Dr. Jim Duncan

April 19, 2023

Dr. Jim DuncanApril 19, 2023

DisclaimerDisclaimerInformation in this presentation may consist of forward-Information in this presentation may consist of forward-

looking statements within the meaning of the Private looking statements within the meaning of the Private

Securities Litigation Reform Act of 1995. These forward-Securities Litigation Reform Act of 1995. These forward-

looking statements are based on current, reasonable looking statements are based on current, reasonable

information and assumptions. However, a number of factors information and assumptions. However, a number of factors

could cause actual results to differ materially from the could cause actual results to differ materially from the

projections, anticipated results or other expectations projections, anticipated results or other expectations

expressed in this release.expressed in this release.

……also, erroneous statements made by Dr. Duncan shall hereinafter be also, erroneous statements made by Dr. Duncan shall hereinafter be

referred to as “Duncanisms,” and referred to as “Duncanisms,” and may or may not reflect themay or may not reflect the views and opinions, views and opinions,

expressed or implied, of any other human on the planet Earthexpressed or implied, of any other human on the planet Earth , and shall in no way represent the , and shall in no way represent the

management, employees, stockholders, partners, or people presently and actively doing business, or management, employees, stockholders, partners, or people presently and actively doing business, or

thinking of doing business, with ConocoPhillips in the past, present, or anytime in the futurethinking of doing business, with ConocoPhillips in the past, present, or anytime in the future…including his …including his

mother. That is…unless we like his views…and if sometime in the future he turns out to have actually been right, we reserve mother. That is…unless we like his views…and if sometime in the future he turns out to have actually been right, we reserve

the right to have endorsed, recommended, and generally come up with his ideas in the first place…the right to have endorsed, recommended, and generally come up with his ideas in the first place…

Modeling the natural gas market can be quite Modeling the natural gas market can be quite tedious....if not confusingtedious....if not confusing

The goal would be, of course to predict prices and be The goal would be, of course to predict prices and be on the “right” side...on the “right” side...

IT WAS the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way- in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

IT WAS the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way- in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

The Tale of Two MarketsThe Tale of Two Markets

Concepts? Models? Tools? Concepts? Models? Tools? Correlation? Forecasts?Correlation? Forecasts?

Global Warming…Normal Weather?Global Warming…Normal Weather?

Decision QualityChina

D&RA

LNGLNG

DSM

Political RiskInnovation Bank

OPECOPEC

Portfolio Management

Sustainability

RussiaRussiaArctic Gas

Coal-Bed

MethaneCoal-Bed

Methane

Imbedded

Options

Mackenzie Delta

Mexico

Japan

Inve

nto

rie

s

DO

E/A

PI

Just When You Think You’ve Just When You Think You’ve Got It All Figured Out… Got It All Figured Out…

SurprisesSurprisesSurprisesSurprises

Observational Acuity TestObservational Acuity TestObservational Acuity TestObservational Acuity Test

After explaining to a student, with various lessons and examples that…

After explaining to a student, with various lessons and examples that…

8

1lim

8 xx

I tried to check if the student really understood the concept, so I gave a different example to work…

I tried to check if the student really understood the concept, so I gave a different example to work…

5

1lim

5 xx55

What a difference a month makes!What a difference a month makes!

Current Market…Current Market…

Source: NYMEX

Market Problem Areas…?Market Problem Areas…?Weather…or the lack thereof

Intermittent Cross-Commodity Relationships

Volatility Due To Terrorism

Weather…or the lack thereof

Intermittent Cross-Commodity Relationships

Volatility Due To Terrorism

Fear Of Supply Shortages Keeping

Anxiety High and Prices Elevated

Hazy Fundamental Picture

Confusing Market Dynamics

Molecularphobic Intervention

The Economy

Cross-Commodity Influences

Fear Of Supply Shortages Keeping

Anxiety High and Prices Elevated

Hazy Fundamental Picture

Confusing Market Dynamics

Molecularphobic Intervention

The Economy

Cross-Commodity Influences

Current Market…Current Market…

Market Hot Points…?Market Hot Points…?Historically High Prices

Surplus Supply?

