Where Modern Petroleum Industry Got Its Start “Colonel” Edwin Drake became the first person to drill successfully for oil near Titusville, Pennsylvania in 1859 . Demand for oil was busted by Civil War and later Growing Sales of Automobiles End of 1800s - Huge gusher blew in at Spindletop, hill in East Texas: TEXAS BECOMES HUB OF USA OIL PRODUCTION

Industry Trends and Latest Developments Energy sector is cyclic in nature and cycles are long. Indicator of industry cycles – upstream spending. Temporary slowdowns: 1997-98 Asian economic crisis and drop in worldwide demand Depressed post 9/11 period, when economic disruption hurt oil&gas demand. Current fundamentals support higher prices on oil&gas Growing margins on upstream outweigh decline in downstream profits. Popularity of natural gas has been growing due to environmental advantages versus coal and oil.

Major Segments of Oil&Gas Industry Upstream Activities Exploration and production of oil and natural gas Midstream Activities Transportation, storage and trading of crude oil, refined products and natural gas. Downstream Activities Refining and marketing of crude oil Local distribution companies Participants Majors – integrated oil and gas companies, which are involved in every aspect of the business integrated Pure-play companies in various areas.

Upstream Operations: Oil&Gas Exploration and Production Process Search for oil and natural gas by geologists and geophysicists Once such areas are found, subsurface conditions are investigated using seismological or other techniques Drilling & Logging To drill – only way to know about the presence of resources Move to next stage, if commercial amounts are encountered Continue if the well contains commercial quantities. Completion One or more flow paths must be constructed for the hydrocarbons to travel between the reservoir and Earth’s surface. Lifting Bringing energy resources to Earth’s surface

Upstream Production Boom Continues IEA: Key Energy Statistics, 2003

Upstream Production Boom Continues IEA: Key Energy Statistics, 2003

Production Boom Driving Factors Global Economic Growth Forecast of GDP Growth Through 2010 – 3%; Expected Worldwide Oil & Gas Demand Growth – 2%-3%; Limited Excess Capacity Of Producing Nations Annual worldwide field decline rate – 4%-6%; Estimated capital investments in world exploration to meet the growing demand - $100 billion annually; Higher Oil&Natural Gas Prices Structural changes in the market (increased supply and trading liquidity – NYMEX trading from 1990) have raised the mean prices for global crude oil and US natural gas

Midstream Operations: Transportation and Storage of Oil&Gas Once Extracted, crude oil&gas must be moved from the wellhead to the refinery or distributors. Transportation Methods (means): Internationally: Oil: Crude Tankers or barges. Global tanker fleet – 2750 tankers with total capacity of 287,400 dead weight tones (As of October 2002 ) Gas: Occasionally natural gas is liquefied and transported internationally in LNG tankers. On Land Oil: Delivered to refineries with pipeline, truck or rail Gas: Delivered to LDCs with trunk pipelines Storages Essential function of an efficient and reliable pipeline network, managing fluctuation in supply and demand

Downstream Operations: Refining and Marketing of Oil Products Crude Oil - Complex Mixture Of Hydrocarbons Refining – creating a variety of final products Refining Steps: Hydro treating, Cracking, Reforming, Alkylation Gasoline Marketing Direct marketing by integrated oil companies at a retail station bearing the company’s name and emblem Selling gasoline through independent marketers Self-Serve business 24-hour point-of-sale terminals, Self service gas station

IEA: Key Energy Statistics, 2003

IEA: Key Energy Statistics, 2003

Downstream Operations: LDC – Gas Utilities LDC – pipeline transmission services that bring natural gas to LDCs and other in direct consumers LDCs own local distribution pipeline system

Natural Gas: The Fuel Of Choice Environmental advantages versus coal& oil Supporting Acts: Clean Air Act Amendments National Energy Policy Act of 1992 Its share in the OECD energy mix reached 23% in 2001, and is projected to increase to 28% by 2030. However, exploiting the world’s gas resources will require massive investments in production facilities and infrastructure.

