Oil Price Outlook

Alaska Permanent Fund Corporation – Energy Forum

Duncan Mathieson, CFA Managing Director Head of Canadian Equities

Not intended for redistribution. For important additional information, please see the additional disclosures at the end of the presentation

24 September 2007

Oil Price Outlook ♦ Topics to Discuss: – UBS Global Asset Management Outlook – Supply Issues: – Is the world running out of oil? – OPEC & Non-OPEC Supply outlook – Demand Issues: – Revisiting 2004 — demand shock – Breakdown of demand profile — OECD vs Non-OECD – Price elasticity of demand – Global Spare Capacity – Oil Inventories vs. Oil Prices — A Disconnect – Investment Opportunities

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Oil Price Outlook ♦ Fundamental Macro Assumptions:

– We believe that over the long term Global Oil Markets are governed by laws of supply and demand. – We believe that producers of oil are economically rational in their behaviour and seek to maximize wealth from reserves.

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UBS Global Asset Management Outlook Long term WTI crude oil price forecast 90 80

WTI Crude Oil (USD/barrel)

70 60 50

UBS forecasted price range

40 30 20 10 0 1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

WTI Crude Oil Price

♦ Our forecast calls for crude oil prices to decline from current levels. Over the next 5 years we expect prices to return to a range of $38 and $48 per barrel.

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Supply Issues “We are in a permanent decline and oil prices are headed to triple digit levels” Source: Jeff Rubin, Chief Economist CIBC, 2007

♦ Major headlines focus on hurricanes, oil field disruptions (accidents/labour), “Hubbert’s peak”, etc. and boldly conclude oil prices will continue to rise. ♦ Consider The Facts: – Between 1984 and 2006: – Worldwide annual production increased from 21 billion to 29.8 billion barrels. – Worldwide reserves rose 57% from 762 billion barrels to 1.2 trillion barrels. – Reserve Life (reserves/production) increased by 4 years to 40.5 years. – In the last 10 years: – Worldwide annual production increased by 4.8 billion barrels. – Worldwide reserves rose by 161 billion barrels. – Reserve Life has remained essentially flat. (excluding oil sands)

♦ Costs have increased, timeline between discovery date and development dates have lengthened, and many regions have increased economic rent which slows activity. YET SUPPLY CONTINUES TO KEEP PACE. Source: BP Statistical Review of World Energy, 2007

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Supply Issues: Non-OPEC Non-OPEC Supply is increasing Total Non-OPEC Production 54

Non-OPEC Avg Daily Production (million bbls/d)

♦ Major developments coming on stream 2007-2010 in the Caspian, West Africa, Brazil and Canada. ♦ Pace of non-OPEC supply additions is accelerating, NOT declining.

46

42

38

34

30

26 1972

1977

1982

1987

1992

1997

2002

2007

Non-OPEC Annual Production Capacity Increases 0.8

Non-OPEC Production Capacity Increase (million bbls/d)

♦ At high prices, there is a significant incentive to invest in new supply, but as projects become more capital intensive, it can take longer for capital to be allocated.

50

1.6% / year

0.7

0.6

0.5

0.4

0.3

0.2

0.5% / year

0.1

0 Average (1988-1998)

1988-1998

Average (1999-2006)

1999-2006 Source: IEA

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Supply Issues: Non-OPEC Annual Non-OPEC supply growth

Non-OPEC Supply Grow th YOY (million bbls/d)

2.50

2.00

1.50

1.00

0.50

0.00

-0.50

-1.00 1972

1976

1980

1984

1988

1992

1996

2000

2004

2008

♦ Hurricanes, oil field disruptions (accidents/labour) affected 2005 production. ♦ Production growth has been ramping up in 2005-2006, and 2008 non-OPEC supply growth is expected to grow at above-average levels historically. Source: ISI Group, IEA 2007 and 2008 figures are estimates 6

Supply Issues: Non-OPEC Non-OPEC Supply vs Global Demand Forecast 3.5

Growth YOY (million bbls/d)

3.0

2.5

2.0

1.5

1.0

0.5

0.0 2000

2001

2002

2003

2004

Global Supply Excluding OPEC Crude

2005

2006

2007E

2008E

World Crude Oil Demand

♦ We are seeing a rebound in non-OPEC supply post-2005. ♦ Even considering the IEA aggressive demand growth forecasts, non-OPEC production growth is expected to meet the bulk of world demand growth in 2008. Under a weaker demand scenario, the call on OPEC is expected to decline in 2008. Source: IEA 7

