Industry Overview

6. INDUSTRY OVERVIEW 6. INDUSTRY OVERVIEW 6.1 OVERVIEW OF THE GLOBAL ECONOMY In the first half of 2013, global economic growth remained modest, averaging 2.5%. Emerging and developing economies grew moderately but still contributed significantly to global growth, while advanced economies strengthened gradually. A combination of factors led to the moderation in emerging and developing countries. The export-reliant countries were affected by weaker demand from advanced economies, particularly due to the prolonged recession in the European Union (EU). Many emerging markets such as Brazil, China and India experienced a surge in credit, leading to high inflation and rising interest rates which slowed down investment and growth. Commodity exporters who had enjoyed favourable terms of trade were affected by lower prices of raw materials. China’s growth moderated as exports decelerated amid policy shift towards more balanced and sustainable development. The slowdown in China is impacting the global economy, particularly commodity exporters such as Australia and Brazil. India’s growth slowed significantly due to large capital outflows since May, which led to marked depreciation of its currency. In the US, private demand, supported by a highly accommodative monetary policy contributed to growth, while the fiscal consolidation measures had a negative effect. Economic activity in Japan picked up in response to Abenomics monetary easing and fiscal stimulus measures aimed at ending deflation and boosting growth. The euro area growth remained subdued, though on a quarter-on-quarter basis, GOP was positive in the second quarter of 2013 after six quarters of recession. The euro area continues to be affected by high unemployment as well as large public and private debts which restrain borrowing and affect growth. Global economic activity is expected to strengthen moderately during the second half of 2013, with the whole year growth projected at 2.9%. Economic expansion will continue to be supported by growth in major emerging and developing economies, reinforced by strengthening in the advanced economies, particularly in the US where activity is expected to intensify as fiscal consolidation eases and monetary conditions stay supportive. However, there are downside risks including the tapering of quantitative easing (QE) in the US and ensuing increase in long-term yields which could lead to further capital outflows and balance of payments problems in some emerging markets. Additionally, uncertainty over the US budget and raising of debt ceiling could weigh on global economic growth. Weaknesses in the euro area’s financial system and high public debts in major advanced economies could affect growth prospects, insufficient fiscal consolidation and structural reforms in Japan as well as the continued slowdown in China, as the economy adjusted towards a more sustainable quality growth also pose downside risks. Furthermore, prolonged political tensions in the Middle East and North Africa (MENA) region could disrupt crude oil production. Global economic activity is forecast to strengthen moderately in 2014. The outlook for advanced economies is expected to improve with output expanding 2% (2013: 1.2%). Substantial easing of fiscal consolidation and a highly accommodative monetary policy in the US and Europe are expected to support growth. The US economy is expected to gain momentum, backed by continued recovery in the property sector and higher household wealth. In the euro area, growth is forecast to recover 1% (2013: -0.4%), driven by smaller fiscal reductions, stronger external demand and improvement of lending conditions to the private sector. In contrast, growth in Japan is projected to decelerate to 1.2% (2013: 2%), as the fiscal stimulus lapses and the consumption tax is increased. Emerging market and developing economies are forecast to expand 5.1 % (2013: 4.5%), with developing Asia continuing to lead the uptick. Growth prospects for other developing regions in Africa, Central and South America, Commonwealth of Independent States as well as Europe are generally brighter, supported by improvements in the advanced economies. Growth in China is projected to decelerate to 7.3% (2013: 7.6%) due to continued restructuring from investment-driven towards a more balanced and higher quality growth based on domestic consumption. India’s growth is expected to accelerate to 5.1 % (2013: 3.8%) as infrastructure improvements ease supply bottlenecks and external demand strengthens. 6. INDUSTRY OVERVIEW (Cant’d) Dated Brent traded at an average of USD1 08/bbl during the first six months (January -June 2012: USD114/bbl) due to the increasing uncertain global economic outlook. However, since July 2013 to September 2013, Dated Brent has averaged above USD110/bbl on improving growth prospects in key advanced economies, reflected by the better-than-expected manufacturing data from China, which signalled firmer demand for energy. Riding on this trend, Tapis price also increased to USD113/bbl in July 2013 compared with USD108/bbl in April 2013. For 2013, the International Energy Agency reported that global oil demand is expected to increase to 90.8 million bpd. On the supply side, while there will be an increase in production notably from the US due to rising shale oil output, global oil supply is estimated to remain tight at 91.3 million bpd. Hence, Dated Brent and Tapis prices are expected to remain stable at USD1 05/bbl and USD115/bbl, respectively in 2013 (2012: USD112/bbl; USD119/bbl) supported by the improving economic outlook in emerging markets during the second half of 2013. PETRONAS continues to pursue exploration activity to sustain production levels. As of end­June 2013, four new oil wells have been discovered which include Adong Kecil West in offshore Sarawak and Ara fields in offshore Peninsular Malaysia. In addition, six new fields are expected to be brought on stream, increasing the total number of Malaysia’s producing fields to 143, comprising 82 oil and 61 gas fields (2012: 77 oil fields; 55 gas fields). As a result, crude oil reserves stood at 5.85 billion barrels as at 1 January 2013 and are estimated to last 27 years, while gas reserves stood at 98.3 trillion cubic feet, sufficient to last 43 years. (Source: Ministry of Finance Malaysia, Economic Report 2013/2014) THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK 6. INDUSTRY OVERVIEW (Cont’d)

