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Czech Republic Oil and Gas Report Q3 2008

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Report Summary

The latest Czech Republic Oil & Gas Report from BMI forecasts that the country will account for 3.78% of Central and Eastern European (CEE) regional oil demand by 2012, while making no material contribution to supply. CEE regional oil demand rose to an estimated 5.46mn barrels per day (b/d) in 2007 and should average 5.61mn b/d in 2008, before reaching 6.25mn b/d by 2012. Production of an estimated 12.74mn b/d in 2007 is forecast to reach 15.38mn b/d by 2012. CEE gas consumption in 2007 was an estimated 632bn cubic metres (bcm), with demand of 772bcm targeted for 2012. Production in 2007 of an estimated 802bcm should reach 961bcm by the end of the period. The Czech Republic’s estimated share of gas consumption in 2007 was 1.41%, with no meaningful contribution to regional supply.

Its share of demand is forecast to be 1.47% by the end of the forecast period. In Q108, we estimate that the OPEC basket price averaged US$92.64 per barrel (bbl) – up around 9% from the Q407 level. The OPEC basket price had exceeded US$102 by the middle of March, slipping back towards US$96/bbl later in the month. The estimated Q108 average prices for the main marker blends are now US$96.54 for Brent, US$97.31 for WTI and US$93.44/bbl for Russian Urals (Mediterranean delivery). Our projections for 2008 as a whole are revised upwards from BMI’s last quarterly report. We are now assuming an OPEC basket price average of US$81 per barrel for 2008, compared with the US$74 estimate provided by our last quarterly report.

Based on recent price differentials, this implies Brent at US$84.71, WTI averaging US$85.63/bbl, and Urals at US$81.88/bbl. Czech real GDP growth is now forecast by BMI at 5.0% for 2008, down from an estimated 6.6% in 2007. We are assuming 4.7% growth in 2009, followed by 4.5% in 2010/11 and 4.4% in 2012. Assuming an average rise in consumption of 2-3% per annum, below the CEE norm, oil demand will reach 237,000b/d in 2012 – implying imports of at least 234,000b/d. In spite of a privatised oil industry, there is very limited international oil company (IOC) involvement in the upstream segment to boost domestic supply of oil or gas. BMI is assuming gas demand will rise by an annual 5% from an estimated 8.9bcm in 2007 to around 11.4bcm by 2012. Between 2007 and 2018, we are forecasting an increase in Czech oil consumption of 25.6%, with import volumes rising steadily from 207,000b/d to 265,000b/d by the end of the 10-year forecast period. Gas consumption is expected to up from 8.9bcm to 14.4bcm by 2018, met by imports.

Details of the new BMI 10-year forecasts can be found in the Appendix of this report, which provides global, regional and country-specific projections. The Czech Republic now occupies equal seventh place with Slovakia in BMI’s newly revised Upstream Business Environment rating, just ahead of Romania. Its minimal oil and gas reserves and poor production outlook work against the country, but are offset somewhat by privatisation progress, the competitive/regulatory environment and reasonable country risk factors. The country is in the middle of the league table in BMI’s newly-revised Downstream Business Environment rating, with a few high scores but no reason to expect near-term progress further up the rankings. It takes sixth place ahead of Azerbaijan and Hungary. Refining capacity is among the region’s lowest, with low scores for likely capacity expansion and for oil and gas demand growth. Population and GDP per capita also work against the country. Kazakhstan is likely to move out of reach above it, and there is some threat from Hungary below.

