CURRENT STATE OF THE ENERGY MARKETS

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CURRENT STATE OF THE ENERGY MARKETS Council of
Petroleum Accountants Societies
Benjamin C. Smith Managing Partner First Enercast
Financial, Inc.
1775 Sherman St, Suite 2825, Denver, CO. 80203
303.860.7494 ben_at_firstenercastfinancial.com
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Introduction

• Fundamentals keeping natural gas prices elevated
• Supply Katrina/Rita, storage, production
• Demand economic activity, industrial growth
• Price Discovery supply/demand imbalance
• New supply sources imports, unconventional
  reserves
• Seasonal outlook
• Weather influence on seasonal energy markets
• Large-scale atmospheric patterns
• 1-6 month weather forecast government
  Enercast models
• Enercast outlook

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Todays tight natural gas markets have been a
long time coming and futures prices suggest that
we are not apt to return to earlier periods of
relative abundance and low prices anytime soon.
Fed Chairman Alan Greenspan
Crude Oil
Natural Gas
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Hurricanes Katrina and Rita
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Hurricanes Katrina and Rita Initially Shut Down
Most Gulf Refinery Capacity
US REFINERY CAPACITY OUTAGE RESPONSE
000 bbl/d
Shut In Capacity
Source EIA
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HURRICANES KATRINA AND RITA SHUT IN SIGNIFICANT
GULF NATURAL GAS PRODUCTION
Bcf/d
US GAS PRODUCTION OUTAGE RESPONSE
Shut In Capacity
Ivan
Source EIA
7
U.S. REFINING CAPACITY SURPLUS DISAPPEARING,
CREATING CHALLENGES
1MBBL/DAY
OPERABLE CAPACITY
GROSS INPUTS
5MBBL/DAY
Source EIA
8
WTI FUTURES CURVES DEFERRED PRICE HAS
INCREASED IN RECENT YEARS
NYMEX WTI PRICE TRENDS
9
AS SPARE CAPACITY INCREASES IN 2006, OECD DAYS
SUPPLY WILL CONTINUE TO DECREASE
Sources EIA, Organization for Economic
Co-operation and Development (OECD), NYMEX
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IMPACT OF HURRICANES ON MARKET FUNADMENTALS
Post Ivan Price Reaction Ivan hits Sept 13, 2004
Still Shut in As of 1/9/05 1.86 Bcf/day of
Gas 400K barrels of Crude/day Cummulative
Shut-ins 581 Bcf of gas 113M barrels of Crude
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Supply - Current Situation

• EIA reported storage data key numbers
• 2641 Bcf - current storage reported by the EIA
  last Thursday
• 168 BCF above the 5 year
  running average
• 1080 Bcf - 9 year running average of end of
  season levels
• 1014 Bcf - last year end of season storage
  level
• 1319Bcf - Enercast end of season storage
  level projection for this year

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Supply - Depletion of North American conventional
resources

• North American production accounts for over 99
  of US gas supply.
• Declining Canadian Production.
• 3.5 Tcf today.
• 2.6 Tcf by 2025.
• U.S. Conventional reserves diminishing.
• 10.0 Tcf today
• 9.5 Tcf in 2025.
• Resource depletion causes exploration and
  production costs to increase.
• Increased rig count is not correlating to
  increased production.
• New price levels make it economical to drill for
  smaller hard to reach reserves.
• Drivers technological improvements and rising
  natural gas prices.
• Increases unconventional sources (tight sands,
  shale, and coal bed methane).

Sources EIA, Short-Term Energy Outlook
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Supply - Changing North American Production
North American Production Forecast
10
8
6
TCF
4
2
0
Alaska
Lower 48 offshore
L48 onshore
conventional
offshore
Lower 48
L48 onshore
unconventional
2005
2025
Sources EIA, Annual Energy Outlook
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Supply Historically High Prices Increase Rig
Count

• 29 increase over past year
• Lower production
• 10 Year Average 862 (Range 600 to 1,100 Rigs)
• Currently around 1,470 Rigs

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Demand Economic Growth

• Strong economic growth expected
• 2006 GDP forecasted to be 3.1 (National
  Association Business Economics)
• Weve recently experienced the fastest GDP growth
  in 20-years
• Strength powered by tax cuts and low interest
  rates
• 10 yr forecasted average projected to be 3.3

Booming Global Economy Lead by strong
economic growth in major population base
countries 9.3 - China 6.9 - India
5.5 - Russia 3.3 - Brazil
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Natural Gas Demand Other Drivers

• Natural gas is fuel of choice
• Historically affordable
• Lower emissions
• Lower capital costs
• Higher fuel efficiency
• Shorter construction lead times
• New utilities are natural gas-fired
• U.S. Utilities turned almost entirely to
  gas-fired power plants for new generation
  projects over the last decade
• Plans for more than 200,000 megawatts of natural
  gas fueled capacity in recent years
• Demand destruction already happened
• Majority of demand has already eroded in recent
  years, as industrial users switched to oil and
  other fuels - or simply shut down and moved
  overseas - in the face of high prices.

