INDUSTRY RISK RATING REPORT 21111

Oil Drilling & Gas Extraction in the US

March 2020

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Contents
Risk Overview.................................................. 3
Industry Definition & Activities...................................... 3
Industry Risk Score......................................................... 3
Risk Rating Analysis....................................................... 3

Structural Risk................................................. 6
Structural Risk Score...................................................... 6
Barriers to Entry............................................................. 6
Basis of Competition...................................................... 6
Domestic and International Markets.............................. 6
Industry Assistance........................................................ 7
Industry Life Cycle.......................................................... 8
Industry Volatility........................................................... 8

Growth Risk..................................................... 9
Growth Risk Score.......................................................... 9
Growth Risk Analysis...................................................... 9

Sensitivity Risk...............................................10
Sensitivity Risk Score.................................................... 10
World price of crude oil............................................... 10
World price of natural gas............................................14
World production of oil............................................... 17
Regulation for the Petrochemical Manufacturing
industry........................................................................ 19
Trade-weighted index.................................................. 20
Total vehicle miles........................................................24

Risk Scores Methodology..............................26

What is Industry Risk.................................................... 26
Industry Risk Scoring Methodology............................. 26
Risk Rating Score Definition......................................... 26
Oil Drilling & Gas Extraction in the US March 2020

Risk Overview
Industry Definition Companies in this industry operate and develop oil and gas field properties. Activities include: the
& Activities exploration and production of crude petroleum; the mining and extraction of oil from oil shale and oil
sands; the exploration and production of natural gas; sulfur recovery from natural gas; and recovery of
hydrocarbon liquids. Companies may operate oil and gas wells on their own account or for others on a
contract or fee basis.

The primary activities of this industry are:

Extracting crude petroleum and natural gas

Extracting natural gas liquid

Exploring for crude petroleum and natural gas

Drilling, completing and equipping wells

Operating separators, emulsion breakers, desilting equipment and field gathering lines for crude
petroleum

Industry Risk Score Forecast Period: Ending December 31, 2020

To calculate the overall risk score, IBISWorld assesses the risks pertaining to industry structure (structural
risk), expected future performance (growth risk) and economic forces (sensitivity risk). Risk scores are based
on a scale of 1 to 9, where 1 represents the lowest risk and 9 the highest. The three types of risk are scored
separately, then weighted and combined to derive the overall risk score.

Risk component Level Weight Score

Structural risk High 25% 6.46

Growth risk Very Low 25% 1.00

Sensitivity risk High 50% 6.47

Overall risk Medium 5.10

Risk Rating Analysis

Risk Score Trend Analysis

Overall risk in the Oil Drilling & Gas Extraction industry is forecast to be MEDIUM over 2020. The primary
negative factor affecting this industry is high competition, while the primary positive factor is a medium
growth risk score. Overall risk will be higher than the MEDIUM-LOW level of the previous year, a result of
unfavorable movements in world price of crude oil as well as world price of natural gas. However, their
impact will be partially offset by a projected fall in growth risk.

Risk Score Context

In 2020, the average risk score for all US industries is expected to be in the MEDIUM band. Furthermore,
the risk score for the Mining sector, which includes this industry, is at a MEDIUM-HIGH level. Therefore, the
level of risk in the Oil Drilling & Gas Extraction industry will be similar to that of the US economy and the

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Mining sector.

Structural Risk Analysis

Structural risk will be HIGH over the outlook period. This industry struggles with high competition.
Businesses competing for market share must incur expenses to differentiate offerings or keep prices low to
entice demand. This results in greater likelihood of declining revenue and lower profits. Industry revenue
displays a very high degree of volatility requiring prudent cash flow management and planning during
times of uncertain demand. Businesses failing to account for these challenges risk sudden losses or even
bankruptcy. This industry is currently in the mature phase of its life cycle which exhibits limited growth in
demand opportunities and forces operators to compete for the remaining sales in order to survive.

Growth Risk Analysis

In recent years, the Oil and Gas Extraction industry has been challenged by a decline in oil and natural gas
prices. Domestic production of oil and gas has steadily increased during the five years to 2019, and
operators have positioned themselves to perform strongly as prices rise in the five years to 2024. Although
the industry remains exposed to global commodity price fluctuations, IBISWorld expects that the industry
will sustain itself moving forward due to its highly lucrative operations.

During the five years to 2019, industry revenue has decreased at an estimated annualized rate of 0.4% to
$413.2 billion. The industry includes globalized companies that engage in all stages of the oil and gas
production process. These companies benefited the most from the emergence of hydraulic fracturing
(commonly known as fracking) and horizontal drilling techniques during the period. Furthermore, the
United States continued to lessen its reliance on foreign sources of oil and gas, most notably those in the
Middle East. By reducing exposure to foreign political events and pressure, domestic operators are
expected to perform strongly as US-produced oil and gas resources increasingly meet domestic demand.
Revenue is expected to rise an estimated 13.3% in 2019 alone, as the Organization of Petroleum Exporting
Countries in addition to major non-member producers such as Russia, Mexico and Kazakhstan (OPEC+)
adhered in aggregate to individually pledged output cuts through 2019.

The future of the industry is expected to increasingly hinge on improvements in drilling technology and
techniques. As industry operators deplete their reserves, it will become necessary to improve efficiency and
minimize waste during the next five years. Industry operators replenish their reserves through either
acquisitions or exploration. The number of industry operators is expected to increase as previously
uneconomical resources become accessible. In the five years to 2024, IBISWorld expects industry revenue
to expand at an annualized rate of 7.6% to total $596.6 billion. This rate, however, is inflated due to steep
revenue declines of 41.9% and 9.8% in 2015 and 2016, respectively, causing growth to start from a
relatively low base. Improving technology is anticipated to assist operators in meeting environmental
concerns and maximize well efficiency. As a result, IBISWorld expects industry companies will be able to
continue profitable and successful operations in the United States.

Sensitivity Risk Analysis

Sensitivity risk is forecast to be HIGH over the outlook period, up from MEDIUM in 2019. The two factors
with the most significant impacts on the industry are world price of crude oil and world price of natural
gas. A rise in either of these factors will lower industry risk.

