The Challenge of Energy Policy IPAA/TIPRO Leaders in Industry Luncheon January 9, 2008

NYSE: DVNwww.devonenergy.compage 2 The Challenge of Energy Policy Where are we? How did we get here? Where do we go from here? What public policy issues need to be addressed?

NYSE: DVNwww.devonenergy.compage 3 Crude Oil Supply Supply of oil is plateauing: ― 1980’s excess crude > 10 MMBOD ― 1999 excess crude = 5 MMBOD ― Current excess crude = 2 MMBOD Non-OPEC, Non-FSU supply flat for five years Most new sources subject to increasing supply constraints

NYSE: DVNwww.devonenergy.compage 4 Supply Constraints The “easy” oil has already been found New supply sources are increasingly complex Light/sweet crude giving way to heavier/sour Increasing complexity requires more highly qualified people “People issues” are the industry’s next big challenge

NYSE: DVNwww.devonenergy.compage 5 Crude Oil Demand Source: International Energy Agency – 2007 demand increase ≈ 9.2 MMBOD Largest increase in demand occurred in last four years Largest contributors – China, India, Middle East and U.S. ―China accounted for ≈ 30% of global oil demand growth

NYSE: DVNwww.devonenergy.compage 6 Crude Oil Demand 5-year projected increase in world oil demand 1.3 to 2.0 MMBOD per year Huge proportion of world’s population still uses minimal amount of oil Economic growth in developing nations will continue to fuel demand Source: International Energy Agency.

NYSE: DVNwww.devonenergy.compage 7 New Light-Duty Vehicle Sales in China Source: International Energy Agency. Overtake US Sales Overtake Japan Sales

NYSE: DVNwww.devonenergy.compage 8 Oil Demand’s Surprising Resiliancy WTI in US Dollars and Euros

NYSE: DVNwww.devonenergy.compage 9 Crude Oil Dynamics Continuing upward cost pressures Rigs, services, refining and people scarcity influencing market NOCs significantly changing competitive landscape Much of world’s oil comes from places susceptible to geopolitical strife Burgeoning resource nationalization

NYSE: DVNwww.devonenergy.compage 10 Access to Worldwide Oil and Gas Reserves NOC Reserves Limited Equity Access Reserves Held by New Russian Companies NOC Reserves (Equity Access) Full IOC Access Source: PFC Energy, BP 2004 Statistical Review.

NYSE: DVNwww.devonenergy.compage 11 Average of Top 5 IOCs’ Reserves Replacement Ratio Source: International Energy Agency.

NYSE: DVNwww.devonenergy.compage 12 Global Oil Supply Prospects to 2015 Oil supply/demand balance is set to remain tight In total, 37.5 MMBOD of gross capacity additions needed in –13.6 MMBOD to meet demand and rest to replace decline in existing fields OPEC and non-OPEC producers have announced plans to add 25 MMBOD through 2015 Further 12.5 MMBOD of gross capacity needed or demand growth curbed Otherwise, supply crunch cannot be ruled out Source: International Energy Agency.

NYSE: DVNwww.devonenergy.compage 13 Crude Oil Prices Lots of volatility Sustained higher prices Effects of alternative energy and current energy policy provisions are years away

NYSE: DVNwww.devonenergy.compage 14 Natural Gas Dynamics Very different dynamics near-term than longer-term Near-term potential price softness Longer-term strong fundamentals

NYSE: DVNwww.devonenergy.compage 15 U.S. Working Gas Storage Data Source: EIA

NYSE: DVNwww.devonenergy.compage 16 U.S. Rigs in Operation Directed Towards Natural Gas

NYSE: DVNwww.devonenergy.compage 17 U.S. Natural Gas Production Source: EIA

NYSE: DVNwww.devonenergy.compage 18 Canadian Rigs in Operation Directed Towards Natural Gas

NYSE: DVNwww.devonenergy.compage 19 Canadian Natural Gas Production 20 Day Rolling Average

