BP PLC — Investor Presentation 2006

Jan 25, 2006

Oil Markets into 2006

Peter Davies Chief Economist, BP plc British Institute of Energy Economics London. 24 January, 2006

Outline

• • Oil and energy today
• • How did we get to here?
• • Prospects for 2006
• • Into the medium term

Oil and Gas: A Perspective

Real Oil Prices

2005: A Snapshot – "the 40% Year"

	2 0 0 5	2 0 0 4	C % h a n g e	C t r r e n u
\$ ( / ) O i l P i b b l r c e s
B t r e n	4 2 5 5	3 8 2 7	4 2 % 6 3 4 6 5 +
W T I	6 9 5 5	4 1 4 9	3 6 4 % 6 6 8 5 +
O C P E b k t a s e	0 1 5 7	3 6 0 4	0 % 9 2 4 7 5 4 +
G P i a s r c e s
\$ H H b ( / b ) t e n r m m y u u	8 6 4	6 1 3	4 0 9 % 8 2 1 +
U K N B P ( U K / h ) t p e r m	4 0 9 5	2 4 3 9	6 6 4 % 9 0 5 5 +
f i i i R M e n n g a r g n s
\$ G ( / ) B P I M b b l	8 6 0	6 0 8	% 4 1 4 3 2 4 +

World Fuel Shares 1965-2004

Share of world primary energy consumption

Brent Oil Prices

Why High Oil Prices?

• • Driven by:
  • − OPEC behaviour post 1999
  • − Strong demand growth 2004
  • − Low spare capacity
  • − Geopolitics
  • − Energy as a financial commodity

Brent Oil Prices 2005

Oil Markets in 2005

Million b/d

2005 Developments

• • Trend demand growth but with Chinese weakness
• • Non-OPEC weakness:
  • – Hurricane disruption
  • – Russian slowdown
  • – Project delays
• • OPEC production growth led to stockbuild

Oil Consumption in 2005

• • GDP growth returns to trend
• • Chinese oil consumption growth slows sharply

Hurricane Impacts

• • net tightened crude oil market
• • loss of r efineries temporarily raised refining margins
• • hit US gas harder than oil
• • revealed new dimensions of energy security – it is not always the Middle East and embargoes

OPEC Crude Oil Production 2004-5

2005 Oil Markets: The Conundrum

• Why did market fundamentals weaken but prices still rise?

OECD Commercial Inventories

Million bbls

Brent Contango & Backwardation

Brent Contango & Backwardation 2004-5

US\$/bbl

Brent Contango & Backwardation 2005

Brent Contango & Backwardation 2005

p

US\$/bbl

Brent Forward Price Curves

© BP 2006 19

2005: The Explanation

• • Inventories built in face of oversupply and enabled through 'flip' into contango
• • 4Q saw:
  • − Hurricane net tightening as production was slow to return
  • − Colder than average weather
  • − High gas prices stimulating resid demand

• •Geopolitical concerns

  • − Iran

• − Iraq

• •Spare capacity remained low
• • Emerging consensus on OPEC price objectives – floor of \$45-50 OPEC basket

• • Prices breakthrough \$60 – in face of rising concerns over Iran
• • Global economic momentum – and expectations of trend economic growth in 2006
• • OPEC wait and see through the winter

Oil Markets in 2005/6

2006 Prospects

• • Trend demand growth with Chinese acceleration
• • Non-OPEC acceleration:

– Hurricane restoration

• – Project delivery
• • Starting from a stockbuild in 2005

2006 supply growth outside of OPEC quotas

Million b/d

2006 Oil Price Prospects

• Drivers

• − 2006 call on OPEC less than current OPEC production levels
• − OPEC capacity rising
• − Geopolitical uncertainties
• • Risks
  • − Economic growth
  • − Supply delays and outages
  • − Geopolitics
• • OPEC may need to trim production to achieve price objectives – but production already at historical high levels
• • Reasonable expectation of \$50-60 Brent for 2006

OPEC: Spare Capacity

• • Oil prices driven up in 2004 by demand surge and low spare capacity – and further in 2005 despite rising inventories
• • 2006 shows further momentum but OPEC may need to trim production. \$50-60 oil prices likely
• • Spare capacity expected to build back to historic levels through 2010 – but call on OPEC still projected to edge upwards. Potential for prices to remain over \$40.
• •Market forces expected to respond – but could take a long time to reassert.