World price of crude oil: The basic principles of supply and demand determine the world price of oil. Oil
prices have a history of exhibiting high volatility, and any increase positively affects industry revenue and
profit. The world price of crude oil is expected to decline in 2019. This factor's contribution to risk is
expected to increase in the coming year.

World price of natural gas: International and local trends in supply and demand influence the price of
natural gas. The price of natural gas is often volatile and significantly affects industry revenue. When the
price of natural gas goes up, industry revenue also increases. This factor's contribution to risk is expected
to increase in the coming year.

World production of oil: Global production levels of oil influence industry revenue according to supply and
demand conditions. Increasing levels of global production reduce the price of crude oil; conversely, falling
levels of supply increase prices. World production of oil is expected to increase in 2019. This factor's
contribution to risk is expected to increase in the coming year.

Regulation: Regulation for the Petrochemical Manufacturing industry (IBISWorld report 32511) has been
increasing due to environmental disasters associated with its operations. New hydraulic fracturing
techniques to extract previously nonviable sources of natural gas and oil have increased regulatory
pressure on the industry, as environmental concerns about water contamination and pollution have not
been fully addressed. Regulation for the Petrochemical Manufacturing industry is expected to continue

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increasing in 2019. This factor's contribution to risk is expected to increase in the coming year.

Total vehicle miles: If people drive more, there is more demand for finished oil products. The Oil Drilling
and Gas Extraction industry provides the raw materials that refineries require to produce gasoline, diesel
and other vehicle fuels. So an increase in the number of vehicle miles driven can positively influence the
industry. In 2018, IBISWorld expects total vehicle miles to increase, representing a potential opportunity for
this industry. This factor's contribution to risk is expected to decrease in the coming year.

Trade-weighted index: The trade-weighted index (TWI) represents the value of the US dollar relative to
foreign currencies. When the TWI decreases, US products become less expensive on the global market.
However, an increasing TWI decreases the attractiveness of domestic products on the international market
as the dollar appreciates. As the United States seeks to decrease its reliance on foreign oil, domestic
producers will export a greater proportion of their products. The trade-weighted index is expected to rise
in 2019. This factor's contribution to risk is expected to decrease in the coming year.

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Structural Risk
Structural Risk Structure component Level Trend Weight Score
Score
Barriers to Entry High Steady 13% 3.00

Competition High 20% 9.00

Industry Exports High Increasing 7% 4.00

Industry Imports Medium Decreasing 7% 4.00

Level of Assistance Low Steady 13% 7.00

Life Cycle Stage Mature 20% 5.00

Volatility of Industry Very high 20% 9.00

Overall Structural Risk Score 6.46

NOTE
An industry's structural score measures the impact of the fundamental characteristics common to all industries. These seven components are
scored separately, then weighted and combined to derive the structural risk score.

Barriers to Entry Barriers to entry in this industry are High and Steady

There are substantial barriers to entry to the Oil Drilling and Gas Extraction
industry. These include the high-risk nature of oil and gas exploration and
development, the difficulty in locating economically viable deposits and the
large amounts of capital companies require bringing fields into production. In
addition, many of the major oil and gas producers are vertically integrated
companies, with interests in downstream operations, such as petroleum refining
and marketing. New entrants lacking such linkages may find it difficult to
penetrate the market.

While the existence of large international oil companies in the industry is

undoubtedly a significant deterrent to market entry, there are opportunities
available for smaller companies to enter the market. The size of the largest
industry players means that smaller projects are not typically of interest to these
companies. Consequently, smaller operators can fill a gap in the market by
developing resources that larger companies would deem uneconomical.
IBISWorld expects the number of enterprises to fall during the five-year period,
as oil prices remain weak, developing new resources remains risky and larger,
more stable companies acquire smaller producers.

Basis of Competition Competition in this industry is High and the trend is High

High barriers to entry indicate that new companies struggle to enter the
industry. Medium barriers to entry mean that companies experience moderate
difficulty when trying to enter an industry. Low barriers to entry indicate that it is
easy for new companies to enter the industry.

Domestic and Exports in this industry are High and Increasing

International
Markets Imports in this industry are Medium and Decreasing

The United States is expected to import an estimated $170.4 billion in industry

product during 2019. Canada is the single major source of oil imports, followed
by Mexico, Saudi Arabia and Colombia. Venezuela, formerly a significant trade
partner for industry materials, has experienced extreme declines in trade volume
due to the enaction of sanctions on the sovereign. Increased domestic
production of natural gas and oil, combined with a greater emphasis on self-
sufficiency in energy commodities, is expected to constrain the level of imports
over the five years to 2024. Imports are expected to decline at an annualized

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rate of 4.6% over the five years to 2019. IBISWorld expects that imports will
reverse this trend, and increase at an annualized rate of 7.6% over the five years
to 2024. However, the decline and subsequent growth in imports are both
attributable to the volatility of crude oil and natural gas prices. The significant
price drops in 2015, including a 47.2% fall in the world price of crude oil and a
34.4% decline in the world price of natural gas, exacerbate the fluctuations in
the level of imports for this industry. The prices of both commodities are
expected to remain volatile over the next five years. Increasing domestic
production is expected to limit imports to only 34.3% of domestic demand in
2019, which IBISWorld anticipates will remain stable to 2024.

Canada accounts for the largest share of industry imports, at an estimated

54.4% of total imports in 2019. After Canada, Mexico accounts for the second-
largest share of total imports at 9.2% of the total. These levels decreased over
the five years to 2019, and IBISWorld expects the decrease is a result of rising
energy independence in the United States. The North American Free Trade
Agreement (NAFTA) facilitates trade with these countries, and many industry
operators maintain refining facilities in the United States. Moving forward,
IBISWorld expects these two countries to continue supplying the largest share
of industry imports.

Exports

US exports of oil and natural gas are expected to rise at an annualized rate of
22.5% to an estimated $87.0 billion over the five years to 2019. NAFTA
encourages trade among North American countries, so Canada is the single
largest origin of export activity. The Republic of Korea and Japan, in addition to
the Netherlands are expected to round out the top four export destinations for
US oil and natural gas in 2019.

