The Economics of Oil and Natural Gas

from a Global, National and State

Perspective February 8, 2017

Erica Bowman

Chief Economist

American Petroleum Institute

1220 L Street, NW • Washington, DC 20005-4070 • www.api.org 1

1220 L Street, NW • Washington, DC 20005-4070 • www.api.org 2

The Stages of U.S.

Unconventional Growth

Source: RBN Energy

1220 L Street, NW • Washington, DC 20005-4070 • www.api.org 3

Oil Markets

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Crude Oil Prices & Event Timeline

What is driving

today’s prices?

Source: EIA, Thomson Reuters

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-3

-2

-1

0

1

2

3

4

5

6

82

84

86

88

90

92

94

96

98

100

2010-Q1 2011-Q1 2012-Q1 2013-Q1 2014-Q1 2015-Q1 2016-Q1 2017-Q1 2018-Q1

Imp

lied

Sto

ck C

han

ge (

mill

ion

bar

rels

per

day

)

Sup

ply

& D

eman

d (

mill

ion

bar

rels

per

day

)

Global Crude Oil and Liquid Fuels Supply, Demand and Stock Change

Implied stock change (right axis) World Production World Consumption

Forecast Historical

Supply consistently starts to exceed demand

Global supply has consistently exceeded demand since

the start of 2014; the Energy Information Administration

(EIA) forecasts a return to market balance starting in the

third quarter of 2017

Source: EIA, Short-term Energy Outlook, January 2017

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GDP Growth in non-OECD countries has not kept pace

with expectations.

Forecast Year:

GDP Growth in non-OECD Countries (Annual Expectations)

Source: EIA Short-term Energy Outlook, January 2017

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-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2014-Q1 2014-Q2 2014-Q3 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1 2016-Q2 2016-Q3 2016-Q4

mill

ion

bar

rels

per

day

Y/Y Crude Oil Production Change

United States Saudi Arabia Iran Iraq Russia

In 2016 U.S. oil production declines year over year while

several OPEC members continue to increase production.

Iraq and Saudi Arabia added over 1.1 million barrels per day of production in 2015 and another

0.7 million barrels per day in 2016. In addition, Iranian production lifted to pre-sanction levels

in 2016 (+0.7 million barrels per day).

Source: EIA

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-300

-200

-100

0

100

200

300

400

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Mill

ion

Bar

rels

pe

r D

ay

Y/Y OECD Inventory Change

The magnitude and duration of the inventory build since

the last quarter of 2014 has been the highest and longest

in fifteen years.

Source: EIA

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Most of the growth in world oil consumption occurs in non-

OECD countries, specifically in Asia.

Source: EIA, International Energy Outlook, 2016

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EIA projects that oil prices will recover to $75 per barrel by

2020 across the majority of the Annual Energy Outlook 2017

cases.

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Colorado Oil Supply

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U.S. Tight Oil Production

Oil production across U.S. tight oil plays

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0

50

100

150

200

250

300

350

400

450

Tho

usa

nd

Bar

rels

pe

r D

ay

Monthly Crude Oil Production

CO WY UT MT NM

Colorado crude oil production had one of the fastest

growth rates in the U.S. between 2013 and 2015. While

production has declined from 2015 highs, production still

remains strong.

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-250 -200 -150 -100 -50 0 50 100

TexasNorth Dakota

WyomingCaliforniaColorado

KansasUtah

LouisianaMontana

MississippiOhio

OklahomaAlabama

Alaska SouthIllinois

ArkansasPennsylvania

MichiganNebraskaKentucky

New MexicoIndiana

South DakotaWest Virginia

AlaskaAlaska North Slope

Gulf of Mexico

Crude Oil Production Change (000 barrels/day) 2016 (through Oct) - 2015

Colorado crude oil production in 2016 was 26

thousand barrels per day less than 2015 levels.

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Niobrara Oil Drilling Productivity and Production

Source: EIA, Drilling Productivity Report, January 2017

Rig count has continued to

rebound since the second

quarter of 2016.

Productivity per rig continues

to increase.

Oil production is expected to

be 13 thousand barrels per

day higher in February 2017

over January 2017.

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Natural Gas Markets

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528

1834

552

109 18

351

495 470

17 115

Coal Natural Gas Crude/PetroleumProducts

HydroelectricPower

Renewables Biofuels

Colorado Energy Profile: 2014 (Trillion Btu)

Production Consumption

Colorado is a net energy exporter mainly due to its

natural gas production.

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Total U.S. Dry Natural Gas Production Decreased in 2016

relative to 2015. However, EIA expects 2017 production

to return to 2015 levels by the third quarter of 2017.

