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Sixth&IEA&IEF&OPEC&Symposium&on&Energy&Outlooks Impact'of'a'low'oil'price'environment'on'supply'and'demand,' stability'and'economic'growth'in'KSA Eugene&C.&McQuaid

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SLIDE 1

Sixth&IEA&IEF&OPEC&Symposium&on&Energy&Outlooks Impact'of'a'low'oil'price'environment'on'supply'and'demand,' stability'and'economic'growth'in'KSA Eugene&C.&McQuaid – Saudi&Arabian&General&Investment&Authority Interactive'Session

February&2016

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SLIDE 2

Scope&&&Outline&

  • 1. Macroeconomic&Performance&&&Outlook&– Salient&Indicators
  • The&Macro&Economy&at&a&Glance
  • The&Macroeconomic&Fundamentals&
  • 2. Storage&Utilization,&Rig&Counts&and&Supply&Security
  • 3. WTI&&&Brent:&Price&Convergence&and&Divergence
  • 4. Hydrocarbons&&&Price&Elasticity&of&Demand&(Part&1&&&2)
  • 5. Energy&Price&Equivalent&Ratios
  • 6. Knightian Uncertainty
  • 7. Energy&Content&Argument
  • 8. …….&&&MacroYFiscal&Energy&Equivalent&Pricing&Model
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SLIDE 3

Key$Indicator$ 2005$(Base$Year) 2015$(Estimated) 2016 (Projected) Real%GDP%Growth (Constant prices) 7.3% 2.8% 2.4% Nominal%GDP%Growth (Current%prices) 5.1% (Est%CAGR) D13.7% 7.1% Population (millions) 23.3 31.4 32.0 Inflation 0.7% 2.0% 2.45% Unemployment N/A 11.7 12.0

Economic'Sector'' 2015'%'of'GDP' 2005'%'of'GDP' Shift:''05715' Manufacturing+ 12.23%+ 9.45%+ ++2.78%+ Construction+ 6.84%+ 4.74%+ ++2.1%+ Wholesale+/+Retail+&+Leisure+ 11.52%+ 6.27%+ ++5.25%+ Transportation+&+Communications+ 6.36%+ 3.54%+ ++2.82%+ Finance+ 12.57%+ 8.8%+ ++3.77%+ Oil+ 25.45%+ 46.47%+ H+21.02%+

+

Macroeconomic$Performance$&$Outlook$– Salient$Indicators

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SLIDE 4

The$Macro$Economy$at$a$Glance$

! Macroeconomic*landscape*is*in*transition*driven*by*private(sector(development,(economic(diversification and*FDI5led(investment. ! Stable(and(progressive(economy(in*real*terms*– A*5%*(compound*average)*real*GDP*in*the*past*decade*underpinning**sustainable*growth. ! Headline(and(core(inflation(are(consistent(with*growth*and*employment*targets*– Price*control*is*reinforced*by*the*dollar*peg*providing*a*robust* anchor*for*monetary*policy. ! Downstream$non4hydrocarbon$produce*[petrochemicals,*minerals*etc.],*in*a*low*oil*price*environment are$increasingly*important*for*employment* and*contribution*to*growth. ! Infrastructure(projects(E the*metro*rail*projects,*aviation,*marine,*lifestyle*&*access*infrastructure*E are*accelerating*and*supporting*investment*

  • pportunities* E i.e.*US$50*billion*capital*spend*in*2005*to*US$180*billion*in*2014.