Volatility

Volatility Due To Terrorism

Weather…or the lack of summer

Historically High Prices

Surplus Supply?

Volatility

Volatility Due To Terrorism

Weather…or the lack of summer

Summer Weather ReliefSummer Weather Relief

Source: NWS

Market RealitiesMarket RealitiesMarket RealitiesMarket Realities

The Market Knife-EdgeThe Market Knife-EdgeThe Market Knife-EdgeThe Market Knife-Edge

Dry Gas Production + Imports + Storage Withdrawals – Consumption – Exports – Storage Injections = 0

Dry Gas Production + Imports + Storage Withdrawals – Consumption – Exports – Storage Injections = 0

Scary Market FactsScary Market FactsScary Market FactsScary Market Facts• Average closing price of natural gas futures

contract from inception to January of 2000…

• $2.02

• Average closing price of natural gas futures since January of 2000

• $4.40

• Average closing price of natural gas futures since January 2003

• $5.54

Scary Market FactsScary Market FactsScary Market FactsScary Market Facts

• Average 1st of November working gas storage level through November 2000

• 2.978 Tcf

• Average 1st of November working gas storage level since November 2000

• 3.161 Tcf

Scary Market FactsScary Market FactsScary Market FactsScary Market Facts

•MMBtu comparison

• Crude oil

• Natural gas equivalent

• $7.00/MMBtu

•MMBtu comparison

• Crude oil

• Natural gas equivalent

• $7.00/MMBtu

Scary Market FactsScary Market FactsScary Market FactsScary Market Facts• Volatility in market prices is triggered by

supply/demand uncertainty due to lag time between high prices and confirmed new supply because of high prices.

• Volatility is profitable…

• A firm supply surplus…e.g. Arctic Gas…a new “elephant”…would have an immediate bearish effect…downward…on prices.

• High prices have not created the crisis necessary to trigger immediate and decisive supplies…in the short term, at least.

• Volatility in market prices is triggered by supply/demand uncertainty due to lag time between high prices and confirmed new supply because of high prices.

• Volatility is profitable…

• A firm supply surplus…e.g. Arctic Gas…a new “elephant”…would have an immediate bearish effect…downward…on prices.

• High prices have not created the crisis necessary to trigger immediate and decisive supplies…in the short term, at least.

Rig CountRig Count

Rig Count vs. PriceRig Count vs. Price

Rig Count vs. Price…LaggedRig Count vs. Price…Lagged

Monthly Rig Count & Production RatioMonthly Rig Count & Production RatioMonthly Rig Count & Production RatioMonthly Rig Count & Production Ratio

Mexican Natural Gas BalanceMexican Natural Gas BalanceMexican Natural Gas BalanceMexican Natural Gas Balance

Natural Gas Supply…?Natural Gas Supply…?

Alaska

Mackenzie Delta

Florida GOM

East Coast

California Coast

Coal Bed Methane (CBM)

Liquefied Natural Gas (LNG)

Alaska

Mackenzie Delta

Florida GOM

East Coast

California Coast

Coal Bed Methane (CBM)

Liquefied Natural Gas (LNG)

Current LNG CapacityCurrent LNG CapacityWood Mackenzie

EverettPeak Send Out = 1.04 BCFDSustained = 0.60 BCFD

Cove PointPeak Send Out = 0.75 BCFDSustained = 0.45 BCFD

Elba IslandPeak Send Out = 0.55 BCFDSustained = 0.325 BCFD

Lake CharlesPeak Send Out = 1.0 BCFDSustained = 0.65 BCFD

TOTAL Peak Send Out = 3.34 BCFDSustained = 2.02 BCFD

Outlook and ForecastOutlook and Forecast

Current Market…Current Market…Current Market…Current Market…

Technically driven market…

Volatility due to speculation will continue

It’s being “fed”

