Markets and Politics

Bob TippeeEditor, Oil & Gas JournalPVF Roundtable General Assembly MeetingAug. 18, 2009

Crude prices

Oil prices track stock prices

Source: KBC Market Services, Monthly Oil Market Outlook, Aug. 6, 2009

World oil demand (MMb/d)

0

10

20

30

40

50

60

70

80

90

100

2004 2005 2006 2007 2008 2009F

OECD

Non-OECD

Source: IEA

83.9

-2.8%

86.3

-0.2%FR: 85.4

IEA’s demand view

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

Jan Apr Jul Oct Jan Apr Jul

Y-Y change

Million

b/d

Forecast month

2008 vs. 2007

2009 vs. 2008

Source: IEA Monthly Oil Market Report for each month indicated

To 83.8 MMb/d for ‘09

World oil supply (MMb/d)

0

10

20

30

40

50

60

70

80

90

100

2004 2005 2006 2007 2008 2009F

Proc. Gain*

OECD

Non-OECD

OPEC**

*Plus other biofuels. Source: IEA

84.6

-2.2%FR: 85.7

Non-OPEC supply (MMb/d)

50.1

50.2

50.3

50.4

50.5

50.6

50.7

50.8

50.9

51

51.1

2006 2007 2008 2009F

Non-OPEC

Source: IEA; Note: Includes OPEC members as of 1-1-09. Angola (1.7 MMb/d), Ecuador (0.5 MMb/d) joined OPEC in ’07. Indonesia withdrew from OPEC in ’08.

OPEC NGL (MMb/d)

0

1

2

3

4

5

6

2004 2005 2006 2007 2008 2009F

OPEC

5.2 +11%

Source: IEA

2010:

6.1

Forcing balance (MMb/d)

Demand 83.9

Ex-OPEC supply

-51.0

OPEC liquids -5.2

Stock change +0.5*

OPEC crude -28.2 0*

Source: IEA *OGJ assumption.

Observations (MMb/d)

Call = 28.2 Quota = 24.85 Call - Iraq @ 2.4 = 25.8 June OPEC-11 crude = 26.12

OPEC’s market view

Source: OPEC Monthly Oil Market Report, January 2009

OPEC production/OECD stocks

Source: OPEC Monthly Oil Market Report, June 2009

OECD stocks (days’ supply; EIA)

OPEC spare capacity (EIA)

The market: a snapshot

Demand will be down in ’09 – but the amount of expected decline is stabilizing

Cushions thick: stocks, p’n capacity OPEC has tried to follow demand

down with production cuts Demand revival depends on economy

IMF’s World Economic Outlook*

*Updated July 8, 2009.

Percent; quarter-over-quarter; annualized.

The questions

What drives prices? Fundamentals (supply and demand) Investment flows Currency fluctuations

Will OPEC wait too long to raise output? Non-OPEC output? Role of speculators?

US energy shares

0%10%20%30%40%50%60%70%80%90%

100%

Hydro, other

Nuclear

Coal

Gas

Oil

Source: EIA for 2004-08

US product demand (MMb/d)

0

5

10

15

20

25

2004

2005

2006

2007

2008

2009

FR

2009

MY

Others

LPG, ethane

Resid

Distillate

Jet fuel

Mogas

18.76

-3.4%

Note: Before exports (1.76 in ’08; 1.85 in ’09). Source: EIA for 2004-08.

18.73

-3.9%

Gasoline, distillate demand (MMb/d)

0123456789

10

2004

2005

2006

2007

2008

2009

FR

2009

MY

Gasoline

Distillate

Source: EIA for 2004-08

3.76

-4.7%

9.01

+.02%

Gasoline, ethanol use (MMb/d)

0

1

2

3

4

5

6

7

8

9

10

2004 2005 2006 2007 2008 2009MY

Gasoline

Ethanol

’09 is mandate (724 Mb/d)

9.01

+0.2%

Source: EIA for 2004-08

EISA mandate: 2.4 MMb/d in 2022 (all biofuels)

ULSD, biodiesel use (MMb/d)

0

0.5

1

1.5

2

2.5

3

3.5

2006 2007 2008 2009MY

0-15 ppm S dist.

