S IMMONS & C OMPANY INTERNATIONAL Crude Oil: The Forgotten Factor in Domestic E&P? IPAA Mid-Year Meeting St. Francis Hotel – San Francisco June 16, 2005 Mark Meyer IPAA Mid-Year Meeting St. Francis Hotel – San Francisco June 16, 2005 Mark Meyer InvestmentBankers to the E nergy Industry S IMMONS & C OMPANY INTERNATIONAL

S IMMONS & C OMPANY INTERNATIONAL 2 Discussion roadmap n A 30,000’ look at domestic crude oil n The incremental nature of domestic crude oil n The deepwater factor n The independents’ presence on the domestic oil front n The distraction (and attraction) of natural gas n Domestic oil – mostly a niche E&P strategy n Implications and thoughts on the future

S IMMONS & C OMPANY INTERNATIONAL 3 U.S. crude oil production peaked in 1972 n 5.7 MMBbl/d in 2003 –vs. 9.4 MMBbl/d peak in 1972 –40% drop from peak n Domestic production satisfies 28% of current demand –vs. 57% in 1972 Source: DOE/EIA and Simmons & Company Intl. analysis

S IMMONS & C OMPANY INTERNATIONAL 4 U.S. oil production is an incremental business n 520,000 producing oil wells n 11 Bbl/d per-well average Source: DOE/EIA and Simmons & Company Intl. analysis Right Scale Left Scale

S IMMONS & C OMPANY INTERNATIONAL 5 Key states are well past their prime n Alaska & California: –Politically challenging –Costs always an issue n Texas & Louisiana: –Gas is king n Key oil producing properties still in the majors’ hands Source: DOE/EIA and Simmons & Company Intl. analysis

S IMMONS & C OMPANY INTERNATIONAL 6 Most domestic giants are OLD n Top 10 = 25% of total production, 26% of total proved reserves n Top 50 = 47% of production, 44% of reserves n Top 100 = 57% of production, 53% of reserves Source: DOE/EIA.

S IMMONS & C OMPANY INTERNATIONAL 7 Crude oil is secondary on the domestic drilling front n Current –Total rig count = 1,311 –Oil-directed rigs = 201 (15% of total) n 1999 Trough –Total rig count = 816 –Oil-directed rigs = 169 (21% of total) n CAGR (since 12/99) –Gas rigs = +10%/year –Oil rigs = +3%/year Sources: Smith International and Simmons & Company Intl. analysis

S IMMONS & C OMPANY INTERNATIONAL 8 Offshore, particularly deepwater, has provided some recent stability, but… n Offshore production now accounts for 36% of total vs. 15% in 1990 n Offshore volumes have grown 5%/year since the 1990 trough n Onshore production has declined by 4%/year over the same period Sources: DOE/EIA and Simmons & Company Intl. analysis

S IMMONS & C OMPANY INTERNATIONAL 9 …deepwater drilling activity has ebbed, and… n Majors operating 12 rigs in deepwater GOM vs. mid-’01 peak of 27 n Mid-cap independents operating 6 rigs vs. mid’01 peak of 9 n Total deepwater GOM rig count of 21 rigs =57% of 2001 peak (37 rigs) Sources: Smith International and Simmons & Company Intl. analysis

S IMMONS & C OMPANY INTERNATIONAL 10 …the number of imminent lease expirations is staggering n 2005 = 300 n 2006 = 800 n 2007 = 1,200 n 2008 = 800 n 2009 = 175 Source: Pioneer Natural Resources Deepwater Lease Expirations: Lease Expirations By Year

S IMMONS & C OMPANY INTERNATIONAL 11 Majors dominate the crude oil landscape n Crude oil production relatively concentrated n Dominated by the majors, legacy integrateds n Only one legacy independent among the Top 10 domestic oil producers “Top 10” Domestic Oil Production Statistics Crude Oil Top 10 Source: DOE/EIA.

S IMMONS & C OMPANY INTERNATIONAL 12 Independents more of a force in natural gas n Natural gas production relatively fragmented n Although majors remain dominant, independents are prominent players “Top 10” Domestic Gas Production Statistics Natural Gas Top 10 Source: DOE/EIA.

S IMMONS & C OMPANY INTERNATIONAL 13 Crude oil vs. natural gas – key factor comparison n Natural gas development is: –Acreage dependent –Primarily infill drilling –Shorter cycle time projects –Primary recovery only –Less facility intensive –Inherently lower cost –Easier to monetize –More technically straightforward n Crude oil development is: –Legacy asset dependent –Infill drilling plus workovers –Longer cycle time projects –Multiple recovery phases –More facility intensive –Inherently higher cost –Harder to monetize –More technically complex Bottom line: Natural gas has a lower “hassle factor” than crude oil

S IMMONS & C OMPANY INTERNATIONAL 14 New gas well returns are compelling, and… n Key advantages –Shorter cycle time…NPV acceleration –Independents more likely to use NYMEX strip price case as basis for gas wells than oil projects –After-tax IRRs exceed 40% on current prices Sources: Dwights/PI and Simmons & Company Intl. analysis

S IMMONS & C OMPANY INTERNATIONAL 15 …maintaining domestic gas production is a resource intensive proposition n Gas-directed rig count up 10%/year since 1990 n U.S. wellhead gas production essentially flat over same period n 2004 decline = 2%- 3% vs. 2003, as indicated by public company production data Sources: DOE/EIA and Baker Hughes..

S IMMONS & C OMPANY INTERNATIONAL 16 An oil niche can be a winner…DNR case example n CO 2 EOR model concentrated in Mississippi n Integrated, monopoly position –Competitively insulated –DNR owns the sole CO 2 source n Predictable, long-term growth less dependent on M&A, regional rig competition Source: Bloomberg

S IMMONS & C OMPANY INTERNATIONAL 17 Implications & thoughts on the future n Domestic crude oil production likely in permanent structural decline n Onshore giants old & declining and many legacy assets remain in the majors control n Deepwater offers the most promise, but remains a scale players game n Natural gas acreage, projects provide more compelling opportunities to smaller, more “ad hoc” oriented independents n Niche, oil-focused strategies have proven successful, but are likely to remain the E&P exception

S IMMONS & C OMPANY INTERNATIONAL IPAA Mid-Year Meeting St. Francis Hotel – San Francisco June 16, 2005 Mark Meyer IPAA Mid-Year Meeting St. Francis Hotel – San Francisco June 16, 2005 Mark Meyer InvestmentBankers to the E nergy Industry S IMMONS & C OMPANY INTERNATIONAL