Technically driven market…

Volatility due to speculation will continue

It’s being “fed”

“If You’re Not The Lead Dog, The Scenery Never Changes”

“If You’re Not The Lead Dog, The Scenery Never Changes”

0

20

40

60

80

100

120

140

160

19501960197019801990200020102020

U.S. Total Energy ConsumptionU.S. Total Energy ConsumptionDOE Forecast

(Quadrillion BTU’s)

Source: EIA

Coal

Natural Gas

Petroleum

Renewables

Nuclear

25%

U.S. Natural Gas Demand By SectorU.S. Natural Gas Demand By SectorBig Growth in PowerBig Growth in Power

Source: EIA

23%

2003

2020

25%

15%

37%20%

32%

14%

34%

ResidentialCommercialIndustrialElectrical Generation

Last WinterLast Winter

Pressure On Natural Gas MarketPressure On Natural Gas Market

Ref: NWS

High VolatilityHigh Volatility

Last Winter2003 - 2004ACTUAL

Last Winter2003 - 2004ACTUAL

WETTER…Brief FreezeWETTER…Brief Freeze

ColderColder

Warmer

Warmer

Record Cold2nd Coldest In 10 Years

Record Cold2nd Coldest In 10 Years

WeatherWeatherWeatherWeather

TmCQ

TmCQ

Where…Q = The amount of thermal energy necessarym = The mass of the objectC = The heat capacity constant of the objectT = The change in Temperature (°K)

Where…Q = The amount of thermal energy necessarym = The mass of the objectC = The heat capacity constant of the objectT = The change in Temperature (°K)

Last WinterLast Winter 2003-20042003-2004

Last WinterLast Winter 2003-20042003-2004

This WinterThis Winter2004-20052004-2005

This WinterThis Winter2004-20052004-2005

Winter ScorecardWinter ScorecardWinter ScorecardWinter Scorecard

WEATHERWEATHERWEATHERWEATHER

ECONOMYECONOMYECONOMYECONOMY

DEMANDDEMANDDEMANDDEMAND

SUPPLYSUPPLYSUPPLYSUPPLY

STORAGESTORAGESTORAGESTORAGE

Price PressurePrice PressurePrice PressurePrice Pressure

Winter SeasonWinter SeasonWinter SeasonWinter Season

UPWARDUPWARD UPWARDUPWARDUPWARDUPWARDRef: Various SourcesRef: Various Sources

Natural Gas Price HistoryNatural Gas Price History

Natural Gas Price Outlook - Bullish $4.50 $7.00+

Natural Gas Price Outlook - Bullish $4.50 $7.00+

•Signposts:

• Economy…?

• Weather pattern shift to more traditional summer/winter weather

• Price induced drilling flattens

• Steeper decline curves…

• Price Induced Demand Side Conservation

• Surprise economics…down

•Signposts:

• Economy…?

