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SAUDI ARABIA OIL & GAS REPORT INCLUDES 10-YEAR FORECASTS TO 2026

Published by:BMI Research

Saudi Arabia Oil & Gas Report Q3 2017 INCLUDES 10-YEAR FORECASTS TO 2026

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: May 2017

ISSN: 1748-4219

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CONTENTS

BMI Industry View ............................................................................................................... 7 Table: Headline Forecasts (Saudi Arabia 2015-2021) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

SWOT .................................................................................................................................... 8 Oil & Gas SWOT ....................................................................................................................................... 8

Industry Forecast ................................................................................................................ 9 Upstream Exploration ................................................................................................................................ 9

Latest Updates ........................................................................................................................................ 9

Structural Trends ..................................................................................................................................... 9

Upstream Projects ................................................................................................................................... 12 Table: Key Upstream Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Upstream Production - Oil ........................................................................................................................ 14

Structural Trends ................................................................................................................................... 14 Table: Oil Production (Saudi Arabia 2015-2020) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Table: Oil Production (Saudi Arabia 2021-2026) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Upstream Production - Gas ....................................................................................................................... 17

Latest Updates ....................................................................................................................................... 17

Structural Trends ................................................................................................................................... 17 Table: Gas Production (Saudi Arabia 2015-2020) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Table: Gas Production (Saudi Arabia 2021-2026) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Refining ................................................................................................................................................. 22

Latest Updates ....................................................................................................................................... 22

Structural Trends ................................................................................................................................... 22 Table: Refining Capacity And Refined Products Production (Saudi Arabia 2015-2020) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Table: Refining Capacity And Refined Products Production (Saudi Arabia 2021-2026) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Refined Fuels Consumption ....................................................................................................................... 26

Latest Updates ....................................................................................................................................... 26

Structural Trends ................................................................................................................................... 26 Table: Saudi Arabia Fuel Price Reform, December 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Table: Refined Products Consumption (Saudi Arabia 2015-2020) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Table: Refined Products Consumption (Saudi Arabia 2021-2026) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Gas Consumption .................................................................................................................................... 30

Latest Updates ....................................................................................................................................... 30

Structural Trends ................................................................................................................................... 30 Table: Gas Consumption (Saudi Arabia 2015-2020) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Table: Gas Consumption (Saudi Arabia 2021-2026) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Trade - Oil ............................................................................................................................................. 33

Latest Updates ....................................................................................................................................... 33

Crude Oil Trade Forecast ........................................................................................................................ 33

Structural Trends ................................................................................................................................... 33 Table: Crude Oil Net Exports (Saudi Arabia 2015-2021) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Saudi Arabia Oil & Gas Report Q3 2017

Table: Crude Oil Net Exports (Saudi Arabia 2021-2026) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Refined Fuels Trade Forecast .................................................................................................................. 37

Structural Trends ................................................................................................................................... 37 Table: Refined Fuels Net Exports (Saudi Arabia 2015-2020) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Table: Refined Fuels Net Exports (Saudi Arabia 2021-2026) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Trade - Gas (Pipeline and LNG) ................................................................................................................. 39

Structural Trends ................................................................................................................................... 39

Industry Risk Reward Index ............................................................................................. 40 Middle East & North Africa - Upstream Industry Risk/Reward Index ................................................................. 40

Middle East & North Africa - Downstream Industry Risk/Reward Index ............................................................. 47

Market Overview ............................................................................................................... 55 Saudi Arabia Energy Market Overview ........................................................................................................ 55

Regulatory Structure ............................................................................................................................... 55

Licensing Regime ................................................................................................................................... 55

Fiscal Regime ........................................................................................................................................ 55 Table: Saudi Arabia PCA Main Fiscal Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Oil And Gas Infrastructure ........................................................................................................................ 56

Oil Refineries ........................................................................................................................................ 56 Table: Saudi Arabia Oil Refineries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Oil Terminals/Ports ................................................................................................................................ 56

Oil Pipelines ......................................................................................................................................... 57

Gas Pipelines ........................................................................................................................................ 58

Company Profile ................................................................................................................ 59 Saudi Aramco ......................................................................................................................................... 59

Table: Major Upstream Assets In Saudi Arabia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Regional Overview ............................................................................................................ 61 MENA Oil & Gas Regional Overview .......................................................................................................... 61

Oil Production: MENA Prepares For Tighter Market .................................................................................... 61 Table: Marginal Impact On 2017 Output From Cut (000b/d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Refined Fuels Consumption: Growth Slowed By Subsidy Reform ..................................................................... 65 Table: Average Gasoline Pump Price June 2015 & March 2017 (USD/Litre) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Refining Capacity: Mega Refineries To Support Economic Diversification ........................................................ 66

Gas Production: Gas Importance Grows To Support Oil Exports .................................................................... 67

Gas Consumption: Industrial Growth And Power Strengthen Consumption ....................................................... 69

Glossary ............................................................................................................................. 70 Table: Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Methodology ...................................................................................................................... 72 Industry Forecast Methodology ................................................................................................................ 72

Source ................................................................................................................................................. 74

Upstream Risk/Reward Methodology ........................................................................................................... 74 Table: Indicators - Explanation And Sources - Upstream RRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Saudi Arabia Oil & Gas Report Q3 2017

Downstream Risk/Reward Methodology ....................................................................................................... 78 Table: Indicators - Explanation And Sources - Downstream RRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Saudi Arabia Oil & Gas Report Q3 2017

BMI Industry View

BMI View: We hold to our current oil production forecast this quarter. In the short term, compliance with

the OPEC, non-OPEC production cut deal will somewhat constrain output. However, in the longer term we

are bullish. A sharp pullback in capex threatens to open a deficit in the market, raising the call on Saudi

crude. The outlook on the downstream is also bullish, supported by further refining capacity additions and

fuel subsidy reform. Gas production and consumption are both set for substantial gains over the forecast

period, although low state-set gas prices and a lack of foreign participation in the sector will hinder a more

aggressive growth rate.

Table: Headline Forecasts (Saudi Arabia 2015-2021)

2015 2016e 2017f 2018f 2019f 2020f 2021f

Crude, NGPL & other liquids prod, 000b/d 12,125.0 12,452.3 12,385.7 12,498.1 12,612.5 12,802.2 12,995.2

Refined products production, 000b/d 2,552.0 2,825.1 2,853.3 3,024.5 3,145.5 3,176.9 3,208.7

Refined products consumption & ethanol, 000b/d 2,538.9 2,436.3 2,399.8 2,435.8 2,479.6 2,529.2 2,582.3

Dry natural gas production, bcm 118.7 131.1 136.1 137.5 138.8 150.8 153.4

Dry natural gas consumption, bcm 118.7 131.1 136.1 137.5 138.8 150.8 153.4

Brent, USD/bbl 53.60 45.13 57.00 60.00 64.00 67.00 70.00

e/f = BMI estimate/forecast. Source: National sources, BMI, EIA, JODI

Latest Updates And Forecasts

■ After a brief dip in 2017, Saudi Arabian oil production will trend upwards as the kingdom brings its large spare production capacity into play. The impact on exports will be somewhat softer, due to significant expansion of domestic refining capacity.

■ In order to support exports, the kingdom has looked to increase the role of gas in the domestic power and industrial sectors. However, domestic gas consumption remains capped due to limited production growth.

■ In spite of Saudi Arabia's heavy focus on unconventional onshore non-associated gas resources, we expect slow progress in developing these prospects. Domestic production will likely remain insufficient to meet unrestrained demand.

■ Despite inadequate domestic supply, proposals to import liquefied natural gas (LNG) will face major roadblocks due to concerns over the loss of the kingdom's energy self sufficient status, low domestic gas prices and risks to domestic gas development.

■ The pace of energy demand growth will begin to slow, as a more ambitious subsidy reform programme begins to take effect.

Saudi Arabia Oil & Gas Report Q3 2017

SWOT

Oil & Gas SWOT

SWOT Analysis

Strengths ■ A vast conventional proven reserves base.

■ Developed oil and gas infrastructure.

■ An established services sector.

■ A stable operating environment.

Weaknesses ■ High level subsidisation of both oil and gas.

■ The close nature of the sector, both in the upstream and downstream segments.

■ Challenging operating environment.

Opportunities ■ Substantial underexplored acreage, including onshore unconventionals and offshore

Red Sea.

■ Continued expansion of the refining capacity.

■ Energy price liberalisation.

Threats ■ Rising regional instability.

■ Sustained lower oil prices, undercutting Aramco's long-term revenue base.

Saudi Arabia Oil & Gas Report Q3 2017

Industry Forecast

Upstream Exploration

BMI View: A lower oil price environment is cementing a strategic refocusing of investment away from

crude and towards non-associated gas.

Latest Updates

■ Based on Baker Hughes rig count data, there were 119 rotary rigs active in Saudi Arabia as of April 2017.

■ Of the total, the majority (86.6%) were onshore; 56.3% were oil-directed and the remainder directed at gas.

Structural Trends

The bulk of Saudi Arabia's oil and gas reserves are located in the country's east and north-eastern provinces.

National oil company Saudi Aramco estimates total proven reserves of 261.1bn barrels (bbl) of oil and

8.4trn cubic metres (tcm) of gas, the bulk of which is associated. Estimates cover both Saudi Arabia and

Aramco's equity share of the Saudi-Kuwaiti Neutral Zone. Reserves are spread across 121 fields, with over

half concentrated in nine giant fields in the kingdom's northeast: Ghawar, Safaniya, Khurais, Manifa,

Shaybah, Qatif, Khursaniyah, Zuluf and Abqaiq.

Oil exploration in Saudi Arabia is conducted by Saudi Aramco. In 2015, the company reported a total of

five oil and gas discoveries. Three were oil fields - Faskar, Janab and Maqam - and two were non-associated

gas fields - Edmee and Murooj; they bring the total number of discovered fields to 134.

The focus of exploration has increasingly shifted towards less proven plays, including the Red Sea and

onshore unconventionals. Aramco has been conducting geological and geophysical studies in the Red Sea

since 2009. The initial targets were mostly in shallow water, but have expanded to include deeper and more

technically challenging prospects. Exploration drilling began at the end of 2011 and has yielded two

significant discoveries: al-Haryd and Shaur, a shallow water gas find.

In February 2015, Aramco suspended its exploration programme in the deepwater Red Sea. According to

industry sources, the programme was among the kingdom's most expensive, operating at a cost of around

USD1mn per day. The depth of the water, complexity of the basin and Aramco's limited understanding of

the geology have all inflated drilling costs. These factors, alongside the lack of infrastructure in the region,

also substantially raise the prospective costs of development. In 2014, Aramco indicated that the initial

development of the Red Sea resources would cost around USD25bn - a level of investment unsupported in

Saudi Arabia Oil & Gas Report Q3 2017

the current price environment. However, the company continues to explore in the shallower water areas and

in 2015 conducted its largest single survey to date.

Price Dampens Appetite For High-Cost Exploration

Front-Month Brent Price Forecast (USD/bbl)

2 0

1 1

2 0

1 2

2 0

1 3

2 0

1 4

2 0

1 5

2 0

1 6

2 0

1 7

2 0

1 8

2 0

1 9

2 0

2 1

100

120

f = BMI forecast. Source: BMI, Bloomberg

Aramco is funnelling increased investment into non-associated gas exploration and has plans to fast-track

the development of its commercial discoveries. In contrast to oil and associated gas, Aramco has allowed

foreign companies to partner it in non-associated gas exploration in the kingdom's Empty Quarter. The

company entered four joint ventures (JVs) between 2003 and 2004.

■ EniRepSa - with Eni and Repsol

■ Luksar - with Lukoil

■ South Robh Al Khali Company - with Royal Dutch Shell

■ Sinopec-Aramco - with Sinopec

However, the companies have since withdrawn from their respective JVs. In 2010, Lukoil relinquished 90%

of the stake in its block, which included two significant gas discoveries. Repsol, Eni and Sinopec exited the

kingdom in 2012, followed by Royal Dutch Shell in 2014.

Saudi Arabia Oil & Gas Report Q3 2017

Drilling results were relatively positive, yielding a number of prospective finds. However, the companies

believed the discoveries to be broadly uneconomic. Part of the problem was the high sulphur content in the

gas, significantly raising the costs of development. Another factor was the low domestic gas price cap. Gas

prices are set at USD1.25/mn British thermal units (/mnBTU) for methane and USD1.75/mnBTU for

ethane. Prices were raised in December 2015, as part of broader energy subsidy reforms, but remain too low

to attract investment from the major internationals. Further subsidy reductions are highly probable, as the

kingdom looks to reform its economy and erode a deep fiscal deficit. However, social pressures and

competitiveness concerns for industry will likely slow the pace of reform.

In recent years Aramco has been moving to establish itself as a major player in the unconventionals

sector. According to Aramco CEO Khalid al-Falih, the company will invest an additional USD7bn on

unconventional gas exploration over the coming years.

The company has been investing heavily in developing new fracturing technologies, including the use of

pulsed, microseismic and staged fracturing techniques. They have also been developing CO2-based

fracturing fluids and techniques for the in situ conversion of fracturing fluids into solids. In 2015, Aramco

deployed new seismic technologies to identify sweet spots within reservoirs, extended lateral well lengths

and used multistage fracturing stimulations.

