natural gas & crude oil: supply/demand & prices outlook to 2015

Natural Gas & Crude Oil:supply/demand & prices

outlook to 2015

February 2009

knowledge to bridge the gap

Page # 2Petral Consulting Companyknowledge to bridge the gap

Waiver of Liability

Petral Consulting Company (PCC) is not liable for any use or misuse of the contents of this presentation

PCC provides no express or implied warranty regarding the accuracy of the information contained in this segment of the presentation.

PCC does not advocate trading strategies, feedstock acquisition strategies, or feedstock marketing strategies. Any actions taken by attendees to the ISM Feb 2009 meeting based on this presentation are at your own risk.


Sir, where should we look for oil?question posed by young geologist

Oil is found within the minds of menWallace Pratt -- chief geologist for Esso

Petral forecasts account for technology improvements in seismic, exploration, and production …we are not members of the peak oil club


HISTORICAL FACTOID

an official Senate inquiry concluded in 1916 that U.S. crude oil production had already passed its peak and would be exhausted by 1941 – » U.S. production in 1916 averaged 824 thousand bpd» production increased for 55 years to a peak of 9.6

million bpd


Natural Gas Supply/Demand & Price Outlookwhat do you believe?

most other consulting firms» nothing goes right –

pessimists are right and gas production IS declining

» in spite of premium prices – merchant power producers expand capacity continuously

» gas inventories do not grow in spite of repeated price spikes

Petral View» higher prices stimulate

exploration & production grows

» higher prices discourage demand growth in power generation & industrial markets

» higher prices encourage LNG production; imports increase, gas inventories reach higher levels & ease fears during winter months


U.S. Natural Gas Reserveshistorical trends & 2008 forecast

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80

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2000

2010

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actual 2008 forecast 90-99 avg.

When gas prices increased to levels that supported more aggressive exploration activity (Dec 2000/Jan 2001), exploration companies immediately recorded increases in producing reserves

In 2007, proven reserves increased in all regions by 8-10% except the Rocky Mountains which recorded a 25% increase

Exploration companies perfected shale reservoir technology & shale plays popped up all over


Growth in Natural Gas Reserves:new fields, new reservoirs, & extensions

(lower 48 only)

05

101520253035

1990

1991

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1999

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2001

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2005

2006

2007

trill

ion

cubi

c fe

et

new fields new reservoirs extensions Avg 87-99 production


U.S. Natural Gas R/P Ratiohistorical trends

U.S. Reserves/Production Ratio

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5

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7

8

9

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11

1990

1995

2000

2001

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2003

2004

2005

2006

2007

rese

rves

/pro

duct

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ratio

For 12 years, the ratio of reserves to production was relatively flat at 8.5-9.0 years

As the jump in exploration activity began to pay off, the R/P ratio began to increase because …

reserves additions outpaced the industry’s capability to construct new natural gas gathering system pipelines to bring discoveries to the market


U.S. Natural Gas Productionhistorical trends & 2008 forecast

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1990

1995

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2006

2008

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2015

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Even though exploration activity was at “maintenance” during 1985-1999, total natural gas production in the U.S increased to 58 bcfd in 2001

The exodus of offshore drilling rigs from the shallow water Gulf of Mexico led to a steady decline in GOM production during 2002-2006 -- hurricane Katrina also caused extensive supply disruption for several months

As production from new discoveries began to kick in, total production increased to about 60 bcfd in 2008


U.S. Natural Gas Demand2008 forecast & comparison vs 2005

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2008

2009

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2011

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2015

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2008 forecast 2005 forecast

2008 forecast for power generation demand is higher than 2005 forecast

» supply growth exceeded expectations & pricing incentives supported stronger demand growth

2008 forecasts for demand in the industrial & residential/commercial sectors are nearly unchanged


U.S. Natural Gas Demandelectric power generation market

Natural Gas Demand:power generation markets

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Demand in the power generation market is sensitive to relative price strength

» residual fuel oil is the alternative fuel supply of choice for power plants with dual fuel capability

» demand response to price spikes is nearly instantaneous


Important Natural Gas Price Drivers

Balanced or Tight Supply » Producers flow wells at full

rates year-round» Buyers worry that

inventories will not reach levels that will cover peak winter demand

» Colder winters strain the capability to withdraw supply from storage fast enough

Adequate to Plentiful Supply» Some producers have to

curtail production during the late summer & early fall

» Full production rates push inventories to storage capacity; some storage operators have containment problems

» Inventories are sufficient to meet demand even during colder winters


Natural Gas PricingHouston Ship Channel minus 1% S resid

Houston Ship Channelminus 1%S Resid

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$ pe

r MM

Btu


Market balance was tight during 2000-2005 & prices maintained premiums versus 1%S resid

Supply growth began to outstrip demand growth in 2007 & prices weakened with persistent discounts versus 1%S resid

Prices are forecast to remain discounted versus resid through 2015


Natural Gas PricingHouston Ship Channel price forecasts

Houston Ship Channel Natural Gas

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Crude Oil Demand/Supply & Pricing


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Before 1978, oil prices were generally $12-15 per barrel.