NYSE: DVNwww.devonenergy.compage 20 Natural Gas Supply Fundamentals North American natural gas production essentially flat No meaningful supply response from this decade’s drilling boom Unconventional supplies (deep offshore gas, Arctic gas, LNG) take years to develop

NYSE: DVNwww.devonenergy.compage 21 Why Has Supply Leveled Off? Rapidly escalating decline rates across North America Slowing of imports from Canada Restrictions on access to resource The causes:

NYSE: DVNwww.devonenergy.compage 22 Why Has Supply Leveled Off? Rapidly escalating decline rates across North America Slowing of imports from Canada Restrictions on access to resource The causes:

NYSE: DVNwww.devonenergy.compage 23 Average Production Decline Rates Source: Independent Investment Bank

NYSE: DVNwww.devonenergy.compage 24 The Number of Wells is Increasing Source: EIA for U.S. Data, CAPP and TransCanada data. NORTH AMERICA GAS WELLS DRILLED # of Wells

NYSE: DVNwww.devonenergy.compage 25 But the Production is Plateauing Source: BP World Review, EIA for U.S. data, CAPP and TransCanada data. NORTH AMERICA GAS WELLS DRILLED Production # of Wells BCFD

NYSE: DVNwww.devonenergy.compage 26 Why Has Supply Leveled Off? Rapidly escalating decline rates across North America Slowing of imports from Canada Restrictions on access to resource The causes:

NYSE: DVNwww.devonenergy.compage 27 Slowing of Imports from Canada Activity is slowing High cost structure ― labor, services, foreign exchange Changes in royalty trust rules ― effect on junior companies Alberta royalty changes Natural gas consumption in oil sands

NYSE: DVNwww.devonenergy.compage 28 Why Has Supply Leveled Off? Rapidly escalating decline rates across North America Slowing of imports from Canada Restrictions on access to resource The causes:

NYSE: DVNwww.devonenergy.compage 29 Restricted Access to Resource Source: U.S. Department of Interior Minerals Management Service U.S. Department of Interior Land Management

NYSE: DVNwww.devonenergy.compage 30 Natural Gas Prices Primarily influenced by North American production declines, increased oil prices (less substitution) and slight demand growth Future prices heavily dependent upon supply availability and weather Prices will be volatile With declining supply, we will need all the natural gas that we can get in the long run!

NYSE: DVNwww.devonenergy.compage 31 LNG Helps in Longer-Term Currently 4 BCFD of North American receipt capacity Growth expectation – BCFD by 2010 High capital costs (export facilities, transportation, import capacity) Competition for cheap natural gas from China, India and Western Europe NIMBY

NYSE: DVNwww.devonenergy.compage 32 Northern Gas For Illustrative Purposes Only Alaska 237 TCF Northern Pipeline Alaska Highway Route Mackenzie Valley Pipeline

NYSE: DVNwww.devonenergy.compage 33 Where Do We Go From Here? Supply/demand balance will remain relatively tight Most meaningful supply additions have multi-year horizons Need to continue to pursue workable energy policy

NYSE: DVNwww.devonenergy.compage 34 Energy Policy Issues Government policy and regulation must: Encourage conservation Provide stable and reasonable fiscal and regulatory framework – need stability for long-term projects Facilitate access to resources: – Improve access to areas currently “off-limits”

NYSE: DVNwww.devonenergy.compage 35 Energy Policy Issues (con’t) Streamline regulatory process: – Improve regulatory access and timelines – Reduce “red-tape” – Reduce jurisdictional overlaps and duplications Refrain from penalizing success: – Avoid emotional reactions based on near-term political pressures – Be aware of increasing cost

NYSE: DVNwww.devonenergy.compage 36 Innovation – The Key to Success We usually find oil in new places with old ideas. Sometimes, we find oil in an old place with a new idea, but we seldom find much oil in an old place with an old idea. Several times in the past we have thought that we were running out of oil, when actually we were running out of ideas. Parke A. Dickey September 15, 1958

Thank You.