Oill and Gas Basics JPM Oct 2006

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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B A S I C S
Energy is significantly more volatile than other markets

Volatility of Various Markets Volatility of Various Markets
200% 180% 160% 140% 120% 100% 80% 60% 40% 20%
B A S I C S
Power
EUR
GLD
CL
NG
HO
SPX
10-yr T bills
0% Jan-01
Sep-01
Jun-02
Mar-03
Nov-03
Aug-04
May-05
Feb-06
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Agenda
Page
Oil Specifics The Big Picture: Macro Oil Fundamentals Whats the Story This Year? Natural Gas Specifics References, Websites and Data Releases to Watch
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B A S I C S
From the well to the tank. . .
S P EC I F I C S
Source: JPMorgan Energy Strategy
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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, field maintenance, geological makeup Geopolitics (e.g. Iran, Nigeria) Field maintenance, unplanned outages Weather (e.g. hurricanes) OPEC decisions and politics internal politics, spare capacity, 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, seasonality winter heating demand, summer cooling demand, holidays, vacation and travel trends Non-oil fuel markets, substitution (e.g. gas, coal, hydro, nuclear) Misc events e.g. 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, traffic, accidents Port capacity, availability Pipeline capacity/nominations
Oil Refining Oil Refining

Refinery capacity/investment Planned outages, unplanned outages Refining economics, run rates Refined product yields
Speculative flows
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Price relationships to watch. . .and what JPMorgan trades

Time spreads e.g. Q1 vs. Q3; winter vs. summer, Cal 05 vs. Cal 06 Regional spreads e.g. NYMEX West Texas Intermediate vs. IPE Brent, NY Harbor gasoline vs. US Gulf gasoline Crude vs. refined product spreads Cracks (e.g. crude-gasoline; crude-heating oil) Refinery margins Crude grade differentials (physical trade only) e.g. West Texas Intermediate vs. West Texas Sour; Bonny Light vs. Brent Product vs. product spreads e.g. gasoline-heating oil
S P EC I F I C S
Interfuel spreads e.g. 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 0.2% CIF NWE Jet fuel cargoes CIF NWE EN590 cargoes CIF NWE 1% and 3.5% fuel oil cargoes FOB NWE Asian market: Singapore jet fuel Natural Gas: NYMEX natural gas European natural gas priced as oil-referenced formula
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How oil (gas) trades
Formal Exchanges
Over-the-Counter
NY Mercantile Exchange
Intl Petroleum Exchange (London)
Swaps/Options
West Texas Intermediate (Light, Sweet) Crude

1 lot = 1,000 bbl
Brent Crude
1 lot = 1,000 bbl
Variety Of Regional Benchmark Crudes and Refined Products. . .
Heating Oil
1 lot = 42,000 gallons = 1,000 bbl
Gas Oil
1 lot = 100 tonnes = 750 bbl
Unleaded Gasoline
1 lot = 42,000 gallons = 1,000 bbl
S P EC I F I C S
Henry Hub Natural Gas

1 lot = 10,000 MMBtu
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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
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Risk exposure and management strategies

Production
Exposure Type
Price of crude Cost of transportation, insurance, duty/tariff Cost of carry (time value of money), 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

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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 1,000 barrels 42,000 gallons 42,000 gallons 100 metric tons 100 metric tons 10,000 MMBtu Quote Unit US$/barrel cents/gallon cents/gallon US$/metric ton US$/metric ton US$/MMBtu
Parcel Parcel
Barges: 1,000 - 5,000 MT (2 - 8 days loading) Cargoes: 10,000 - 25,000 MT (15 days loading)
Delivery Methods Delivery Methods

Delivery specifications are factored into the cost of products. For example Free on Board (FOB) Cost Insurance Freight (CIF) In the US, products may be priced as pipe, barge, or waterborne based on delivery method
Main Locations Main Locations