6.2 OVERVIEW OF THE OIL AND GAS INDUSTRY
Beijing 186.10.6530.7010 Housloi1 11 7i3.GiiAL47PFC Energy Kuala Lumpur I G03i171.34 00 Moscow +/ (~%) /9/ 3/33 Paris +33UTf02900 Singapore ,65. 67364317Date: 0L{ JUL 20’11+ W8shinglcn +1.202.8/2 1199 The Board of Directors Reach Energy Berhad Level U6, Block D3, Solaris Dutamas No.1, Jalan Dutamas 1 50480 Kuala Lumpur
Re: Independent Market Research Report Assessing The Oil And Gas Exploration And Production Markets In Which Reach Energy Berhad (“Reach Energy”) Will Be Operating Dear Board of Directors, PFC Energy SARL (“PFC Energy”) has prepared an Independent Market Research Report (“report”) assessing the oil and gas exploration and production markets in which Reach Energy will be operating. The report is to be included in the Prospectus of Reach Energy in relation to the company’s initial public offering (“IPO”) on the Main Market of Bursa Malaysia Securities Berhad. PFC Energy is a global consulting firm specializing in the oil and gas industry. We have focused eXclusively on the energy sector for 27 years. PFC Energy is an independent partnership with over 150 professional staff working from offices in Washington DC, Houston, Kuala Lumpur, Moscow, Paris, Beijing and Singapore. We are aware that this report will be included in the Prospectus and we further confirm that we are aware of our responsibilities under Section 214 of the Capital Markets and Services Act 2007. PFC Energy acknowledges that if we are aware of any significant changes affecting the contents of this report between the date of completion and the date of issuance of the Prospectus, or after the issue of the Prospectus and before the issue of the securities, we have an ongoing obligation to update the report, issue a supplementary report, or withdraw our consent for the inclusion of the report in the Prospectus. PFC Energy has prepared the report in an independent and objective manner utilizing our expertise, experience, proprietary data, secondary information, and public sources. We believe that the report presents a true and fair view of the industry within the acceptable limitations. Our research has been conducted with all due care and diligence and may not reflect the actual performance of individual companies in the industry. The report should not be considered as a recommendation to buy or not to buy the securities of any company or companies. Yours faithfully,

(2~ ~.’­Ron Kapavik Senior Director; Gas, Power, Coal & Renewables Head of PFC Energy -Malaysia
For and on behalf of PFC Energy SARL (995313-A)
10 Jalan P. Ramlee UBI\! Tower, Level 27 Kuala Lumpur, Malaysia 50250 Office: +6032172 3400 Email: info@pfcenergy.com Website: www.pfcenergy.com Strategic Advisors in Global Energy Washington’ Houston’ Kuala Lumpur’ Beijing’ Paris’ Lausanne’ Bahrain www.pfcenergy.com
104 6. INDUSTRY OVERVIEW (Cont’d) PFC Energy Reach Energy Berhad -Independent Market Research Analysis IPage 2 PFC Enorgy This report is prepared by PFC Energy SARL (“PFC Energy”) for inclusion in the prospectus of Reach Energy Berhad in relation to an initial public offering for its listing on the Main Market of Bursa Malaysia Securities Berhad. PFC Energy has prepared this report in an independent and objective manner utilizing our expertise, experience, proprietary data, secondary information, and public sources. We believe that the report presents a true and fair view of the industry within the acceptable limitations. Summary of Independent Market Research PFC Energy notes that Reach Energy Berhad’s objective is to raise funds to acquire company(-ies) or asset(s) in the upstream segment of the oil and gas industry (exploration and production or “E&P’J. The company’s strategic and operational focus is in the Asia Pacific region. PFC Energy believes the state of the oil and gas industry is very strong. Driven by population growth and an expanding global economy, particularly in the Asia Pacific region, demand for energy products is expected to grow steadily. This growing energy demand will see sustained high prices in oil and gas and a need for increased investment to produce necessary supply volumes. Opportunities for investment and activity in this operational and economic environment are expected to be robust. For further details of our analysis, please refer to the following content: 1….Overview of Oil and Gas Industry 1.1 Exploration 1.2 Production 1.3 Past Performance 1.4 Future Growth 1.5 Demand 2….Asia Pacific· Overview
2.1 Reserves 2.2 Production 2.3 Brownfield Activity 2.4 Demand 3….Recent M&A Activity
3.1 Asia Pacific M&A Activity 3.2 Industry Players and Competition 4….Relevant Laws and Regulations Governing the Industry 4.1 Laws and regulations 4.2 Fiscal Terms 5….Risks and Challenges Facing the Industry
5.1 Increasing Costs Structure 5.2 Fiscal Terms 5.3 Regulation 5.4 Technology 6…. Prospects and Outlook of the Oil and Gas Industry 6.1 The Outlook for Oil Prices 6.2 Future growth PFC Energy is a global consulting firm specializing in the oil and gas industry. We have focused exclusively on the energy sector for 27 years. We operate from offices in Washington DC, Houston, Kuala Lumpur, Moscow, Paris, Beijing and Singapore. Our research has been conducted with all due care and diligence and may not reflect actual performance of individual campanies in the industry. The report should not be considered as a recommendation ta buy or not buy securities ofany specific company or companies. Strategic Advisors in Global Energy Washington’ Houston’ Kuala Lumpur’ Beijing’ Paris’ Lausanne’ Bahrain www.pfcenergy.com
105

