The Alliance ‘Meet Alaska 2003’ 20 th Annual Conference A Capital Market Perspective on Alaskan...

The Alliance ‘Meet Alaska 2003’20th Annual Conference

A Capital Market Perspective on Alaskan Energy Issues

Thomas A. Petrie, CFAJanuary 22, 2003

PETRIEPARKMAN & Co.

Commodity Market Environment

U.S. Energy Policy Initiatives

Capital Market Drivers

Alaskan Energy Issues

Conclusions

PETRIE PARKMAN & Co.i

Topics

The Geopolitical Backdrop

• Iraq

• Venezuela

• Saudi Arabia

• OPEC Dynamics 2003-2007

• Russia

• Iran

PETRIE PARKMAN & Co.1

WTI $/Bbl (1989-2003 YTD)

0

100

200

300

400

500

600

700

800

900

<$12

$12-

$14

$14-

$16

$16-

$18

$18-

$20

$20-

$22

$22-

$24

$24-

$26

$26-

$28

$28-

$30

>$30

Price Range

# D

ays



0

5

10

15

20

25

30

1949

1954

1959

1964

1969

1974

1979

1984

1989

1994

1999

2004

E

2009

E

2014

E

2019

E

2024

E

Mill

ion

Ba

rre

ls p

er

da

y

United States Britain and Norway Persian Gulf Nations

Predicted production curve

Results match Hubbert’s prediction

Source: Deffeyes, K.S. (2001), Hubbert’s Peak

World Oil Production – “Hubbert’s Peak”


OPEC Production and Capacity


0

10

20

30

40

50

1975 1980 1985 1990 1995 2000

MM

b/d

Excess Capacity

Production

Henry Hub $/MMBtu (1995-2003 YTD)

0

100

200

300

400

500

600

700

<$1.

00

$1.0

0-$1

.50

$1.5

0-2.

00

$2.0

0-$2

.50

$2.5

0-$3

.00

$3.0

0-$3

.50

$3.5

0-$4

.00

$4.0

0-$4

.50

$4.5

0-$5

.00

>$5.

00

Price Range

# D

ay

s




U.S. Gas Rig Count vs. 12- Month Gas Strip

Week Ending 1/17/03

300

400

500

600

700

800

900

1,000

1,100

01/0

3/97

03/1

4/97

05/2

3/97

08/0

1/97

10/1

0/97

12/1

9/97

02/2

7/98

05/0

8/98

07/1

7/98

09/2

5/98

12/0

4/98

02/1

2/99

04/2

3/99

07/0

2/99

09/1

0/99

11/1

9/99

01/2

8/00

04/0

7/00

06/1

6/00

08/2

5/00

11/0

3/00

01/1

2/01

03/2

3/01

06/0

1/01

08/1

0/01

10/1

9/01

12/2

8/01

03/0

8/02

05/1

7/02

07/2

6/02

10/0

4/02

12/1

3/02

U.S

. G

as R

ig C

ount

$1.75

$2.75

$3.75

$4.75

$5.75

$6.75

Gas

Str

ip (

$/M

cfe)

Gas Rigs Gas Strip

Lower – 48 Resource Pyramid (Technically Recoverable)

Cum Production 881

Reserves- 157

New Fields- 633

Reserve Appreciation-305

Tight Gas 230Coalbed Methane 74Shale 52 356 Tcf

Unassessed Portion of Coalbed Methane, Shale and Tight Gas (300-500?)

Geopressured Brine – Up to 24,000 Gas in Place

Gas Hydrates- Up to 300,000 Gas in Place

In general, movement down the pyramid involves decreasing concentration

… increasing development costs, increasing technology needs, and increasing uncertainty

> 50% of new fields

(in Tcf)


U.S. Energy Policy

• Alaska Initiatives Are Likely

• Gas Development Initiatives Likely

• LNG to Have a Role?

• Conservation and Alternative Supply Measures Will Probably be Required to Achieve Actual Passage of an Energy Bill


The Longer Term North American Gas Supply Solution


North Slope Gas

Mackenzie D

elta Gas

North S

lope

LNG

?

LNG to U.S. West Coast ?

LNG from Asia

BajaLake

Charles

Elba Island

Cove Point

Everett

?

LNG

LNG

LNG

LNG

Capital Markets Drivers- Post Enron & the Iraqi Confrontation

• Global Economic Malaise

• Partisan Politics Reigns – 2004 Presidential Campaign is Underway

• Unsettled Regulatory Framework

• Continuing Trend of Corporate Consolidation

• Impaired Capital Formation


Industry Consolidation Trends

• Conventional resource maturity is a looming reality

• Production shortfalls are causing majors to undertake significant shifts in their upstream strategies (i.e., focus on ROCE versus production

growth)

• BP / Apache transaction provides the “green light” for additional divestitures by other majors; regional buyers’ markets may develop

• E&P property divestitures and geographic portfolio realignments likely to accelerate over the 2003-2005 period

• For the foreseeable future, the independent sector will be characterized by continuing corporate consolidations alongside noteworthy property acquisition transactions


North Slope Reconfiguration


Mid – ‘90’s Players New Millennium Players

British Petroleum

ARCO

Exxon

Mobil

Amerada Hess

Phillips

Unocal

Chevron

Amoco

Oxy

BP

ConocoPhillips

ExxonMobil

Anadarko

Pioneer

Armstrong

Burlington

EnCana

TotalFinaElf

Unocal

ChevronTexaco

• A “crisis of confidence” continues to impact many if not most investment decisions

• Extreme sensitivity to corporate governance and management compensation at a time of rapid and unpredictable change in rules and procedures

• Commodity prices ( particularly oil ) are perceived as more likely to fall than rise, engendering concern about a related decline in energy equity values

• Investors in recent new issues have not been particularly rewarded for the incremental risk

• Reacting to the meltdown in the merchant power and pipeline businesses, rating agencies and lenders are behaving much more conservatively

• A wide gap in the perception of value exists between company management and investors

Why Capital Formation Is Impaired


Alaskan Energy Issues

• NPRA

• ANWR

• North Slope Gas Development

• Emerging Role for Independents?


ANWR

• Highly Politicized ( “Environmental Poster Child” )

• Meritorious Arguments Lack Lower 48 Traction

• Exploitation Time Frame Well Beyond Attention Span of Capital Market Decision Makers

• Perception of Preferable Alternatives

• Significant Congressional Action Unlikely ( Pre 2004 Election ) Absent a Major Supply Crisis


North Slope Gas Development

• Stage Set by a Looming Lower- 48 Supply / Concerns

• Pipeline vs LNG Options?

• Possible Bi-Partisan Political Support for the Pipeline Option (at a Price)

• LNG Competitiveness vis a vis Pacific Basin Sources?

• Canadian Gas Development Issues

• Gas Pipeline Financing Incentives / (Wellhead Price Protection?)

• Capital Availability


Conclusions

• The Petroleum sector is on the threshold of the most challenging operating environment seen since the 1970’s

• Oil and gas companies need to be able to operate in and cope with a wide range of commodity price scenarios

• Restoration of reliable North American gas supply will require timely execution of an Alaskan gas pipeline complemented by significant LNG projects

• Capital markets are only now beginning to focus on the looming challenges facing the petroleum sector

• Alaskan petroleum supply competitiveness faces noteworthy global pressures


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