IPAA/TIPRO – November 8, 2006Copyright © 2006 John S. Herold, Inc.1 John S. Herold, Inc....

IPAA/TIPRO – November 8, 2006 Copyright © 2006 John S. Herold, Inc.1

John S. Herold, Inc.

IPAA/TIPRO Houston

November 8, 2006 Petroleum Club of Houston

Arthur L. Smith, CFA

Chairman & CEO


Herold Houston OfficeYellow Page Listing

Heroin Abuse Helpline

8021 Bissonnet 77074 713 777-8021

Heroin Aid Helpline 8021 Bissonnet 77074 713 777-8021

Herold John S Inc.

8552 Katy Freeway 77024 713 973-9222

Herpes Information Line

7553 South Freeway 77021 713 741-4377

Herpes Resource Center- Houston 713 879-1142

Herpin Nancy G 6750 West Loop South 77401 713 665-4424


Goals and Objectives

Energy sector fundamentals –

the facts/issues/problems of the mature –

but quite exciting petroleum industry



Energy sector fundamentals – the facts/issues/problems of the mature – but quite exciting petroleum industry

Hubbert and Peak Oil – The JSH Experience





Recent Herold data and analysis on upstream effort and success – evidence in the numbers


Goals and Objectives Energy sector fundamentals – the

facts/issues/problems of the mature – but quite exciting petroleum industry



To muse about the future of Alternate Energy






To muse about the future of Alternate Energy

To keep you entertained with some fishing pics


The Harsh RealityOil & Natural Gas are 63% of our Energy

US Consumption of Energy, 2006 (quadrillion BTU)

Renewables6%

Petroleum40%

Nuclear8%

Natural Gas23%

Coal23%

Source: EIA 2006 Annual Energy Outlook


The end of the Oil Age?

October 25-31, 2003 edition


World Oil ProductionColin Campbell

2006


Colin Campbell’s Discovery “Gap”


World Oil ProductionColin Campbell

2006

1980

1986


Life Cycle of U.S. Oil Production


The Giants are Depleted!

Top 15 US Fields Ranked By Ultimate Production

13

5.4

2.8

2.7

2.6

2.1

2

1.9

1.5

1.5

1.4

1.4

1.4

1.4

1.3

1.1

0 2 4 6 8 10 12 14

Huntington B. (CA) 1920

Slaughter (TX) 1936

Elk Hills (CA) 1911

Belridge So. (CA) 1911

Kelly-Snyder (TX) 1948

Sho-Vel-Tum (OK) 1919

Panhandle (TX) 1921

Thunder Horse (GOM) 2001

Kern River (CA) 1899

Yates (TX) 1926

Wasson (TX) 1936

Kuparuk River (AK) 1969

Midway Sunset (CA) 1894

Wilmington (CA) 1932

East Texas (TX) 1930

Prudhoe Bay (AK) 1968

Billio

n B

arr

els

of

Oil (

1999)

Produced Reserves

Remaining Reserves


Top U.S. Producing Fields

Top US Producing Oil and Gas Fields (2004)

0

50

100

150

200

250

San

Ju

an B

asin

Pru

dh

oe

Bay

Mar

s-U

rsa

New

ark

Eas

t

PR

B C

oal

Bed

Hu

go

ton

Ku

par

uk

Riv

er

Lo

wer

Mo

bile

Bay

Sp

rab

erry

Tre

nd

Mid

way

-Su

nse

t

Jon

ah

Bel

rid

ge

So

uth

Elk

Hill

s

Alp

ine

Ker

n R

iver

Wat

ten

ber

g

Car

thag

e

Kin

g /

Ho

rn M

tn

An

trim

Mad

den

Pin

edal

e

Was

son

No

rth

star

Kep

ler

Miln

e P

oin

t

Cym

ric

Nat

ura

l Bu

ttes

Rat

on

Bas

in

Pan

han

dle

Wes

t

2004

Pro

du

ctio

n, M

MB

oe

Oil, MMBoe Gas, MMBoe

Indicates a field from the Top 15 US fields list


How Did We Get Here?Lots of Mixed Signals

2 year Boom

20 year Bust Cycle from 1978-2000

Assumptions that are no longer valid

Natural gas in North America is plentiful, easy to find and will remain

cheap – forever!

