OCTOBER 2006

OIL & GAS BASICS
C O N F I D E N T I A L

Katherine Spector
(1-212) 834-2031 katherine.b.spector@jpmorgan.com

Scott Speaker
(1-212) 834-3878 scott.c.speaker@jpmorgan.com

P R I V A T E

AN D

Sung Yoo
(1-212) 834-7045 sung.k.yoo@jpmorgan.com

S T R I C TL Y

Kristi Jones
(1-212) 834-2835 kristi.l.jones@jpmorgan.com

Oil & Gas Basics_20061020_book

This presentation was prepared exclusively for the benefit and internal use of the client in order to indicate, on a preliminary basis, the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure to any other party. This presentation is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by JPMorgan. Neither this presentation nor any of its contents may be used for any other purpose without the prior written consent of JPMorgan. The information in this presentation is based upon management forecasts and reflects prevailing conditions and our views as of this date, all of which are subject to change. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the client or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the client. The information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects. JPMorgan is a marketing name for investment banking businesses of J.P. Morgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by J.P. Morgan Securities Inc. and its securities affiliates, and lending, derivatives and other commercial banking activities are performed by JPMorgan Chase Bank and its banking affiliates. JPMorgan deal team members may be employees of any of the foregoing entities.

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Oil & Gas Basics_20061020_book

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Websites and Data Releases to Watch 2 13 24 54 62 O I L & G AS B A S I C S 2 .Oil & Gas Basics_20061020_book Agenda Page Oil Specifics The Big Picture: Macro Oil Fundamentals What’s the Story This Year? Natural Gas Specifics References.

. .Oil & Gas Basics_20061020_book From the well to the tank. S P EC I F I C S Source: JPMorgan Energy Strategy O I L 3 .

field maintenance. nuclear) Misc events – e. Iran.Oil & Gas Basics_20061020_book Market drivers to watch Oil Demand Oil Demand Macro economy — — — — Oil Supply Oil Supply Upstream investment – capacity additions? Cost? Location? Type of crude? Natural decline rates – Field age. relationships with consumer countries Oil Inventories Oil Inventories Level relative to long term trend and normal seasonality Level relative to demand Regional distribution Levels at transit points Crude versus refined product levels Sectoral trends – are growth sector energy intensive? Power generation trends what kind of fuel does new generation use? Transportation trends – number and type of cars sold? Tax and subsidy regimes – distort price signals to consumers and affect their consumption behavior… Weather. unplanned outages Refining economics. substitution (e.g.g.g. spare capacity. summer cooling demand. vacation and travel trends Non-oil fuel markets. hydro. geological makeup Geopolitics (e. hurricanes) OPEC decisions and politics – internal politics. SARS. Sep. 11 Other Other Deals associated with mergers/acquisitions S P EC I F I C S Distribution Distribution Tanker supply/demand/rates Seaborne disruptions – weather. Nigeria) Field maintenance. holidays. seasonality – winter heating demand. accidents Port capacity. unplanned outages Weather (e. availability Pipeline capacity/nominations Oil Refining Oil Refining Refinery capacity/investment Planned outages. traffic. coal. run rates Refined product yields Speculative flows O I L Source: JPMorgan Energy Strategy 4 .g. gas.

g. IPE Brent. winter vs. Cal 06 Regional spreads — e.2% CIF NWE — Jet fuel cargoes CIF NWE — EN590 cargoes CIF NWE — 1% and 3.g. West Texas Sour. . refined product spreads — ‘Cracks’ (e. Brent Product vs. NY Harbor gasoline vs.g. Q1 vs. summer. Cal 05 vs.Oil & Gas Basics_20061020_book Price relationships to watch. crude-gasoline. Q3.and what JPMorgan trades Time spreads — e. Bonny Light vs.g.g. West Texas Intermediate vs. gasoline-heating oil S P EC I F I C S Interfuel spreads — e.g. NYMEX West Texas Intermediate vs. crude-heating oil) — Refinery margins Crude grade differentials (physical trade only) — e. product spreads — e. US Gulf gasoline Crude vs. natural gas-heating oil Oil Crude — WTI — Brent — Tapis — Dubai Refined products US market: — NYMEX heating oil — US Gulf Coast heating oil — US Gulf Coast jet fuel — NYMEX gasoline European market: — IPE gasoil — Gasoil 0.5% fuel oil cargoes FOB NWE Asian market: — Singapore jet fuel Natural Gas: NYMEX natural gas European natural gas priced as oil-referenced formula 5 O I L . .

000 MMBtu Source: JPMorgan Energy Strategy O I L 6 .000 bbl Brent Crude 1 lot = 1.000 gallons = 1.000 gallons = 1.Oil & Gas Basics_20061020_book How oil (gas) trades Formal Exchanges Over-the-Counter NY Mercantile Exchange Int’l Petroleum Exchange (London) Swaps/Options West Texas Intermediate (‘Light.000 bbl Variety Of Regional Benchmark Crudes and Refined Products. Heating Oil 1 lot = 42.000 bbl S P EC I F I C S Henry Hub Natural Gas 1 lot = 10. Sweet’) Crude 1 lot = 1.000 bbl Gas Oil 1 lot = 100 tonnes = 750 bbl Unleaded Gasoline 1 lot = 42. . .

Oil & Gas Basics_20061020_book Major global crude benchmarks and oil market centers Dated Brent London (IPE) WTI New York (NYMEX) Dubai Oman Urals Tapis Singapore S P EC I F I C S Source: JPMorgan Energy Strategy O I L 7 .

insurance. time spread Refinery margins Risk Management Strategy Producer hedging: swaps or put options Freight hedging Hedging with time spreads Hedging cracks (spread between crude and refined products) or full margins Consumer hedging: swaps or call options Hedging product — product risk. or regional risk Refined product price Locational/basis risk S P EC I F I C S Retail margins Consumption Source: JPMorgan Energy Strategy O I L 8 .Oil & Gas Basics_20061020_book Risk exposure and management strategies Production Exposure Type Price of crude Cost of transportation. duty/tariff Cost of carry (time value of money).

or “waterborne” based on delivery method Main Locations Main Locations S P EC I F I C S Europe: Amsterdam-Rotterdam-Antwerp.5. products may be priced as “pipe”.000 MT (15 days loading) Delivery Methods Delivery Methods Delivery specifications are factored into the cost of products. Mediterranean. Arab Gulf. “barge”. Los Angeles.Oil & Gas Basics_20061020_book Conventions of the oil market Benchmarks Benchmarks Commodity Crude (global) Gasoline (US) Heating oil (US) Gas oil (Europe) Jet fuel (Europe) Natural gas (US) Lot Size 1. West Coast. United States: New York Harbour.000 gallons 42. US Gulf Coast.000 gallons 100 metric tons 100 metric tons 10.25.000 MMBtu Quote Unit US$/barrel cents/gallon cents/gallon US$/metric ton US$/metric ton US$/MMBtu Parcel Parcel Barges: 1.000 MT (2 . Singapore Source: JPMorgan Energy Strategy O I L 9 . Midcontinent. North West Europe.8 days loading) Cargoes: 10. San Francisco. For example — Free on Board (“FOB”) — Cost Insurance Freight (“CIF”) In the US.000 .000 barrels 42. Rotterdam.000 .

