The North American Unconventional Revolution & The Oil Price Collapse

Transcription

1 The North American Unconventional Revolution & The Oil Price Collapse Art Berman Labyrinth Consulting Services, Inc. Ray Leonard Hyperdynamics Jesse H. Jones Graduate School of Business Houston, Texas September 21, 2015 Slide 1

2 The Shale Revolu4on & The Current Oil Price Collapse The current oil price collapse was caused by over- produc4on of unconven4onal oil funded by debt. It was a classic bubble. OPEC s decision to increase produc4on is part of a stratagem to stop capital providers from funding non- commercial 4ght oil projects and to increase its market share. Rig produc4vity, drilling efficiency and re- fracking are red herrings intended to distract from the truth that 4ght oil companies are losing money. Higher future oil prices are inevitable because of deferred investment, growing demand and geo- poli4cal risk. Slide 2

3 The Simple Explana4on for the Current Oil Price Collapse: Produc4on Surplus 16,000" Top)15)Crude)Oil)Producing)Countries) World&Liquids&Supply&and&Demand&July&2013DJune&2015& Supply# Demand# Brent#Price# Thousands)of)Barrels)of)Oil)Per)Day) 14,000" 12,000" 10,000" 8,000" 6,000" 4,000" Russia) U.S.)+)Canada) Saudi)Arabia) U.S.)) China) Canda"+"U.S." Russia" Saudi"Arabia" United"States" China" Canada" Iraq" Iran" United"Arab"Emirates" Kuwait" Nigeria" Venezuela" Brazil" Millions&of&Barrels&of&Liquids&Per&Day& 97# 96# 95# 94# 93# 92# 91# 90# Supply&<&Demand& Supply&>&Demand& $120# $100# $80# $60# $40# Brent&Crude&OIl&Price&(Dollars&Per&Barrel)& 2,000" Mexico" Angola" 89# $20# Source:))EIA) 0" Jan,08" Apr,08" Jul,08" Oct,08" Jan,09" Apr,09" Jul,09" Oct,09" Jan,10" Apr,10" Jul,10" Oct,10" Jan,11" Apr,11" Jul,11" Oct,11" Jan,12" Apr,12" Jul,12" Oct,12" Jan,13" Apr,13" Jul,13" Oct,13" Jan,14" Apr,14" Jul,14" Oct,14" Jan,15" Apr,15" Kazakhstan" 88# Jul013# Source:&&EIA&STEO&September&2015& Aug013# Sep013# Oct013# Nov013# Dec013# Jan014# Feb014# Mar014# Apr014# May014# Jun014# Jul014# Aug014# Sep014# Oct014# Nov014# Dec014# Jan015# Feb015# Mar015# Apr015# May015# Jun015# Jul015# Aug015# $0# From 2010 through 2013, U.S. 4ght oil and Canadian heavy oil produc4on increased 3.5 mmbd of crude oil but was matched by a reduc4on in supply from Libya, Iran, Syria, Sudan and Yemen due to poli4cal events. Ongoing deple4on from the North Sea and West Africa was also important. Throughout 2014, supply exceeded demand because con4nued North American produc4on increases were not matched by further poli4cally driven reduc4ons. Prices lagged the supply- demand signal by about 6 months and began to fall in June Slide 3

4 Produc4on Surplus or Deficit Total Supply Minus Total Demand World%Liquids%ProducAon%Surplus%or%Deficit% 3# $140# RelaAve%Liquids%ProducAon%Surplus%or%Deficit%(Millions%of%Barrels%Per%Day)%% 2.5# 2# 1.5# 1# 0.5# 1.27% Rela4ve produc4on surplus or deficit is the simplest way to measure and evaluate the rela4onship between world liquids supply & demand, and oil price. The current price collapse is because of a sustained 20- month produc4on surplus that con4nues today. Previous surplus events quickly re- balanced without causing major price disrup4ons. Geopoli4cal supply interrup4ons affected previous supply- demand imbalances but have been largely absent during the present price collapse. Previous volumes of liquids produc4on from North America were lower by several million barrels per day. 0.8% 0# 1Q11# 2Q11# 3Q11# 4Q11# 1Q12# 2Q12# 3Q12# 4Q12# 1Q13# 2Q13# 3Q13# 4Q13# 1Q14# 2Q14# 3Q14# 4Q14# 1Q15# 2Q15# $40#!0.1%!0.3%!0.3%!0.3% )0.5#!0.42%!0.51% )1#!1.1% Source:%%IEA%OMR%September%2015,%EIA% )1.5#!0.95% Brent%Price%(RHS)%!0.8%!1.08% 0.41% 1.12% 0.91% 1.37% 1.48% 2.57% $120# $100# $80# $60# $20# $0# Brent%Crude%Oil%Price%(Dollars%Per%Barrel)% Slide 4

