September 18, 2014

Dr. Loren C. Scott Loren C. Scott & Associates, Inc. www.lorencscottassociates.com

Energy Prices

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1990 1995 2000 2005 2010 2015

PGA PGAL PGAH

Figure 7: Price of Natural GasPe

r MM

BTU

2014 2015 2016PGA $4.50 $4.70 $4.80PGL $4.20 $4.10PGH $4.90 $5.20

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1980 1985 1990 1995 2000 2005 2010 2015

POA POAL POAH

Fig. 6: Oil PricesPr

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per B

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2014 2015 2016Average $100 $95 $90Low $85 $85High $120 $120

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76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06

Watch (1) shale plays & (2) the Gulf

Oddity #1: Energy has gained allies

(Very important to Bakken)

North Dakota’s Bakken Field • 2003: 10,000 b/d produced • 2014: 1,100,000 b/d produced---110-fold increase • ND surpassed Alaska as 3rd largest source of

domestic oil in 3/12 • Large amounts of “associated” natural gas being

produced – Lack of pipelines and gas-gathering systems means

about 30% fared off – As of 6/14 every new well must have capture plan to

reduce flaring to 5% by 2020 – $4 bill being invested in gathering systems b/w now &

2017

Bakken Well Economics: Year 1

• Crude Oil………………….365,000 bbls • Oil @ $80……………….….$29,200,000 • Dry Gas @ $3/mcf………… 1,181,505 • NGLs @$10/mcf………….. 3,933,850 • Total 1st Year…………… $34,315,355 • Over production life of 45 years: 615,000 bbls • New productivity adding 486 b/d for average

well (542,000 b/year) (4/14)

Oddity # 2

Each shale play is different Technology not as easily

transferable (Bakken lucky on this score)

A new Competitor for Rigs Emerging

Wolfcamp Shale Play

Wolfcamp Shale Largest in U.S.?

• Wolfcamp 50 Billion boe • Eagle Ford 27 Billion boe • Bakken 13 Billion boe • Second only to Ghawar Field in Saudi

Arabia • Wolfcamp Shale 3,500-4,500’ thick • Eagle Ford 300’ thick

Breakeven Oil Prices by Play (Rodgers Oil & Gas Consulting)

• Monterey (CA) $36 • Eagle Ford (TX) $49 • Bakken (ND) $50 • Granite Wash (OK) $57 • Niobrara (CO) $66 • Tuscaloosa (MS) $69 • Tuscaloosa (LA) $92

Oddity #3: Dramatic Improvements in Oil Imports

• 2013: – U.S. Production: 8.5 mmb/d – U.S. Imports: 7.6 mmb/d (47%)

• 2008: – U.S. Production: 5.0 mmb/d – U.S. Imports: 9.8 mmb/d (66%)

HIS - Shale plays Responsible for:

• U.S. oil production up 70% since 2008---highest growth of any country in world over that period

• Balance of payments effect: – Production over last 5 years has reduced our oil

import bill by $70 billion & reduced trade deficit by 10%.

– Growth of shale gas will prevent spending $100 billion of import natural gas.

• Increase since 2008 in oil = 88% of Iran’s exports before sanctions imposed. Helped make sanctions work well.

Latest Ole Miss Story

“I lost my 710 cap.”

Oddity #4:

Weird Bakken Effect on Oil Prices

Oil Price Trends

Oddity #5: Desire to Export Oil

Very important issue to Bakken

Already an exporter of petroleum products

Oil Product Demand/Production

Diesel & jet fuel comprised more than 80% of exports

• More stringent EPA regulations on sulfur content of diesel fuels in 2016

• Some refineries do not want to make financial commitment (Phillips $800 mm; Marathon $2.5 billion!) to produce lower sulfur diesel to meet U.S. standards;

• Why not export it overseas? • Shipping rates really low due to glut of tankers

Oddity #6: Debate over what is a

“product”? Is a field-level $500K to $5mm

facility to strip off volatile propane and butane so

condensate can safely flow through pipelines make it a

“product”?

Odd Effects of Export Issue

• 8 companies have announced plans to build $360 mm condensate splitters to turn lighter ends of crude into exportable products like naptha; Valero building topping units at TX refineries to do same thing, as is BP

• Anticipating export boom – orders for new VLCCs gone from 3 in 2011 to 47 in 2013.; 18 ordered for 2014-I

Oddity #7: Product Demand Decline

Note Oil Product Demand Decline:

Sources of Demand Decline

• Fewer vehicle miles traveled due to recession

• Current Corporate Average Fuel Economy (CAFÉ) requirements – 2012-16: increase fuel economy by:

• 31% for automobiles • 14% for light trucks

Oddity #8: Quick Recovery in GOM

• Pre-Spill: 33 rigs • Post Spill: 11 rigs • 2013: 36 • Mid 2014: 40 • 2015: 53* • 2016: 60*

– *Penn Energy

Benefits of the Gulf?