Under pressure from industry advocates, Congress overturned the ban on US

crude oil exports originally enacted in 1975 during its December 2015 session.
According to a study by the EIA, an average 15.1 million barrels of crude oil will
be exported per day from the United States in 2019. a number that will rise by
over 50.0% in the next decade. Advocates of the new legislation say domestic
producers will benefit from higher prices in foreign markets, increasing
competitiveness.

Geopolitical events influence trade patterns in the oil and natural gas global
markets. Due to the prevalence of the OPEC+ in global markets, the United
States has increasingly emphasized self-sufficiency in energy production. While
the majority of global crude oil is still produced by OPEC, the United States'
efforts in domestic production have increased its level of exports and decreased
its imports. The boom in oil drilling and gas extraction in regions such as the
Bakken oil field in North Dakota has spurred expenditure in the Oil Drilling and
Gas Extraction industry over the five years to 2019, and IBISWorld expects
exports to continue growing over the five years to 2024.

Industry Assistance The level of industry assistance is Low and the trend is Steady

The Oil Drilling and Gas Extraction industry is not protected by tariffs and does
not receive any nontariff protection; however, it does benefit from some
industry-specific policies.

Expensing of intangible drilling costs enables companies engaged in the

production of domestic oil and gas to treat certain intangible costs of drilling
and development, such as fuel, labor, supplies and repairs as expense items.
This is an exception to general tax rules, which require capitalization of such
costs. Integrated oil companies can only expense 70.0% of these costs, while
independent producers can fully expense these costs.

The percentage depletion allowance permits independent producers to subtract

15.0% of sales from a property as a deduction for the depletion or depreciation
of the capital investment in the mineral reserve. It is only available to small,

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independent producers. There is also a 15.0% income tax credit for the costs of
recovering oil through one of several enhanced oil recovery methods.

Industry Life Cycle This industry is Mature Life Cycle Reasons

The industry has well-
The Oil Drilling and Gas Extraction industry is in the mature phase of its life established products and
cycle. Industry value added (IVA), a measure of the industry's contribution to the participants
overall economy, is expected to decline at an annualized rate of 1.0% in the 10-
The industry has begun
year period to 2024. US GDP, however, is expected to grow an annualized 2.1%
using new techniques and
during the same period. The importance of oil and gas extraction will continue
technologies to capitalize
to ensure the relevance of this industry. Recent discoveries in the Bakken oil
on new resources
field in North Dakota and the Appalachian basin have bolstered the United
States' supply of natural gas resources. Improved technologies enabled The industry's major
companies to use horizontal drilling and hydraulic fracturing to extract players are responding to
previously uneconomical supplies from shale formations in these regions. market developments by
merging operations
However, growth in domestic oil output is uncertain. Most of the major oil fields
in the United States were discovered decades ago and are now in decline. The industry has
Though the drilling moratorium has been lifted for deepwater oil exploration, it discovered new resources
will be some time before increased extraction adds to the industry's output at a to extract
steady rate. However, if output from new oil exploration is significant, the
industry's life cycle may change. At the same time, the output of natural gas is
expected to continue expanding. This increase is expected to provide growth
opportunities in other downstream industries such as Coal and Gas Powered
Generation (IBISWorld report 21111a).

Other likely candidates for energy generation have emerged as well.

Technologies that generate biofuels, solar, wind, and other types of renewable
energies seek to displace oil and gas energy generation. Most of these
technologies are in the growth phase of their life cycles; however, it is unlikely
that they will pose major threats to the industry over the five years to 2024.

Industry Volatility The level of volatility is Very high

Over the five years to 2019, the Oil Drilling and Gas Extraction industry has
exhibited an extremely high level of revenue volatility. Typically, the revenue
performance of the Oil Drilling and Gas Extraction industry is very volatile and
sensitive to shifts in both crude oil prices and natural gas prices, which vary
markedly in response to global supply and demand trends. Oil and gas prices
tend to increase sharply during periods of excess demand and fall markedly if
excess supply emerges.

The volume of US oil production does not respond strongly to price

movements, particularly price increases. Resource depletion limits the extent to
which output can respond to rising prices. Similarly, demand for local crude oil
does not respond strongly to shifts in prices. Instead, imports tend to bear the
brunt of weak or falling demand, but they can also gain disproportionately as
demand rises when prices are low.

The relatively fixed nature of local crude oil production means that oil price
movements feed directly into revenue. In contrast, US natural gas consumption
and production is trending up, but it is also sensitive to both economic
conditions and natural gas prices. Solid economic growth has a positive effect
on demand for and production of natural gas, while economic weakness tends
to reduce demand for gas, especially for industrial use.

The effects of shifts in natural gas prices on revenue depends on the magnitude
of the change. As the supply of natural gas in the United States has risen due to
increased production in North Dakota and Pennsylvania, companies' cost of
extraction remains constant, placing pressure on revenue in natural gas
segments as prices fall.

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Growth Risk
Growth Risk Growth component Level Revenue Weight Score
Score
2017-2019 Annualized growth Very Low 24.7% 25% 1.00

2019-2020 Forecast growth Very Low 13.5% 75% 1.00

Overall Growth Risk Score Very Low 1.00

NOTE
The growth risk score evaluates forecasted industry revenue growth against past performance as well as expected growth for all other
industries. A high industry growth rate is associated with lower risk for operators in that industry.

Growth Risk Analysis In recent years, the Oil and Gas Extraction industry has been challenged by a
decline in oil and natural gas prices. Domestic production of oil and gas has
steadily increased during the five years to 2019, and operators have positioned
themselves to perform strongly as prices rise in the five years to 2024. Although
the industry remains exposed to global commodity price fluctuations, IBISWorld
expects that the industry will sustain itself moving forward due to its highly
lucrative operations.

During the five years to 2019, industry revenue has decreased at an estimated
annualized rate of 0.4% to $413.2 billion. The industry includes globalized
companies that engage in all stages of the oil and gas production process.
These companies benefited the most from the emergence of hydraulic
fracturing (commonly known as fracking) and horizontal drilling techniques
during the period. Furthermore, the United States continued to lessen its
reliance on foreign sources of oil and gas, most notably those in the Middle
East. By reducing exposure to foreign political events and pressure, domestic
operators are expected to perform strongly as US-produced oil and gas
resources increasingly meet domestic demand. Revenue is expected to rise an
estimated 13.3% in 2019 alone, as the Organization of Petroleum Exporting
Countries in addition to major non-member producers such as Russia, Mexico
and Kazakhstan (OPEC+) adhered in aggregate to individually pledged output
cuts through 2019.