• Weather pattern shift to more traditional summer/winter weather

• Price induced drilling flattens

• Steeper decline curves…

• Price Induced Demand Side Conservation

• Surprise economics…down

Crude Oil – Natural Gas Btu Crude Oil – Natural Gas Btu EquivalenceEquivalence

Crude Oil Price HistoryCrude Oil Price History

NotionalSpare Capacity

1.5 MMB/D

NotionalSpare Capacity

1.5 MMB/D

Hurricanes

Accidents

Loading Delays

Hurricanes

Accidents

Loading Delays

Nigeria: 2.3 MMB/D

Labor Tensions

Ethnic Tensions

Nigeria: 2.3 MMB/D

Labor Tensions

Ethnic Tensions

Saudi Arabia: 9.1 MMB/D

Attacks on Foreigners

Infrastructure Sabotage

Saudi Arabia: 9.1 MMB/D

Attacks on Foreigners

Infrastructure Sabotage

Russia: 9.3 MMB/D

Yukos Affair

Pipeline Sabotage

Chechnya

Russia: 9.3 MMB/D

Yukos Affair

Pipeline Sabotage

Chechnya

Venezuela: 2.6 MMB/D

Referendum August 15th

Lack of Investment

Lingering Strike Effects

Venezuela: 2.6 MMB/D

Referendum August 15th

Lack of Investment

Lingering Strike Effects

Iraq: 2.0 MMB/D

Pipeline Sabotage

Political Instability

Iraq: 2.0 MMB/D

Pipeline Sabotage

Political Instability

Major Output RisksMajor Output Risks

(1) Iraq

– Guerilla War

– Potential for Civil War

(2) Stability of non-democratic regimes

– Islamic hard-liners look to undermine

– Reformists seek liberties

(1) Iraq

– Guerilla War

– Potential for Civil War

(2) Stability of non-democratic regimes

– Islamic hard-liners look to undermine

– Reformists seek liberties

Middle East Minefields

-Explosive and Connected-

Middle East Minefields

-Explosive and Connected-

(3) Iran

– Member of Axis of Evil

– Hard-line clerics control security apparatus

– Seeks Nuclear capability

– Supports terrorist organizations (e.g. Hezbollah, Hamas)

– Evidence aiding Al Qaeda

(3) Iran

– Member of Axis of Evil

– Hard-line clerics control security apparatus

– Seeks Nuclear capability

– Supports terrorist organizations (e.g. Hezbollah, Hamas)

– Evidence aiding Al Qaeda

Middle East Minefields

-Explosive and Connected-

Middle East Minefields

-Explosive and Connected-

5.05.56.06.57.07.58.08.59.09.5

10.0

Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan

Saudi vs. Russian Crude Oil Saudi vs. Russian Crude Oil ProductionProduction

1995 1998 1999 2000 2001 20021996 1997

Million Barrels per Day

40% of GDP

13% of GDP

Oil exports =

Source: International Energy Agency, Petrologistics

Fiscal Break-Even WTI Price Fiscal Break-Even WTI Price Requirements for OPEC NationsRequirements for OPEC Nations

$27.25

$25.75

$23.25$22.25

2021222324252627282930

Saudi Arabia Nigeria Venezuela Iran

Source: Wood Mackenzie

Dollars per Barrel

Crude Oil Price Outlook - Bullish $36.00 $45.00+

Crude Oil Price Outlook - Bullish $36.00 $45.00+

•Signposts:

• Economy…?

• OPEC floor shift

• Demand induced refinery runs

• Useful life maintenance outages

• Steeper decline curves

• Continuing volatility due to implied terrorist attacks

• Russian uncertainty

• Worldwide demand growth

•Signposts:

• Economy…?

• OPEC floor shift

• Demand induced refinery runs

• Useful life maintenance outages

• Steeper decline curves

• Continuing volatility due to implied terrorist attacks

• Russian uncertainty

• Worldwide demand growth

Coal ConcernsCoal ConcernsCoal ConcernsCoal Concerns

Hitches in the Giddy up

Hitches in the Giddy up•Hurricanes

•Early Cold•Peace?•New US Terror Attacks•Finally Face Fundamentals!

•Hurricanes•Early Cold•Peace?•New US Terror Attacks•Finally Face Fundamentals!

Crude Oil: High DemandCrude Oil: High Demand

World oil demand is growing at its fastest pace in 16 years. U.S., European and Japanese economies are finally growing again and China is sucking in oil -- imports are 20 percent higher than a year ago -- to power its manufacturing and to make gas for its booming car market. The world consumed 79 million barrels of oil a day in the second quarter. Forecasts call for that to rise to 82.5 million in the fourth quarter.

World oil demand is growing at its fastest pace in 16 years. U.S., European and Japanese economies are finally growing again and China is sucking in oil -- imports are 20 percent higher than a year ago -- to power its manufacturing and to make gas for its booming car market. The world consumed 79 million barrels of oil a day in the second quarter. Forecasts call for that to rise to 82.5 million in the fourth quarter.