60

62

64

66

68

70

72

74

76

78

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

bcf

/d

U.S. Dry Gas Production

2014 2015 2016 2017 STEO

Source: EIA, Short-term Energy Outlook, January 2017

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0

1,000

2,000

3,000

4,000

5,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

bcf

U.S. Natural Gas Working Storage

2014 2015 2016 2017 STEO

The lower 2016 production and continued strong demand

pulls from the power generation sector throughout 2016

has helped to bring working natural gas storage levels

back into balance.

Source: EIA, Short-term Energy Outlook, January 2017

1220 L Street, NW • Washington, DC 20005-4070 • www.api.org 20

40

50

60

70

80

90

100

110

120

130

140

2000 2005 2010 2015 2020 2025 2030 2035 2040

Bcf

/d

U.S. Dry Natural Gas Production

Actuals

High oil and gasresource

High oil price

High economicgrowth

Reference case

Alternative assumptions cause significant differences in

U.S. natural gas production projections.

Source: EIA, Annual Energy Outlook, 2017

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0

20

40

60

80

100

120

Referencecase

Higheconomic

growth

High oilprice

High oiland gas

resourceand

technology

U.S. Natural Gas Demand: 2025

0

20

40

60

80

100

120

Referencecase

Higheconomic

growth

High oilprice

High oiland gas

resourceand

technology

U.S. Natural Gas Demand: 2030

Power Gen

Industrial

LNG Exports

Pipeline Exports

Res/Comm

Natural gas demand sector growth is impacted by different

drivers.

Source: EIA, Annual Energy Outlook, 2017

The largest demand growth opportunities include industrial, LNG exports and power generation.

High oil prices will drive the most growth in LNG exports and industrial demand while high oil and gas

resources will drive the most growth in power generation.

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Industrial Specifics

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Source: IHS, America’s New Energy Future, September 2013; EIA, Natural Gas Plant Liquids Production, January 2017

Natural gas plant liquids production exceeds

expectations.

Actual production

2013 Projection Historical

NGL Production (thousand barrels per day)

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0

200

400

600

800

1000

1200

$100/bbl Oil $59/bbl Oil

Cost to Produce One Metric Ton of Ethylene ($US per metric ton)

The driver of U.S. competitiveness is the cost to

convert ethane to ethylene versus naptha to ethylene.

Source: IHS- America's new energy future report, volume 3.

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Petrochemicals, primary metals, nonmetallic mineral

products and paper lead the natural gas intensity

rankings.

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Natural Gas Trade

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Source: EIA, Annual Energy Outlook 2017

Increased natural gas trade is driven by LNG export

and pipeline exports to Mexico.

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Global demand for LNG, oil, and global and domestic

natural gas prices impact expected future U.S. LNG export

volumes.

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Power Generation

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20

20

19

19

20

25

29

29

25

21

20

22

21

20

18

18

21

24

27

29

26

23

20

21

23

23

23

22

24

30

34

33

30

26

24

25

25

24

24

24

26

32

37

37

31

24

22

23

0

5

10

15

20

25

30

35

40

J A N F E B M A R A P R M A Y J U N J U L A U G S E P O C T N O V D E C

BC

F/D

NAT GAS CONSUMPTION: POWER GENERATION

2013 2014 2015 2016

Source: EIA, Short-term Energy Outlook, January 2017

Natural gas consumed for power generation was the

highest on record in 2016 at 27.5 Bcf/d.

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Source: EIA, Electric Power Monthly

Coal-fired power generation was highest in CO, with

non-hydroelectric renewables coming in second.

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Colorado Natural Gas Supply

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0

1000

2000

3000

4000

5000

6000

7000

8000

Mill

ion

Cu

bic

Fee

t p

er

Day

Natural Gas Production: Gross Withdrawals

CO MT NM UT WY

Colorado natural gas production in 2016 remained flat to

2015 levels.

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-2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5

Texas

Wyoming

Arkansas

Gulf of Mexico

Utah

Kansas

California

New Mexico

Alaska

Oklahoma

Colorado

Montana

North Dakota

West Virginia

Louisiana

Pennsylvannia

Ohio

Natural Gas Production Change: Bcf/d 2016 (through Oct) - 2015

Large year over year natural gas production declines were

realized in Arkansas, Wyoming and Texas in 2016 relative

to 2015.

Source: EIA, Natural Gas Production, January 2017

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Niobrara Natural Gas Drilling Productivity and Production

Source: EIA, Drilling Productivity Report, January 2017

Rig count has started to

rebound since the second

quarter of 2016.

Productivity per rig continues

to increase.

Natural gas production is

expected to be 45 million

cubic feet per day higher in

February 2017 over January

2017.

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Thank you.