Presentation by EconMatters at the 2012 Ontario Advocis School for the Financial Advisors Assoc. of Canada on Aug. 14, 2012

1. North America Energy Landscape
THE 2012 ONTARIO ADVOCIS SCHOOL
The Financial Advisors Association of Canada
Presented by EconMatters
August 14, 2012
http://www.econmatters.com/

2. Agenda
1. Global Energy Demand Outlook
2. Unconventional Energy in North America
3. Impact from the Shale Drilling Boom
4. Industry Challenges & Constraints
5. Near Term Outlook

3. 1. Global Energy Demand Outlook
– Offshore Deepwater “Golden Triangle”

4. Global Energy Demand Growth To Decelerate
• ExxonMobil sees global energy demand rising by 20% from 2010 to 2025, but by only 10%
from 2025 to 2040.
• Many OECD countries, plus China – populations will change little by 2040. This global
population growth deceleration, coupled with gains in energy efficiency, will add significant
slowdown to the historical energy demand growth trend.
• Energy demand growth in Non‐OECD countries will continue to outpace developed nations of
OECD – China’s CNOOC recently paid 60% premium to acquire Canada’s Nexen.
Source: 2012, The Outlook for Energy: A View to 2040, ExxonMobil
Note: OECD: Organization of Economic Co‐operation & Development

5. Oil & Gas Still the Top Two Energy Sources
• By 2040, oil and natural gas will be the world’s top two energy sources, accounting
for about 60% of global demand, compared to ~ 55% today
Source: 2012, The Outlook for Energy: A View to 2040, ExxonMobil

6. Offshore Deepwater Golden Triangle
• Producers continue to focus and increase Exploration & production (E&P) spending on the “Golden
Triangle” ‐ mostly offshore deepwater
 West Africa
‐ Sierra Leone, Liberia, Angola, Ghana’s Jublee
 South America
‐ Brazil/Petrobras $236.5B spending plan through 2016
 U.S.
‐ Gulf of Mexico restart
• Benefiting OSV (Offshore Supply Vessel) & Petroleum Aviation sectors
Chart Source: Schlumberger Investor Presentation, March 2012

7. 2. Unconventional Energy in North America

8. Unconventional Energy in The U.S.
• New technologies such as hydraulic fracturing & EOR (Enhanced Oil Recovery) and relatively
high oil prices could mean continuing increase of crude oil production in the United States to
2030‐2035
• In the U.S., crude oil production for the lower 48 states is estimated to have reached a 23‐
year high in June of 5.74 million bbl/d driven primarily by unconventional oil resources in
formations such as Bakken in N. Dakota, and Eagle Ford in Texas
• EIA projects the United States become a net exporter of natural gas by 2022
• Rising unconventional oil and natural gas production in North America could bring a more
stable energy price environment
Source: Annual Energy Outlook, 2012, EIA, June, 2012

9. Unconventional Energy in Canada
• The main driver for future Canadian oil production growth continues to be oil
sands development
• Growing domestic U.S. crude oil production will increase competition for western
Canadian crude oil. Nonetheless, the U.S. Gulf Coast remains a significant market
opportunity for Canadian supplies given the region’s huge refining complex
Source: CAPP (Canadian Assoc. of Petroleum Producers), June 2012

10. 3. Impact from The Shale Drilling Boom

11. Brent to WTI Premium
• North Sea Brent has been trading at a premium of $15‐$20 per barrel over U.S.
WTI since 2011 vs. the historical $1 to $2 per barrel discount
• Rising production, lack of take‐away pipeline capacity and a sluggish economy
have contributed to rising inventory levels, particularly at Cushing OK, depressing
WTI benchmark
• Potential delay in pipeline projects and weak economy in the U.S. could mean WTI
will continue to trade at a considerable discount to Brent in the next few years
• U.S. WTI crude oil discount to the North Sea Brent is expected to give cost
advantages to U.S. refiners versus other Atlantic Basin rivals
Chart Source: The Finite World
Chart Source: This Week in Petroleum, EIA, Aug. 8, 2012

12. Heat Wave Can’t Lift Natural Gas
• Supply glut has brought U.S. natural gas price (spot Henry Hub) to a 10‐year low of
$1.907/mmbtu in April, 2012
• Significant profit hit across the oil supply chain from producers (e.g., Noble,
Marathon) and oilfield services companies (e.g. Baker Hughes, Halliburton) ‐
Producers shut in production and laid down rigs
• Henry Hub price has surged ~ 44% since the April low mainly due to hotter than
normal weather forecast, and coal‐gas switch by the power sector
• Weather conditions are temporary, and electricity companies will switch back to
coal when prices of natural gas become high
Chart Source: EIA Annual Energy Outlook, 2012; Reuters; EconMatters research

13. Henry Hub Natural Gas Price Decoupled
• Supply glut and lack of exporting capacity has brought the Henry Hub price
significantly below LNG and natural gas global price benchmarks in other regions
• NBP (U.K. benchmark natural gas prices) averaged more than four times the
price in the U.S. in the second quarter
• Cheap natural gas price could bring lower utility costs to consumers, and
provides a cost advantage to U.S.‐based petrochemical plants
Source: Valero Investor Presentation, July 2012; EconMatters research