5 Market Share is OPEC s Chief Mo4va4on World'Liquids'Produc6on'Since'2008' U.S.%+%Canada%and%OPEC%Liquids%Produc<on%Since%January%2014% OPEC" Non+OPEC"Less"U.S."&"Canada" U.S."+"Canada" U.S.%&%Canada% OPEC% 120" 20.5% 38.0% 20.0% Millions'of'Barrels'of'Liquids''Per'Day' 100" 80" 60" 40" 20" Source:'EIA'September'2015'STEO' 0" Jan+08" Apr+08" Jul+08" Oct+08" Jan+09" Apr+09" Jul+09" Oct+09" Jan+10" Apr+10" Jul+10" Oct+10" Jan+11" U.S.'&'Canada' +'7.9'mmbpd' ' NonFOPEC' Less'U.S.'&'Canada' +'1.1'mmbpd' ' OPEC' +'2.3'mmbpd' ' Apr+11" Jul+11" Oct+11" Jan+12" Apr+12" Jul+12" Oct+12" Jan+13" Apr+13" Jul+13" Oct+13" Jan+14" Apr+14" Jul+14" Oct+14" Jan+15" Apr+15" Jul+15" U.S.%+%Canada%Millions%of%Barrels%of%Liquids%Per%Day% 19.5% 19.0% 18.5% 18.0% 17.5% 17.0% 16.5% Source:%EIA%September%2015%STEO% 16.0% Jan/14% Feb/14% Mar/14% Apr/14% May/14% Jun/14% U.S.%&%Canada%(LHS)% OPEC%(RHS)% Jul/14% Aug/14% Sep/14% Oct/14% Nov/14% Dec/14% Jan/15% Feb/15% Mar/15% Apr/15% May/15% Jun/15% Jul/15% 37.5% 37.0% 36.5% 36.0% 35.5% 35.0% OPEC%Millions%of%Barrels%of%Liquids%Per%Day% North American produc4on increased 7.9 mmbpd since North American 4ght oil, oil sands and deep- water produc4on pose a threat to OPEC market share. OPEC produc4on increased 2.3 mmbpd since 2008 with 75% (1.72 mmbpd) since June Long- term oil- demand decline & compe44on from renewables are also threats to OPEC. U.S. 4ght oil and deep- water will peak in the 2020s. Only oil sands produc4on is long term. On the face of it, the Saudi- led OPEC strategy to defend market share regardless of price appears to be having the intended effect of driving out costly, inefficient producbon. IEA September 2015 Oil Market Report Slide 5

6 Historical Perspec4ve for the Oil Price Collapse Oil$Price$&$World$Events$ U.S.$$WTI$Oil$Price$(August$2015$Dollars$Per$Barrel)$ $160# $140# $120# $100# $80# $60# $40# End$of$ U.S.$$ Spare$ Capacity$ 1970$ Arab$Oil$ Embargo$ 1973$ IranOIraq$ War$ 1980$ OPEC$Cut$ ProducMon$ 10$mmbpd$ 1980O85$ Iraq$ Invades$ Kuwait$ 1990$ Low$OPEC$Spare$ Capacity$ OPEC$Cut$ <$2.5$mmbpd$ ProducMon$ 2003O2008$ 1.1$mmbpd$ 1998O99$ 9O11$ AVacks$ 2011$ Financial$ Collapse$ 2008$ Arab$ Spring$ 2011O12$ $20# Iranian$ Saudi$Arabia$Abandons$ RevoluMon$ Swing$Producer$Role$ 1978O79$ Late$1985$ Source:$$EIA$&$Federal$Reserve$Bank$of$St.$Louis$ $0# Jan,68# Mar,69# May,70# Jul,71# Sep,72# Nov,73# Jan,75# Mar,76# May,77# Jul,78# Sep,79# Nov,80# Jan,82# Mar,83# May,84# Jul,85# Sep,86# Nov,87# Jan,89# Mar,90# May,91# Jul,92# Sep,93# Nov,94# Jan,96# Mar,97# May,98# Jul,99# Sep,00# Nov,01# Jan,03# Mar,04# May,05# Jul,06# Sep,07# Nov,08# Jan,10# Mar,11# May,12# Jul,13# Sep,14# World poli4cal and economic events affect oil prices. OPEC has only acted as swing producer a few 4mes: ü following oil shocks of 1970s and early 1980s: ineffec4ve, ü during Asian Financial Crisis: marginally effec4ve, ü 2009 during Global Financial Crisis: effec4ve. Only is similar to current situa4on: new source of oil for world market, other interven4ons were because of economic events. Asian$Financial$Crisis$ July$1997$ OPEC$Cuts$ProducMon$ 1.7$mmbpd$$Jan$2009$ Slide 6