We expect much of the planned USD7bn expenditure to focus on this type of R&D. Improved fracturing

technologies can offer higher recovery rates, enhanced well productivity and substantial cost reductions,

aiding the commercial viability of unconventional projects. This is of particular importance in Saudi Arabia,

given the low domestic gas price.

In 2014, Aramco said it was looking to reduce the cost of unconventional gas production to USD2.00-3.00/

mnBTU. Assuming this target is reached, Aramco will be producing at a loss of USD0.5-1.50/mnBTU, or

around USD20-55mn per billion cubic metres (bcm). Limiting this loss has become increasingly important,

as sustained lower oil prices erode Aramco's long-term revenue base. Exploration will also likely focus on

tight as opposed to shale gas, given the higher porosity and permeability of the kingdom's tight sand

formations, and subsequently lower costs of development.

Saudi Arabia Oil & Gas Report Q3 2017

Upstream Projects

Table: Key Upstream Projects

Name Field Name Companies Status Est. Peak Liquids Output (b/d)

Est. Peak Gas Output (bcm)

Type of Project

Block A Mushaib, Tukhman Saudi Aramco (20%), Lukoil (80%)

Appraisal - - Tight Gas

Duhul Duhul Saudi Aramco (100%)

Discovery - - Oil

Khafji Joint Operations (KJO)

Khafji, Hout, Lulu, Dorra

Kuwait Petroleum Corporation, Saudi Aramco

Suspended - - Oil

Salsal Salsal Saudi Aramco (100%)

Discovery - - Oil

Turayqa Turayqa Saudi Aramco Discovery - - Gas

Mihwaz Mihwaz Saudi Aramco Discovery - - Gas

Al-Haryd Al-Haryd Saudi Aramco Discovery - - Oil

Kidan Kidan Saudi Aramco Appraisal - - Sour Gas

Midyan Midyan Saudi Aramco Development - 0.8 Gas & Condensate

Marjan Marjan Saudi Aramco (100%)

Production 270,000 - Oil

Qatif Qatif Saudi Aramco (100%)

Production 500,000 - Oil & Gas

Safaniyah Safaniyah Saudi Aramco (100%)

Upgrade/EOR 1,200,000 - Heavy Oil

Nuayyim Nuayyim Saudi Aramco (100%)

Production 100,000 - Oil

Khurais Khurais Saudi Aramco (100%)

Upgrade/EOR 1,500,000 3.3 Oil & Gas

Shaybah Shaybah Saudi Aramco (100%)

Expansion 1,000,000 - Oil

Berri Berri Saudi Aramco (100%)

Production 1,150,000 - Oil

Ghawar Ghawar Saudi Aramco (100%)

Upgrade/EOR 5,800,000 20.7 Oil & Gas

Wasit Arabiyah, Hasbah Saudi Aramco (100%)

Production - 25 Gas

Karan Karan Saudi Aramco (100%)

Production - 18.6 Sour Gas

Manifa Manifa (Moneefa) Saudi Aramco (100%)

Production 900,000 10.3 Heavy Oil & Sour Gas

Zuluf Zuluf Saudi Aramco (100%)

Production 500,000 - Oil

Saudi Arabia Oil & Gas Report Q3 2017

Key Upstream Projects - Continued

Name Field Name Companies Status Est. Peak Liquids Output (b/d)

Est. Peak Gas Output (bcm)

Type of Project

Khursaniyah Khursaniyah, Abu Hadriyah and al- Fadhili

Saudi Aramco (100%)

Production 500,000 5.8 Oil & Gas

Abu Sa'fah Abu Sa'fah Saudi Aramco (100%)

Production 300,000 - Oil

Haradh Haradh Saudi Aramco (100%)

Production 900,000 1.4 Oil & Gas

Abu Ali Abu Ali Saudi Aramco Discovery - - Gas

Faras Faras Saudi Aramco Discovery - Gas

Amjad Amjad Saudi Aramco Discovery - - Gas

Badi Badi Saudi Aramco Discovery - - Gas

Faris Faris Saudi Aramco Discovery - - Gas

Sadawi Sadawi Saudi Aramco Discovery - - Oil

Naqa Naqa Saudi Aramco Discovery - - Oil

Qadqad Qadqad Saudi Aramco Discovery - - Oil & Gas

Wafra Joint Operations (WJO)

Wafra, South Umm Gudair, Humma, South Fuwaris, ARQ

Kuwait Oil Company (KOC) (50%), Chevron (50%)

Suspended 250,000 - Oil

Dammam Dammam Saudi Aramco (100%)

Suspended 100,000 - Oil

Source: BMI Upstream Projects Database

Saudi Arabia Oil & Gas Report Q3 2017

Upstream Production - Oil

BMI View: Saudi Arabia will continue to grow its oil production in order to maintain its oil export

commitments in the face of growing domestic demand.

■ We have held to our current oil production forecast this quarter, averaging 10.3mn b/d over 2017, including crude, condensates and NGLs.

■ The near-term production outlook is heavily contingent on the outcome of the OPEC meeting on May 25. Our forecast assumes that the current cut deal will be rolled over in its current form. However, Saudi's current over-compliance with the deal is likely to slip, due to weaker compliance by non-OPEC members and peaking domestic demand over the summer.

Structural Trends

We have revised up our long-term oil production forecast for Saudi Arabia. Previously, we had forecast

relatively flat production across the ten-year period, rising from 10.3mn barrels a day (b/d) in 2017 to

10.4mn b/d in 2026. We now forecast slightly higher growth averaging 0.7%, with output ending the period

at 11.2mn b/d. The upward revision reflects our view that Saudi Arabia will utilise its large spare capacity

to plug deficits in the global oil market and cap any upswing in the price.

Oil Production Forecast

(2015-2026)

Crude, NGPL & other liquids prod, 000b/d (LHS) Crude, NGPL & other liquids prod, % y-o-y (RHS)

2 0

1 5 e

2 0 1

6 e

2 0 1

7 f

2 0

1 8 f

2 0

1 9

2 0

2 1

2 0

2 2

2 0

2 3

2 0

2 4

2 0

2 5

2 0

2 6

5,000

10,000

15,000

-2

e/f = BMI estimate/forecast. Source: Saudi Aramco, EIA, BMI

Saudi Arabia Oil & Gas Report Q3 2017

The kingdom has clearly signalled that it does not want to see prices return to their previous highs. The oil

demand outlook is structurally weaker than it was during previous downturns and it is not in the interests of

a major producer to destroy additional demand through too-aggressive price re-inflation.

According to our data, global fuels consumption growth has peaked and will trend downwards over the

coming decade. Developed markets (DMs) will act as the main drag, largely due to the strong fuel

efficiency gains being made in these countries. Among emerging markets (EMs), the slowdown in China

and wide-ranging subsidy reforms will also act to weaken consumption growth.

Despite softer consumption, we forecast a significant deficit in the global market from 2020. The collapse in

prices in 2014 has choked off investment into the sector and the existing projects pipeline is set to roll off

over 2017 and 2018. Prior to the revision of our Saudi production outlook, we had forecast the market to

reach a 1.5mn b/d deficit by 2021. A deficit of this scale would have catalysed a large drawdown in crude

inventories and left the market exposed to a major price spike. In the face of this, we believe the kingdom

will strategically deploy its large spare capacity in order to cap the upswing in prices. Our current revision

assumes only gentle intervention by OPEC, which will reduce but not erase our forecast deficit; however,

we note significant upside risk to the forecast, should the price recovery be stronger than we anticipate.

A Strong Capacity For Intervention

Plans to boost the country's productive capacity to 12mn b/d were completed in 2010. The last major

greenfield project to be brought online was the Manifa heavy oilfield; development of the field was

completed in 2013, reaching full capacity as of end-2014. Peak output is around 900,000b/d of Arabian

Heavy crude, 65,000b/d of condensate and 0.93bn cubic metres (bcm) of gas. Output from Manifa will not

be exported, but will be used to supply the domestic refining sector.

In 2014, Aramco continued with two development projects at the major Shaybah field. Production was

boosted to 1.0mn b/d in May 2016, boosting the share of Arabia Extra Light in overall output. The Shaybah

processing facilities have also been developed to process natural gas liquids (NGLs) from the field. NGLs

offer an alternative feedstock for the kingdom's petrochemicals plants and will be critical to offsetting

mounting gas supply constraints.

The company also has plans to expand the giant Khurais oilfield, adding 300,000b/d of additional

production capacity. The project was scheduled for completion in 2017, but was subsequently delayed.

More recent statements indicate a plan to complete the project by 2018 and we have re-introduced it into

Saudi Arabia Oil & Gas Report Q3 2017

our forecasts. In addition, expansion of the Berri field will add an addition 250,000b/d production capacity,

although a timeline for this project has yet to be confirmed.

In the context of sustained lower oil prices, the company is also raising its focus on maximising recovery

rates on existing assets. For example, the company has been investing to improve reservoir characterisation

and seismic processing techniques. In 2015, it increased the computing capability of its Exploration and

Petroleum Engineering Centre Computer by 177.0% for reservoir stimulations and 76.0% for seismic

capacity. The additional capacity reduces seismic data processing times and improves reservoir

characterisation, which can optimise field development and production.

Table: Oil Production (Saudi Arabia 2015-2020)

2015 2016e 2017f 2018f 2019f 2020f

Crude, NGPL & other liquids prod, 000b/d 12,125.0 12,452.3 12,385.7 12,498.1 12,612.5 12,802.2

Crude, NGPL & other liquids prod, % y-o-y 4.6 2.7 -0.5 0.9 0.9 1.5

e/f = BMI estimate/forecast. Source: Saudi Aramco, EIA BMI

Table: Oil Production (Saudi Arabia 2021-2026)

2021f 2022f 2023f 2024f 2025f 2026f

Crude, NGPL & other liquids prod, 000b/d 12,995.2 13,191.7 13,370.2 13,551.8 13,714.6 13,880.3

Crude, NGPL & other liquids prod, % y-o-y 1.5 1.5 1.4 1.4 1.2 1.2

f = BMI forecast. Source: BMI, EIA, National sources

Saudi Arabia Oil & Gas Report Q3 2017

Upstream Production - Gas

BMI View: Gas production growth will be driven by non-associated conventional field developments; the

role of unconventionals will remain limited, due to technical and financial barriers to production.

Latest Updates

■ Saudi Aramco is on track to bring on stream the kingdom's first shale gas project in Q417. The Jalamid field is targeted to produce around 2.0bn cubic metres (bcm) a year and will supply a power plant in the northwest.

Structural Trends

Saudi Arabia is targeting an aggressive ramp-up in gas production for use in the domestic industrial and

power sectors, displacing the role of crude and releasing it for export. Ensuring a reliable supply of low-cost

ethane feedstock for the expanding petrochemical sector is also critical.

Historically, much of the kingdom's output was associated gas drawn from the giant Ghawar oilfield,

feeding the Hawiya, Haradh and Uthmaniyah gas plants. In recent years, Riyadh has made gains in

increasing production and diversifying away from its associated resources. In recent years there has been

strong increase in the number of gas-directed rigs in the kingdom, and we expect this upward trend in gas-

directed drilling to continue in 2017.

The offshore Karan gas field, which came online in 2011, was the first non-associated field to be developed

in the kingdom. Karan added an additional 18.6bn cubic metres (bcm) at peak production levels, delivered

to the Khursaniyah gas processing facility. Khursaniyah was brought on stream in 2010 to process

associated gas from the Abu Hadriya, Fadhili, Khursaniyah, Marjan, Safiniyah and Zuluf fields. It was

expanded to accommodate Karan, and associated production from the Manifa heavy oilfield, and has

nameplate capacity of 29.8bcm.

Saudi Arabia Oil & Gas Report Q3 2017

Gas Production Forecast

(2015-2026)

Dry natural gas production, bcm (LHS) Dry natural gas production, bcm, % y-o-y (RHS)

2 0

1 5 e

2 0

1 6 e

2 0

1 7 f

2 0

1 8 f

2 0

1 9

2 0

2 0 f

2 0

2 1 f

2 0

2 2

2 0

2 3

2 0

2 4 f

2 0

2 5 f

2 0

2 6 f

100

150

200

e/f = BMI estimate/forecast. Source: Saudi Aramco, EIA, BMI

The Wasit gas plant, which began commissioning in 2015, is the second major non-associated gas

development, processing output from the Arabiyah and Hasbah gas fields offshore in the Gulf. Wasit has

capacity to process up to 25.8bcm of gas and 240,000b/d of natural gas liquids at peak production. The

project was due online in 2014, but was delayed due to technical issues stemming from the high sulphur

content of the offshore gas fields. The plant began processing production from Arabiyah and Hasbah in

2016, ramping up to peak production in 2017.

In January 2015, Saudi Aramco pre-qualified nine bidders to compete for an engineering, procurement and

construction (EPC) contract for the Fadhili gas plant. In August, three companies bid individually on the

contract (Daelim, Hyundai and Petrofrac) and a further six bid as consortiums (GS and Tecnicas

Reunidas, Saipem and JGC and Samsung & Daewoo). The companies bid to construct a 25.8bcm facility,

with costs ranging between USD5-6bn. Reports surfaced in Q315, indicating that the Petrofrac consortium

had won the EPC contract.

