Agenda
DOLLARS AND DISTILLATES DRIVE CRUDE
STRICTLY PRIVATE AND CONFIDENTIAL
October 2010
QE and high liquidity risk inflation short term, but will add supply when rates rise
After the Liquidity Cycle
Gold $/troz
 Gold prices are a good barometer of interest rates, liquidity
1400
and inflation risk
1200
 QE risks weakening the US dollar, adding a further
1000
stimulus to North American and Emerging Market growth
800
 Linking of Fed policy to price levels, rather than growth a
600
key change in policy – could spark inflationary expectations
and cause money to flow into commodities
400
200
 Low interest rates enable the oil market to hold high levels
0
1983
of inventory – currently a stabilizing feature, but could
become a driver of rising prices
LATEST MARKET OUTLOOK
1993
1998
2003
US Dollar and Crude Oil Correlation to Resume
$/EU
$/bbl
Bbl / troz
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
2008
Source: JP Morgan Energy Strategy, Bloomberg
Oil Price is Cheap When Measured in Gold
1983
1988
Brent Crude
160
1.7
USD/EUR
140
1.6
120
1.5
100
80
1.4
60
1.3
40
1988
1993
1998
1.2
20
Oil priced in Gold
2003
0
Jan 04
2008
1.1
Jan 05
Jan 06
Jan 07
Source: JP Morgan Energy Strategy, Bloomberg
Source: JP Morgan Energy Strategy, Bloomberg
2
Jan 08
Jan 09
Jan 10
Base case price forecast: Potential for major disruptions from all directions
Old World: Forward price solidly anchored
■ Prior to the 2004-2008 price run-up and subsequent
collapse, the forward curve was anchored around
$20/bbl
■ $20/bbl was thought to be the marginal cost of
supply
■ Short-term disruptions had minimal impact on longterm price views
■ OPEC sought to manage market through inventories
In US$/bbl
$140
$120
$100
$80
$60
$40
$20
$'99
'01
'03
'05
'07
'09
'11
Source: JPMorgan Energy Strategy
New World: Disruptions will transmit across the forward price curve
Event/shock (US$ Impact)
Front
Back (Dec 2012)
Global economic shock (+ or -)
+20/-30
+10/-15
Iraqi collapse or shock
+30/-5
+15/-5
+40
+20
+15/-20
+15/-15
-5
-10
Substantial change to costs
+5/-5
+10/-20
Unknown supply disruption
+5 to +50
+0 to +30
?
?
LATEST MARKET OUTLOOK
Iran turmoil
China take-off or collapse
Substantial interfuel substitution
Other?
Source: JPMorgan Energy Strategy
3
■ Over 2004-2008 worries about longterm supply escalated
■ In 2008-2009 there was concern about
the duration of the recession
■ In both cases, long-term concerns
directly impacted short-term prices
■ The past year has seen a period of
relative stability with the market poised
at $70-80/bbl
■ Is this the calm realistic?
■ Will prices ratchet up again as we saw
over 2004-2008?
Flexible LNG seeks to push into high value market for oil substitutes
Oil-linked Asia provides the highest value for LNG
Competing Fuels
4
UK Natural Gas
7
Asia Spot LNG (Japan)
9
Asia Long Term LNG (Recent)
12
LSWR FOB Indonesia
12.50
Fuel Oil 180CST FOB Singapore
11.50
Naphtha CFR Japan
16
Minas Crude Oil
15
■ Demand was weak in 2009 due to the crisis, but
new LNG supply is pushing into the Asian market
■ Spot LNG is certainly competitive with oil...sellers
seek to place flexible LNG in high value niche
markets in place of oil (e.g., India, Kuwait)
Global Gas Prices: What will Qatar do with its flexible volumes?
Push into Asia
■ A huge question is what Qatar will do with
over 30 MTPA of “flexible” LNG initially
targeted at the US and UK which is now
ramping up
LATEST MARKET OUTLOOK
■ Korea was up over 80% yoy
US$/MMBtu (approx)
US Natural Gas
Source: JPMorgan Energy Strategy, Bloomberg
■ Asian LNG imports grew by close to 30 percent in
August versus the same period last year
$3-5/MMBtu
$9-13/MMBtu
How will Qatar adjust to
new market realities?
■ This has important implications for the oil
market as it is 740 kbd of oil equivalent
■ Will it push into low value markets to
compete with coal, or will it get pulled into
Asia as a substitute for oil?
■ The Middle East is the latest region to
emerge as a surprise LNG
importer...replacing oil
$3-8/MMBtu
Source: JP Morgan
4
Oil demand is robust, poised to move into supply deficit
Global Demand Growth Profile and Forecasts by Region, 2009-2011
461
87
44
2272
-99
911
Europe
OECD North America
1631
211
■ Still seen above trend, driven by
Emerging Market demand
252
-
883
285 281
1182
FSU
166
263
82
157
59
Latin America
119
80
75
■ World oil demand growth to moderate
to 1.6 mbd in 2011
757
■ China imports easing
■ But signs it is drawing on stocks
521
Middle-East
Asia Pacific
■ Structural risks:
■ Natural gas substitution
■ Efficiency
Africa
World Oil Balance
-1218
Global
2009
2010
2011
92.0
+10.0
+8.0
90.0
LATEST MARKET OUTLOOK
Source: JPMorgan Energy Strategy
■ OPEC output has stabilised at 29.1 mbd, even
assuming rising OPEC supplies, a market deficit
is seen
+6.0
+4.0
88.0
+2.0
86.0
■ Still see trend GDP growth
■ Receding risks of double-dip recession
■ But Eurozone problems show they have
not gone away
+0.0
-2.0
84.0
-4.0
82.0
Jan 08
Stock Change To Balance
Jan 09