Supply Issues: OPEC OPEC capacity is set to expand over the next 5-6 years 14

Produc tion Mbpd

12 10 8 6 4 2 0 2005

2006E

2007E

2008E

2009E

2010E

2011E

Saudi Arabia

UAE

Qatar

Nigeria

Iran

Indonesia

Algeria

Risked forecast

2012E

Kuw ait

♦ Even assuming delays to planned projects, capacity is set to expand by as much as 7 million barrels per day. Source: IEA, Bloomberg, Bernstein 8

Supply Issues: OPEC Saudi investment in new capacity is unprecedented with a 3 fold increase in drilling 120

Saudi Annual Average Rig Count

103 100

80 64 60

40 21 22 22

25

29 29

26

22 21 16

20

11

16 6 5 4 5

31 32 32 32

26 28

37

25 20

17 17 17

10

2007E

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

0

♦ OPEC has not had to aggressively invest in incremental capacity additions until recently. The cartel was reluctant to expand capacity after the oil price crash of 1998-99 as OPEC’s efforts were focused on cutting output to push prices back up. ♦ Why would OPEC want lower prices? –

Excessively high prices encourage non-OPEC competition and destroy demand growth, ultimately lowering OPEC’s wealth.

Source: IEA, Bloomberg, Berstein 9

Demand Issues World Oil Demand: Revisiting 2004 — Demand Shock 4.0%

World Oil Demand Growth YOY (% )

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0% 2000

Source: IEA

2001

2002

2003

2004

2005

2006

2007E 2008E 2009E 2010E 2011E 2012E

♦ In 2004, strong global GDP growth of 5.3% caused a record spike in oil demand (+3.8%). While we foresee continued robust economic growth and strong oil demand growth, it is far below the record level seen in 2004. ♦ 2006 oil demand was less that half the originally expected rate. ♦ The IEA demand growth forecast may be overly optimistic. A price response is becoming evident. Also, the effect of the recent subprime turmoil on oil demand is as yet unknown. Source: IEA

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Demand Issues OECD Countries: OECD demand appears to be weakening, partially in response to prices. 1.2 1 0.8 0.6 0.4

-0.4

Q2/07

Q1/07

Q4/06

Q3/06

Q2/06

Q1/06

Q4/05

Q3/05

Q2/05

Q1/05

Q4/04

Q3/04

Q2/04

Q1/04

Q4/03

Q3/03

-0.2

Q2/03

0

Q3/07E

0.2 Q1/03

Year-over-year demand grow th (MB/ d)

1.4

-0.6 -0.8 Source: IEA

♦ Weak OECD demand during the past 9 quarters. We believe this is partially due to the impact of higher prices on demand.

♦ The OECD consumes ~60% of the world’s oil. The impact of conservation efforts should not be underestimated.

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Demand Issues Non-OECD Countries: Non-OECD demand growth remains robust, but below peak growth rates seen in 2004. 3 2.5 2 1.5 1 0.5

Q3/07E

Q2/07

Q1/07

Q4/06

Q3/06

Q2/06

Q1/06

Q4/05

Q3/05

Q2/05

Q1/05

Q4/04

Q3/04

Q2/04

Q1/04

Q4/03

Q3/03

Q2/03

0 Q1/03

Year-over-year demand grow th (MB/ d)

3.5

♦ Non-OECD countries (China, Middle East, India) are key drivers of world oil demand. We continue to expect robust demand growth, but below peak 2004 levels.

♦ Price subsidies in effect in many developing countries could delay a price response. Source: IEA 12

Demand Issues Prices and Demand — They are Related…Ultimately! ♦ Short-run demand is inelastic – Substitutes are not readily available – Production plants cannot change overnight – Some initial (but marginal) demand response from conservation beginning to appear.

♦ Long-run demand is elastic – Consumer response: – After 1970s price shocks, oil demand in the 1980s ended the decade about where it started, despite GDP & population growth – Demand response then driven by advent of energy efficient appliances, more efficient autos, increased house insulation, more efficient generation capacity, etc. – Price effect: – OECD price elasticity over the 30 years: -- A 1% change in oil price impacts demand by -0.4%. – GDP effect: – A 1% increase in GDP per capita increases oil consumption by 0.6% in developed countries and 0.9% in emerging markets.

Source: UBS Global Asset Management estimates 13

Global Spare Capacity

Effective spare capacity (MB/ d)

Demand shock of 2004 led to virtual elimination of spare capacity, but we are seeing a slow rebuild 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

♦ Global spare capacity declined from a comfortable level of 7% of demand in 2002 to <1% in 2004.

