT has earmarked USD 110Mn to go towards purchasing twelve ships over the next two years. The company already has four chemical tankers and three LPG carriers ordered and due for delivery later this year and in 2011. Jun 24 - Genmar Announces Closing of Offering of Common Stock - Genmar has announced the closing of an offering of shares of the company's common stock. The company sold a total of 30.6Mn shares of newly issued common stock at a price to the public of USD 6.75 per share.

IMO Environment Issues Source: Marine Environment Protection Committee (MEPC) of the International Maritime Organisation (IMO) The United Nations has tasked the IMO (which is the United Nations’ specialized agency with responsibility for the safety and security of shipping and the prevention of marine pollution by ships) with investigating CO2 emissions from ships. The IMO’s Maritime Environment Protection Committee (MEPC) has initiated various studies in recent years to try to understand the impact that shipping has on the environment. The latest meeting MEPC 61 was in September/October 2010. An unabridged report from the meeting is provided below. The next scheduled meeting MEPC62 is in July 2011 Further Progress Made by MEPC 61 (September/October 2010) on Technical, Operational and Market-Based Measures International maritime transport is the most energy efficient mode of mass transport, and made only a modest contribution to global CO2 emissions of 2.7% in 2007 (Figure 1) while carrying 90% of world trade.

Figure 1: Global emissions of CO2 in 2007 (Second IMO GHG Study 2009) A global approach for further improvements in energy efficiency and emission reduction is needed as sea transport is predicted to continue growing significantly in line with world trade (Figure 2).

Figure 2: World fleet fuel consumption (except naval vessels) from different activity-based estimates and statistics (Second IMO GHG Study 2009)

IMO’s work on enhanced energy efficiency and GHG emission control has three distinct building blocks and the Organization has over several years developed technical and operational reduction measures that will when fully implemented significantly improve the maritime sector’s carbon footprint. The third building block is the market-based mechanisms where IMO currently is working in accordance with a work plan culminating in 2011.

Technical and Operational Measures The most important technical measure is the Energy Efficiency Design Index for new ships (EEDI) that will require a minimum energy efficiency level per capacity mile (e.g. tonne mile) for different ship type and size segments (Figure 3 shows a range of typical CO2 efficiencies of surface cargo carriers). With the level being tightened incrementally every five years the EEDI will stimulate continued technical development of all the components influencing the fuel efficiency of a ship.

Figure 3: Typical ranges of CO2 efficiencies of surface cargo carriers (Second IMO GHG Study 2009).

On the operational side, a mandatory management tool for energy efficient ship operation (SEEMP) has been developed to assist the shipping industry in achieving cost-effective efficiency improvements in their operations using the Energy Efficiency Operational Indicator (EEOI) as a monitoring tool and benchmark. Having considered means by which technical and operational measures could be introduced in the Organization’s regulatory regime, the Marine Environment Protection Committee (MEPC), at its sixty-first session, noted the desire of some States party to MARPOL Annex VI – Regulations for the prevention of air pollution from ships to request the Secretary-General to circulate proposed amendments to that Annex, to make mandatory, for new ships, the Energy Efficiency Design Index (EEDI) and the Ship Energy Efficiency Management Plan (SEEMP)), both of which have been previously disseminated for voluntary use. The circulated draft amendments would then be considered by the Committee at MEPC 62 with a view to adoption under MARPOL Annex VI. MEPC 61 also noted, however, that some other States did not support the circulation of such amendments. Although decisions as to how to proceed with the next step of IMO’s climate change strategy were not reached by consensus at MEPC 61, the Committee made noteworthy progress on all three elements of its GHG work, namely technical, operational (description of the package of technical and operational reduction measures for ships agreed by MEPC 59) and market-based measures, and it is expected that further substantial progress will continue to be made at its next meeting in July 2011. The EEDI will establish a minimum energy efficiency requirement for new ships depending on ship type and size and is a robust step-wise mechanism to increase the energy efficiency of ships for many decades to come. The EEDI is a non-prescriptive, performance-based mechanism that leaves the choice of technologies to use in a specific ship design to the industry. As long as the required energy-efficiency level is attained, ship designers and builders would be free to use the most cost-efficient solutions for the ship to comply with the regulations. The reduction level in the first phase is set to 10% and will be tightened every five years to keep pace with technological developments of new efficiency and reduction measures. IMO has set reduction rates until the period 2025 to 2030 when a 30% reduction is mandated for most ship types calculated from a baseline representing the average efficiency for ships built between 1999 and 2009.The EEDI is developed for the larger and most energy intensive segments of the world merchant fleet and will embrace 72% of emissions from new ships covering the following ship types: oil and gas tankers, bulk carriers, general cargo and container ships. For ship types not covered by the current formula, suitable formulas will be developed in the future addressing the largest emitters first. The SEEMP establishes a mechanism for a shipping company and/or a ship to improve the energy efficiency of ship operations. The SEEMP provides an approach for monitoring ship and fleet efficiency performance over time using the Energy Efficiency Operational Indicator (EEOI) as a monitoring tool and serves as a benchmark tool. The SEEMP urges the ship owner and operator at each stage of the plan to consider new technologies and practices when seeking to optimize the performance of a ship. The Second IMO GHG Study 2009 indicates that a 20% reduction on a tonne-mile basis by mainly operational measures is possible and would be cost-effective even with higher fuel prices than those currently experienced. The SEEMP will assist the shipping industry in achieving this potential.