Source: JPMorgan Energy Strategy
5
Total Product Demand
Jan 10
Jan 11
Supply
-6.0
Rising oil demand reflects infrastructure strains, comfort with high prices
US Port Traffic
Vehicle Fuel Consumption and Oil Prices
800
MPG
22.0
750
$ bbl
120
700
650
600
21.5
80
21.0
40
550
500
450
400
350
300
2002
20.5
Total Loaded Inbound
2003
2004
2005
2006
2007
2008
2009
0
Crude Oil Prices $/bbl
2010
Source: JP Morgan Energy Strategy, Port Authority Long Beach and LA
Source: JP Morgan Energy Strategy, US Bureau of Transport, EIA
Global Air Traffic Indicators
 World oil demand is coming in stronger than
economic growth indicators suggest
Miles Index
 Robust demand from Emerging Market
40
economies due to growth straining infrastructure
- much in the same way as 2004 and 2008
30
20
LATEST MARKET OUTLOOK
Average Miles Per Gallon
10
 Signs that initial conservation response to high
0
-10
prices is waning – not surprising considering oil
prices have averaged $75 bbl for five years now
Freight Traffic
-20
Passenger Traffic
 Subsidies being removed in emerging markets,
-30
2003
2004
2005
2006
2007
2008
2009
but likely to be re-imposed if prices rise
2010
Source: JP Morgan Energy Strategy, IATA
6
Distillate will provide the marginal demand barrel in 2010
Non-OECD Product Demand Year-on-Year Change
mbd
3
Light Ends
Middle Distillate
Global Product Demand Year-on-Year Change
mbd
4
Fuel Oil
2
Light Ends
Middle Distillate
Fuel Oil
2
1
0
0
-2
-1
-2
-4
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
 Dramatic divergence in product demand growth trends
OECD Product Demand Year-on-Year Change
between Emerging Markets and OECD post recession
mbd
2
Light Ends
Middle Distillate
 Light ends have driven the market higher, led by the
Fuel Oil
petrochemical sector
 Decline in light ends reflects weaker gasoline
demand and end of petchem restocking
 Maybe too bearish
LATEST MARKET OUTLOOK
0
 Middle distillate demand (gasoil, diesel, jet and
-2
kerosene) has shown signs of improvements in the past
few months
-4
 Strong gasoil/diesel cracks and is good news for
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
complex refiners
7
In an industry running at 93% capacity there is little margin for error
Peak Oil Projection
International Energy Agency Concern
 There is a need to find 3-4 mbd of new oil every year just to stand still
 But we have been doing that for the past decade
LATEST MARKET OUTLOOK
 When we are less successful or demand surges, prices spike
 When we are marginally better, there is a downward bias to prices
 Future project analysis only provides clarity for the next 3-4 years
 Reality is there are plenty of hydrocarbons around
 The real questions are the price to produce them and the price to curtail demand
 A major concern is that even with the highest level of spare capacity for a decade, the industry is
running at 96% of capacity
 There is little margin for error
8
Meeting emerging market growth will be a challenge
Growth in Emerging Markets
Indexed Global Oil Demand Growth
OECD
 EM economies pull more oil for every extra dollar earned
than mature economies.
China/India/Brazil
Other Non-OECD
250
 EM’s have been the driver of oil demand for much of the
200
last decade, but now that they make up nearly half the
world oil economy
150
100
 Forecast of Chinese demand for 2010 is up 10.4%, plus
another 5.3% in 2011. It will surpass the US as the worlds
largest consumer by 2020
50
0
 Demand growth for 2011 from India and Brazil with yoy
increases of 4.4% and 4.8%, respectively.
Percent Share of Global Oil Demand
Chinese Oil Demand Growth
30
Chinese Oil Demand …
Mln Barrels per Day
20
LATEST MARKET OUTLOOK
2013 Forecast
2001 Average
25
Other NonOECD
26%
Other NonOECD
30%
15
10
China/India/
Brazil
12%
5
OECD
62%
0
2000
2004
2008
2012
Source: JP Morgan Energy Strategy, JODI, IEA
2016
2020
2024
2028
Source: JP Morgan Energy Strategy, JODI, IEA
9
China/India/
Brazil
20%
OECD
50%
High price and better equipment availability allows production to grow
 Over the past year, 2010 non-OPEC supply projections
Per country Revisions (% and Vol) to 2010 Supply-ex FSU
by the International Energy Agency have been revised
up by 770 kbd
1
150
0.8
 Russia and Azerbaijan were two major FSU
100
0.6
forecasting issues, which cancelled each other out
 Russia higher to new projects
 Azerbaijan to ongoing project delay
0.4
50
0.2
0
 Supply revised higher in 41 countries, lower in 23
0
-0.2
 Decline (and forecasting error) has not gone away
-50
-0.4
-0.6
-0.8
Volume supply revisions kbd (RHS)
Percentage supply revisions (LHS)
-1
Number of countries with revisions
-100
-150
 Russia and USA alone present upside risk to 2011
forecast non-OPEC supply growth of 0.5 mbd
 Corporate guidance suggests Russian output
LATEST MARKET OUTLOOK
growth of 350 kbd, JPM forecast 80 kbd
Downward
Revisions,
23
 US growth could be revised up on:
 lower drilling impact to Gulf of Mexico
 Rapid shale oil development
Upward
Revisions,
41
 Strong pace of development in West Africa
