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					June 4, 2009

Global: Energy: Oil

Global Roundtable

Global: Energy: Oil – Recovery and relapse: Bullish oil equities at beginning of new upcycle
Unresolved supply challenges and stabilizing demand drive bullish oil equity view
Bullish oil equities
As our confidence grows that the next major oil price upcycle is underway, the Goldman Sachs global energy equity research team continues to recommend investors to overweight higher-beta energy stocks that are well-positioned to benefit from the upturn. Looking across our collective major oils coverage universe, our list of global favorites includes Cairn India (India), CNOOC (China), Gazprom (Russia), Hess (United States), Lukoil (Russia), Petrobras (Brazil), Royal Dutch Shell (Europe), and Suncor Energy (Canada).

Raising 2009 and 2010 oil price forecasts
We are raising our 2009 and 2010 WTI oil price forecasts to $59/bbl ($50/bbl before) and $80/bbl ($70/bbl before), respectively, as we continue to gain confidence that the trough in the oil cycle has passed and a new up-turn is underway. We continue to believe that crude oil supply remains structurally challenged and that demand rationing prices will return in the years ahead.

See the financial advisory disclosures section of this document for important disclosures about transactions in which The Goldman Sachs Group, Inc. or an affiliate is acting as financial advisor.

Drivers of bullish oil view
Key drivers of our bullish oil view are: (1) nonOPEC supply declines accelerate in 2H2009 and 2010; (2) effective OPEC spare capacity appears limited to the oil it took off the market in recent months; (3) OECD demand stabilizes near current levels; and (4) non-OECD demand growth recovers over the course of 2009 and 2010.

Key investment themes for new upcycle
Key investment themes include: (1) BRICs are the place to be; (2) Russian oils look inexpensive; (3) Canada: Should a second “C” be added to BRICCs? (4) The market is likely to continue to favor growth over returns; (5) super majors are not so super anymore; and (6) western regionals with attractive, niche exposures look interesting.

Arjun N. Murti
(212) 357-0931 | arjun.murti@gs.com Goldman, Sachs & Co.

Michele della Vigna, CFA
+44(20)7552-9383 | michele.dellavigna@gs.com Goldman Sachs International

Key risk
A renewed weakening in global GDP is the key risk to our bullish view.
Kelvin Koh, CFA
+852-2978-1218 | kelvin.koh@gs.com Goldman Sachs (Asia) L.L.C.

The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers in the US can receive independent, third-party research on companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.independentresearch.gs.com or call 1-866-727-7000. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc.

Goldman Sachs Global Investment Research

Global Investment Research

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Global: Energy: Oil

Table of contents
Recovery and relapse: Bullish oil equities at beginning of new upcycle Oil macro relapse: Structural supply challenges were never resolved in the last cycle Global favorites: Oil leverage, growth potential, improving profitability, reasonable value Disclosures 3 4 17 25

Goldman Sachs Global Energy Equity Research Team
Americas Energy - Arjun Murti, Business Unit Leader Integrated Oils, Refining Arjun Murti Amil Mody Joe Citarrella E&Ps, Coal Brian Singer Andre Benjamin Pavan Hoskote Uma M. Yanamandra Electric Utilities, IPPs Michael Lapides Jaideep Malik Zac Hurst Neil Mehta Aditi Rai Dastidar Europe Energy - Michele della Vigna, Energy Team Leader European Marketing Analyst Hugh Selby-Smith European Integrated Oils Michele della Vigna Michael Rae Russian Oils Anton Sychev Geydar Mamedov E&P Christopher Jost Oil Services Henry Tarr Daniel Brook Refiners Henry Morris Asia Energy - Kelvin Koh, Energy Team Leader Asia ex-Japan, India Kelvin Koh Patrick Tiah Chris Shiu Jason Jin Nikhil Bhandari Peter Zheng Korea Kenneth Whee Joon-Ho Lee India Nilesh Banerjee Durga Dath Karthik Bhat Taiwan Jim Hung Rowena Chang Japan Hiroyuki Sakaida Shintaro Horinouchi
Source: Goldman Sachs Research.

Oil Services/Drillers Daniel Boyd Dimitry Dayen Kyle Jenke Amit Dokania Pipelines, MLPS, GPs Ted Durbin Michael Cerasoli Smriti Dixit

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Recovery and relapse: Bullish oil equities at beginning of new upcycle
As our confidence grows that the next major oil price upcycle is underway, the Goldman Sachs global energy equity research team continues to recommend investors to overweight higher-beta energy stocks that are well-positioned to benefit from the upturn. We are raising our crude oil forecasts for 2009-2011 as well as our corresponding EPS estimates and target prices for the vast bulk of our global oils coverage universe (for details on specific EPS, ratings, and target price changes,
please see corresponding notes published by each of our regional analyst teams).

Looking across our collective major oils coverage universe, our list of global favorites includes Cairn India (India), CNOOC (China), Gazprom (Russia), Hess (United States), Lukoil (Russia), Petrobras (Brazil), Royal Dutch Shell (Europe), and Suncor Energy (Canada). We screened our global major oils coverage universe in terms of: (1) leverage to our bullish crude oil view; (2)
growth potential; (3) profitability; and (4) valuation.

Key investment themes are as follows:

• •

BRICs are the place to be. Five of our favorite eight are BRICs-based, namely Cairn India, CNOOC, Gazprom, Lukoil, and
Petrobras.

Russian oils look inexpensive. In contrast to the just about all of the other BRICs-based oil companies, Lukoil and Gazprom are trading at EV/DACF valuations that are both below the sector average and below their own trading histories. For investors comfortable with geopolitical risk in Russia, the valuations look compelling to us. Canada: Should a second “C” be added to BRICCs? We have a favorable view of the substantial oil sands and heavy oil
resource in Canada, with Suncor Energy a global favorite of ours. Canada appears to be the one advanced economy with sizable oil resources that can help fuel future BRICs/non-OECD demand growth.

•

•

Market likely to continue to favor growth over returns. Energy investors typically are more willing to pay for growth during an upcycle, with the current up-turn being no exception. We see the preference for growth continuing and six of our eight global favorites are leaders in E&P volume growth. Super majors not so super anymore. The most notable de-rating has happened to the super majors, which are laggards in
terms of growth and, with the notable exception of Exxon Mobil, no longer generate superior profitability. Royal Dutch Shell is included as a global favorite, as we view favorably its exposure to “Top 230” projects. We also wanted to include at least one European oil.

•

•

Western regionals with attractive, niche exposures look interesting. Our favorites are Hess and Repsol, both of which have
unique exposure to Brazil’s emerging “pre-salt” play.

We are raising our 2009-2011 WTI oil price deck to $59/bbl ($50/bbl before), $80/bbl ($70/bbl before), and $100/bbl ($90/bbl before), respectively, as we continue to gain confidence that the trough in the oil cycle has passed and a new up-turn is underway (see Exhibit 2). We continue to believe that crude oil supply remains structurally challenged and that in the years ahead,
oil prices will need to rise to sufficiently high levels to again ration demand as occurred in 2008. Our base-case view is that oil prices will return to demand-rationing levels around the 2011 time frame, with the precise timing driven by the strength (or lack thereof) in global economic growth in the interim. Our revised forecasts reflect a return to mid-cycle-like conditions in 2010.

