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Prepared for

VMA Market Outlook WorkshopSan Francisco, CA

by

Spears & AssociatesTulsa, OK

Outlook for the Oil and Gas IndustryAugust 2010

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Macro Environment

• US crude oil spot prices are expected to

average $75-$80/bbl through the end of 2011

– Global demand growth rate of ~1.7% (1.5

million bpd) per year

• 80%-90% of incremental demand growth

to come from emerging markets

– 5+ million bpd spare capacity among OPEC

nations

• US natural gas spot prices are expected to

average $4.50-$5.00/mmbtu through the end of

2011

– US gas demand to increase 0.1% in 2010

• Industrial gas use up 1.5% but power

sector gas consumption down 1.5%

– US gas output is currently growing ~2%/year

Price

Outlook

Well

Costs

Rigs By

Type

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Macro EnvironmentPrice

Outlook

Well

Costs

Rigs By

Type• Overall well costs have risen modestly over the

past three quarters

― The cost increase has been uneven with

most of the price gains coming from rigs,

stimulation services, and OCTG

(casing/tubing).

• Further well cost increases are expected

through the end of this year. With commodity

prices expected to move sideways during this

period, operators’ upstream margins are

expected to decline.

• Oilfield service firms are expected to bring

significant additional OCTG and frac

horsepower capacity into the US market over

the next 6-12 months.

• The rate of increase in composite well costs is

expected to move sideways next year.

― OCTG and stimulation service prices are

expected to show declines in 2011.

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Macro EnvironmentPrice

Outlook

Well

Costs

Rigs By

Type• The US petroleum industry has adapted to the

stress of the current economic cycle by

fundamentally altering the way it goes about

drilling wells

― Rigs drilling horizontal wells have seen

activity increase 2X since Q2 2009 while

directional and vertical well drilling activity is

up 10% and 25%, respectively, over the

same time span

― The greater productivity of horizontal wells

(up to 20X more than conventional vertical

wells) means fewer wells (and valves!) are

needed to produce the same amount of oil

or gas output.

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Upstream Activity OutlookActive

Rigs

New

Wells

Active

Wells

Eqpt

Newbuild• Overall US rig count is expected to average

1,515 active units (as measured by Baker

Hughes) in 2010, up 40% from 2009, and will

average 1,645 active units in 2011, up 9%.

• Gas drilling activity will fall about 20% from mid-

2010 to the end of 2011 due to softness in gas

prices and the continued decline in drilling in

conventional gas reservoirs (using vertical

wells). In contrast, over the same timeframe the

number of rigs drilling oil wells is expected to

increase about 50%.

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Upstream Activity OutlookActive

Rigs

New

Wells

Active

Wells

Eqpt

Newbuild• We expect to see gas drilling activity fall in all regions

over the balance of this year and next, except in the

Marcellus basin, where operators are still ramping up

their field development programs.

• About two-thirds of all US oil rigs are active in either

Permian or the Williston basins. Oil rig count in both

regions, as well as other districts, has improved steadily

since mid-2009.

― Among oil plays, rig count in the Bakken shale is

currently about 40% above the 2008 peak; rig activity

in the Permian basin is about 10% above its 2008

peak. In other regions oil rig activity is currently about

even with the levels seen in late 2008.

― Oil drilling in all regions is expected to rise over the

balance of this year and next.

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Upstream Activity OutlookActive

Rigs

New

Wells

Active

Wells

Eqpt

Newbuild• The number of new gas wells drilled is

expected to fall 15% in 2011, to about 15,700

wells.

― The highly-productive horizontal wells now

being drilled means that more new gas

supplies can be brought to market in 2011

than in 2008 with fewer than half the

number of new gas wells drilled.

• The number of new oil wells drilled in 2011 is

expected to increase 33% in 2011, to about

33,800 wells.