7 The Context For The Current Oil Price Crisis: Supply- Demand Fundamentals Millions,of,Barrels,of,Liquids,Per,Day,, 5.00# 4.00# 3.00# 2.00# 1.00# 0.00# )1.00# )2.00# )3.00# )4.00# Rela<ve#Surplus#or#Deficit# WTI#Price# 2#per.#Mov.#Avg.#(Rela<ve#Surplus#or#Deficit)# Global,Peak,of, Deep,Water, Jan)03# Apr)03# Jul)03# Oct)03# Jan)04# Apr)04# Jul)04# Oct)04# Jan)05# Apr)05# Jul)05# Oct)05# Jan)06# Apr)06# Jul)06# Oct)06# Jan)07# Apr)07# Jul)07# Oct)07# Jan)08# Apr)08# Jul)08# Oct)08# Jan)09# Apr)09# Jul)09# Oct)09# Jan)10# Apr)10# Jul)10# Oct)10# Jan)11# Apr)11# Jul)11# Oct)11# Jan)12# Apr)12# Jul)12# Oct)12# Jan)13# Apr)13# Jul)13# Oct)13# Jan)14# Apr)14# Jul)14# Oct)14# Jan)15# Apr)15# Jul)15# Rising,Prices,Despite, Supply,Surplus, Low, OPEC, Spare, Capacity, Global,Financial, Collapse, Onset,of, Tight,Oil, OPEC,Cut, China, mmbpd, Demand, Expansion, Arab, Spring, Longest,Period,of,Sustained,High, Oil,Prices,in,History, 2014,Oil, Price, Collapse, $160# $140# $120# $100# $80# $60# $40# $20# Source:,EIA,STEO,2007$2015, $0# CPI$Adjusted,WTI,Price,(Dollars,Per,Barrel), Oil prices are rela4vely insensi4ve to supply- demand fundamentals below ~$90/barrel. Most produc4on surpluses before 2011 occurred when oil prices were less than $90/ barrel, were short- dura4on events, and market balance was quickly restored. The greatest rela4ve surplus in the current episode was 3.16 mmbpd (May 2015). Slide 7

8 : The Longest Period of High Oil Prices in History in Real Dollars Oil,Prices,in,2015,Dollars, CPI$Adjusted,WITCrudeOil,Price,(Dollars,Per,Barrel), $160# $140# $120# $100# $80# $60# $40# 1973,Arab,, Oil,Embargo, Sept,1979$Sept,1981:, 27,months, Sept,2007$Sept,2008:, 13,months, 18,Years,of,Low,Oil,Prices, &,Global,Market,Adjustment, 2008,Financial,, Crisis, Nov,2010$ Sept,2014:, 47,months, $20# Source:,,EIA,&,Federal,Reserve,Bank,of,St.,Louis, $0# Jan,70# Mar,71# May,72# Jul,73# Sep,74# Nov,75# 1980,Iran$Iraq,War, Jan,77# Mar,78# May,79# Jul,80# Sep,81# Nov,82# Jan,84# Mar,85# May,86# Jul,87# Sep,88# Nov,89# Jan,91# Mar,92# May,93# Jul,94# Sep,95# Nov,96# Jan,98# Mar,99# May,00# Jul,01# Sep,02# Nov,03# 1,Year,of,Low,Oil,Prices, &,Global,Adjustment, Jan,05# Mar,06# May,07# Jul,08# Sep,09# Nov,10# Jan,12# Mar,13# May,14# Jul,15# November 2010 September 2014 was the longest period of oil prices > $90 per barrel ever (all prices in 2015 U.S. Dollars). Created demand destruc4on similar to periods of Iran- Iraq War and the Financial Crisis. Oil prices were depressed for almost 18 years (Feb Nov 2003). Oil prices rebounded in a year aner An OPEC produc4on cut of 2.3 mmbpd accelerated that price recovery. Slide 8