Evidence – EIA/CERA/NPC 2000 -- 30 TCF in 2010

Natural gas worldwide is plentiful, easy to find and will remain

cheap – forever!

Overinvestment in combined cycle natural gas fired generating

plants

No easy fixes – Alternate Energy = Awful Economics


From………………….To


Energy Investor Manic Depressive Cycles

0

10

20

30

40

50

60

70

80

Dec

-83

Dec

-84

Dec

-85

Dec

-86

Dec

-87

Dec

-88

Dec

-89

Dec

-90

Dec

-91

Dec

-92

Dec

-93

Dec

-94

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

WTI Crude Spot Prices

Mania

Depression

Emotion Cycle

Source: PAA, LP


Energy Investor Manic Depressive Cycles

0

10

20

30

40

50

60

70

80

Dec

-83

Dec

-84

Dec

-85

Dec

-86

Dec

-87

Dec

-88

Dec

-89

Dec

-90

Dec

-91

Dec

-92

Dec

-93

Dec

-94

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

WTI Crude Spot Prices

Mania

Depression

Emotion Cycle

?


Today’s Situation Unrelenting demand growth for oil and natural gas is taxing(!) new

supply growth

Sharp reservoir depletion is exacerbating the “up the down

escalator” problem

Blame the economists! Price elasticity of demand for oil has been

grossly overestimated, $60/bbl is not expensive… No kidding!

( European gasoline and diesel are already $300/bbl)

25 Years of underinvestment in upstream is now coming back with

a vengeance!

Oilfield service and supply in high gear; Demand is soaring for the

picks and shovels – and Young “Miners!”

Capacity constraints, delays, shortages are crimping the 2000s

Black Gold Rush


Insatiable Energy Demand Growth

Source: ExxonMobil Energy Outlook Dec. 2005


Global Oil Supply Map

830

647

1032

645

987553

184

577

2134970

205316

142

2094

193

755


Can OPEC Produce 47 MM B/D?

Source: ExxonMobil Energy Outlook Dec. 2005

*MMBoe

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Algeria

Indonesia

Iran

Iraq

Kuwait

Libya

Nigeria

Qatar

Saudi Arabia

UAE

Venezuela

OPEC Production (1973-current)

Liquids Demand vs. Supply

Source: EIA


What about Natural Gas?


Gas Production and ImportsUS Gas Marketed Production and Imports

0

5

10

15

20

25

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

TC

F p

er y

ear

Marketed Gas Production Imports

Arab Oil Embargo

Iranian Revolution & NGPA Enacted

Oil Price Freefall

Source: EIA


Nat Gas Imports from Canada

Bcf

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

197

3

197

4

197

5

197

6

197

7

197

8

197

9

198

1

198

2

198

3

198

4

198

5

198

6

198

7

198

8

198

9

1990

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

2000

200

1

1980


0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Bcf

Canadian Nat Gas Imports

Run out of Steam

Herold Consulting – Peak Oil Copyright © 2006 John S. Herold, Inc.32

Gulf of Mexico Gas Production Plummets

Gulf of Mexico Gas Production

0

1,000

2,000

3,000

4,000

5,000

6,000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

An

nu

al G

as P

rod

uct

ion

, BC

F/y

ear

0%

6%

12%

18%

24%

30%

36%

GoM Gas Production - Less than 200 M Deep GoM Gas Production - Greater than 200 Meters Deep

GoM as % of Total US Gas Production Deepw ater as % of Total GOM Gas Production

Deepwater as % of Total GoM Gas Production

GoM as % of Total US Gas Production


0

100

200

300

400

500

600

700

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Bcf

Imports of LNG


0

100

200

300

400

500

600

700

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Bcf

Imports of LNG

2006


NYMEX Gas Future Strip Price Expectations

$3.00

$3.50

$4.00

$4.50

$5.00

$5.50

$6.00

$6.50

$7.00

$7.50

$8.00

$8.50

$9.00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

2002

2003

2004

2005•2006


GUPR

For 2005

Companies - 205

Reserves – 258 BBoe

Investment - $277 B

Production – 19 BBoe

Oil – 35 MMBbl/d

Gas – 107 Bcf/d***Analysis limited to companies with full disclosure of E&P operations.