The future of the industry is expected to increasingly hinge on improvements in

drilling technology and techniques. As industry operators deplete their reserves,
it will become necessary to improve efficiency and minimize waste during the
next five years. Industry operators replenish their reserves through either
acquisitions or exploration. The number of industry operators is expected to
increase as previously uneconomical resources become accessible. In the five
years to 2024, IBISWorld expects industry revenue to expand at an annualized
rate of 7.6% to total $596.6 billion. This rate, however, is inflated due to steep
revenue declines of 41.9% and 9.8% in 2015 and 2016, respectively, causing
growth to start from a relatively low base. Improving technology is anticipated
to assist operators in meeting environmental concerns and maximize well
efficiency. As a result, IBISWorld expects industry companies will be able to
continue profitable and successful operations in the United States.

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Sensitivity Risk
Sensitivity Risk Sensitivity component Level Weight Score
Score
World price of crude oil High 25% 6.39

World price of natural gas Very High 20% 8.77

World production of oil High 20% 6.94

Regulation for the Petrochemical Manufacturing

Very High 15% 7.00
industry

Trade-weighted index Medium - Low 10% 4.22

Total vehicle miles Very Low 10% 2.62

Overall Sensitivity Risk Score High 6.47

NOTE
IBISWorld has identified and weighted the most significant external factors affecting industry performance. These factors are scored separately,
then weighted and combined to derive the sensitivity risk score.

World price of crude Estimated value in 2020: $41.3 per barrel

oil
2015-2020 Compound Growth: -4.05%

Forecast value in 2025: $56.5 per barrel

2020-2025 Compound Growth: 6.46%

The world price of crude oil represents the equally weighted average of oil on three different markets of
light crude oil across the world in terms of US dollars per barrel. These markets are for Dated Brent
petroleum (38 American Petroleum Institute) in the United Kingdom, Fateh petroleum (32 API) in Dubai
and West Texas Intermediate petroleum (40 API) in Midland, TX, United States. Annual figures are
presented as the average of monthly averages. Historical figures and projections are sourced from the
International Monetary Fund (IMF) and the US Energy Information Administration.

Current Performance

Oil prices are highly volatile. A wide range of external factors influence price fluctuations, and these factors
include foreign exchange movements, foreign policy decisions, production levels and demand from
emerging markets. The most influential development over the past five years has been the increasing
emphasis on hydraulic fracturing and horizontal drilling techniques. While upstream oil and gas producers
have used these techniques for decades, technological developments have made both hydraulic fracturing
and horizontal drilling more efficient and more profitable than ever before. In the United States, the shift
toward these techniques has drastically increased production levels, which has in turn pressured domestic
prices for both oil and natural gas.

Environmental concerns have increased during the five-year period, and as a result, public support for
additional investment in alternative fuel sources has affected oil and gas producers' ability to expand
operations, especially in offshore arenas. Crude oil prices are largely determined by market conditions and
falling demand can pressure crude oil prices. Though demand for crude oil is projected to remain strong,
as it is an input for a wide range of products, high levels of supply, pressure to develop alternative fuel
sources and restrictions on crude oil exports in the United States have weighed on crude oil's price
performance over the past five years. For example, as the United States increasingly has supplied itself with
petroleum, exporting nations, such as Nigeria and Venezuela, have had to seek other markets for their
petroleum output. The US government voted to remove crude oil export restrictions, entering global
markets, which will further increase supply and pressure prices.

Although overall economic conditions have improved from recessionary lows in 2009, demand from
emerging markets, most notably China, has eased in recent quarters. Though the rapid industrialization of
countries such as China and India boosted demand for petroleum products, high levels of production
continue to pressure prices for crude oil across the globe. In the United States, for example, constrained
exports of crude oil limited producers' ability to seek the highest available price for their output. As a
result, prices fell steadily in the United States since the second half of 2014, as production continued and

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surpluses developed. Moreover, the Organization of the Petroleum Exporting Countries (OPEC), in addition
to US drilling operators, have continued to produce at steady levels despite the recent decline in price. This
has exacerbated the buildup in supply and put additional pressure on prices, though prices recovered from
their bottom experienced in January 2016. Over 2019, trade disputes and political tensions in the Middle
East, particularly with Iran, placed downward pressure on prices as risks over production disruptions and
economic growth increased. This has led prices to decline in 2019 again after two consecutive years of
growth.

Outlook

The price of crude oil is expected to experience a variety of upward and downward price pressures over the
next five years. Ultimately, however, the world price of crude oil is expected to grow slowly over the next
five years. US production levels will continue to be strong and the removed export restrictions could
further encourage upstream companies to keep production levels high. In addition, OPEC's production
levels are also anticipated to remain high.

Together, this will ensure high levels of oil supply for the globe, putting downward pressure on prices. In
2020, the Coronavirus epidemic is expected to put downward pressure on global economic growth,
resulting in lower production and lower demand for crude oil. This will also put downward pressure on
prices. Following a projected decline in oil prices in 2020 and 2021, prices are expected to rise due to
economic growth and high demand in emerging and developed markets. As a result, IBISWorld estimates
the world price of crude oil to increase an annualized 0.7% over the five years to 2025.

Volatility

Volatility will likely be persistent over the next five years, as many exogenous factors can drastically
influence overall market conditions. Several oil producing countries experience political instability that will
continue over the next five years, most notably Iran and Libya. Additionally, central banks across the world
will continue to focus on oil price movements, as low oil prices can benefit a wide range of industries and
encourage economic growth. Nonetheless, the potential for sudden price fluctuations will remain constant.

Over the next five years, Russian production of petroleum resources will play an important role in European
markets for natural gas and crude oil. Countries that are rich in shale resources, such as China and Russia,
will challenge the US competitive advantage in hydraulic fracturing and horizontal drilling production over
the next five years. However, the US will maintain its advantage in shale resource development due to its
already-developed infrastructure and its access to technology and expertise. Moreover, carbon taxes and
other political decisions can curb demand and hurt prices in the future.