Low InventoriesLow Inventories

Stocks of oil are low by historic standards, removing a cushion between demand and supply. The unusually cold winter in the Northern Hemisphere caught oil companies shorthanded, forcing them to run down stocks. But oil companies are keeping less oil on hand than in the past to lower their cost of business. OPEC has kept its stocks low as a matter of policy.

Stocks of oil are low by historic standards, removing a cushion between demand and supply. The unusually cold winter in the Northern Hemisphere caught oil companies shorthanded, forcing them to run down stocks. But oil companies are keeping less oil on hand than in the past to lower their cost of business. OPEC has kept its stocks low as a matter of policy.

Supply SnagsSupply Snags

Unrest has disrupted oil production in the Middle East, Nigeria and Venezuela. New production investment has been low in the Persian Gulf and Caspian Sea. Mature U.S. and North Sea oil fields are producing less and new finds have dropped to 6.8 billion barrels annually in 2001-2003 from 11.4 billion barrels per year in the previous five years. U.S refineries are running at near-full capacity, slowing gas deliveries to consumers. Summer driving will only make things worse.

Unrest has disrupted oil production in the Middle East, Nigeria and Venezuela. New production investment has been low in the Persian Gulf and Caspian Sea. Mature U.S. and North Sea oil fields are producing less and new finds have dropped to 6.8 billion barrels annually in 2001-2003 from 11.4 billion barrels per year in the previous five years. U.S refineries are running at near-full capacity, slowing gas deliveries to consumers. Summer driving will only make things worse.

Pump ProblemsPump Problems

U.S. gas prices rose more than 50 cents per gallon during the first five months of 2004, but higher crude accounted for only about half of that. Severe winter weather delayed U.S. refiners from making their annual switch to summer products. Even if they try to play catch-up, tankers from the Gulf take six weeks to reach the U.S. so new supplies wouldn't reach consumers until late summer. And because different U.S. regions require different gas formulations, a shortage in one can't be met with shipments from another.

U.S. gas prices rose more than 50 cents per gallon during the first five months of 2004, but higher crude accounted for only about half of that. Severe winter weather delayed U.S. refiners from making their annual switch to summer products. Even if they try to play catch-up, tankers from the Gulf take six weeks to reach the U.S. so new supplies wouldn't reach consumers until late summer. And because different U.S. regions require different gas formulations, a shortage in one can't be met with shipments from another.

Price PressurePrice Pressure

Oil prices have jumped 30 percent this year thanks to the supply-and-demand problems, the weaker U.S. dollar and speculation. A 10 percent drop in the dollar against currencies of other oil-consuming countries means a 7.5 percent rise in the dollar price of oil. OPEC officials also blame hedge fund bets that prices will go higher for up to 20 percent of $40 oil. But even at $42, a barrel of oil is cheaper than it was in 1980, when it cost $81 in today's money. (In 1864, oil hit a giddy $8 per barrel -- $92 in 2004 dollars.)

Oil prices have jumped 30 percent this year thanks to the supply-and-demand problems, the weaker U.S. dollar and speculation. A 10 percent drop in the dollar against currencies of other oil-consuming countries means a 7.5 percent rise in the dollar price of oil. OPEC officials also blame hedge fund bets that prices will go higher for up to 20 percent of $40 oil. But even at $42, a barrel of oil is cheaper than it was in 1980, when it cost $81 in today's money. (In 1864, oil hit a giddy $8 per barrel -- $92 in 2004 dollars.)

Economic DisruptionEconomic Disruption

High oil prices push up inflation through higher energy and transportation costs; they can push up interest rates and trim economic growth too. A $1 gain in crude oil prices adds $280 million per year to U.S. airlines' fuel bills. If price rises are steep enough or last long enough, they can trigger recessions, as happened in 1973-1974, when OPEC tripled oil prices overnight, and in the 1980s, when oil prices stayed above today's prices in real terms for seven years.