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Our confidence that a new up-turn has begun is predicated on the following:

• • • •

Non-OPEC supply declines accelerate over the remainder of 2009 and 2010. Effective OPEC spare capacity is, we think, limited to the oil it took off the market over the past six months. OECD demand stabilizes near current levels on an absolute basis and experiences “normal” seasonality over the rest of 2009. Non-OECD demand growth recovers over the course of 2009 and 2010.

Exhibit 1: Goldman Sachs Global Energy Equity Research: Updated commodity price forecasts
Crude oil prices WTI spot oil ($/bbl) Brent ($/bbl) new old new old 2009E: 1Q 2QE 3QE 4QE Year 2010E 2011E 2012E 2013N $43 58 65 70 $59 $80 $100 $105 $85 $43 47 50 60 $50 $70 $90 $105 $85 $45 57 65 70 $59 $80 $100 $105 $85 $45 45 50 60 $50 $70 $90 $105 $85 Gulf Coast 3:2:1 (WTI) new old $9.13 8.00 8.17 5.67 $7.74 $7.93 $9.50 $11.00 $9.67 $9.13 9.02 7.83 4.67 $7.66 $7.93 $10.20 $11.55 $9.35 Refining margins Europe 2:1:1 (Brent) new old $10.79 8.00 8.00 9.00 $8.95 $8.70 $10.50 $12.50 $12.50 $10.79 8.00 8.00 9.00 $8.95 $10.50 $12.50 $13.00 $10.50 Singapore 2:1:1 (Dubai) new old $12.11 8.90 6.90 7.50 $8.85 $8.00 $9.00 $10.50 $9.50 $12.11 5.25 6.75 6.75 $7.72 $7.00 $8.00 $8.50 $8.50 Light-heavy, sweet-sour spreads WTI-WTS ($/bbl) WTI-Maya ($/bbl) new old new old $0.91 1.33 1.95 2.80 $1.75 $4.00 $5.00 $5.25 $4.25 $0.91 2.35 2.50 3.00 $2.19 $3.50 $4.50 $5.25 $4.25 $4.66 3.93 6.50 8.40 $5.87 $12.00 $15.00 $15.75 $12.75 $4.66 7.05 7.50 9.00 $7.05 $10.50 $13.50 $15.75 $12.75 Natural gas US Henry Hub ($/MMBtu) new old $4.75 3.75 4.00 5.00 $4.38 $6.50 $7.50 $7.00 $7.00 $4.75 4.25 4.50 5.50 $4.75 $6.50 $7.50 $7.00 $7.00

Source: Bloomberg, Goldman Sachs Research estimates.

Oil macro relapse: Structural supply challenges were never resolved in the last cycle
Non-OPEC supply actually shrunk at end bull market, now on-track for secular decline
Perhaps the most surprising revelation from the 2004-2008 super bull market was the fact that non-OPEC crude oil supply actually fell in 2008 and is on-track to fall by an even greater amount in 2009. This is despite the fact that capital spending and industry activity rose dramatically during the bull market and just about all oil companies had robust production growth forecasts. We believe the deceleration and ultimate shrinkage in non-OPEC crude oil supply is the biggest difference between the super bull market in the 2000s versus the 1970s (see Exhibit 2). In the 1970s, we saw a traditional supply response to high prices and increasing activity via a decade of robust supply growth, which, in the face of multi-year demand declines, led to an extended period of low oil prices. While oil demand growth fell in 2008 and is on-track to fall by an even larger amount in 2009, non-OPEC supply is also falling, which gives us considerable confidence that the we will not need to wait 15 years for the next major upcycle as we did in the 1980s and 1990s.

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Exhibit 2: Core supply/demand balances have remained tight in stark contrast to the 1970s super cycle
Growth rate in global oil demand and non-OPEC supply; “Balance” is difference in growth rates (supply less demand)
1970s super-cycle
10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 -2.0% -4.0% -6.0% Global oil demand Non-OPEC supply Balance (S-D) 1986 Throughout the 1970s bull market, non-OPEC supply was growing in excess of global oil demand

5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1999 2000 2001 2002 2003

2000s super-cycle
This time, non-OPEC supply has lagged demand

2004

2005

2006

2007

2008E

2009E

2010E

-1.0% -2.0% -3.0% -4.0%

Global oil demand

Non-OPEC supply

Balance (S-D)

Source: BP Statistical Review of World Energy, IEA, Goldman Sachs Research estimates.

As we look out over the next five years, we believe only Brazil and, to a lesser degree, Canada will deliver meaningful, positive supply growth among the key non-OPEC regions (see Exhibit 3). Overall, we see non-OPEC crude oil supply shrinking by 2.6 million b/d over the next five years, or an average of just over 0.5 million b/d per year. We believe risk to our non-OPEC supply forecasts is to the downside based on the 2002-2008 experience. Exhibit 3: Non-OPEC supply forecast to decline 2.6 million b/d over next five years
Cumulative crude oil supply growth by area for next 5 years

Cumulative crude oil supply growth (2009E-2013E)
1.0 0.5 0.0 (0.5) (1.0) (1.5) (2.0) (2.5) (3.0) All Other Total non-OPEC FSU North Sea Canada Brazil US Mexico million barrels per day

Source: Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research

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OPEC spare capacity has built, but “utilization rate” still a robust 93%
We do not share investor concerns that the build in OPEC spare capacity represents an overhang on oil markets that will keep prices subdued for several years. While we agree that there is now a greater cushion than existed for most of the super bull market period of 2004-2008, we believe stabilizing demand and declining non-OPEC supply will eat into the spare capacity relatively quickly, perhaps by the end of 2010 or 2011 (see Exhbit 4). We estimate that OPEC spare capacity will peak at around 5.5 million b/d in 2Q2009. Adjusting for ongoing issues in the Niger Delta and uncertainty over Saudi Arabia’s ability to sustain production above 10 mn b/d suggests OPEC has no more spare capacity than the circa 3.5 million b/d of production it removed from oil markets over the past few months. Furthermore, if we compare OPEC spare capacity to total crude oil supply capacity, we estimate a trough “utilization rate” of 93%. In our view, very few other industries would be likely to be able to claim such a high utilization rate at trough demand levels. The idea that crude oil markets can rebalance at trough demand with a 93% utilization rate and at a time when non-OPEC is showing signs of perhaps permanently rolling over, we think points to a fairly bullish outlook whenever global economic growth stabilizes let alone recovers. Exhibit 4: OPEC spare capacity has built of late, but we think will fall quickly in 2010-2011; supply “utilization rate” a still healthy 93% currently
Annual OPEC immediately deliverable spare capacity: 1974-2012E
14,000 12,000 thousands b/d 10,000 8,000 6,000 4,000 2,000 0 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010E Total OPEC ex-Nigeria ex-Nigeria, Saudi over 10 mnb/d While there is some build in spare capacity, we expect it to start declining again by 2H2009; some of the excess in the Niger Delta and Saudi (over 10) we think is questionable 100% 95% % utilization 90% 85% 80% 75% 70% 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009E

Worldwide crude oil supply "utilization rate"

Source: Goldman Sachs Research estimates.