16/bbl S P EC I F I C S Extensions of this idea? Look at the forward spreads. Barge or cargo? Cargo. $239/tonne Compare to what crude? Urals.Oil & Gas Basics_20061020_book For example. What sulphur content? 1%. CIF or FOB? CIF. .66 bbl = $13. €36. Rotterdam or Med? Med. What is the price of spot fuel oil relative to crude? What region? Europe.34 €1 - $239 1 tonne FO x 1 tonne 6. look at the spread to the US or Asian fuel cracks Source: JPMorgan Energy Strategy O I L 10 . .60 1 bbl Urals x $1.

70 S P EC I F I C S M01 M05 M09 M13 M17 M21 M25 M29 M33 Source: JPM organ Energy Strategy O I L 11 . Contango Curves In US$/bbl $5.20 $5.90 $4. Contango Curves Backwardation vs.00 backwardation curve $4.80 $4.10 $5. contango Backwardation vs.Oil & Gas Basics_20061020_book Backwardation vs.30 contango curve $5.

Backwardation Contango vs.Oil & Gas Basics_20061020_book More backwardation than contango The oil curve shifts regularly between backwardation and contango Historically. Backwardation Number of instances 90 80 70 60 50 40 30 20 10 0 S P EC I F I C S Contango Backwardation $(11) $(9) $(7) $(5) $(3) $(1) $1 $3 $5 $7 $9 $11 N ote: M 02–M 13 in U S$/bbl Source: JPM organ Energy Strategy O I L 12 . oil has spent more time in backwardation than contango Backwardation has been steeper than periods of contango Contango vs.

Websites and Data Releases to Watch 2 13 24 54 62 O I L & G AS B A S I C S 13 .Oil & Gas Basics_20061020_book Agenda Page Oil Specifics The Big Picture: Macro Oil Fundamentals What’s the Story This Year? Natural Gas Specifics References.

such as gasoline and heating oil Other products that are derived from crude oil include: Jet fuel. residual fuel oil. refinery fuel costs.Oil & Gas Basics_20061020_book How is crude oil related to other oils. and plastics The difference between the price of a finished product. A refinery ‘margin’ is essentially the refiner’s profit — i. given the value of the finished product slate minus other costs to the refiner such as transport costs. the value of the product slate. kerosene. tar. like gasoline and heating oil? Crude oil is what gets pumped out of the ground. fertilizers. petrochemicals. etc. such as gasoline. naphtha. lubricants. asphalt. and the price of crude oil is often referred to as the ‘crack spread. diesel. Very little crude oil is consumed directly — it is a raw material that has to be refined into other products.’ A crack spread is a very simplistic representation of how much money a refiner makes by turning crude into products A refinery ‘netback’ is the crude price at which a refiner breaks even. minus the cost of crude inputs and other expenses Source: JPMorgan Energy Strategy T H E B I G P I C T U R E : M AC R O OI L F U N D AM E N T AL S 14 .e.

sour’ crude has a low API gravity and a high sulfur content In general. A ‘heavy. and sell for different prices based on their qualities When we talk about ‘light. sweet’ crude. light/sweet crude tends to sell at a higher price than heavy/sour crude In general. Heavy/sour grades yield less gasoline. refiners can produce a higher yield of high quality refined products. and a low sulfur content. such as gasoline. by running light/sweet crudes. and more of the ‘dirty’ products such as fuel oil P I C T U R E : M AC R O OI L F U N D AM E N T AL S Source: JPMorgan Energy Strategy T H E B I G 15 . we mean grades with a high API gravity number. All grades have different qualities.Oil & Gas Basics_20061020_book Is all crude oil the same? There are many different grades of crude oil.

2 59.7 OI L F U N D AM E N T AL S M AC R O 103.Oil & Gas Basics_20061020_book Where are most of the world’s oil reserves? Proved Oil Reserves (end 2005) Proved Oil Reserves (end 2005) In thousand million barrels 742.3 140.5 40.5 P I C T U R E : Asia Pacific North America Africa South & Central America Europe & Eurasia Middle East Source: JPMorgan Energy Strategy.5 114. BP Statistical Handbook (June 2006) T H E B I G 16 .

BP Statistical Handbook (June 2006) T H E B I G 17 .Oil & Gas Basics_20061020_book Where are the world’s top consumers of oil? Top Oil Consumers (2005) Top Oil Consumers (2005) Other 49% F U N D AM E N T AL S United States 25% OI L M AC R O India 3% Germany 3% FSU 5% Japan 6% China 9% P I C T U R E : Source: JPMorgan Energy Strategy.

8 mbd 3.Oil & Gas Basics_20061020_book US gasoline: 12% of global demand and growing US Gasoline Demand & Exploration Based on Fuel Efficiency US Gasoline Demand & Exploration Based on Fuel Efficiency In million b/d 12 Historical Gasoline Demand 11 F U N D AM E N T AL S Extrapolation at today's MPG At 22 MPG At 24 MPG At 26 MPG At 28 MPG At 30 MPG At 30 MPG With Staggered Fleet Turnover 1. EIA T H E B I G 18 .4 mbd 10 270 kbd 9 OI L 8 M AC R O 7 P I C T U R E : 6 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: JPM organ Energy Strategy .2 mbd 2.4 mbd 2.

245 1.560 1.879 3.4% 1.7% 3. the US and China produce a lot of oil.1% 1.0% 5.405 2.9% The world’s biggest producers are not necessarily the same as the world’s biggest exporters.0% 1. For example.2% 2.131 3.1% 1.206 Share of Global Production 12.Oil & Gas Basics_20061020_book Who are the world’s top producers of crude oil? 2005 Averages 2005 Averages Volume in kbd Producer Russia Saudi Arabia United States Iran China Mexico Venezuela Norway UAE Nigeria Kuwait Iraq Canada Libya Brazil UK-offshore Algeria Angola Kazakhstan Indonesia Qatar Malaysia Oman Argentina India Other Volume 9.2% 2.025 942 796 727 722 665 663 10.634 1.185 9.9% 0.640 1.7% 1.9% 4.5% 2.805 1.133 1.506 2.063 5. IEA T H E 19 .813 1.334 2.5% 12.617 3.6% 3.458 2.4% 7.5% 2.706 2.3% 1.3% 2.9% 13.9% 2.3% 4.0% 0.345 1.4% 3. but export very little given high domestic demand OPEC members Saudi Arabia and Iran are the world’s biggest exporters of crude oil B I G P I C T U R E : M AC R O OI L F U N D AM E N T AL S Note: Bold = OPEC members Source: JPMorgan Energy Strategy.8% 1.4% 3.