9 World Demand Has Fallen Since Late 1960s World(Liquids(Demand(Growth( 10%$ Peak(Demand( Growth(( 8%$ Year%Over%Year(Demand(Growth(2%Year(Moving(Average( 6%$ 4%$ 2%$ 0%$!2%$ Arab(Oil( Embargo( Iran%Iraq( War( 2008( Financial( Crisis( 1.1%( 2015(YTD( 1967$ 1968$ 1969$ 1970$ 1971$ 1972$ 1973$ 1974$ 1975$ 1976$ 1977$ 1978$ 1979$ 1980$ 1981$ 1982$ 1983$ 1984$ 1985$ 1986$ 1987$ 1988$ 1989$ 1990$ 1991$ 1992$ 1993$ 1994$ 1995$ 1996$ 1997$ 1998$ 1999$ 2000$ 2001$ 2002$ 2003$ 2004$ 2005$ 2006$ 2007$ 2008$ 2009$ 2010$ 2011$ 2012$ 2013$ 2014$ 2015$YTD$!4%$!6%$ Source:((BP(StaOsOcal(Review(2015(&(EIA(September(2015(STEO( Year- over- year world liquids demand has been declining since the late 1960s year- to- date demand growth has decreased to 1.1%. Major periods of demand destruc4on: Arab Oil Embargo ( ), Iran- Iraq War ( ), Financial Crisis ( ). Saudi Arabia s strategy is, in part, to s4mulate demand through low oil prices back to levels before the oil shocks. Slide 9

10 The Cost of Tight Oil According to Schlumberger Oil and gas produced from shale reservoirs is much more expensive than conven4onal oil and gas. The marginal cost of 4ght oil produc4on is about $75 per barrel. The marginal cost of OPEC produc4on is less than $10 per barrel. The marginal cost of land conven4onal produc4on is less than $25 per barrel. Slide 10

11 The Cost of Tight Oil According to Schlumberger U.S. 4ght oil required almost 100 4mes more wells to produce approximately the same volume of liquids as Saudi Arabia. The cost was more than 100 4mes as much. Slide 11

12 Tight Oil & Shale Gas Plays Are Not Profitable for Most Companies 1H#TightDOil#Companies#Spending#vs.#Earning:#2015D2014#Comparison# 2015$ 2014$ 7.0# 1H$2015$Debt2to2Cash$Flow$For$Tight$Oil$Companies$ 3.5$ 3.3# 3.2# 6.0# 5.8$ Ra-o#of#Capital#Expenditures#to#Cash#From#Opera-ons# 3.0$ 2.5$ 2.0$ 1.5$ 1.0$ 0.5$ 1.6$ 0.9$ 2.8# 2.6# 1.2$ 1.3$ 2.5# 1.1$ 2.3# 0.9$ 2.2# 1.2$ 2.2# 1.5$ 2.0# 1.8# 1.3$ 1.2$ 1.6# 1.6# 1.4$ 1.2$ 1.5# 1.0$ 1.4# 0.8$ 5.0# 4.0# 3.0# 2.0# 1.0# 5.1$ 5.0$ 3.8$ 3.3$ 3.3$ 3.1$ 3.1$ 3.0$ 2.5$ 2.3$ 2.2$ 2.1$ 1.7$ 0.0$ Whi/ng$ Marathon$ Pioneer$ Oasis$ Hess$ Oxy$ Average$ Con/nental$ Murphsy$ SM$ Newfield$ Apache$ EOG$ Conoco$ 0.0# Marathon# Oasis# Whi6ng# Con6nental# Average# Hess# Pioneer# Conoco# Oxy# Apache# Murphsy# SM# Newfield# EOG# Source: Company 10- Q SEC Filings and Google Finance Tight oil companies outspend cash flow by an average of 120%: spend $2.20 for every dollar earned from opera4ng ac4vi4es. Tight oil company debt- to- cash from opera4ng ac4vi4es ra4o averages 3.3: would take more than 3 years to pay down debt if all cash flow was used. E&P average was 1.59 (Bank of Finland). Ra4o of 2 or more is commonly the threshold for loan covenant triggers. The shale revolu4on has been funded by debt, public offerings, and bond sales made aqrac4ve by zero interest rate policies. The illusion that large produc4on volumes must be profitable is false. Slide 12