Confidence growing that global oil demand is stabilizing now and could rise modestly in 2010
We are gaining confidence that global oil demand is in the early stages of stabilizing, based on the following:

• • •

US oil demand figures, though still choppy, are showing signs of forming a bottom on an absolute basis (see Exhibits 6). The GS Global Leading Indicator has correlated well with global implied oil demand and is now pointing up (see Exhibit 7). Goldman Sachs Global ECS Research is forecasting global GDP to recover to 3.4% in 2010 from -1.4% in 2009, with China and the non-OECD the key drivers of the improvement (see Exhibits 8 and 9).

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•

We see the ongoing improvement in forward WTI time spreads as consistent with our view that crude oil supply/demand balances are steadily moving back into balance (see Exhibits 10-11).

Our forecasts assume that the trough in global oil demand on an absolute and year-over-year basis was reached in 2Q2009 (see Exhibits 5 and 12). We assume “normal” seasonal improvements in 3Q and 4Q2009 and a modest recovery in 2010. We believe our 2010 global oil demand forecasts could prove conservative, as our global GDP forecast of 3.4% would more typically translate to +1.0%-1.5% global oil demand growth, about double the +0.6% reflected in our oil supply/demand models at the present time. Exhibit 5: Goldman Sachs Global Energy Equity Research: Global crude oil supply/demand summary
Supply growth rates adjusted for country movements in and out of OPEC
in million b/d, unless otherwise indicated 2008 1Q Demand y-o-y growth Supply: Non-OPEC y-o-y growth OPEC: Crude NGLs Total Total Inventory build (draw): Implied stock change from S/D model Less: Net underestimation of demand/other Floating storage/oil in transit Government inventory build (draw) Total adjustments Reported OECD inventory build (draw) Demand growth (y-o-y) Supply growth (y-o-y): Non-OPEC OPEC Total -0.4% 4.6% 1.6% -0.2% 4.6% 1.8% -0.7% 3.9% 1.2% -0.4% -0.9% -0.6% -0.4% 3.0% 1.0% -0.4% -8.1% -3.7% -1.4% -8.2% -4.3% -1.1% -6.4% -3.4% -1.6% -2.1% -1.8% -1.1% -6.2% -3.3% -1.7% 4.1% 0.6% -1.4% 5.6% 1.5% -0.8% 3.4% 1.0% -0.6% 3.5% 1.2% -0.2% 0.8% 0.2% -0.5% 1.0% 0.2% (0.9) 0.3 0.0 (0.5) 0.1 1.0% 0.4 (0.0) 0.0 0.4 0.3 0.6% 0.5 (0.3) (0.1) 0.1 0.6 -1.0% 0.2 0.1 0.0 0.3 0.5 -2.7% 0.1 0.0 0.0 0.1 0.4 -0.5% (1.3) 0.5 0.2 (0.7) 0.5 -3.9% 0.0 (0.4) 0.2 (0.2) 0.9 -4.3% 0.7 0.0 0.2 0.9 (1.5) -1.8% 0.6 0.0 0.2 0.8 (0.5) -1.3% (0.0) 0.0 0.2 0.2 (0.2) -2.9% 0.0 0.0 0.1 0.1 (0.0) 0.6% 0.0 0.0 0.1 0.1 (0.0) 1.5% 0.0 0.0 0.1 0.1 (0.1) 1.1% 0.0 0.0 0.1 0.1 (0.1) 1.2% 0.0 0.0 0.1 0.1 (0.9) 1.2% 0.0 0.0 0.1 0.1 (1.8) 1.3% (0.4) 0.7 0.7 0.7 0.5 (0.2) 0.7 (0.6) 0.3 0.1 0.1 0.1 (0.0) 0.0 (0.8) (1.7) 32.4 4.7 37.1 86.9 32.3 4.7 36.9 86.7 32.4 4.8 37.2 86.2 31.4 4.9 36.3 85.9 32.1 4.7 36.9 86.4 28.4 4.6 33.0 83.7 28.2 4.7 32.9 83.0 28.9 4.9 33.7 83.2 29.5 5.0 34.5 84.4 28.7 4.8 33.5 83.6 29.9 4.9 34.9 84.1 31.7 5.1 36.8 85.3 32.8 5.3 38.1 86.2 34.1 5.3 39.4 87.3 34.4 5.3 39.7 87.5 34.8 5.3 40.2 87.7 49.9 (0.2) 49.7 (0.1) 49.0 (0.4) 49.6 (0.2) 49.6 (0.2) 50.7 (0.2) 50.1 (0.7) 49.5 (0.5) 49.9 (0.8) 50.0 (0.5) 49.2 (0.9) 48.5 (0.7) 48.1 (0.4) 47.9 (0.3) 47.8 (0.1) 47.5 (0.2) 87.4 0.9 2Q 86.0 0.5 3Q 85.4 (0.9) 4Q 85.2 (2.4) Year 86.0 (0.5) 1Q 83.9 (3.4) 2QE 82.2 (3.7) 2009E 3QE 83.9 (1.6) 4QE 84.1 (1.1) Year 83.5 (2.5) 2010E 84.0 0.5 2011E 85.3 1.3 2012E 86.2 1.0 2013E 87.2 1.0 2014E 88.3 1.1 2015E 89.4 1.1

Source: IEA, Goldman Sachs Research estimates.

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Exhibit 6: US weekly oil demand showing signs of stabilizing
Weekly US oil demand (thousands b/d)
Product Implied Demand: Total Product Demand, 4-wk avg.
22,000 21,500 21,000 20,500 (Mbbl/d) 20,000 19,500 19,000 18,500 18,000 17,500 Q1 Q2 Q3 Q4

Exhibit 7: GS GLI pointing up, which bodes well for oil demand growth
GS Global Leading Indicator versus implied global oil demand growth (%, y-o-y)

5.5 4.5 3.5 2.5 1.5 0.5 (0.5) (1.5) (2.5) (3.5) (4.5) (5.5) (6.5) Jan-93

GS Global Leading Indicator

5.5% Implied oil demand growth (%) 3.5% 1.5% -0.5%
GLI appears to be turning the corner, which bodes well for future global oil demand.

GLI index (% change, y-o-y)

-2.5% -4.5%

Implied global oil demand growth Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

2005

2006

2007

2008

2009

2009E

Source: DOE, Goldman Sachs Research estimates.

Source: IEA, Goldman Sachs Global ECS Research. Goldman Sachs Research estimates..

Exhibit 8: GS economists calling for near-trend global GDP growth in 2010

Exhibit 9: Expected 2010 GDP rebound supports oil demand recovery
Global GDP growth vs. Global oil demand growth
6.0%

Real GDP, % yoy 2008 United States Europe Japan Advanced Economies China BRICs Emerging Markets World 1.1% 0.9% -0.7% 0.8% 9.0% 7.5% 6.2% 2.9% 2009E -3.0% -3.9% -6.3% -3.8% 8.3% 4.5% 2.2% -1.4% 2010E 1.2% 0.9% 1.1% 1.3% 10.9% 8.0% 6.5% 3.4%

5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2008E -1.0% -2.0% -3.0% -4.0% Global oil dem and grow th (% yoy) Global real GDP grow th (% yoy) Trend oil dem and Trend GDP grow th 2010E 1990 1992 1994 1996 1998 2000 2002 2004 2006

Source: Goldman Sachs Global ECS Research.

