Worldwide Demand for Crude Oil & Refined Products: Refinery Business Objectives: Fundamental Qualities of Oil:

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1 6HFWLRQ )DFWRUV'ULYLQJ &UXGH2LO3ULFHV +RZWKH)DFWRUV $IIHFW&KDG V 3ULFHV &RQWH[W0DUNHWLQJ&KDG V2LO T he Project has now shipped over 50 million barrels of Chadian crude oil to market and the results so far have been positive due to the timing of Chad s entry into the world oil market. World market conditions have driven crude oil prices to unusually high levels, beginning in the fourth quarter of 2003 when the first oil was shipped and continuing into the fourth quarter of Total revenue for Chad so far has been higher than anticipated by some revenue estimates during the Project s planning phase. (For more information on total Project oil shipments and revenue, see the section on Construction & Commissioning.) However, based on the fundamental quality characteristics of the Chadian Doba Blend crude oil, it is clear that oil from the Project will not be bringing in the very top prices garnered by lighter competing crude oils such as the widely reported benchmark pricing for the high quality Brent crude. To understand how Chadian oil is valued against competing crude oils in the world marketplace, it is important to understand three basic factors that drive crude oil prices. Worldwide Demand for Crude Oil & Refined Products: The price for crude oil in the world markets fluctuates constantly based on supply and demand for refined products such as gasoline, jet fuel, disesel, and chemical feed stocks. This balance between supply and demand for refined products in turn drives the price of crude oil, which rises when demand for refined products is high. Refinery Business Objectives: Refineries seek crude oil that can be processed through their facilities at the most efficient rate in order to minimize their operating costs. Therefore, lighter crude oil commands a better price than heavy crude oil since it costs more for a refinery to process high value products from heavy crude oil. Fundamental Qualities of Oil: Refineries look for crude oil that can be processed through their facilities at the least expense. For example, crude oils that contain impurities such as calcium or acid are more costly to refine. Some refineries do not have the capability to process crude with high levels of certain impurities. Although the total effect has been to significantly increase the price of Chad s Doba Blend oil, each of these three basic factors plays out differently, in some cases working to boost the price and in others holding it down.

2 &RQVRUWLXP 0DUNHWLQJ'XWLHV Worldwide Demand Very High for Light Refined Products: In the last year the benchmark Brent crude oil has been trading at more than double its historic average price. In these high demand market conditions, the price received for Chad s oil has also risen. The high prices have resulted in first year royalty revenue for Chad that exceeds the projections for annual revenue made by the World Bank during the Project s planning phase. This additional revenue has come to Chad even during the relatively low volume startup year, before the Project has reached its planned peak volume levels. Peak sales volumes on the Project will reach an average of 225,000 barrels per day, compared to the first year daily average of only 140,000 barrels. Chad Crude Yields Smaller Amount of High Value Products: Although world oil prices have increased, Chad s oil is a heavy oil which is inherently more expensive to process for high value products. Without sophisticated equipment, a refinery can only turn about one-fourth of a barrel of Chad s Doba Blend oil into high value light products such as gasoline, jet fuel, and diesel. By contrast, even without the sophisticated equipment, at least two-thirds of a Brent barrel of crude oil can be refined into these high demand products. In these market conditions, the demand for light products, such as gasoline, has risen much more than the demand for heavier fuel oil, which is the primary product yielded by a barrel of Doba Blend processed without sophisticated equipment. Thus, the price differential has widened between Brent crude and Chadian Doba Blend crude. Impurities Lower Price of Chad Crude: In addition to being a heavy, viscous oil, Chad s Doba Blend crude oil is high in calcium and acid. These impurities decrease the price that refineries are willing to pay for Doba Blend compared to competing oils around the world. The high levels of calcium and acid require a refinery to dilute the Chadian oil with other crude oils when processing, increasing refinery operating costs, and thus reducing the appeal of Chadian oil. In addition, the high viscosity of Chad s oil also makes it more expensive to process. However, Chad s oil has a low amount of one impurity, sulfur, and that could help improve its price in the future as market conditions evolve. Early Shipments Commanded Relatively Higher Prices: These factors played to the benefit of Chad and the Project early in the first year of crude oil shipments. Although the Project must ship from all three fields in order to achieve full volume, during the initial startup it shipped only from one of the three fields, the Miandoum field. Miandoum contains the lightest oil of the three and thus, during the early shipments, the Chadian oil was temporarily commanding somewhat higher prices than for the actual Doba Blend oil that will be shipping for the remaining decades of the Project s life. As a condition of the partnership between the Project and Chad, each of the Consortium members has the responsibility to market its share of the crude oil shipped to market. Each of the three companies has a trading group of market experts who sell the oil to refineries and fuel oil blenders. They make sales weeks in advance in order to ensure uninterrupted production by keeping a steady flow