S P EC I F I C S
Europe: Amsterdam-Rotterdam-Antwerp; Arab Gulf; Mediterranean; North West Europe; Rotterdam. United States: New York Harbour; Los Angeles; San Francisco; US Gulf Coast; Midcontinent; West Coast. Singapore
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For example. . .
What is the price of spot fuel oil relative to crude?
What region? Europe. Rotterdam or Med? Med. What sulphur content? 1%. CIF or FOB? CIF. Barge or cargo? Cargo. $239/tonne
Compare to what crude? Urals.
36.60 1 bbl Urals
$1.34 1
$239 1 tonne FO
1 tonne 6.66 bbl
= $13.16/bbl
S P EC I F I C S
Extensions of this idea? Look at the forward spreads; look at the spread to the US or Asian fuel cracks
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Backwardation vs. contango

Backwardation vs. Contango Curves Backwardation vs. Contango Curves
In US$/bbl $5.30 contango curve
$5.20
$5.10
$5.00 backwardation curve $4.90
$4.80
$4.70
S P EC I F I C S
M01
M05
M09
M13
M17
M21
M25
M29
M33
Source: JPM organ Energy Strategy
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More backwardation than contango

The oil curve shifts regularly between backwardation and contango Historically, oil has spent more time in backwardation than contango Backwardation has been steeper than periods of contango
Contango vs. Backwardation Contango vs. 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
$11
N ote: M 02M 13 in U S$/bbl Source: JPM organ Energy Strategy
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Agenda
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How is crude oil related to other oils, like gasoline and heating oil?
Crude oil is what gets pumped out of the ground. Very little crude oil is consumed directly it is a raw material that has to be refined into other products, such as gasoline and heating oil Other products that are derived from crude oil include: Jet fuel, diesel, residual fuel oil, naphtha, kerosene, lubricants, tar, asphalt, petrochemicals, fertilizers, and plastics The difference between the price of a finished product, such as gasoline, and the price of crude oil is often referred to as the crack spread. 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, given the value of the finished product slate minus other costs to the refiner such as transport costs, refinery fuel costs, etc. A refinery margin is essentially the refiners profit i.e. the value of the product slate, minus the cost of crude inputs and other expenses
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P I C T U R E :
M AC R O
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F U N D AM E N T AL S
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Is all crude oil the same?

There are many different grades of crude oil. All grades have different qualities, and sell for different prices based on their qualities When we talk about light, sweet crude, we mean grades with a high API gravity number, and a low sulfur content. A heavy, sour crude has a low API gravity and a high sulfur content In general, light/sweet crude tends to sell at a higher price than heavy/sour crude In general, refiners can produce a higher yield of high quality refined products, such as gasoline, by running light/sweet crudes. Heavy/sour grades yield less gasoline, and more of the dirty products such as fuel oil
P I C T U R E :
M AC R O
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Where are most of the worlds oil reserves?

Proved Oil Reserves (end 2005) Proved Oil Reserves (end 2005)
In thousand million barrels
742.7
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M AC R O
103.5 40.2 59.5
114.3
140.5
P I C T U R E :
Asia Pacific
North America
Africa
South & Central America
Europe & Eurasia
Middle East
Source: JPMorgan Energy Strategy, BP Statistical Handbook (June 2006)
T H E
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Where are the worlds top consumers of oil?