Discovery to First Production 14 12 10
Asia-Pacific 8
Africa Middle East 6
Europe 4 North America 2 0
Years to Production
6. INDUSTRY OVERVIEW (Cont’d) PFC Energy Rea,ch Energy Berhad -Independent Market Research Analysis I Page 5 PFC Energy Production: Production of oil and gas is the operational and technical objective of a field development plan. Production of a field can go through numerous phases depending on the reservoir, hydrocarbon type, and commerciality of remaining reserves. Conventional oil and gas fields typically reach their highest level of production (the “peak”) within 2-4 years of production starting. The field will enter a natural decline from that peak level of production over the following ten to twenty years. The technical, operational, and commercial teams will implement or consider investments in enhanced recovery methods that can increase production or slow the rate of natural decline. Midstream & Downstream: Once oil and gas begins production, these products go through two further segments of the oil and gas industry. The Midstream segment can include transportation, storage, and marketing and the Downstream segment which can include refining and distribution of refined products. Companies focused purely on E&P will sell their unrefined products (oil and gas) into the Midstream & Downstream segments where they will be transported and sold as product to end­user. Some companies, typically very large companies, in the industry have ownership in all three segments (E&P or Upstream, Midstream, and Downstream) as a business strategy to maximize profitability at each segment. This strategy is known as vertical integration and companies in the oil & gas industry that employ this strategy are often referred to as “integrated” companies. Past Performance The oil and gas industry has successfully increased hydrocarbon reserves and production volumes to meet increasing demand due to more advanced economies and increasing population. Over the last three decades, oil and gas production has increased steadily with a high correlation to the growth rate (gross domestic product or GOP) of the global economy. Declines in mature, conventional production in North America and Europe have largely been replaced by increased production in the Middle East, Africa, and Asia Pacific regions. Global reserves are largely held by OPEC or other countries with limited access for Independent Oil Companies (laCs). As exhibited in the “Reserves” section below, access to reserves for laCs is a key issue as to their strategy and competitiveness. Strategic Advisors in Global Energy Washington’ Houston’ Kuala Lumpur’ Beijing’ Paris’ Lausanne’ Bahrain www.pfcenergy.com
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Increasing reserves certainty and likelihood of commerciality

 

6. INDUSTRY OVERVIEW (Cont’dj PFC Energy Reach Energy Berhad -Independent Market Research Analysis I Page 7 PFC Energy The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. ii. PROBABLE OIL AND GAS RESERVES are those additional reserves that are less certain to be recovered than proved reserves but which, together with proved reserves are as likely as not to be recovered. When deterministic methods are used, it is as likely as not that actual remaining quantities recovered will exceed the sum of estimated proved plus probable reserves. When probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the proved plus probable reserves estimates. iii. POSSIBLE OIL AND GAS RESERVES are those additional reserves that are less certain to be recovered than probable reserves. When deterministic methods are used, the total quantities ultimately recovered for a project have a low probability of exceeding proved plus probable plus possible reserves. When probabilistic methods are used, there should be at least a 10% probability that the total quantities ultimately recovered will equal or exceed the proved plus probable plus possible reserves estimates. CONTINGENT RESOURCES are quantities of oil and gas that are deemed less certain than reserves and are considered not matured enough for commercial exploitation due to impediments faced on the technological or business fronts. In order for contingent resources to be upgraded and considered as reserves, key conditions (or “contingencies”) preventing commercial development will have to be addressed such as acquiring all necessary environmental and government approvals. Other contingencies may exist in the form of economic, legal, political or regulatory constraints. The company also has to provide evidence of its intention of proceeding with development within a reasonable time frame (usually 5 years). Contingent resources are classified into three categories -1C, 2C, and 3C with 1C being the most certain. PROSPECTIVE RESOURCES are estimated volumes of hydrocarbons yet to be discovered. These volumes are estimated based upon indirect evidence prior to or in the absence of drilling and maintain a higher risk profile as compared to contingent resources mainly due to it bearing discovery risk. In order for prospective resources to be upgraded to contingent resources, the hydrocarbons will first have to be discovered and evaluated. An estimated amount of recoverable quantities of the discovery would then have to be estimated based upon appropriate development. Prospective resources are classified into three categories -low estimate, best estimate and high estimate, with low estimate being the most certain. Strategic Advisors in Global Energy Washington’ Houston’ Kuala Lumpur’ Beijing’ Paris’ Lausanne’ Bahrain wwwpfcenergy.com

100% 80% 60% 40% 20% 0%

Global Ownership of Oil & Gas Resources

85%
13%  8%  7%
1970  1980  1998  2011  NOC Reserves (No/Limited Access)  NOC Reserves (Equity Access)  Soviet Reserves  Full IOC access reserves