After the Iranian Revolution, prices spiked to $45 per barrel

Before the price spike, global oil demand growth averaged 2.6% per year or 1.65-1.75 million bpd

As prices moved sharply higher, demand began to decline in 1980 and fell by a total of 8 million bpd (1980-1983)

Equally important, high prices sparked a global surge in exploration & discovery

Global Crude Oil Demandwhat happens when prices spike?


non-OPEC production

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1980

1985

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As crude oil prices moved sharply higher after the Iranian revolution, exploration activity surged & non-OPEC producers made major discoveries all over the world -- North Sea, Mexico, Alaska

Non-OPEC production increased by 12 million bpd during 1975-1985 – growth in non-OPEC production was the bane of OPEC’s existence during 1985-1999

Global Crude Oil Supplywhat happens when prices spike?


OPEC production

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1975

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1985

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bbl p

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Non-OPEC producers flow at full capacity all the time

During this period of declining demand, OPEC producers bore the full brunt of both falling demand and rising non-OPEC supply

OPEC producers had more than 10 million bpd of spare capacity by 1985

Saudi Arabia saw its production fall to a low of 3.4 million bpd in 1985 or more than 6 million bpd less than in 1979 – the Saudi royal family learned some very hard lessons during 1979-1985

Global Crude Oil Supplywhat happens when prices spike?


OECD Crude Oil Demand

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Crude oil demand in the OECD countries (the mature economies of North America, Western Europe, Japan & S Korea) began to decline when prices began to accelerate after 2004

Government intervention becomes virtually certain as consumers complain about rising prices

U.S. mandates for boosting the average automobile fuel efficiency to 35 mpg by 2020 were in place prior to the election

Demand in OECD countries will continue to decline for several years

Global Crude Oil Demandwhat happens when prices spike?


OPEC production

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1995

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Before 2005, four countries in the Middle East had measureable spare production capacity; no one country had control

During 2005-2007, only Saudi Arabia had spare capacity & exercised control

Does the Saudi royal family remembers the lessons of 1978-1985?» Saudi Arabia increased

production capacity to 11.5 mmbpd during 2007-2008 & Kuwait added 0.5 mm bpd of capacity in 2008

Global Crude Oil Supplywhat happens when prices spike ?


non-OPEC production

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Production from non-OPEC sources increased steadily during 1995-2005 but production growth began to accelerate after 2006 -- in response to high prices

U.S. production is forecast to increase by 0.5-1.0 mm bpd during 2010-2015 -- after 25 years of decline

Canadian production is forecast to grow by 0.75-1.0 mm bpd -- not as fast as expected in 2007 but production will continue to grow

Global Crude Oil Supplynon-OPEC production trends


the recession: how deep, how long, how widespread & how much impact on crude oil demand?

government mandates: how fast will auto manufacturers shift to producing hybrids and all-electric vehicles?

falling oil prices: how do they impact development of high cost supply sources like the Alberta oil sands & deepwater offshore reserves?

resurgent Russia and nuclear Iran: will they act together to restrict supply development in the Caspian Sea & Middle East?

Iraq: will Iraq achieve political stability & attract foreign capital needed to boost production to 4 to 5 million bpd by 2020?

Saudi Arabia: increased production capacity to 11.5 million bpd but will produce only 7.5-9.0 million bpd for several years; Saudi royal family will TRY to use surplus production capacity to control prices to its geopolitical advantage

Crude Oil Prices1986 to 1999 déjà vu? OR a more complex world?


Petral ChroniclesFantasy Headlines

WTI spikes to $45 per bbl – Feb 7, 2004WTI spikes to $45 per bbl – Feb 7, 2004√ √ Sep 2004Sep 2004

WTI spikes to $60 per bbl – Aug 7, 2004WTI spikes to $60 per bbl – Aug 7, 2004√ √ Aug 2005Aug 2005

PCC -- WTI spikes to $100 per bbl – Feb 7, 2005PCC -- WTI spikes to $100 per bbl – Feb 7, 2005Goldman Sachs $105 per bbl – Apr 1, 2005Goldman Sachs $105 per bbl – Apr 1, 2005

√ √ Mar 2008Mar 2008PCC -- Bull Rally Pushes WTI to $150 per bbl – Nov, 2007PCC -- Bull Rally Pushes WTI to $150 per bbl – Nov, 2007

√ √ July 2008 ($145.91)July 2008 ($145.91)


WTI at Cushing: Cash Market

WTI at Cushing: cash market prices

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natural gas & crude oil: supply/demand & prices outlook to 2015

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