Top Oil Consumers (2005) Top Oil Consumers (2005)
Other 49%
United States 25%
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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, BP Statistical Handbook (June 2006)
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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
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
1.4 mbd
2.2 mbd
2.8 mbd
3.4 mbd
10
270 kbd
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M AC R O
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 , EIA
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Who are the worlds 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 9,185 9,063 5,131 3,879 3,617 3,334 2,706 2,506 2,458 2,405 2,133 1,813 1,805 1,640 1,634 1,560 1,345 1,245 1,025 942 796 727 722 665 663 10,206
Share of Global Production 12.5% 12.4% 7.0% 5.3% 4.9% 4.6% 3.7% 3.4% 3.4% 3.3% 2.9% 2.5% 2.5% 2.2% 2.2% 2.1% 1.8% 1.7% 1.4% 1.3% 1.1% 1.0% 1.0% 0.9% 0.9% 13.9%
The worlds biggest producers are not necessarily the same as the worlds biggest exporters. For example, the US and China produce a lot of oil, but export very little given high domestic demand OPEC members Saudi Arabia and Iran are the worlds biggest exporters of crude oil
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P I C T U R E :
M AC R O
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Note: Bold = OPEC members Source: JPMorgan Energy Strategy, IEA
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What is OPECs role

OPEC does not set prices. OPEC sets production quotas. Currently 10 of the cartels 11 members are subject to group quotas; Iraq is exempt. Saudi Arabia is by far the groups biggest and most influential member
What is OPECs ideal price?

Contrary to popular believe, it is not to OPECs advantage to target as high an oil price as possible. The cartel wants to maximize revenues, but needs consumers as much as consumers need OPEC oil. At very high oil prices, OPEC faces two risks: 1. 2. 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, and reduce OPECs market share
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P I C T U R E :
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A little history. . .
US Refiner Acquisition Price of Imported Crude US Refiner Acquisition Price of Imported Crude
In US$/bbl $100 $90 $80
Nominal
Real
$70 Iran-Iraq
War
Non-OPEC competition grows, 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, Gulf War II, Nigeria strike
P I C T U R E :
M AC R O
OI L
Nigerian strike, cold winter
2004
2006
Source: JPMorgan Energy Strategy, EIA
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Until this bull run, loss of market share was a real concern for OPEC
Shifting Market Share Shifting Market Share
42% 41% 40%
OPEC Share of Global Oil Production (%)
FSU/Saudi Oil Production (mbd) 12.5
11.5
10.5 Saudi Oil Production 9.5
39% 38%
8.5 37% 36% 35% 34% '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 FSU Oil Production 7.5 OPEC Share of Global Production 6.5
P I C T U R E :
M AC R O
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5.5
T H E
B I G
Source: JPM organ Energy Strategy , IEA, OPEC
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Keeping the cartel together can be tough, too

The Prisoners (OPEC Members) Dilemma The Prisoners (OPEC Members) Dilemma
The best outcome for the group as a whole, but hard to achieve. . .
OPEC MEMBER #1 Cut Production Cheat on Quotas
Cut Production
(6,6)
(1,10)
OPEC MEMBER #2
Given the chance that other members might cheat, 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
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(10,1)
(3,3)
P I C T U R E :
All members have an incentive to cheat, even though they would all be better off sticking to quotas
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Agenda
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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 56.70 55.25 9.02 2006 2007 67.39 64.05
63.48 70.72 70.60 59.90 64.00
Ongoing oil buying interest from consumers and investors Iran noise; major Nigerian disruptions Call on OPEC crude still topping 30 million b/d in 2007 OPEC showing commitment to a $50-55 basket price
67.05 63.05 7.32 7.50
62.71 70.43 71.00 59.78 7.84 6.65 6.18 7.67 6.02
2006 crude forecasts as of May 2, 2006, 2007 crude forecasts as of Aug. 9, 2006. Natural gas forecast as of March 2, 2006 *Actual to date prices as of October 6, 2006 Note: All values are period averages. WTI & Brent in $/bbl; natural gas in $/MMBtu Source: JPMorgan Energy Strategy
Y EAR ?
Crude Oil Price History, Forwards & Forecast Range Crude Oil Price History, Forwards & Forecast Range
US$/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
Comfortable oil inventories Hurricane season less eventful than expected? Warm weather this winter to follow? Global oil demand growth moderating; 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?
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WHATS
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JPM Probable Range JPM Possible Range History Forward Curve JPM Forecast
THI S
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 ?
WHATS
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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
THI S
$0 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
S T O RY
WHATS
Although demand growth has moderated, we dont think the products story is over yet. New refinery capacity additions will pressure these markets by 20072008, but not yet this year. Spec changes in the US will be supportive psychologically if not physically
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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, 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 , IEA, 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 1.69
1.64 1.59
In billion bbl 1.10