Upstream Investment

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

2001 2002 2003 2004 2005

Ca

pita

l In

vest

me

nt(

$B

)

Development Exploration Acq - Unpr. Acq - Pr. Other

One Trillion Dollars!

Total investment in the drill bit totaled $770 BDevelopment capital increased 91% from 2001 to 2005....

but Exploration capital increased just 50%

Increased 31% in 2005


Historical RRC – the 2000s look like the 1970s

$0

$5

$10

$15

$20

$25

1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003

RR

C,

$/B

OE

Nominal Real

Prudhoe Bay Discovery

Cost Conscious ’80s-’90s

Inflationary ’70s


Reserve Replacement CostsSoar at Home & Abroad

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.0019

81

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Res

erve

Rep

lace

men

t Cos

t ($/

BO

E)

International Costs

U.S.


F&D Reserve Additions

0

5,000

10,000

15,000

20,000

25,000

2001 2002 2003 2004 2005

Pro

ved

Re

serv

es

(MM

Bo

e)

Oil Gas BOE

Higher spending did not impact additions

Added 96 BBOE from 2001 - 2005 – averaging 19 BBOE per year Increased investment did not yield increased reserves….yet

F&D includes:

Extensions, Discoveries, Improved Recovery and Revisions


0

10,000

20,000

30,000

40,000

50,000

60,000

20

01

20

02

20

03

20

04

20

05

To

tal

We

lls

0.00

0.10

0.20

0.30

0.40

0.50

0.60

MM

Bo

e p

er

we

ll

F&D Reserve Adds per total E&D Wells (Successful only) drilled; MMboe/well

Total E&D Wells (Successful & Dry) drilled

Results by Well

GUPR Activity

Drilling activity continued to increase – well count increased 13% in 2005

Reserves added per well declined 4% to .310 MMBoe pwe well

Reserves per well declined for 3rd consecutive year


F&D Costs

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

2001 2002 2003 2004 2005 3-yr. Avg.

Find

ing

& D

evel

opm

ent C

osts

($ p

er B

OE

)

Increased 88% from 2002 to 2005!


World Golf Championships

Distribution of Total Strokes from Par at World Golf Championships

0

2

4

6

8

10

12

14

16

18

20

23-20 under 19-15 under 14-10 under 9-5 under 4 under to even 1-5 over 6-10 over 11-13 over

Variance from Par

Fre

qu

en

cy

A

normal

distribution


F&D Costs (2005 3-yr. Avg.)

A challenging distribution?

0

10

20

30

40

50

60

70

Under $5.00 $5.00 - $9.99 $10.00-$14.99 $15.00-$19.99 $20.00-$24.99 $25.00 and higher

Finding & Development Costs, $/boe

Nu

mb

er

of

Co

mp

an

ies

FDCs for 1/3 of GUPR companies exceeded $25/BOE


0%

20%

40%

60%

80%

100%

120%

140%

2001 2002 2003 2004 2005 Avg.

F&

D R

ep

lace

me

nt R

ate

Extensions & Dsicoveries Improved Recovery Revisions

Reserve Replacement

Replaced 110% of Total Production via F&D

100%


Oil v. Gas Replacement

0%

20%

40%

60%

80%

100%

120%

140%

160%

2001 2002 2003 2004 2005 5-yr.

F&

D R

ese

rve

Re

pla

cem

en

t Ra

te(%

)

Oil Replacement Rate Gas Replacement Rate

Replaced Oil Production Once in the Last 5 Years

100%


Reserves

0

50,000

100,000

150,000

200,000

250,000

300,000

2001 2002 2003 2004 2005

Pro

ved

Res

erve

s (M

MB

oe)