Saudi Arabia Oil & Gas Report Q3 2017

We have upgraded our forecast to reflect this additional output from Fadhili from 2019. The decision to

push forward with the project in the face of sharply declining oil export revenues is further proof of the

kingdom's ongoing strategic refocusing towards the development of its domestic gas resources. Lower oil

revenues have led to the cancellation or delay of other major projects, including upgrade work at the Ras

Tanura refinery, which was suspended in early January 2015. However, gas development projects appear to

have been ring-fenced from the cuts.

The Fadhili project is relatively high cost. It was initially conceived with a capacity of 10.3bcm, at a cost of

USD1.6bn, to process associated gas from the Fadhili oilfield. The subsequent increase in capacity and

higher estimated project costs are due to its expansion to include sour gas production from other fields. The

government is also in the process of developing it first project in the north-western region with development

of the Midyan gas plant. The Midyan field was discovered in the early 1990s, although work did not begin

on the plant until 2013. The facility is scheduled to come online by Q416, with nameplate capacity of

0.8bcm of non-associated gas and 4,500b/d of condensates.

While it offers significant upside risks towards the back end of our 10-year forecast period, progress in

developing the kingdom's vast unconventional resources will be relatively slower. Aramco had said the

company would look to produce gas from unconventional formations using hydraulic

fracturing (fracking) by 2020. In response to rising demand and tightening domestic supply, the company

accelerated the timeline, targeting 2.0bcm of shale output by 2018.

Aramco's unconventional gas programme, which launched in 2011, became fully operational in 2013. The

company is currently exploring for unconventional gas in three areas: the Northwest, South Ghawar and

Rub al-Khali (The Empty Quarter).

Saudi Arabia's shale potential is substantial, with Baker Hughes estimating that the country could hold some

18.1tn cubic metres (tcm) of technically recoverable shale gas resources. However, there are major

obstacles to shale gas development in Saudi Arabia:

■ Lack Of Infrastructure: The bulk of Saudi Arabia's unconventional resources lie in remote areas, which lack existing infrastructure.

■ Geological Complexity: Saudi Arabia's tight gas resources lie deep in the ground, making them more technically challenging to tap.

■ Water Scarcity: The hydraulic fracturing technique used to produce shale resources requires large quantities of water, which Saudi Arabia lacks.

Saudi Arabia Oil & Gas Report Q3 2017

These factors combine to significantly raise the cost of production - problematic given the artificially low

domestic gas prices in Saudi Arabia. Although the pricing framework is under review, we see little scope

for improvement. In the absence of adequate pricing reform, and in light of major technical challenges, we

predict slow gains in the development of unconventional gas resources in the kingdom within the coming

years.

The only significant development in progress to-date is a project in Turaif. In H215, Aramco awarded JGC

a contract for the construction of processing facilities and midstream infrastructure, to supply shale gas to

power the Waad al-Shamal mining project. According to reports, Aramco plans to produce 2.0bcm from the

project by 2018.

Further upside risk stems from gas conservation efforts. Saudi Aramco is looking to cut the level of gas

flaring, and the kingdom's flare gas recovery system has allowed an addition 50bcm of output to be

connected to the gas network over the past decade.

Small-scale gas capture technology could offer a means to reduce flaring at smaller oilfields, where it would

be uneconomic to develop a large gas processing plant. This involves mini gas-to-liquids (GTL) facilities

that capture gas and deploy it at the source. Aramco's investment in US-based Siluria Technologies, which

is developing technologies to convert methane into gasoline and ethylene, could open opportunities, and

offer alternative means to monetise flared or stranded gas.

Table: Gas Production (Saudi Arabia 2015-2020)

2015 2016e 2017f 2018f 2019f 2020f

Dry natural gas production, bcm 118.7 131.1 136.1 137.5 138.8 150.8

Dry natural gas production, bcm, % y-o-y 1.6 10.4 3.8 1.0 1.0 8.7

Dry natural gas production, % of domestic consumption 100.0 100.0 100.0 100.0 100.0 100.0

e/f = BMI estimate/forecast. Source: Saudi Aramco, EIA, BMI

Saudi Arabia Oil & Gas Report Q3 2017

Table: Gas Production (Saudi Arabia 2021-2026)

2021f 2022f 2023f 2024f 2025f 2026f

Dry natural gas production, bcm 153.4 156.5 158.1 159.6 161.2 162.8

Dry natural gas production, bcm, % y-o-y 1.7 2.0 1.0 1.0 1.0 1.0

Dry natural gas production, % of domestic consumption 100.0 100.0 100.0 100.0 100.0 100.0

f = BMI forecast. Source: Saudi Aramco, EIA, BMI

Saudi Arabia Oil & Gas Report Q3 2017

Refining

BMI View: Refining capacity will rise to nearly 3.31mn b/d by the end of the forecast period, driven by the

Jazan and Yanbu refinery projects. High refinery utilisation rates will see refined fuels production reach

3.3mn b/d by 2026.

Latest Updates

■ Refinery output in Q117 averaged 2.74mn b/d, significantly below our 8.53mn b/d for the year.

■ We are holding to our forecast, as Q1 data was heavily skewed by a low of 2.51mn b/d produced in January.

Structural Trends

In 2014, nameplate refining capacity increased to 2.5mn b/d, with the full inclusion of the 400,000b/d

SATORP refinery complex at Jubail. The plant saw its first commercial shipments in September 2013, and

has gradually ramped up production. The refinery is designed to produce high-grade fuels and the complex

also includes integrated petrochemical units to produce benzene, paraxylene and propylene. The feedstock

is Arab Heavy crude oil from the nearby Safaniya and Manifa fields.

In 2015, capacity grew to 2.9mn b/d, as output from Yanbu came on stream. In September 2014, Saudi

Aramco and joint venture (JV) partner Sinopec began production testing at the 400,000b/d facility. Yanbu

has been fully commissioned and was running at full capacity as of June 2016.

Saudi Arabia Oil & Gas Report Q3 2017

Refining Capacity Forecast

(2015-2026)

Crude oil refining capacity, 000b/d (LHS) Refined products production, 000b/d (LHS) Crude oil refining capacity, utilisation, % (RHS)

2 0 1

5 e

2 0 1

6 e

2 0 1

7 f

2 0 1

8 f

2 0

1 9

2 0 2

0 f

2 0 2

1 f

2 0 2

2 f

2 0 2

3 f

2 0

2 4 f

2 0 2

5 f

2 0

2 6 f

1,000

2,000

3,000

4,000

100

105

e/f = BMI estimate/forecast. Source: BMI, EIA, Saudi Aramco

We forecast that the first production at the 100% state-owned Jazan refinery will occur in 2018, although

cost overruns, contract disputes and major infrastructural headwinds have somewhat weighed on project

development.

Located in the south-west, Jazan is among the most underdeveloped and remote provinces of Saudi Arabia.

Infrastructure is critically lacking and materials for the project have to be shipped to the Jazan terminal on

the Red Sea. Construction of the terminal has yet to be completed, and has previously prevented access by

the large carriers needed to transport heavy equipment. Due to the scale of the Jazan refinery project and the

various barriers to progress faced, the risks to completion by 2018 remain on the downside.

Given the high specification of Saudi Arabia's refineries, a secure supply of low-cost crude feedstock, high

efficiencies and a strong domestic market, we anticipate a high level of utilisation, averaging above 90.0%

throughout most of our forecast period. The make-up of the new refineries is heavily geared towards high-

grade, light-end products, and we see motor gasoline and middle distillates as the main source of production

growth over the next 10 years.

Saudi Arabia Oil & Gas Report Q3 2017

High-End Products Driving Growth

Saudi Arabia Refined Fuels Production Forecast (000b/d)

Motor gasoline Jet fuel/kerosene Kerosene Distillate fuel oil Residual fuel oil Refined LPG

2 0 1

5 e

2 0

1 6

2 0

1 7

2 0

1 8

2 0 1

9 f

2 0

2 1

2 0

2 2

2 0

2 3

2 0

2 4

2 0

2 5

1,000

2,000

3,000

4,000

e/f = BMI estimate/forecast. Source: Saudi Aramco, EIA, BMI

Table: Refining Capacity And Refined Products Production (Saudi Arabia 2015-2020)

2015e 2016e 2017f 2018f 2019f 2020f

Crude oil refining capacity, 000b/d 2,905.0 2,905.0 2,905.0 3,305.0 3,305.0 3,305.0

Crude oil refining capacity, % y-o-y 16.0 0.0 0.0 13.8 0.0 0.0

Crude oil refining capacity, utilisation, % 87.8 97.2 98.2 91.5 95.2 96.1

Refined products production, 000b/d 2,552.0 2,825.1 2,853.3 3,024.5 3,145.5 3,176.9

Refined products production, % y-o-y 10.0 10.7 1.0 6.0 4.0 1.0

Refined products production & ethanol, 000b/d 2,552.0 2,825.1 2,853.3 3,024.5 3,145.5 3,176.9

Refined products production & ethanol, % y-o-y 10.0 10.7 1.0 6.0 4.0 1.0

e/f = BMI estimate/forecast. Source: Saudi Aramco, EIA, BMI

Saudi Arabia Oil & Gas Report Q3 2017

Table: Refining Capacity And Refined Products Production (Saudi Arabia 2021-2026)

2021f 2022f 2023f 2024f 2025f 2026f

Crude oil refining capacity, 000b/d 3,305.0 3,305.0 3,305.0 3,305.0 3,305.0 3,305.0

Crude oil refining capacity, % y-o-y 0.0 0.0 0.0 0.0 0.0 0.0

Crude oil refining capacity, utilisation, % 97.1 98.1 98.5 99.0 99.5 100.0

Refined products production, 000b/d 3,208.7 3,240.8 3,257.0 3,273.3 3,289.6 3,306.1

Refined products production, % y-o-y 1.0 1.0 0.5 0.5 0.5 0.5

Refined products production & ethanol, 000b/d 3,208.7 3,240.8 3,257.0 3,273.3 3,289.6 3,306.1

Refined products production & ethanol, % y-o-y 1.0 1.0 0.5 0.5 0.5 0.5

f = BMI forecast. Source: BMI, EIA, Saudi Aramco

Saudi Arabia Oil & Gas Report Q3 2017

Refined Fuels Consumption

BMI View: Fuel subsidy reforms will continue to exert drag on Saudi Arabian fuels consumption growth,

driving a second consecutive y-o-y decline in demand in 2017.

Latest Updates

■ We have revised down our refined fuels consumption forecast this quarter. We now forecast demand to decline by 1.5% y-o-y in 2017, compared to 1.0% previously.

Structural Trends

The impact of fuel price hikes on demand was evident in Saudi Arabia in 2016. After the kingdom raised

retail prices for various fuels in a range of 10.0-80.0%, consumption fell by 4.0% y-o-y. Diesel bore the

brunt, with prices rising by 50.0-80.0% and demand slumping 10.0%. Jet fuel - which was unaffected by the

price hikes - was an outperformer in the Saudi fuels basket, with consumption rising by 13.8% for the year.

Refined Products Production And Consumption Forecast

(2015-2026)

Refined products production, 000b/d (LHS) Refined products consumption, 000b/d (LHS) Refined products consumption, % y-o-y (RHS)

2 0

1 5

2 0

1 6

2 0

1 7 f

2 0

1 8

2 0

1 9

2 0

2 1

2 0

2 2

2 0

2 3

2 0

2 4

2 0

2 5

2 0

2 6

1,000

2,000

3,000

4,000

-5

e/f = BMI estimate/forecast. Source: Saudi Aramco, EIA, BMI

We believe that the rise in prices will be sticky; we expect further price hikes to be announced in July. The

kingdom has signalled its intent to gradually shift towards market pricing, with its domestic fuels prices still

Saudi Arabia Oil & Gas Report Q3 2017

amongst the lowest globally. Although fuel price reform has been on the agenda for a number of years, the

downcycle in the oil sector, which slashed government revenues, has added impetus to subsidy reform.

Additional hikes in 2017 will drive a 1.5% decline in demand, according to our forecasts, significantly less

than the 4.0% loss in 2016. On the one hand, we expect the size of the price increases to be smaller. In

addition, the impact will be softened by a cash subsidy programme currently being rolled out by the Saudi

Arabian government.

Table: Saudi Arabia Fuel Price Reform, December 2015

Old New % Chg

Gasoline - High Grade (USD/litre) 0.16 0.24 50.0

Gasoline - Low Grade (USD/litre) 0.12 0.20 66.7

Diesel - Transport (USD/litre) 0.07 0.12 79.1

Diesel - Industry (USD/litre) 9.11 14.10 54.8

Arab Light Crude (USD/bbl) 4.24 6.35 49.8

Arab Heavy Crude (USD/bbl) 2.67 4.40 64.8

Kerosene (USD/bbl) 23.00 25.70 11.7

Source: BMI, Apicorp

The government's Vision 2030 - which targets an aggressive rebalancing away from oil - has also been

factored into the outlook. A shift to less energy-intensive sectors will ultimately weigh on demand, although

we expect the process of economic diversification to be slow. Energy-intensive industries such as the

cement and petrochemicals sectors have voiced concerns over fuel-price hikes, although their cost structures

remain low and competitive internationally. A larger concern is the broader economic downturn driven by

the slump in oil prices, which we forecast will drag the kingdom into recession in 2017. However, with

recovery forecast for Brent, the downturn will be temporary and we expect a return to growth from 2018.