1.05 1.00 0.95 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
1.54 1.49 1.44 0.00 Jan Feb Mar Apr May Jun Jul
Five-Year Range Five-Year Average 2005 2006 Aug Sep Oct Nov Dec
0.00 0.90
TH E
Note: Latest month is to-date only , not full-month projection Source: JPMorgan Energy Strategy , IEA, Gov n't & industry sources
Note: Latest month is to-date only , not full-month projection Source: JPMorgan Energy Strategy , IEA, Gov n't & industry sources
WHATS
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Hurricanes hammer US Gulf refineries

Roughly a quarter of US refining capacity was offline at peak during last years unprecedented hurricane season. Much of the hurricane-affected capacity had normalized by early 2006 with a few major exceptions As of May 3, 325,000 b/d, or 22%, of Gulf of Mexico oil production remains offline, 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 3.5 In US$ Gasoline Crack Heating Oil Crack Gasoline Crack Fwd NYMEX Heating Oil Crack Fwd
$35 $30 $25 $20 $15 $10 $5 $$(5)
3.0 2.5
Y EAR ?
2.0 1.5 1.0 0.5 0.0 -0.5 28-Aug-05
TH E
S T O RY
THI S
WHATS
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, EIA, government and country sources
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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) 2.7
2.4 2.1 1.8 1.5 1.2 0.9
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
0.6 0.3 0.0 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
WHATS
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. Planned maintenance is set to average 798 kbd offline in October, compared to 527 kbd offline in October of last year. Unplanned outages of several hundred thousand barrels for October 2006 compared to more than 2 million b/d lost in October 2005
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TH E
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) 1,000 800 600 400 200 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
S T O RY
WHATS
TH E
Europe has always been structurally long gasoline but has become more so as vehicle demand shifts to diesel. The Atlantic Basin is now long gasoline. . .but shorter and shorter distillate
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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 2,500 5,000 500 2,000 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; pipeline operators must meet the 15 ppm limit by Sept. 1; retailers must offer 15 ppm by Oct. 15 Dramatic changes to diesel standards underscore the challenge of not only making the fuel but also distributing it to customers. While US refiners have successfully ramped up ULSD production and inventories of the new spec have climbed steadily, 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, jet, kerosene) that operators will be challenged in how they batch/order the fuels in the pipe. 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. Separate storage tanks will also be required for distribution of ULSD
* Implemented in Beijing July 2005 ahead of 2008 Olympics; to be enforced nationwide 2010 ** Implemented in major cities in 2005; to be enforced nationwide in 2010 Source: JPMorgan Energy Strategy, 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
S T O RY
THI S
<15 ppm sulphur diesel 15-50 ppm sulphur diesel
WHATS
TH E
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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. RBOB/Alcohol Stocks RFG Inventories vs. 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; to be enforced nationwide 2010 ** Implemented in major cities in 2005; to be enforced nationwide in 2010 Source: JPMorgan Energy Strategy, government & press reports
Y EAR ?
THI S
Major US gasoline spec changes slated for 2006: lower sulfur content limit and the elimination of the oxygen content standard, which will impact MTBE use While market concern, over the what is in effect an MTBE phase-out, has been dramatic, these worries are overdone. We are experiencing some hiccups along the supply chain during the present transition period, but these should work themselves out as the US has proven itself to be quite capable of blending components up to standard
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WHATS
TH E
S T O RY
Phasing out MTBE. . . 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, 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 ethanols affinity to water, 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, after it has been transported separately by pipe

States such as New York and California have already successfully phased out
WHATS
TH E
S T O RY
MTBE in favor of ethanol
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Short- to medium-term drivers for the oil market

Bullish
Ongoing oil buying interest from consumers and investors Iran noise; 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. Warm weather this winter to follow? Global oil demand growth moderating; 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?
WHATS
TH E
S T O RY
THI S
Y EAR ?
35
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
WHATS
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Todays crude curve: Contango in the front, 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
WHATS
TH E
S T O RY
THI S
37
A new paradigm contango at $70!