Saudi Arabia is by far the group’s biggest and most influential member F U N D AM E N T AL S What is OPEC’s ideal price? Contrary to popular believe.Oil & Gas Basics_20061020_book What is OPEC’s role OPEC does not set prices. Iraq is exempt. At very high oil prices. OPEC faces two risks: 1. it is not to OPEC’s advantage to target as high an oil price as possible. OPEC sets production quotas. High oil prices could reduce economic growth and oil demand growth High oil prices could encourage higher-cost non-OPEC producers to make investments that would increase global oil supply. The cartel wants to maximize revenues. Currently 10 of the cartel’s 11 members are subject to group quotas. and reduce OPEC’s market share T H E B I G P I C T U R E : M AC R O OI L 20 . 2. but needs consumers as much as consumers need OPEC oil.

Gulf War II.Oil & Gas Basics_20061020_book A little history. Nigeria strike P I C T U R E : M AC R O OI L Nigerian strike. price war Gulf War I $60 $50 $40 $30 $20 $10 $0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Netback Pricing Exxon Valdez spill Soviet Union collapse 9/11 Asian Crisis Hurricane Katrina & Rita Hurricane Ivan Venezuela Crisis. cold winter 2004 2006 Source: JPMorgan Energy Strategy. . US Refiner Acquisition Price of Imported Crude US Refiner Acquisition Price of Imported Crude In US$/bbl $100 $90 $80 F U N D AM E N T AL S Nominal Real $70 Iran-Iraq War Non-OPEC competition grows. . EIA T H E B I G 21 .

5 P I C T U R E : M AC R O OI L 5.5 T H E B I G Source: JPM organ Energy Strategy .5 OPEC Share of Global Production 6.5 11.5 Saudi Oil Production 9.Oil & Gas Basics_20061020_book Until this bull run.5 10. loss of market share was a real concern for OPEC Shifting Market Share Shifting Market Share 42% 41% 40% F U N D AM E N T AL S OPEC Share of Global Oil Production (%) FSU/Saudi Oil Production (mbd) 12. OPEC 22 .5 39% 38% 8.5 37% 36% 35% 34% '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 FSU Oil Production 7. IEA.

1) (3. even though they would all be better off sticking to quotas Source: JPMorgan Energy Strategy T H E B I G 23 .6) (1. . .3) P I C T U R E : All members have an incentive to cheat. F U N D AM E N T AL S OPEC MEMBER #1 Cut Production Cheat on Quotas Cut Production (6. too The Prisoner’s (OPEC Member’s) Dilemma The Prisoner’s (OPEC Member’s) Dilemma The best outcome for the group as a whole. and the noncheater could end up in his worst case scenario. all members have an incentive to cheat themselves Cheat on Quotas M AC R O OI L (10.Oil & Gas Basics_20061020_book Keeping the cartel together can be tough.10) OPEC MEMBER #2 Given the chance that other members might cheat. but hard to achieve.

Oil & Gas Basics_20061020_book Agenda Page Oil Specifics The Big Picture: Macro Oil Fundamentals What’s the Story This Year? Natural Gas Specifics References. Websites and Data Releases to Watch 2 13 24 54 62 O I L & G AS B A S I C S 24 .

2006. 2006 *Actual to date prices as of October 6.60 59.50 … 62. Forwards & Forecast Range Crude Oil Price History.05 … … 63. 2006. slower economic growth ahead Downstream investment should start to hit the market in 2007-08 Reassessment of investors’ commodities allocations down the road as returns falter and interest rates rise? 25 WHAT’S TH E S T O RY JPM Probable Range JPM Possible Range History Forward Curve JPM Forecast THI S .71 70.48 70.90 … … … 64.05 … 7.18 7.39 64. major Nigerian disruptions Call on OPEC crude still topping 30 million b/d in 2007 OPEC showing commitment to a $50-55 basket price 67.72 70.84 … 6.05 63. Natural gas forecast as of March 2.78 … 7.43 71.67 6. 2007 crude forecasts as of Aug.02 2006 crude forecasts as of May 2. 9.Oil & Gas Basics_20061020_book Short.to medium-term drivers for the oil market Current JPMorgan Price Forecasts Current JPMorgan Price Forecasts 1Q06 2Q06 3Q06 4Q06 WTI Forecast WTI Actual* Brent Forecast Brent Actual* Natural Gas Forecast Natural Gas Actual … … … 65.00 2005 … 56.65 … 6.70 … 55.00 Ongoing oil buying interest from consumers and investors Iran noise. WTI & Brent in $/bbl. Forwards & Forecast Range US$/bbl $100 $80 $60 $40 $20 $0 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Source: JPM organ Energy Strategy Comfortable oil inventories Hurricane season less eventful than expected? Warm weather this winter to follow? Global oil demand growth moderating.32 … … 7.02 2006 2007 67.00 59. natural gas in $/MMBtu Source: JPMorgan Energy Strategy Y EAR ? Crude Oil Price History. 2006 Note: All values are period averages.25 … 9.

Oil & Gas Basics_20061020_book The crude oil market today Crude Oil Price History & Forwards Crude Oil Price History & Forwards In US$/bbl $75 $65 $55 $45 $35 $25 $15 $5 $0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 WTI Brent TH E S T O RY THI S Y EAR ? Source: JPMorgan Energy Strategy WHAT’S 26 .

we don’t think the products story is ‘over’ yet. Spec changes in the US will be supportive psychologically if not physically TH E 27 .Oil & Gas Basics_20061020_book This has been a refined products driven market Heating Oil Crack + Forwards Heating Oil Crack + Forwards US$/bbl $20 $18 $16 $14 $12 $10 $8 $6 Y EAR ? Gasoline Crack + Forwards Gasoline Crack + Forwards US$/bbl $20 $18 Heat Crack Fwds Heat Crack $16 $14 $12 $10 $8 $6 $4 $2 Gasoline Crack Gasoline Crack Fwds $4 $2 $0 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 Source: JPMorgan Energy Strategy THI S $0 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 Source: JPM organ Energy Strategy S T O RY WHAT’S Although demand growth has moderated. New refinery capacity additions will pressure these markets by 2007—2008. but not yet this year.

