Oil and Gas Price Forecast Update: Where are Oil and Gas Prices Heading?

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1 RESERVOIR ENGINEERING SOFTWARE & SERVICES Oil and Gas Price Forecast Update: Where are Oil and Gas Prices Heading? Dale Struksnes, Manager - Reserve Evaluations April 13, 2010

2 Media Commentary on Oil and Gas Prices Lots of daily volatility in the markets how to explain? Day 1 Prices are up due to optimism about the economic recovery, inventories are down, U.S. dollar is down, colder weather, etc. Day 2 Prices are down to to concerns about the lagging economic recovery, inventories are up, U.S. dollar is up, warmer weather, etc. Repeat cycle.. Oxford University paper on oil prices: oil prices have become indeterminate

3 Topics to be Covered Overview of the world economic situation (past and future) Focus on future oil and gas supply and demand issues Big picture overview (North America and World) Specific supply/demand issues Review future oil and gas price forecasts (as at March 31, 2010)

4 Main Conclusions: Canada is recovering from the recession along with the other world economies The oil and gas sector is recovering Still future uncertainty and volatility Commodity Price Forecast: Short Term (6-12 months) Oil ok Gas?? Medium/Long Term Oil ok Gas ok

5 Where are Current Commodity Prices? Oil (WTI $U.S./BBL) May 2010 contract price (futures) $84.34 Gas (Henry Hub $U.S./MMBTU) May 2010 contract price (futures) $4.01

6 World Economic Situation World Economies plunged into recession in early 2008 Recession commonly defined as 2 consecutive quarters of negative GDP growth Numerous other factors (employment, housing, mfg, profits, etc.) Leading indicators now show that economies are recovering

7 S&P 500 and S&P TSX Composite Indexes S&P TSX Composite S&P 500

8 OECD Composite Leading Indicator Source: OECD

9 ADS Index of US Business Conditions Source: Philadelphia Fed

10 Canadian Composite Index Improving Source: Statistics Canada

11 GDP Forecasts Slow and steady recovery generally predicted Asian economies (China and India) to lead growth with 6-10% annual GDP growth rates in next 2 years World GDP growth of 3% in 2010 Canada to outperform G7 nations 3.5% growth in 2010

12 World GDP Growth Quarter-over-quarter annualized Source: IMF

13 Oil and Gas Supply and Demand Issues Non-OECD Countries continue to increase energy usage exceed OECD countries Hydrocarbons still to provide the majority of energy supply for the world in the foreseeable future Increasing Unconventional Gas Production (Shale Gas) LNG Imports (potential increase) Bullish for long term oil and gas prices

14 World Energy Consumption to Increase Source: EIA

15 Non-OECD Countries to Surpass OECD Countries for Energy Consumption Source: EIA

16 Hydrocarbons to Provide Majority of World s Energy Supplies in the Future Source: EIA

17 North American Oil and Gas Supply Forecasts Canadian Oil Forecast U.S. Oil Forecast Canadian Gas Forecast U.S. Gas Forecast

18 Canadian Historical and Forecast Oil Production Source: NEB

19 U.S Historical and Forecast Oil Production Source: EIA

20 Canadian Historical and Forecast Natural Gas Production Source: NEB

21 U.S Historical and Forecast Natural Gas Production Source: EIA

22 Oil and Gas Supply and Demand Fundamentals Oil Supply Demand North America (Canada, U.S.); World Natural Gas Supply Demand North America (Canada, U.S.); World

23 Oil Supply Drilling activity over 500 rigs drilling for oil in U.S. Fluctuating inventory levels not directly impacting oil prices Worldwide supply 85 MMBOPD Weather hurricanes Geopolitical risks (Iran, Iraq, Russia, Africa, etc.)

24 World Oil Stock Source: EIA

25 Oil Demand U.S. dollar inverse relationship to oil price Hedge funds, commodity trading Seasonality (lower prices in shoulder seasons) Winter heating oil Summer driving season ($1.05/liter) Economy strong oil price correlation to stock market indices World oil demand growth in 2010 (MMBOPD): IEA 1.7, EIA 1.5, OPEC 0.8 China importing 5 MMBOPD.

26 Dow Jones Index & Oil Price Source: Yahoo Finance, EIA

27 Gas Supply Impact of shale gas and LNG High storage levels in Lower 48 states and Western Canada Drilling activity 959 gas rigs drilling in U.S. Longer term: 1500 rigs (1100 gas focused) to sustain long term demand growth of 2%/yr Weather hurricanes! Predictions of 15 storms/8 hurricanes for 2010 season Potential 1 BCFD impact GOM Northern Gas MVP o/s BCFD; $18B; 10 TCF Alaska p/l o/s BCFD; $35B; 35 TCF

