PRICING & PURCHASING SUMMIT WASHINGTON DC | NOVEMBER 11-12 2014 PRICING & PURCHASING SUMMIT

Global Oil Market Outlook 11, November 2014 Jim Burkhard Vice-President, Oil Markets and Energy Scenarios +1 202 857-5183 jim.burkhard@ihs.com

World oil supply growth has come mostly from North America since 2008 Pricing & Purchasing Summit / November 2014 World oil supply growth has come mostly from North America since 2008 United States total US tight oil only Saudi Arabia Tight oil Source: IHS Energy. Note: Figures do not include OPEC condensate and OPEC/non-OPEC NGLs.

Pricing & Purchasing Summit / November 2014 Non-OPEC crude supply United States will continue to drive historically-strong growth 2014

Oil prices and US tight oil investment Pricing & Purchasing Summit / November 2014 Oil prices and US tight oil investment Impact of US tight oil investments at different WTI price levels © 2014 IHS 41004-2 Source: IHS GREEN ZONE Most projects move forward RED ZONE WTI $80+ Severe spending slowdown; only very best projects advance $70-$80 $50-$60 CAUTIONARY ZONE Most capacity additions resilient at 70+ WTI, but some cancelled/postponed

Pricing & Purchasing Summit / November 2014 Non-OPEC liquids supply growth to outpace world oil demand growth in 2014 and 2015 Notes: Liquids supply includes crude oil, condensate, and natural gas liquids (NGLs). Liquids demand includes all refined products, blended biofuels, synthetic fuels, as well as liquefied petroleum gases (LPGs) and ethane. Source: IHS

September 2014 production: 800,000 bd Pricing & Purchasing Summit / November 2014 ISIL’s territorial ambitions September 2014 production: 800,000 bd

September 2014 production: 800,000 bd Pricing & Purchasing Summit / November 2014 Libyan production: Key variable that could push prices up or down September 2014 production: 800,000 bd

Pricing & Purchasing Summit / November 2014 Conventional resources move along a continuum of permeability into unconventional resources Continuum of increasingly difficult rocks (decreasing permeability) Low-permeability carbonates Porous/permeable sandstone and carbonate Mixed sandstone & fine-grained material Rock type Chalk Shale Tightly cemented or muddy sandstone Permeability >1,000 millidarcies (mD) <0.01 mD Porosity >30% <1% Fracture completions in vertical wells Long-reach horizontal wells +/- multistage hydraulic fracturing Long-reach horizontals + multistage hydraulic fracturing Completion practices Drill and complete Waterflood

Pricing & Purchasing Summit / November 2014 Application of horizontal drilling in the Delaware Sandstone in the US state of New Mexico has raised production significantly Horizontal wells Vertical wells

North American Natural Gas Prices 11, November 2014 Mary Barcella Director, North American Natural Gas +1 202 857 5179 mary.barcella@ihs.com

Unconventional gas has led to rapid production growth and lower prices Pricing & Purchasing Summit / November 2014 Unconventional gas has led to rapid production growth and lower prices

Greater production has resulted in lower, less volatile prices Pricing & Purchasing Summit / November 2014 Greater production has resulted in lower, less volatile prices

Price determination for North American natural gas Pricing & Purchasing Summit / November 2014 Price determination for North American natural gas Market Fundamentals Production Infrastructure Storage Potential Disruptors Weather Coal Supply Regional bottlenecks

No sign of a slowdown in production Pricing & Purchasing Summit / November 2014 No sign of a slowdown in production Unconventional development has opened up a massive North American resource base estimated well in excess of 3,000 Tcf that can be developed at less than $6.00 per million Btu (MMBtu) Increasing EURs and development of new unconventional plays is increasing resource base that is commercial at below $4.00/MMBtu Marcellus and Utica are expected to grow to 25-30% of North American supply completely changing pipeline flows and basis relationships Significant investment in infrastructure will be required to connect growing supply to growing demand Cost of development has been falling due to productivity improvements Massive hydraulic fracturing could drive another wave of productivity improvements

Pricing & Purchasing Summit / November 2014 Infrastructure additions in the Marcellus each year have been accompanied by production increases

Pricing & Purchasing Summit / November 2014 Gas storage inventories have almost regained the five-year average after being seriously depleted last winter

Pricing & Purchasing Summit / November 2014 A cold winter could increase price toward $5; a mild winter could reduce price to the low-$3s

Abnormal weather would add some price volatility this winter Pricing & Purchasing Summit / November 2014 Abnormal weather would add some price volatility this winter

Pricing & Purchasing Summit / November 2014 Coal prices put a floor under gas prices owing to gas/coal competition in electric dispatch. Difficulties with coal supply could raise the price floor

Pricing & Purchasing Summit / November 2014 Delivery constraints can cause localized price spikes in peak demand periods

Pricing & Purchasing Summit / November 2014 Bottom Line Assuming normal weather, expect gas prices to range between $3.60 and $3.90 next year, with a 2015 average of $3.73. A cold winter could temporarily increase the March average price to nearly $5, with higher regional spikes on very cold days. A mild winter could drop the March average price to the low $3’s.

Thank You! Questions?