10 1.05 1. builds in the US and Japan offset draws in Europe and other areas 0 48 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Source: JPMorgan Energy Strategy .90 TH E Note: Latest month is to-date only . Gov n't & industry sources Total OECD Crude Inventories Total OECD Crude Inventories Y EAR ? Total OECD Product Inventories Total OECD Product Inventories In billion bbl 1.00 0. Gov n't & industry sources WHAT’S 28 .64 1. IEA.59 In billion bbl 1.49 1.00 Jan Feb Mar Apr May Jun Jul Five-Year Range Five-Year Average 2005 2006 Aug Sep Oct Nov Dec 0.69 1.54 1.95 Five-Year Range Five-Year Average 2005 2006 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec THI S S T O RY 1.00 0. IEA. Gov n't & industry sources Note: Latest month is to-date only .Oil & Gas Basics_20061020_book Commercial oil inventories — Crude levels remain healthy Total OECD Commercial Inventories Total OECD Commercial Inventories In days of demand cover 60 Winter 58 56 54 52 50 Summer Linear Trend A 7 million bbl build in refined product inventories offset a 7 mb draw from crude. The level of crude remains much more comfortable than the level of refined product stocks Regionally in August. not full-month projection Source: JPMorgan Energy Strategy .44 0. not full-month projection Source: JPMorgan Energy Strategy . IEA.

government and country sources 29 .5 28-Aug-05 TH E S T O RY THI S WHAT’S 27-Sep-05 27-Oct-05 26-Nov-05 26-Dec-05 25-Jan-06 24-Feb-06 26-Mar-06 25-Apr-06 25-May-06 Source: JPMorgan Energy Strategy.0 1.5 In US$ Gasoline Crack Heating Oil Crack Gasoline Crack Fwd NYMEX Heating Oil Crack Fwd $35 $30 $25 $20 $15 $10 $5 $$(5) 3. 325. according to MMS reporting Hurricane Impacts in Perspective Hurricane Impacts in Perspective Gulf of Mexico Crude Shut In (in mbd) Actual Refinery Loss Minus Gulf of Mexico Crude Shut In Projected Refinery Loss Minus Gulf of Mexico Crude Shut In 3. EIA.0 2. of Gulf of Mexico oil production remains offline.5 1.5 Y EAR ? 2.Oil & Gas Basics_20061020_book Hurricanes hammer US Gulf refineries Roughly a quarter of US refining capacity was offline at peak during last year’s unprecedented hurricane season. Much of the hurricane-affected capacity had normalized by early 2006 with a few major exceptions As of May 3.0 0.5 0.0 -0. or 22%.000 b/d.

5 1. Unplanned outages of several hundred thousand barrels for October 2006 compared to more than 2 million b/d lost in October 2005 30 TH E .2 0.6 0.7 2.4 2.Oil & Gas Basics_20061020_book US refinery maintenance: Looking ahead to the fall US Planned & Unplanned Refinery Shutdowns US Planned & Unplanned Refinery Shutdowns Average Offline Capacity Per Month (in million b/d) 2.3 0. Planned maintenance is set to average 798 kbd offline in October.9 Y EAR ? Unplanned PADD I (East Coast) PADD II (Midwest) PADD III (Gulf) PADD IV (Rockies) PADD V (West Coast) Hurricane Ivan Hurricane Katrina & Rita 0.1 1.8 1. compared to 527 kbd offline in October of last year.0 Mar-02 Jul-02 Nov-02 Mar-03 Jul-03 Nov-03 Mar-04 Jul-04 Nov-04 Mar-05 Jul-05 Nov-05 Mar-06 Jul-06 Nov-06 THI S S T O RY Source: JPM organ Energy Strategy . IIR WHAT’S While the US planned refinery maintenance program for October looks to be heavier this year than last year. unplanned outages are minimal compared to 2005.

IEA S T O RY WHAT’S TH E Europe has always been structurally long gasoline but has become more so as vehicle demand shifts to diesel. . .but shorter and shorter distillate 31 .000 800 600 400 200 0 -200 -400 Y EAR ? Net Gasoil Balances By Region Net Gasoil Balances By Region Regional production minus regional consumption (in kbd) 400 300 200 100 0 -100 -200 -300 -400 -500 -600 Asia Europe North America Total OECD OECD Asia OECD Europe OECD North America Total OECD -600 -800 -1.000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: JPM organ Energy Strategy . IEA THI S 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: JPM organ Energy Strategy .Oil & Gas Basics_20061020_book Gasoline: An easier problem to solve in the Atlantic Basin Net Gasoline Balances By Region Net Gasoline Balances By Region Regional production minus regional consumption (in kbd) 1. The Atlantic Basin is now long gasoline.

15 Dramatic changes to diesel standards underscore the challenge of not only making the fuel but also distributing it to customers.000 50 430 30 2003 500 500 350 50 500 350 350 500 10 10 50 50 15 2004 2005 2006 15 10 2007 2009 2010 The US diesel sulfur limit drops by 97% this year to 15 ppm US refiners were required to meet the new standard by June 1. Test flows have shown that the sulfur in ULSD will have to be far lower/cleaner in order to deliver fuel at the government-set limit to consumers. 1. there are still logistical challenges associated with the storage and transport of the cleaner fuel Ultra-low sulfur diesel is so much cleaner than others in the distillate family (heating oil. EIA S T O RY THI S <15 ppm sulphur diesel 15-50 ppm sulphur diesel WHAT’S TH E 32 . jet. government & press reports Y EAR ? US Diesel Inventories By Sulfur Content US Diesel Inventories By Sulfur Content Million bbl 80 60 40 20 0 Feb'05 Apr'05 Jun'05 Aug'05 Oct'05 Dec'05 Feb'06 Apr'06 Jun'06 Aug'06 Source: JPM organ Energy Strategy .Oil & Gas Basics_20061020_book Changes to diesel specs: Lower sulfur limits to challenge supply chain Changes to Diesel Sulfur Limits Changes to Diesel Sulfur Limits In ppm US Europe Canada China* India** Brazil Japan S Korea 500 2. pipeline operators must meet the 15 ppm limit by Sept. While US refiners have successfully ramped up ULSD production and inventories of the new spec have climbed steadily. to be enforced nationwide in 2010 Source: JPMorgan Energy Strategy. Separate storage tanks will also be required for distribution of ULSD * Implemented in Beijing July 2005 ahead of 2008 Olympics.500 5. kerosene) that operators will be challenged in how they batch/order the fuels in the pipe. to be enforced nationwide 2010 ** Implemented in major cities in 2005. retailers must offer 15 ppm by Oct.000 500 2.

