Economics Society of Northern Alberta

December 214 Economics Society of Northern Alberta 215 Outlook Conference Oil & Gas Outlook Randy Ollenberger Managing Director BMO Capital Markets

Crude Oil Outlook Collapse in crude oil prices due to combination of financial and fundamental factors Unwinding of speculative position Return of Libyan production Weaker demand growth Current price levels are not sustainable Global supply costs support oil price of $9-$1/bbl Shale oil supply costs are not the only costs that matter Cash flow breakeven for the industry is $9-$1/bbl The US industry cannot sustain growth below $8/bbl Slide 2

WTI Speculative Net Interest Thousands 5 4 3 2 1-1 Slide 3 QE2 Starts Speculative interest in crude oil spiked with the start of QE 2 Liquidity Inflation hedge Global growth stimulus Positioning now being unwound QE 2 over Deflation concerns Lack of meaningful growth outside of US Further reduction in speculative interest could lead to further near-term downside

Looser Market Balance Million b/d 3. 2.5 2. 1.5 1..5. -.5-1. -1.5-2. Slide 4 Source: International Energy Agency Non-OPEC OPEC Demand Sharp drop in OPEC (Libya) production tightened market in 213 Libya production dropped 1 million b/d from Q1/13 to Q1/14 OPEC production dropped 4, b/d Non-OPEC production increased 1.1 million b/d Y-o-Y increase in demand is not enough to accommodate a full return of Libyan production and expected growth in non- OPEC supply

Oil Sands vs Tight Oil $/bbl 14 $/bbl 14 12 12 1 1 8 6 4 2 27 28 29 21 211 212 213 Tight Oil Oil Sands 3 Yr Avg Tight Oil 3 Yr Avg Oil Sands 8 6 4 2 Slide 5

Global Oil Supply Cost Proved Reserves (Bn bbl) 45 4 35 3 25 2 15 1 5 Cumulative % of Reserves 12% 1% 8% 6% 4% 2% % Oil Supply Cost (US$/boe)

Oil Price vs Global Supply Cost US$213/bbl 12 1 Brent Price 8 6 Supply Cost 4 2, Company Reports Slide 7

US Oil Production Sensitivity b/d 6, 5, 4, 3, 2, 1, Cash flow breakeven is materially higher than economic breakeven US oil production is very sensitive to changes in prices due to higher decline rates 54 company sample accounts for 75% of anticipated growth in US supply over next three years Rapid growth cannot be sustained at $8 oil Slide 8 $8 Brent $1 Brent

Myth #1: Oil Sands is High Cost Marginal Source of Supply US shale has emerged as a low cost alternative source of supply Production could increase by another 3 million b/d Concern that US shale oil could back oil sands out of the market Oil sands is cost competitive with shale oil US refiners need access to heavy supplies to optimize refining profitability

Cash Costs by Type $/bbl 7 6 Mining Cash Cost 5 4 3 In Situ Cash Cost 2 1 MEG CVE SU HSE CLL SU* CNQ COS SU Opex Royalty Transport

Cash Costs Trends $/bbl 11 1 9 8 7 6 5 4 3 2 1 In Situ Bitumen Integrated Mining

Cash Cost Sensitivity $/bbl 5 45 In Situ Bitumen Integrated Mining 4 35 3 25 2 15 1 5 1 9 8 7 6 5 1 9 8 7 6 5 Brent Crude (US$/bbl) Opex Royalty Diluent

Cash Costs vs Oil Price $/bbl 5 45 4 35 3 25 2 15 1 5 1995 1996 1997 1998 1999 2 Royalties Opex Other WTI US$/bbl Cdn Par C$/bbl

Oil Sands Supply Costs $/bbl 14 12 1 Athabasca In Situ 8 6 4 2 Cold Lake In Situ Mineable 1, 2, 3, 4, 5, 6, Remaining Established Resource (mmbbls)

Oil Sands Mining Supply Costs by Type $/bbl 11 1 9 8 7 6 5 4 3 2 1 Existing Brownfield/Expansion Greenfield

Oil Sands Supply Costs by Project $/bbl 11 1 9 8 7 6 5 4 3 2 1 In Situ Mining Avg Mining Avg In Situ 189