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$ per $ per
Year % Change Year % Change
barrel barrel
1980 35.71 N/A 2004 37.72 30.5

1981 34.04 -4.7 2005 53.36 41.5

1982 31.54 -7.3 2006 64.27 20.5

1983 29.47 -6.6 2007 71.16 10.7

1984 28.55 -3.1 2008 96.96 36.3

1985 27.37 -4.1 2009 61.77 -36.3

1986 14.17 -48.2 2010 79.03 28.0

1987 18.20 28.4 2011 104.05 31.7

1988 14.77 -18.9 2012 105.01 0.9

1989 17.91 21.2 2013 104.07 -0.9

1990 22.99 28.4 2014 96.25 -7.5

1991 19.37 -15.7 2015 50.79 -47.2

1992 19.04 -1.7 2016 42.84 -15.7

1993 16.79 -11.8 2017 52.81 23.3

1994 15.95 -5.0 2018 68.33 29.4

1995 17.20 7.9 2019 61.39 -10.2

1996 20.37 18.4 2020 41.30 -32.7

1997 19.27 -5.4 2021 52.40 26.9

1998 13.07 -32.2 2022 53.38 1.9

1999 17.98 37.5 2023 54.44 2.0

2000 28.23 57.0 2024 55.42 1.8

2001 24.33 -13.8 2025 56.48 1.9

2002 24.95 2.5 2026 57.55 1.9

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2003 28.90 15.8

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World price of Estimated value in 2020: $3.7 per thousand cubic feet
natural gas
2015-2020 Compound Growth: -11.67%

Forecast value in 2025: $4.0 per thousand cubic feet

2020-2025 Compound Growth: 1.17%

The world price of natural gas is represented in nominal dollars. World prices are calculated by averaging
monthly natural gas prices reported from the title transfer facility (TTF) in the Netherlands, the Indonesian
liquefied natural gas price in Japan and the natural gas spot price at the Henry Hub in Louisiana. Data is
sourced from the International Monetary Fund.

Current Performance

Until the middle of 2008, natural gas prices skyrocketed, driven by high oil prices, stabilizing or declining
gas reserves near high-consuming countries such as the United States, concerns over greenhouse gas
emissions and a general run-up in fuel prices. The financial crisis of 2008, a broader global economic
slowdown and excessive supply has caused demand for natural gas to fall substantially. Natural gas is in a
constant state of oversupply due to the difficulty in reducing production. Shutting off a well runs the risk of
losing the supply altogether. Oversupply has restrained natural gas prices over the past five years.

Additionally, the recession caused energy prices to plummet across the board in 2009, and natural gas was
no exception, dropping to an average of $6.76 per thousand cubic feet. Alongside low demand, the
inability to reduce production meant that gas producers accumulated large stockpiles of gas during this
period. As economic growth resumed, natural gas demand grew in 2010 to exceed annual consumption
levels before the economic downturn. That year, producers sold off their stockpiles, which kept the price of
natural gas from growing strongly even though oil and coal prices grew significantly. The surge in demand
exhausted the accumulated stockpiles by the end of 2010. Heightened demand for natural gas in Asia, in
addition to improving global economic conditions in developed countries, drove the world price of natural
gas up considerably in 2011. Consumption of natural gas increased further in 2012, primarily driven by the
increased relative cost advantages of natural gas over coal for power generation in some regions. However,
drastic oversupply continued to place heavy downward pressure on global prices.

The world price of natural gas has been volatile due to the globalization of natural gas, companies
specializing in natural gas exploration, production and transportation and the emergence of shale gas. In
particular, the price of natural gas in the United States has fallen significantly since the discovery of the
Marcellus Shale, while prices across the rest of the world continue to generally increase. In 2015, the world
price of natural gas declined significantly as global crude oil prices dropped to its lowest point since 2003.
Prices improved after amid recovering oil prices, controlled supply and growing consumption of natural
gas globally. In 2019, the price of natural gas declined significantly again as fears of economic slowdown
and lower activity in China dampened demand for coal and oil, while oversupply of natural gas from
volatile weather conditions further drove down prices. In 2020, prices are expected to continue declining
due to oversupply, a warm winter across all US regions and the threat of an economic slowdown resulting
from the Coronavirus.

Outlook

The world price of natural gas is anticipated to rise at an annualized rate of 1.2% over the five years to
2025. Although the US price of natural gas is projected to increase during the five-year period, the world
price of natural gas is expected to be weighed down by rising supply levels, in addition to slow growth in
China and Europe.

Natural gas found in locations closer to demand centers such as North America, Western and Eastern
Europe, Eastern Mediterranean, Africa and North Asia will likely reduce dependency on Middle Eastern and
Russian reserves. Furthermore, the practice of hydraulic fracturing, which is the process used to extract the
gas from the tight rock formations using a mixture of water, sand and chemical lubricants, which increases
the production potential of wells, will achieve widespread use in the near future. Technological
breakthroughs such as this will put the United States on track to become an exporter of natural gas over
the next five years. These expansions of supply are expected to inhibit the price of natural gas from
appreciating at a high rate.

Global energy demand will be driven upward during this period as the wealth of businesses and consumers
in developing nations grows rapidly. Natural gas will increasingly meet this demand, as opposed to other
energy sources, due to its reputation of cleanliness.

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Oil Drilling & Gas Extraction in the US March 2020

Volatility

The volatility of world natural gas prices is very high. The difficulties of forecasting future trends in energy
are widely recognized. Even the most sophisticated of forecasting models cannot account fully for a myriad
of complex and generally uncontrollable variables that affect prices.

In any given year, natural gas demand observably fluctuates on a seasonal basis, falling in summer months
and rising in winter months. The need for heat during the winter and lack thereof during the summer are
the primary factors responsible for these fluctuations. Seasonal anomalies, such as cooler summers or
warmer winters, can dampen this effect and change the amount of gas demanded on a large scale, thereby
affecting natural gas prices. Utilities that purchase gas when prices are lower during the summer months,
to keep inventories ready for the winter, also have a muting effect on natural gas seasonality.