! Investment*Flows*– KSA*attracted*US$8bn*in*2014*[equates*to*18%*of*total*FDI*into*greater*Arab*region]*E KSA*FDI*stock*(US$215.9bn)*as*a*%*GDP*is* 28.7%*which*benchmarked*against*the*world*average*FDI*(%*of*GDP)*is*33.6%. ! Gradual*transition*to*a*Knowledge(Society(through*sector*focused*diversification*including*manufacturing,*health,*transport,*financial*services,*and* ICT. ! Non5traditional(sectors(are*also*propelling*investment*development*opportunities*i.e.*Finance,*agriculture*sector*and*food*exports.* ! National(Transformation(Program((NTP):*To*accelerate*real*economic*growth*and*ongoing*diversification*efforts: " Led*by*the*Council*for*Economic*Development*and*Affairs, " Public*financial*and*fiscal*management*development*framework*at*Ministry*of*Finance, " Public*debt*management,*local*and*foreign*currency*bond*issuance,*liquidity*control*and*capital*market*enhancements*projects*at*SAMA.

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SLIDE 5

The$Real$Sector$– Consumer$Price$Index$ MACROECONOMIC$ FUNDAMENTALS

Consumer)&)produces)prices)remain) moderate)&)manageable)in)the)medium) term:)

  • Headline(inflation(remains(subdued(at(

2.0%(in(2015,(and(will(ease(to(a(‘steady( state’(of(2.45%(in(2016.

  • Retreating(from(the(recent(global(trend(s)(

in(disinflation(and(deflation…. core( inflation,(which(excludes([the(volatile( components](food(and(rental(and( housingJrelated(services,(underlies( headline(rates(as(anticipated.

3.8 3.7 2.9 3.5 2.7 2.0 2.4 0.5 1 1.5 2 2.5 3 3.5 4 2010 2011 2012 2013 2014 2015 2016

Index,$2006=1

Consumer Price$Index$(Including$Estimates$Fy2016)

Source: (1)$IMF$Article$IV$Consultation$2015.$(2)$SAGIA$Planning Department(

Assessment.

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SLIDE 6

KSA’s&GDP&Profile By&Sector:&Public&/&Private&&&Oil MACROECONOMIC& FUNDAMENTALS

Data&Source:&CDSI&National&Accounts&2014

10 20 30 40 50 60 2010 2011 2012 2013 2014

Percentage

Axis4Title

GDP4by4Institutional4Sectors4(At4Current4Prices)444

Oil4Sector Private4Sector Government

In4nominal4terms4KSA’s4macro4economy4is4 converging4in4such4that4both4the4oil4and4 non4oil4sectors4are4contributing4robustly4 to4overall4growthJ all4be4it4that4lower4 average4oil4prices4has4reduced4 hydrocarbon4contributions.4 This4convergence4is4driven4by4private4 sector4development4through4economic4 diversification,4 construction/manufacturing4and4 downstream4hydrocarbon4economic4 activity. The4Government4sector4remains4steady4 in4its4contribution4to4GDP.44

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SLIDE 7

GDP$at$Current$and$Constant$Prices$ MACROECONOMIC$ FUNDAMENTALS

Strong'GDP'economic'growth'in'Fy2015/16:

  • Real%GDP%growth%of%3.5%%in%2014%–

experienced%a%‘levelling%out’%at%2.8%%in% 2015%and%estimated%to%sustain%at%2.4%%for% 2016.

  • Fluctuating%longHterm%hydrocarbon%pricing%

arrangement,%impacting%fiscal%revenues,% remain%a%key%influencer%in%current% economic%growth%levels%–

  • Diversification%and%private%sector%

development%are%critical%in%KSA% transformational%planning%trajectory.

  • The%National%Transformation%Planning%and%

infrastructure%development%sectors%acting% as%a%primary%catalyst.%

2.7 3.5 2.8 2.4 1.4 0.3 F13.7 7.1 F25 F15 F5 5 15 25 35 45 2013 2014 2015 2016

GDP$%$Growth$at$Constant$and$Current$Prices

Real$GDP Nominal$GDP

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SLIDE 8

Hydrocarbon*&*Non*Hydrocarbon*Sector*Growth*

Dedicated(government/led(transition(to(diversify( economy(through(private(sector(development:

  • Non$hydrocarbon,private,sector,growth,is,

estimated,at,3.4%,2015,and,3.8%,in,2016,$ Driven,in,principle,by,financial,&,manufacturing, sectors.