13 The Cost of Tight Oil For Pure Players First Half 2015 H1#2015#COST#PER#BOE#SUMMARY H1#2015 PIONEER EOG CONTINENTAL OPERATING#COST#PER#BOE $20.66 $16.97 $18.24 CAPEX#PER#BOE $34.33 $27.03 $40.70 REALIZED#PRICE#PER#BOE $31.50 $ @$24.04 *$Note:$Continental's$Capex$Per$BOE$is$80%$of$total$to$approximate$maintenance$capital Source:#Company#SEC#Filings#&#Labyrinth#ConsulKng#Services,#Inc.# DAILY#PRODUCTION#COMPARISON BOE$per$Day #PCT#CHANGE PIONEER 195, ,690 0% EOG 512, ,000 0% CONTINENTAL 216, ,457 12% Source:#Company#SEC#Filings#&#Labyrinth#ConsulKng#Services,#Inc.# Pioneer, EOG and Con4nental represent a weighted cross sec4on of the main 4ght oil plays: Pioneer Permian, EOG Eagle Ford and Con4nental Bakken. Opera4ng costs consume between 50% and 65% of sales revenue. Because 2015 produc4on was flat with 2014, all capex for Pioneer and EOG may be considered maintenance and not growth. Slide 13

14 The Cost of Tight Oil For Pure Players First Half 2015 Daily)Prod)(MBd)or) Realized)Price)($/b) EOG MMcfd) or)$/mcf) Revenue Daily)Prod)(Mboe) Crude)Oil)&)Condensate 288 $51.91 $14, Natural)Gas)Liquids 75 $15.83 $1, Natural)Gas)(6:1)Mcf:Boe) 898 $2.19 $1, Total $18, Price)Per)Boe $35.28 BreakSEven)Price Oil $66.44 Boe $44.00 PIONEER Crude)Oil)&)Condensate 100 $47.40 $4, Natural)Gas)Liquids 36 $14.50 $ Natural)Gas)(6:1)Mcf:Boe) 358 $2.53 $ Total $6, Price)Per)Boe $31.49 BreakSEven)Price Oil $88.88 Boe $54.97 Source:5Company5SEC5Filings5&5Labyrinth5ConsulEng5Services,5Inc.5 Boe repor4ng: Ø A barrel of NGL is equal to a barrel of crude oil even though the value is 30% and the energy content is 65%. Ø An mcf of natural gas is equal to 17% barrel of crude oil (6 Mcf = 1 Boe) even though the value is 5%. The break- even crude oil price is ~$66/barrel for EOG and ~$89/barrel for Pioneer. Slide 14

15 U.S. Oil Produc4on Has Declined Later and Less Than Predicted OPEC$and$U.S.$Crude$Oil$Produc0on$ OPEC$ U.S.$ OPEC$Crude$Oil$Produc0on$(Millions$of$Barrels$Per$Day)$ 31.50$$ 31.00$$ 30.50$$ 30.00$$ 29.50$$ 29.00$$ U.S.$Produc0on$Down$$ 510$kbpd$Since$April$2015$ OPEC$Produc0on$ U.S.$Produc0on$ OPEC$Produc0on$Flat$at$31.24$mmbpd$$ Up$1.2$mmbpd$Since$Jan$2015$ 10.00$ 9.50$ 9.00$ 8.50$ 8.00$ 7.50$ U.S.$Crude$Oil$Produc0on$(Millions$of$Barrels$Per$Day)$ Source:$EIA$STEO$September$2015$$ 28.50$$ Jan.14$ Feb.14$ Mar.14$ Apr.14$ May.14$ Jun.14$ Jul.14$ Aug.14$ Sep.14$ Oct.14$ Nov.14$ Dec.14$ Jan.15$ Feb.15$ Mar.15$ Apr.15$ May.15$ Jun.15$ Jul.15$ Aug.15$ 7.00$ U.S. produc4on has declined ~510,000 bopd since April OPEC produc4on has increased 1.2 mmbopd since January Leads and lags: ü New produc4on in the deep- water Gulf of Mexico, ü High- grading of 4ght oil core area wells, ü Focus on drilled but previously uncompleted wells, ü Addi4onal capital flows, ü Con4nued produc4on for cash flow to meet interest expenses. Slide 15