• Elephant finds – Chevron St. Malo Field, lower tertiary: 13,000 bbl/d

• Straddles world’s biggest consumer • Politically stable area (Argentina alarm) • Cost of taxes, royalties, and regulations among

lowest in world • Lots of opportunities from small, low risk

prospects to giant targets in extreme conditions • Vast network of pipelines & refineries

Oddity #9:

Changes in Mexico’s Energy Sector

Pacto por Mexico • Ended the national monopoly on oil and

gas exploration and development of past 75 years

• Declared constitutional on December 18, 2013

Pacto por Mexico • Secondary laws and regulations to be

worked out – Rules & regs for contracts with Mexican

government • Production-sharing, profit-sharing, pure service

contracts – How much and what properties can Pemex

keep (9/15/14 decision by Ministry of Energy);

• Estimated – Pemex gets 75% v 25% to private cos;

• Latter likely in deep waters and prospective shale plays

Trans-Boundary Hydrocarbons Agreement

Oddity #10

Unusual Effect of Jones Act

Oddity #11:

How will those vessels (& other vehicles) be powered?

(Source of demand for Bakken gas)

The Chemical Side

• Waller Marine: $200 mm • Harvey Gulf International – Port

Fourchon : $400 mm offshore LNG fueling facility

• Michoud Facility – New Orleans – Lockheed Martin building LNG fuel tanks

• What’s going on here?

LNG for Water-Borne Vessels

• Driven by: • (1) more stringent EPA regulations on

sulfur content of diesel fuels in 2016 • (2) spread b/w diesel and LNG prices,

Cost by Vessel/Vehicle

• Water-borne vessels (not ocean-going) – Dual LNG/diesel vessels cost 20% more

than diesel-fired vessels---roughly $15 mm more; – LNG operational costs about 40% less ;

maintenance costs far lower – Takes up lot of storage space

• Duel-fuel police cars: +$10,000 • Freight Trucks:

– 40% higher (+$50,000): Feds reimburse ½

Oddity #12:

Major industrial rebound in U.S. Low natural gas prices plus… (Another source of demand for

Bakken gas)

Amazing Industrial Boom: Case of Louisiana

• Past: Good year = $5 billion • GRIMA Survey: $103.8 billion! • Highly concentrated by industry;

– Chemicals = $95.8 billion • Highly concentrated geographically

(chemicals only) – Baton Rouge to New Orleans: $20.2 billion – Lake Charles MSA: $73.4 billion

Nature of Expansions • General Chemicals

– Ethylene, methanol, ammonia, etc. • G-T-L plants

– Sasol: $14-$17 billion – G2X: $1.5 bill – Southern California Telephone & Energy:

$2.4 bill • LNG Export terminals:

– At least $40 billion

UT Center for Energy Economics 2014

• 144 gas-intensive industrial projects of $121 billion;

• 26 BCF/day of demand; 19-31% increase in gas demand

• Does not include natural gas-fired power plants under construction or # of natural gas-powered vehicles

3 Massive Bets

• Massive bet on price staying low • Massive bet on Europe remaining stupid • Massive bet on oil/natural gas price split

1

2

3

4

5

6

7

8

9

1990 1995 2000 2005 2010 2015

PGA PGAL PGAH

Figure 7: Price of Natural GasPe

r MM

BTU

2014 2015 2016PGA $4.50 $4.70 $4.80PGL $4.20 $4.10PGH $4.90 $5.20

0

20

40

60

80

100

120

140

1980 1985 1990 1995 2000 2005 2010 2015

POA POAL POAH

Fig. 6: Oil PricesPr

ice

per B

arre

l

2014 2015 2016Average $100 $95 $90Low $85 $85High $120 $120

Oddity # 13

Gross ignorance about energy companies

“Big Oil”

In list of top 20 holders of oil reserves in the world, where does

ExxonMobil rank?

Top 20 Oil Reserve Holders: 2011

• 1.Saudi Arabia Oil • 2. Petroleos de Venz • 3. Nat’l Iran Oil • 4. Iraq Nat’l Oil • 5. Kuwait Pet. Corp. • 6. Abu Dhabi Nat’l • 7. Libyai Nat’l Oil • 8. Nigerian Nat’l Oil • 9. Qatar Pet. Corp. • 10. OAO Rosnett

• 11. OAO Lukoil • 12. Sonatrach • 13. PetroChina • 14. Petroleo Brasileiro • 15. BP PLC • 16. Petrolos Mexicanos • 17. ExxonMobil • 18. Sonangol • 19. Petroleos del Ecuador • 20. Total SA

ExxonMobil

• World oil reserves: relative size (2011) – Saudi Arabian Oil: 264.5 billion barrels – Petroleos d Venezuela: 211.2 billion barrels – Nat’l Iranian Oil co.: 151.7 billion barrels – ExxonMobil: 10.1 billion barrels

• Produces only 1% of world oil output

145.9 TCF

11.7 Bbl

36.9 TCF 3.8 Bbl

12.3 TCF Alaska:

217.1 TCF 45.4 Bbl

Recoverable Natural Gas Moratorium Areas

18.2 TCF 10.5 Bbl

Reaction to speech?

Depends on your perspective…

September 18, 2014

Dr. Loren C. Scott Loren C. Scott & Associates, Inc. www.lorencscottassociates.com