  • Operationalization,of,Tawadul will,deepen,the,

equity,market,and,broaden,investor,base,– Morgan,Stanley,Composite,Index,(a,rating, system,of,global,stock,exchanges),currently, entering,the,assessment,phase,for,emerging, market,status,(currently,KSA,is,frontier,status).

  • Future,potential,lies,in,the,SME,,tourism,&,

hospitality,,diverse,financial,services,, IT/telecoms,and,export$driven,industrial, activity.

12.2 5.1 &1.6 1.5 2.4

1.2

8.1 5.5 6.4 5.0 3.1 3.3

10.0 5.4 2.7 3.5 2.8 2.4

&5 5 10 15 20 2011 2012 2013 2014 2015 2016

Real%GDP%Growth:%Hydrocarbons%and%nonhydrocarbons%(%)%

Oil0GDP Non0Oil0GDP Real0GDP Linear0(Real0GDP)

Source: (1)*IMF*Article*IV*Consultation*2015.*(2)*SAGIA*Planning*Department*Assessment.

MACROECONOMIC* FUNDAMENTALS

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SLIDE 9

KSA’s&Foreign&Trade&Profile MACROECONOMIC& FUNDAMENTALS

200000 400000 600000 800000 1000000 1200000 1400000 1600000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

RIYALS1(Millions)

Foreign&Trade:&Exports&&&Imports

Exports Imports Non1Oil1Exports

Data&Source:&CDSI&Import&&&Export&Trade&Statistics&2014

  • Non1oil1exports1are1reflecting1a1modest1

increase1in1private1sector1focused1trading1 patterns.

  • Petrochemicals1&1minerals1dominate1the1

non1oil1exports1– however1revenues1from1 such1will1be1muted1as1the1dollar1continues1 to1appreciate1and1the1US$1/1SAR1peg1 remains1in1place.1

  • The1US$1appreciation1trend1continues1to1

support1lower1import1prices1which1are1 reflected1in1the1current1CPI1index.111

  • Oil1exports1values1will1remain1challenged1

under1current1volume1/1production1levels.

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SLIDE 10

Current'Account'Balance MACROECONOMIC' FUNDAMENTALS

  • Current'account'surplus'narrowed'to'a'

healthy'10.9%'of'GDP'in'2014.

  • Anticipated'by'a'further'trajectory'into'

deficit'(B0.9%)'in'2015'as'a'result'of' volatile'hydrocarbon'revenues.

  • This'will'be'shorted'lived'as'a'return'to'a'

moderate'and'acceptable'surplus'during' Fy2016B20'is'forecast.'

670.0 734.0 744.0 746.0 644.0 690.0 23.7 22.5 18.2 10.9

  • 0.9

2.4

  • 100

100 200 300 400 500 600 700 800 2011 2012 2013 2014 2015 2016

Current'Account'as'a'%'GDP

In0US$0billions as0%0of0GDP

Source: (1)'IMF'Article'IV'Consultation'2015.'(2)'SAGIA'Planning'Department'Assessment.

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SLIDE 11

Current'Account'+ Component'Breakdown

MACROECONOMIC) FUNDAMENTALS

The)components)of)the)current)account,)in) particular)the)trade)balance)emphasize:

  • Exports:)Volatile)hydrocarbon)prices)are)

reducing)export)value)and)fiscal)revenues.

  • It)is)accepted)that)Non)hydrocarbon)

exportJdiversification)is)the)key)economic) driver)for)future)growth)in)KSA.

  • Imports:)The)appreciation)(US$))over)an)

extended)period)has)ensured)that) imported)goods)are)cheaper)and)thus)a) catalyst)to)increase)personal)expenditure)/) consumption.