16 Rig Produc4vity and Drilling Efficiency Bakken;Eagle'Ford;Permian'Rig'Produc,vity' Bakken'Produc>on'Per'Rig'vs.'Produc>on'Per'Well' Produc<on!Per!Rig! Rig!Count! Produc0on#Per#Rig# Produc0on#Per#Well#!2,000!!!2,000!! 700# Produc>on'per'rig'(lhs)' 135#!1,800!!!1,600!! Produc,on'Per'Rig'(LHS)'!1,800!!!1,600!! 600# 130# Produc,on'Per'Rig'(Barrels)'!1,400!!!1,200!!!1,000!!!800!!!600!! Number'of'Rigs'(RHS)'!1,400!!!1,200!!!1,000!!!800!!!600!! Number'of'Ac,ve'Rigs' Produc>on'Per'Rig'(Barrels'of'Oil'Per'Day)' 500# 400# 300# 200# Produc>on'per'well'(rhs)' 125# 120# 115# 110# Produc>on'Per'Well'(Barrels'of'Oil''Per'Day)'!400!!!400!!!200!!!200!! 100# 105#!"!!!! Jan"07! Source:''EIA'September'2015'Drilling'Produc,vity'Report' Apr"07! Jul"07! Oct"07! Jan"08! Apr"08! Jul"08! Oct"08! Jan"09! Apr"09! Jul"09! Oct"09! Jan"10! Apr"10! Jul"10! Oct"10! Jan"11! Apr"11! Jul"11! Oct"11! Jan"12! Apr"12! Jul"12! Oct"12! Jan"13! Apr"13! Jul"13! Oct"13! Jan"14! Apr"14! Jul"14! Oct"14! Jan"15! Apr"15! Jul"15!!"!!!! 0# Source:'EIA,'Drilling'Info'&'Labyrinth'Consul>ng'Services,'Inc.' Claims that produc4on per rig have increased are true: pad drilling is more efficient. But rigs don t produce oil, wells do! What about the produc4on per well? What about the cost per barrel? The average well becomes poorer through 4me this is not unique to 4ght oil produc4on. But it is important to differen4ate where the units of produc4on come from and they don t come from rigs. Jan$14' Feb$14' Mar$14' Apr$14' May$14' Jun$14' Jul$14' Aug$14' Sep$14' Oct$14' Nov$14' Dec$14' Jan$15' Feb$15' Mar$15' Apr$15' May$15' 100# Slide 16

17 Rig Produc4vity and Drilling Efficiency DAILY&PRODUCTION&COMPARISON BOE$per$Day &PCT&CHANGE PIONEER 195, ,690 0% EOG 512, ,000 0% CONTINENTAL 216, ,457 12% Source:&Company&SEC&Filings&&&Labyrinth&ConsulEng&Services,&Inc.& EOG$H1$2015$vs.$2014$COST$PER$BOE$COMPARISON 2014 H1& &CHANGE OPERATING&COSTS&PER&BOE $19.02 $ % CAPEX&COSTS&PER&BOE* $33.80 $ % REALIZED&PRICE&PER&BOE $58.11 $ % NET&MARGIN&PER&BOE $5.30 9$9.63 9$14.93 *Note:'EOG's'Capex'Per'BOE'is'85%'of'total'to'approximate'maintenance'capital Source:$Company$SEC$Filings$&$Labyrinth$ConsulLng$Services,$Inc.$ EOG had flat daily produc4on in H compared to 2014 so all capex may be considered maintenance. Capex fell 20% reflec4ng lower oil field services costs + drilling efficiency. Opex fell 11% reflec4ng reduced staff, lower taxes on reduced revenues, etc. Our company has a rig today that costs $16,500 per day compared to the ini4al quote in September 2014 of $27,500 per day (40% savings). Conclusion: reduced costs are real and some is because of efficiency but most is because of lower costs. Con4nued cost reduc4ons are probably not sustainable at the same scale. Slide 17

18 The Financializa4on of the Explora4on & Produc4on Business Interest$Rate$ 7%# 6%# 5%# 4%# 3%# 2%# 1%# Federal$Funds$Interest$Rates$January$2000>January$2015$ $160# $140# $120# $100# $80# $60# $40# $20# WTI$Oil$Price$January$2015$US$Dollars$ Easy credit feeds our love of immediate grabficabon, distorts self- regulabon, creabng a destabilizing posibve- feedback loop that dominates the calculus of risk. - - Peter Wybrow, WSJ May 11, %# Jan000# Jun000# Nov000# Apr001# Sep001# Feb002# Jul002# Dec002# May003# Oct003# Mar004# Aug004# Jan005# Jun005# Nov005# Apr006# Sep006# Feb007# Jul007# Dec007# May008# Oct008# Mar009# Aug009# Jan010# Jun010# Nov010# Apr011# Sep011# Feb012# Jul012# Dec012# May013# Oct013# Mar014# Aug014# Jan015# $0# Source: EIA and Federal Reserve Board In a zero- interest world, where can reasonably secure yields be found? Investment banks iden4fied the U.S. E&P business as the solu4on. Yields for corporate junk bonds, preferred stock and other capital instruments in the range of 6-10% interest. In the United States and backed by a hard asset in the ground. E&P companies aqracted similar yield- focused investors as sub- prime deriva4ves did before the Financial Crisis. Shale gas and later, 4ght oil companies have access to almost infinite capital with no performance requirement other than to avoid debt covenants. Slide 18