28 Natural Gas Storage at High Level Source: EIA

29 US Gas Storage & Price Source: EIA

30 Shale Gas in North America Technology has unlocked the key to a huge resource base! Horizontal wells and multi-stage fracs Low cost gas supply North American shale gas production has ramped up from 1 to 8 BCFD in less than 5 years As a result, U.S. gas production at levels not seen since 1970 s (almost 65 BCFD total) Looked at as holy grail, but still has challenges (sweet spot results extrapolated throughout play areas, infrastructure and service sector issues)

31 North American Shale Gas Plays

32 Shale Gas - Rapid Production Growth Source: EIA

33 Source: CERI

34 Source: CERI

35 Economics of Shale Gas Plays vs WCSB

36 Impact of LNG to North American Supply LNG rapidly growing Currently world LNG is a 23 BCFD market which will grow to 50 BCFD in the next 5-10 years US 2010 LNG demand projected to be approximately 1.5 BCFD with potential range of 1-4 BCFD Concerns that LNG would flood the North American market last summer (same potential this summer) Saved by strong worldwide demand for LNG (higher prices paid overseas), and project delays Three main LNG importing countries: Japan, Korea, Spain Landed costs for LNG: $4 $7

37 North American LNG Terminals

38 Worldwide LNG Exports Source: EIA

39 Worldwide LNG Imports Source: EIA

40 Gas Demand North America Long term demand increase Short term industrial demand returning 2009 demand destruction of approx 2 BCFD 2010 EIA forecast approx 1 BCFD demand growth Innovations create additional long term demand Natural gas vehicles North American transportation is 90 BCFE/D potential Electrical power generation Canada 2 BCFD potential Environmental/political issues promote gas as a greener energy source - ANGA Weather El Nino (warm Western N.A., cold Eastern N.A. temporary)

41 Economy and Commodity Price Impact on Drilling Activity High supply and low demand for natural gas illustrated in record storage levels Canada and U.S. hit hard in 2009 Gas drilling plummeted in the U.S. and Canada and may provide the short term brake on gas supply that was needed Drilling activity has picked up again Longer term: 1500 rigs (1100 gas focused) to sustain long term demand growth of 2%/yr (TPH Study)

42 Oil and Gas Industry Drilling Activity Levels Source: Baker Hughes

43 Wells Drilled in Canada Sharp Decline! Source: CAODC, PSAC

44 Wells Drilled in US Sharp Decline! Source: EIA

45 Economics of Oil Production What is a reasonable price range for oil which achieves a long term supply/demand balance? OPEC wants to support a price of $70-80/bbl in short term price setter through control of 1/3 of world supply higher oil prices will derail a fragile economic recovery U.S gasoline consumption curtailed at $3.00/gallon which translates into $90/bbl Oilsands development requires $80-90/bbl (4X cost 10 yrs ago) Deepwater developments (Gulf of Mexico, Brazil Tupi) require $60/bbl North Sea developments require $50/bbl $40 latte effect ($ /bbl oil is not sustainable in ST!) Therefore a reasonable price band for oil is $70-90/bbl

46 Oil Development Needs to be Economic! Long term development of adequate supply to meet demand must be economic! Industry needs to spend $500 Billion annually to meet future demand and counter depletion, and won t do that for $40 oil Typical 5 year lead times needed for large new projects to come onstream Depletion Worldwide yearly depletion is 4 million bbls/day Vs Worldwide recession which has cut 1-2 million bbls/day

47 Economics of Gas Production What is a reasonable price range for natural gas which achieves a long term supply/demand balance? Ziff Energy study - $7-8/mcf WCSB study Shale gas $3-10/mcf LNG - $4-7/mcf Short term supply demand imbalance may dictate lower prices Long term prices need to revert to a range ($5-9/mcf) where producers can make money

48 Price Forecasts Price Relationships Oil price vs gas price (energy equivalence divergence) Oil Price Forecast (Fekete/Consultants/Futures) WTI Edmonton Light Gas Price Forecast (Fekete/Consultants/Futures) NYMEX Henry Hub AECO

49 Oil and Gas Price Relationship (6:1) Source: EIA

50 Oil Price Forecast

51 Oil Price Forecast

52 Natural Gas Price Forecast

53 Natural Gas Forecast

54 Summary - Oil and Gas Prices and Activity World economies recovering from recession with 2010 GDP growth 3% Oil and gas prices are subject to volatility, short term price cycles getting shorter and more erratic Short term pricing Oil is trading in an acceptable range ($75-85/bbl) Gas prices will be challenged ($ /mcf?) Long term supply and demand trends point to continuous demand growth and implicit increases in commodity prices to stimulate adequate exploration and development Oil will trade in a range of $70-100/bbl Gas will trade in a range of $4-9/mcf Activity levels Oil (conventional and oilsands) focused activity will continue Gas activity will cautiously move forward as prices stabilize at higher levels low cost plays (ie: U.S. shale gas) will develop first

55 Closing Comments: SPE initiative underway for annual mid year oil and gas price forecast survey (consultants, banks) Contact Info: Thanks!

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