In addition, our Autos team is forecasting a gradual pick-up in vehicle sales growth following aggressive

contraction in 2016 and 2017. From a y-o-y decline of 21.0% and 3.2%, respectively, sales will pull back

into positive territory from 2018, averaging 3.3% over the three-year period to 2020.

Saudi Arabia Oil & Gas Report Q3 2017

Demand Growth Tapering

Saudi Arabia Vehicle Sales Growth

Saudi Arabia - Vehicle sales, units, % y-o-y

2 0

1 1

2 0

1 2

2 0

1 3

2 0

1 4

2 0

1 5

2 0

1 6

2 0

1 7

2 0 1

8 f

2 0

1 9

2 0

2 1

-30

-20

-10

e/f = BMI estimate/forecast. Source: BMI, OICA

The domestic power sector also remains heavily dependent on liquid fuels. Despite plans for greater

diversification, oil will remain a dominant source of power generation in 2026, accounting for around 47%

of total output. Limited domestic supply and the prioritisation of gas for the refining and petrochemicals

sectors will curb attempts at a broader shift from oil-fired to gas-fired power generation. Renewable

technologies will also enter the mix, in particular solar, but their role will be heavily constrained. The main

fuels consumed by the power sector are diesel, residuals and unrefined crude.

Saudi Arabia Oil & Gas Report Q3 2017

Oil Dominating Domestic Power Sector

Saudi Arabia Oil-Fired Power Generation

Saudi Arabia - Generation, Oil, TWh (LHS) Saudi Arabia - Generation, Oil, % change y-o-y (RHS)

2 0

1 5 e

2 0 1

6 e

2 0

1 7 f

2 0 1

8 f

2 0 1

9 f

2 0 2

0 f

2 0

2 1 f

2 0

2 2

2 0

2 3 f

2 0

2 4

2 0

2 5

2 0

2 6

100

200

300

e/f = BMI estimate/forecast. Source: National sources, BMI

Table: Refined Products Consumption (Saudi Arabia 2015-2020)

2015 2016 2017f 2018f 2019f 2020f

Refined products consumption, 000b/d 2,538.9 2,436.3 2,399.8 2,435.8 2,479.6 2,529.2

Refined products consumption, % y-o-y 5.2 -4.0 -1.5 1.5 1.8 2.0

e/f = BMI estimate/forecast. Source: Saudi Aramco, EIA BMI

Table: Refined Products Consumption (Saudi Arabia 2021-2026)

2021f 2022f 2023f 2024f 2025f 2026f

Refined products consumption, 000b/d 2,582.3 2,636.6 2,694.6 2,756.5 2,822.7 2,893.3

Refined products consumption, % y-o-y 2.1 2.1 2.2 2.3 2.4 2.5

f = BMI forecast. Source: Saudi Aramco, EIA BMI

Saudi Arabia Oil & Gas Report Q3 2017

Gas Consumption

BMI View: Rising demand from the industrial and power sectors will support strong gas consumption

growth. Consumption will remain capped by production across our forecast period.

Latest Updates

■ Another round of subsidy cuts is expected in Q317, although it is unclear how natural gas prices will be affected.

■ Given the government's strategic focus on the oil-to-gas switching, it is unlikely that gas will be exposed to aggressive increase in prices.

Structural Trends

In order to sustain crude exports in the face of the rapidly rising domestic demand, Saudi Arabia has looked

to gas to displace the role of crude in the industrial and power sectors.

Gas Production And Consumption Forecast

(2015-2026)

Dry natural gas production, bcm (LHS) Dry natural gas consumption, bcm (LHS) Dry natural gas consumption, % y-o-y (RHS)

2 0

1 5

2 0

1 6

2 0

1 7

2 0

1 8 f

2 0

1 9

2 0

2 1

2 0

2 2

2 0

2 3

2 0

2 4

2 0

2 5

2 0

2 6

100

150

200

e/f = BMI estimate/forecast. Source: BMI, EIA, Saudi Aramco

Progress towards displacing the use of oil in the power sector will be undermined by continued energy

demand growth. Domestic power generation will grow at a compound annual growth rate (CAGR) of 3.6%

Saudi Arabia Oil & Gas Report Q3 2017

for the next 10 years. As such, while natural gas-fired generation will increase at a significantly faster pace -

CAGR 4.7% - it will displace only a marginal share of crude in the overall energy mix. According to our

forecasts, crude oil-fired generation will account for 47.1% of the total in 2026, down from 51.2% in 2016.

Power Sector Driving Domestic Gas Comsumption

Saudi Arabia Electricity Generation By Source

Saudi Arabia - Generation, Natural Gas, TWh Saudi Arabia - Generation, Oil, TWh

2 0

1 5

2 0 1

6 e

2 0

1 7

2 0

1 8 f

2 0

1 9 f

2 0

2 1

2 0

2 2

2 0

2 3

2 0 2

4 f

2 0

2 5

2 0

2 6

200

400

600

e/f = BMI estimate/forecast. Source:National sources, BMI

Our forecasts factor in ongoing subsidy reform efforts, which will help to moderate energy demand growth.

However, demand effects are unlikely to accrue until the backend of our 10-year forecast period. In

December 2015, the government announced a plan to reduce subsidies on natural gas, electricity and a

range of oil products over the following five years. The reductions are significant but from a very low base,

while social and political sensitivities to higher prices will restrain the pace of reform.

Subsidy reform will help lower gas demand growth from industrial consumers, but will have little impact on

power sector demand. A number of industrial consumers - such as SABIC, Saudi Arabia Fertilizers

Company, Saudi Cement Company and Yanbu National Petrochemical Company - have indicated that

the higher energy input and feedstock costs will raise overall operating costs, in a range of 5.0-8.0%. The

companies have said they will look to improve efficiencies to offset the increase. Efficiency improvements

Saudi Arabia Oil & Gas Report Q3 2017

through, for example, infrastructure upgrades or the introduction of new technologies, will take a number of

years to come into effect.

A slower pace of electricity demand growth, due to higher electricity prices, will undercut oil-fired

generation growth, but will do little to alter demand for gas, as the government pursues its fuel-switching

agenda. The pace of fuel-switching will, in our view, remain capped by the domestic availability of gas

across our 10-year forecast period.

A faster switch from oil to gas could be supported by the start of liquefied natural gas (LNG) imports. A

number of Middle Eastern countries have turned to LNG to answer peak summer demand, with imports

buoyed by the increased availability and falling spot prices for LNG globally. However, we believe that

Saudi Arabia will hold back from LNG imports due to its concern with maintaining primary energy

independence.

Table: Gas Consumption (Saudi Arabia 2015-2020)

2015e 2016e 2017f 2018f 2019f 2020f

Dry natural gas consumption, bcm 118.7 131.1 136.1 137.5 138.8 150.8

Dry natural gas consumption, % y-o-y 1.6 10.4 3.8 1.0 1.0 8.6

e/f = BMI estimate/forecast. Source: Saudi Aramco, EIA, BMI

Table: Gas Consumption (Saudi Arabia 2021-2026)

2021f 2022f 2023f 2024f 2025f 2026f

Dry natural gas consumption, bcm 153.4 156.5 158.1 159.6 161.2 162.8

Dry natural gas consumption, % y-o-y 1.7 2.0 1.0 1.0 1.0 1.0

f = BMI forecast. Source: Saudi Aramco, EIA, BMI

Saudi Arabia Oil & Gas Report Q3 2017

Trade - Oil

BMI View: Saudi Aramco will act to maintain crude export share in the face of increased domestic demand

and rising non-OPEC supply.

Latest Updates

■ It is probable that Saudi revenues were under pressure in Q117, as the drop in crude exports (8.4%) was larger than the rise in crude oil prices (7.0% for Brent).

■ Net fuels exports rose sharply over the same period (28.7%), but from a much lower base. Crude and products exports fell by 5.4% over the period.

■ We expect oil prices to pick up from Q3, although depressed exports over the summer months will likely dampen the near-term upside to revenues.

Crude Oil Trade Forecast

Structural Trends

In 2016, Saudi Arabia's crude oil exports remained elevated, supported by rising domestic production and

increased oil-to-gas switching in the power sector. It also reflects relative strength in the kingdom's key

Asian export markets, where strategic stockpiling in a number of countries - in particular China and, to a

lesser extent, India - and higher refinery run rates have supported continued demand for crude.

Saudi Arabia Oil & Gas Report Q3 2017

Asia Maintains Its Dominance

Saudi Arabia Crude Exports By Region, 2015, %

656.4

6.4

16.6

5.6

Asia North West Europe Mediterranean US Other

Source: Saudi Aramco, BMI

Export volumes have been closely tracked by the industry and variously interpreted as signals of the

kingdom's broader strategic intent. One key area of focus has been the regional shift in trade flows and the

question of the Asian pivot. As the major global growth market, Saudi Arabia has begun to explicitly target

a higher volume of its output towards Asian consumers in recent years. In line with this objective, national

oil company Saudi Aramco has also been acquiring equity shares in a number of refineries and refinery

projects in the region, including facilities in China, Japan, South Korea and Vietnam.

Saudi Arabia Oil & Gas Report Q3 2017

Crude Oil Net Exports Forecast

(2015-2026)

Crude & other liquids net export, 000b/d (LHS) Crude & other liquids net export, % y-o-y (RHS)

2 0

1 5 e

2 0

1 6 e

2 0

1 7 f

2 0

1 8

2 0

1 9

2 0

2 1

2 0

2 2

2 0

2 3

2 0

2 4

2 0

2 5 f

2 0

2 6

5,000

10,000

15,000

-2

e/f = BMI estimate/forecast. Source: Saudi Aramco, EIA, BMI

The reorientation of the kingdom's exports towards Asia has often been understood as a response to the

sharp decline in US demand for crude, as rising domestic shale production has progressively displaced

imports. This has, in turn, sparked speculation that - in light of heightened competition for market share in

Asia - Saudi Arabia may struggle to find a home for its oil. In our view, this speculation is broadly

unfounded.

In the first place, a breakdown of exports by destination shows that over the past five years the increased

volumes sent to Asia have not been drawn from the US, but from other markets. According to data from

Aramco, between 2010 and 2015 the share of the kingdom's crude exports going to Asia rose from 55.5% to

65.0%, while the US' share of Saudi Arabia's exports increased from 16.0% to 16.6% over the same period.

Over the coming years, rising domestic production - coupled with increased imports of Canadian heavy

crudes - will likely further erode Saudi Arabia's exports to the US. However, we do not expect the kingdom

to fully lose its foothold in this major North American market, nor do we see loss of market share as the

main driver behind its strategic shift to Asia.

Saudi Arabia Oil & Gas Report Q3 2017

Furthermore, we believe that Saudi Arabia is well-positioned to withstand rising competition for Asian

market share. Aramco has built strong relations with its suppliers in Asia and has rapidly grown its presence

in the region's refining sector. It also offers a stable source of supply, and with one of the lowest lifting costs

globally, it has the capacity to undercut the prices of a number of its key competitors.

Rising product stocks and a forecast narrowing in product crack spreads could dampen demand among

Asian refiners. Storage demand looks set to remain robust, due to a mix of commercial and strategic

stockpiling in India and North East Asia, in particular China.

Table: Crude Oil Net Exports (Saudi Arabia 2015-2021)

2015e 2016e 2017f 2018f 2019f 2020f 2021f

Crude & other liquids net export, 000b/d 9,573.0 9,627.2 9,532.4 9,473.6 9,467.1 9,625.2 9,786.5

Crude & other liquids net export, % y-o-y 3.2 0.6 -1.0 -0.6 -0.1 1.7 1.7

Crude & other liquids net export, USDbn 173.9 143.2 187.9 197.1 210.8 224.8 239.3

e/f = BMI estimate/forecast. Source: National sources, BMI

Table: Crude Oil Net Exports (Saudi Arabia 2021-2026)

2021f 2022f 2023f 2024f 2025f 2026f

Crude & other liquids net export, 000b/d 9,786.5 9,950.9 10,113.2 10,278.5 10,425.0 10,574.2

Crude & other liquids net export, % y-o-y 1.7 1.7 1.6 1.6 1.4 1.4

Crude & other liquids net export, USDbn 239.3 250.6 262.1 270.1 274.0 277.9

f = BMI forecast. Source: National sources, BMI

Saudi Arabia Oil & Gas Report Q3 2017

Refined Fuels Trade Forecast

Structural Trends

Saudi Arabia has become a net refined product importer since 2009 as domestic consumption increases

steeply. Its downstream expansion has seen its net imports of refined products temporarily diminish.

However, strong domestic consumption growth will again outpace production from 2020.

The kingdom has been targeting its refined products increasingly towards Asian consumers over the past

several years. However, 2015 saw the region's share of total exports decline to 34.5%, down from 46.4% in

2014.