3 2YHUDOO2XWORRN of tankers arriving at the marine terminal. Consortium members have so far sold Chadian oil into markets such as the United States Gulf Coast, South Korea, India, China, and the Bahamas. It is important to note that each Consortium member has its own refineries. Therefore, safeguards have been built into the agreements to make sure that the Consortium members cannot take advantage of that situation by selling to their own refineries at below market prices. To guard against that potential, sales to non-consortium refineries are used to calculate the average price per quarter. This quarterly average market price is then submitted to Chad s Ministry of Petroleum for approval and used in the calculation of Chad s royalties. It would be impossible to predict whether Chad s higher than expected revenue levels will continue into the future. The revenue boost has been driven by unusually high oil prices based on worldwide crude oil market conditions. Those conditions could change at any time with changes in supply and demand, which are heavily influenced by such volatile circumstances as wars and other geopolitical events. However, one factor that will affect Chad s future total revenue is the volume of oil shipped to market. Chad s production volume has been steadily increasing over the last year and the Project anticipates reaching full production levels in the near future. In addition, as described in this and previous Quarterly Reports, the Consortium has been studying the potential development of additional new oil resources. If those new developments come to fruition they will help extend the number of years that production can continue at full capacity. Chad s oil begins the final leg of its journey to world markets here, at the Project s marine terminal off the shore of Cameroon. The crude oil is processed at Komé, Chad, removing water and sediment to meet world crude oil marketing requirements. Pumps then send the oil 1,070 kilometers through a buried pipeline to coastal Cameroon. The Project s Floating Storage and Offloading vessel (left) loads the oil onto export tankers like this one (right).

4 Export tankers tie up to the marine terminal and take on shipments of crude oil. The buyer of the crude oil agrees to pay based on a computerized custody transfer meter that measures the exact amount of oil actually loaded onto the export tanker and thus sent to market. The measurements are double checked by officials from Chad and Cameroon who are stationed on the vessel to supervise before-and-after physical measurements of oil levels in the tanks of the Floating Storage and Offloading vessel. Refineries buy crude oil as a raw material and then turn it into salable products. Unrefined crude oil cannot power a car or truck, make a jet fly, or pave a road. Crude oil therefore does not achieve its ultimate value until it has been turned into products such as gasoline, jet fuel, diesel, lubricating oils and greases, raw materials for chemical factories, and asphalt.

5 Two-Thirds High Value Light Products One-Fourth High Value Light Products North Sea Brent Chadian Doba Blend Crude Oil Crude Oil Not all crude oils are alike. The benchmark high quality Brent crude oil is a light crude, which means it contains a high proportion of extremely valuable products such as gasoline, jet fuel, and diesel. Twothirds of Brent crude can be efficiently refined into these high value products without sophisticated equipment. Compared to light crude oils, the Doba Blend heavy crude oil from Chad contains far fewer high value products. Less than one-fourth of Chad s crude oil can be turned into the most valuable refinery products. The heavier crude oil components are refined into lower value products (e.g., asphalt, bunker oil, etc.). Thus, Doba Blend oil commands a lower price in the world marketplace. (Figures based on raw assay yields.) 3 7UDFNLQJWKH5LVLQJ3ULFHRI&UXGH2LO86'ROODUVSHU%DUUHO Price/Barrel in U.S. Dollars $20.79 = Brent Historic Average ( Present) 4Q2003 1Q2004 2Q2004 3Q2004 When world oil prices rise, most oil prices are pulled higher than historic averages, even prices for heavy crudes. However, when oil is more costly the refineries focus efforts on crude oil containing higher demand products crude oil such as the benchmark Brent crude that yields a very high percentage of light, high value products such as gasoline and jet fuel. Thus, periods of high crude oil prices tend to increase the difference in market prices between light and heavy crude, as refineries tend to choose light crude over heavy crude. This market behavior is shown in the graph, since Chad s first shipments of crude oil were from only one of the three oilfields, a field that produces a lighter crude. However, the Doba Blend price fell well below Brent because the blend is heavier than the initial crude oil shipments from the single field. Refineries pay less for crude oil that contains high levels of acid and calcium, impurities that drive up refinery operating costs and limit refinery production rates. However, Chad s oil has a low sulfur content, which could help improve its appeal to refiners in future market conditions. Brent Doba Blend Dated Brent prices as quoted in Platt s. Doba Blend prices FOB Cameroon Doba Blend prices pending Ministry approval.

6 In addition to world market forces and the fundamental qualities of Chad s oil, another factor drives the total revenue from the Project the quantity of oil actually shipped to market. Drilling teams like this one have been working in southern Chad to increase the quantity of oil produced by the Project to its planned daily average of 225,000 barrels per day. However, this has been a startup year and full production has not yet been achieved. During the first year of oil shipments the average daily crude oil sales volume was 140,000 barrels per day, about two-thirds of the planned peak sales volume. Even so, unprecedented high global oil prices have worked to the benefit of Chad. Royalties paid to Chad for the relatively low volume start up year totaled $109 million at the end of the third quarter, more money than originally predicted even for a full volume year.