Source: IEA, Goldman Sachs Global ECS Research, Goldman Sachs Research estimates.

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Exhibit 10: WTI 1-12 month time spreads have been strengthening

Exhibit 11: WTI 1-60 month time spreads have also been strengthening

WTI 1-12 month time spread 20.0% 10.0% % backwardation (contango) % backwardation (contango) 0.0% Oct-08 Nov-08 Jun-08 Aug-08 Sep-08 May-08 May-09 Mar-08 Mar-09 Jun-09 Jan-08 Jul-08 Feb-08 Jan-09 Feb-09 Dec-08 Apr-08 Apr-09 -10.0% -20.0% -30.0% -40.0% -50.0% 20.0% 10.0% 0.0%

WTI 1-60 month tim e spread

Oct-08

Nov-08

Jun-08

Jul-08

Aug-08

Sep-08

May-08

-10.0% -20.0% -30.0% -40.0% -50.0% -60.0%

% backw ardation/(contango)

% backw ardation/(contango)

Source: Bloomberg, Goldman Sachs Research.

Source: Bloomberg, Goldman Sachs Research.

Exhibit 12: We believe oil supply declines will exceed demand declines starting in 3Q2009, with balances tightening further in 2010
Growth rate in global oil demand, non-OPEC supply, and OPEC supply (left axis); WTI spot oil price (right axis)
2.0

(1)

(2)

(3)

(4)

$140

1.0

$120

$100 Growth (y-o-y, mn b/d) 0.0 1Q07 (1.0) $60 (2.0) $40 (3.0) 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08E 1Q09E 2Q09E 3Q09E 4Q09E 2010E $80 WTI oil price ($/bbl)

(1) With little OPEC spare capacity and global oil demand sharply exceeding nonOPEC supply growth, oil prices reached "demand rationing" levels well above $100/bbl in 2Q08. (2) Starting in 3Q08, global oil demand collapsed and with it oil prices. (3) By the end of 1Q09, OPEC supply cuts begin to catch-up with demand declines. (4) Supply declines expected to exceed moderating demand declines in 2H09. Note, we assume OPEC supply increases, providing some cushion in the event demand declines do not moderate.

$20

(4.0) Global oil demand growth Non-OPEC supply growth OPEC supply growth WTI oil price

$0

Source: IEA, Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research

May-09

Mar-08

Mar-09

Jun-09

Jan-08

Feb-08

Jan-09

Feb-09

Dec-08

Apr-08

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Non-OECD recovery key to future oil demand growth
Our economists’ trend-like global GDP forecast for 2010 is driven by an expected rebound in non-OECD economic growth. The nonOECD accounted for some 95% of global oil demand growth over the past decade, and we expect to account for well over 100% of oil demand growth in the future given the prospects for secular decline in OECD oil demand (see Exhibit 13). Within the non-OECD, we view China as the linchpin, as a number of the other key non-OECD regions, like the Middle East and Latin America, are likely to be pro-cyclical with oil/commodity prices. Not suprisingly, therefore, growing evidence that China’s economy has turned the corner has been a key driver of oil prices and energy equities. Exhibit 13: Non-OECD was 95% of demand growth over past decade and we think will be more than 100% over next 5 years
We forecast more than 100% of future demand growth will be from non-OECD. - 2.9 + 4.2

90 millions of barrels per day 85 80 75 70 65

95% of oil demand growth over past decade from non-OECD; US gasoline accounted for 6% of growth; Other + 10.8 US/OECD shrunk 1%.

+ 0.7

-0.1

- 0.1

Other OECD

NonOECD

OECD

US gasoline

US other

NonOECD

1998

2008

Source: IEA, Goldman Sachs Research estimates.

Oil inventory statistics not helpful at the inflection points—current environment no exception
We believe that many investors have stayed bearish or on the sidelines out of concern that the rise in US oil inventories through early May called into question our view that fundamentals were on-track to turn bullish in 2H2009. Looking at prior downturns, we find that inventories were a lagging indicator and did not prove helpful in correctly forecasting the turn in the cycle (see Exhibits 1415). For example, in the 2002 recovery, oil prices actually rallied from $18/bbl to $25/bbl during a period of rising US oil inventories. An investor would have missed a large portion of the initial upcycle if they had waited for inventories to fall. Even in the 1999 recovery, oil prices rose from $12/bbl to $18/bbl before a sustained sharp drop in oil inventories began.

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Exhibit 14: Oil prices recovered in 1999 well before inventory declines began
WTI oil (left) vs. US crude and key product inventories (right)
$35 $30 $25 WTI spot oil ($/bbl) $20 730,000 $15 710,000 $10 $5 $0 May-97 May-98 Jul-97 Jan-97 Sep-97 Jan-98 Mar-97 Mar-98 Nov-97 WTI oil prices recovered from $10/bbl to $18/bbl before inventories began to sustainably decline. May-99 Jul-98 Sep-98 Jan-99 Jul-99 Sep-99 Mar-99 Jan-00 Nov-98 Nov-99 Mar-00 690,000 670,000 650,000 810,000 790,000 Inventories (thousands barrels) 770,000 750,000

Exhibit 15: In 2002, oil prices recovered despite further inventory builds
WTI oil (left) vs. US crude and key product inventories (right)
$40 $35 $30 WTI spot oil ($/bbl) $25 $20 $15 $10 $5 $0 May-01 May-02 May-03 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Sep-01 Sep-02 Nov-01 Nov-02 Sep-03 Nov-03 Mar-01 Mar-02 Mar-03 Jan-04 Mar-04 780,000 760,000 Inventories (thousands barrels) 740,000 720,000 700,000 680,000 660,000 640,000 620,000

In 2002 recovery, oil prices rose from $18/bbl to over $25/bbl over 6 months before inventories began to sustainably decline.

WTI spot oil

Crude + Key Products

WTI spot oil

Crude + Key Products

Source: Bloomberg, DOE, Goldman Sachs Research.

Source: Bloomberg, DOE, Goldman Sachs Research.

We find the GS GLI was a better predictor of the turn in the oil cycle. In both the 1999 and 2002 recoveries, the turn in the GS GLI correctly predicted a recovery in crude oil prices as well as the ultimate turn in inventories (see Exhibits 16 and 17). We note that in both of the prior cycles, the turn in crude oil prices preceded a sustained improvement in inventories. Importantly, the GS GLI is showing signs of inflecting, which we think bodes well for our bullish 2H2009/2010 crude oil view (see Exhibits 18 and 19).