 

bn boe Global Oil Reserves 1,800 1,600 1,400 1,200 1,000 800 600 400 200
Asia Pacific Africa Middle East Former Soviet Union Europe South America North America
Years
tln cubic Global Gas Reserves meters 200 150 100 50 0

 

Years Asia Pacific Africa Middle East Former Soviet Union Europe South America North America

 

mmtpa Global Oil Production 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0
Asia Pacific Africa Middle East Former Soviet Union Europe South America North America Years
mmtpa Global Gas Production 3,500 3,000 2,500 2,000 1,500 1,000 500 0
Asia Pacific Africa Middle East Former Soviet Union Europe South America North America
Years

Reach Energy Berhad -Independent Market Research Analysis | Page 12 PFC Energy mmtoe 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

Global Energy Consumption -By Region Asia Pacific (exc. China) China Africa Middle East Former Soviet Union Europe South America North America

 

mmtoe 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

Global Energy Supply -By Region Asia Pacific (exc. China) China Africa Middle East Former Soviet Union Europe South America North America

 

Asia Pacific Oil Reserves -By Country bln bbls Thailand 45 40 35 30 25 20 15 10 5 0 Other Brunei Malaysia Indonesia Australia Vietnam India China

tln m3 18 16 14 12 10 8 6 4 2 0

Asia Pacific Gas Reserves -By Country Bangladesh Myanmar Thailand Brunei Other PNG Vietnam Pakistan India Malaysia Indonesia China Australia

 

6. INDUSTRY OVERVIEW (Cont’d) PFC Energy Re~ch Energy Berhad -Independent Market Research Analysis I Page 16 PFC Energy Exploration & Production Business Environment The E&P business in the Asia Pacific region offers a diverse set of business environments in which companies can invest. Different countries offer different types of assets, infrastructure, fiscal terms, and regulatory environments for investment. Malaysia: Oil production has been declining over the last decade while gas production rose significantly in the early 2000s, but has shown signs of declining more recently. Due to the importance of the oil and gas industry to the country, the government and PETROI\lAS have taken steps to increase investment and activity. New fields, new fiscal terms, and enhanced recovery techniques are encouraging greater investment in the country. PETRONAS specific objectives include rejuvenating existing fields through enhanced oil recovery (EaR), developing small fields, and intensifying exploration activities. This will include: • Reviewing PSC terms and introducing new petroleum contract agreements
• Attracting companies with specialized skills and abilities
• Using its role as industry regulator to ensure the most economic and efficient technologies are deployed as well as see to infrastructure being cooperatively utilized