 Iraq, Brazil provide two-way risks
10
OPEC will let oil prices swing between $55 and $100 per barrel
 OPEC uncomfortable with prices below $70 bbl, but
Prompt WTI Price
would only act if prices dipped below $65 bbl
 The time taken to gather a response could see
prices dip to $55
90
80
 Saudi budget needs $70 to balance – with social
70
spending growing rapidly, Saudi will be comfortable if
prices rise gradually
60
 Outside of a significant downward price shift, OPEC is
50
WTI
40
10 day MAV
20d MAV
30
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
not likely to change current quotas. Additional output
from Iraq/Nigeria. Still concerned about high prices
Jul-10
Source: JP Morgan Energy Strategy, JODI, IEA
Geopolitical flashpoints
High geopolitical risks over next six months
 Attacks on Iraqi northern pipeline have been stepped
up during political impasse
LATEST MARKET OUTLOOK
 Nigerian elections risk positioning by Niger Delta
rebels
 Iranian sanctions seem to be having economic effect,
but international patience wearing thin
 Venezuelan elections already causing surge in diesel
demand as president seeks to avert rolling blackouts.
Source: JP Morgan Energy Strategy, JODI, IEA
11
Refinery Crude Runs
Post-Summer Runs and Margins
NYMEX product cracks
 Refining runs are being supported by the bottom
Heat Crack
$/bbl
half of the barrel
Gas Crack
Fuel Oil Crack
20
15
 US refining runs have remained high despite
10
impending maintenance
5
 Diesel and fuel oil demand for power generation
0
has been higher than years prior
-5
-10
 Diesel demand forecast has been adjusted up
-15
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10
by 150 kbd globally. Fuel oil adjusted up by a
similar amount – more significant effect due to
smaller pool
US Refinery crude runs
2010
 Surge in demand is reflected in prompt cracks
rising to above $15/bbl for ULSD in Europe, its
highest level since late June
LATEST MARKET OUTLOOK
Aug-10 Sep-10
2009
2008
2007
17.0
16.0
 Northern hemisphere winter heating demand
15.0
could keep inventories tight in coming months
14.0
13.0
 Market will be reluctant to draw inventory prior to
12.0
1Q11
11.0
10.0
J
F
M
A
M
J
Source: JP Morgan Energy Strategy, EIA
12
J
A
S
O
N
D
Global crude demand peaked in the summer: winter rebound seen in 4Q10
Crude Market Balance
m b/d
mb
Crude Market Balance
74.0
150
100
73.0
50
-
72.0
-50
-100
71.0
-150
-200
70.0
-250
-300
69.0
LATEST MARKET OUTLOOK
Jan-10
Jan-09
Jan-08
Stock Change (rhs)
Crude Demand
Crude Supply
 Material upward revisions to supply estimates suggest market less tight than previously thought
 Crude market tightness still seen peaking in July/August
 Thereafter seasonal maintenance points to renewed build., before year-end ramp-up in runs start the next draw
13
World product supply potential points to distillate-led tightness
Tighter Fuel Oil to Pressure Upgrading Margins
mbd
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
LPG
Naphtha
2009
Gasoline
2010
Jet/kero
2011
2012
Gasoil/Diesel
Fuel Oil
2013
LATEST MARKET OUTLOOK
Source: JP Morgan Energy Strategy
■
Robust economic growth in Emerging Market economies, Asia in particular, underpins distillate-led demand growth
■
By contrast rising supplies of ethanol and NGL volumes will pressure gasoline cracks
 Continued robust naphtha demand growth provides some support to light distillate markets
■
A similar picture of rising supplies (OPEC NGL volumes) is evident in LPG markets
■
By contrast diesel/gasoil markets look set to tighten despite distillate-focused upgrading investment
14
Reported Crude Stocks have fallen by 10% from early 2009 peak
OECD Commercial Crude Inventories and Floating Storage
In mb
1.25
Floating
OECD Land-based
1.20
1.15
1.10
1.05
1.00
LATEST MARKET OUTLOOK
0.95
0.90
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
OECD land-based crude stocks and global floating crude storage has
fallen by over 100 mb since the peak in April 2009
15
Apr-10
Medium-term risks to near-term prices
Spare capacity starts to fall sharply from 2011
mbd
mbd
100
7
and Iraqi oil field
development are the real
uncertainties as we move
forward
6
95
5
90
 Financial stresses and
4
unemployment could drive
efficiencies, but policy and
high prices will be more
effective and permanent
3
85
2
80
1
75
 Electric vehicles are unlikely
to have a significant impact
on demand until post 2015 at
best
0
2009
2010
Supply Capacity (LHS)
2011
2012
2013
Demand(LHS)
2014
 Pace of economic growth
2015
OPEC Spare Capacity (RHS)
LATEST MARKET OUTLOOK
JPMorgan Medium Term Crude Oil Price Forecast
Nymex WTI Crude ($/bbl)
1Q10
2Q10
3Q10
4Q10
2010
2011
2012
2013
78.88
78.05
76.00
81.00
78.50
82.50
92.50
102.50
Price forecast assumes OPEC will try to moderate increases
 but will the market rise much faster, to prevent a supply crunch happening?
All Forecasts are period averages. Actual to date prices for 1Q10 and 2Q10 are as of July 30, 2010
16
METHODOLOGY & REFINERY OUTLOOK
J.P. Morgan – Global Refinery Analysis Model