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Demand Growth Expected to Grow by 2-4
Proj.
History
Elec 24
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Industrial Growth Slowed by Higher Natural Gas
Prices

• Growth expected in next 20-years.
• 3.2 - services sector
• 2.6 - industrial
• Energy-intensive sectors are more sensitive to
  energy price increases.
• Productivity improvement is projected to be
  slower in the energy-intensive sectors.
• The industrial sectors share of total output is
  expected to fall from 35 percent in 2005 to 34
  percent in 2010 and 32 percent in 2025.
• The manufacturing share of total output is
  projected to fall from 27 percent in 2005 to 26
  percent in 2010 and remain at that level through
  2025.

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Industrial Growth Projections 2005-2025
Source EIA
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Demand - Industrial Energy Demand Projections

• Despite higher natural gas prices industrial
  demand is expected to increase
• 12 from 2005 to 2010
• 41 from 2005 to 2025
• Electricity
• 41 percent from 2005 to 2025
• Competition in the generation market keep
  electricity prices low
• Petroleum
• 19 from 2005 to 2025
• Coal
• 3 decline from 2002 to 2010
• 8 decline from 2002 to 2025

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Supply/Demand Imbalance

• Declining Supply Strong Demand Growth
  Imbalance
• Average shortage of 2.4tcf/year through the end
  of 2010
• The growing demand from U.S. Consumers would
  leave the nation with a gas shortfall of 10
  billion cubic feet a day by the end of the decade
• Sustained higher prices keep supply demand in
  check

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Supply/Demand Imbalance
Supply and demand figures are based off 6
natural gas
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Supply New Sources to Meet Demand

• Significant additional supply not expected for
  7-15 years new supplies will be more expensive
  than domestic conventional production
• Unconventional production
• 5.9 trillion cubic feet in 2002 to 9.2 trillion
  cubic feet in 2025
• Alaska natural gas pipeline
• Expected to be operational by 2021
• Will add 2.7tcf of new supply 
• Overseas imports
• Liquefied natural gas (LNG) imports increase from
  less than .5tcf today to 2.2 in 2010
• 4.8tcf by 2025
• LNG is expected to be price competitive with
  domestic sources

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Seasonal Forecast

• Influences on seasonal natural gas price and
  volatility
• Weather
• Weather
• Weather
• Economic activity
• Production/Supply

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Energy Demand and Weather Are HIGHLY CORRELATED.
Utility Load vs. Temperature
KEY ELEMENTS

• Day-to-day weather dictates day-to-day variations
  in load
• Peak load as a function of temperature R2 0.90

Source Enercast Outlook Team, Client Data
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Gas Demand is Primarily Weather Driven
Source Enercast Outlook Team
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Enercast Seasonal Forecasting

• The Enercast Outlook team evaluates
• Macroeconomic data
• All government and public forecasts
• Our proprietary forecast models
• Over the counter and CME traded weather futures
  markets

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Weather Futures as a Leading Indicator to Energy
Price
Ex November-March HDD Forecast
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Seasonal Forecasts Are Most Predictable When
Large Scale Atmospheric Patterns Are In Play
KEY ELEMENTS

• Warm Pacific SSTs anomalies
• Deepening thermocline
• Warmer Winters in Midwest
• Hot Northeast summers

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During a (Cold) La Nina Phase U.S. Temps see
Extremes
KEY ELEMENTS

• Cold Pacific SSTs anomalies
• Shallow thermocline
• Colder and Snowy Winters
• Hot Midwest and Northeast Summers
• Wet and Cool Southeast Summers

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DURING YEARS OF NUETRAL CONDITIONS ARE INTERNALLY
DRIVEN BY OTHER FACTORSTHIS FURTHER LIMITS
PREDICTABILITY
A SLEW OF FACTORS DRIVE WEATHER CONDITIONS ALONG
WITH INTERNALLY DRIVEN FACTORS
Source Enercast Outlook Team
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MET Office Forecast
No El Nino
Jan/Feb/Mar
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NWS Forecast
Jan-Mar
Feb-Apr

• NWS is predicting weak El Nino

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Enercast Preliminary Forecast And Current Market
Winter Outlook Jan-March
Updated SST Forecast Mean Percentile SST Anomaly
Source Enercast Outlook Team
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Key Points

• Growth in Natural Gas Demand Continuing
• Declining North American Supply
• Imports Not Adding Significant Supply Until After
  2009
• New Price Point for Natural Gas through 2005
• Volatile weather driving markets in the seasonal
  timeframe

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Enercast Monthly Outlook Reports

• Seasonal Forecast
• HDD forecast and discussion broken down by
  each consuming region and 20 cities including
  HDD strip and CMEweather contract valuation
  analysis
• EIA Storage analysis long term storage model
  takes into account weather and macroeconomic
  factors on energy demand
• Climate Impact Statement - analysis of the
  Enercast ensemble model and major climate
  influences such as NOA, El Nino, Sea Surface
  Temperatures
• Natural gas price forecast assembling a
  seasonal price forecast based of the HDD
  forecast, EIA storage analysis, and Climate
  Impact.
• modeling technology is run on IBM-64 Processor
  P-series supercomputer
• scientific and analyst team A. Ameko, J.
  Stetten, D. Melita, R. Madden, G. Branstator, M.
  Berliner, S. Mullen, G. Poulos
• First Enercast Financial
• 1775 Sherman St., Suite 2825, Denver, CO 80203
• 303.860.7494ph