Improved fiscal terms, ease of entry, and ease of doing business should open new areas for investment as well as make previously marginal or non-commercial fields now economically attractive. Indonesia: Oil production has been rapidly declining over the last decade while gas production has increased slightly. Much of that increase is going to higher domestic gas consumption which is less lucrative for the government and NOC (Pertamina) than LNG exports. Pertamina’s focus is on growing production from its domestic E&P portfolio, through EaR and infill projects at mature domestic fields, and developing its major projects such as Cepu. The government is also developing a coalbed methane (CBM) strategy for Indonesia as the country possesses a significant potential resource (-450 tcf) of CBM. There is also potential for shale production towards the end of the decade. The government has also indicated a willingness to adjust fiscal terms to attract more investment, particularly in new or underexplored/underinvested areas. These adjustments can include general improvements of the equity split of production to reductions in VAT and import duties on equipment and facilities. A reorganization of the relationship between the regulator, NOC, and government is ongoing in Indonesia which may cause delays in the short-term. Australia: Oil production has been declining over the last decade while gas production, with a significant boost via LNG exports, has been steadily rising over the same time period. Australia has one of the most open oil and gas business environments in the world, similar to the US, Canada, and Norway. This attracted a large number of major laCs pursuing oil production first and later purSUing large offshore gas deposits via LNG exports. There continues to be a variety of business opportunities ranging from Strategic Advisors in Global Energy Washington’ Houston’ Kuala Lumpur’ Beijing’ Paris’ Lausanne’ Bahrain wwwpfcenergy.com
6. INDUSTRY OVERVIEW (Cont’d) PFC Energy Re~ch Energy Berhad -Independent Market Research Analysis I Page 17 PFC Energy enhanced recovery in mature/brownfield areas, underexplored frontier areas, coal bed methane, and emerging shale plays. Australia’s government has shown sensitivity to the financial needs of the oil and gas industry to continue high levels of investment in the country, but it also continues to implement strict environmental and regulatory controls. Myanmar: Myanmar’s oil and gas industry was under restrictive investment sanctions until recently. Due to this lack of investment and activity, there is a significant amount of underexplored or untapped resource potentially available. Myanmar’s gas production has been slowly increasing, but the industry and infrastructure are in need of investment, technology, and modernization. Many large laCs have expressed interest in entering Myanmar, but as with any frontier (geologic or economic) there is uncertainty surrounding the eventual results. Myanmar recently concluded its onshore and offshore bid rounds in October 2013 and March 2014, respectively. The bid rounds attracted a range of bidders including NOCs (Oil & Natural Gas Corp Ltd (ONGC), Brunei National Petroleum Co (PetroleumBRUNEI), PETRONAS, PTT Exploration and Production Pic), laCs (Eni SpA, Statoil ASA, Shell, Total SA, ConocoPhillips Company, BG Group Pic) and smaller independents (Pacific Hunt Energy Corp, MPRL E&P Pte Ltd) with the laCs dominating in the deepwater offshore blocks. Thailand: Both oil and gas production have increased steadily over the last decade, but proved reserves are rapidly dwindling. The country’s production has long been dominated by a handful of companies, but smaller companies have been pursuing resources and brownfield opportunities left behind in shallow waters or onshore. The Thai government is hoping to attract increased investment to maintain production as well as add proved reserves. The Department of Mineral Fuels (DMF) has announced plans to launch the 21 st licensing round which will comprise of onshore and shallow waters blocks that will include opportunities for EaR and brownfield activity. Philippines: Unlike most countries in Asia, oil and gas production in the Philippines has historically not seen a significant amount of exploitation and development. Country production has thus far peaked at 33 kbd of oil (2010) and 305 mmcfd of natural gas (2009). In terms of reserves, both oil and gas have been relatively steady over the last ten years at 139 mmboe (million barrels of oil equivalent) of oil and 3,480 bcf (billion cubic feet) of gas. There has been renewed interest in the Philippines due to its relatively unexplored acreage, steady GOP growth, and steady population growth; all being drivers of a potentially robust energy market. Vietnam: Oil production over the last ten years has been relatively steady but is expected to decline over the coming decade. Gas production has steadily risen over the last ten years, and there are significant volumes remaining to exploit. Some of these volumes are in areas lacking infrastructure or are not currently supported by market prices in Vietnam. The government and NOC are looking at options for improving fiscal terms to attract new and renewed investment. These could include tax incentives, reduced bureaucracy, and higher domestic gas and product prices. Strategic Advisors in Global Energy Washington’ Houston’ Kuala Lumpur’ Beijing’ Paris’ Lausanne’ Bahrain www.pfcenergy.com
6. INDUSTRY OVERVIEW (Cont’d) PFC E Reach Energy Berhad -Independent Market Research Analysis I Page 18 nergy PFC Energy China: Within Asia, China is the largest source of oil and gas supply, oil and gas demand and is the largest oil reserves holder and second largest gas reserves holder. As such, China is a very important market place in Asia. As China produces, consumes, and imports a great deal of its energy, the Chinese government places great importance on increasing domestic supply and reserves. There are a variety of large existing Chinese NOCs pursuing increased supply via domestic exploitation of a variety of production types (conventional, offshore, shale, CBM, etc). When foreign investment is sought, these NOCs often partner with Major laCs that can provide technical expertise and have access to significant capital for large-scale projects and investments. As more conventional or shallow water areas mature during China’s production increases, there could be more opportunities for investment, but it remains to be seen whether the NOCs or Major laCs will retain or divest these positions. India: The second largest source of oil supply and oil reserves in Asia, Indian oil reserves have seen little growth over the last decade. India’s oil demand is three times its domestic supply, creating a heavy import burden that is growing. While domestic production has grown at -1 % per annum since 2003, demand is growing at 4% per annum. On the gas side, reserves have grown at -5% per annum and production at -1 % per annum over the last decade, but gas demand has grown at -6% per annum over the same time period. India has a similar investment climate (though perhaps less economically stable) to China; large NOCs responsible for domestic supply that often rely on partnerships and investments from Major laCs for technical expertise and foreign capital. As more conventional onshore areas mature, there could be more opportunities for investment, but these areas have traditionally been retained by domestic NOCs. Additionally, as the cost of India’s imported oil and gas (combined with subsidies for refined products) begins to slow economic growth, the government could offer more attractive investment and fiscal terms to encourage domestic production growth of oil and gas. Brunei: A mature and relatively small market for oil and gas reserves and production. The country’s .oil and gas reserves are almost entirely held by Shell and PetroieumBRUNEI. Beyond these two companies, there are -10 companies with interests in one or two blocks in the onshore and shallow water areas of the country. Oil production has been declining at -5% per annum over the last decade, with most barrels being exported due to Brunei’s low domestic demand. Gas reserves have been slowly declining (-2% per annum since 2003) even as production has remained essentially flat since 2003. Shell has begun preparations for a large EaR project to reverse the declines seen over the last decade, and the country’s investment focus going forward will be on its under-explored deepwater areas located further offshore. Brunei expects this deepwater area to provide gas feedstock to its LNG export projects in future decades. New Zealand: The New Zealand market is in a period of transition. The New Zealand E&P play is small and mature (most exploitation has occurred in the Taranaki basin), but Strategic Advisors in Global Energy Washington’ Houston’ Kuala Lumpur’ Beijing’ Paris’ Lausanne’ Bahrain www.pfcenergy.com
6. INDUSTRY OVERVIEW (Cont’d) PFC Energy Re~ch Energy Berhad -Independent Market ResecHch Analysis I Page 19 PFe Energy the country is opening up new areas onshore and offshore to encourage exploration. This effort has been broadly successful with a large program of exploration drilling expected in the near-term which could revitalize the country’s oil and gas industry. The deepwater area is under-explored, but is receiving a great deal of interest from regional and lVIajor IOCs; though it is too early to say whether it will meet success. Existing blocks are widely held by numerous small players which could lead to an active M&A market given the renewed interest in the country. Papua New Guinea (PNG): A small but growing economy largely based around upcoming liquefied natural gas (LNG) projects and other resource mining. For new entrants, upstream opportunities primarily exist in emerging gas plays and to a lesser extent in mature oil plays in the onshore Papuan Basin, with the possibility of high-risk frontier offshore gas prone exploration. Modest domestic energy demand means that oil and gas monetization will be mostly via exports. In general, further development and production in Asia Pacific is likely to come from investment in older discoveries near infrastructure or reinvestment in existing fields that have entered decline. These types of investments are typically referred to as “brownfield” or secondary/tertiary/enhanced recovery assets. The Asia Pacific region’s mature base of discoveries and production assets saw initial investment during the 1990­2005 time period when global oil prices averaged US$25/bbl (per barrel). During the 2006-2012 time period, global oil prices have averaged US$75/bbl and brownfield investment opportunities (previously non-commercial discoveries or enhanced recovery techniques) have become more commercially attractive. As an indication, during the 1990-2005 time period, the Asia Pacific region (excluding China) had 448 discoveries greater than 10 million barrels of oil equivalent (mmboe). During an expected time period of commercialization for those discoveries (1995-2012), 302 fields were brought onstream. This indicates that there could be 146 discoveries that were previously non­commercial (due to the commodity price environment at the time of discovery) which are now commercially viable. This figure does not account for additional producing assets that are in decline which may (given the recent and forecasted high oil price environment) justify further investment to increase the amount of recoverable barrels from the field. These brownfield assets and producing fields are nearby existing infrastructure and the risk levels are typically low as the exploration, commercial, regulatory, and environmental issues have been overcome during the initial development of the field. Demand Asia Pacific Energy Consumption by Fuel Type: In the Asia Pacific region, overall energy demand is expected to grow at an average rate of 2.8% during the 2010-2030 time period. Energy demand for oil is expected to grow at an average rate of 1.9% per annum and natural gas is expected to grow at 4.0% per annum over the same time Strategic Advisors in Global Energy Washington’ Houston· I<uala Lumpur’ Beijing’ Paris’ Lausanne’ Bahrain www.pfcenergy.com