J.P. Morgan’s Global Refinery Analysis Model (GRAM) is a bottom-up analysis of existing refinery capacity and
confirmed investment projects

The analysis covers more than one thousand individual new units adding to the existing 750 detailed refineries in
the model

Regional crude slates and volumes are forecast based on typical regional consumption patterns and forecast
changes to crude quality

NGL supply volumes are assumed to be a substitute for crude in the global crude market
 Implications for the residue balance in particular
 Supply analysis assumes OPEC will maximize production of non-quotas barrels ahead of crude

The GRAM uses 50 crude assays to analyze output from the initial distillation of the crude. The model then runs
these outputs through secondary processing units and aggregates the output into seven finished product
categories
 Model assumes that most capital intensive units are filled first
 i.e. cokers are filled before visbreakers

The impact of the new capacity additions are shown through a comparison of total product supply of these seven
product categories against JP Morgan’s detailed product demand model

Regional and global product market balances are then calculated including other sources of supply including
NGLs and biofuels
17
Regional refining capacity growth: the Americas; EMEA; Asia-Pacific

Global refining industry set for substantial growth in 20102014 period

Growth is led by regional champions
 China in Asia
 Saudi Arabia in the Middle East
 The US and Brazil in the Americas

METHODOLOGY & REFINERY OUTLOOK

Global Refining Capacity Growth 2010-2014 (mbd)
1.7
1.5
3.0
2.3
1.9
Ongoing investment in upgrading capacity will
 Further boost the supply of light clean products
 Continue to tighten fuel oil markets
 Puts upgrading margins under pressure
CDU
Regional variations will become critical to refinery
profitability
 European and Japanese refineries faces the
greatest pressure to close capacity
 Falling regional demand keeps profit generation
under intense pressure
 Rising biofuels supplies globally will further
undermine potential returns
Upgrading
Source: JP Morgan Energy Strategy, Wood Mackenzie
18
1.6
Regional upgrading capacity growth: the Americas; EMEA; Asia-Pacific
Global Crude Distillation Capacity Growth 2010-2014
1.0
Global Upgrading Capacity Growth Profile 2010-2014
1.5
1.0
1.0
0.5
1.0
1.0
0.5
0.5
0.5
1.0
0.5
-
-
-
0.5
2010
2010 2012 2014
2012
2010 2012 2014
2014
-
2010
2012
METHODOLOGY & REFINERY OUTLOOK
2012
2014
2014
Source: JP Morgan Energy Strategy, Wood Mackenzie
Source: JP Morgan Energy Strategy, Wood Mackenzie
■
2010
-
Asia Pacific and Middle East lead CDU capacity increase
 Driven by supply security concerns in China, India
 OPEC expansions driven by:
■ Energy security
■ Desire to maximize revenue from the barrel
■ Market control
■
Brazil, Mexico and the US bolster the Americas
■
Upgrading capacity additions concentrated in next three years
19
2010
2012
2014
Oil market outlook : Conclusions
 Linking of Fed policy to price levels, rather than growth a key change in policy – could spark
inflationary expectations and cause money to flow into commodities
 Low interest rates enable the oil market to hold high levels of inventory – currently a stabilizing
feature, but could become a driver of rising prices
 The recent decision to allow output to drift higher and lower stock levels adds weight to extreme
views on higher underlying decline rates and lower spare capacity
 World oil demand growth of 2.2mbd will moderate to 1.6 mbd in 2011
 Still seen above trend, driven by Emerging Market demand and healthy EM GDP growth.
 Light ends have driven the market higher, led by the petrochemical sector
 Middle distillate demand (gasoil, diesel, jet and kerosene) has overtaken gasoline/naphtha
as transportation gain become the dominant feature of world oil demand growth.
 A major concern for the industry and OPEC is that even with 6mbd of spare, the industry is
running at 93% of capacity; suggesting there is little margin for error
 OPEC output has stabilised at 29.1 mbd, and upcoming OPEC meeting is unlikely to see any
LATEST MARKET OUTLOOK
departure from current script.
 The market seems happy to anchor prices in the $80-100/bbl long-term, but is this rational?
Supply and demand shocks could quickly force a re-appraisal of long-term equilibrium prices if
circumstance change.
20
North American capacity expansion driven by the US
 US refiners continue to adapt to rising supplies of heavy sour crude/bitumen from Canada, rising Shale Oil production
and the Middle East’s increasingly sour crude slate
 Nearly 75% of US capacity additions relate to projects to increase the ability to process heavy sour crude
 Key projects include:
US Coking Capacity Growth Projects
 Motiva Port Arthur—325 kbd new crude
capacity in 2012
 Marathon Garyville—180 kbd new crude
capacity on stream in 2010
 Projects involve substantial expansion of
upgrading units
METHODOLOGY & REFINERY OUTLOOK
 However, these investment decisions, while
still robust in term of potential economics
ignore the changing landscape of the US
crude market—notably the rise of better
quality oil from the emerging shale oil plays
Source: JP Morgan Energy Strategy, Wood Mackenzie
21
World product supply potential points to distillate-led tightness
Tighter Fuel Oil to Pressure Upgrading Margins
mbd
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
LPG
Naphtha
2009
Gasoline
2010
Jet/kero
2011
2012
Gasoil/Diesel
Fuel Oil
2013
PRODUCT BALANCES
Source: JP Morgan Energy Strategy
■
Robust economic growth in Emerging Market economies, Asia in particular, underpins distillate-led demand growth
■
By contrast rising supplies of ethanol and NGL volumes will pressure gasoline cracks
 Continued robust naphtha demand growth provides some support to light distillate markets