We are experiencing some hiccups along the supply chain during the present transition period. to be enforced nationwide 2010 ** Implemented in major cities in 2005. EIA Y EAR ? THI S Major US gasoline spec changes slated for 2006: lower sulfur content limit and the elimination of the oxygen content standard. has been dramatic. RBOB/Alcohol Stocks RFG Inventories vs. government & press reports Source: JPM organ Energy Strategy . which will impact MTBE use While market concern. RBOB/Alcohol Stocks In million bbl 35 30 25 20 15 10 5 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Finished RFG RBOB w/ Alcohol * Implemented in Beijing July 2005 ahead of 2008 Olympics. but these should work themselves out as the US has proven itself to be quite capable of blending components up to standard 33 WHAT’S TH E S T O RY . to be enforced nationwide in 2010 Source: JPMorgan Energy Strategy.Oil & Gas Basics_20061020_book Changes to gasoline specs: Sulfur limits and oxygenate requirements Changes to Gasoline Sulfur Limits Changes to Gasoline Sulfur Limits In ppm European Union US China* India** Japan South Korea Brazil** 2004 150 120 500 500 50 130 400 50 80 2005 50 90 150 150 10 30 2006 2008 2009 10 RFG Inventories vs. over the what is in effect an MTBE phase-out. these worries are overdone.

phasing in ethanol 2005 US Energy Policy Act eliminated the national oxygen content standard in gasoline — while not explicitly banning MTBE — it effectively phases out the gasoline additive MTBE and phases in the use of renewable fuels ⎯ MTBE has been found to contaminate groundwater. after it has been transported separately by pipe ⎯ States such as New York and California have already successfully phased out WHAT’S TH E S T O RY MTBE in favor of ethanol 34 .Oil & Gas Basics_20061020_book Phasing out MTBE. it cannot be transported by pipeline after mixing with gasoline ⎯ Reformulated gasoline for oxygenate blending (RBOB) is blended with ethanol Y EAR ? THI S in the tank. opening up MTBE-makers up to lawsuits Most of the industry are using ethanol because it replaces octane and cleanburning properties of MTBE and it is in compliance with renewable fuel standard Because of ethanol’s affinity to water. . .

to medium-term drivers for the oil market Bullish Ongoing oil buying interest from consumers and investors Iran noise. Warm weather this winter to follow? Global oil demand growth moderating. major Nigerian disruptions Call on OPEC crude still topping 30 million b/d in 2007 OPEC showing commitment to a $50-55 basket price Bearish Comfortable oil inventories Hurricane season less eventful than expected.Oil & Gas Basics_20061020_book Short. slower economic growth ahead Downstream investment should start to hit the market in 2007-08 Reassessment of investors’ commodities allocations down the road as returns falter and interest rates rise? WHAT’S TH E S T O RY THI S Y EAR ? 35 .

Oil & Gas Basics_20061020_book Mean reversion (at least to the $20) is out the window We are now assuming a new long-term average of $40 Front-month NYMEX West Texas Intermediate with ‘Snapshot in Time’ Future Strips Front-month NYMEX West Texas Intermediate with ‘Snapshot in Time’ Future Strips In US$/bbl $80 $70 $60 $50 $40 Y EAR ? $30 $20 $10 $'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 TH E S T O RY THI S Source: JPM organ Energy Strategy WHAT’S 36 .

backwardation further out West Texas Intermediate Curve West Texas Intermediate Curve In US$/bbl $70 $68 $66 $64 $62 Y EAR ? $60 $58 $56 $0 Nov06 May07 Nov07 May08 Nov08 May09 Nov09 May10 Nov10 May11 Nov11 May12 Nov12 Source: JPM organ Energy Strategy WHAT’S TH E S T O RY THI S 37 .Oil & Gas Basics_20061020_book Today’s crude curve: Contango in the front.

Backwardation (in US$/bbl) M01-M02 NYMEX WTI $4 M01 NYMEX WTI $75 $65 $55 $3 $2 Backwardation $45 $35 $25 $15 $1 Y EAR ? $- THI S $(1) S T O RY Contango $(2) '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 Source: JPM organ Energy Strategy $5 $(5) TH E WHAT’S We see contango as sustainable at these price levels. However. Backwardation (in US$/bbl) WTI Flat Price vs. a compelling move lower (sub $50) could see backwardation return 38 .Oil & Gas Basics_20061020_book A new paradigm — contango at $70! WTI Flat Price vs.

Oil & Gas Basics_20061020_book WTI backwardation vs. Flat Price M01 NYMEX WTI (in US$/bbl) $90 $80 $70 $60 $50 $40 $30 $20 Y EAR ? 1996-2002 2004-present 10/13/2006 $10 $$0 $(8) $(6) $(4) $(2) $$2 $4 $6 $8 $10 $12 M02-M24 NYMEX WTI (US$/bbl) Source: JPMorgan Energy Strategy S T O RY THI S WHAT’S TH E We see contango as sustainable at these price levels. However. Flat Price WTI Backwardation vs. a compelling move lower (sub $50) could see backwardation return 39 . flat price WTI Backwardation vs.

retail investors) New — Institutional investors participate in the energy space in the past ~3 years WHAT’S Passive — Take long-term. banks have markets (flow and structured business and view of the market. occasional.Oil & Gas Basics_20061020_book Change in the balance of energy market participation At the end of the day. railroads. Depending interest has arguably increased with been market-makers and risk business) and/or taking risk on customer business. but increasingly more risen. mutual funds. Remaining deals large. one-off M&A related strategic hedges. airlines. tend to enter and trend exit positions quickly Old and New — Not new to energy per se but more professional and putting more money towards this space in the last ~3 years Active — Take proprietary risk daily. Consumers typically hedge 1-3 hedged more actively as prices have derivatives since the early-1990s depending on hedging program years into the future. Options strategies generally preferred over swaps. industrials) Financial institutions Y EAR ? (Banks) Trend Players (Commodity Trading Advisors) THI S Down — Significantly less day-today tactical hedging at high prices. 3 Years Ago? Energy Producers (E&P companies) Energy Consumers (Utilities. May have markets as far as 10+ years into the future inception of these markets long or short term prop views Old — CTAs have traded energy Active — Fast moving. though options rather than sophisticated hedgers may go out as far as swaps have been the preferred 5-7 years in products with sufficient vehicle for upside protection with liquidity downside participation Old — Although the mix of banks Active — Trade daily making Buyers or Sellers — Depending on customer No significant change. but also more sophisticated and varied involvement in full range of energy products Old — Energy producers have Active — May trade anywhere been actively hedging with from daily to annually derivatives since the early-1990s depending on hedging program S T O RY Macro Hedge Funds TH E Institutional Investors have really only started to (Pension funds. for downside protection with upside exposure Old — Energy consumers have Active — May trade anywhere Buyers — The natural buyers in the energy Up — If anything consumers have been actively hedging with from daily to annually markets. though in energy changes. Tend not to enter or exit positions on short-term price fluctuations Up significantly — Major inflow of money and interest in commodities as an asset class that really did not exist in a meaningful way 3 years ago 40 . May have long or short term views. supply and demand determine price. it is a shift in the balance of participation Participant Old or New? Active or Passive? Buyers or Sellers? Where on the Curve? Sellers — The natural sellers in the energy markets. adding liquidity and price clarity to that part of the curve Buyers — Institutionals enter the market almost exclusively from the long side via products like Commodities Indices and oillinked notes Up — Generally more dollars in energy. hedge funds more long than short given price trend. Past 2 yeas had a good fundamentals story But if there has a been a ‘paradigm shift’ in this market. and take directional or relative value positions in the full range of energy products Buyers or Sellers — Depending on view of the market. Buyers or Sellers — Depending on market No significant change for years directional.Funds may participate in any part of the curve and have shown particular interest in owning deferred price and volatility. generally directional views. banks may make price takers in energy since the (proprietary trading). On average in recent years. Producers typically hedge 2-3 years out but can now find sufficient liquidity to hedge as much as 7 years out Activity vs.