Bakken vs Oil Sands $/boe 5 F&D 45 4 75 $/boe 15 161 Supply Cost 125 35 3 25 2 15 Oil Sands 3-yr Average Bakken 3-yr Average 1 75 5 Oil Sands 3-yr Average Bakken 3-yr Average 1 5 25 Horizontal Drilling Horizontal Drilling

Permian vs Oil Sands $/boe 35 F&D $/boe 12 Supply Cost 3 25 2 15 Oil Sands 3-yr Average Permian 3-yr Average 1 8 6 Oil Sands 3-yr Average Permian 3-yr Average 1 4 5 2 Horizontal Drilling Horizontal Drilling

Eagle Ford vs Oil Sands $/boe 6 F&D 5 4 Eagle Ford 3-yr Average $/boe 18 Supply Cost 16 14 12 Eagle Ford 3-yr Average 3 Oil Sands 3-yr Average 1 8 Oil Sands 3-yr Average 2 6 1 4 2

North American Supply Costs 12 1 8 6 4 2 3-Yr Average Supply Cost Model Implied

Myth #2: Oil Sands Growth is Limited by Insufficient Market Access Available markets Rate of growth in oil sands production could outpace growth in global oil demand and decline in non-opec supply What markets are available to Canadian oil sands producers? Transportation What are the infrastructure limitations? Competitive positioning Will US shale oil back oil sands out of the market?

Existing Export Pipeline Capacity Edmonton 3 Burnaby 1 18 11 Anacortes Salt Lake San Francisco Los Angles Hardisty 5 28 Billings Denver Guernsey 145 Midland 59 85 2,5 St Paul Wood River Cushing 193 4 Flanagan Houston Freeport 1,327 9 Capacity Pipeline Market b/d Enbridge Ont, PADD I, II, III 2,5 Keystone (TransCanada) PADD II 59 Plains PADD IV 15 Express (Kinder Morgan) PADD II, IV 28 TransMountain (Kinder Morgan) BC, PADD V 18 Interpipeline PADD IV 11 Total Capacity 3,81 491 926 231 1 Chicago 1 Patoka St James Sarnia Toledo 74 Montreal Warren PADD I PADD II PADD III PADD IV PADD V Delivery Pipelines Other Pipelines

Proposed Export Pipeline Capacity Kitimat 525 Edmonton 59 Hardisty Burnaby 72 1,1 Anacortes Billings Capacity 83 Pipeline Market Salt Lake In-Service b/d Guernsey Alberta Clipper Ont, PADD I, II & III Mid-215 12 San Francisco Alberta Clipper Ont, PADD I, II & III 215 23 Enbridge Line 9 Que, Export Mid-214 Denver 24 Line 9 Expansion Que, Export 215 8 Flanagan South PADD II & III Oct-14 585 Enbridge Line 61 (Phase I) PADD II & III Mid-214 16 Enbridge Line Los 61 (Phase Angles II) PADD II & III Late-215 64 Southern Access Extension PADD II & III Mid-215 3 Trunkline Conversion PADD II & III 215 54 Line 3 Replacement PADD II & III 217 37 Keystone XL PADD II & III 217 83 TransMountain PADD V, Export 218 59Midland TransCanada Conversion Que, Export 217-218 1,1 Enbridge Gateway PADD V, Export 218 525 Total Capacity 6,31 225 St Paul 1,2 Wood River 6 Cushing 83 Flanagan Houston Freeport 3 54 Sarnia 1,2 7 18 Chicago Patoka St James 32 Montreal Portland PADD I PADD II PADD III PADD IV PADD V St John Proposed Pipelines Existing Pipelines

North American Market Consumption by Feedstock Type Western Canada: 571 25 167 193 6 Eastern Canada: 1,14 55 PADD V: 2,524 195 569 1369 391 PADD IV: 569 23 32 191 324 PADD III: 7,884 444 1778 3427 2236 PADD II: 3,42 386 226 193 1715 11 51 246 524 642 PADD I: 965 97 125 219 Light Sweet Light/Medium Sour Heavy Synthetic Domestic US Source: U.S. Energy Information Administration, National Energy Board, BMO Capital Markets

Myth #3: Oil Sands Less Attractive due to Carbon Intensity Environmental challenges has emerged as a material threat to oil sands development Water usage Land disturbance Greenhouse gas emissions Oil sands producers increasing require a social license to operate Facts not always the most relevant consideration