■
A similar picture of rising supplies (OPEC NGL volumes) is evident in LPG markets
■
By contrast diesel/gasoil markets look set to tighten despite distillate-focused upgrading investment
22
North American supply potential — gasoline imports to diminish
North American Gasoline Market to Become More Balanced
mbd
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
-1.2
-1.4
LPG
Naphtha
2009
Gasoline
2010
Jet/kero
2011
2012
Gasoil/Diesel
Fuel Oil
2013
PRODUCT BALANCES
Source: JP Morgan Energy Strategy
■
Regional gasoline import requirement diminishes due to falling demand (despite Mexico)
■
Rising ethanol supplies help rebalance market
■
Current diesel exports are eroded by strong economic growth supporting diesel demand
■
However we have assumed US refiners do not radically alter their operating mode – i.e. they remain focused
on max gasoline
23
Upgrading capacity to tighten the fuel oil balance in the coming years
Global Fuel Oil Supply and Demand Balance
mbd
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
2009
2010
2011
2012
2013
Source: J.P. Morgan Energy Strategy
 With the move towards cleaner/lower sulfur fuels, demand for the bottom cut of the barrel has continued to
trend lower over the years despite strength in other product groups
 However, we expect the fuel oil balance to tighten considerably over the next several years as the current
refinery buildout cycle is expected to add a considerable amount of upgrading capacity
 Much of the new refining capacity (the bulk in non-OECD Asia) is expected to be rather sophisticated, with
the ability to reprocess much of the fuel oil produced into more desirable (and higher priced) middle and
light end products
 In Europe and North America, the inability to build new greenfield refineries has led to additions of
secondary units to existing infrastructure to produce a lighter product slate, reducing fuel oil yields
European supply potential — gasoline exports remain a threat to region
Diesel-Biased Demand Leaves Region Vulnerable to Rationalization
mbd
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
LPG
Naphtha
2009
Gasoline
Jet/kero
2010
2011
Gasoil/Diesel
2012
Fuel Oil
2013
PRODUCT BALANCES
Source: JP Morgan Energy Strategy
■
Despite lower crude run assumptions, declining regional demand leaves European refineries exposed to
competition from rising Asian export volumes (particularly from India)
■
In contrast to North America, Europe’s product balance moves more out of line with demand
■
Capacity rationalization remains a real risk given low complexity many regional refineries
24
Conclusions: global refining and product supply
 Refiners globally are over-investing in new capacity, and particularly upgrading capacity
 This is the area that has provided strong returns over the past 20 years, but by virtue of
overinvestment will provide less of a competitive advantage in the future
 World refinery capacity and upgrading expansions to constrain refining margins for the next five
years
 Upgrading capacity to keep fuel oil margins tight and narrow differentials between light/sweet, and
heavy/sour crude oil prices
 Bulk of new capacity taking place in Asia and Middle East—the area of greatest demand growth
 Low clean freight rates to open up wider scope for product trade when Asia becomes over-supplied
 Refining profitability is therefore likely to be strongly influenced by location factors—particularly
access to low cost crudes
 Atlantic Basin crude supplies to be tightened by ongoing draw from Asia, Russian preference for
supplies via ESPO pipeline, ongoing decline in North Sea
PRODUCT BALANCES
 US refiners continue to adapt to rising supplies of heavy sour crude/bitumen from Canada, rising
shale oil production and the Middle East’s increasingly sour crude slate
 Significant investment in additional coking capacity will allow refiners to run heavier crude slates—
positioning themselves to capture lower cost feedstock’s on the Gulf Coast and potentially the US
Midwest
 But many of these investment plans were signed off before the recent surge in shale oil production
25
Agenda
J.P. MORGAN GLOBAL COMMODITIES GROUP
STRICTLY PRIVATE AND CONFIDENTIAL
October 2010
26
J.P. Morgan Global Commodities – Growth Story
Investing in our platform
 J.P. Morgan has made significant investments in building out and diversifying our Global Commodities platform and
capabilities - organically and through strategic acquisitions, such as RBS Sempra
 J.P. Morgan's Global Commodities Group offers clients a comprehensive set of market making, structuring, risk management,
financing and warehousing capabilities across the full spectrum of commodity asset classes
Key transactions accelerate J.P. Morgan’s growth
 Completed acquisition
 Acquired UBS
 Acquired Bear Energy
GLOBAL COMMODITIES OVERVIEW
 J.P. Morgan expands
energy trading platform
organically
 J.P. Morgan corporate
focus on developing
market leading energy
trading platform
2005-2006
 Co-founded the New
as part of J.P.
Morgan’s acquisition of
Bear Stearns
 Acquired ClimateCare,
a leading originator of
carbon offsets
Commodities Canada
Ltd and UBS AG’s
global agricultural
business
 Acquired
EcoSecurities Group
plc, a global leader in
the carbon credit
market
 Completed acquisition
of RBS Sempra’s
North America natural
gas and power trading
portfolios in October
York Mercantile
Exchange’s Green
Exchange
2006
of RBS Sempra’s
metals, oil, coal,
plastics, agricultural,
and concentrates; nonU.S. emissions,
European power and
gas and investor
products assets from
the Royal Bank of
Scotland and Sempra
Energy in July
2008
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2009
2010
J.P. Morgan Global Commodities Group
Commodity risk expertise is interlinked with firm wide capabilities