19 Over- Produc4on Will Con4nue As Long As Capital Is Available Despite low oil prices and poor financial performance, capital flow to U.S. E&P companies has increased. Investors seeking high yields cannot find other op4ons. The hype is working about efficiency reducing the price needed for profitability and re- fracking. Investors think they are buying assets that are viable even at the lower oil prices. Slide 19

20 The Fall in Oil Price is Part of a Larger Paqern of Defla4on & Devalua4on Source: FINVIZ A strong U.S. dollar correlates with weak commodity values. Slide 20

21 The Rela4onship Between Oil Price and the Value of the U.S. Dollar U.S.&Dollar&Value&vs.&Brent&Crude&Oil&Price& Trade,Weighted#U.S.#Dollar#Index# Brent# Trade6Weighted&U.S.&Dollar&Index&(January&1997&=&100)& 125# 120# 115# 110# 105# 100# 95# 18&June&2014& QE&3&Tapering&& 24&Oct&2014& End&of&QE&3& Announced& $140# $120# $100# $80# $60# $40# $20# Brent&Crude&Oil&Price&(Dollars&Per&Barrel)& Source:&St.&Louis&Federal&Reserve&Bank&and&EIA& 90# 3,Jan,14# 24,Jan,14# 14,Feb,14# 7,Mar,14# 28,Mar,14# 18,Apr,14# 9,May,14# 30,May,14# 20,Jun,14# 11,Jul,14# 1,Aug,14# 22,Aug,14# 12,Sep,14# 3,Oct,14# 24,Oct,14# 14,Nov,14# 5,Dec,14# 26,Dec,14# 16,Jan,15# 6,Feb,15# 27,Feb,15# 20,Mar,15# 10,Apr,15# 1,May,15# 22,May,15# 12,Jun,15# 3,Jul,15# 24,Jul,15# 14,Aug,15# 4,Sep,15# $0# Oil represents approximately 50% of all tradable volume in commodi4es. The value of the U.S. dollar has increased ~20% since mid Oil prices have fallen ~60%. The slowing of quan4ta4ve easing in 2014 coincided with lower oil prices. Because all oil transac4ons are in U.S. dollars, there is an inverse correla4on between the U.S. exchange rate and oil prices. This correla4on is complex and has existed strongly since about 2000 but less so previously. A stronger U.S. dollar does not fully account for the decline in oil prices. Slide 21

22 Peak Oil: Reserves Have An Associated Price U.S.'Crude'Oil'Produc8on' Oil$Prices$in$2015$Dollars,$January$1950?August$2015$ Conven0onal"Oil" Tight"Oil" Oil#Prices#Above#$90# Oil#Prices# Poly.#(Oil#Prices)# Millions'of'Barrels'of'Oil'Per'Day' 12" 10" 8" 6" 4" 2" 0" 1950" Source: EIA 1952" 1954" 1956" 1958" 1970%Peak%Oil% Produc2on%9.6%mmbpd% 1960" 1962" 1964" 1966" 1968" 1970" 1972" 1974" Prudhoe%Bay% 1976" 1978" 1980" 1982" 1984" 1986" 1988" 1990" 1992" 1994" 1996" 1998" Tight%Oil% Produc2on%+% Conven2onal%%%%%%% 9.1%mmbpd% 2000" 2002" 2004" 2006" 2008" 2010" 2012" 2014" WTI$Crude$OIl$Price$(2015$Dollars$Per$Barrel)$ $155# $150# $145# $140# $135# $130# $125# $120# $115# $110# $105# $100# $95# $90# $85# $80# $75# $70# $65# $60# $55# $50# $45# $40# $35# $30# $25# $20# $15# $10# $5# $0# Jan050# Jan051# $45$1950?2015$ Average$Price$ Jan052# Jan053# Jan054# Jan055# Jan056# Jan057# Long?term$Trend$Line$ Source:##EIA#&#Federal#Reserve#Bank#of#St.#Louis# Jan058# Jan059# Jan060# Jan061# Jan062# Jan063# Jan064# Jan065# Jan066# Jan067# Jan068# Jan069# $58$1974?2015$ Average$Price$ Jan070# Arab$$ Oil$Embargo$ Jan071# Jan072# Jan073# Jan074# Jan075# Jan076# Jan077# Jan078# Jan079# Iran?Iraq$ War$ Jan080# Jan081# Jan082# Jan083# Jan084# Jan085# Jan086# Jan087# Jan088# Jan089# 1st$Gulf$ War$ Jan090# Jan091# Jan092# Jan093# Jan094# Jan095# $68$1999?2015$ Average$Price$ Asian$ Financial$ Crisis$ Jan096# Jan097# Jan098# Jan099# Jan000# Jan001# Jan002# Jan003# Jan004# 2008$ Financial$ Crisis$ Jan005# Jan006# Jan007# Jan008# Jan009# Jan010# Jan011# Jan012# Jan013# Jan014# Jan015# Reserves have an associated price. As price increases, more expensive reserves are found. This does not mean that peak oil predic4ons at a lower price assump4on were wrong. The observa4on of Peak Oil: once conven4onal produc4on peaks, supply will become increasingly dependent on more expensive, lower quality sources of oil. Like shale, deep- water, and tar sands. It looks like Peak Oil is ba{ng 1000! Many believe that Peak Oil is false because more oil con4nues to be produced. What is the cost and what is the life cycle of that produc4on? The average 2015 dollar price of oil has increased over 4me: $ , $ , $ Long- term trajectory is higher. This reflects higher demand and higher costs to produce more expensive oil. Slide 22