Refined Products Net Exports Forecast

(2015-2026)

Refined products net exports, 000b/d (LHS) Refined products net exports, % y-o-y (RHS)

2 0

1 5

2 0 1

6 e

2 0 1

7 f

2 0 1

8 f

2 0

1 9

2 0

2 1

2 0

2 2

2 0 2

3 f

2 0

2 4

2 0

2 5

2 0

2 6

250

500

750

-1,000

1,000

2,000

3,000

4,000

e/f = BMI estimate/forecast. Source: Saudi Aramco, EIA, BMI

Saudi Arabia Oil & Gas Report Q3 2017

Table: Refined Fuels Net Exports (Saudi Arabia 2015-2020)

2015e 2016e 2017f 2018f 2019f 2020f

Refined products net exports, 000b/d 13.1 388.7 453.5 588.7 665.9 647.7

Refined products net exports, % y-o-y -113.9 2,873.4 16.7 29.8 13.1 -2.7

Refined products net exports, USDbn -1.4 6.4 9.1 13.3 15.4 15.4

e/f = BMI estimate/forecast. Source: Saudi Aramco, EIA, BMI

Table: Refined Fuels Net Exports (Saudi Arabia 2021-2026)

2021f 2022f 2023f 2024f 2025f 2026f

Refined products net exports, 000b/d 626.4 604.2 562.4 516.7 466.9 412.8

Refined products net exports, % y-o-y -3.3 -3.5 -6.9 -8.1 -9.6 -11.6

Refined products net exports, USDbn 16.2 15.5 14.3 13.0 11.7 10.2

f = BMI forecast. Source: National sources, BMI

Saudi Arabia Oil & Gas Report Q3 2017

Trade - Gas (Pipeline and LNG)

BMI View: Strong domestic consumption growth and constraints on production will prevent Saudi Arabia

from exporting natural gas within the next 10 years. The kingdom will not cede its energy-independent

status by importing LNG.

Structural Trends

We forecast unrestrained gas demand to outstrip production across our forecast period, undermining the

potential for exports. With delays to major gas projects creating the risk of near-term supply shortfalls,

Saudi Arabia has also reportedly been considering construction of a liquefied natural gas (LNG) import

terminal. LNG imports would improve the security of supply and could offer a flexible solution to meeting

peak seasonal demand.

However, imports could pose downside risk to domestic output. Poor pricing dynamics and technical

barriers to production have already weighed on our forecast and the availability of import alternatives would

dilute the need for domestic gas development. Other countries in the Gulf Cooperation Council, such as

Kuwait and the UAE, which began seasonally importing LNG, have struggled to wean themselves off the

resource

Importing LNG would also break Saudi Arabia's energy self-sufficient status, a status which the kingdom

may be reluctant to cede. Further delays or disruptions to the domestic gas supply would see the project gain

traction, but imported LNG will remain a last resort.

Saudi Arabia Oil & Gas Report Q3 2017

Industry Risk Reward Index

Middle East & North Africa - Upstream Industry Risk/Reward Index

BMI View: The dominance of NOCs in MENA's Upstream sector and the poor Competitive Landscape is

the strongest determinant of the region's underperformance in our global Upstream RRI, with MENA

ranking fifth out of six regions globally. Although MENA holds the largest hydrocarbon resource base in

the world it is worst-in-class in terms of investment openness. As some of the largest producers in the region

look to open up more to private and/or foreign participation in the sector its low score in our Upstream RRI

highlights the scale of the challenge to attract private capital over the long term.

A Large Resource Base Bolsters Final Scores

MENA Upstream O&G Risk/Reward Index

Scores Out Of 100. Higher Scores = Lower Risk. Source: BMI Risk/Reward Index

Main Regional Features & Latest Updates

■ Despite the extensive resource base of the Middle East, as a region MENA scores second lowest in our Upstream RRI, ahead of only Sub-Saharan Africa.

■ The region outperforms the global average only in our Industry Rewards category which registers oil and gas resource bases and production potential.

■ MENA particularly underperforms in the competitive landscape category given the prominence of national oil companies, and in all areas of Risks due to a weak political and economic outlook.

■ Within the region, outperformers are those countries with greater investor diversity and lower country risk factors. These tend to be more business friendly investment environments with a more stable political outlook such as the UAE and Qatar.

Saudi Arabia Oil & Gas Report Q3 2017

■ Since most markets in the region have large resource bases, their scale is not a strong competitive advantage for any one country in particular, though countries with smaller reserves, such as Bahrain and Tunisia, underperform the region.

■ Other underperformers are predominantly those with a less stable political environment or where internal conflict dissuades investment, such as Libya and Yemen.

Regional RRI Snapshot: UAE Leads The Way

MENA Upstream RRI

Scores Out Of 100. Higher Scores = Lower Risk. Source: BMI Risk/Reward Index

UAE And Qatar Top In MENA

As with the bulk of major producers in the MENA region, both the UAE and Qatar have a substantial

hydrocarbon resource base. What sets the two countries apart is the lower level of country risk, with among

the most stable political systems and strongest economic outlooks in the region.

The UAE claims the top spot in our MENA upstream index due to its more attractive licensing structures,

being one of the few countries in the region to offer concessions. Qatar ranks second in MENA, though on a

global scale the two countries are less competitive, placed at seventh and 16th in our global rankings

respectively.

Saudi Arabia Oil & Gas Report Q3 2017

Egypt and Oman have a comparative strong showing in the regional tables, despite having marginally

smaller resource bases than many of their peers. Oman outperforms the region in the political and

operational risk categories, ranking third in risk scores in the region. The Sultanate's position is also

supported with one of the better bureaucratic and legal frameworks in the Middle East. Egypt scores

relatively well due to the greater number of companies operating and a competitive fiscal regime, though

underperforms in short-term risks and quality of infrastructure.

Highest Deviation Appears In Risk Scores

Deviation Of Risk & Reward Scores vs MENA Average Score

Rewards Risks

U A

Q a

ta r

S a

u d

i A ra

b ia

E g

yp t

O m

a n

A lg

e ri

K u w

a it

Ir a

B a

h ra

Tu n

is ia

L ib

Y e

m e

-50

-25

*Negative number = underperforms regional average. Possitive number = outperformes regional average. Source: BMI

Kuwait And Iran Struggle

Kuwait underperforms in the index despite having extensive oil and gas reserves. Similar to Saudi Arabia,

extensive state ownership of resources restricts foreign investors and poor licensing structures offers

minimal incentive to invest, though Kuwait in particular is dragged down by greater bureaucratic

inefficiencies.

Saudi Arabia Oil & Gas Report Q3 2017

Iran also somewhat disappoints given its considerable oil and gas production potential. The main reason

behind this is the uncertainty around the fiscal environment as well as below average long-term political and

economic scores. More stability in domestic and international politics could see this improve.

War And Low Resource Bases Hurt

High Risk And Weak Rewards

Libya & Yemen vs MENA Average

Libya Yemen MENA Average

Industry Rewards

Country Rewards

Industry Risks

Country Risks

100

Source: BMI

The underperformers in our upstream RRI fall into two categories:

Firstly, the rare few countries in the Middle East that have a far smaller than average resource base, and

secondly, the countries ravaged by conflict.

Tunisia and Bahrain underperform the region in terms of resource base and production growth potential.

Both Yemen and Libya are in the midst of a civil war, which severely impacts the political, economic and

operating risk scores. Damage to infrastructure also requires heavy levels of investment. Libya ranks 80th in

our global upstream RRI, while Yemen ranks bottom of our 87 country index.

Saudi Arabia Oil & Gas Report Q3 2017

Risks vs Rewards

MENA Upstream Risk/Reward Index

Scores out of 100, higher score = lower risk. Source: BMI Risk/Reward Index

Saudi Arabia Oil & Gas Report Q3 2017

Rewards

MENA Upstream Rewards Index

Scores out of 100, higher score = lower risk. Source: BMI Risk/Reward Index

Saudi Arabia Oil & Gas Report Q3 2017

Risks

MENA Upstream Risk Index

Scores out of 100, higher score = lower risk. Source: BMI Risk/Reward Index

New Upstream O&G Risk/Reward Index

We have overhauled our oil & gas Risk/Reward Index (RRI) methodology to more accurately capture the

different elements that impact the overall investment attractiveness of a country's upstream sector. We have

increased the number and variety of indicators that make up the final index's core and we have reassessed

the weightings of the Reward and Risk indicators to ensure the Risk/Reward environment is accurately

reflected through our matrix. The RRI uses a combination of our proprietary industry forecasts and analyst

assessment of the regulatory climate. As regulations evolve and forecasts change, so the Index scores

change, providing a highly dynamic and forward-looking result.

Saudi Arabia Oil & Gas Report Q3 2017

Middle East & North Africa - Downstream Industry Risk/Reward Index

BMI View: Outperformers in the MENA Downstream RRI are identified by good access to feedstock,

modern refining facilities and a stable economic and political outlook. Countries with low refining

complexity high levels of political and economic instability hold the highest risk.

High Rewards Boost GCC

MENA Downstream - Risk/Reward Index Heat Map

Scores out of 100, Higher Score = More Attractive Market. Source: BMI Risk/Reward Index

Main Regional Features & Latest Updates:

■ The MENA region scores below the global average of 50, at just 43.2 in our Downstream Oil & Gas Risk/Reward Index (RRI).

■ The region's underperformance largely derives from the high level of risk, with fuel subsidies deterring foreign investment and poor political and economic outlooks.

■ MENA only achieves above average scores in the country rewards category, supported by a large refining capacity, strong fuels demand and excellent export opportunities.

■ MENA's combined score is substantially dragged down by the poor state and low complexity of the refining sectors in Iraq, Egypt, Libya and Yemen.

■ The UAE, Qatar and Saudi Arabia are the region's top performers, supported by both lower risk factors, more advanced refining sectors and substantial export capability.

Saudi Arabia Oil & Gas Report Q3 2017

Regional RRI Snapshot: UAE & Qatar Lead, Saudi Catching Up

MENA Downstream RRI

Scores out of 100, Higher Score = More Attractive Market. Source: BMI Risk/Reward Index

Feedstock Availability & Modern Facilities Support Best Scores

Similar to the Upstream RRI, MENA's Downstream RRI is supported by strong country rewards, including

substantial feedstock availability, fuels export capacity and a strong domestic demand outlook. The top

performers in the region - the UAE, Qatar and Saudi Arabia - are supported by modern and efficient

refining facilities that surpass domestic demand needs. Excess fuels production capacity beyond local

consumption needs is critical given fuel subsidies in domestic market limit margins.

This propels the top MENA markets above the global average score. Along with strong rewards showing,

the UAE and Qatar are further supported by among the most stable economic and political environments in

the region. Nonetheless, despite having the top two positions in the MENA Downstream RRI, the UAE and

Qatar rank 14th and 20th in our universe of 87 global markets.

Saudi Arabia Oil & Gas Report Q3 2017

High Rewards See Top MENA Markets Outperform

UAE, Qatar, Saudi Arabia vs Global Average

UAE Qatar Saudi Arabia Global Average

Industry Rewards

Country Rewards

Industry Risks

Country Risks

100

Source: BMI Downstream RRI

Civil War & Low Complexity Weigh On Rank

The MENA region as a whole is dragged down by the underperformance of Yemen and Libya that are

currently mired in civil war. Not only are the facilities in the two countries low complexity, both have also

faced operational inconsistency and damage after being targeted by militia and rebels. Libya ranks 84th and

Yemen 87th of our global downstream index.

Saudi Arabia Oil & Gas Report Q3 2017

Extremely High Risk Markets

Yemen & Libya vs Global Average

Libya Yemen Global Average

Industry Rewards

Country Rewards

Industry Risks

Country Risks

Source: BMI Downstream RRI

Other weak scores in the region come from countries where refining sectors have suffered from chronic

underinvestment. Low complexity facilities that produce large amounts of less profitable heavy ends

combine with subsidies domestic markets and high risk political and economic landscapes. Iraq and Egypt

fall into this category, despite having large domestic markets that hold substantial demand potential.

Upgrades to facilities in Egypt and a new project at Karbala in Iraq, will support better scores in the coming

quarters.

Saudi Arabia Oil & Gas Report Q3 2017

Low Complexity Hurts MENA Scores

% Residual Fuels Of Total Fuels Production 2016

Iraq Egypt Tunisia Iran Libya Kuwait Oman Saudi Arabia Algeria Yemen Bahrain United Arab Emirates Qatar

Country

More EfficientLess Efficient

Source: BMI

Saudi Arabia Oil & Gas Report Q3 2017

Downstream Risks vs Rewards

MENA Downstream Risk/Reward Index

Scores out of 100, Higher Score = More Attractive Market. Source: BMI Risk/Reward Index

Saudi Arabia Oil & Gas Report Q3 2017

Downstream Rewards

MENA Downstream Rewards Index

Scores out of 100, Higher Score = More Attractive Market. Source: BMI Risk/Reward Index

Saudi Arabia Oil & Gas Report Q3 2017

Downstream Risks

MENA Downstream Risks Index

Scores out of 100, Higher Score = More Attractive Market. Source: BMI Risk/Reward Index

Saudi Arabia Oil & Gas Report Q3 2017

Market Overview

Saudi Arabia Energy Market Overview

Regulatory Structure

The governance of Saudi Arabia's oil and gas sector has undergone significant change since King Salman

bin Abdulaziz al-Saud ascended to the throne in January 2015. The main changes are as follows:

■ The Supreme Council for Petroleum and Mineral Resources has been absorbed within the Council of Economic Development, which is headed by the Deputy Crown Prince, Mohamed bin Salman.

■ The national oil company, Saudi Aramco, has been separated from the Ministry of Petroleum & Mineral Resources.