36.5 33.6 29.9 25.2 13.0 14.4 J9.9 J8.5 J8.7 J11.3 J11.5 J10.7 1.4 1.5 1.8 2.2 2.8 3.6 J4.4 J4.1 J4.8 J5.2 J5.2 J5.0 J60.0 J40.0 J20.0 0.0 20.0 40.0 60.0 2011 2012 2013 2014 2015 2016

Goods Services Income Transfers

Current'Account'Components'(%'of'nominal'GDP)'

Source: (1)'IMF'Article'IV'Consultation'2015.'(2)'SAGIA'Planning'Department'Assessment.

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SLIDE 12

Storage(Utilisation,(Rig(Counts(and(Supply(Security

  • Circa:($380-$400(billion((((((Hydrocarbon(R&D,(and(Investment(since(2014.(
  • 3(– 5mbpd(production(impact(over(the(next(decade(=>(Supply(security(risk(is(evident.

North&American&Rig&Count&– January&8,&2016 North&American&Rig&Count&January&22,&2016&&&& North&American&Rig&Count&February&5,&2016

Oil Gas( Total Y:O:Y Rig(Count 516 148 664 1,750 Change(from(Previous Week

  • 20
  • 14
  • 34
  • Oil

Gas( Total Y:O:Y Rig(Count 510 110 627 1,633 Change(from(Previous Week

  • 5
  • 8
  • 13
  • Oil

Gas( Total Y:O:Y Rig(Count 467 104 571 1,456 Change(from(Previous Week

  • 31
  • 17
  • 48
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SLIDE 13

Storage(Utilisation,(Rig(counts(and(Supply(Security

  • 3(D’s:(De9investment,(Decommissioning(and(Depreciation
  • 150(oil(platforms(in(the(UK(North(Sea(are(expected(to(be(scrapped(over(the(next(10(years

BAKER&HUGHES&INCORPORATEDs WORLDWIDE&RIG&COUNT

2015 Latin+America Europe Africa Middle+East Asia+Pacific Total+Intl. Canada U.S. Total+World Jan 351 128 132 415 232 1258 368 1683 3309 Feb 355 133 132 415 240 1275 363 1348 2986 Mar 351 135 125 407 233 1251 196 1110 2557 Apr 325 119 120 410 228 1202 90 976 2268 May 327 116 100 398 217 1158 80 889 2127 Jun 314 113 103 401 215 1146 129 861 2136 Jul 313 108 94 391 212 1118 183 866 2167 Aug 319 109 96 393 220 1137 206 883 2226 Sep 321 109 96 396 218 1140 183 848 2171 Oct 294 108 93 403 213 1111 184 791 2086 Nov 284 108 90 419 208 1109 178 760 2047 Dec 270 114 91 422 198 1095 160 714 1969 Avg. 319 117 106 406 220 1167 193 977 2337 2014 Latin+America Europe Africa Middle+East Asia+Pacific Total+Intl. Canada U.S. Total+World Jan 401 126 139 403 256 1325 504 1769 3598 Feb 400 132 154 396 259 1341 626 1769 3736 Mar 406 148 132 401 258 1345 449 1803 3597 Apr 403 151 136 407 252 1349 204 1835 3388 May 404 149 140 414 243 1350 162 1859 3371 Jun 398 147 123 425 251 1344 240 1861 3445 Jul 407 153 137 432 253 1382 350 1876 3608 Aug 410 143 125 406 255 1339 399 1904 3642 Sep 402 148 117 396 260 1323 406 1930 3659 Oct 393 148 125 390 252 1308 424 1925 3657 Nov 375 149 142 403 255 1324 421 1925 3670 Dec 369 148 138 403 255 1313 375 1882 3570 Avg. 397 145 134 406 254 1337 380 1862 3578

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SLIDE 14

Benchmark*WTI*and*Brent*0 Price*Convergence

Two$Schools$of$Thought:

  • API$/$EIA$/$IEA$release$the$inventory$reports.$
  • inventory$growth.$….witnessing$a$plateua?
  • Crude$oil$demand$

<$supply…Impacts$weak$global$demand….weighed$on$the$Brent$crude$oil$prices$ …..WTIDBrent$spread$narrow/converge….boosts$US$production$volumes.