WTI Flat Price vs. Backwardation (in US$/bbl) WTI Flat Price vs. Backwardation (in US$/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
$5 $(5)
TH E
WHATS
We see contango as sustainable at these price levels. However, a compelling move lower (sub $50) could see backwardation return
38
WTI backwardation vs. flat price

WTI Backwardation vs. Flat Price 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)
S T O RY
THI S
WHATS
TH E
We see contango as sustainable at these price levels. However, a compelling move lower (sub $50) could see backwardation return
39
Change in the balance of energy market participation

At the end of the day, supply and demand determine price. Past 2 yeas had a good fundamentals story But if there has a been a paradigm shift in this market, 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. Producers typically hedge 2-3 years out but can now find sufficient liquidity to hedge as much as 7 years out
Activity vs. 3 Years Ago?
Energy Producers
(E&P companies)
Energy Consumers
(Utilities, airlines, railroads, industrials)
Financial institutions Y EAR ?

(Banks)
Trend Players
(Commodity Trading Advisors)
THI S
Down Significantly less day-today tactical hedging at high prices. Remaining deals large, occasional, one-off M&A related strategic hedges. Options strategies generally preferred over swaps, 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. Consumers typically hedge 1-3 hedged more actively as prices have derivatives since the early-1990s depending on hedging program years into the future, but increasingly more risen, 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, though in energy changes, banks have markets (flow and structured business and view of the market. Depending interest has arguably increased with been market-makers and risk business) and/or taking risk on customer business, banks may make price takers in energy since the (proprietary trading). 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, Buyers or Sellers Depending on market No significant change for years directional, 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. May have long or short term views, and take directional or relative value positions in the full range of energy products Buyers or Sellers Depending on view of the market. On average in recent years, hedge funds more long than short given price trend.Funds may participate in any part of the curve and have shown particular interest in owning deferred price and volatility, 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, 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, mutual funds, retail investors)
New Institutional investors participate in the energy space in the past ~3 years
WHATS
Passive Take long-term, generally directional views. 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
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 have seen a refined products-led market. In other words, as much as crude oil prices have increased, prices for refined products such as gasoline and diesel have gone up even more This had been in large part a demand story. Demand growth has been strong particularly in 2004, and particularly in the US and non-OECD Asia. Importantly, demand growth is disproportionately for light-end products, notably diesel, which is a type of distillate
Y EAR ?
The oil industry cycles through periods of over- and under-investment. Refining and distribution (e.g. pipelines, tankers, 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, it is also not a driver that can be reversed overnight. We see tight downstream capacity influencing price until at least 200708, unless demand growth falters significantly
41
WHATS
TH E
S T O RY
THI S
Is the demand story over?

Historical Oil Demand Growth Historical Oil Demand Growth
%yoy, 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
WHATS
TH E
Demand growth has moderated relative to 2004. We see this trend continuing for the balance of the year
42
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 3,250 Gasoline 2,500 Distillate Jet/Kero Fuel Oil Heavy Light
1,750
Y EAR ?
1,000
THI S
250
S T O RY
-500 2000 2001 2002 2003 2004 2005

Source: JPM organ Energy Strategy , IEA, gov ernment & industry sources
WHATS
TH E
43
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$1,000 GDP 9
Japan
China
8 7 6 5 4 3 2 1 0 250 5,250
OECD
Non-OECD
Find from same publication (above)
0 0 1,000 2,000 3,000 4,000 5,000 GDP (in billion current US$)
Source: JPM organ Energy Strategy , BP Statistical H andbook
10,250
15,250
20,250
25,250
THI S
GDP (in billion current US$)