mmtoe 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

 

Asia Pacific Energy Consumption -Fuel Type
Renewables Hydro Nuclear Coal Natural Gas Oil/Liquids

6. INDUSTRY OVERVIEW (Cont’d) Reach Energy Berhad -Independent Market Research Analysis IPage 21

 

PFC Energy PFC Energy 3. Recent M&A Activities There has been an increase of oil and gas related M&A over the last decade. Much of this activity has been driven by alternate viewpoints of the E&P market. With supply and demand fundamentals indicating sustained high oil prices, increased shareholder pressure to generate growth and returns, and a more liquid market place due to an increase of sellers and buyers, the oil and gas M&A market place should stay very active over the next five to ten years. • Independent Oil Companies (IOC): Some companies believe that availability of reserves is dWindling for laCs and they must consolidate large positions of acreage and prospective reserves now. Others are selling down their large mature positions to focus on expenditures related to growth projects and exploration; creating a secondary M&A market focused on enhanced recovery using more advanced technology and techniques. There have always been business development (8D) focused companies as well that seek out assets or companies with upside potential (Le., companies with untapped or undervalued commercial potential). Expenditures from all these viewpoints have increased due to greater economic opportunities related to the high oil price environment.
• National Oil Companies (NOCs): The largest resource-holding NOCs (those with large domestic reserves and relatively low domestic demand) are relatively inactive in the global M&A market place. Acquisitions by these types of NOCs are usually related to technology capture or inter-governmental politics. Another group of NOCs are the resource-seeking NOCs (those with high domestic demand), with the Chinese and Indian NOCs the best examples of this group. These companies have a mandate to seek out and acquire available resources to assure sufficient energy supply to their home countries. Commerciality is not a primary concern to these companies and M&A prices often escalate quickly when these types of NOCs begin bidding on an asset or company. There are also NOCs, typically from smaller countries, which behave similar to the laCs in that they are seeking justifiable commercial returns as well as volumetric growth.

Conclusion: While there are broadly increased levels of investment interest in energy resources, the M&A market place is in relative balance between buyers and sellers. Competition for assets has increased, but the growing regional demand for oil and gas, as well as sustained higher commodity prices, supports significantly greater overall E&P investment and activity. External forces such as NOC participation in the M&A market typically only affects assets specifically pursued by NOCs; typically corporate or large­asset acquisitions. On the contrary, the highest level of M&A activity in Asia has been in lower cost (US$1 DOmin or less) transactions; with deals ranging from exploration acreage to mature producing assets. Commercial returns depend on a company’s ability to extract value in addition to the transaction price; this additional value is dependent on technical skill, project planning, geologic circumstance, and market conditions. Strategic Advisors in Global Energy Washington’ Houston’ Kuala Lumpur’ Beijing’ Paris’ Lausanne’ Bahr-ain www.pfcenergy.com