Oil Gas BOE

Reserves did not increase with investment


11

12

13

14

15

162

00

0

20

01

20

02

20

03

20

04

20

05R

es

erv

es

/Pro

du

cti

on

Ra

tio

; A

ve

rag

e

(R/P) Ratio, Avg: Oil (R/P) Ratio, Avg: O&G (R/P) Ratio Avg: Gas

R/P Ratios

GUPR Universe

Gas R/P increased to over 15

Oil R/P declined to under 13

Oil and gas R/P ratios diverged


Change in R/P Ratios

Oil R/P ratios are down across almost every region

Region as Reported in GUPR


Production Rate

0

4,000

8,000

12,000

16,000

20,000

2001 2002 2003 2004 2005

Oil

an

d G

as

Pro

du

ctio

n (

MM

Bo

e)

Oil Gas BOE

Total increased 4% in 2005 to 19 BBoe


Observations $0$50,000$100,000$150,000$200,000$250,000$300,00020012002200320042005Acquisition Costs - ProvedAcquisition Costs - UnprovedExploration CostsDevelopment Costs

Investment increased significantly…. But did not translate into reserve additions

Maturing basins Rising cost structure Longer lead times

F&D replacement rates were marginal – just over 100% Supported by Improved Recovery and Revisions

Accounted for 27% of additions Investment focus shifting towards gas

Replacement rates for oil were only 75% Gas replacement averaged 137%

Hard Oil or Easy Gas?


Relative Prices per 42-Gallon Barrel

Crude Oil

$70.00

Gasoline

$124.57

Coca-Cola®

$119.29

Tropicana ®Orange Juice

$301.56

Milk

$267.96



McIlhennyTabasco® Pepper

Sauce

$4,542.72

Jack Daniel’s® Old No. 7

Tennessee Whiskey

$3,273.81

Starbuck’s Venti® Latte

$1,075.20

Visine A.C.® Eye Drops

$39,728.64

Perrier® Sparkling Natural Mineral Water

$426.41



$39,728.64


0

20

40

60

80

100

12019

65

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

An

nu

al O

il P

rod

uct

ion

(M

MB

bl/d

)

North America S. & Cent. America Europe & Eurasia Middle East Africa Asia Pacific

World Oil Production

BP Statistical Review - 2006

But we seldom think about oil production by company….

Are we missing something important?

We often think about oil by region or play…


$50

$55

$60

$65

$70

$75

$80

Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Sep-06

$4

$6

$8

$10

$12

$14

$16

PEC’05

Herold Energy Timeline (2005 – 2006): A Year of Many Mergers

2005 2006

AugMay

Fe

b

Ju

ly

Ap

ril

Mar

Ju

neOct Nov

Dec Jan Sept

Sept

PEC’06

COP buys BR

OXY buys VPI

TLM buys

Paladin

Lukoil buys

Nelson

CHK buys Columbia Nat. Res.

INEOS buys BP’s Innovene

Inpex buys

Teikoku

Harvest and Viking Energy Trusts merge

ONGC, CNPC team up to buy Syrian assets

Cal Dive (Helix) buys REM

WTI merges with KMG’s subsidiary

HAWK buys KCS

PPP buys Latigo

2005 Executive Oil Conference2005 Executive Oil Conference

““Growth Strategies in the Current Growth Strategies in the Current EnvironmentEnvironment””

Randy Foutch Randy Foutch President & CEO President & CEO –– Latigo Petroleum, Inc.Latigo Petroleum, Inc.

April 6th, 2005Midland, TX

EPL revises bid, SGY approves

PXP bids for SGY

EPL bids for SGY Woodside bids for EPL, if SGY deal is terminated

APC buys KMG, WGR

DVN buys Chief

MRO sells Russian

subsidiary to Lukoil

?