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Oil Drilling & Gas Extraction in the US March 2020

$ per $ per
Year thousand % Change Year thousand % Change
cubic feet cubic feet
1985 3.81 N/A 2006 7.67 5.5

1986 3.44 -9.7 2007 7.84 2.3

1987 2.13 -38.1 2008 11.20 42.7

1988 1.90 -10.8 2009 6.76 -39.6

1989 1.59 -16.4 2010 7.33 8.4

1990 2.04 28.1 2011 10.05 37.1

1991 2.23 9.5 2012 10.96 9.1

1992 2.62 17.5 2013 10.75 -1.9

1993 2.77 5.7 2014 10.61 -1.3

1994 2.50 -9.6 2015 6.96 -34.4

1995 2.65 5.9 2016 4.76 -31.6

1996 3.11 17.4 2017 5.32 11.7

1997 2.96 -4.8 2018 6.96 30.8

1998 2.36 -20.3 2019 4.15 -40.3

1999 2.47 4.6 2020 3.74 -9.9

2000 4.33 75.4 2021 3.79 1.3

2001 4.17 -3.8 2022 3.83 1.2

2002 3.48 -16.4 2023 3.86 0.6

2003 4.65 33.6 2024 3.94 2.3

2004 5.18 11.4 2025 3.97 0.6

2005 7.27 40.2 2026 4.03 1.5

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World production of Estimated value in 2020: 102.4 Million barrels per day
oil
2015-2020 Compound Growth: 1.06%

Forecast value in 2025: 107.0 Million barrels per day

2020-2025 Compound Growth: 0.88%

The world production of oil represents the total world oil supply produced per day. Data and projections
are sourced from the US Energy Information Administration and the Organization of the Petroleum
Exporting Countries (OPEC).

Current Performance

The biggest factor controlling the world production of oil is the world price of oil. A higher price
encourages production increases to take advantage of the available profits, while a lower price forces
extraction companies to cut back on the production capacity they can no longer afford. Also, when the
price of oil is relatively stagnant, as it was in 2006 and 2007, the Organization of Petroleum Exporting
Countries (OPEC) often lowers the production quotas of its member nations to force the price up again.
When it does so, as in 2006 and 2007, production from non-OPEC nations increases to compensate. As a
result, the world production of oil remained virtually unchanged between 2005 and 2007.

However, the dramatic oil price spike in 2008 caused production to jump for the reasons described above.
The global recession followed, and the lowered oil demand it caused the price of oil to fall considerably,
which ultimately forced the world's oil producers to cut their daily production back 0.9% in 2009. As prices
recovered rapidly in 2010, so did production, growing 3.2% to pass the 2008 average. The price of oil
resumed growth in 2011, and with it the global supply of oil. In 2013, the price of oil declined, hampering
strong growth in the production of oil during the year. Production rebounded in 2014, despite a significant
decline in the price of oil. Subsequently, the world price of oil plummeted due to weak demand and a
supply gut. This can largely be attributed to OPEC maintaining production levels, despite falling oil prices.
The United States has continued to increase domestic production of oil, which has contributed to the
supply glut and weighed on prices. In late 2016, however, OPEC agreed to concerted production cuts to
attempt to rebalance global supply and demand, creating upward pricing pressures. Over the five years to
2020, world production of oil is expected to grow at an annualized rate of 1.1%.

Outlook

The world production of oil will increase slightly at 0.9% over the five years to 2025. While political unrest
in Libya and Venezuela may weigh down on growth in the next couple of years as depletion of existing oil
fields, increases in production is expected to come from Brazil, Canada, Norway and Guyana, which will
ultimately drive up production. For example, Guyana just started extracted crude oil in late 2019 and is
expected to ramp up production quickly over outlook period. Prices are expected to remain low as a result
of increased supply and a prolonged period of low prices will cause some companies to slow or halt
production. However, the timing and nature of OPEC production quota changes are difficult to forecast,
and any dramatic changes by the organization would alter world production totals significantly.

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Million Million
Year barrels % Change Year barrels % Change
per day per day
1980 63.99 N/A 2004 83.45 4.8

1981 60.60 -5.3 2005 85.10 2.0

1982 58.10 -4.1 2006 85.22 0.1

1983 57.93 -0.3 2007 85.29 0.1

1984 59.56 2.8 2008 86.65 1.6

1985 59.16 -0.7 2009 85.85 -0.9

1986 61.54 4.0 2010 88.56 3.2

1987 62.10 0.9 2011 89.04 0.5

1988 64.40 3.7 2012 91.09 2.3

1989 65.52 1.7 2013 91.69 0.7

1990 66.44 1.4 2014 94.28 2.8

1991 66.34 -0.2 2015 97.10 3.0

1992 66.55 0.3 2016 97.60 0.5

1993 67.10 0.8 2017 98.11 0.5

1994 68.64 2.3 2018 100.85 2.8

1995 70.31 2.4 2019 100.75 -0.1

1996 71.99 2.4 2020 102.37 1.6

1997 74.22 3.1 2021 103.34 0.9

1998 75.68 2.0 2022 104.31 0.9

1999 74.84 -1.1 2023 105.22 0.9

2000 77.73 3.9 2024 106.07 0.8

2001 77.67 -0.1 2025 106.97 0.8

2002 77.10 -0.7 2026 107.85 0.8

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2003 79.62 3.3

Regulation for the Regulation for the Petrochemical Manufacturing industry (IBISWorld report 32511) has been increasing due
Petrochemical to environmental disasters associated with its operations. New hydraulic fracturing techniques to extract
previously nonviable sources of natural gas and oil have increased regulatory pressure on the industry, as
Manufacturing
environmental concerns about water contamination and pollution have not been fully addressed.
industry Regulation for the Petrochemical Manufacturing industry is expected to continue increasing in 2019.

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Trade-weighted Estimated value in 2020: 107.5 index points

index
2015-2020 Compound Growth: 1.20%

Forecast value in 2025: 102.1 index points

2020-2025 Compound Growth: -1.02%

The trade-weighted index (TWI), also known as the real broad index, measures the strength of the US
dollar relative to the currencies of the nation's trading partners. Weightings are determined by the share of
trade with each country, with the five largest allocated to the Euro, Canadian dollar, Chinese yuan,
Japanese yen and Mexican peso. These five currencies account for over two-thirds of the TWI. The data for
this report is price adjusted (i.e. real) and sourced from the Economic Research Division of the Federal
Reserve. Figures are based to an index value of 100 at January 2006.