■ Saudi Aramco is under the supervision of the Supreme Council of the Saudi Aramco Oil Company (SCSA). The SCSA is formed of 10 members: five from the board of Aramco and five others. The SCSA is chaired by the Deputy Crown Prince Mohamed bin Salman.

Saudi Aramco is the national oil company. Aramco is heavily dominant in the industry, in both the upstream

and downstream sectors, performing all commercial functions on behalf of the government.

Licensing Regime

Saudi Aramco is licensed through a petroleum concession agreement (PCA). Foreign companies participate

in the sector through joint ventures with Aramco. Given limited foreign participation and the closed nature

of the sector, we have little visibility on the terms of the PCA.

Fiscal Regime

Table: Saudi Arabia PCA Main Fiscal Terms

Corporate Income Tax

Royalties Fees And Bonuses

Resource Tax Export Duties Import Duties Other Key Fiscal Terms

85% - oil; 30%-85% - gas, gas condensates and NGLS

Yes - stipulated by contract

na na na Yes - typically at a rate of 5%

na = Not available/applicable. Source: Ernst & Young, BMI

Saudi Arabia Oil & Gas Report Q3 2017

Oil And Gas Infrastructure

Oil Refineries

Table: Saudi Arabia Oil Refineries

Location Project Name Capacity, b/d Status Ownership

Jazan Jazan 400,000 Under construction Saudi Aramco (100%)

Jubail SATORP (Jubail) 400,000 Active Saudi Aramco Total Refining and Petrochemical Company (SATORP) is a

JV between Saudi Aramco (62.5%), Total (37.5%)

Al Jubail SASREF 305,000 Active Saudi Aramco Shell Refinery Company (SASREF) is the operator

Jiddah (Jeddah) Jiddah (Jeddah) 100,000 Active Saudi Aramco

Rabigh Rabigh 400,000 Active Saudi Aramco (50%), Sumitomo (50%)

Riyadh Riyadh 124,000 Active Saudi Aramco (100%)

Yanbu SAMREF 400,000 Active Saudi Aramco Mobile Refinery Company (SAMREF) is a JV between

Saudi Aramco (50%), Exxonmobil (50%)

Yanbu YASREF 400,000 Active Yanbu Aramco Sinopec Refining Company (Yasref) is a JV between

Saudi Aramco 62.5%, Sinopec 37.5%

Ras Tanura Ras Tanura 550,000 Active Saudi Aramco

Source: BMI Global Refineries Database

Oil Terminals/Ports

Saudi Aramco operates oil export terminals at Duba, Jeddah, Jazan, Jubail, Ju'aymah and Ras Tanura,

while PetroRabigh operates a terminal at Rabigh. The most significant of these are the Ras Tanura facility

on the Persian Gulf and the Yanbu facility on the Red Sea.

Ras Tanura

The Ras Tanura oil terminal complex is located in the east of the country close to major producing fields,

and is linked by subsea pipeline to the Ju'aymah offshore oil terminal. The terminal comprises three

separate sections, known as the North Pier, South Pier and the Sea Islands. According to the Energy

Information Administration (EIA), the Sea Islands terminal has a capacity of around 6mn barrels a day (b/

d), with an additional 2.5mn b/d of capacity available at the two port terminals.

Saudi Arabia Oil & Gas Report Q3 2017

Yanbu

Saudi Arabia's second major export route is located at the Red Sea port of Yanbu. According to the EIA, the

terminal has a capacity of around 4.5mn b/d of oil and 2mn b/d of natural gas liquids (NGL) and refined

products, and accounts for around a quarter of Saudi Arabia's oil exports. The terminal, which was

completed in 1982, was designed to reduce the country's strategic dependence on export routes that passed

through the Straits of Hormuz. An additional attraction of the location was its relative proximity to

European markets, allowing tankers to cut around 7,000km off the journey distance to Europe compared

with transporting oil from the Persian Gulf.

The Yanbu terminal is linked to the East-West oil pipeline and its parallel NGL pipeline, both of which

transport liquids from production centres further east. Oil can be processed at Aramco's refinery in the city,

or stored in one of the company's 11 floating roof crude oil storage tanks, each of 1mn barrels (bbl). The

facility also has two 250,000bbl cone roof storage tanks for bunker fuel.

Ras al-Ju'aymah

The Ras al-Ju'aymah oil terminal is located 11km offshore, close to the Ras Tanura oil terminal, to which it

is linked by subsea pipeline. According to the EIA, the facility has a capacity of up to 3.6mn b/d.

Rabigh

The Rabigh oil terminal is operated by the PetroRabigh refining company. The facility, which according to

Aramco has a maximum offloading hourly rate of 110,000bbl, was historically used to source crude oil

from Yanbu for the PetroRabigh refinery. Since 2005 the East-West pipeline spur to Rabigh has reduced

pressure on the port.

Oil Pipelines

According to the EIA, Saudi Arabia has around 15,000km of oil pipelines, operated by Saudi Aramco.

Although the country has several oil export pipelines, none are currently operational, meaning that all oil

exports are sent via tanker terminals. The domestic pipeline network does play a role in the country's

exports, however, by transporting oil to the country's west coast to the export terminal at Yanbu.

Saudi Arabia Oil & Gas Report Q3 2017

East-West Oil Pipeline

The 1,202km East-West pipeline, also known as the Petroline, transports crude oil from the Abqaiq

processing plants in the east of the country to refineries and export terminals in the west. The pipeline,

which has a capacity of 5mn b/d, is operated by Saudi Aramco and transports mainly Arabian Light crude.

A 146km spur from the pipeline to the refinery and oil terminal at Rabigh was completed in 2005, allowing

600,000b/d to be transported and reducing the need to transport oil to the Rabigh refinery by sea. The

pipeline runs alongside a 290,000b/d NGL pipeline which provides feedstock for petrochemical plants in

Yanbu.

Shaybah-Abqaiq Pipeline

The Shaybah-Abqaiq pipeline runs north from the Shaybah oil field at the edge of the Rub al-Khali to Saudi

Aramco's major oil processing centre at Abqaiq. The 638km pipeline has a capacity of 660,000b/d.

Saudi Arabia-Bahrain Pipeline

Saudi Arabia exports about 230,000b/d of crude oil from Abqaiq to Bahrain via the AB-1 pipeline. All the

crude is refined at Bahrain's Sitra refinery.

Gas Pipelines

Saudi Arabia currently has no gas export pipelines and a relatively limited domestic gas distribution

network, known as the Master Gas System (MGS). Construction work started on the MGS in 1975 as a way

of reducing flaring of associated gas. The bulk of the network was completed by mid-1980. The pipeline

network is fed by 64 gas separator plants and is linked to three gas processing plants at Shedgum,

Uthmaniyah and Berri. NGLs from the MGS system are fed into the East-West NGL pipeline at Shedgum,

from where they are transported to Yanbu on the Red Sea.

Saudi Arabia Oil & Gas Report Q3 2017

Company Profile Saudi Aramco Latest Updates

■ Saudi Aramco is set to sign a number of deals with US companies during the visit of President Trump to the country. Unconfirmed reports indicate that deals are on the table between the national oil company (NOC) and Schlumberger, General Electric, Halliburton, Baker Hughes, Weatherford, General Electric, National Oilwell Varco, Nabors Industries and Rowan Companies.

■ If signed, the deals are intended to aid in the development of local manufacturing capabilities. This forms part of the broader Saudisation drive, which aims to increase the percentage of locally produced goods and services in the energy sector to 70.0% by 2021.

■ The planned IPO of Aramco received a major boost with the announcement by the Saudi government that income tax paid by the NOC would be reduced from 85.0% to 50.0%. This will significantly improve the company's valuation, by increasing the present value of its discounted future cash flows.

SWOT Analysis

Strengths ■ Vast oil and gas reserves base.

■ Strong technical capabilities.

■ Large-scale investment in technological development and innovation.

■ Dominant position in Saudi Arabia.

■ Significant spare production capacity.

Weaknesses ■ High cost and technical complexity of non-associated resource base.

■ High level of state control.

Opportunities ■ Substantial underexplored acreage offshore.

■ Large untapped unconventional resource base.

Threats ■ Social unrest concentrated in oil producing regions.

■ Rising insecurity in the Middle East region.

■ Sustained lower oil prices undercutting revenue.

Saudi Arabia Oil & Gas Report Q3 2017

Company Overview Saudi Aramco is the national oil company for Saudi Arabia. It is a fully integrated

company, with full control of the kingdom's upstream assets and a dominant position in

the downstream. It currently produces around one in every nine barrels of crude

produced globally and is looking to raise its production in order to maintain exports

while growing domestic refining capacity. The company's main strategic aim is to

diversify downstream, both at home and abroad, in both the refining and

petrochemicals sectors.

Table: Major Upstream Assets In Saudi Arabia

Field Location Capacity (mn b/d)

Ghawar Onshore 5.8

Safaniya Offshore 1.2

Khurais Onshore 1.2

Manifa Offshore 0.9

Shaybah Onshore 0.8

Qatif Onshore 0.5

Khursaniyah Onshore 0.5

Zuluf Offshore 0.5

Abqaia Onshore 0.5

Source: EIA , BMI

Saudi Arabia Oil & Gas Report Q3 2017

Regional Overview

MENA Oil & Gas Regional Overview

BMI View: Gas production in the MENA region is set for substantial growth over the next 10 years freeing

up domestically consumed oil for export. Oil production will also increase despite short-term OPEC

curtailments. Efforts to diversify economies will support new refining and petrochemicals projects adding

value to exports.

To highlight the key themes that inform BMI's Middle East and North Africa (MENA) oil and gas

forecasts, we have compared countries on the basis of the following key indicators:

■ Oil production

■ Oil consumption

■ Refining capacity

■ Gas production

■ Gas consumption

Our MENA coverage includes Algeria, Bahrain, Egypt, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi

Arabia, Tunisia, UAE and Yemen.

Oil Production: MENA Prepares For Tighter Market

Even with the production cut across OPEC and non-OPEC countries, we forecast oil production in the

MENA region to grow 0.9mn b/d in 2017 to 34.0mn b/d. While we currently see a high likelihood of deal to

roll over into H217, it will predominantly be the exempt MENA countries of Iran and Libya that will drive

the y-o-y growth in production given the lower base of output in these countries in 2016. In addition,

stronger demand in the MENA region over the summer months will see seasonal increases in production

and result in compliance slippage.

Saudi Arabia Oil & Gas Report Q3 2017

Table: Marginal Impact On 2017 Output From Cut (000b/d)

2016 Crude And Condensate

Production 2017 Crude And Condensate

Production Y-o-Y Change

Algeria 1,635.3 1,655.7 20.4

Egypt 662.8 691.5 28.7

Libya 416.7 751.4 334.7

Tunisia 52.5 52.1 -0.4

Bahrain 55.5 55.1 -0.4

Iran 3,660.6 3,923.2 262.6

Iraq 4,459.2 4,619.3 160.1

Kuwait 3,077.4 3,094.9 17.5

Oman 1,008.3 1,000.5 -7.8

Qatar 1,964.1 1,940.4 -23.7

Saudi Arabia 12,452.3 12,385.7 -66.6

United Arab Emirates 3,895.0 3,908.8 13.8

Yemen 12.5 12.3 -0.2

Source: BMI

Beyond 2017, countries in the MENA region with the capability to quickly bring back any spare production

capacity created from limiting output will do so as the market tightens. A number of major projects, both

gas and oil, remain under development and will drive production growth over the coming years:

■ Saudi Arabia has vowed to maintain its 12.5mn b/d of crude production capacity adding 300,000b/d at the Khurais oil field, 900,000b/d at Manifa and up to 1mn b/d at Shaybah. Production from the neutral zone share with Kuwait is also offline and could return in 2017.

■ Kuwait, which will also benefit from a potential neutral zone restart, is investing to reach its target crude and condensate production capacity of 3.165mn b/d in 2017 and 4.0mn b/d by 2020. There has been an aggressive increase in the number of operating rigs in Kuwait over late 2016 and early 2017.

Saudi Arabia Oil & Gas Report Q3 2017

Kuwait Steps Up Drilling

Key MENA Oil Producer Rig Counts

KUWAIT ALGERIA EGYPT IRAQ OMAN SAUDI ARABIA UAE

Jun- 16

Jul- 16

Aug- 16

Sep- 16

Oct- 16

Nov- 16

Dec- 16

Jan- 17

Feb- 17

100

150

Source: Baker Hughes

■ The UAE is aiming to increase crude oil output to 3.5mn b/d by the end of 2018 and sustain that output for 25 years. ExxonMobil's Upper Zakum expansion and the addition of Total, BP, CNPC and Inpex to the onshore concession investors will support this.

■ Iraq has an oil production target of 5.5mn b/d to 6.0mn b/d by 2020, supported by contracted production plateau levels at its largest oil fields. The combined plateau target output of the Rumaila, West Qurna-2, Majnoon, Zubair and Halfaya is 5.55mn b/d.

Saudi Arabia Oil & Gas Report Q3 2017

MENA Preparing For Tighter Crude Market

Oil Production In Major MENA Producers (000b/d)

Algeria Egypt Libya Tunisia Bahrain Iran Iraq Kuwait Oman Qatar Saudi Arabia United Arab Emirates

2 0

1 5

2 0

1 6

2 0

1 7 f

2 0

1 8 f

2 0 1

9 f

2 0

2 0 f

2 0 2

1 f

2 0 2

2 f

2 0

2 3

2 0

2 4

2 0

2 5 f

2 0

2 6

10,000

20,000

30,000

40,000

Source: BMI, JODI, OPEC, National Sources

We forecast crude, condensate and oil liquids production to increase by more than 4mn b/d from 2017 to

2026, with the 13 countries we cover in the MENA region increasing output from 34.0mn b/d to 38.3mn b/

d. This will be driven by Saudi Arabia, Iraq and Kuwait.