KMI agrees to a private buyout

COS (Can. Oil Sands)’ 1st bid

SNG’s bid

PCA bids for Can Southern

PCA’s 2nd bid

COS’ 2nd bid

PCA’s 3rd bid

SNG’ 2nd bid

COS’ offer accepted

Gas

Oil


Exxon Mobil

1. Humble Oil & Refining 2. Standard Oil (NJ) 3. Socony Vacuum 4. Superior Oil 5. Anglo-Iranian Oil 6. Standard Oil (Ohio) 7. Pan American Standard Oil (Indiana) 8. Dome Petroleum 9. Atlantic Refining 10. Richfield 11. Sinclair 12. Supron Energy 13. Union Sulfur & Oil 14. Anderson Pritchard 15. Royal/Dutch Shell 16. Shell Union (Shell Oil) 17. The Texas Company 18. Tidewater 19. Pacific Western-Getty 20. Skelly 21. Gulf 22. Standard Oil (CA) 23. Standard Oil (KY) 24. Cities Service 25. Occidental 26. Phillips 27. Aminoil 28. General American Oil 29. Continental Oil 30. Union Oil 31. Pure Oil 32. Sun Oil 33. Sunray-Sunray DX 34. Midcontinent 35. Texas Pacific 36. Kerr McGee 37. Plymouth Oil 38. Ohio Oil 39. Texas Oil & Gas 40. Amerada Petroleum 41. Hess Oil and Chemical 42. Total Petroleum 43. PetroFina 44. Fina Inc. 45. Elf Aquitaine

1950 1960 1970 1980 1990 2000

ExxonMobil

Amoco

Atlantic Richfield

Allied Chemical/Signal Union Texas (IPO)

BP

RD/SC

Getty Texaco

Chevron

Occidental

Phillips

ChevronTexaco

ConocoPhillipss

Unocal

Amerada Hess

USX

TotalFinaElf

Marathon

Sun Oil

Conoco

Kerr- McGee

Oryx

Sunoco

(Marathon)

PZL

British Petroleum

(Conoco)

BP Amoco

Dupont

Total

Altura

US Government – Elk Hills


Canadian Small E&P• Amber• Archer• Barrington• Baytex• Beau Canada• Berkley• Blue Range• Bonavista• Cabre• Canadian 88• Cimarron• Chauvco• CS Resources• Dorset• ELAN• Elk Point• Encal• Genesis• Maxx• Morgan• Morrison• Newport• Northrock• Northstar• Numac• Pacalta• PanEast• Paramount• Penn West• Petromet• Pinnacle• Remington• Rigel• Rio Alto• Sceptre• Stampeder• Summit• Tri-Link• Ulster• Vermilion

Trusts

• Baytex Energy Trust

• Bonavista Energy Trust

• Enerplus Resources

• Espirit Exploration

• Freehold Royalty Trust

• NAL O&G Trust

• Paramount Energy Trust

• Pengrowth Energy Trust

• Petrofund Energy Trust

• Penn West Energy Trust

• Progress Energy

• Ultima Energy Trust

• Vermilion Energy Trust

Befo

re -

19

95

Aft

er

- 2

00

6


Canadian Large E&P• AEC

• Anderson

• Canadian

Natural

• Conwest

• Crestar

• Gulf Canada

• Home Oil

• Husky

• Nexen

• Norcen

• Pan Canadian

• Poco

• Ranger

• Renaissance

• Talisman

• Tarragon

• Wascana

Befo

re -

19

95

Aft

er

- 2

00

6

• Canadian Natural

• Husky

• Nexen

• EnCana

• Talisman

• Imperial

• Shell Canada


0

10

20

30

40

50

60

70

80

90

100

>10

,000

>1,

000

>10

0

>10

Oth

er

# o

f C

om

pa

nie

s

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% o

f T

ota

l Re

se

rve

s

Company Count % of Total Reserves

Distribution of Reserves Top ten companies accounted for 61% of reserves

The 41 largest reserve holders accounted for 92% of reserves The impact of the balance of the industry is limited


GUPR Top 12 Reserve Holders

ROS

E

COP

TOT

PBR

CVX

RDS

PEMEX

BP

PTR

LUK

XOM

0 5,000 10,000 15,000 20,000 25,000

ENI

ConocoPhillips

Total

Petrobras

Rosneft

Chevron

RD Shell

PEMEX

BP

PetroChina

Lukoil

ExxonMobil

Proved Reserves (MMBoe)

Oil

Gas BOE

The 12 largest reserve holders accounted for 68% of GUPR reserves Seven majors, four NOCs, and Lukoil

Top 12 accounted for 68% of reserves


Nigeria

S. Arabia

Iran

Russia

Qatar

Iraq

Abu Dhabi

Kuwait

Libya

Algeria

Malaysia

0 50,000 100,000 150,000 200,000 250,000 300,000

ExxonMobil

Petronas

Sonatrach

NOC

NNPC

KPC

ADNOC

INOC

QPC

Gazprom

NIOC

S. Aramco

Proved Reserves (MMBoe)

