I Was Like, Oh My God, Did I Really Say That? IECA Spring Conference

Bureau of Economic Geology, The University of Texas at Austin

Oil & Gas Investment USEIA, April 7-8, 2009 Dr. Michelle Michot Foss, CEE-UT

Trends Drivers

• Upstream cost structures and margins relative to financing • Demand-side pricing policies by governments (oil) • Impact of financial markets • Resources and opportunities – “frontier” oil • “Frontier” natural gas • Cross-commodity pricing (fuel competition) – the challenge of building value for nat gas • Climate • Investment trends – invest in what you know

©CEE-UT, 2 Dr. Michelle Michot Foss, CEE-UT

Players and Cost Structures

Oil & Gas Investor, October 2008 ©CEE-UT, 3 Dr. Michelle Michot Foss, CEE-UT

400% Improvements in NOCs’ reserve Average replacement rate are supported by East Asia and Pacific 350% Europe and Central Asia improvements in governance, more effective Latin America and Caribbean Middle East and North Africa and stable alliances between NOCs and OGDCL South Asia 300% IOCs, sound competitive frameworks, and Sub-Saharan Africa progressive fiscal regimes… 250% Rosneft

CNOOC 200% Average NOC

PetroChina 150%

GDF Sinopec Petronas ONGC 100% PETROBRAS Gazprom StatoilHydro PDVSA 50% Sonatrach PEMEX PTT

Reserve Replacement Rate (BOE, %) 0% QP KPC 45PetroBangla 50 55Kazmun- 60 65ECOPETROL 70 75 80 85 90 aigas -50%

-100% Average All Scores

A Citizen’s Guide to NOCs, CEE and World Bank, ©CEE-UT, 4 www.worldbank.org/noc Dr. Michelle Michot Foss, CEE-UT

500% …and enables them to create and Average optimize value from assets. East Asia and Pacific Europe and Central Asia Latin America and Caribbean PetroBangla 400% Middle East and North Africa South Asia Sub-Saharan Africa

300%

200%

Rosneft

Gazprom ONGC 100% PEMEX Effective Tax Rate (%) Tax Rate Effective PDVSA ECOPETROL Kazmunaigas PETROBRAS QP Petronas Sinopec StatoilHydro PetroChina Average NOC CNOOC GDF 0% PTT KPC Sonatrach OGDCL -50 0 50 100 150 200

-100% Value Creation Indicator

A Citizen’s Guide to NOCs, CEE and World Bank, ©CEE-UT, 5 www.worldbank.org/noc Dr. Michelle Michot Foss, CEE-UT

A Citizen’s Guide to NOCs, CEE and World Bank, ©CEE-UT, 6 www.worldbank.org/noc Dr. Michelle Michot Foss, CEE-UT Non-Commercial Performance Contributions by Type/Revenue (%)

100 80 16 60 40 31 22 58 20 24 31 23 0 -4 6 -4 -20 StatHydro Petrobras Sinopec Petrochina Pemex

Taxes, Roys., Bonuses Price Subsidies Direct Social Expenses Excess Labor Cost

CEE-UT ©CEE-UT, 7 Dr. Michelle Michot Foss, CEE-UT

Oil Demand Growth by Region, 2006-2008 (YTD)

1.4 1.2 1 0.8 0.6 0.4 0.2 0 mmb/d -0.2 China Middle East Other non- OECD Rest of World World -0.4 -0.6 OECD Asia -0.8 WTI Price (Real), 2006-2008 (YTD) -1 -1.2 40 2006 2007 2008 YTD 35

20 mmb/d Subsidies and 15 10

5 Demand 0 WTI Price (Real)

2006 2007 2008 YTD

IEA, NYMEX ©CEE-UT, 8 Dr. Michelle Michot Foss, CEE-UT Not All Opportunities are the Same

From Holditch, 2005, “Statistical Correlations in Tight Gas Sands”, American Association of Petroleum Geologists (AAPG) Hedberg Conference Proceedings. http://www.searchanddiscovery.net/documents/abstracts/2005hedberg_vail/abstracts/extended/hol ditch01/holditch01.htm

©CEE-UT, 9 Dr. Michelle Michot Foss, CEE-UT Electron Imagery of Barnett Fractures

Gale, J. F. W., Reed, R. M., and Holder, Jon, 2007, Natural fractures in the Barnett Shale and their importance for hydraulic fracture treatments: AAPG Bulletin, v. 91, no. 4, p. 603–622.