Key Statistics: Estimated World Oil Reserves

Key Statistics: Estimated World Gas Reserves

Organization of Petroleum Exporting Countries (OPEC) Wields Worldwide Power Cartel, consisting of 11 nations heavily reliant on oil revenues as their main source of income. Founded in 1960, Headquarter – Vienna, Austria Objectives Coordinate and unify the petroleum policies of its members, Safeguard their individual and collective interests; Stabilize the price of oil; Provide an efficient economic and regulated petroleum supply to oil-consuming nations Provide a fair return on capital to those investing in the petroleum industry

Estimated World Oil&Gas Reserves Oil Reserves Year 2002 Natural Gas Reserves Year 2002

Oil Price History

Oil Prices Today OPEC Reference Basket price: October 29 – November 6 OPEC Reference Basket price: Arithmetic Average Of Seven Selected Crudes November 6 - $27.84/bbl OPEC: www.opec.org

Natural Gas Prices

Natural Gas Prices Fluctuate Widely Worsened price volatility can be attributed to: A tightening of supply and demand conditions Distressed trading fundamentals Drying up of credit, Declining liquidity, Reduced price transparency Weather influences natural gas prices With the growing influence of new gasfired electrical plants gas prices and demand are more sensitive to summer temperature

Key Industry Ratios Prices of Oil, Gas and Refined Products GDP Growth Most closely watched factors in the energy business Highly important information for net exporters GDP Growth Energy products play a central role in economic activity, providing energy for industry, commerce and transportation On the other hand, economic growth has an impact on demand for oil, gas and refined products

Key Industry Ratios (Cont’d) Oil&Gas supply and demand Critical factor in assessing the oil&gas industry’s outlook US Demand on Oil Year 2002 – 76.75 mln b/d, Expected levels: in 2003 – 77.59 mln b/d, Forecast for 2004 – 1.9% growth US Demand on Natural Gas Year 2002 – 21.71Tcf, 1.4% decline Expected levels: in 2003 – 2.3% increase, Forecast for 2004– 3.8% growth

Key Industry Ratios (Cont’d) Oil&Gas inventory Oil versus gas breakdown: company’s relative sensitivity to oil&gas prices Refinery Capacity Utilization Important measure of the health of refining sector In general, high utilization rates are indicative of strong demand Heating and Cooling Degree Days Natural gas is consumed in proportion to extremes in temperature

How To Analyze Oil&Gas Company The fortune of oil&gas industry companies are tied to overall supply/demand issues and price level; Company Specific Factors Oil versus gas oil versus gas breakdown of company activity helps to understand company’s relative sensitivity to oil&gas prices. Production volumes Production volumes tend to fluctuate from year to year, depending on prices and economic developments Multinational oil&gas companies tend to work for long term plans

How To Analyze Oil&Gas Company (Cont’d) Reserve quality Quality is determined by such factors as: Geographic location of reserves relative to its potential markets, Political and financial risk associated with exploiting them Reserve Replacement Measures the extent to which a company replenishes its reserve base as it is depleted by production Reserve Life Measures how long a company’s reserves are expected to last based on current production levels.

How To Analyze Oil&Gas Company (Cont’d) Upstream performance ratio Managing the costs of finding, developing and producing reserves is of the utmost importance to oil companies; Finding costs – expenses of searching for new oil&gas reserves Development cost – expenses in preparing reserves for production by obtaining access to reserves and building facilities needed Lifting costs - efficiency of the company’s oil&gas production, the extent to which the company controls its operating costs Costs (expressed per barrel or per-Mcf terms) are usually analyzed for 3-5 years to reflect long-term cycles Accounting methods used to estimating costs: Successful-efforts method Full-cost method

Question?

IEA: Key Energy Statistics, 2003

IEA: Key Energy Statistics, 2003