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THE GEOPOLITICS OF ENERGY

The likelihood of a significant price fluctuation in oil and gas over the next six months due to geopolitical events is low,
claim some 40 energy and geopolitical analysts from around the world who participated in a crowd-based analytic
exercise conducted by Wikistrat early this month.

Wikistrat’s experts predict that markets can expect movement in the range of $40–50 per barrel of crude oil for the
remainder of 2015. Even in case of significant geopolitical events, prices are unlikely to move higher than $60 per
barrel, due to present inventories which are at levels not seen in at least 80 years, generally weak demand and OPEC’s
apparent willingness to maintain production in the face of resilient non-OPEC supply.

Despite this assessment, monitoring these events will allow both the private and public sector to generate strategic and
operational early warning should oil prices exceed the $40–50 range.

Among more than 55 geopolitical scenarios generated by our analysts, three of them were identified as the most likely
to generate short-term price instability: social unrest in Venezuela, the ongoing conflict over Ukraine, and the potential
for political turmoil in Algeria.

SCENARIO LIKELIHOOD/ BOTTOM LINE FOR INVESTORS

Social unrest in Venezuela leads to massive
social strikes and violent clashes.
IMPACT
High Likelihood/ • Declining social and economic conditions might push
Low Impact Venezuela to sell assets more aggressively, particularly its
refineries in Europe and Citgo Petroleum (Venezuela’s U.S.
refining unit), currently valued at more than $10 billion.
• In addition, Venezuela’s Latin American competitors –
such as Bolivia and Peru in natural gas, and Colombia
and Brazil in oil – might see some gains if they can move
quickly to secure market share.

The ongoing conflict over Ukraine continues to
intensify, leading the EU to moderately extend
the scope of existing sanctions.
Medium Likelihood/ • Sanctions will continue to have a long-term impact on
Medium Impact investment in Russian oil and gas fields, particularly in
the Arctic. However, Gazprom’s pricing policies and some
evidence of European stockpiling mean gas prices are
likely to remain low even into the winter months.

Algerian President Abdelaziz Bouteflika’s
deteriorating health and eventual death
throws one of the largest oil and gas exporters
to Europe into a cycle of violence between
recently ousted military elites, discontented
masses and powerful business interests.
Low Likelihood/ • If Algeria descends into chaos, Russia is likely to benefit
High Impact since it is the most likely substitute for Algerian liquefied
natural gas, particularly as EU demand increases during
the winter months. Qatar is also likely to see an opportunity
to increase its liquefied natural gas exports.
• The situation could also pose a significant cost to companies
already invested in the country, such as BP, Norway’s
Statoil, Sonatrach and Hess Corp.
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SCENARIOS

SCENARIO I:
VENEZUELA FALLS INTO CHAOS – AN OPPORTUNITY FOR INVESTORS?
Venezuela’s economy is in shambles. Depressed oil prices have eaten up its foreign exchange reserves, inflation is running
at 120 percent, health and social services continue to deteriorate, criminal and police violence is increasing, there is
periodic rioting and looting, and corruption remains rampant. President Nicolas Maduro’s approval rating is at record
lows and it has banned much of the opposition from participating in December’s upcoming parliamentary elections.

Our analysts estimate that even if civil unrest leads to massive social strikes and violent clashes, it is unlikely that
Venezuelan oil will go completely off the market. Production could drop from the current rate of 2.5 million barrels
per day to an erratic 0.5–1.0 million barrels per day over the coming months, primarily impacting exports to the United
States and China. However, historically high volumes of crude in storage across the globe are capable of offsetting such
short-term shocks.

Bottom Line for Investors: The likelihood of the situation in Venezuela deteriorating is rated as high. However, the
market has sufficient oversupply that the impact of such a deterioration on global prices is likely to be low. Declining
social and economic conditions might push Venezuela to move more aggressively to sell assets – particularly its refineries
in Europe and Citgo Petroleum (Venezuela’s U.S. refining unit), currently valued at more than $10 billion. This would
offer an opportunity for those who are willing to take the risk and buy those assets below market price to gain over the
long term. In addition, Venezuela’s Latin American competitors – such as Bolivia and Peru in natural gas, and Colombia
and Brazil in oil – might see some gains if they are able to move quickly to secure market share.

SCENARIO II:
RUSSIA ESCALATES CONFLICT IN UKRAINE; EU EXTENDS SCOPE OF SANCTIONS, MARKET
PRICES LARGELY UNAFFECTED
Conflict over Ukraine will continue and may intensify over the next six months, complicating the EU-Russia relationship,
increasing tensions and leading the EU to moderately extend the scope of existing sanctions. Nevertheless, the Ukrainian
conflict is unlikely to lead to an outright ban on Russian oil and gas imports due to the trade dynamics between
Europe and Russia.

To put it simply: Russia is too big, scary and crucial to European energy supplies for Brussels to issue such a ban.
Europe may be moving to reduce Russian leverage by stockpiling supply (Russian gas sales to the EU reached record
highs in July); however, with Russia continuing to supply Europe with more than 30 percent of its crude and natural gas
needs and Russia remaining dependent on Europe as its primary export market, it is unlikely that either side will take
the risk of instituting an embargo.

Bottom Line for Investors: Sanctions will continue to have a long-term impact on investment in Russian oil and gas
fields, particularly in the Arctic. However, Gazprom pricing policies and some evidence of European stockpiling mean
that gas prices are likely to remain low even into the winter months. Over the long run, additional sanctions could
eventually impact production. This would cause global oil prices to rise progressively as Russian production
drops, especially as Russia remains dependent on Western exploration and production firms to support drilling and
other routine activities in the aging western Siberian and other workhorse production fields.

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SCENARIO III:
DISAPPEARANCE OF ALGERIAN PRESIDENT LEADS TO A POWER STRUGGLE
Recent developments in Algeria may be overlooked by the market at present. Algeria is Europe’s third-largest gas
supplier (it produces 80 million cubic meters of gas per year) after Russia and Norway; it is the 18th largest oil producer
(1.5 million barrels per day) in the world and the second largest in Africa. Algerian President Abdelaziz Bouteflika’s
deteriorating health and eventual death could throw one of the largest oil and gas exporters to Europe into a cycle of
violence between recently ousted military elites, discontented masses and powerful business interests.

Should a power vacuum develop, Algeria’s state-owned energy sector could grind to a halt, effectively being held hostage
to violent demonstrations and civil unrest. Adding fuel to the fire is the recent collapse in the price of oil, which has
already put Algeria’s economy into decline, given that 60 percent of the government budget and 97 percent of export
earnings are dependent on oil and gas.

Bottom Line for Investors: If Algeria descends into chaos, Russia is likely to benefit since it is the most likely substitute
for Algerian liquefied natural gas as EU demand increases during the winter months. Qatar is also likely to see an
opportunity to increase its liquefied natural gas exports. On the losing side, an escalation in the security situation in
Algeria would also pose a significant cost to companies are already invested in the country – such as BP, Norway’s
Statoil, Sonatrach and Hess Corp.