Corporate Risk Management: J.P. Morgan provides risk management solutions for clients hedging commodities
exposure - clients covered include consumers, producers, refiners and traders of metals, energy and agriculture/softs

Market Intelligence: J.P. Morgan affords clients a wide view of the commodity markets given J.P. Morgan’s diverse
client base and distributes industry leading research in all commodities

Commodity Related Financing: J.P. Morgan provides corporate finance solutions for clients seeking to buy or sell
commodity assets or to leverage assets as collateral for financing transactions

Leverage of J.P. Morgan’s internal resources (Research, Lending, Equity and Debt Underwriting):
 J.P. Morgan’s clients have access to J.P. Morgan’s complete platform
 Up to date on latest industry and product trends

Strong customer relationships: J.P. Morgan works closely with customers to design the most appropriate solution in
the futures, cash, and over-the-counter commodities markets
GLOBAL COMMODITIES OVERVIEW
J.P. Morgan stands out

Commodity leader: J.P. Morgan is at the leading edge of product development and risk management in the
Commodity and Currency product space

Risk transfer: J.P. Morgan takes significant principal risk, publishes leading research, and works on a global structure
to ensure that our customers get the best service available

J.P. Morgan’s vast ability to take risk:
 Long-dated risk: J.P. Morgan can take on commodity risk beyond normal market tenors
 Outsized Risk : J.P. Morgan has strong market risk lines so can warehouse sizable positions
 Exotic risk: J.P. Morgan has the ability to trade products that many other banks do not
 Correlation risk: J.P. Morgan has a large correlation book and has the ability to trade exotic correlation
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J.P. Morgan Covers Commodities Across the Supply Chain
Research
Futures & Options
 Metals, Bulk Commodities
 OTC Metals, Energy and Ags
 Listed Futures and Options
 Energy and Power
 Warehousing Risk
 Specialist Trading Desks
 Grains and Agricultural
 Structured Products
 Global Clearing Solutions
 Technical Analysis
 Long Dated Contracts
 Electronic Trading
Energy and
Power
 Coal
 Electricity
 Natural Gas
 Gasoline
GLOBAL COMMODITIES OVERVIEW
Global Commodities
 Crude Oil
 NGLs
Transportation
 Freight
Base Metals
Precious Metals
Agricultural
Weather
 Steel
 Gold
 Cattle
 Temperature
 Nickel
 Silver
 Zinc
 Platinum
 Dairy
 Precipitation
Grains
 Wind
 Soybeans
 Tin
 Copper
 Palladium
 Wheat
 Corn
 Aluminium
Softs
 Lead
 Coffee
 Aluminium Alloy
 Sugar
 NASAAC
 Cotton
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 Hurricanes
Environmental
Markets
 Carbon
allowances and
offsets (e.g.,
RGGI; EUAs;
CERs; VERs)
 Sunshine
 Sulphur Dioxide
 Crop Yields
 Nitrogen Oxides
 Renewable
Energy Credits
Plastics
 Ethylene
 Polyethylene
 Polypropylene
J.P. Morgan – Oil Trading
Global Oil Trading Headcount by Location – 24 hour coverage
London 18
Stamford 12
Calgary 6
PHYSICAL AND FINANCIAL OIL CAPABILITIES
New York 13
Geneva/ Zug 5
Houston 4
Singapore 16
 In addition, there are over 20 waterborne and pipeline logistics experts spread across these locations
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Global Footprint
Worldwide Locations
 From metals and energy to environmental and agricultural commodities, our nearly 2,000 professionals in more than 10
countries operate at the center of the commodity markets. In addition to our office locations, our Henry Bath warehousing
franchise operates more than 100 individual warehouses locations in 11 countries
Liverpool
Oxford
Oslo
London*
Stamford
Calgary
Stockholm
Holland
New York*
Beijing
Germany
Chicago
Washington DC
Shanghai
Maryland
Seoul
Hong Kong
Tokyo
Houston*
Madrid
Istanbul
GLOBAL COMMODITIES OVERVIEW
Singapore*
Geneva
Sao Paulo**
Dubai
Zug
Mumbai
Italy
Combined Location
JPM GCG Only Center
Johannesburg**
Sydney
RBS-S Only Center
* Major hub
** Expected in 2nd half of 2010
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J.P. Morgan’s Global Oil Physical Asset Overview
London
New York
Calgary
Geneva/ Zug
PHYSICAL AND FINANCIAL OIL CAPABILITIES
Houston
Singapore
Time Chartered Vessels
Storage Facilities
 J.P. Morgan can provide physical off take, delivery, storage, shipping and blending solutions across most petroleum products,
enabled by strong trading, operational, and functional support expertise
 Unique market position because much of the physical activity cannot be achieved in the financial market (e.g., float a ship
without a sale, unmatched physical longs and shorts in different market areas, trade non-hub locations)
 Participate in both wet and dry freight
32