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Exhibit 16: GS GLI a better indicator of turn in oil cycle during 1998 downturn
WTI spot oil versus GS GLI (left graph); OECD crude and key product inventories versus GS GLI (inverted scale) (right graph)
$35 $30 $25 WTI spot oil ($/bbl) $20 3.00 $15 2.00 $10 $5 $0 May-97 May-98 May-99 Jul-97 Jul-98 Sep-97 Sep-98 Jul-99 Nov-97 Nov-98 Sep-99 Jan-97 Jan-98 Jan-99 Nov-99 Mar-97 Mar-98 Mar-99 Jan-00 Mar-00 1.00 6.00 2,500,000 2,450,000 Inventory (thousands bbls) 2,400,000 2,350,000 2,300,000 2,250,000 2,200,000 2,150,000 2,100,000 May-97 May-98 May-99 Jul-97 Jul-98 Sep-97 Sep-98 Jul-99 Nov-97 Nov-98 Sep-99 Nov-99 Jan-97 Jan-98 Jan-99 Mar-97 Mar-98 Mar-99 Jan-00 Mar-00 In 1998 downturn, inventories began to sustainbly decline several months after trough in GLI. 2.00 0.00

In 1998 downtun, oil price troughed shortly after GLI turned.

5.00

1.00 GLI (% yoy, inverted scale)

4.00 GLI (% yoy)

3.00

4.00

5.00

0.00

6.00

WTI spot oil

GLI

Crude + Products

GLI

Source: Bloomberg, IEA, Goldman Sachs Research.

Exhibit 17: GS GLI a better indicator of turn in oil cycle during 2001 downturn
WTI spot oil versus GS GLI (left graph); OECD crude and key product inventories versus GS GLI (inverted scale) (right graph)
$40 In 2001downtun, oil price troughed shortly after GLI turned. 4.00 3.00 2.00 1.00 0.00 (1.00) (2.00) $15 (3.00) (4.00) May-01 May-02 May-03 Jul-01 Jul-02 Sep-01 Sep-02 Jul-03 Nov-01 Nov-02 Sep-03 Nov-03 Jan-01 Jan-02 Jan-03 Mar-01 Mar-02 Mar-03 Jan-04 Mar-04 2,100,000 May-01 May-02 May-03 Jul-01 Jul-02 Jul-03 Sep-03 Nov-03 Sep-02 Nov-02 Sep-01 Nov-01 Jan-01 Jan-02 Jan-03 Jan-04 Mar-01 Mar-02 Mar-03 Mar-04 Inventory (thousands bbls) 2,400,000 (4.00) (3.00) (2.00) 2,300,000 (1.00) 0.00 In 2001 downturn, inventories began to sustainbly decline over 6 months after trough in GLI. 1.00 2.00 2,150,000 3.00 4.00 GLI (% yoy, inverted scale)

$35

2,350,000

WTI spot oil ($/bbl)

$30

GLI (% yoy)

$25

2,250,000

$20

2,200,000

$10

WTI spot oil

GLI

Crude + Products

GLI

Source: Bloomberg, IEA, Goldman Sachs Research.

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Exhibit 18: Current cycle trough looks very much like prior downturns
WTI oil (left) vs. US crude and key product inventories (right)
$160 $140 800,000 $120 WTI spot oil ($/bbl) $100 $80 $60 $40 650,000 $20 $0 Aug-08 Apr-09 Apr-08 May-09 May-08 Jan-09 Dec-08 Jan-08 Feb-09 Jun-09 Feb-08 Jun-08 Jul-08 Sep-08 Oct-08 Nov-08 Mar-09 Mar-08 Current cycle looks similar to prior troughs in 1998-9 and 2001-2. 600,000 700,000 Inventories (thousands barrels) 850,000

Exhibit 19: Positive inflection GS GLI bodes well for current cycle
WTI spot oil versus GS GLI
$150 3.00 2.00 $130 GLI showing signs of turning the corner. 1.00 0.00 (1.00) (2.00) (3.00) $70 (4.00) (5.00) (6.00) $30 Aug-08 Apr-08 Apr-09 May-08 May-09 Dec-08 Jan-08 Jan-09 Feb-08 Jun-08 Sep-08 Nov-08 Feb-09 Jul-08 Oct-08 Mar-08 Mar-09 (7.00) GLI (% yoy)

750,000

WTI spot oil ($/bbl)

$110

$90

$50

WTI spot oil

Crude + Key Products

WTI spot oil

GLI

Source: Bloomberg, DOE, Goldman Sachs Research.

Source: Bloomberg, Goldman Sachs Research.

Strength in long-dated prices the key to our updated oil price forecasts
Our WTI spot crude oil price forecasts reflect our projection for long-dated WTI crude oil (60 months forward) adjusted by our expectation for the shape of the forward curve (months 1-60). Our view of the likely shape of the forward curve is driven by our outlook for crude oil and key product inventories, which in turn are based on our oil supply/demand model. As noted above, we believe WTI time spreads (i.e., the shape of the forward curve) have traded largely in line with the inventory path. The bigger question at the moment and what has surprised us most in 1H2009 has been the resilience of long-dated WTI oil prices (see Exhibit 20). We believe that long-dated WTI oil prices will trade at levels that ensure long-term supply and demand stay in balance. If it appears oil markets are on track to have structural oversupply, long-term oil prices would be expected to fall to levels that disincentivize new investment. Earlier in 2009, when things looked particularly bleak for global economies and financial markets — with lots of talk about a new “Great Depression”— long-dated oil prices sold off on the fear that the downturn in demand would be severe and long-lasting, thereby obviating the need for investment in crude oil supply. Toward the end of 1Q2009 and into 2Q2009, as it became apparent that the worst of the financial crisis had likely passed and there were some glimmers of hope that global economic growth could stabilize and potentially rebound, long-dated oil prices rallied. We think oil markets have correctly concluded that a sharp, sustained drop in capital spending would be very negative for already-lackluster supply growth, and that investment flows need to continue into crude oil supply projects; hence the recovery in long-dated WTI oil prices.

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Exhibit 20: Long-dated WTI prices have proved far more resilient through the downturn than we expected

$160 $140 $120 $/bbl $100 $80 $60 $40 $20 1Q08 Front-month weakness and the potential for cost deflation did not weigh on the back-end as much as expected 2Q08 3Q08 4Q08 1Q09 2Q09 Long-dated WTI has proven far more resilient than we expected

60-months forward WTI

WTI spot oil

Source: Bloomberg, Goldman Sachs Research.

In the event that global oil demand recovers and supply growth remains stagnant, we believe both long-dated and spot oil prices will return to levels that incentivize demand rationing, like seen in 1H2008 (see Exhibit 21). In our view, it is a combination of the absolute level of prices plus the rate of change in oil prices that drive rationing. We do not know how high prices will need to rise to ration demand in the next upturn. Reasonable arguments can be made for higher and lower prices than were seen in 1H2008. The keys are: (1) how quickly consumer behavior adjusts; (2) will price signals make their way to consumers so appropriate reductions in demand occur; and (3) how resilient will global economic growth prove to be in the face of potentially higher oil prices. Recently there has been some discussion that governments around the world should make efforts to dampen oil price volatility. In our view, the best way to dampen volatility is to encourage the construction of additional oil storage facilities, which can soak up excess supply during periods of demand weakness and serve as a buffer during periods of strong demand. The perverse way to dampen volatility would be through various forms of price controls, which in our view would be a severely negative act that would probably lead to shortages, as we have seen throughout history. For example, price controls did not work in the United States in the 1970s (remember the gas lines?) and again did not work in China this decade (gasoline shortages occurred in early 2008).