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. But the energy intensity to growth ratio does moderate as countries get richer
WHATS
TH E
44
The cycle of investment

OECD Oil Demand vs. 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, or lack thereof, is cyclical and tends to overshoot in both directions Theres no reason to think that this investment cycle wont eventually be the same OECD demand exceeds OECD refinery capacity. That means that, increasingly, spare refinery capacity is in the nonOECD. That means that just like crude production most of the worlds refined products production is geographically far away from most of the worlds 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 , IEA, EIA
WHATS
45
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 3.6% 1.8% 2.5% 3.8% 1.7% 5.4%
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, BP Statistical Handbook
S T O RY
WHATS
TH E
More refined products, in particular, have to travel greater distances to their end user. Ports, pipes, tankers, etc. are all an issue will they see the investment boom that refining is seeing?
46
Non-OPEC production has disappointed in recent years

Historical Oil Supply Growth Historical Oil Supply Growth
%yoy, 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, IEA
WHATS
47
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
WHATS
TH E
OPECs market relevance has waned. The group hasnt had to cut production or show any discipline since March 2004
48
Sliding OPEC spare capacity, but capacity additions in the pipeline

OPEC Spare Capacity vs. Price OPEC Spare Capacity vs. Price
In kbd 8,000 7,000 6,000 5,000 4,000
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
3,000 2,000 1,000 0 Aug-97
300 1,130 180
1,200 100 525 1,200 860 1,610 1,825 5,495
S T O RY
THI S
Feb-99
Aug-00
Feb-02
Aug-03
Feb-05
TH E
WHATS
* Excluding declines Note: This is not a complete list and is subject to change Source: JPMorgan Energy Strategy, government reports, media reports
49
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
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
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
S T O RY
1 0
'79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05
0
TH E
'67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05
WHATS
50
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 = 1,062 >5 = 329
More corrupt/risky
Less corrupt/risky
0% '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05
THI S
Average of Country Risk Rating & Corruptionion Perception Index (0 = highest risk/most corrupt)
Source: JPMorgan Energy Strategy , BP Statistical Handbook, Transparency International, UNCTAD
S T O RY
WHATS
TH E
More and more of the worlds remaining oil reserves are in geopolitically risky parts of the world, and thats not going to change
51
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, 8%
43% 41% 39%
Y EAR ?
Renewable, 6%
Coal, 23%
37% 35% 0% '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05
Petroleum, 40%
Natural Gas, 23%
THI S
S T O RY
WHATS
TH E
Political rhetoric aside, oils share of US energy consumption is rising, the share of renewables has fallen slightly in each of the past 2 decades
52
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, All Sources From Mideast Gulf From OPEC Members
Venezuela, 11% Nigeria, 8%
Canada, 16%
Mexico, 12%
UK, 3% Mideast Gulf, 17% Other Opec, 4%
Other NonOpec, 28%
10% 0% '60 '63 '66 '69 '72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '02 '05
S T O RY
THI S
WHATS
TH E
Foreign oil supplies are an ever growing percent of US demand. OPEC members supply just less than half of total US net oil imports and Middle East Gulf produces supply 20%
53
Agenda
Page
2 13 24 54 62
O I L
&
G AS
B A S I C S
54
How is gas different from oil?

