Deutsche - The Peak Oil Market

North America

United States

Industrials

Integrated Oil

4 October 2009

The Peak OilMarket

Price dynamics at the end ofthe oil age

Paul Sankey

Research Analyst(+1) 212 250-6137paul.sankey@db.com

Silvio Micheloto, CFA

Research Analyst(+1) 212 250-1653silvio.micheloto@db.com

David T. Clark, CFA

Research Analyst(+1) 212 250-3523david-t.clark@db.com

Deutsche Bank Securities Inc.All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from localexchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. DeutscheBank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a singlefactor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's researchis available to customers of DBSI in the United States at no cost. Customers can access IR athttp://gm.db.com/IndependentResearchor by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARELOCATED IN APPENDIX 1. MICA(P) 106/05/2009

FITT Research

Fundamental, Industry, Thematic,Thought Leading

Deutsche Bank Company Research'sResearch Product Committee has deemedthis work F.I.T.T. for investors seekingdifferentiated ideas. Here our Oil & Gasteam extends its ongoing series ofthought pieces on the peak of oil demandand supply.

Fundamental: Efficiency will drive thelong-term future of oilIndustry: Price volatility will reign in themedium termThematic: Government distortions =chronic underinvestmentThought leading: The end is nigh for theAge of OilTable of contents

Executive Summary..........................................Page 03Peak Oil Supply.................................................Page 07Peak Oil Demand..............................................Page 28Price Dynamics.................................................Page 44Wider Impacts..................................................Page 57 Valuation and Risks...........................................Page59Appendix..........................................................Page 61

C o m p a n y

G l o b a l M a r k e t s R e s e a r c h

North America

United States

Industrials

Integrated Oil

4 October 2009

The Peak Oil Market

Price dynamics at the end ofthe oil age

Paul Sankey

Research Analyst(+1) 212 250-6137paul.sankey@db.com

Silvio Micheloto, CFA

Research Analyst(+1) 212 250-1653silvio.micheloto@db.com

David T. Clark, CFA

Research Analyst(+1) 212 250-3523david-t.clark@db.com

Fundamental, Industry, Thematic, Thought Leading

Deutsche Bank Company Research's Research Product Committee has deemedthis work F.I.T.T. for investors seeking differentiated ideas. Here our Oil & Gasteam extends its ongoing series of thought pieces on the peak of oil demand andsupply.Deutsche Bank Securities Inc.All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from localexchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. DeutscheBank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a singlefactor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's researchis available to customers of DBSI in the United States at no cost. Customers can access IR athttp://gm.db.com/IndependentResearchor by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARELOCATED IN APPENDIX 1. MICA(P) 106/05/2009

FITT Research

Top picks

ExxonMobil (XOM.N),USD66.58 BuyCanadian Natural (CNQ.TO),CAD68.42BuyConocoPhillips (COP.N),USD46.80HoldChevron (CVX.N),USD68.14 HoldHess Corporation (HES.N),USD51.79Hold

Companies featured

ExxonMobil (XOM.N),USD66.58 Buy

2008A 2009E2010EEPS (USD) 8.47 4.174.84P/E (x)9.8 16.013.8EV/EBITDA (x) 5.5 8.98.4

Canadian Natural (CNQ.TO),CAD68.42Buy

2008A 2009E2010EEPS (CAD) 6.53 6.525.56P/E(x)11.3 10.512.3EV/EBITDA (x) 7.0 5.95.6

ConocoPhillips (COP.N),USD46.80Hold

2008A 2009E2010EEPS (USD) 10.61 3.794.20P/E (x)7.1 12.411.1EV/EBITDA (x) 3.9 3.93.8

Chevron (CVX.N),USD68.14 Hold

2008A 2009E2010EEPS (USD) 11.18 4.525.41P/E (x)7.6 15.112.6EV/EBITDA (x) 3.9 6.05.6

Hess Corporation (HES.N),USD51.79Hold

2008A 2009E2010EEPS (USD) 7.28 1.741.49P/E (x)12.3 29.734.8EV/EBITDA (x) 4.0 4.25.7

Marathon Oil (MRO.N),USD30.48Hold

2008A 2009E2010EEPS (USD) 6.36 1.972.25P/E (x)6.8 15.513.6EV/EBITDA (x) 3.8 4.44.4

Murphy Oil (MUR.N),USD55.57 Sell

2008A 2009E2010EEPS (USD) 8.52 3.402.48P/E (x)8.5 16.422.4EV/EBITDA (x) 3.5 5.15.0

Occidental Petroleum (OXY.N),USD74.33Buy

2008A 2009E2010EEPS (USD) 8.95 3.653.69P/E (x)8.0 20.420.1EV/EBITDA (x) 4.2 7.36.2

Petro-Canada (PCA.TO),CAD45.50No

2008A 2009E2010EEPS (CAD) 7.82 ––P/E (x)5.6 ––EV/EBITDA (x) 3.0 ––

Suncor Energy (SU.TO),CAD35.35

2008A 2009E2010EEPS (CAD) 3.49 ––P/E (x)13.7 ––EV/EBITDA (x) 10.2 ––

F

undamental: Efficiency will drive the long-term future of oil

Building on our February 2008 note “The 100mb/d peak oil market”, we haverefined and deepened our global demand/supply model, and extended it out to2030 to capture the game-changing emergence of a powerful disruptivetechnology, the electric car. Our gasoline model focuses on the major (200% +)efficiency gains flowing from the new era in transportation. Unburdened by theconflicted forecasting agendas of government agencies, oil companies, or automakers, we forecast a game change. US and then global oil demand will falldramatically once the high efficiency fleet hits critical mass; competing structurallycheaper natural gas will exacerbate the pace of demand decline. In our view globaloil demand peaks in 2016, with oil prices, before a long, tandem, decline.

I

ndustry: Price volatility will reign in the medium term

While the Street, governments, OPEC and the integrateds are all excessivelyfocused on supply alone as the key factor for the future of oil, our analysis viewsthe price-demand interaction as the linchpin in a supply-constrained world. Wepostulate that government-created distortions – not geology - prevent oil supplyfrom responding to rising prices, and so demand must therefore be broken, by aprice crisis. We conclude that medium-term volatility must increase, causingsupply under-investment to become even more chronic, and the resulting pricespike – implied to be to $175/bbl in 2016 - will drive a final stake into long-term oildemand. By contrast, natural gas supply responds to high prices, and will price ata major discount to oil priced to break demand.

T

hematic: Government distortions = chronic underinvestment

Our theme-by-theme cost of supply curve finds the demand-clearing price of oil.We have developed price-demand elasticity curves and present a final supply-demand equilibrium price for a declining oil market to 2030 of around $100/bbl.

T

hought leading: The end is nigh for the Age of Oil

This is the end of the 20

th

Century of Oil; we are entering the 21

st

Century ofElectricity. We expect high volatility in both fuels as the baton is passed. Once thepeak oil market is reached and demand begins its decline, there will be a real needfor OPEC to reverse its strategy of under-supply, and pursue market share & lowerprices. This shift will threaten the value of high cost un-developed oil such as ultra-deepwater (Brazil, Lower Tertiary, West Africa, and elsewhere) undevelopedCanadian heavy oil sands, and the companies that are adding rig capacity toservice them. Refining is also directly and negatively threatened, as is the airlineindustry; we see peak aviation as a function of lack of oil supply, as prices fallbelow levels required to develop marginal oil. As base demand shrinks away ledby gasoline, so global oil supply will shrink too. We strongly prefer oil-leveredcompanies with low and flexible future capex intensity, short refining.