Select Oil Team Members
Jeff Frase,
Managing Director
Ken Krug,
Executive Director
Dean Bristow,
Executive Director
Kirk Kinnear,
Executive Director
Jay Miller,
Executive Director
PHYSICAL AND FINANCIAL OIL CAPABILITIES
David Scholten,
Executive Director
Ira Eisenstein,
Executive Director
Andy Kelleher,
Managing Director
Greg Hebrank,
Executive Director
Max Strongin,
Executive Director
Dean Craig,
Executive Director
Jeff Frase joined J.P. Morgan and the GCG management team in October 2008 as the head of Global Oil Trading, based in New York. He joins
us from Lehman Brothers, where he ran Global Oil Trading for one year. Prior to Lehman, Jeff was a part of Goldman Sachs' Commodities
franchise for 17 years, where he had most recently been head of Global Crude Oil and Derivatives trading.
Ken Krug joined J.P. Morgan in July 2010 and will run the North American physical crude oil trading business. Prior to joining, he spent four years
at Goldman Sachs running the North American physical crude oil business. Ken also started the Canadian physical crude oil trading business
during his time at Goldman. In addition, Ken has worked in the refining space doing supply and trading at Suncor Energy.
Dean Bristow joined J.P. Morgan in 2010 with the acquisition of Sempra. He has spent the past year at Sempra running the Canadian Crude Oil
book, trading Canadian physical grades, and managing the physical storage portfolio. Previously at Sempra, Dean managed business
development for North America physical oil and the Canadian wellhead business. Dean has over 21 years in the energy business.
Kirk Kinnear joined J.P. Morgan in 2010 with the acquisition of Sempra. He has over 30 years experience in oil trading with Phibro Energy, Hess
Energy Trading and Sempra. Kirk was responsible for supplying crude to refineries in the mid-continent with Farmland, and the US Gulf Coast
with Phibro USA. He has worked on the trans-Alaska Pipeline and has experience as a lease crude buyer in the Mid-Continent and the Rockies.
Kirk currently serves as Secretary on the Board of Directors and NYMEX Foundation.
Jay Miller joined J.P. Morgan in 2010 with the acquisition of Sempra. He has been in the oil industry since 1975 and began his career trading at
ConocoPhillips. Jay helped start the crude oil trading group at Drexel, Burnham, Lambert until the energy trading operations were sold to Sempra
Energy. Jay has spent most of his career managing domestic crude oil trading operations and has extensive experience on both the physical and
financial side of the business. Jay is also a member of the Board of Directors of the New York Mercantile Exchange.
David Scholten joined J.P. Morgan in 2010 with the acquisition of Sempra. He joined Sempra in 2005 as domestic crude oil trader. Prior to that,
David was with Shell Trading US Co where he held various positions as a domestic crude oil trader. Before trading, David spent 8 years in
refining as a chemical engineer with Star Enterprise.
Ira Eisenstein joined J.P. Morgan in April 2008 as a crude oil trader. Ira started his career as a trader at Phibro Energy and also worked in the
tanker industry. Prior to joining J.P. Morgan, Ira was an Executive Director responsible for crude oil trading at Morgan Stanley for 17 years.
Andy Kelleher joined J.P.Morgan in August 2009 as the head of North American Products, bringing with him 30 years of extensive experience
trading physical crude and products. His previous roles include President of ConocoPhillips Supply and Trading, Vice President of Tosco Supply
and Trading, Phillips Petroleum Company, Sunoco Supply and Trading, and The Marc Rich Trading Company.
Greg Hebrank joined J.P. Morgan in 2010 with the acquisition of Sempra. At Sempra, Greg managed North American light products trading
(gasoline, ethanol, distillates, jet) for the past 6 years. Prior to Sempra, Greg worked for BP, Koch, Shell and El Paso Corporation in light
products trading.
Max Strongin joined J.P. Morgan in 2010 with the acquisition of Sempra. Max joined the Sempra fuel oil desk in 2002 and traded financial fuel
oil. Max is currently an Executive Director at J.P. Morgan trading financial and physical fuel oil based in Stamford.
Dean Craig joined J.P. Morgan in 2010 with the acquisition of Sempra. He has been with Sempra for five years, and currently runs the physical
Natural Gas Liquids book. Dean has traded Natural Gas Liquids for 10 years. Prior to that, Dean traded refined products including unleaded
gasoline, jet, and distillate for 8 years. In total, Dean has been in the trading business for 20 years.
33
J.P. Morgan named “Derivatives House of the Year” by EnergyRisk
Energy Risk’s Derivatives House of the Year