Saudi Arabia Oil & Gas Report Q3 2017

Refined Fuels Consumption: Growth Slowed By Subsidy Reform

Low oil prices are forcing fuel subsidy reform as government budgets need to be recalibrated due to lower

revenues. All Gulf Cooperation Council (GCC) countries and Egypt have implemented changes to increase

pump prices for gasoline, and in some cases diesel. Numbing powerful refined fuel demand growth will be

essential to prevent countries from dropping net oil export levels and enact production cuts. All major

MENA states have seen the price of fuel increase since mid-2015, and in most cases this has led to a weaker

growth or even negative year-on-year demand.

Table: Average Gasoline Pump Price June 2015 & March 2017 (USD/Litre)

June-15 March-17

Saudi Arabia 0.12 0.24

Kuwait 0.20 0.34

Qatar 0.26 0.47

Bahrain 0.27 0.42

Oman* 0.29 0.51

UAE* 0.47 0.52

Egypt 0.20 0.38

*Revised monthly in line with global market prices; accurate as of March 30 2017. Source: globalpetrolprices.com

After falling in 2016, consumption patterns across MENA will stabilise 2017. A rise in fuel prices across

countries with large consumer bases will stunt the level of demand growth going forward. We also

anticipate a switch from higher quality fuels to lower grades, given the largest price increases have been

made in the premium 98 and 95 octane fuels, while 91 and lower have seen less of an increase. Economic

diversification efforts, particularly in expanding the refining and petrochemical sectors, will continue to

drive demand for oil. The MENA region also has a young demographic and a decent vehicle sales outlook,

pointing to stronger domestic demand. That said, weaker economic growth as governments are unable to

invest into economies and the likelihood of further subsidy cuts, will curb the rate of consumption growth.

We forecast Middle East refined product consumption to increase from 9.9mn b/d in 2017 to 11.5mn b/d in

2026. The rise of 1.6mn b/d (16%) over the ten years to 2026, is a marked slowdown in growth compared to

a 2.2mn b/d (29%) increase over the prior ten years from 2006.

Saudi Arabia Oil & Gas Report Q3 2017

Subsidy Reform Curbing Consumption Growth

MENA Refined Fuels Consumption (000b/d)

Algeria Egypt Libya Tunisia Bahrain Iran Iraq Israel Kuwait Oman Qatar Saudi Arabia United Arab Emirates Yemen

2 0 1

5 e

2 0 1

6 e

2 0 1

7 f

2 0 1

8 f

2 0

1 9 f

2 0

2 0 f

2 0

2 1 f

2 0

2 2 f

2 0

2 3 f

2 0

2 4 f

2 0

2 5 f

2 0 2

6 f

2,500

5,000

7,500

10,000

12,500

Source: BMI, JODI, National Sources

Refining Capacity: Mega Refineries To Support Economic Diversification

With an abundance of low-cost feedstock and widespread government support to diversify the economy

away from crude oil exports, the MENAs refining capacity is forecast to grow strongly across our 10-year

forecast period. However, with government budgets set to be limited by lower oil prices in the coming four

to five years, capacity expansion beyond those currently in the pipeline will be limited. We forecast refining

capacity in MENA to increase from 11.3mn b/d in 2017 to 13.1mn b/d in 2020. Beyond 2020

New investment will be spread across a number of greenfield and brownfield developments, but

key contributors to growth include:

■ Saudi Arabia's 400,000b/d Jizan facility is slated for start-up in 2018.

■ Kuwait has awarded USD11.5bn in contracts for the 615,000b/d Al Zour refinery and is targeting operational start-up by 2020.

■ Iraq let the contract for the 140,000b/d Karbala refinery in June 2015, which is due to be completed by 2020.

Saudi Arabia Oil & Gas Report Q3 2017

■ Iran is due to bring on the first 120,000b/d phase of the Persian Gulf Star refinery by early 2017, with two subsequent 120,000b/d phases following. The country has also proposed an extensive upgrade programme to modernise existing facilities.

■ Expansions at the Sohar in Oman (2017) and Sitra in Bahrain (2018) will boost crude distillation capacity.

Fuels import demand in the major consumption market of Europe is forecast to be flat to negative, forcing

the Middle East to lean on Asia for fuels exports. China and India are also building up their own domestic

refining centres, leaving an increasingly crowded global market. However, the new facilities being built in

the Middle East benefit from access to low-cost feedstock, are efficient and leverage economies of

scale, which all combine to offer an advantage in a competitive fuels market.

Diversifying Through Refined Product Exports

MENA Refining Capacity & Refined Product Consumption (000b/d)

Crude oil refining capacity, 000b/d Refined products consumption, 000b/d

2 0

1 5

2 0

1 6

2 0

1 7

2 0

1 8

2 0

1 9

2 0

2 1

2 0

2 2

2 0

2 3

2 0

2 4

2 0

2 5

5,000

10,000

15,000

Source: BMI

Gas Production: Gas Importance Grows To Support Oil Exports

MENA gas production is set for strong growth as the region continues to substitute more costly and less

efficient oil with gas in power generation. Increased gas output is intended to free up more crude for export,

or prevent exports from declining as domestic oil demand rises. We forecast natural gas production in the

Saudi Arabia Oil & Gas Report Q3 2017

MENA region to increase 13% from 2017 to 2026, rising from 836bcm to 946bcm, with more potential

upside from Iran depending on IPC uptake from foreign investors.

Much of the gas in the Middle East is associated in oilfields and few countries have developed sufficient

infrastructure to collect and transport this resource to demand centres. A further disincentive to progress is

that many countries do not have separate regulations governing associated gas production, creating a lack of

clarity around the reward for monetising gas. As a result, large volumes of gas that could be monetised are

flared - particularly in Iraq and Iran.

Gas Focus Grows

MENA Gas Production (bcm)

Algeria Egypt Libya Tunisia Bahrain Iran Iraq Kuwait Oman Qatar Saudi Arabia United Arab Emirates Yemen

2 0

1 5

2 0 1

6 e

2 0

1 7 f

2 0

1 8

2 0

1 9

2 0 2

0 f

2 0 2

1 f

2 0 2

2 f

2 0 2

3 f

2 0 2

4 f

2 0

2 5

2 0

2 6

500

1,000

e/f = BMI estimate/forecast. Source: National sources, EIA, BMI

Non-associated gas will be the largest contributor to new gas output:

■ Iran holds the most gas production upside through further phase development of the South Pars field, which could add over 60bcm of production capacity in the next five years. Foreign investment and export routes will be essential to realising this.

■ Oman is progressing the Khazzan gas project, which will boost gas production by 15bcm from 2017

■ In Saudi Arabia, the Wasit gas project has already reduced crude burn over 2016 - supporting oil exports - and the Fadhilli gas development (26bcm) will be major boost to gas growth in 2019.

Saudi Arabia Oil & Gas Report Q3 2017

■ The Miran project (8bcm) in the Kurdistan Region of Iraq and Barzan phase 2 (10bcm) in Qatar will also be major additions over the next few years.

Gas Consumption: Industrial Growth And Power Strengthen Consumption

All countries in the MENA region will see gas consumption grow over the next 10 years and this will be at

a faster rate than production growth. We forecast gas consumption to increase from 682bcm in 2017 to

828bcm in 2026, an increase of 21.4%.

Consumption will be driven by the region's burgeoning downstream sector - in particular petrochemicals -

and a gradual reorientation of the power sector from oil to gas-fired generation. In many MENA countries,

oil continues to be used in power plants due to insufficient gas availability, while some gas power facilities

are idle or working at low capacity due to lack of supply. Gas reinjection is also increasing throughout the

Middle East to maintain reservoir pressures at maturing oil fields.

Burgeoning Gas Demand

Selected Middle East Countries - Gas Consumption (bcm)

Algeria Egypt Libya Tunisia Bahrain Iran Iraq Kuwait Oman Qatar Saudi Arabia United Arab Emirates Yemen

2 0

1 5

2 0 1

6 e

2 0

1 7

2 0 1

8 f

2 0 1

9 f

2 0

2 1

2 0

2 2

2 0

2 3

2 0

2 4

2 0

2 5

2 0

2 6

250

500

750

1,000

e/f = BMI estimate/forecast. Source: EIA, BMI

Saudi Arabia Oil & Gas Report Q3 2017

Glossary

Table: Glossary of Terms

AOR additional oil recovery KCTS Kazakh Caspian Transport System

APA awards for predefined areas km kilometres

API American Petroleum Institute LAB linear alkyl benzene

bbl barrel LDPE low density polypropylene

bcm billion cubic metres LNG liquefied natural gas

b/d barrels per day LPG liquefied petroleum gas

bn billion m metres

boe barrels of oil equivalent mcm thousand cubic metres

BTC Baku-Tbilisi-Ceyhan Pipeline Mcm mn cubic metres

BTU British thermal unit MEA Middle East and Africa

Capex capital expenditure mn million

CBM coal bed methane MoU memorandum of understanding

CEE Central and Eastern Europe mt metric tonne

CPC Caspian Pipeline Consortium MW megawatts

CSG coal seam gas na not available/ applicable

DoE US Department of Energy NGL natural gas liquids

EBRD European Bank for Reconstruction &Development NOC national oil company

EEZ exclusive economic zone OECD Organisation for Economic Cooperation & Development

e/f estimate/forecast OPEC Organization of the Petroleum Exporting Countries

EIA US Energy Information Administration PE polyethylene

EM emerging markets PP polypropylene

EOR enhanced oil recovery PSA production sharing agreement

E&P exploration and production PSC production sharing contract

EPSA exploration and production sharingagreement q-o-q quarter-on-quarter

FID final investment decision R&D research and development

FDI foreign direct investment R/P reserves/production

FEED front end engineering and design RPR reserves to production ratio

FPSO floating production, storage and offloading SGI strategic gas initiative

FTA free trade agreement SoI statement of intent

FTZ free trade zone SPA sale and purchase agreement

GDP gross domestic product SPR strategic petroleum reserve

Saudi Arabia Oil & Gas Report Q3 2017

Glossary of Terms - Continued

AOR additional oil recovery KCTS Kazakh Caspian Transport System

G&G geological and geophysical t/d tonnes per day

GoM Gulf of Mexico tcm trillion cubic metres

GS geological survey toe tonnes of oil equivalent

GTL gas-to-liquids conversion tpa tonnes per annum

GW gigawatts TRIPS Trade-Related Aspects of IntellectualProperty Rights

GWh gigawatt hours trn trillion

HDPE high density polyethylene T&T Trinidad & Tobago

HoA heads of agreement TTPC Trans-Tunisian Pipeline Company

IEA International Energy Agency TWh terawatt hours

IGCC integrated gasification combined cycle UAE United Arab Emirates

IOC international oil company USGS US Geological Survey

IPI Iran-Pakistan-India Pipeline WAGP West African Gas Pipeline

IPO initial public offering WIPO World Intellectual Property Organization

JOC joint operating company WTI West Texas Intermediate

JPDA joint petroleum development area WTO World Trade Organization

Source: BMI

Saudi Arabia Oil & Gas Report Q3 2017

Methodology

Industry Forecast Methodology

BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and

causal/econometric modelling. The precise form of model we use varies from industry to industry, in each

case being determined, as per standard practice, by the prevailing features of the industry data being

examined.

Common to our analysis of every industry is the use of vector autoregressions. Vector autoregressions allow

us to forecast a variable using more than the variable's own history as explanatory information. For

example, when forecasting oil prices, we can include information about oil consumption, supply and

capacity.

When forecasting for some of our industry sub-component variables, however, using a variable's own

history is often the most desirable method of analysis. Such single-variable analysis is called univariate

modelling. We use the most common and versatile form of univariate models: the autoregressive moving

average model (ARMA).

In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality

is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for

analysis and forecasting.

BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use

of objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple

non-linear models, such as the log-linear model, are used when necessary. During periods of 'industry

shock', for example poor weather conditions impeding agricultural output, dummy variables are used to

determine the level of impact.

Effective forecasting depends on appropriately selected regression models. BMI selects the best model

according to various different criteria and tests, including but not exclusive to:

■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account;

■ Testing the directional movement and magnitude of coefficients;

■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value);

■ All results are assessed to alleviate issues related to auto-correlation and multi-collinearity.

Saudi Arabia Oil & Gas Report Q3 2017

BMI uses the selected best model to perform forecasting.

Human intervention plays a necessary and desirable role in all of BMI's industry forecasting. Experience,

expertise and knowledge of industry data and trends ensure that analysts spot structural breaks, anomalous

data, turning points and seasonal features where a purely mechanical forecasting process would not.

Sector-Specific Methodology

There are a number of principal criteria that drive our forecasts for each energy indicator.