♦ Effective spare capacity remains lower than historic averages, but we expect the rebuild to continue, with over 4 MB/d of effective spare capacity by 2008 (over 5% of daily demand). Estimates of effective spare capacity exclude Venezuela, Indonesia, Nigeria and Iraq. As of August 2007. 2007 figures are estimates. Source: IEA 14

Global Spare Capacity IEA effective spare capacity estimates vs. oil prices

80 Most recent data, Sept. ‘07

Oil Price WTI $/bbl

70 60 50 40 30 20 1

2

3

4

5

IEA reported spare capacity (Mbpd)

6

7 Sources: IEA, OPEC, Bernstein

♦ Current level of spare capacity would suggest a lower oil price. ♦ Price changes may lag changes in spare capacity, meaning that the market may need to see concrete “proof” before prices begin to moderate From Jan 1990 – Aug 2007 using monthly data where WTI price is greater than $26 15

Oil inventories vs. oil prices — a disconnect US crude and product inventories vs. WTI crude oil

US Crude Oil Stocks (million barrels)

350.0

325.0

2000-2003 300.0

275.0

DATA includes all weekly plots from 1-31-2000 through 12-31-2003

2000 - 2003 250.0 $15.00

$25.00

$35.00

$45.00

$55.00

$65.00

$75.00

$85.00

Weekly WTI Crude Oil Price (USD/Barrel)

♦ Historically:

high inventories = low oil prices low inventories = high oil prices Source: US DOE 16

Oil inventories vs. oil prices — a disconnect US crude and product inventories vs. WTI crude oil

US Crude Oil Stocks (million barrels)

350.0

325.0

300.0

2004 to present 275.0

2000 - 2003

2004 - Present

250.0 $15.00

$25.00

$35.00

$45.00

$55.00

$65.00

$75.00

$85.00

Weekly WTI Crude Oil Price (USD/Barrel)

♦ What we see: Breakdown in historical relationship between inventories and prices as rising inventories since 2004 have not lowered prices.

♦ “Fear-based model”: Stocks build as prices rise. We saw a similar relationship during the oil price spikes of the 1978-80 period. Data as of Sept. 2007 Source: US DOE 17

Oil inventories US crude inventories are strong; but low product inventories have been providing support for crude prices US Major Product Stocks: Forward Demand Cover

US Crude Oil Stocks: Forward Demand Cover Days

Days

29

24 2006 2005

23

28 2006 27

22

5-Yr Average 2007

21

26

20

25

19

24

2007

5-Yr Average 5-Yr Range Shaded

18

23

2005 5-Yr Range Shaded

17

22 Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

♦ US crude oil inventories suggest we are well supplied. ♦ Low product inventories indicative of tightness in refining capacity rather than shortages in crude supply. Data as of Sept. 2007 Source: US DOE 18

Summary ♦ We believe the price/inventory relationship will ultimately revert to normal… but… only when OPEC spare capacity is rebuilt. ♦ There is a “fear premium” built into current oil prices, because OPEC’s effective spare capacity has narrowed. – Fears of lost productive capacity due to wars, weather, accidents, terrorism, nationalization . . . – Fears of a sustained period of higher than normal demand growth particularly from developing countries (China & India)

♦ Our analysis sees spare capacity increasing to 4-5 MM B/D over the next two years: – Increased OPEC and Non-OPEC production (between 20 and 30 new 75,000+barrel per day projects each year through 2010) adding up to 3 million barrels per day of net new capacity annually. – Slowdown in rate of demand growth is already beginning to appear. The IEA reduced its demand forecasts in 2006, and has begun to do so again in 2007. We believe demand forecasts of the major agencies are optimistic. – With capacity rebuilt, the fears may not subside but we believe the impact they will have on pricing will be diminished.

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Investing Opportunities: Canadian Oil Sands

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Canadian Oil Sands ♦ Oil Sands puts Canada in 2nd place in world oil reserves ranking, exceeded only by Saudi Arabia! World Oil Reserves

300

200 150

Oil Sands

100 50

U.S.A.

Nigeria

Libya

Russia

Venezuela

Iran

Kuwait

U.A.E.