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Exhibit 21: Goldman Sachs Global Energy Equity Research: WTI forward price path
$150 $140 $130 $120 WTI spot crude oil ($/bbl) $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 "Supply destruction" zone "Normalized" oil price "Demand destruction" zone

Actual GS Low case
Source: Bloomberg, Goldman Sachs Research.

GS Equity Research base case GS High case

Marginal costs continue to rise and 2009 deflation may be less than originally thought
Exhibit 22 shows our updated view of the oil industry’s marginal cost curve, which continued to rise through 2008, with the average company we cover now needing around $70/bbl WTI oil to generate a cost-of-capital return and the bottom quartile companies – incredibly – needing over $80/bbl for a cost-of-capital return. As WTI plummeted below $40/bbl in late 2008 and early 2009, meaningful reductions in capital spending were announced by most oil companies around the world and we think the market quickly recognized that such a low oil price was not sustainable.

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Exhibit 22: Upstream “all-in” cost curve continued to increase in 2008
Oil price required to earn a “cost of capital” return for our global coverage universe
Oil price required for cost of capital return 140 120 100 80 60 40 20 0 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000 26,000 28,000 30,000 32,000 34,000 36,000 Oil and gas production (kboe/d) 2007 2006 2005 2004 2003 2002 2001 2000 2008

Source: Company reports, Goldman Sachs Research estimates.

With non-OPEC crude oil supply having declined in 2008 and on-track to decline further in 2009 despite previously very high levels of activity, oil markets have understandably been concerned about the likely negative supply response from sustained lower crude oil prices. This highlights the asymmetric nature of the oil supply curve: higher prices did not result in more supply but lower oil prices would likely lead to greater supply declines. At the beginning of 2009, the widely held view was that lower oil services, drilling, and material costs would drive the industry cost curve materially lower, placing downward pressure on long-dated oil prices. We did not entirely disagree with the view—at least on a cyclical basis—and had thought long-dated WTI could trade as low as $50/bbl through 1H2009. In fact, long-dated WTI barely fell to the mid-$60s/bbl for several weeks, has averaged $72/bbl thus far in 2009, and is currently at $78/bbl. While some cost deflation is now expected, it now appears that 15%-20% order-of-magnitude reductions is more likely versus the 40%-50% decline in costs that seemed possible at the start of 2009.

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Global favorites: Oil leverage, growth potential, improving profitability, reasonable value
Our favorite major oil companies globally include Cairn India (India), CNOOC (China), Gazprom (Russia), Hess (United States), Lukoil (Russia), Petrobras (Brazil), Royal Dutch Shell (Europe), and Suncor Energy (Canada). We have screened our
global oils coverage universe in terms of (1) leverage to our bullish crude oil view; (2) growth potential; (3) profitability; and (4) valuation (see Exhibit 23). Exhibit 23: Goldman Sachs Global Energy Equity Research: Top picks among major oils globally
Company Cairn India CNOOC Gazprom Hess Lukoil Petrobras Royal Dutch Shell Suncor Energy ++ most favorable
Source: Goldman Sachs Research.

Region India China Russia USA Russia Brazil Europe Canada --most unfavorable

Crude oil Leverage + o o ++ + + o ++

Production Growth ++ + + + -++ o ++

Profitability ++ ++ o ++ + ++

Valuation + ++ o ++ + +

Key investment themes are as follows:

•

BRICs are the place to be. The vast majority of the stocks that are trading at above-average valuations and have been re-rated higher relative to their own history are in the BRICs. With GDP growth in the BRICs expected to sharply outpace advanced economies and most of our BRICs-based oil companies also expected to show leading E&P volume growth, the re-rating seems logical to us. We include five BRICs-based oil companies in our list of eight global favorites, namely Cairn India, CNOOC, Gazprom, Lukoil, and Petrobras. Reliance Industries is a sixth BRICs-based company that also screens well, but strong share price performance and a particularly high valuation keep it off our favorites list at this time. Russian oils look inexpensive: An exception to the BRICs premium. In contrast to oil companies in Brazil, China, and India, Lukoil and Gazprom are both trading at below sector-average EV/DACF and below their own historical average EV/DACF. We attribute the discount to concern about geopolitical risk in Russia vis-à-vis other areas of investment opportunity. With Russia having a substantial oil and gas resource base and Lukoil and Gazprom both having above-average EPS sensitivity to changes in oil prices, we include both companies on our list of global favorites. Canada: Should a second “C” be added to BRICCs? Among western oil companies, the Canadian oils Suncor Energy and
Canadian Natural Resources screen well, given leading volume growth given the sizable oil sands/heavy oil resource bases each owns. Among our global favorites, we have included Suncor Energy, which is one of the few growth leaders to have been de-rated relative to its own history, though it does still trade at higher EV/DACF valuation than the sector. Driven by future oil sands expansions, Canada we think will be one of only two major non-OPEC areas (Brazil is the other) that is likely to show positive crude oil supply growth over the next five years. Given expected oil demand growth in the BRICs/non-OECD, we see

•

•

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Canadian oil sands-exposed companies as well-positioned to benefit from oil price strength that stems from that demand growth. We see Canada as the only large advanced economy positioned to deliver positive crude oil supply growth needed by the BRICs/non-OECD

•

Market likely to continue to favor growth over returns. Energy investors are typically more willing to pay for growth during an upcycle, with companies with strong returns usually holding up better during downcycles. We find that the stocks that are currently trading at above-average valuations and have been re-rated higher relative to their own history are also expected to generate leading E&P volume growth. Six of our eight favorites show leading or above-average expected E&P volume growth over the next three years, including Cairn India, CNOOC, Gazprom, Hess, Petrobras, and Suncor. Super majors not so super anymore. The most notable de-rating has happened to the super majors—the “market darlings” of
the low oil price environment of the 1990s. BP, Chevron, ENI, Royal Dutch Shell, and Total have all been de-rated related to their own histories and are now also trading at below sector-average valuations. The same is true for ConocoPhillips, though it has fallen far enough strategically and financially that we do not even consider it a super major any more, having downgraded its classification to “western regional.” The only super major still trading at a premium valuation is ExxonMobil, which now enjoys a sizable return on capital advantage over other super majors. Still, Exxon is trading below its own historical average valuation. Collectively, the super majors are all in the least favorable growth quadrant and no longer enjoy a clear profitability advantage, with the exception of Exxon. We have included Royal Dutch Shell to our list of global favorites, as we have a favorable view of its exposure to “Top 230” projects slated to come on-line over the next few years; we also wanted to include at least one stock from Europe on our global favorites list.

•

•

Western regionals with attractive, niche exposures look interesting. Our global favorites list includes Hess which offers
unique exposure to Brazil’s emerging “pre-salt” play in the Santos Basin. In the case of Hess, it also has attractive exploration opportunities elsewhere, including the deepwater Gulf of Mexico, Libya, Ghana, and Australia. Finally, Hess has among the highest EPS and share price sensitivities to our bullish crude oil view. Other western regionals that screened well but are not currently included on our global favorites list include BG, Canadian Natural Resources, Murphy Oil, Occidental Petroleum, Repsol, and Statoil.