J.P. Morgan won EnergyRisk’s Derivatives House of the Year in
June, 2010

The magazine highlighted “a year of innovation in which it
executed a number of ground-breaking deals” as key
components of J.P. Morgan’s industry dominance
J.P. MORGAN GLOBAL COMMODITIES CREDENTIALS

Recognized Products


“Organic growth and a raft of acquisitions” have led to a “growing
foothold” in the commodities industry
Several structured transactions, in particular, showcased J.P.
Morgan’s ever-growing leadership in commodities

Strategic fuel hedge programme for the Republic of Panama

Rainfall-contingent power hedge for a South American-based
utility company
Expansion of price-making capabilities throughout Asia

Tokyo Commodity Exchange

Bear Energy

Japanese crude cocktail

ClimateCare

Regional crudes

UBS Canadian energy and global agriculture businesses

Agriculture products

EcoSecurities

Regional coal

Sempra global metals and oil businesses

Regional Power
"What's starting to change are clients' views of J.P. Morgan.
We didn't just flip a switch and one day it happened. We have
been deliberate in our growth strategy. We are now in parts
of the world that hadn't been a major focus for our
commodities team, such as Central and Latin America, the
Middle East, Africa and Asia. Over the course of the past few
years, our focus in energy and other commodities has really
been extending beyond financial and flow products to more
physical and structured transactions.“
-Mike Camacho, Global Head of Commodity Sales
EnergyRisk; June, 2010
34