and particularly in the US and non-OECD Asia.Oil & Gas Basics_20061020_book Medium-term drivers of oil price have not gone away — yet Key fundamental drivers have supported oil prices in recent years that are still with us today For the past several years. We see tight downstream capacity influencing price until at least 2007—08. Demand growth has been strong — particularly in 2004. it is also not a driver that can be reversed overnight. pipelines. In other words. Refining and distribution (e. as much as crude oil prices have increased. demand growth is disproportionately for ‘light-end’ products. tankers. which is a type of distillate Y EAR ? The oil industry cycles through periods of over. we have seen a refined products-led market. Importantly. unless demand growth falters significantly 41 WHAT’S TH E S T O RY THI S .g.and under-investment. terminals) are particularly pronounced examples of how years of under-investment due to poor margins can lead to capacity constraints down the road While under-investment in refining and distribution is not a permanent market feature. notably diesel. prices for refined products such as gasoline and diesel have gone up even more This had been in large part a demand story.

Oil & Gas Basics_20061020_book Is the demand story over? Historical Oil Demand Growth Historical Oil Demand Growth %yoy. We see this trend continuing for the balance of the year 42 . 3 month rolling average 30% OECD Demand Growth/Contraction 25% 20% 15% 10% 5% Y EAR ? Non-OECD Project World Project Non-OECD Demand Growth/Contraction Global Demand Growth OECD Project Historical Average Rate of Global Growth 0% -5% Apr-98 Mar-99 Feb-00 Jan-01 Dec-01 Nov-02 Oct-03 Sep-04 Aug-05 Jul-06 Jun-07 THI S S T O RY Source: JPMorgan Energy Strategy WHAT’S TH E Demand growth has moderated relative to 2004.

500 Distillate Jet/Kero Fuel Oil Heavy Light 1.Oil & Gas Basics_20061020_book Light-end products dominate global oil demand growth Dieselization and tightening global fuel specs will continue to dictate the global oil demand growth profile — we see this trend continuing even as total demand growth eases Global Oil Demand Growth by Major Product Global Oil Demand Growth by Major Product In kbd 3. IEA.750 Y EAR ? 1.250 Gasoline 2.000 THI S 250 S T O RY -500 2000 2001 2002 2003 2004 2005 Source: JPM organ Energy Strategy . gov ernment & industry sources WHAT’S TH E 43 .

250 OECD Non-OECD Find from same publication (above) 0 0 1.000 5. But the energy intensity to growth ratio does moderate as countries get richer WHAT’S TH E 44 .000 2. BP Statistical H andbook S T O RY Chinese oil demand growth will continue to be significant to the global balance. especially in the lead-up to the Beijing Olympics.000 4.250 15.000 GDP 9 Japan China 8 7 6 5 4 3 2 1 0 250 5.250 20.250 25. BP Statistical H andbook 10.000 GDP (in billion current US$) Source: JPM organ Energy Strategy .250 THI S GDP (in billion current US$) Source: JPM organ Energy Strategy .Oil & Gas Basics_20061020_book Energy intensity in emerging economic powers moderates as they grow Energy Intensity/GDP — China & Japan Energy Intensity/GDP — China & Japan Oil bbl consumed per US$1.000 GDP 8 7 6 5 4 3 2 1 Y EAR ? Energy Intensity Declines As GDP Increases Energy Intensity Declines As GDP Increases Oil bbl consumed per US$1.000 3.

‘spare’ refinery capacity is in the nonOECD. That means that. EIA WHAT’S 45 . That means that — just like crude production — most of the world’s refined products production is geographically far away from most of the world’s consumption 30 25 20 0 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 TH E S T O RY THI S Source: JPM Energy Strategy . or lack thereof.Oil & Gas Basics_20061020_book The cycle of investment OECD Oil Demand vs. is cyclical and tends to overshoot in both directions There’s no reason to think that this investment cycle won’t — eventually — be the same OECD demand exceeds OECD refinery capacity. increasingly. IEA. Refinery Capacity OECD Oil Demand vs. Refinery Capacity In million b/d 55 50 45 40 35 Y EAR ? Refined Products Import Gap Refinery Capacity Oil Demand Downstream investment.

6% 1.4% 35% 30% 0% Source: Clarkson's Shipping Review THI S 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: JPMorgan Energy Strategy.Oil & Gas Basics_20061020_book Energy infrastructure/distribution capacity is still a constraint Global Oil Demand Supplied By International Trade Global Oil Demand Supplied By International Trade Oil Trade:Oil Demand 60% 55% 50% 1985-89: 44% 45% 40% Y EAR ? 2000-04: 58% 1995-99: 55% 1990-94: 51% Growth In Waterborne Crude & Products Transport 1987-1995 1996-2005 2001-2005 Crude Refined Products 3. have to travel greater distances to their end user.5% 3. BP Statistical Handbook S T O RY WHAT’S TH E More refined products. Ports. etc.8% 1.8% 2. in particular. are all an issue — will they see the investment boom that refining is seeing? 46 . tankers.7% 5. pipes.

IEA WHAT’S 47 . 3 month rolling average 25% OPEC Supply Growth/Contraction Global Supply Growth Non-OPEC Supply Growth/Contraction Historical Average Rate of Global Growth 20% 15% 10% 5% Y EAR ? 0% -5% -10% Mar-98 Jul-99 Nov-00 Mar-02 Jul-03 Nov-04 Mar-06 Jul-07 TH E S T O RY THI S Source: JPMorgan Energy Strategy.Oil & Gas Basics_20061020_book Non-OPEC production has disappointed in recent years Historical Oil Supply Growth Historical Oil Supply Growth %yoy.

The group hasn’t had to cut production — or show any discipline — since March 2004 48 .Oil & Gas Basics_20061020_book OPEC sails through three bull years OPEC Crude Production & Group Quota OPEC Crude Production & Group Quota In million b/d 29 28 27 26 25 24 23 22 Y EAR ? Quota OPEC-10 Wellhead Production of Crude 21 20 0 Oct-02 Mar-03 Aug-03 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 S T O RY THI S Source: JPM organ Energy Strategy . IEA WHAT’S TH E OPEC’s market relevance has waned.

