©BEG/CEE-UT, 1 Volatility Lovers: Unite! Medium and Long Term Tendencies in North American Oil & Gas Prices VI Congreso, Acapulco 2014

©BEG/CEE-UT, 2 How Oil & Gas Impacts the World 2011Crude OilMarketed Gas Annual Production32 BBBL124 TCF Est. Market Value$5 Trillion (Current USD) Global GDP$71 Trillion (Current USD) PPP GDP (TOE)$51 Trillion (2011 USD) Sources: EIA, World Bank Indicators, BP Annual Statistical Review; PPP GDP based on USD purchasing power parity output per kg oil equivalent

©BEG/CEE-UT, 3 Established Endowments Diameter of bubble is total production, 2012, BOE; U.S. was 14 MMBOE. Countries with “+” are mainly gas producers. BP Statistical Review and EIA, CEE analysis.

©BEG/CEE-UT, 4 Established Patterns of Use Electricity in tWh, gas in TCF, BP Statistical Review and EIA, CEE analysis.

©BEG/CEE-UT, 5 Over confidence We think our predictions or estimates are more likely to be correct than they really are Illusion of truthWe’re more likely to believe a familiar statement Confirmation biasTendency to favor information that confirms our beliefs Hindsight bias“Duh!” principle Halo effectOne trait influences others as we make judgments Sunk-cost fallacyThey matter (!), because we are… Loss aversion…more afraid of incurring losses than acquiring gains, and… Self-serving…we’ll happily claim responsibility for success more often than failure, but just to be sure… Lady Macbeth effect…“Out, damn spot!” FramingWe have blinders and silos Availability heuristicPredict frequency based on how easily an example comes to mind Markets “R” Us

©BEG/CEE-UT, 6 A strong “demand stack” scenario CEE analysis; EIA ER refers to EIA 2014 Early Release, Dec 2013 (reference case) Other 2030 = 10.8 (residential+ commercial 10.5) Industrial 2030 = 8.8 (EIA ER = 8.5) Power 2030 = 15.9 (EIA ER = 10.1) Pipe Exports 2030 = 3.9 (EIA ER = 3.4) LNG Exports 2030 = 1.0 (EIA ER = 3.5) CEE assumes all possible EPA actions

©BEG/CEE-UT, 7 Volatility Returns Small changes in supply- demand balance exert large changes in price volatility. Natural gas has tended to demonstrate greater price volatility than oil. “Volatility is Dead”

©BEG/CEE-UT, 8 CEE based on EIA, NYMEX Shifting value propositions… C2 (ethane) is ~20% of WTI

©BEG/CEE-UT, 9 …and challenging value capture

©BEG/CEE-UT, 10 (Oil Sands) Resources From Holditch, 2005, 'Statistical Correlations in Tight Gas Sands', American Association of Petroleum Geologists (AAPG) Hedberg Conference Proceedings. Conventional Reservoirs Smaller volumes Relatively easy to develop Unconventional Reservoirs Larger volumes Relatively more difficult to develop Opportunities and Economics Vary Frontier resources: does the need to build scale change risk and uncertainty in ways not fully perceived by market participants?

©BEG/CEE-UT, 11 A Possible Outcome: Crude Oil Based on Foss, 2011, OIES NG 58; see Foss, Gulen, Wainberg, Oil & Gas Investor, September 2013 Key driver: global demand

©BEG/CEE-UT, 12 NOCs: 2011 Total Costs with 10% Return Avg. $73/BOE

©BEG/CEE-UT, 13 NOCs: 2013 Total Costs with 10% Return Avg. $74/BOE

©BEG/CEE-UT, 14 NOCs: 2011 Total Costs with E&P CAPEX Avg. $86/BOE

©BEG/CEE-UT, 15 NOCs: 2013 Total Costs with E&P CAPEX Avg. $96/BOE

©BEG/CEE-UT, 16 A Possible Outcome: Natural Gas Based on Foss, 2011, OIES NG 58; see Foss, Gulen, Wainberg, Oil & Gas Investor, September 2013 Key drivers: supply, infrastructure challenges; demand “pull”; flat oil price and/or diminished liquids values

©BEG/CEE-UT, 17 A Possible Outcome - Oil:Gas Spread Based on Foss, 2011, OIES NG 58; see Foss, Gulen, Wainberg, Oil & Gas Investor, September 2013

©BEG/CEE-UT, 18 Map presents a possible gas flow scenario, Foss, Ch. 3 in Pricing Internationally Traded Gas, Oxford, 2012; gas trade data from EIA The Future? 2012: 20% of Canadian supply 2012: 18% of Mexican supply 2x current NA exports by 2020? ~8- 9 BCFD