High oil prices push up inflation through higher energy and transportation costs; they can push up interest rates and trim economic growth too. A $1 gain in crude oil prices adds $280 million per year to U.S. airlines' fuel bills. If price rises are steep enough or last long enough, they can trigger recessions, as happened in 1973-1974, when OPEC tripled oil prices overnight, and in the 1980s, when oil prices stayed above today's prices in real terms for seven years.

Cartel CrunchCartel Crunch

OPEC's 11-member states pump 39 percent of the world's oil production and half of oil exports. The 44-year old cartel tries to manage prices by regulating output, though quotas rarely reflect true OPEC output. But while OPEC opted to raise output at its June 3 meeting in Beirut, most members are producing at full capacity already. OPEC also has internal policy divisions between pro-U.S. members such as Saudi Arabia and Kuwait and countries less favorably disposed to the Bush administration such as Iran and Venezuela.

OPEC's 11-member states pump 39 percent of the world's oil production and half of oil exports. The 44-year old cartel tries to manage prices by regulating output, though quotas rarely reflect true OPEC output. But while OPEC opted to raise output at its June 3 meeting in Beirut, most members are producing at full capacity already. OPEC also has internal policy divisions between pro-U.S. members such as Saudi Arabia and Kuwait and countries less favorably disposed to the Bush administration such as Iran and Venezuela.

The Fear FactorThe Fear Factor

Although the U.S. gets only 10 percent of its oil from the Persian Gulf, the Middle East remains the world's largest oil producing region. Recent violence in Saudi Arabia, including a deadly attack by Islamic militants in Khobar, and a fear that al Qaeda-linked forces are trying to provoke civil war in the kingdom have again raised fears about supply interruptions. Continuing unrest in Iraq will delay the return of its oil to world markets in any significant volume.

Although the U.S. gets only 10 percent of its oil from the Persian Gulf, the Middle East remains the world's largest oil producing region. Recent violence in Saudi Arabia, including a deadly attack by Islamic militants in Khobar, and a fear that al Qaeda-linked forces are trying to provoke civil war in the kingdom have again raised fears about supply interruptions. Continuing unrest in Iraq will delay the return of its oil to world markets in any significant volume.

Vulnerable InfrastructureVulnerable Infrastructure

The world's oil infrastructure has many points open to terrorist attack, but it would take simultaneous strikes to cause a significant disruption. Oil wells, pipelines and tankers are the least of the worries. Ports are a bigger potential chokepoint because most oil producing nations have only one or two terminals. But with U.S. refineries already at full capacity -- no new ones have been built for years because of environmental concerns and NIMBYism -- taking out one would send U.S. fuel prices soaring.

The world's oil infrastructure has many points open to terrorist attack, but it would take simultaneous strikes to cause a significant disruption. Oil wells, pipelines and tankers are the least of the worries. Ports are a bigger potential chokepoint because most oil producing nations have only one or two terminals. But with U.S. refineries already at full capacity -- no new ones have been built for years because of environmental concerns and NIMBYism -- taking out one would send U.S. fuel prices soaring.

The Bottom LineThe Bottom Line

Although oil -- and natural-gas -- prices have risen sharply, they will likely have only mild effects on overall economic activity, making real U.S.gross domestic product only about 0.9 percent lower than it would otherwise be. Not enough to derail the recovery. Businesses also have more experience with energy price shocks; they understand how the shocks affect them and how other segments of the economy will respond. But many of the factors behind the recent surge in prices are likely to persist.

Although oil -- and natural-gas -- prices have risen sharply, they will likely have only mild effects on overall economic activity, making real U.S.gross domestic product only about 0.9 percent lower than it would otherwise be. Not enough to derail the recovery. Businesses also have more experience with energy price shocks; they understand how the shocks affect them and how other segments of the economy will respond. But many of the factors behind the recent surge in prices are likely to persist.