000 7.000 4. media reports 49 . but capacity additions in the pipeline OPEC Spare Capacity vs.Oil & Gas Basics_20061020_book Sliding OPEC spare capacity.200 100 525 1.610 1. Price In kbd 8.000 2.000 0 Aug-97 300 1.495 S T O RY THI S Feb-99 Aug-00 Feb-02 Aug-03 Feb-05 TH E Source: JPMorgan Energy Strategy WHAT’S * Excluding declines Note: This is not a complete list and is subject to change Source: JPMorgan Energy Strategy.825 5.200 860 1.000 1.000 Y EAR ? Expected Additions to Expected Additions to OPEC Capacity* (in kbd) OPEC Capacity* (in kbd) US$/bbl Nymex WTI Price $80 $70 $60 $50 $40 $30 $20 $10 $Aug-06 2006 Saudi Arabia Iran Nigeria Algeria Venezuela Libya UAE 2007 Saudi Arabia Nigeria Algeria 2008 Saudi Arabia Nigeria Indonesia 2009-2010 Saudi Arabia Algeria Qatar 2006 2007 2008 2009-2010 2006-2010 Total 300 160 265 50 75 150 200 Spare Capacity 500 220 140 3. Price OPEC Spare Capacity vs.000 6.000 5.130 180 1. government reports.

BP Statistical Handbook TH E '67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 Source: JPMorgan Energy Strategy . BP Statistical Handbook Iraq Iraq In million b/d 4 Iranian Revolution 3 2 1 0 Iran-Iraq War Gulf War I Gulf War II '67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 Source: JPMorgan Energy Strategy .Oil & Gas Basics_20061020_book Top geopolitical hotspots: No strangers to disruptions Iran Iran In million b/d 6 5 4 3 2 1 0 '67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 Source: JPMorgan Energy Strategy . BP Statistical Handbook Nigeria Nigeria Y EAR ? Venezuela Venezuela Strike cripples production In million b/d 3 In million b/d 4 3 2 Strike cripples production THI S 2 S T O RY 1 1 0 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 0 Source: JPMorgan Energy Strategy . BP Statistical Handbook WHAT’S 50 .

062 >5 = 329 More corrupt/risky Less corrupt/risky 0% '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 Source: JPM organ Energy Strategy . Transparency International. BP Statistical H andbook THI S Average of Country Risk Rating & Corruptionion Perception Index (0 = highest risk/most corrupt) Source: JPMorgan Energy Strategy . and that’s not going to change 51 .Oil & Gas Basics_20061020_book Oil production: An inherently risky business OECD Reserves as % of Global OECD Reserves as % of Global OECD Reserves: Global Reserves 25% 20% 15% 10% 5% Y EAR ? Oil Reserves by Risk of Location Oil Reserves by Risk of Location Total Reserves (in '000 billion bbl) 500 450 400 350 300 250 200 150 100 50 0 0-1 1-2 2-3 3-4 4-5 5-6 6-7 7-8 8-9 9-10 <5 = 1. BP Statistical Handbook. UNCTAD S T O RY WHAT’S TH E More and more of the world’s remaining oil reserves are in geopolitically ‘risky’ parts of the world.

EIA Source: JPM organ Energy Strategy . the share of renewables has fallen slightly in each of the past 2 decades 52 .Oil & Gas Basics_20061020_book US oil dependency — on the rise US Oil Demand as % of Total US Energy Demand US Oil Demand as % of Total US Energy Demand 49% 47% 45% US Oil Demand by Source (2004) US Oil Demand by Source (2004) Nuclear. 6% Coal. oil’s share of US energy consumption is rising. 23% 37% 35% 0% '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 Petroleum. EIA WHAT’S TH E Political rhetoric aside. 23% THI S S T O RY Source: JPM organ Energy Strategy . 8% 43% 41% 39% Y EAR ? Renewable. 40% Natural Gas.

EIA Source: JPMorgan Energy Strategy. All Sources From Mideast Gulf From OPEC Members Venezuela. 11% Nigeria. 17% Other Opec. EIA S T O RY THI S WHAT’S TH E Foreign oil supplies are an ever growing percent of US demand.Oil & Gas Basics_20061020_book US reliance on oil imports also on the rise US Net Oil Imports As % Of Total US Oil Demand US Net Oil Imports As % Of Total US Oil Demand 70% 60% 50% 40% 30% 20% Y EAR ? US Net Oil Imports By Source US Net Oil Imports By Source Total Oil Imports. 16% Mexico. 12% UK. 28% 10% 0% '60 '63 '66 '69 '72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '02 '05 Source: JPMorgan Energy Strategy. 8% Canada. OPEC members supply just less than half of total US net oil imports and Middle East Gulf produces supply 20% 53 . 3% Mideast Gulf. 4% Other NonOpec.

Oil & Gas Basics_20061020_book Agenda Page Oil Specifics The Big Picture: Macro Oil Fundamentals What’s the Story This Year? Natural Gas Specifics References. Websites and Data Releases to Watch 2 13 24 54 62 O I L & G AS B A S I C S 54 .

Oil & Gas Basics_20061020_book How is gas different from oil? Natural gas is a regional commodity. whereas oil is a global commodity In other words. In fact. European natural gas is priced using an oil-referenced formula S P E C I F I C S The widespread adoption of liquefied natural gas (LNG) — when and if it happens — will change the gas market from a regional market to a global market. For example. regional gas markets are unrelated. This means that the US gas market is effectively a closed system For this reason. particularly inter-continentally. the development of LNG will make the gas market look more like the oil market N A T U R A L GA S 55 . In other words. Most natural gas is transported in gaseous form via pipeline. the UK gas market has no relationship to the US gas market. oil is fungible in a way that gas is not Why? The physical properties of natural gas make it harder to transport.

Oil & Gas Basics_20061020_book

The US natural gas market
Natural gas is transported in the U.S. through pipelines to different locations called Hubs Hubs are market places where the physical commodity can be bought and sold. Different market places have different prices due to different supply and demand factors Henry Hub is the most liquid physical natural gas market, because Henry Hub is where futures contracts are settled for the physical commodity. It is the market which is most closely represented by the NYMEX futures curve Producers and consumers of natural gas have incentives to not only hedge their physical commodity exposure using futures contracts, but also to hedge the location (basis) risk associated with dealing in different markets across United States, Canada and Mexico The basis market provides this added hedging ability
S P E C I F I C S

In the basis market hub locations trade at a differential to NYMEX futures contracts on a forward basis Hence leading to the ability to buy the NYMEX +/— the appropriate basis differential forward to hedge a future sale of the physical commodity Some of the most frequently quoted basis markets are: the Rocky Mountain region, the Houston Ship Channel Hub, AECO (Canada), and the Panhandle Hub

N A T U R A L

GA S

56

Oil & Gas Basics_20061020_book

Natural gas: How is it measured?
In the United States, natural gas derives its value from its British thermal unit (Btu) content, or heating capability British thermal unit: a unit of heat equal to about 252 calories; quantity of heat required to rise the temperature of one pound of water one degree Fahrenheit Volumetrically natural gas is measured in cubic feet (cf) on a 24-hour flowing basis, and consequently a standard conversion was adopted whereby 1 cf = 1,000 Btus, which allows for natural gas to be bought and sold in terms of its Btu value
Useful gas conversions: Useful gas conversions:
1 MMbtu = 1 million Btu’s 1 Mcf ≈ 1 MMBtu, depending upon the purity of the gas
S P E C I F I C S