Oil

Gas BOE

Proved O&G Reserves (Top 12)

Top 12 GUPR dwarfed by State Companies


-50%

0%

50%

100%

150%

200%E

xx

on

Mo

bil

Lu

ko

il

Pe

tro

Ch

ina

BP

PE

ME

X

RD

Sh

ell

Ch

ev

ron

Ro

sn

eft

Pe

tro

bra

s

To

tal

Co

no

co

Ph

illip

s

EN

IF&

D R

epla

cem

ent

Rat

e (3

-yy.

Avg

.)

Extensions & Discoveries Improved Recovery Revisions

Top 12 - Replacing Reserves

Only two companies replaced reserves with E&D

100%


Oil v. Gas – F&D Replacement

-100%

0%

100%

200%

300%

400%

Ex

xo

nM

ob

il

Lu

ko

il

Pe

tro

Ch

ina

BP

PE

ME

X

RD

Sh

ell

Ch

ev

ron

Ro

sn

eft

Pe

tro

bra

s

To

tal

Co

no

co

Ph

illip

s

EN

I

F&

D R

eser

ve R

epla

cem

ent

Rat

e(%

)

Oil Replacement Rate Gas Replacement Rate

Gas Repl. rate was higher for 10 of 12 companies

100%


-10%

-5%

0%

5%

10%

15%

20%

XOM LUKOY PTR BP PEMEX RDS CVX ROSN PBR TOT COP E

Pro

du

ctio

n G

row

th (

%)

Production Growth (Oil) Production Growth (Gas)

2005 Production Growth, %

320%

Oil production declined for many majors

XOM: ExxonMobil BP: BP plc CVX: Chevron TOT: Total

LUKOY: Lukoil PEMEX: Pemex ROSN: Rosneft COP: ConocoPhillips

PTR: PetroChina RDS: RD Shell PBR: Petrobras E: ENI


Disrupting production forecasts

Kashagan: 1200 MBbl/d

La Ceiba: 55 MBbl/d

West Qurna:

600 MBbl/d

Project Kuwait:

450 MBbl/d

Azadegan: 260

MBbl/d

Atlantis: 200 MBbl/d

Hebron – Ben Nevis:

165 MBbl/d

Thunder Horse: 250 MBbl/d

Bonga: 225

MBbl/d

Cepu: 180

MBbl/d

Political delays

Technical delays

Will an environment with significant ongoing

project delays and supply disruptions be the norm?


Majors’ Investment Patterns Investment patterns shifted last several years with increases in CF

Upstream investment did not increase commensurate with CF

Sporadic acquisition activity

Increasing development spending – significant projects

Flat to limited increases in exploration investments

Companies challenged to deploy incremental CF

Group was slow to respond to higher price expectations

Anticipated access to resources denied, challenged and/or delayed

Portfolios lack significant depth in new ventures

Excess cash directed towards financial alternatives Debt reduced

Consistent increases in dividends

Rapid increases in share repurchases


OXYMORONSJSH Favorites


Industry Returns

E&P Composite, ROACE, Trailing 12-Months

0%

10%

20%

30%

40%

50%

60%

Q4_

2000

Q1_

2001

Q2_

2001

Q3_

2001

Q4_

2001

Q1_

2002

Q2_

2002

Q3_

2002

Q4_

2002

Q1_

2003

Q2_

2003

Q3_

2003

Q4_

2003

Q1_

2004

Q2_

2004

Q3_

2004

Q4_

2004

Q1_

2005

Q2_

2005

Q3_

2005

Q4_

2005

Q1_

2006

0

10

20

30

40

50

60

70

E&P Refining Integrated WTI

Returns improve with higher oil prices


Net Debt to Total Capital for Global Super Majors

-20%

-10%

0%

10%

20%

30%

40%

50%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 6Mo

Total Group TOT RDS COP BP CVX XOM

Paying Down Debt

Underleveraged Balance Sheets –

Blessing or Curse?