Global GHG Emissions U.S. 18% Europe 12% Japan 4% Canada 2% India 7% Other 27% Russia 5% Source: United Nations Statistics Division China 25%

North American GHG Emissions Source: Canadian Association of Petroleum Producers

Greenhouse Gas Emissions Wells-to-Wheels 12 1 98 12 12 12 16 14 114 17 96 8 6 4 2 Source: Canadian Association of Petroleum Producers Saudi Arabia Mexico Iraq Venezuela Nigeria US Gulf Coast California Thermal Oil Sands Average SAGD SOR 2.4 Gasoline Consumption Production and Refining

Outlook for Canadian Oil We see significant growth in western Canadian oil production Oil sands production is generally competitive with US shale oil and is a required feedstock for the US refining industry Market access continues to evolve but market forces are working despite political intervention Greenhouse house gas emissions issues are overstated Federal government needs to take a clear role

Western Canadian Production Million b/d 7 6 5 CAPP Forecast 4 3 2 1 In Situ Mining Conventional Heavy Conventional

Oil Sands Production Million b/d 4.5 4. 3.5 3. 2.5 In Situ 2. 1.5 1..5 Mining.

Natural Gas Outlook Slide 32

Withdrawal Season Outlook Tcf 4. Tcf.5. 3.5 -.5-1. 3. 2.5 5-Year Average 213-1.5-2. -2.5 2. 1.5 1..5. Slide 33 214 Forecast winter exit Bcf 5-5 -1-15 -2-25 -3-35 -4-45 -5 Season-to-Date Balance of Season 29/1 21/11 211/12 212/13 213/14 214/15

Withdrawal Season Outlook Consuming East Region Tcf 2.5 2. 1.5 5-Year Average 213 Tcf.2. -.2 -.4 -.6 -.8-1. -1.2-1.4-1.6 1..5. Slide 34 214 Forecast winter exit Bcf 5-5 -1-15 -2-25 Season-to-Date Balance of Season 29/1 21/11 211/12 212/13 213/14 214/15

Northeast Pipeline Expansions Bcf/d 2. 1.5 1..5. Cumulative Increase Bcf/d 8 7 6 5 4 3 2 1 Slide 35 RexBackhaul Phase 1 ANR Lebanon Lateral Millennium Expansion TGP Utica Backhaul Project Columbia Gas Warren County RexBackhaul Phase 1 West Side Expansion Line 157 RexBackhaul Phase 2 Team 214 NE Connector TGP Uniondale Project, company reports

Withdrawal Season Outlook Producing Region Tcf 1.6 1.4 1.2 1. 5-Year Average Tcf.1. -.1 -.2 -.3 -.4 -.5 -.6 -.7.8.6 213 214 Bcf 5 Season-to-Date Balance of Season.4-5.2. Slide 36 Forecast winter exit -1-15 29/1 21/11 211/12 212/13 213/14 214/15

U.S. Drilling Activity 1,8 1,6 1,4 1,2 1, 8 6 4 2 Source: BakerHughes, BMO Capital Markets $/Mcf 14 12 1 8 6 4 2 Slide 37 Gas Rigs Oil Rigs Henry Hub Strip

Withdrawal Season Outlook Consuming West Region Tcf.7.6.5 213 5-Year Average Tcf.1. -.1 -.1 -.2 -.2 -.3 -.3 -.4.4.3 214 Bcf 5 Season-to-Date Balance of Season.2.1 Forecast winter exit -5. Slide 38-1 29/1 21/11 211/12 212/13 213/14 214/15

Regional Gas Supply Costs $/Mcf 1 Marcellus 8 6 4 2 27 28 29 21 211 212 213 $/Mcf 9 8 7 6 5 4 3 2 1 Eagle Ford 27 28 29 21 211 212 213 3-Yr Average 1-Yr Actual 3-Yr Average 1-Yr Actual $/Mcf Dry Type Curve Wet Type Curve $/Mcf Dry Type Curve Wet Type Curve 1 8 Montney 1 8 Fayetteville 6 6 4 4 2 27 28 29 21 211 212 213 2 27 28 29 21 211 212 213 Slide 39 3-Yr Average 1-Yr Actual Type Curve 3-Yr Average 1-Yr Actual Typer Curve

Source: http://www.powerlineblog.com/archives/211/11/obamas-job-destroying-machine-grinds-on.php

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