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.
Page # 3Petral Consulting Companyknowledge to bridge the gap
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
Page # 4Petral Consulting Companyknowledge to bridge the gap
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
Page # 5Petral Consulting Companyknowledge to bridge the gap
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
Page # 6Petral Consulting Companyknowledge to bridge the gap
U.S. Natural Gas Reserveshistorical trends & 2008 forecast
30
80
130
180
230
280
330
2000
2010
billi
on c
ubic
ft p
er d
ay
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
Page # 7Petral Consulting Companyknowledge to bridge the gap
Growth in Natural Gas Reserves:new fields, new reservoirs, & extensions
(lower 48 only)
05
101520253035
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
trill
ion
cubi
c fe
et
new fields new reservoirs extensions Avg 87-99 production
Page # 8Petral Consulting Companyknowledge to bridge the gap
U.S. Natural Gas R/P Ratiohistorical trends
U.S. Reserves/Production Ratio
4
5
6
7
8
9
10
11
1990
1995
2000
2001
2002
2003
2004
2005
2006
2007
rese
rves
/pro
duct
ion
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
Page # 9Petral Consulting Companyknowledge to bridge the gap
U.S. Natural Gas Productionhistorical trends & 2008 forecast
30
35
40
45
50
55
60
65
70
1990
1995
2000
2002
2004
2006
2008
2010
2015
billi
on c
ubic
ft p
er d
ay
actual forecast
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
Page # 10Petral Consulting Companyknowledge to bridge the gap
U.S. Natural Gas Demand2008 forecast & comparison vs 2005
30
35
40
45
50
55
60
65
70
75
2008
2009
2010
2011
2012
2013
2014
2015
billi
on c
ubic
ft p
er d
ay
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
Page # 11Petral Consulting Companyknowledge to bridge the gap
U.S. Natural Gas Demandelectric power generation market
Natural Gas Demand:power generation markets
10
12
14
16
18
20
22
2000
2005
2008
2009
2010
2011
2012
2013
2014
2015
billi
on c
ubic
ft p
er d
ay
2008 forecast 2005 forecast
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
Page # 12Petral Consulting Companyknowledge to bridge the gap
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
Page # 13Petral Consulting Companyknowledge to bridge the gap
Natural Gas PricingHouston Ship Channel minus 1% S resid
Houston Ship Channelminus 1%S Resid
-5
-4
-3
-2
-1
0
1
2
3
2000
2005
2008
2009
2010
2011
2012
2013
2014
2015
$ pe
r MM
Btu
2008 forecast 2005 forecast
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
Page # 14Petral Consulting Companyknowledge to bridge the gap
Natural Gas PricingHouston Ship Channel price forecasts
Houston Ship Channel Natural Gas
0
2
4
6
8
10
2000
2005
2010
2015
dolla
rs p
er M
MB
tu
actual forecast
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Crude Oil Demand/Supply & Pricing
Page # 16Petral Consulting Companyknowledge to bridge the gap
30
35
40
45
50
55
60
65
1975
1980
1985
mill
ion
bbl p
er d
ay
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?
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non-OPEC production
2022242628303234363840
1975
1980
1985
mill
ion
bbl p
er d
ay
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?
Page # 18Petral Consulting Companyknowledge to bridge the gap
OPEC production
0
5
10
15
20
25
30
35
40
1975
1980
1985
mill
ion
bbl p
er d
ay
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?
Page # 19Petral Consulting Companyknowledge to bridge the gap
OECD Crude Oil Demand
30
32
34
36
38
40
42
44
46
1995
2000
2005
2008
mill
ion
bbl p
er d
ay
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?
Page # 20Petral Consulting Companyknowledge to bridge the gap
OPEC production
20
22
24
26
28
30
32
34
1995
2000
2005
2008
mill
ion
bbl p
er d
ay
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 ?
Page # 21Petral Consulting Companyknowledge to bridge the gap
non-OPEC production
20
25
30
35
40
45
50
1995
2000
2005
2008
mill
ion
bbl p
er d
ay
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
Page # 22Petral Consulting Companyknowledge to bridge the gap
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?
Page # 23Petral Consulting Companyknowledge to bridge the gap
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)
Page # 24Petral Consulting Companyknowledge to bridge the gap
WTI at Cushing: Cash Market
WTI at Cushing: cash market prices
020406080
100120
2000
2005
2010
2015
dolla
rs p
er b
bl
actual forecast
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