Energy Supply

This covers the supply of crude oil, natural gas, refined oil products and electrical power, which is

determined largely by investment levels, available capacity, plant utilisation rates and national policy. We

therefore examine:

■ National energy policy, stated output goals and investment levels;

■ Company-specific capacity data, output targets and capital expenditures, using national, regional and multinational company sources;

■ International quotas, guidelines and projections from organisations such as OPEC, the International Energy Agency (IEA), and the US Energy Information Administration (EIA).

Energy Consumption

A mixture of methods is used to generate demand forecasts, applied as appropriate to each individual

country:

■ Underlying economic (GDP) growth for individual countries/regions, sourced from BMI published estimates;

■ Historic relationships between GDP growth and energy demand growth in an individual country are analysed and used as the basis for predicting levels of consumption;

■ Government projections for oil, gas and electricity demand;

■ Third-party agency projections for regional demand, from organisations such as the IEA, EIA and OPEC;

Extrapolation of capacity expansion forecasts based on company- or state-specific investment levels.

Saudi Arabia Oil & Gas Report Q3 2017

Cross Checks

Whenever possible, we compare government and/or third-party agency projections with the declared

spending and capacity expansion plans of the companies operating in each individual country. Where there

are discrepancies, we use company-specific data as physical spending patterns to determine capacity and

supply capability. Similarly, we compare capacity expansion plans and demand projections to check the

energy balance of each country. Where the data suggest imports or exports, we check that necessary

capacity exists or that the required investment in infrastructure is taking place.

Source

Sources include those international bodies mentioned above, such as OPEC, IEA, and EIA, as well as local

energy ministries, official company information, and international and national news, plus international and

national news agencies.

Upstream Risk/Reward Methodology

Our Upstream Oil & Gas Risk/Reward Index (RRI) quantifies and ranks a country's attractiveness within

the context of the oil industry, based on the balance between the risks and rewards of entering and

operating in different countries.

We combine industry-specific characteristics with broader economic, political and operational market

characteristics. We weight these inputs in terms of their importance to investor decision making in a given

industry. The result is a nuanced and accurate reflection of the realities facing investors in terms of: 1) the

balance between opportunities and risk; and 2) between sector-specific and broader market traits. This

enables users of the index to assess a market's attractiveness in a regional and global context.

The index combines our proprietary forecasts and analyst assessment of the regulatory regime. As

regulations and forecasts change, so the index scores change providing a highly dynamic and forward-

looking result.

The Upstream Oil & Gas Risk Reward Index comprises 87 countries.

Benefits of using BMI's Upstream Oil & Gas RRI

■ Global Rankings: A global table, ranking all the countries for upstream oil & gas from least (closest to zero) to most (closest to 100) attractive.

Saudi Arabia Oil & Gas Report Q3 2017

■ Accessibility: Easily accessible, top down view of the global, regional or sub-regional Risk/Reward profiles.

■ Comparability: Identical methodology across 87 countries for oil and gas allows users to build lists of countries they wish to compare, beyond the confines of a global or regional grouping.

■ Scoring: Scores out of 100 with a wide distribution, provide nuanced investment comparisons. The higher the score, the more favourable the country profile.

■ Quantifiable: Quantifies the rewards and risks of doing business in the upstream sector in different countries around the world and helps identify specific flashpoints in the overall business environment.

■ Comprehensive: Comprehensive set of indicators, assessing industry-specific risks and rewards alongside political, economic and operating risks.

■ Entry Point: A starting point to assess the outlook for the upstream oil & gas sector, from which users can access more granular forecasts and analysis to gain a deeper understanding of the market.

■ Balanced: Multi-indicator structure prevents outliers and extremes from distorting final scores and rankings.

■ Methodology is a combination of proprietary BMI forecasts, analyst insights and globally acceptable benchmark indicators (for example, World Bank's Doing Business Scores, Transparency International's Corruption Perceptions Index).

Weightings of Categories And Indicators

Upstream Risk Reward Index

Source: BMI

Saudi Arabia Oil & Gas Report Q3 2017

The upstream RRI matrix divides into two distinct categories:

Rewards:

Evaluation of an Industry's size and growth potential (Industry Rewards), and also macro industry and/or

country characteristics that directly impact the size of business opportunities in a specific sector (Country

Rewards).

Risks:

Evaluation of micro, industry-specific characteristics, crucial for an industry to develop to its

potential (Industry Risks) and a quantifiable assessment of the country's political, economic and

operational profile (Country Risks).

Assessing our Weightings:

Our matrix is deliberately overweight on Rewards (70% of the final RRI score for upstream markets) and

within that, the Industry Rewards segment (60% of final Rewards score). This is to reflect the fact that when

it comes to long term investment potential, industry size and growth potential carry the most weight in

indicating opportunities, with other structural factors (demand outlooks and infrastructure integrity)

weighing in, but to a slightly lesser extent. In addition, our focus and expertise in Emerging and Frontier

Markets has dictated this bias towards industry size and growth to ensure we are able to identify

opportunities in countries where regulatory frameworks are not as developed and industry sizes not as big

(in USD terms) as in developed markets, but where we know there is a strong desire to invest.

Saudi Arabia Oil & Gas Report Q3 2017

Table: Indicators - Explanation And Sources - Upstream RRI

Indicator Source Rationale

Rewards

Industry Rewards

Oil Reserves (bn bbl) BMI data Indicates size of the opportunity for oil developments

Gas Reserves (bcm) BMI data Indicates size of the opportunity for gas developments

Discoveries Rate - last FIVE years BMI Calculation Outlines the prospectivity and potential of the upstream

Hydrocarbon Production (boe) BMI forecast Five-year forward looking indication of production volumes

Hydrocarbon Production Growth (boe, %)

BMI forecast Five-year forward looking indication of production growth

Country Rewards

State Asset Ownership (%) BMI Calculation Demonstrates the potential access and restrictions to resources

Competitive Landscape BMI Calculation Divides resource base by the approximate number of companies operating to indicate the level of competition.

Infrastructure Integrity BMI Calculation Calculates the extent and quality of oil and gas infrastructure, indicating ease of access and level of maintenance investment needed.

Risks

Industry Risks

Licence Type BMI Calculation Outlines a country score based on whether oil and gas licenses are offered as concessions, production sharing agreements or service contracts.

Income Tax Government Source Outlines the relative tax rate incurred by oil and gas companies.

Royalties & Special Taxes Government Source Indicates further required payments (and supplementary taxes) beyond income tax.

Bureaucratic Environment BMI Operational Risk Score

Outlines the ease of business processes, with a particular emphasis on mitigating the risk of delay to project timelines.

Legal Environment Risk BMI Operational Risk Score

A second ease of business indicator, highlighting potential challenges with the transparency and effectiveness of rule of law.

Country Risks

Long-Term Economic Risk Index BMI Country Risk Index The LT ERI takes into account the structural characteristics of economic growth, the labour market, price stability, exchange rate stability and the sustainability of the balance of payments, as well as fiscal and external debt outlooks for the coming decade.

Short-Term Economic Risk Index BMI Country Risk Index The ST ERI seeks to define current vulnerabilities and assess real GDP growth, inflation, unemployment, exchange rate fluctuation, balance of payments dynamics, as well as fiscal and external debt credentials over the coming two years

Saudi Arabia Oil & Gas Report Q3 2017

Indicators - Explanation And Sources - Upstream RRI - Continued

Indicator Source Rationale

Long-Term Political Risk Index BMI Country Risk Index The LT PRI assesses a country's structural political characteristics based on our assumption that liberal, democratic states with no sectarian tensions and broad-based income equality exhibit the strongest characteristics in favour of political stability, over a multiyear timeframe.

Short-term Political Risk Index BMI Country Risk Index The ST PRI assesses pertinent political risks to investment climate stability over a shorter time frame, up to 24 months forward.

Operational Risk Index BMI Operational Risk Index

The ORI focuses on existing conditions relating to four main risk areas: Labour Market, Trade and Investment, Logistics, and Crime and Security.

Source: BMI

Downstream Risk/Reward Methodology

Our Downstream Oil & Gas Risk/Reward Index (RRI) quantifies and ranks a country's attractiveness within

the context of the downstream industry, based on the balance between the risks and rewards of entering

and operating in different countries.

We combine industry-specific characteristics with broader economic, political and operational market

characteristics. We weight these inputs in terms of their importance to investor decision making in a given

industry. The result is a nuanced and accurate reflection of the realities facing investors in terms of: 1) the

balance between opportunities and risk; and 2) between sector-specific and broader market traits. This

enables users of the index to assess a market's attractiveness in a regional and global context.

The index combines our proprietary forecasts and analyst assessment of the regulatory regime. As

regulations and forecasts change, so the Index scores change providing a highly dynamic and forward-

looking result.

The Downstream Oil & Gas Risk/Reward Index comprises 87 countries.

Benefits of using BMI's Downstream Oil & Gas RRI

■ Global Rankings: A global table, ranking all the countries for downstream from least (closest to zero) to most (closest to 100) attractive.

Saudi Arabia Oil & Gas Report Q3 2017

■ Accessibility: Easily accessible, top down view of the global, regional or sub-regional Risk/Reward profiles.

■ Comparability: Identical methodology across 87 countries for downstream oil allows users to build lists of countries they wish to compare, beyond the confines of a global or regional grouping.

■ Scoring: Scores out of 100 with a wide distribution, provide nuanced investment comparisons. The higher the score, the more favourable the country profile.

■ Quantifiable: Quantifies the rewards and risks of doing business in the downstream sector in different countries and helps identify specific flashpoints in the overall business environment.

■ Comprehensive: Comprehensive set of indicators, assessing industry-specific risks and rewards alongside political, economic and operating risks.

■ Entry Point: A starting point to assess the outlook for the downstream sector, from which users can access more granular forecasts and analysis to gain a deeper understanding of the market.

■ Balanced: Multi-indicator structure prevents outliers and extremes from distorting final scores and rankings.

Weightings of Categories And Indicators

Downstream Risk Reward Index

Source: BMI

Saudi Arabia Oil & Gas Report Q3 2017

The downstream RRI matrix divides into two distinct categories:

Rewards:

Evaluation of an industry's size and growth potential (Industry Rewards), and also macro industry and/or

country characteristics that directly impact the size of business opportunities in a specific sector (Country

Rewards).

Risks:

Evaluation of micro, industry-specific characteristics, crucial for an industry to develop to its

potential (Industry Risks) and a quantifiable assessment of the country's political, economic and

operational profile (Country Risks).

Assessing our Weightings:

Our matrix is deliberately overweight on Rewards (60% of the final RRI score for a market) and within that,

the Industry Rewards segment (60% of final Rewards score). This is to reflect the fact that when it comes to

long-term investment potential, industry size and growth potential carry the most weight in indicating

opportunities, with other structural factors (demographic, labour statistics and infrastructure availability)

weighing in, but to a slightly lesser extent. In addition, our focus and expertise in Emerging and Frontier

Markets has dictated this bias towards industry size and growth to ensure we are able to identify

opportunities in countries where regulatory frameworks are not as developed and industry sizes not as big

(in USD terms) as in developed markets, but where we know there is a strong desire to invest.

Saudi Arabia Oil & Gas Report Q3 2017

Table: Indicators - Explanation And Sources - Downstream RRI

Indicator Source Rationale

Rewards

Industry Rewards

Refining Capacity ('000b/d) - five-year average

BMI Forecast Quantifies the current size of the refining sector as a comparison to peer markets

Utilisation Rates (%) - five-year average BMI Calculation Outlines the efficiency of the existing facilities, identifying over or under capacity

Domestic Fuels demand ('000b/d) - five-year average

BMI Forecast Shows the size of the domestic market demand as a comparison to peer markets

Fuel Demand (% Growth) - five-year average BMI Forecast Indentifies the domestic demand opportunity and trend in consumption patterns

Regional Fuel Demand - five-year average BMI Forecast Shows the regional export market size to represent the opportunity for exports

Life Span of Infrastructure BMI Calculation Approximate calculation of the life span of infrastructure to identify the need remaining operating life

Theoretical Net Crude Exports ('000b/d) - five year average

BMI Calculation Identifies spare capacity of domestic oil supply as a potential feedstock

Country Rewards

State asset ownership (%) BMI Calculation Indicates how much of the given market is open for private investment

Infrastructure Integrity BMI Calculation A metric used to identify the level of maintenance, upgrade and modernisation required in each market

Risks

Industry Risks

Logistics Risk Rating BMI Operational Risk Index

Offers a comparative indicator on ease of transport for feedstock supply, fuels distribution and import/export flexibility.

Fuel Subsidies BMI Calculation Penalizes a market's score if fuels prices are sold at below market costs.

Country Risks

Long-Term Political Risk Index BMI Country Risk Index The LT PRI assesses a country's structural political characteristics based on our assumption that liberal, democratic states with

Saudi Arabia Oil & Gas Report Q3 2017

Indicators - Explanation And Sources - Downstream RRI - Continued

Indicator Source Rationale no sectarian tensions and broad-based income equality exhibit the strongest characteristics in favour of political stability, over a multiyear timeframe.

Short-Term Political Risk Index BMI Country Risk Index The ST PRI assesses pertinent political risks to investment climate stability over a shorter time frame, up to 24 months forward.

Operational Risk Index BMI Operational Risk Index

The ORI focuses on existing conditions relating to four main risk areas: Labour Market, Trade and Investment, Logistics, and Crime and Security.

Source: BMI

Saudi Arabia Oil & Gas Report Q3 2017

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