Current Performance

The dollar declined for six consecutive years between 2003 and 2008, driven by increased demand for
cheap imports sourced mainly from Pacific Rim nations. Meanwhile, the Euro strengthened rapidly during
this period, adding new countries and establishing itself as a credible international reserve currency. Lastly,
strong economic growth in China, Europe, Russia and Australia created significant interest rate differentials
with the United States, diverting investor funds into these nations. The combination of these factors
reduced demand for US dollars while increasing the value of the US's major trading currencies, resulting in
a steady devaluation of the US currency.

The financial crisis in 2009 temporarily reversed these trends. The collapse of the subprime mortgage
market and the subsequent fallout crippled the global economy and investor appetite for risk. As a result,
investors flocked to safe assets, leading to a surge in demand for US assets and causing a 4.1%
appreciation in the US dollar for the year. However, global economic conditions improved in 2010, a trend
which persisted in 2011, bringing back investor appetite for risk and reversing the greenback's recent
momentum. As a result, the TWI declined 4.7% in 2010 and an additional 5.2% in 2011.

Sharp increases experienced in 2015 are expected to be a direct consequence of diverging monetary
policies in advanced economies. For example, while the Federal Reserve raised the federal funds rate, the
Bank of Canada and the European Central Bank reduced comparable rates resulting in a higher return on
the dollar as opposed to other major currencies, raising its value in the international market. Over the five
years to 2019 the daily value of the greenback has fluctuated considerably. For instance, the index
increased significantly from 2014 to 2016, but fell slightly in 2017. The uncertainty surrounding the financial
future of sovereign debt issued primarily by Greece weakened the value of the euro during this period. The
weakening of the euro also provided a boost to TWI, particularly given the euro's large weighting within
the index. Alternatively, the United States presented a bright spot in the global economy, causing the value
of the US dollar to rise.

Moreover, as commodity prices slid in 2015, it left many emerging markets severely exposed leading to
greater currency flight into the United States. The majority of the gains in the value of the dollar during
2016 occurred after Brexit, and following the US presidential election; however, IBISWorld measures TWI as
an annual average. As a result, the annual value for TWI in 2016 was relatively subdued, though the metric
entered 2017 at a relatively high level, causing the TWI to decline slightly throughout the year. Additionally,
the Federal Reserve raised rates early in 2017; however, this action was largely priced into the market.
Federal Open Market Committee rate decisions were much less aggressive throughout the rest of 2017, as
inflationary pressure did not rear itself as aggressively as jobs numbers would have indicated. As a result,
stronger growth in Europe and Japan, combined with an easing of accommodative monetary measures in
Canada, placed strong downward pressure on the TWI in 2017, and this trend continued through 2018. In
2019, the TWI increased again as trade tensions and negoations impacting world commodity prices.
Additionally, ongoing geopolitical stuggles have increased the value of the dollar in 2019, further
increaseing the TWI. However, multiple decreases to the Federal Funds Rates are expected to dampen
demand for dollars in the international market, further decreasing the trade-weighted index. Overall,
IBISWorld estimates that the TWI will increase 0.3% to an index value of 92.5, over the five years to 2020.

Outlook

IBISWorld projects the TWI to remain relatively flat over the five years to 2025, though this metric is
expected to hover around the index's historical equilibrium. Attractive infrastructure and construction
activity are anticipated to attract further foreign investment. However, these developments are not
expected to result in an appreciation of the US dollar, as other economies begin to increase their interest
rates in response to more stable growth. As this occurs, global currency flows into the United States will

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Oil Drilling & Gas Extraction in the US March 2020

likely slow, weighing on the value of the dollar.

Overall, while the TWI is expected to decline over the next five years, the forecast is highly exposed to
macroeconomic variables, and various potential movements in both the country-specific and international
levels can alter the path of the TWI. For instance, one potential concern is the appreciation of the yuan that
may occur as China seeks to reduce its image as a currency manipulator and take the lead in globalized
trade. China's prominent and growing weighting within the TWI means that the US dollar would be
weakened by the reversal of this policy and the subsequent appreciation in the yuan. Furthermore, increase
geopolitical trade tensions and the implementation of tariffs could also negatively impact the TWI as
American goods become more expensive to importers in other countries. However, some of these
concerns are already priced into the current value of the TWI, and the dollar may strengthen if the actual
revaluation is lower than expectations.

Data Volatility

Floating exchange rates are notoriously volatile; they respond to changes in the political climate, economic
conditions, interest rates and trade patterns, among a plethora of other factors. However, the TWI displays
only a moderate level of volatility because it is based on an average of many currencies. Furthermore,
fluctuations in any given component may be offset by changes in another. IBISWorld anticipates that this
degree of volatility will persist in the future.

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Oil Drilling & Gas Extraction in the US March 2020

Year Index % Change Year Index % Change

1980 92.80 N/A 2004 101.74 -5.0

1981 99.43 6.6 2005 100.00 -1.7

1982 109.40 10.0 2006 98.94 -1.1

1983 113.68 4.3 2007 94.29 -4.7

1984 120.72 7.0 2008 90.98 -3.3

1985 125.40 4.7 2009 95.33 4.4

1986 110.62 -14.8 2010 90.78 -4.6

1987 101.86 -8.8 2011 86.28 -4.5

1988 94.79 -7.1 2012 88.48 2.2

1989 96.50 1.7 2013 88.78 0.3

1990 93.74 -2.8 2014 90.80 2.0

1991 91.96 -1.8 2015 101.25 10.5

1992 90.17 -1.8 2016 105.46 4.2

1993 92.01 1.8 2017 104.91 -0.6

1994 91.97 0.0 2018 104.05 -0.9

1995 90.22 -1.8 2019 107.06 3.0

1996 92.49 2.3 2020 107.48 0.4

1997 97.00 4.5 2021 106.58 -0.9

1998 104.78 7.8 2022 105.21 -1.4

1999 104.17 -0.6 2023 104.19 -1.0

2000 108.02 3.9 2024 103.16 -1.0

2001 113.97 5.9 2025 102.13 -1.0

2002 113.94 0.0 2026 101.11 -1.0

2003 106.74 -7.2

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Total vehicle miles Estimated value in 2020: 3.4 Trillion

2015-2020 Compound Growth: 1.84%

Forecast value in 2025: 3.6 Trillion

2020-2025 Compound Growth: 1.30%

This driver represents the total miles driven by all motor vehicles over the calendar year. This includes cars,
trucks, motorcycles and buses, but not trains or planes. Data is sourced from the Bureau of Transportation
Statistics (BTS).

