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

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

Dale Struksnes, Manager - Reserve Evaluations April 13, 2010

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’ ”

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)

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

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

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

S&P 500 and S&P TSX Composite Indexes

S&P 500 S&P TSX Composite

OECD Composite Leading Indicator

Source: OECD

ADS Index of US Business Conditions

Source: Philadelphia Fed

Canadian Composite Index Improving

Source: Statistics Canada

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

World GDP Growth

Quarter-over-quarter annualized

Source: IMF

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

World Energy Consumption to Increase

Source: EIA

Non-OECD Countries to Surpass OECD Countries for Energy Consumption

Source: EIA

Hydrocarbons to Provide Majority of World’s Energy Supplies in the Future

Source: EIA

North American Oil and Gas Supply Forecasts



Canadian Oil Forecast



U.S. Oil Forecast



Canadian Gas Forecast



U.S. Gas Forecast

Canadian Historical and Forecast Oil Production

Source: NEB

U.S Historical and Forecast Oil Production

Source: EIA

Canadian Historical and Forecast Natural Gas Production

Source: NEB

U.S Historical and Forecast Natural Gas Production

Source: EIA

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

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.)

World Oil Stock

Source: EIA

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.

Dow Jones Index & Oil Price

Source: Yahoo Finance, EIA

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 2018 1.2 BCFD; $18B; 10 TCF

 Alaska p/l o/s 2023 4 BCFD; $35B; 35 TCF

Natural Gas Storage at High Level

Source: EIA

US Gas Storage & Price

Source: EIA

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)

North American Shale Gas Plays

Shale Gas - Rapid Production Growth

Source: EIA

Economics of Shale Gas Plays vs WCSB

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

North American LNG Terminals

Worldwide LNG Exports

Source: EIA

Worldwide LNG Imports

Source: EIA

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)

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)

Oil and Gas Industry Drilling Activity Levels

Source: Baker Hughes

Wells Drilled in Canada – Sharp Decline!

Source: CAODC, PSAC

Wells Drilled in US – Sharp Decline!

Source: EIA

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 ($150-200/bbl oil is not sustainable in ST!)

 Therefore a reasonable price band for oil is $70-90/bbl

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

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

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

Oil and Gas Price Relationship (6:1)

Source: EIA

Oil Price Forecast

Oil Price Forecast

Natural Gas Price Forecast

Natural Gas Forecast

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 ($3.50-5.50/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

Closing Comments:



SPE – initiative underway for annual mid year oil and gas price forecast survey (consultants, banks)



Contact Info: dstruksnes@fekete.com



Thanks!