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Leverage to our bullish crude oil view
We have looked at leverage to our bullish crude oil view using the following metrics (see Exhibit 24):

• •

EPS/DACF sensitivity to $10/bbl change in oil price Share price correlation to 2-year strip WTI oil (using weekly returns)

The companies that screen as most leveraged to our bullish crude oil view include Canadian Natural Resources, Chevron, Hess, Lukoil, Murphy Oil, Nexen, Occidental Petroleum, Sasol, Statoil, and Suncor Energy. The surprise for investors will likely be Chevron, which unlike the other super majors screens as unexpectedly leveraged to crude oil in terms of both EPS and share price sensitivity. Exhibit 24: Leverage to crude oil
EPS sensitivity to a $10 change in WTI oil (x-axis); weekly share price correlation since 2000 to 2-year strip WTI oil (y-axis)
60.0% Share price correlation to 2 yr. WTI strip oil CNQ 50.0% COP Oxy 40.0% PBR MRO XOM CNOOC PTR BG Gazprom 10.0% Eni 0.0% 8.0% 13.0% 18.0% 23.0% 28.0% 33.0% 38.0% 43.0% EPS sensitivity to $10/bbl change in WTI spot oil
Source: Bloomberg, Factset, Goldman Sachs Research estimates.
HIGH EPS AND SHARE PRICE SENSITIVITY TO CRUDE OIL

NXY CVX HES Statoil

SU MUR

30.0%

BP REP RDS

OMV

LUK Sasol

20.0%

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Growth potential
We use the following metrics to compare growth potential among our global oils universe (see Exhibits 25 and 26):

• • •

BOE production CAGR, 2009E-2012E Oil production CAGR, 2009E-2012E Absolute oil production growth, 2009E-2012E

In looking at growth potential, we placed a greater emphasis on an ability to grow oil production in terms of both CAGR and absolute volume growth, given global crude oil supply is expected to stagnate in coming years in contrast to global natural gas supply, which should grow at a healthy clip. As such, we expect investor to place a premium on companies that can show meaningful crude oil supply growth. Companies that screen as having attractive BOE volume growth including crude oil growth include BG, Cairn India, Canadian Natural Resources, Murphy Oil, Occidental Petroleum, Petrobras, Reliance Industries, Suncor, and Repsol. In terms of absolute crude oil growth, Petrobras is the clear leader. Exhibit 25: Oil production versus BOE production CAGR
16.0% 14.0% Oil production CAGR (2009-2012) 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -3.0% BP Eni -1.0% 1.0% 3.0% 5.0% 7.0% 9.0% 11.0% 13.0% 15.0% TOT INPEX Sasol LUK COP PBR Oxy MRO NXY HES PTR CNOOC Statoil ONGC CVX RDS XOM OMV MUR CNQ BG REP SU Reli (50.7% CAGR)
HIGH CAGR FOR CRUDE OIL AND BOE PRODUCTION

Exhibit 26: Oil production CAGR versus absolute oil volume growth
Cairn (119.5% CAGR)
Oil production growth (2009-2012, Mb/d) 300 250 200 150 100 50 0 -50 -100 -150 -200 -250 -6.0% -3.0% 0.0% 3.0% 6.0% 9.0% 12.0% 15.0% 18.0% Oil production CAGR (2009-2012) BP LUK Eni PTR Sinopec Statoil RDS TOT Sasol CVX CNQ SU OMV Oxy REP CNOOC MUR Reli NXY MRO COP INPEX BG PBR

(84.6% CAGR)

HIGH CRUDE OIL CAGR AND ABSOLUTE GROWTH

Cairn (119.5% CAGR)

ONGC XOM

Sinopec

Total production CAGR (2009-2012)

Source: Goldman Sachs Research estimates.

Source: Goldman Sachs Research estimates.

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Profitability
We have examined profitability for our coverage universe using the following metrics (see Exhibits 27 and 28):

• • • •

Return on capital employed, 2009E-2012E Cash return on cash invested, 2009E-2012E Improvement in ROCE, 2011E versus 2009E Improvement in CROCI, 2011E versus 2009E

Companies that screened well in terms of having strong accounting and cash returns include BG, Cairn India, CNOOC, ExxonMobil, Lukoil, Murphy Oil, ONGC, Occidental Petroleum, Sasol, and Suncor Energy. In terms of favorable returns and expected improvement in ROCE over the next few years, we highlight Cairn India, Chevron, CNOOC, Exxon, Lukoil, Murphy, and Occidental Petroleum. Exhibit 27: 2009E-2011E average ROCE versus CROCI
22.0% 20.0% 18.0% CROCI (2009-2011 avg.) 16.0% OMV LUK MUR Oxy Gazprom SU PTR Eni Statoil 12.0% PBR Sinopec HES Reli TOT RDS MRO BP COP CVX 10.0% NXY 14.0% 8.0% 6.0% 8.0% 13.0% 18.0% 23.0% ROCE (2009-2011 avg.) 28.0% 33.0% 38.0% -15.0% 8.0% 13.0% 18.0% 23.0% ROCE (2009-2011 avg.) 28.0% 33.0% 38.0% REP CNQ INPEX CNOOC BG Sasol Cairn ONGC XOM (39% ROCE) ROCE change: 2011E versus 2009E
STRONG CASH AND ACCOUNTING RETURNS

Exhibit 28: 2009E-2011E avg. ROCE vs. ROCE improvement over period
STRONG AND IMPROVING RETURNS

20.0%

15.0% HES 10.0% CNQ COP

LUK MRO NXY

Oxy

XOM

(51% chg)

Cairn

MUR Gazprom CVX CNOOC BG Eni REP RDS TOT BP 5.0% SU Sasol PTR Reli Statoil PBR Sinopec OMV 0.0%

(39% ROCE)

-5.0% INPEX -10.0% ONGC

Source: Goldman Sachs Research estimates.

Source: Goldman Sachs Research estimates.

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Valuation
For valuation, we looked at the following (see Exhibits 29 and 30):

• •

EV/DACF, 2010E, relative to peers, relative to company’s history EV/GCI, 2010E, relative to peers, relative to company’s history Exhibit 30: 2010E EV/GCI vs. EV/GCI premium/(discount) to company’s historical average EV/GCI

Exhibit 29: 2010E EV/DACF vs. EV/DACF premium/(discount) to company’s historical average EV/DACF
100% EV/DACF premium/(discount) vs. company's history

60% EV/GCI premium/(discount) vs. company's history

80%

PBR

50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% 0.2 INPEX MRO LUK Eni COP CVX REP
INEXPENSIVE

CNQ BG PBR Sinopec Statoil HES Gazprom PTR OMV MUR ONGC XOM BP NXY TOT RDS SU Reli Oxy Sasol CNOOC

60% PTR 40% CNQ Sinopec 20% OMV INPEX MRO Statoil HES NXY Eni CVX REP -40% 2.0 3.0 Gazprom 4.0 5.0 Oxy ONGC Sasol RDS XOM SU BG Reli CNOOC

0%

-20%

MUR LUK COP

BP TOT 6.0 7.0 8.0 9.0 10.0 11.0 12.0

EV/DACF (2010E)

0.4

0.6

0.8

1.0 EV/GCI

1.2

1.4

1.6

1.8

2.0

Source: Datastream, Factset, Goldman Sachs Research.