Financial Investment Options

Cash Payouts Approach 50% of Capital Outlays

$0

$15

$30

$45

$60

$75

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Divi

dend

s & B

uyba

cks,

$B

0%

15%

30%

45%

60%

75%

Perc

enta

ge o

f Cap

ital I

nves

tmen

t

Buybacks Dividends Both as % of Capital Investment

$120 B in Dividends & Share Repurchases in 2005


Major Oils

(60%)

(30%)

0%

30%

60%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Tot

al S

hare

hold

er R

etur

n

Median (Universe) Companies included:

BP plc

Chevron Corp.

ConocoPhillips

ENI, SpA

Exxon Mobil Corp.

Repsol YPF

Royal Dutch Shell plc

Total S.A.

Median (Major Oils)

Copyright 2006 © John S. Herold, Inc.

Source: John S. Herold, Inc.

Shareholder Return for Majors

Major Oils are underperforming the sector


Market Demands are Ever Changing


0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Total Bitumen Production

Borealis ECA

Christina Lake ECA

Foster Creek Total ECA

Orion EOR at Hilda Lake Blackrock Ventures

Northern Lights Synenco60% SNP (40%)

MacKay River PCA

Fort Hills PCA (55%)/UTS Teck

Joslyn Project Total Total 84% Enerplus 16%

JackFish DVN

Surmont COP (50%)/TOT(50%)

Long Lake Project Total NXY 50% OPC 50%

Total AOSP SHC60%/WTO20%/CVX20%

Horizon Project Total CNQ

Sunrise Thermal HSE

Tucker Thermal HSE

Kearl Lake Total IMO (70%)/XOM(30%)

Cold Lake Total IMO 100%

Suncor Total SU

Syncrude Total COS 35%IMO 25% PCA 12% NXY 7.2%

Investment in Oil SandsAnnounced projects approaching 3.5 MMBbl/d


A chart estimating ownership of gas input and marketing rights associated with LNG production

*Tonnages may include production sharing contract volumes, which are credited to the account of the national oil company

Source John S Herold estimates

2005 20062007 2008 2009 2010Marathon

Repsol

Chevron Texaco

NWS Australia LNG

Snohvit LNGConocoPhillipsBG Group

ENITotal SA

BPExxon Mobil

Shell

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Mil

lion

s of

Ton

nes

Year Production Growth2005 152 MTonnes2010 293 MTonnes + 14%2015 391MTonnes + 6%2020 500MTonnes + 5%

Implied LNG Contracts

LNG Consumption grows at 0.6MM Boe/yr 05-2010

Investment in LNG


Investment in U. S. Natural Gas

Significant investment needed to offset declines


Investment in Exploration

More Exploration is Needed

0

10

20

30

40

1998 1999 2000 2001 2002 2003 2004 2005

Expl

orat

ion

Spen

ding

, $B

0%

5%

10%

15%

20%

25%

30%

Perc

ent

of T

otal

Exploration Spending % of Total Outlays

More Exploration is Needed…..


Worldwide Rig Count

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Jan

-97

May

-97

Sep

-97

Jan

-98

May

-98

Sep

-98

Jan

-99

May

-99

Sep

-99

Jan

-00

May

-00

Sep

-00

Jan

-01

May

-01

Sep

-01

Jan

-02

May

-02

Sep

-02

Jan

-03

May

-03

Sep

-03

Jan

-04

May

-04

Sep

-04

Jan

-05

May

-05

Sep

-05

Jan

-06

May

-06

Sep

-06

USA Canada International

But drillers are operating at full capacity

Capacity


$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

2000 2001 2002 2003 2004 2005

Indian NOCs Asian NOCs Africa & Middle East NOCs

South & Central America NOCs European NOCs Chinese NOCs

China/Rosneft $6 Billion VPP

CNOOC/Unocal $22 Billion Bid

CNPC/ PetroKazakhstan

Norsk/Spinnaker

Statoil/EnCana Deepwater GOM

CNPC-Sinopec/ EnCana Ecuador

PTTEP/Pogo Thailand

Emerging Competitors - NOCs

NOCs are investing heavily outside of borders to access supply - emphasis placed on securing oil production – primarily through M&A -