  • Versus

! Price$differential$will$continue$to$diverge*because$of$oversupply$in$the$US. ! Lifting$of$exports$embargos$/constraints$by$the$Cushing$Hub$which$(plus$US$law)$effectively$blocks$ WTI$from$being$exported$– No$longer$an$impediment! ! Parlance*– Open*for*Debate…..does*Contango explain*near*equilibrium?*

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SLIDE 15

Hydrocarbon*– Short*Run:*Price*Elasticity*of*Demand*and*Supply

1. Hydrocarbons-demand-is-price-inelastic-in-the-ST-(insensitive-to-changes-in-price):-

  • Oil-satisfies-essential-needs-– basic-utility,
  • Transportation-sectorAcentric,
  • Taxation-and-subsidies-‘isolate’-consumers-from-the-impact-of-price-revisions.-

2. Demand-is-influenced-primarily-by-macroAfiscal-trends-(i.e.-income-effect),-counterAcyclical-macroA prudential-impact,-geo-political-relationships,-‘Knightian’*Uncertainty,-and-the-‘soft-influencers’.- The$balance$of$elasticity$perfect$recipe$for$oil$price$volatility 3. Hydrocarbon-price-elasticity-of-oil-supply-low-(especially-in-absence-of-spare-capacity):-

  • Long-lead-in-time-for-oil-projects-leading-to-a-“lagging”-effect-in-supply-responses,
  • So…hydrocarbon-demand-more-responsive-to-income-than-prices.-

Thus$income$elasticity$effects$dominate$price$elasticity$effects$ 4. Thus-market-price-strongly-influenced-by-any-changes-in-expected-level-of-short-to-medium-term- income-growth-in-major-emerging-markets-– Aggregate-Economic-growth-is-dominant-factor- influencer--A INCOME-FACTOR. Key$question:$why$perceptions$or$expectations$of$low$price$elasticity$persist$in$the$oil$market$even$for$ the$long$term?$

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SLIDE 16

Hydrocarbon*– Long*Run:*Price*Elasticity*of*Demand*and*Supply

However,(in(the(longer(run...( ! Demand'and'(less'so)'supply'are'price'elastic.'

  • Consumers'will'make'the'investment'required'to'reduce'fuel'consumption'or'switch'to'a'

different'fuel,

  • On'the'supply'side,'companies’'cash'flow'improves,'investment'increases,'new'fields'are'

developed,

  • However,'higher'prices'may'also'encourage'resource'nationalism'and'slow'down'

investment/production.' The(rationale(in(the(Conventional(Hydrocarbon(Pricing(Framework( ! Fluctuations'in'oil'prices'would'induce'supply/'demand'reactions'and'institutional'responses'that' could'price'threshold'[limit]'on'oil…such'that: Demand(side(

  • High'oil'prices'would'have'an'adverse'impact'on'demand'through'price'and'an'
  • income'effect;
  • High'oil'prices'would'eventually'slowdown'real'economic'growth'and'oil'demand.

Supply(side(

  • High'oil'prices'encourage'investment'in'nonHOPEC'countries;'
  • High'oil'prices'encourage'substitution'at'the'margin'by'increasing'the'relative'price'of'oil;'
  • OPEC'increases'oil'supply'to'prevent'oil'prices'from'rising;'
  • High'oil'prices'result'in'longHterm'destruction'of'oil'demand'and'encourage'the'entry'of'

substitutes'at'a'large'scale;

  • Has'effect'of'increasing'the'elasticity'of'oil'supply'and'generates'strong'feedback'in'presence'of'

large'supply'disruptions'

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SLIDE 17

Energy'Price'Equivalence'Ratios

  • Fact:&Energy&Content&Price&Differential:
  • In#BTU#terms,#$1#of#natural#gas#can#obtain#200,000#units#of#energy#(at#a#spot#rate#of#$5/million#

BTU)#

  • Versus&
  • $1#of#WTI#oil#which#generates#60,000#units#of#energy#(at#a#spot#rate#of#$97/barrel).#

=&>&&&&&&&330%&energy&content&price&differential.