Natural gas is a regional commodity, whereas oil is a global commodity In other words, oil is fungible in a way that gas is not Why? The physical properties of natural gas make it harder to transport, particularly inter-continentally. Most natural gas is transported in gaseous form via pipeline. This means that the US gas market is effectively a closed system For this reason, regional gas markets are unrelated. For example, the UK gas market has no relationship to the US gas market. 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. In other words, 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
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
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 Btus 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
Major market drivers

Weather is both a demand and supply factor Summer storage injection season (AprilOctober) is influenced by cooling demand Winter storage withdrawal season (NovemberMarch) 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
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 2,300 2,100 1,900 1,700 1,500 1,300 1,100 900 700 500 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
GA S
The long-term gas price will depend heavily on LNG to fill the growing disconnect between demand from residential, commercial, 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. . . or price will have to ration demand
59
N A T U R A L
US LNG terminal capacity

Imports by Terminal (Monthly) Imports by Terminal (Monthly)
In Bcf 5.0
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
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 , 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, LNG supply is the limiting factor for the US, not spare terminal capacity. 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, likely to pressure US gas prices
60
GA S
Winter natural gas storage trajectories

Winter Gas Storage Trajectories Winter Gas Storage Trajectories
In Bcf 3,500
3,000 2,500 2,000 1,500 1,000 500 0 7-Oct 200001 200102 200203 200304 200405 200506
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
N A T U R A L
GA S
61
Agenda
Page
2 13 24 54 62
O I L
&
G AS
B A S I C S
62
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
Key websites
US Department of Energy, Energy information Administration www.eia.doe.gov
W ATC H
Organization of Petroleum Exporting Countries www.opec.org BPs Statistical Review of World Energy www.bp.com New York Mercantile Exchange www.nymex.com Commodity Futures Trading Commission www.cftc.gov International Energy Agency www.iea.org
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
64
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,
W E B SI T E S
A N D
D A TA
R EL EA S E S
T O
65
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
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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OCTOBER 2006

OIL & GAS BASICS

Oil & Gas Basics_20061020_book

Oil & Gas Basics_20061020_book

Energy is significantly more volatile than other markets

Oil & Gas Basics_20061020_book

Oil & Gas Basics_20061020_book

From the well to the tank. . .

Source: JPMorgan Energy Strategy

Oil & Gas Basics_20061020_book

Market drivers to watch

Oil Supply Oil Supply

Oil Inventories Oil Inventories

Oil Refining Oil Refining

Source: JPMorgan Energy Strategy

Oil & Gas Basics_20061020_book

Price relationships to watch. . .and what JPMorgan trades

Interfuel spreads e.g. natural gas-heating oil

Oil & Gas Basics_20061020_book

How oil (gas) trades

Intl Petroleum Exchange (London)

West Texas Intermediate (Light, Sweet) Crude

Variety Of Regional Benchmark Crudes and Refined Products. . .

Henry Hub Natural Gas

Oil & Gas Basics_20061020_book

Major global crude benchmarks and oil market centers

Source: JPMorgan Energy Strategy

Oil & Gas Basics_20061020_book

Risk exposure and management strategies

Risk Management Strategy

Hedging with time spreads

Refined product price Locational/basis risk

Retail margins Consumption

Oil & Gas Basics_20061020_book

Conventions of the oil market

Delivery Methods Delivery Methods

Main Locations Main Locations

Oil & Gas Basics_20061020_book

Compare to what crude? Urals.

36.60 1 bbl Urals

1 tonne 6.66 bbl

Oil & Gas Basics_20061020_book

Backwardation vs. contango

$5.00 backwardation curve $4.90

Source: JPM organ Energy Strategy

Oil & Gas Basics_20061020_book

More backwardation than contango

N ote: M 02M 13 in U S$/bbl Source: JPM organ Energy Strategy

Oil & Gas Basics_20061020_book

Oil & Gas Basics_20061020_book

Oil & Gas Basics_20061020_book

Is all crude oil the same?

Source: JPMorgan Energy Strategy

Oil & Gas Basics_20061020_book

Where are most of the worlds oil reserves?

103.5 40.2 59.5

South & Central America

Europe & Eurasia

Source: JPMorgan Energy Strategy, BP Statistical Handbook (June 2006)

Oil & Gas Basics_20061020_book

Where are the worlds top consumers of oil?

United States 25%

Source: JPMorgan Energy Strategy, BP Statistical Handbook (June 2006)