23 Support for $100 Per Barrel Oil Prices in the Period from Profits'&'Taxes' 100' 95' Li4ing'Cost' '$/BBL' 3000M$ 1500M$ Marginal$ Bakken$ Eagle$ Ford$core$ 75' Canada$ Orinoco$ 50' Shale$Oil$ Conven:onal$ MMBBL/D' Most conven4onal producers needed $100/barrel oil to balance their fiscal budgets. Unconven4onal producers needed $100/barrel oil to make a profit. Slide 23

24 The Longer- Term Outlook for Oil Prices is Strong EIA'AEO'2015'Crude'Oil'Forecast' Total"U.S." Lower"48"Onshore" Tight"Oil" 12" 2020'Peak'Produc?on' 10" Millions'of'Barrels'of'Crude'Oil'Per'Day' 8" 6" 4" 2" 0" 2012" 2013" 2014" 2015" 2016" 2017" 2018" 2019" 2020" 2021" 2022" 2023" 2024" 2025" 2026" 2027" 2028" 2029" 2030" Source: Hyperdynamics Source: EIA The shin from low- cost conven4onal oil to high- cost deep- water and unconven4onal produc4on will con4nue as conven4onal produc4on declines & net exports by major producers decrease. Reserves of deep- water and 4ght oil are limited and produc4on will peak in the 2020s. Con4nued growth in natural gas liquids, heavy oil and renewables will be necessary to sustain world demand in the 2020s. Upward pressure on oil prices is likely. Slide 24

25 Top 15 Oil Producing Countries 2014%Production%1000%bpd 2014%Consumption%Change%from%2013 5;Year%Consumption%Change US 11, % 1.4% Saudi%Arabia 11, % 22.8% Russia 10, % 1.4% Canada 4,292 ;0.5% 8.3% China 4, % 34.6% UAE 3, % 47.3% Iran 3,614 ;2.0% 0.6% Iraq 3,285 NA NA Kuwait 3,123 ;0.3% 10.9% Mexico 2,784 ;5.0% ;2.8% Venezuela 2,719 ;0.3% 13.3% Nigeria 2, % 6.8% Brazil 2, % 29.9% Qatar 1, % 78.5% Norway 1,895 ;3.8% 1.4% Source:%BP Of the top 6 producing countries, demand increased in 2014 except for Canada. 5- Year demand growth in double digits for Saudi Arabia, China, UAE, Kuwait, Venezuela, Brazil and Qatar. Data suggests that there will be more domes4c consump4on among top oil- producing countries and, therefore, less oil available for net export. That puts upward pressure on long- term oil prices. Slide 25

26 The Shale Revolu4on & The Current Oil Price Collapse: Conclusions The current oil- price collapse is because of over- produc4on of expensive unconven4onal oil funded by debt. It is a classic bubble and part of a larger process of defla4on and devalua4on because of too much debt used to fund growth at any cost. If capital con4nues to flow to North American 4ght oil companies, lower prices may con4nue for several years. Yield is the aqrac4on. Over- supply is the issue but weakening demand growth is also a factor. OPEC s objec4ve is price discovery and to stop the capital enablers from funding non- commercial projects. Rig produc4vity and drilling efficiency are red herrings to distract from the truth that 4ght oil is losing money at low oil prices most savings is from lower oil- field service costs. Long- term pressure for higher oil prices as projects are deferred, produc4on depletes and net exports decline. It is unlikely that prices will return to levels in the near- to medium term without a significant OPEC produc4on cut. Geopoli4cal risk may modify all predic4ons! It [4ght oil] will compete. Will all of it compete at all pricing? No Rex Tillerson, CEO of ExxonMobil Slide 26