Slide 25 of 25

Notes:

• We believe crude oil prices will strengthen somewhat, but prices will rise much more slowly than they fell, and they are expected to remain lower in 1998 than in recent prior years.
  • Cuts in production by some producing countries will help to slow the supply surplus.
  • However a large overhang in stocks and slowed demand growth from the Asian situation will keep a strong price increase out of the picture.

• We also expect the light-heavy differential to contract somewhat.
  • The loss of the Asian market for West African sweet crude oils will put downward pressure on the differential.
  • Cutbacks in heavy crude oil production targeted by Mexico, Saudi Arabia and to some degree Venezuela should help narrow the differential.
  • The residual fuel market should improve if crude prices stay down.

• As our prior slides have shown, the factors affecting the differentials are diverse and hard to predict on a short-term basis. The market can reverse itself fairly quickly, but our best guess is that the differentials should be shrinking as the year progresses, rather than growing.

• In conclusion, the bad news for the California producers is that crude prices are not likely to rebound strongly in the near future. The good news is that they are expected to increase somewhat over today’s low levels by year end, and the differential should shrink somewhat as well.