Current Performance

Growth in total vehicle miles slowed significantly from 2005 through 2007 after consistently outpacing the
growth in vehicle registrations in previous years. This slowdown can be attributed to the high price of oil
observed over the same period, as consumers and businesses looked away from expensive gasoline-
powered transportation. Businesses were forced to find cheaper transportation for their goods (e.g. trains)
or find new methods of delivery for information (e.g. the internet). This came to a head in 2008 as the price
of oil skyrocketed in the first half of the year (with growth of 36.3% during the year) while the economy
tanked in the second half. The 2008 financial crisis caused massive job losses, which shrunk consumer
spending. Businesses adjusted to lower demand, and this reduction in consumer and business spending
meant fewer goods needed to be shipped across the country, damaging the trucking industry. The
combined effect caused total vehicle miles to drop for the first time in over two decades, down 1.8% to
2.98 trillion miles in 2008 from 3.03 trillion miles in 2007.

Total vehicle miles continued to slide in 2009, to an estimated 2.96 trillion miles, as the effect of the global
recession continued to reverberate throughout the economy, shrinking consumer and business spending.
However, the rate of decline was lessened by the low price of oil observed over the year, which helped the
struggling trucking industry by lowering costs and inducing more demand. The economy began to recover
from 2010 through 2013, leading to a steady increase in total vehicle miles, except for 2011, when high oil
prices caused a slight dip.

Strong economic growth over the five years to 2020 and significant declines in the world price of oil have
supported the trucking industry and encouraged individuals to drive more. The world price of crude oil
declined 47.2% in 2015,15.7% in 2016 and 9.6% in 2019. The explosive popularity of ride-sharing services
has added more cars to the road, contributing significantly to the number of vehicle miles as well. As a
result, the total number of vehicle miles driven has increased an annualized 1.8%.

Outlook

IBISWorld forecasts steady growth in the total number of vehicle miles over the five years to 2025. Total
miles have historically grown at a steady pace, and this will continue as the economy grows. Oil prices will
likely rise, but consumers will demand more gas-efficient vehicles rather than reducing distances traveled,
providing steady growth in total miles. However, businesses will continue to search for ways to use the
internet to reduce or eliminate transportation costs where applicable. Ride-sharing services, which remain
popular, will also contribute notably as well. This shift will cause total vehicle miles to continue increasing.
Total vehicle miles are expected to reach 3.62 trillion in 2025, an annualized growth rate of 1.3%.

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Oil Drilling & Gas Extraction in the US March 2020

Year Trillion % Change Year Trillion % Change

1990 2.14 N/A 2009 2.96 -0.7

1991 2.17 1.3 2010 2.97 0.4

1992 2.25 3.5 2011 2.95 -0.6

1993 2.30 2.2 2012 2.97 0.6

1994 2.36 2.7 2013 2.99 0.6

1995 2.42 2.8 2014 3.03 1.3

1996 2.49 2.6 2015 3.10 2.3

1997 2.56 3.1 2016 3.17 2.6

1998 2.63 2.7 2017 3.21 1.2

1999 2.69 2.3 2018 3.26 1.5

2000 2.75 2.1 2019 3.33 2.2

2001 2.80 1.8 2020 3.39 1.7

2002 2.86 2.1 2021 3.44 1.5

2003 2.89 1.2 2022 3.49 1.3

2004 2.96 2.6 2023 3.53 1.3

2005 2.99 0.8 2024 3.57 1.2

2006 3.01 0.8 2025 3.62 1.2

2007 3.03 0.6 2026 3.65 1.0

2008 2.98 -1.8

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Oil Drilling & Gas Extraction in the US March 2020

Risk Scores Methodology

What is Industry IBISWorld Industry Risk evaluates the inherent risks associated with hundreds of different industries in the
Risk United States. Industry Risk is assumed to be "the difficulty or otherwise of the operating environment".
This approach is new in that it analyzes non-financial information surrounding each industry.

The Industry Risk score is forward looking, and the score looks at expected Industry Risk over the next
12-18 months. The methodology is based on industry classifications and is designed to identify and
quantify risks inherent in specific industries both now and into the 12 month forecast.

Industry-based information would, for example, enable the examination of a loan book (portfolio) with
regards to risk, which would enable a more sophisticated assessment of risk spread and pricing to risk.
Alternatively, individual exposures can be better evaluated using an assessment of structure and key
drivers of change in the industry of the exposure.

Industry Risk A numeric scoring system is used and is based on a scale of 1 to 9, where a score of 1 represents the
Scoring lowest risk and 9 is the highest risk. For each of the three major risk categories (Structure, Growth and
External Sensitivities) a component score is derived from various sub components. Finally an overall score
Methodology
is derived by combining the three major risk categories.

Overall Score: This is derived from an amalgamation of the various component scores, as explained below:

Structure Score: This score is made up by analyzing internal industry risk factors. These factors are an
industry's; level of volatility, barriers to entry, external assistance, trade exposure imports and exports (if
any), industry life cycle, and amount of competition. This component contributes to 25% of the overall
score.

Growth Score: This figure is derived as an amalgamation of background and forecast growth scores. This
component contributes to 25% of the overall score.

Sensitivity Score: This figure is derived by examining external and exogenous factors which affect risk
within the industry. Examples include input costs, number of housing starts, commodity prices, etc. This
component contributes to 50% of the overall score.

Risk Rating Score Risk Score Risk Score

Definition
1-3 >3 - 4.1
Very Low Low
Risk Score Risk Score Risk Score

>4.1 - 4.7 >4.7 - 5.3 >5.3 - 5.9

Medium - Low Medium Medium - High
Risk Score Risk Score

>5.9 - 7 >7 - 9
High Very High

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information you need – fast.

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