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CHAPTER 3 Our Environment Economic and industrial environment

The economic and industrial environment in which we operate is key to adapting our business model and determining our strategy.

ECONOMIC AND INDUSTRIAL ENVIRONMENT

EXPLORATION AND PRODUCTION

The fall in oil prices, which has left the barrel of Brent at $38 in December 2015 (70% lower than its price in June 2014), is impacting all oil companies, mainly with regard to their exploration and production activities. This situation originates in:

Oversupply caused by maximum levels of unconventional hydrocar- bon production in the US (shale oil).

Reduced demand in the past year, mainly in emerging countries es- pecially the Chinese economy.

The decision by the members of the Organisation of Petroleum Ex- porting Countries (OPEC) not to cut production to raise prices.

Exploration and production are see- king maximum efficiency in processes to improve profitability, which is condi- tioned by:

The increase in development costs for exploration projects, mainly due to increasing technical com- plexity (deepwater and unconven- tional fields).

Reconsideration of major invest- ments.

Asset divestment.

CURRENT SITUATION

2016-2020 OUTLOOK The oversupply scenario is expected to continue and therefore a reversal in the downward price trend in the short term is regarded as unlikely. In the long term (2020), the price of Brent is expected to recover to a point of equilibrium at around $80/bbl.

The future of exploration and production is directly related to crude prices and, while they remain low, a change in the business scenario is not likely, keeping cost reductions, the search for efficien- cies and the contention of investments related to growth.

ANNUAL AND CORPORATE RESPONSIBILITY REPORT 2015