1 MMcf = 1,000 MMBtu 10 MMcf = 10,000 MMBtu = 1 NYMEX contract 1 Bcf = 1 billion cubic feet = 1,000,000 MMBtu 1 Tcf = 1 trillion cubic feet

N A T U R A L

GA S

57

Oil & Gas Basics_20061020_book

Major market drivers
Weather is both a demand and supply factor Summer storage injection season (April—October) is influenced by cooling demand Winter storage withdrawal season (November—March) is influenced by heating demand Shoulder Months (March, April, May and September, October, November) are less weather sensitive But hurricane disruptions — most typically in the late-summer to fall — can affect the supply side of the balance Drought conditions in areas that depend on hydropower for electricity generation can also boost gas demand
S P E C I F I C S

Oil price is also a driver of gas price, because there is some degree of substitutability between the two fuels Liquefied Natural Gas (LNG) is a minor factor in the gas market now, but will become increasingly important as the market develops. LNG will make the gas market more global
58

N A T U R A L

GA S

or price will have to ration demand 59 N A T U R A L .100 900 700 500 0 S P E C I F I C S Lower-48 Production Canadian/Alaska Production Demand 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: JPM organ Energy Strategy . industrial and power generation consumers and North American sources of supply The declining domestic production scenario makes LNG vital to satisfying projected US demand growth.300 2.700 1. . .Oil & Gas Basics_20061020_book The US needs LNG to meet growing gas demand The growing US LNG supply ‘gap’ The growing US LNG supply ‘gap’ In Tcf In Bcf/day 2.500 2. EIA GA S The long-term gas price will depend heavily on LNG to fill the growing disconnect between demand from residential.900 1. commercial.500 1.100 1.300 1.

5 0.0 4.0 3. not spare terminal capacity.0 1.5 2.0 2.0 S P E C I F I C S Sustainable Capacity Everett (MA) Lake Charles (LA) Cove Point (MD) Elba Island (GA) Gulf Gateway (Offshore) Jan Feb Mar Apr May Jun Source: JPM organ Energy Strategy .Oil & Gas Basics_20061020_book US LNG terminal capacity Imports by Terminal (Monthly) Imports by Terminal (Monthly) In Bcf 5.5 3.5 4. LNG supply is the limiting factor for the US. Waterborne LN G Report Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep N A T U R A L Right now.0 0. likely to pressure US gas prices 60 GA S . LNG imports to the US should ramp up from late 2007 when new supplies from Trinidad and the Middle East come online contracted to meet US demand.5 1.

000 1.500 2. EIA N A T U R A L GA S 61 .500 3.000 2.Oil & Gas Basics_20061020_book Winter natural gas storage trajectories Winter Gas Storage Trajectories Winter Gas Storage Trajectories In Bcf 3.500 1.000 500 0 7-Oct 2000–01 2001–02 2002–03 2003–04 2004–05 2005–06 S P E C I F I C S 1-Nov 26-Nov 21-Dec 15-Jan 9-Feb 6-Mar 31-Mar 25-Apr 20-May 14-Jun 9-Jul 3-Aug 28-Aug 22-Sep Source: JPM organ Energy Strategy .

Oil & Gas Basics_20061020_book Agenda Page Oil Specifics The Big Picture: Macro Oil Fundamentals What’s the Story This Year? Natural Gas Specifics References. Websites and Data Releases to Watch 2 13 24 54 62 O I L & G AS B A S I C S 62 .

Oil & Gas Basics_20061020_book Important data releases EIA Weekly Petroleum Status Report (Wednesdays 10:30 AM) EIA Weekly Natural Gas Storage Report (Thursday 10:30 AM) W ATC H R EL EA S E S T O EIA Petroleum Supply Monthly Report (end of month) EIA Short Term Energy Outlooks (beginning of month) IEA monthly Oil Market Report (~10th of the month) Euroilstock inventory report (~10th of the month) CFTC Commitment of Traders report (Fridays) R E F E R EN C E S. W E B SI T E S A N D D A TA 63 .

doe. W E B SI T E S A N D D A TA R EL EA S E S T O 64 .Oil & Gas Basics_20061020_book Key websites US Department of Energy. Energy information Administration www.gov International Energy Agency www.nymex.gov W ATC H Organization of Petroleum Exporting Countries www.org BP’s Statistical Review of World Energy www.com Commodity Futures Trading Commission www.bp.com New York Mercantile Exchange www.iea.eia.org R E F E R EN C E S.cftc.opec.

W E B SI T E S A N D D A TA R EL EA S E S T O 65 .Oil & Gas Basics_20061020_book Bloomberg codes Prices: Prices: Main energy page W ATC H News & Info: News & Info: NRG <enter> DOE <enter> CRUD <enter> CEM <enter> CL1 [cmdty] HO1 [cmdty] HU1 [cmdty] NG1 [cmdty] CO1 [cmdty] QS1 [cmdty] USPD <enter> EUPD <enter> FEPD <enter> All energy news Oil news Gas news Power news Refinery news OPEC Energy glossary Keeping time Calendars Top energy pages OTOP ETOP TGAS NI NRG NI OIL NI GAS NI ELC NI REF NI OPEC REFG <enter> IC <enter> CDR <enter> EIA inventory data Global crude oil prices Exchange menu Nymex WTI crude Nymex heating oil Nymex gasoline Nymex natural gas IPE Brent crude IPE gasoil Cash values for refined products R E F E R EN C E S.

Oil & Gas Basics_20061020_book Reuters codes Prices: Prices: Main energy page W ATC H News & Info: News & Info: Q: ENERGY Q: EIAA Q: CLc1 Q: HOc1 Q: HUc1 Q: NGc1 Q: LCOc1 Q: LGOc1 Energy glossary ENERGY/3 Energy highlights Link to energy codes All energy news Oil news Gas news OPEC news EIA inventory report US refinery news Q: nTOPO or TOP/O O/CODES O OIL NGS OPEC EIA/S REF/US EIA inventory data Nymex WTI crude Nymex heating oil Nymex gasoline Nymex natural gas IPE Brent crude IPE gasoil Cash values for refined products W E B SI T E S A N D D A TA R EL EA S E S T O Q: PRODUCT/1 R E F E R EN C E S. 66 .

Oil & Gas Basics_20061020_book Basic oil conversions 42 gallons = 1 barrel 159 liters = 1 barrel W ATC H 7.33 barrels of crude = 1 ton R E F E R EN C E S. W E B SI T E S A N D D A TA R EL EA S E S T O 67 .

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