14. Oil to Gas Price Ratio
• Theoretically, based on an energy exchange equivalent basis, crude oil and natural
gas prices should have a 6 to 1 ratio
• Due to various market characteristics, the price of oil (WTI) has been following a
pattern of 8‐12X that of natural gas (Henry Hub) between 2006 and late 2009
• The ratio between WTI and Henry Hub shot up to a historical record high of 52:1
when natural gas dipped to a 10‐year low in April, 2012
• This ratio is expected to remain significantly above the historical level in the
medium term
Source: ICIS.com, EconMatters research

15. Natural Gas Pain Spilled Over to Oil Markets
• The sharp decrease in NGL pricing is spreading the pain of low natural‐gas prices to the oil
markets
• NGL (Natural Gas Liquid) – By‐products of natural gas, including propane, butane, pentane,
hexane and heptane
• Prior to mid‐2008, a mixed barrel of NGLs usually followed crude oil prices at 60% to 70% of
the price of crude oil – Partly contributed to the rising natural gas production
• With low natural gas prices, producers have shifted drilling to NGL‐rich shale plays to improve
economics ‐‐ Shale Drilling Boom = Oversupply of NGL
• The price of an ethane‐ propane NGL mix was down about 58% from January ‐ producers
such as Devon and Chesapeake feeling the pain
Mont Belvieu, TX Propane Spot Price FOB ($ / Gallon)
Source: Index Mundi, Aug. 3, 2012; Reuters, Aug. 2012

16. 4. Industry Challenges & Constraints

17. Peak Energy Labor ‐ The Big Crew Change
• The 16 years of low oil prices after
1986 has resulted in very little
investment in R&D and recruiting in the
oil industry
• The need for experienced project
managers and engineers is becoming
acute with more larger projects
requiring more complex technologies
and processes
• Based on Schlumberger survey data for
2010, the number of inexperienced
industry professionals will have
increased, and become a major
headache by 2015
• This talent war and cost pressure will
be inflationary and disruptive
• Potential consequences include project
delays, poor risk management, and
increasing non‐operating assets
Chart Source: Guardian.co.uk
Source: Schlumberger Investor Presentation, March 2012

18. Rising E&P Project Costs
• The IHS Upstream Capital Cost Index (UCCI) rose at a more accelerated rate of 2.3% over the
six‐month period ending March 31, 2012, compared to 5.3% increase for the entire 2011
• The cost increases were driven by strong oil prices increasing demand for oilfield goods and
services
• Costs are rising with more larger and difficult projects in remote or complex formations, as
well as a shortage of experienced and skilled personnel
• Rising costs could have a negative impact on future investments driving up energy prices
Source: IHS‐CERA, July 2012

19. Oil and Gas Pipeline Crunch
• Growing unconventional energy production has created an urgent need for additional transportation
infrastructure in North America
• Producers have turned to rail, barge and even truck tankers to transport oil to refineries – Rail costs about
$15/barrel, 3x the cost of pipeline
• Reversing the oil flow for the past 40 years ‐ Seaway Pipeline, owned by Enterprise and Enbridge, — is
moving 150,000 bbl/d out of Cushing, OK to Texas, 400,000 bbl/d by 2013
• $10B a year planned in 2012 and 2013 on pipeline build‐out, four times the average of the previous 7
years
• Potential shortfall of specialized materials like valves and pumps ‐‐ Projects (e.g. TransCanada proposed
$7.6 B Keystone XL pipeline) could be at risk of significant delays
Source: Reuters, July, 2012

20. 5. Near Term Outlook
Note: The near‐term price outlook in the presentation reflects only the current market fundamental factors,
and does not include a scenario of extreme geopolitical or weather events.

21. Near Term Oil Market Outlook
• Reduced oil production by Iran due to Western sanctions has not affected the oil market much,
as Saudi Arabia stepped up production this year to near 30‐year highs
• Recent data suggest the economic picture in emerging Asia (China) could worsen further in 2H
2012
• Sovereign debt crisis and recession in the Euro zone is further depressing global economic and
oil demand outlook ‐ OPEC output fell in July to its lowest since February
• Brent is expected to stay above in the $100/bbl, while maintaining a $10‐$15 premium to the
U.S. WTI in the next 2‐3 years
• A Trader’s Market ‐ more correlation to the broad equity market (QE3 from the U.S. Fed?)
• Longer term, sustained high oil prices lead to higher margins, more investment and energy
efficiency, which ultimately rebalances the market
Increasing Correlation ‐ Crude Oil vs. S&P 500
Chart Source: Ft.com, Aug. 10, 2012
Note: The near‐term price outlook in the presentation reflects only the current market fundamental factors, and does not include a
scenario of extreme geopolitical or weather events.

22. Near Term Natural Gas Market Outlook
• U.S. EIA raised estimate for domestic natural gas consumption this year, expecting demand to climb 4.9%
YoY in 2012 driven by a 21% jump in utilities coal‐to‐gas switching, offsetting declines in residential and
commercial use
• Consultancy Spears & Assoc. estimated coal should provide a floor for natural gas at around $2.40/mmbtu
in the near term. Demand increase from Canadian oil sands could also provide support for natural gas
prices
• North America LNG export capacity is not expected to come online till around 2015 (Cheniere Energy’s
Sabine Pass plant), and may have logistic disadvantage competing with Australia or Quatar
• A momentum‐driving market, but in general, Henry Hub price could stay at below $4.00/mmbtu for the
next 2‐3 years
Note: The near‐term price outlook in the presentation reflects only the current market fundamental factors, and does not include a scenario
of extreme geopolitical or weather events.

23. Oil Price History
Chart Source: Guardian.co.uk

24. Questions & Comments?
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