Reach Energy Berhad -Independent Market Research Analysis | Page 22 PFC Energy
6. INDUSTRY OVERVIEW (Cont’d) PFC E Reach Energy Berhad -Independent Market Research Analysis I Page 23 nergy PFC Energy Asia Pacific M&A Activity: The Asia Pacific region is an active M&A market place with 656 transactions recorded over the last six years. This represents approximately one-quarter of global M&A activity (excluding North America). Of the 656 Asia Pacific transactions, 531 had acquisition costs less than US$100 million dollars or acquisition costs were not announced (typically indicative of smaller transactions between two private parties). A further 44 Asia Pacific transactions had acquisition costs between $100 million and $250 million dollars. These acquisitions include both corporate (entire company) and asset (an equity stake in a specific block or field) acquisitions. • A recent transaction (June 2012) in the Asia Pacific region would be Pan Orient’s sale of three producing blocks in Thailand. The acquisition was made by ECO Environmental Investments (a non E&P energy company) for US$162mln and included a 60% operated stake with 6 million barrels of 1P reserves (with an implied acquisition price of US$22/bbl) and 18 million barrels of 2P reserves (with an implied acquisition price of US$9/bbl). Additionally, the assets were producing at a rate of 1.6 thousand barrels per day at the time of acquisition. After the acquisition, the partners have completed additional 3D seismic to identify more prospects on the blocks. They also initiated an enhanced oil recovery (EOR) waterflood program to increase production and recoverable reserves.
• Another recent transaction (August 2013) in the Asia Pacific region would be Santos’s acquisition of a 50% interest in the Northwest Natuna PSC offshore Indonesia from AWE Limited for US$188 million in cash and assumed costs. The 50% interest includes (pre-royalty) 31 million barrels of 1P reserves (with an implied acquisition price of US$6.16/bbl) and 49 million barrels of 2P reserves (with an implied acquisition price of US$3.84/bbl). The PSC contains the undeveloped Ande Ande Lumut heavy oil field which was discovered in April 2000 and two subsequent appraisal wells were drilled in 2006. A final investment decision (FlO) for development of the field is expected to be made in 2014.

 

Strategic Advisors in Global Energy Washington’ Houston· Kuala Lumpur’ Beijing’ Paris’ Lausanne’ Bahrain www.pfcenergy.com
126 6. INDUSTRY OVERVIEW (Cant’d) PFC Energy Re~ch Energy Berhad -Independent Market Research Analysis I Page 24 PFC Energy Industry Players and Competition: All upstream companies are essentially in competition with each other for available resources. This competition comes in the form of access to acreage and reserves. Most companies have active business development teams that are focused on pursuing and reviewing potential opportunities. These teams usually go in cycles of heavy activity focused on acquiring or disposing of assets and less active periods where opportunities are reviewed and considered but are unlikely to be pursued. These periods of activity are determined by company objectives, corporate finances, and available opportunities. As expected, companies with active business development teams and available financial resources are most likely to engage in M&A activity. The knowledge, skills, and abilities of these business development teams varies from company to company. Successful teams are usually a combination of technical, operational, and financial people with a management team capable of making rapid decisions when an actionable deal is identified. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK Strategic Advisors in Global Energy Washington’ Houston’ Kuala Lumpur’ Beijing’ Paris’ Lausanne’ Bahrain wwwpfcenergy.com
127 6. INDUSTRY OVERVIEW (Cont’d) PFC Energy Reach Energy Berhad -Independent Market Research Analysis IPage 25 PFC Energy 4. Relevant Laws and Regulations Governing the Industry Laws and Regulations: Each country has different rules, regulations, and legal systems governing its oil and gas industry. These laws are often complex and unique to the business of oil and gas within a particular legal jurisdiction. There are generally strict laws governing contracting, investment, employment, importation of equipment and materials, exports of hydrocarbons, local and corporate taxes, health and safety, and increasingly, environment regulations. Fiscal Terms: Fiscal terms are the taxes and financial terms and conditions of the contract for exploration, development, production, and disposal of oil and gas assets. These contracts can involve relatively simply royalty tax systems or complex production sharing agreements or contracts (PSAs or PSCs) that account for things like production levels, time from first production, costs reimbursed, hydrocarbon prices, revenue, excess profits, or rate of return of the project. Some terms of these contracts are negotiable on a project by project basis and others are strictly adhered to for all projects. Three Standard Models for Fiscal Terms I-~–~e~~~~;­