  • Thus:&Energy&Equivalence:
  • One#barrel#of#oil#produces#5.8#million#BTUs#of#energy.
  • Since#early#2006,#and#LNG/BBL#is#almost#80%#cheaper#than#oil#on#an#energyOequivalent#basis.
  • In#February#2014#oil#=#$95.32#bbl,#
  • LNG#=#$3.34#p/m#BTUs.

! At#a#multiple#of#5.8#times#to#equal#the#same amount#of#energy#produced#by#a#barrel#of#oil,# natural#gas was#selling#for#the#equivalent#of only#$19.38#per#barrel. " Expansive costOsaving#incentives O switch#from#gasoline#to#natural#gas and#its#derivatives#to#for# transportation#purposes.

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SLIDE 18

Knightian Uncertainty

Schools'of'Thought….root'of'explanation'– predictive'utility'

  • 1. LNG:'Hub'V'Oil'indexation….'Short'term'impact.
  • 2. US'production'rates…
  • 3. Saudi'Arabia’s'ability'to'grow'production…
  • 4. Iran’s'credible'ability'to'produce'more'oil.
  • 5. Chinese'economic'slowdown'and'its'impact'on'consumption…
  • 6. Positive'autocorrelation'in'the'commodity'and'equity'markets…
  • 7. GCC'currency'peg'with'the'US$...
  • 8. Russia’s'ability'to'add'global'production
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SLIDE 19

Barrel&of&Oil:&Energy&Content&Argument

Jan$12Lubricants Other2Refined2Products Asphalt2&2 Road2Oil Liquified2Refinery2Gas Residuel2Fuel2Oil Marketable2Coke Sill2Gas Jet2Fuel Distillate2 Fuel2Oil Gasoline Feb$12 Mar$12 Apr$12 May$12 Jun$12 Jul$12 Aug$12 Sep$12 Oct$12 Nov$12 Dec$12 Jan$13 Feb$13 Mar$13 Apr$13 May$13 Jun$13 Jul$13 Aug$13 Sep$13 Oct$13 Nov$13 Dec$13 Jan$14 Feb$14 Mar$14 Apr$14 May$14 Jun$14 Jul$14 Aug$14 Sep$14 Oct$14 Nov$14 Dec$14 Jan$15 Feb$15 Mar$15 Apr$15 May$15 Jun$15 Jul$15 Aug$15

slide-20
SLIDE 20

Macro&Fiscal+Energy+Equivalent+Pricing+Model

28.02 12.6 21.0 27.3 23.5 17.3 13.6 125.45 102.88 108.9 97.09 58.1 48.43 2.68 3.62 6 4.05 2.99 2.34 R².=.0.7838 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 0% 1000% 2000% 3000% 4000% 5000% 6000% 7000% 8000% 9000% 10000% 11000% 12000% 13000% 14000% 15000% 16000% 17000% Jan412 Apr412 Jul412 Oct412 Jan413 Apr413 Jul413 Oct413 Jan414 Apr414 Jul414 Oct414 Jan415 Apr415 Jul415 Oct415

Spot%price%ratios:%Crude%Hydrocarbon%sweet/light%oil%to%liquifeid%natural% gas%[LNG]

%.Price. Difference. between.Brent.and.EE.LNG Oil4gas.price.equivalent. ratio.(6.8) Energy.Equiv.Price.of.LNG UK.Brent U.S..Henry.Hub.LNG Linear..(%.Price.Difference. between.Brent. and.EE. LNG)

Sources:)EIEA Oil)and)gas)energy)equivalent) ratio:) approx&5.8&to&6.9&(lower&parameter& Ratio)above)(below))range)means)gas)is) sold)at)a)discounted)(premium))price.))