Table of Contents

Executive Summary 6

SWOT Analysis .8

Czech Republic Political SWOT 8

Czech Republic Economic SWOT ...... 8

Czech Republic Business Environment SWOT ..... 9

Czech Republic Energy Market Overview .10

Global Oil Market Overview ..13

Table: Global Oil Consumption (000b/d) . 14

Table: Global Oil Production (000b/d) ..... 15

Oil Price Outlook ...16

Waiting For A Correction ... 16

Table: Crude Price Assumptions 2007/2008 ...... 17

Revised Forecasts ...... 17

Table: Oil Price Forecasts ...... 18

Regional Energy Market Overview ...19

Oil Supply And Demand ...... 19

Table: Central/Eastern Europe Oil Consumption (000b/d) . 20

Table: Central/Eastern Europe Oil Production (000b/d)..... 21

Oil: Downstream 22

Table: Central/Eastern Europe Oil Refining Capacity (000b/d) 22

Gas Supply And Demand .... 23

Table: Central/Eastern Europe Gas Consumption (bcm) .... 23

Table: Central/Eastern Europe Gas Production (bcm) . 24

Liquefied Natural Gas 25

Table: Central/Eastern Europe LNG Exports/(Imports) ( 25

Business Environment Ranking .....26

Central/Eastern Europe Region ... 26

Composite Scores .. 26

Table: Regional Upstream Business Environment Rating.... 27

Table: Regional Downstream Business Environment Ratin 28

Upstream Scores ... 28

Downstream Scores 29

Czech Republic Upstream Rating – Overview ... 29

Czech Republic Upstream Rating – Potential Returns 29

Czech Republic Upstream Rating – Risks to Potential Ret 29

Czech Republic Downstream Rating – Overview . 30

Czech Republic Downstream Rating – Potential Returns .... 30

Czech Republic Downstream Rating – Risks to Potential Returns 30

Business Environment ....31

Legal Framework 31

Infrastructure.. 32

Labour Force.. 33

Foreign Investment Policy .. 34

Tax Regime . 34

Industry Forecast Scenario ....36

Oil and Gas Reserves . 36

Oil Supply and Demand ...... 36
Gas Supply and Demand ..... 36
Refining and Oil Products Trade . 37
Revenues/Import Costs . 37
Czech Republic Oil & Gas – Historic Data & Forecasts..... 38
Other Energy .. 39
Czech Republic Other Energy – Historic Data & Forecasts 41
Key Risks to BMI’s Forecast Scenario .. 41
Long-term Oil & Gas Outlook ..... 41
Macroeconomic Outlook .42
Czech Republic - Economic Activity 44
Regional Case Study .....45
Gazprom In The CIS And Europe .... 45
Main Transit Countries .. 48
Competitive Landscape ...52
Key Players – Czech Oil & Gas Sector ..... 53
Overview/State Role ... 53
Key Upstream Player ..... 54
Key Downstream Players . 54
Company Monitor .55
Unipetrol .. 55
Shell Czech Republic . 57
OMV CR .. 59
Agip Praha.. 61
Moravské Naftové Doly (MND) ... 63
PKN Orlen – Summary .. 65
BP – Summary ...... 65
Cepro – Summary . 65
Slovnaft – Summary 65
Carpathian Resources – Summary ... 65
Gazprom – Summary ..... 66
Glossary of Terms 67
Oil & Gas Ratings: Revised Methodology .68
Introduction 68
Ratings Overview 68
Table: BMI Oil & Gas Business Environment Ratings: Structure 69
Indicators . 69
Table: BMI Oil & Gas Business Environment Upstream Ratings: Methodology 70
Table: BMI Oil & Gas Business Environment Downstream Ratings: Methodology .. 71
Oil & Gas Outlook: Long-term forecasts ..72
Global Oil Demand 72
Global Oil Demand (000b/d) .. 72
Global Oil Production (000b/d) 73
Global Oil Supply ...... 73
Global Gas Demand .. 74
Global Gas Demand (bcm) ..... 74
Global Gas Supply ..... 74
Global Gas Production (bcm) . 75
Regional Oil Demand 76
CEE Oil Consumption (000b/d) 76
Regional Oil Supply ... 76 CEE Oil Production (000b/d) . 77 Regional Refining Capacity 77 CEE Oil Refining Capacity (000b/d) . 78 Regional Gas Demand . 78 CEE Gas Consumption (bcm) . 79 Regional Gas Supply .. 79 CEE Gas Production (bcm) .... 80 Czech Republic Country Overview 80 Czech Republic Oil & Gas – Long-term Forecasts ..... 81 Czech Republic Other Energy – Long-term Forecasts 82 Methodology & Risks To Forecasts ...... 82 BMI Forecast Modelling ...83 How we generate our industry forecasts . 83 Energy Industry 84 Cross checks ... 84 Sources .... 84