©CEE-UT, 10 Dr. Michelle Michot Foss, CEE-UT US Gas Rigs, Production 1,800 1,900 Average Gas Rig Count Production US Dry Gas Production (Bcf) 1,600 Backlog 12-Month Moving Average, US Dry Gas Production (Bcf) 1,800

1,400 1,700

1,200 1,600

1,000

1,500 800 Average Gas Rig Count 1,400 600 US Dry Gas Production (Bcf)

1,300 400

200 1,200

89 92 95 98 01 04 07 -08 n-87 n-90 n-93 n-96 n-99 n-02 n-05 n an-94 an-97 an-00 an-03 an-06 an-09 Ja Jan-88Jan- Ja Jan-91Jan- Ja J Jan- Ja J Jan- Ja J Jan- Ja J Jan- Ja J Jan- Ja J

Baker Hughes, USEIA ©CEE-UT, 11 Dr. Michelle Michot Foss, CEE-UT The Endless Resource

Source: NPC 2007 ©CEE-UT, 12 Dr. Michelle Michot Foss, CEE-UT Natural Gas vs. Petroleum Prices $30 U.S. Gulf Coast No 2 Diesel Low Sulfur Spot Price FOB ($/MMBtu) 25 U.S. Gulf Coast No. 2 Heating Oil Spot Price FOB ($/MMBtu) U.S. Gulf Coast Residual Fuel Oil 1.0 % Sulfur LP Spot Price CIF ($/MMBtu) Henry Hub Monthly Average Spot Price ($/MMBtu) $25 Actual Ratio, Crude Oil:Gas Prices 20 Rough 6:1 Oil:Nat Gas Ratio

$20 What kind of business are we in? 15

$15 $/MMBtu 10

$10 Oil:Natural Gas Price Ratio

5 $5

$0 0

5 6 3 -93 -94 -01 -02 -09 b b b-9 b-9 b b b-0 b eb-89 eb-90 eb-91 eb-97 eb-98 eb-99 eb-00 eb-04 eb-05 eb-06 eb-07 eb-08 F F F Feb-92Fe Fe Fe Fe F F F F Fe Fe Fe F F F F F Fe

Sources: U.S. EIA; NYMEX; CEE ©CEE-UT, 13 Dr. Michelle Michot Foss, CEE-UT Public Acceptance: Sample LNG Projects in Same Region Safety/Security 5 What caused the differences? Other/Intangibles Wetlands 4 Onshore vs. Offshore?

3 Developer posture?

Property Value Fisheries 2 Early dialogue?

1 Safety/Security 5

Air Emissions Energy Costs Other/Intangibles Wetlands 4

3 1 - Perceived Benefit Employment Roads Property Value Fisheries 3 - Indifferent 2 5 - Perceived Cost

Taxes 1 Immediate Site Community Waterway Community Local Community (City) Greater Community (State) National Community (Federal) External Interest Group Unlicensed Onshore Air Emissions Energy Costs

1 - Perceived Benefit Project Employment Roads 3 - Indifferent 5 - Perceived Cost

Taxes Immediate Site Community Waterway Community Local Community (City) Greater Community (State) National Community (Federal) External Interest Group Licensed Offshore Project

Sources: CEE, Community and Economic ©CEE-UT, 14 Benefits of LNG, 2008 Dr. Michelle Michot Foss, CEE-UT Sample Projects in Different Regions

Safety/Security 5 What caused the differences? Other/Intangibles Wetlands 4 Onshore vs. Offshore?

3 Developer posture?

Property Value Fisheries 2 Early dialogue?

1 Safety/Security 5

Air Emissions Energy Costs Other/Intangibles Wetlands 4

3 1 - Perceived Benefit Employment Roads 3 - Indifferent Property Value Fisheries 5 - Perceived Cost 2

Taxes 1 Immediate Site Community Waterway Community Local Community (City) Greater Community (State) National Community (Federal) External Interest Group Unlicensed Onshore Air Emissions Energy Costs

1 - Perceived Benefit Project Employment Roads 3 - Indifferent 5 - Perceived Cost Taxes Immediate Site Community Waterway Community Local Community (City) Greater Community (State) National Community (Federal) External Interest Group Licensed Onshore Project

Math Whiz

• Total annual CO2 emitted is 188 bn ton • 8bn is derived from human activity – US produces 2 bn • Net generation from US coal plants is ~170mm MWh – CO2 production is ~2,250 lbs/MWh, or 191mm tons • The total atmosphere is 5 quadrillion tons – We would be removing 0.00000382% if all CO2 from US coal-fired power gen was captured – We would be removing 0.00016% if all CO2 attributed with human activity were captured or eliminated

API Truth Primer ©CEE-UT, 19 Dr. Michelle Michot Foss, CEE-UT 450,000 400,000 Cumulative U.S. Oil & Gas 350,000 Production, 1936-2007 •Arctic? Impact of 300,000 BBOE (Includes •Hydrates 250,000 Still Alaska) ? 200,000 looking •Offshore Technology – 150,000 for the below 100,000 10,000ft Deferring 50,000 peak… 0 •4-d seismic, offshore below Declines 5,000ft •3-d seismic, horizontal drilling, measurement while drilling, offshore below 1,000ft •Pipeline trenching and welding, compression, pressure control, metering; national grid develops •Directional drilling, offshore below 250ft water •Long-line pipelinedepth transmission •Advances in drilling, early seismic, shallow offshore E&P •Oil discovered at Spindletop (Texas), 1901 •Oil discovered in Titusville, Pennsylvania, 1859; natural gas replaces town gas, 1870s Conventional porosity/permeability Unconventional Nano IT Pathway: Mainframes Minis Micros Work Stations

Not to scale 1990 2000 1850 1950 1960 1980 1900 1930 1940 1970

Center for Energy Economics

www.beg.utexas.edu/energyecon

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