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Upstream Activity OutlookActive

Rigs

New

Wells

Active

Wells

Eqpt

Newbuild• The number of active gas wells is expected

to exceed 458,000 wells in 2011, up 0.8%

from this year

• Active oil well count is forecast to reach

533,000 wells next year, up 2.0% from

2010

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Upstream Activity OutlookActive

Rigs

New

Wells

Active

Wells

Eqpt

Newbuild• The combination of high utilization and rising

prices has led to a surge in orders for new frac

equipment in recent months.

• Total North American frac horsepower is

estimated to reach 9.97 million hp by the end of

2010, up 28% for the year.

• With lead times for new equipment orders

reported to be on the order of about 5 months,

most of the new equipment is not expected to

begin entering the market until the second half

of 2010.

• Given that we expect rig activity to increase

about 9% in 2011, demand for frac services is

expected to grow 10%-15% next year as

operators continue the trend toward ever-larger

frac jobs.

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Upstream Activity OutlookActive

Rigs

New

Wells

Active

Wells

Eqpt

Newbuild• We estimate that new drilling rig construction

activity has fallen about 60% in the US in 2010,

to about 100 new units this year.

• Highly-efficient advanced technology rigs

designed for use in shale plays are nearly fully

utilized. Operators remain willing to sign long-

term (~3 year) contracts for these units,

providing the support for new rig construction

(~$25 million/unit).

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Midstream Activity OutlookActivity

Drivers

Major

Projects• Capital spending for midstream operations

(gathering systems and gas processing plants)

is driven by:

― Change in gas production capacity

― Oil-gas price relationship

― Drilling activity

― Gas composition (“wet” gas)

― Petchem markets

• NGL production has been rising ~3% per year

since 2005

• Rising NGL production combined with

decoupled oil and gas prices has resulted in

the US becoming a low-cost source for

petchem feedstocks.

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Midstream Activity OutlookActivity

Drivers

Major

Projects• “Most active” regions are expected to be:

o Marcellus shale (Pennsylvania)

o Houston, PA gas

processing/fractionation (Mark West)

o Sarnia, OH

o Williston basin

o Tioga, ND gas plant (Hess)

o Bakken Pipeline/Bushton, KS

fractionator (Oneok)

o Upper Texas Coast (Mont Belvieu)

o Fractionator operators (Targa

Resources, Enterprise, etc.) have

announced incremental capacity

expansions but no new grass roots

facilities.

o Total fractionation capacity in this region

expected to increase by 100-150k bpd

during 2010-2012.

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Summary

• US oil and gas prices are expected to remain generally steady through the end of

2011 near current levels.

• Overall well costs are expected to rise through the end of this year but then move

sideways during 2011.

• The widespread adoption of horizontal drilling techniques and the associated increase

in new well productivity is fundamentally restructuring the upstream industry in the

US.

• Overall US rig count is expected to increase 9% in 2011 after rising 40% this year.

Gas drilling activity will fall 20% but oil drilling activity will grow 50% in 2011.

• The number of active oil wells (up 2%) and gas wells (up <1%) will grow modestly in

the coming year.

• “Frac” horsepower additions are expected to grow 15%-20% in 2011 after rising 25%-

30% this year. Drilling rig newbuilding is expected to hold steady.

• NGL production is expected to grow 3% in 2011.

• Midstream capex for processing plants and pipelines is expected to hold steady.

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Since 1965 Spears & Associates has provided market research and business

information services to the worldwide petroleum equipment and service industry,

specializing in products and services used in exploration, drilling & completion,

production, transportation and refining. Current and former clients include

petroleum equipment manufacturers, oilfield service firms, producers, financial

institutions, trade associations, and government entities.

Spears also provides independent commercial due diligence and advisory

services in support of oilfield mergers/acquisitions and IPOs.

In addition to our market research and consulting assignments, Spears and

Associates produces several publications covering the upstream petroleum

industry, including: the quarterly Drilling and Production Outlook, the annual

Oilfield Market Report, the PipeLogix series of reports on the oil country

tubular goods (OCTG) and line pipe markets, the quarterly Drilling and

Completion Services Cost Index, and the weekly Oilfield Market Intelligence

report on commercial developments in the NAM upstream industry.

Spears and Associates