but is investment increasing worldwide supplyor

simply transferring ownership of assets


When Good News is Bad News


The Lower Tertiary Play


Price Expectations

NYMEX GAS FUTURE STRIP PRICE EXPECTATIONS

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

$11.00

$12.00

$13.00

$14.00

$15.00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

$/M

btu

9/30/02 9/30/03 9/30/04

9/30/05 9/29/06

2005

2006

2004

2003

2002


Oil Prices Fall off the Cliff

WTI Cushing Spot vs. 18-Month Strip

$0

$10

$20

$30

$40

$50

$60

$70

$80

Jan

-01

Jul-

01

Jan

-02

Jul-

02

Jan

-03

Jul-

03

Jan

-04

Jul-

04

Jan

-05

Jul-

05

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

$/B

oe

WTI Cushing

J un'06

Dec'05

Sept'05

J un'05

Mar'05

Dec'03

J un'04

Mar'03

Mar'04

Dec'04

J un'03 Sept'03

Sept'04

Sept'06

Mar'06


Going Forward Forecasts may naively assume that motivated capital is

going to be effectively and efficiently deployed to maintain or increase oil production




Forces disrupting capital flow will continue unabated – with volatility being the norm, and calm and certainty being the exception – a downward price air pocket




Forces disrupting capital flow will continue unabated – with volatility being the norm, and calm and certainty being the exception – a downward price spike

IOCs operating in free markets are critical to fully exploit the remaining resources






The number of independent companies sufficiently motivated by stakeholders to increase oil production and supply is shrinking






The number of independent companies sufficiently motivated by stakeholders to increase oil production and supply is shrinking

Mitigating peak oil may be more difficult than envisioned


With Alternate Energy It’s a Supply Side Issue


J.S. Herold Alternative Energy Scenarios

Natio

nalistic &

Reac

tion

ary

Active MotivatedExpanding Visionary

Fitful IndifferentContracting Shortsighted

Second Wind

Technology Society

Economy Politics

$

Ener

gy P

rice

s

Historic Highs

Historic Lows

Active MotivatedExpanding VisionaryActive MotivatedExpanding Visionary

Fitful IndifferentContracting ShortsightedFitful IndifferentContracting Shortsighted

Second Wind

Technology Society

Economy Politics

$

Ener

gy P

rice

s

Historic Highs

Historic Lows

Technology

SocietyEconomy

Politics

Slow Lane

Ener

gy P

rice

s



$

Historic Highs

Historic Lows

Technology

SocietyEconomy

Politics

Slow Lane

Ener

gy P

rice

s



$

Historic Highs

Historic Lows



Mother of Invention

Technology Society

Economy Politics$

Ener

gy P

rice

s

Historic Highs

Historic Lows



Mother of Invention

Technology Society

Economy Politics$

Ener

gy P

rice

s

Historic Highs

Historic Lows



Wild Ride

Technology

Society

Economy

Politics

$

Ener

gy P

rice

s

Historic Highs

Historic Lows



Wild Ride

Technology

Society

Economy

Politics

$

Ener

gy P

rice

s

Historic Highs

Historic Lows

Fundam

entals &

Geopolitics

Governmental Energy Policies

Fundam

entals &

Geopolitics

Governmental Energy Policies

Restrictive on Margin

Glo

bal F

ocu

s & M

arket D

riven

Abundant Accessibility


Historical Ethanol Production

Largely concentrated in Appalachian Locations

Uncle Jesse: an environmentalist

and a conservationist well before his

time

(and now conducting activities subsidized by the U.S. Government)


Ethanol Production = Enhanced Performance


Significant Technological Advancements

NowThen60 gallon San Luis Still Complete = $5,995.00

~60 gallon Bailing Wire & Barrel Still Complete ~= $5.95


John S. Herold, Inc.

60 Years of Independent

Energy Research

Employee Owned Independent

Norwalk, CT

Houston, TX

Industry Insights from Independent Thinking

Clean Data – Creative Minds

70 Professionals

IPAA/TIPRO – November 8, 2006Copyright © 2006 John S. Herold, Inc.1 John S. Herold, Inc....

Documents

Transcript of IPAA/TIPRO – November 8, 2006Copyright © 2006 John S. Herold, Inc.1 John S. Herold, Inc....