Biodiesel

Source: EIA for 2006-08

3.008

-6.2% Applied 80% factor to dist. demand

’08 production: 44,500 b/d;

’08 consumption: 20,900 b/d

’22 mandate:

326,160 b/d

Industry oil imports (MMb/d)

0

2

4

6

8

10

12

14

16

Products

Crude

12.15

-5.8%

65% of demand

Source: EIA for 2004-08

US refining

16.4

16.6

16.8

17

17.2

17.4

17.6

17.8

78

80

82

84

86

88

90

92

94

Capacity

Utilization

MMb/d %

Source: EIA for 2004-08

US total liquids production (MMb/d)

0

1

2

3

4

5

6

7

8

NGL, LRG

C and C

7.05 +4.6%

Source: EIA for 2004-08

US gas consumption (tcf)

20.5

21

21.5

22

22.5

23

23.5

24

Cons.

Fcst.

Source: EIA for 2004-08

22.75

-2.0%

Marketed gas production (tcf)

21.2 +5%

Source: EIA for 2004-08

0

5

10

15

20

25

Other

Fed GoM

Louisiana

Texas

21.23

-1.0%

US gas imports (tcf)

-2

-1

0

1

2

3

4

5

2004

2005

2006

2007

2008

2009

FR

2009

MY

Exports

LNG

Mexico

Canada

LNG 0.53

+50%

Source: EIA for 2004-08

US drilling--completions

0

10,000

20,000

30,000

40,000

50,000

60,000

2004

2005

2006

2007

2008

2009

FR

2009

MY

Comp.

Fcst

43,384 -16.7%

Source: API for 2004-08

36,788

-29.4%

US drilling – rig count

0200400600800

1,0001,2001,4001,6001,8002,000

Rigs

Fcst.

Source: Baker Hughes for 2004-08

1,503

-19.5% 1,235

-33.9%

The budget’s costs (ex. climate) Measure 2010-19 receipts

(billion $)

Superfund 17.2

GoM tax (deepwater) 5.3

IDC 3.3

Tertiary injectant 0.062

Passive loss 0.049

Manufacturers’ tax 13.3

G&G amortization 1.19

Percentage depletion 8.3

GoM (use or lose) 1.2

Total 49.9

Renewables instead of oil – 1

“The [measure or its result], like other oil and gas preferences the administration proposes to repeal, distorts markets by encouraging more investment in the oil and gas industry than would occur under a neutral system…”

From Treasury Department explanations of budget oil, gas provisions:

Renewables instead of oil – 2

“…To the extent the [measure or result] encourages overproduction of oil and gas, it is detrimental to long-term energy security and is also inconsistent with the administration’s policy of reducing carbon emissions and encouraging the use of renewable energy sources through a cap-and-trade program.”

Closing the gap takes money

Source: US Energy Information Administration

Arithmetic of subsidies - 1 Oil & gas in 1981

38.1 x 1015 btu $10.9 billion

subsidies (percentage vs. cost depletion and expensing E&D costs)

Ethanol in 2007 550 x 1012 btu $3.2 billion

subsidies

29¢/MMbtu $5.82/MMbtu

Source: “Federal Financial Interventions and Subsidies in Energy Markets 2007,” Energy Information Administration, April 2008

Arithmetic of subsidies - 2 Oil & gas in 2007

30.57 x 1015 btu $1.74 billion

subsidies (various, mostly for small producers)

Ethanol in 2007 550 x 1012 btu $3.2 billion

subsidies

5.7¢/MMbtu $5.82/MMbtu

Cost to displace oil and gas

By 5% from projected 2020 usage levels

Assuming $6/MMbtu subsidization of 2.93 quads of solar, wind, and biofuels

Requires subsidies totaling $17.6 billion

NOTE: 2007 subsidy levels: solar $7.16/MMbtu, wind $6.87/MMbtu (production), $5.82/MMbtu ethanol (consumption/blending)