Source: Datastream, Factset, Goldman Sachs Research.

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Valuation still attractive; EPS revisions expected to be positive in 2010
We believe we are in the early stages of what is likely to be a multi-year positive EPS revision cycle, with our new 2010 EPS estimates meaningfully above consensus in most regions (see Exhibit 31). We see notable upside for our global oil coverage universe, with most sectors and regions trading only slightly above long-term trough valuations using stable-denominator metrics like EV/GCI (see Exhibits 32-35).
Exhibit 31: We see meaningful upside to consensus estimates for 2010 for most energy sub-sectors
EPS growth 2009E vs 2010E vs 2008 2009E Americas Integrated oils Refining E&Ps Oil services/drillers Pipeline/MLPs Europe Integrated oils Refining E&Ps Oil services/drillers Asia Integrated oils Refining E&Ps -62% -30% -39% -5% 8% -42% -52% -74% -24% -10% 14% -24% 102% 13% 22% -3% 7% 38% 38% 779% -13% 33% 7% 50% GS versus Consensus 2009E 2010E 28% -15% 13% -4% NA -4% -15% NA -5% 3% -4% 4% 38% -36% 27% -4% NA 5% -9% NA -32% 10% -6% 25%

Source: DataStream, Reuters, ThomsonOne, Goldman Sachs Research estimates.

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Exhibit 32: Americas Oils EV/GCI
1.6 x 1.4 x 1.2 x 1.0 x 0.8 x 0.6 x 0.4 x 2002 2003 2004 2005 2006 2007 2008 2009 +1 std. Avg. -1 std. dev.

Exhibit 33: European Oils EV/GCI
1.2 x 1.1 x 1.0 x 0.9 x 0.8 x 0.7 x 0.6 x 0.5 x 2002 2003 2004 2005 2006 2007 2008 2009 Avg. -1 std. dev. +1 std.

Source: Datastream, Reuters, ThomsonOne, Goldman Sachs Research estimates.

Source: Factset, Goldman Sachs Research

Exhibit 34: Russian Oils EV/GCI
1.8 x 1.6 x 1.4 x 1.2 x 1.0 x Avg. 0.8 x 0.6 x 0.4 x 2002 2003 2004 2005 2006 2007 2008 2009 -1 std. dev. +1 std.

Exhibit 35: Asia Oils EV/GCI
1.8 x 1.6 x 1.4 x 1.2 x 1.0 x 0.8 x 0.6 x 0.4 x 2002 2003 2004 2005 2006 2007 2008 2009
24

+1 std.

Avg.

-1 std. dev.

Source: Datastream, Goldman Sachs Research.

Source: Datastream, Goldman Sachs Research.

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Financial Advisory Disclosures
Goldman Sachs is acting as financial advisor to another party in an announced strategic transaction which may be material to Repsol Ypf S.A..

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Reg AC
We, Arjun N. Murti, Michele della Vigna, CFA and Kelvin Koh, CFA, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Investment profile
The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month

volatility adjusted for dividends.

Quantum
Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.

Disclosures
Coverage group(s) of stocks by primary analyst(s)
Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research.

Company-specific regulatory disclosures
Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research.

Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships

Buy

Hold

Sell

Buy

Hold

Sell

Global 25% 53% 22% 54% 51% 43% As of April 1, 2009, Goldman Sachs Global Investment Research had investment ratings on 2,718 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.

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Global: Energy: Oil

Price target and rating history chart(s)
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See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-managed public offerings in prior periods; directorships; market making and/or specialist role. The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman, Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSE Rules 472 restrictions on communications with subject company, public appearances and trading securities held by the analysts. Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachs website at http://www.gs.com/research/hedge.html. Goldman, Sachs & Co. is a member of SIPC(http://www.sipc.org).

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The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and regulations. Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. Canada: Goldman Sachs Canada Inc. has approved of, and agreed to take responsibility for, this research in Canada if and to the extent it relates to equity securities of Canadian issuers. Analysts may conduct site visits but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (India) Securities Private Limited; Japan: See below. Korea: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. Russia: Research reports distributed in the Russian Federation are not advertising as defined in Russian law, but are information and analysis not having product promotion as their main purpose and do not provide appraisal within the meaning of the Russian Law on Appraisal. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore) Pte. (Company Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted without permission. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Services Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request.
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Ratings, coverage groups and views and related definitions
Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a

stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return.
Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership. Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.

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Not Rated (NR). The investment rating and target price, if any, have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target, if any, for this stock,

because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

Ratings, coverage views and related definitions prior to June 26, 2006
Our rating system requires that analysts rank order the stocks in their coverage groups and assign one of three investment ratings (see definitions below) within a ratings distribution guideline of no more than 25% of the stocks should be rated Outperform and no fewer than 10% rated Underperform. The analyst assigns one of three coverage views (see definitions below), which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and valuation. Each coverage group, listing all stocks covered in that group, is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html.

Definitions
Outperform (OP). We expect this stock to outperform the median total return for the analyst's coverage universe over the next 12 months. In-Line (IL). We expect this stock to perform in line with the median total return for the analyst's coverage universe over the next 12 months. Underperform (U). We expect this stock to underperform the median total return for the analyst's coverage universe

over the next 12 months.
Coverage views: Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12

months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.
Current Investment List (CIL). We expect stocks on this list to provide an absolute total return of approximately 15%-20% over the next 12 months. We only assign this designation to stocks rated Outperform. We require a 12-month price target for stocks with this designation. Each stock on the CIL will automatically come off the list after 90 days unless renewed by the covering analyst and

the relevant Regional Investment Review Committee.

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The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and pursuant to certain contractual arrangements, on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs JBWere Pty Ltd (ABN 21 006 797 897) on behalf of Goldman Sachs; in Canada by Goldman Sachs Canada Inc. regarding Canadian equities and by Goldman Sachs & Co. (all other research); in Germany by Goldman Sachs & Co. oHG; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs JBWere (NZ) Limited on behalf of Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union.
European Union: Goldman Sachs International, authorised and regulated by the Financial Services Authority, has approved this research in connection with its distribution in the European Union and United Kingdom; Goldman, Sachs & Co. oHG, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also be distributing research in Germany.

General disclosures in addition to specific disclosures required by certain jurisdictions
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment. Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. We and our affiliates, officers, directors, and employees, excluding equity analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives (including options and warrants) thereof of covered companies referred to in this research. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of the investments referred to in this research and the

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income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at http://www.theocc.com/publications/risks/riskchap1.jsp. Transactions cost may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request. Our research is disseminated primarily electronically, and, in some cases, in printed form. Electronic research is simultaneously available to all clients. Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, One New York Plaza, New York, NY 10004. Copyright 2009 The Goldman Sachs Group, Inc. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.

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