The 2006 AGA Financial Forum

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The 2006 AGA Financial Forum
Dave Pursell May 2006
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Oil and Gas Tale of Two Cities?

• Crude Oil 68/bbl
• Motor Gasoline 2.10/gal NYMEX
• Almost 3/gal retail
• Natural Gas 7/mcfand disappointing!
• Oil inventories above normal
• Natural gas inventories 59 above normal

Fear . . . that's the other guy's
problem. Louis Winthorpe, III trading places
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Natural Gas

• Most Commodities Price is set by marginal cost
  of supply
• Natural Gas Marginal cost of consumption!
• Power Demand Grows
• Industrial Demand Shrinks Even as GDP expands

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Natural Gas NPC Study
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Natural Gas Storage Trends
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Natural Gas

• Near term Ugly!
• Too much gas
• Not enough storage
• Gas prices 5/mcf this summer
• EPs drill thru?
• Activity levels suffer?
• 5/mcf gas sets floor (coal)
• Rockies gas gets ugly

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Diminishing Productivity Per Well
I can hardly remember how I built my bankroll,
but I can't stop thinking about the way I lost
it." Mike.Rounders
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Natural Gas Well Economics in Various Basins
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Natural Gas Power Generation
Efficiency Gains will reverse in an expanding
economy
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Natural Gas Production Growth?
Storm adjusted production is starting to grow
Trust in God and for all others, ask for the
data.
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Natural Gas Higher Highs and Higher Lows

• 2001
• 10/mcf gas impacted demand
• lt4/mcf - gas marginal cost supply
• 2005/06
• 15/mcf gas impacted demand 6/mcf gas
  marginal cost supply

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Natural Gas

• Long term until LNG Arctic gas are
  meaningful
• and U.S. economy continues to
  expand
• Gas price higher highs higher lows

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Oil Market

• OPEC Capacity Growth
• Non-OPEC Supply Growth
• Demand Growth
• Price Resilience of Demand?
• Government Energy Policy
• Natural Gas Can and Will De-couple

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Inventories Do They Matter?
You know, Nietzsche says, "Out of chaos comes
order. Howard Johnson Blazing Saddles
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Saudi Arabia Production has Peaked?

• Napoleon, like anyone can even know that.
  Kip, Napoleon Dynamite

• Lots of Press Lately
• There is NO good info on Saudi Arabia production
  capacity
• It is getting more difficult to grow supplybut
  declining?
• Beware of the ill-informed reading technical
  papers and analyzing water cut trends.
• Saudi oil-directed rig count growing from 15 to
  90 rigs.

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Recent Oil Market Drivers

• Geopolitics
• Iran
• Iraq
• Nigeria
• US MoGas Market
• Write your congressman a thank you letter

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Cycle Buster?
Two days ago, I saw a vehicle that would haul
that tanker. You want to get out of here? You
talk to me. MaxRoad Warrior
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Demand Trends Maybe It Is Different?
Transportation fuels are key
I'm just here for the gasoline. MaxRoad
Warrior
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MoGas Demand Not Great
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Demand Does Respond to Prices

• http//www.houstongasprices.com/
• No website for cheap milk or whiskey!
• Post Katrina/Rita motor gasoline consumption
  declined.
• Even Jan 06 (prices lower) demand was 50 bps
  lower than year ago.

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Conclusion

• Cycle Has The Potential To Be Extended
• Not Different This Time But Certain Elements
  Are Interesting.
• Demand is the Monster In The Closet
• Supply Gains Will Materializebut Gradually
• Commodity Prices Will Be VolatileGet Used To It.

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www.pickeringenergy.com
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www.pickeringenergy.com Institutional
Research Houston, Texas Research Department 713
333-2960 Dan Pickering dpickering_at_pickeringenergy
.com 713 333-2961 Trading Desk 800-507-2400 Mich
ael du Vigneaud mduvigneaud_at_pickeringenergy.com 71
3-333-2976 Matthew Pham mpham_at_pickeringenergy.com
713-333-2977 Email info_at_pickeringenergy.com Cle
aring through Bear, Stearns Co.
Inc. 713.333.2960 Phone ? 713.333.2965 Fax? 1800
West Loop South ? Suite 300 ? Houston, Texas
77027