L—-‘-I-~·_·-~-­__ __~-~.-==_-____ J~===-_-~.~-~,-.-.~-_._~.-.==_-]’~-.~_-~=– -..-__:1-_ Concession/Royalty Production Sharing Contract -Funds paid to the govemment from -Determines the percentage of the produdion of oil or gas, free of production to be received by costs except taxes and based on associated parties typically either volume or value. consisting of the contractor, govemment and in some cases, the-Typically amounts to -15 -30% of national oil company. total production. -Cost Oil: Proportion of productionI-Taxes: Contractors are also allocated to the operator for theobligated to pay various taxes purpose of recovering defined costs. associated with their operations including corporate income taxes
-Profit Oil: Proportion of production and property tax. net of costs and expenses to be divided between participating parties (as profit) defined by the PSC. , Usually on a sliding scale favorable I to the contractor in early years of II’ the agreement. Service Contract -Operating costs incurred by the contractor are reimbursued with an additional fixed rate remuneration fee per barrel (RFB) produced. -All revenues from production net RFB are retumed to the govemment. Contractor does not receive any physical oil it produces. -Cost Oil: Total projed costs (or an amount of which that has been predetermined) is recoverable. -Taxes: Contractors are also, I I obligated to pay various taxes III associated with their operations including corporate income tax, I —r——-J Lr~~-“=~~I=~~~~-·J [——–)—-­L~._._”.~~.~~!~_=~~~2~.~_~,_._._. __. Strategic Advisors in Global Energy Washington’ Houston’ Kuala Lumpur’ Beijing’ Paris’ Lausanne’ Bahrain www.pfcenergy.com
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6. INDUSTRY OVERVIEW (Cont’d) PFC Energy Reach Energy Berhad -Independent Market Research Analysis I Page 27 PFC Energy lead to a change in terms unfavorable to the operator, contractor, and its partners. There is a risk of expropriation and resource nationalism that has seen contracts revoked or renegotiated. These concerns are aspects of political and market risk that need to be a consideration when evaluating entry options to a particular country or legal jurisdiction. Regulation: Following recent well-publicized events that highlighted health, safety, and environmental issues in the E&P industry, there has been renewed emphasis on regulation. Some regulations come in the form of tighter safety checks, increased investment in emergency planning, redundancy procedures in the event of a disaster, and more detailed studies of the environmental impact of E&P operations. Increased regulations of health, safety, and environmental issues can lead to delays to the development plan and increased costs. Technology: As increasingly complex reserves are commercialized by E&P companies, technology is continually being stretched to its limits in deepwater, oil sands, LNG, shale, and other imminent frontier technology plays. Potential changes in technology are more likely to come about due to the regulatory changes discussed previously. New technologies can also alter the supply, demand, and prices of local or global markets. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK Strategic Advisors in Global Energy Washington’ Houston’ Kuala Lumpur’ Beijing’ Paris’ Lausanne’ Bahrain www.pfcenergy.com
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Annual Average Price -Brent Crude Oil US$/bbl
$0

6. INDUSTRY OVERVIEW (Cont’d) PFC Energy Reach Energy Berhad -Independent Market Research Analysis IPage 29 PFC Energy disruptions. This lack of surplus spare capacity contributed to the rise in oil prices that began in 2006. With the global economic downturn of 2007 to 2009, demand for oil decreased and supply pressures on oil prices began to abate. The addition of the new capacity eased the physical likelihood of disruption, but did not result in a lowering of oil prices as in previous cycles for several reasons. Firstly, financial investors began to re-enter the market in September 2010 under the belief that the world economy was in recovery and these investments supported oil prices in spite of relatively high surplus capacity. Secondly, in early 2011 unrest in the Middle East and North Africa raised the fear that physical oil supplies would be affected. Although the disruption to North African supply could be easily covered by the rest of the OPEC members, market concern over increased risk is expected to keep prices high and volatile over the next two years. Additionally, the cost of producing oil has risen significantly and this rise in costs is likely to provide a “cost push” factor to oil prices in the future. The emergence of significant production from shale oil and gas resources in North America has also affected global supply and demand. Due to unexpected strong supply from shale oil and gas in North America, the United States has reduced the amount of oil it imports from international markets. This reduced demand from North America has increased available supply and capacity in international oil markets, in turn putting less upward pressure on global oil prices. To project the range of possible oil prices into the future, different economic scenarios were developed which account for the interaction of rising global demand for oil coming from the emerging markets, high oil prices (which reduce demand), environmental regulations (which also reduce demand), and new sources of supply. Market conditions are expected to sustain oil prices from 2014 to 2015 which are significantly higher than the US$35.30/barrel average for WTI (West Texas Intermediate; a benchmark price for crude oil) during 2000 to 2005 and the US$72.69/barrel average from 2005 to 2010. Brent prices continued a slow rise through the end of 2013, closing the year at -US$109/bbl. This increase is expected to taper off during 2014 which is forecast to average US$106/bbl. Regardless of these smaller fluctuations, the higher oil price levels and steadily increasing demand is likely to continue to fuel high levels of exploration and production activity. Although oil prices could be higher for the remainder of this decade, oil and gas companies are likely to be reluctant to make large investment decisions based on expectations of sustained prices higher than US$100. Strategic Advisors in Global Energy Washington’ Houston’ I<uala Lumpur’ Beijing’ Paris’ Lausanne’ Bahrain www.pfcenergy.com
132 6. INDUSTRY OVERVIEW (Cont’d) PFC Energy Reach Energy Berhad -Independent Market Research Analysis IPage 30 PFC Energy Please Note: The projections made by PFC Energy are based upon public (BP Statistical Review, SEC, company reports) and private sources, as well as internal estimates that are based upon data that is sUbject to significant uncertainty and incorporate assumptions that are subject to change and may prove to be incorrect. Recipients of the information should be aware that the process of making these projections is inexact and actual results may differ materially from those projected. In light of the limitations on the utility of the projections and information described above, as well as other factors, recipients are cautioned not to place undue reliance on this information. This report is dated 4th July 2014 THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK
Strategic Advisors in Global Energy Washington· Houston· Kuala Lumpur· Beijing· Paris· Lausanne· Bahrain www.pfcenergy.com
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