Canada

Iraq

Conventional

0 Saudi Arabia

Billions of barrels

250

Source: Alberta Energy and Utilities Board, 2005 21

Canadian Oil Sands: The driver of growth Oil Sands + Frontiers = Growth Canadian Oil and Gas Product ion

Million boe/day

7.0

6.0

Synthetic Bitumen

5.0

East Coast

4.0

Natural Gas

3.0

2.0

Conventional Liquids

1.0

Convent ional Liquids

Nat ural Gas

East Coast

Bit umen

2008E

2007E

2006E

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

0.0

Synt het ic

♦ Companies seeking growth are primarily targeting oil sands, heavy oil and frontier regions. Source: National Energy Board of Canada 22

Canadian Oil Sands – Economics ♦ In our opinion, it is not unreasonable to expect production of upgraded synthetic oil to reach 4 million barrels per day by 2020. ♦ Oil sands are an attractive source of supply, although current activity in the oil sands region is staggering and causing significant cost inflation. ♦ We believe a portion of recent cost inflation is cyclical, reflecting current high levels of activity. ♦ The economics of Oil Sands developments remain robust even at $38-$48/bbl long term oil prices. (IRR = 11% - 18%) ♦ Challenge to sustain returns is control of costs. This includes construction and longer term operating costs.

Oil Sands Illustrative Economics Oil Price (US$) Capital Cost (US$ million) Project Life (Years) Peak Production (000 bbls/day) Operating Cost (US$/bbl)

40.00 6,800 30 110 16

60.00 6,800 30 110 18

Tax Rate (%)

34%

34%

Internal Rate of Return %

10.9

17.8

Source: UBS Global Asset Management and Canadian Natural Resources 23

Alaska Permanent Fund Corporation – Energy Forum

Duncan Mathieson, CFA Managing Director Head of Canadian Equities

Not intended for redistribution. For important additional information, please see the additional disclosures at the end of the presentation

24 September 2007

Duncan Mathieson, CFA Head of Canadian Equities Managing Director Years of investment industry experience: 25 Education: Queen’s University (Canada), BComm (Hons) ♦ In June 2007, Duncan Mathieson was appointed Head of Canadian Equities overseeing research and portfolio construction activity in the Canadian market. Duncan maintains his responsibilities as Director of Canadian Equity Research including analyst responsibilities in the Canadian oil and gas sector. ♦ Prior to joining the firm in 2003, Duncan served as Director, Oil and Gas Research for Scotia Capital Inc. His research responsibilities included coverage of Canadian integrated and senior exploration and production companies, as well as the macro analysis of global crude oil and North American natural gas markets. ♦ In addition to traditional equity market valuations, Duncan has completed detailed analysis of Canada’s largest oil and gas projects, including oil sands developments in Northern Alberta, the Hibernia and Terra Nova oil developments offshore Newfoundland and the Sable Natural Gas project offshore Nova Scotia.

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Additional disclosures Past performance is no guarantee of future results. There is no guarantee that investment objectives, risk or return targets discussed in this presentation will be achieved. The opinions expressed in this presentation are those of the UBS Global Asset Management Business Group of UBS AG and are subject to change. No part of this presentation may be reproduced or redistributed in any form, or referred to in any publication, without express written permission of UBS Global Asset Management. This material supports the presentation(s) given on the specific date(s) noted. It is not intended to be read in isolation and may not provide a full explanation of all the topics that were presented and discussed. Information contained in this presentation has been obtained from sources believed to be reliable, but not guaranteed. Furthermore, there can be no assurance that any trends described in this presentation will continue or that forecasts will occur because economic and market conditions change frequently. The information contained in this presentation should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this information or that securities sold have not been repurchased. The securities discussed do not represent an account’s entire portfolio over the course of a full market cycle. It should not be assumed that any of the securities transactions or holdings referred to herein were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities referred to in this presentation. A client's returns will be reduced by advisory fees and other expenses incurred by the client. Advisory fees are described in Part II of Form ADV for UBS Global Asset Management (Americas) Inc. This presentation does not constitute an offer to sell or a solicitation to offer to buy any securities and nothing in this presentation shall limit or restrict the particular terms of any specific offering. Offers will be made only to qualified investors by means of a prospectus or confidential private placement memorandum providing information as to the specifics of the offering. No offer of any interest in any product will be made in any jurisdiction in which the offer, solicitation or sale is not permitted, or to any person to whom it is unlawful to make such offer, solicitation or sale. Any statements made regarding investment performance expectations, risk and/or return targets shall not constitute a representation or warranty that such investment objectives or expectations will be achieved. The achievement of a targeted ex-ante tracking error does not imply the achievement of an equal ex-post tracking error or actual specified return. According to independent studies, ex-ante tracking error can underestimate realized risk (expost tracking error), particularly in times of above-average market volatility and increased momentum. Different models for the calculation of ex-ante tracking error may lead to different results. There is no guarantee that the models used provide the same results as other available models. Copyright © 2007 UBS Global Asset Management (Americas) Inc.

US-I

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