# Presentation: 106741

## 2006 EIA Energy Outlook & Modeling ConferenceMarch 27, 2006Panel: The Future Relationship of Oil & Natural Gas Prices in the US

- John B. Parry (VP/Senior Analyst)
- Dr. John T. Malone (VP/Senior Analyst)
**John S. Herold, Inc**

## What does John S. Herold Do?

**Oil Companies**

**Financial Intermediaries**

**Capital Providers**

- Where is Capital Flowing?
- What Have the Returns Been?
- What Will the Returns Be?

- Dividends

- Interest Payments

- Debt

- Equity

- Capital

- Credit

**OUR CLIENTS**

- Equity Investors

- Debt Investors

- Credit Providers

- Investment Banks

- BP plc

- TOTAL

- ExxonMobil

- Shell

- Lukoil

## Summary

- Tightened spare world crude oil & refining capacity expected to maintain ALL energy price levels near 2004/05 levels in near to medium term
- Short-term US oil/gas price ratio likely to average in upper range of past ten years; longer term ratio expected to trend upwards if LNG successfully bridges widening US supply/demand gap at competitive prices
- Above ground inventories will continue to influence shorter-term  price swings for US oil & gas; post-hurricane(s) price spike driven by future inventory concerns
- Oil-indexed pricing for European gas means strong competition for LNG supply to the US for the foreseeable future – Atlantic Basin/Middle East LNG economics expected to be increased factor in future US oil/gas price ratio

## Call on OPEC

- Source: ExxonMobil Energy Outlook Dec. 2005

- *MMBoe

**OPEC Production **
**(1973-current)**

**Liquids Demand vs. Supply**

- Source: EIA

## US Refined Product Imports

## US Reformulated Gasoline Inventories

## Storage at Seasonal Highs

## Storage Drawdown

## US Natural Gas Consumption by Sector

## Industrial vs. Power Gas Consumption

## US Proved Natural Gas Reserves

## Natural Gas Well productivity has fallen 30% since 1990 

- Source John S Herold

- Declining Natural Gas Well Productivity in NA

## Fully Allocated Unit Costs

## US Natural Gas Supply

## US Gas Pipeline Imports From Canada

## Atlantic Basin LNG Regas Capacity 2010

## Indicative Spot Netbacks to Select LNG Suppliers 3.22.06

## Marathon OilEquatorial Guinea LNG Project

- Marathon OilEquatorial Guinea LNG Project

**Project Type:** Utility
**Ownership:** Marathon 60%, GEP Petroleum 25%, Mitsui 8.5%, Marubeni 6.5%

**Operating Parameters:**
- 	Capital Cost: 1.4 billion
- 	Capacity: 3.4 MT/yr.
- 	Contract: 17 years (Bg)

- Start-up: Late 2007
- Pricing: Henry Hub Index
- Op. Cost: $1.00/Mcf

**Economic Returns:****	****	****	****	****            **
- 	_Gas Price Scenario_	    _Internal Rate of Return:_
- 	Base Case		     15%
- 	$3.50		     12%
- 	$4.25	                         16%
- 	$5.00	                         17%
- 	$6.00		    19%

## Ratio trending downwards

- Oil - $**21.22**/bbl
- Gas - $**1.45**/Mcf

- Oil - $**14.38**/bbl
- Gas - $**2.08**/Mcf

- Oil - $**31.10**/bbl
- Gas - $**5.89**/Mcf

- Oil - $**56.56**/bbl
- Gas - $**8.91**/Mcf

***1996-2005 average = 7.6***

## Ratio highly volatile in short term

- 4.0

- 9.6

## Summary

- Tightened spare world crude oil & refining capacity expected to maintain ALL energy price levels near 2004/05 levels in near to medium term
- Short-term US oil/gas price ratio likely to average in upper range of past ten years; longer term ratio expected to trend upwards if LNG successfully bridges widening US supply/demand gap at competitive prices
- Above ground inventories will continue to influence shorter-term  price swings for US oil & gas; post-hurricane(s) price spike driven by future inventory concerns
- Oil-indexed pricing for European gas means strong competition for LNG supply to the US for the foreseeable future – Atlantic Basin/Middle East LNG economics expected to be increased factor in future US oil/gas price ratio