Market-Based Measures The package of the technical and operational measures is a very important step in ensuring that the shipping industry has the necessary mechanisms to reduce its GHG emissions. However, the Committee has at several sessions recognized that these measures would not be sufficient to satisfactorily reduce the amount of GHG emissions from international shipping in view of the growth projections of world trade. Therefore, market-based mechanisms have been considered by the Committee in line with Assembly resolution A963(23) and its GHG work plan. A market-based mechanism would serve two main purposes:

1.off-setting in other sectors of growing ship emissions and providing an economic incentive for the maritime industry to invest in more fuel-efficient ships and technologies; and

2.to operate ships in a more energy-efficient manner.

The MEPC 59 agreed by overwhelming majority that a market-based instrument was needed as part of a comprehensive package of measures for regulation of GHG emissions from international shipping. The MEPC 59 further agreed by consensus that any regulatory GHG regime applied to international shipping should be developed and enacted by IMO as the sole competent international organization with a global mandate to regulate all non-commercial aspects of international shipping. As shipping is a global industry and ships are competing in a single global market, it must be regulated at the global level to be environmentally effective (avoid Carbon leakage) and to maintain a level playing field for all ships, irrespective of flag or ownership. Following an in-depth discussion on market-based measures, the MEPC 59 agreed on a work plan culminating in 2011 for its further consideration of market-based measures. The MBM proposals under review range from proposals for contribution schemes for all CO2 emissions from international shipping (to be collected by fuel oil suppliers and transferred to a global fund), or only emissions from ships not meeting the EEDI requirement, via emission trading systems, to schemes based on the actual ship’s efficiency both by design and operation. Among the measures are also proposals for rebate mechanisms and other ways to accommodate the difference in the socioeconomic capability between developing and developed states, as well as other suggestions on how the special needs and circumstances of developing countries can be accommodated. Some of the proposed schemes would reward efficient ships and ship operators by recycling parts of the financial contribution to the most efficient ones based on benchmarking. Other schemes would drive investments in more energy efficient technologies and improvements in operations by setting compulsory efficiency standards for all vessels (new and existing) and the trading of efficiency credits. Several of the proposed mechanisms, the contributions schemes (levy) inherently and the trading schemes through auctioning; would generate funds the greater part of which would be used for climate change purposes in developing countries. For a further description of the proposed measures, refer to the summary of the ten “Market-based Measures Proposals under consideration within the Expert Group on Feasibility Study and Impact Assessment of Possible Market Based Measures (MBM-EG)”. The MEPC 59 noted that there was a general preference for the greater part of any funds generated by a market-based instrument under the auspices of IMO, to be used for climate change purposes in developing countries through existing or new funding mechanisms under the UNFCCC or other international organizations (such as IMO or organizations established under its auspices). The MEPC 61 held an extensive debate on how to progress the development of suitable market-based measures (MBM) for international shipping, following the submission of a comprehensive report by an Expert Group which carried a feasibility study and impact assessment of several possible market-based measures submitted by governments and observer organizations. Links to the report of the work undertaken by the Expert Group on Feasibility Study and Impact Assessment of possible Market-based Measures, to the presentation given by the Expert Group at MEPC 61, to the study from Vivid Economics commissioned by the International Maritime Organization’s Marine Environment Protection Committee's Market-Based Mechanisms Expert Group (MBM-EG) on the “Assessment of the economic impact of the Market-based Measures” and to the presentation of Vivid Economics study can also be found on the top right side of this page. The scope of the work of the Expert Group was to evaluate the various proposals on possible MBMs, with the aim of assessing the extent to which they could assist in reducing GHG emissions from international shipping, giving priority to the maritime sectors of developing countries, least developed countries (LDCs) and Small Island Developing States (SIDS). The MBM proposals under review ranged from a contribution or levy on all CO2 emissions from international shipping or only from those ships not meeting the EEDI requirement, via emission trading systems, to schemes based on a ship’s actual efficiency, both by design (EEDI) and operation (EEOI). MEPC 61 agreed on the Terms of Reference for an intersessional meeting of the Working Group on GHG Emissions from Ships, to be held in March 2011, tasking the group with providing an opinion on the compelling need and purpose of MBMs as a possible mechanism to reduce GHG emissions from international shipping. The meeting is also tasked to further evaluate the proposed MBMs considered by the Expert Group, including the impact of the proposed MBMs on, among others, international trade, the maritime sector of developing countries, as well as the corresponding environmental benefits. A report from the intersessional group will be submitted to MEPC 62 in July 2011 enabling the Committee to make further progress in accordance with its work plan.