U.S. Energy Market Trends for 2006Living in a High Priced Environment
Presented toCFA Society of OklahomaOklahoma City and Tulsa, OK
December 7 , 2005
Peter FasulloEn*Vantage, Inc
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Who is En*Vantage, Inc.?
• Located in Houston, Texas, En*Vantage, Inc. was founded in 1999 to provide strategic, executive management, project development, marketing, trading and risk management advisory services to a wide range of clients and to invest in assets and businesses within the energy.
• En*Vantage is also the managing partner for the San Juan Basin Partnership, which produces over 1.0 million per day of equity coal seam natural gas from reserves located in the New Mexico San Juan Basin.
• Each of the En*Vantage's Principals has senior management experience with Fortune 500 companies. This experience allows us to offer energy companies solutions and services that are grounded from a practical and fundamental standpoint in a time efficient manner.
• Over the course of the past six years we have advised approximately 100 public and private clients on a wide range of energy related topics.
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Today’s Energy Environment
The US is not an island: energy complex is highly integrated and becoming more interdependent around the world.
Energy demand growth is stretching available supplies. “Just in time” approach, while efficient from a capital
perspective, increases vulnerability to supply disruptions. Weather and geopolitical events merely exacerbate a tight
energy environment. High prices exist for all forms of energy, with frequent price
shocks. All of the above will continue to impact energy prices in
2006.
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Preconceived Notions about Oil and Energy in General
Just a few years ago, the U.S. and the world was lulled into
a false sense of security about crude oil availability and the
consequences of unbridled consumption.
Energy efficiency and conservation were a thing of the past. Oil supplies can be found cheaply and efficiently. Oil prices could be held in check, that is supplies could
support demand growth without price consequences.
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The Wake-Up Call has Sounded
Demand for light-premium refined products is growing too fast relative to the world’s available refining capacity.
Little cushion exist for the timely production of light-sweet crudes, like WTI, which produces the highest yields of light-premium products.
Crude oil is not a homogenous or a fungible commodity. Any cushion that might exist in world oil supply is generally a
poorer quality feedstock Upgrading (refining) capacity is insufficient to handle poorer
quality crude oils worldwide. Price is needed to control and impede demand.
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Spare Production Capacity versus Price
WTI Price vs Spare World Production CapacityMonthly Averages from Jan '02 thru Nov '05
R2 = 0.8906
$15
$20
$25
$30
$35
$40
$45
$50
$55
$60
$65
$70
0 250 500 750 1,000 1,250 1,500 1,750 2,000 2,250 2,500 2,750 3,000 3,250 3,500 3,750 4,000 4,250 4,500 4,750 5,000 5,250 5,500 5,750 6,000
Spare Production Capacity (1000 Bbls)
WTI
($/B
bl)
Source: EIA and En*Vantage
OPEC spare capacity is currently 900 MBPD to 1.4 MMBPD
Hurricanes Katrina & Rita temporarily knocked out 100% of World's spare production capacity.
- 2005 World oil demand: 83.5 million bpd.- Annual growth rates of 1.5% to 2.0% possible.- Implies World oil supplies must increase 1.2 to 1.7 million bpd per year.
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Upward Trend in Oil (WTI) Prices is Not Over, Yet
Crude Oil (WTI) Cash Prices7/1/2004 thru 12/2/2005
$32
$36
$40
$44
$48
$52
$56
$60
$64
$68
$72
$ pe
r Bar
rel
$32
$36
$40
$44
$48
$52
$56
$60
$64
$68
$72
Long term support
Most likely trading range in the next 6 months
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How about Natural Gas?
Despite accelerated drilling for natural gas in North America, supply growth has been non-existent for a number of years.
Supply disruptions caused by the hurricanes highlights US vulnerabilities to easily access incremental supplies.
Natural Gas infrastructure is currently putting constraints on managing local supply/demand issues in the U.S.
Natural Gas is trending from a continental commodity to a globally based commodity. US will need to compete for LNG.
Market demand for Gas is being more dominated by the electric generation and residential/commercial sectors.
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Natural gas has become more valuable relative to crude oil, with price spikes more frequent.
Gas to Crude Price Ratio*(Henry Hub Gas to WTI on a BTU Basis)
1/91 thru 11/05
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200% ’91-’94: 56% ’95-’98: 70% ’99-’02: 78% ’03: 103% ’04: 84% '05 YTD: 87%
Winter ‘00/’01
Winter/Spring ’03
"Gas Bubble" Mid '80s to Early '90s
End of "Gas Bubble" Late '90s to Now
"The Emergence of Gas Fired Power Plants"
* Based on 5.8 MM BTU/Bbl
Winter ‘00/’01
Hurricanes
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Against historical norms, current gas inventories are adequate, but winter temps above normal the past 4 yrs.
EIA Natural Gas Storage Survey( For week ending November 25, 2005)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
31-Dec 31-Jan 29-Feb 31-Mar 30-Apr 31-May 30-Jun 31-Jul 31-Aug 30-Sep 31-Oct 30-Nov
5-Year Range5-Year Average200320042005
Storage Injection Season
BCF
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For most of 2005, gas prices closely followed crude. Currently gas prices have detached from crude.
2005 Gas Price Trend and Price Band
$5
$6
$7
$8
$9
$10
$11
$12
$13
$14
$15
$/M
M B
TU
$5
$6
$7
$8
$9
$10
$11
$12
$13
$14
$15Crude Prices $/MM BTU Actual Gas Prices $/ MM BTU85% of Crude Price 75% of Crude Price
Daily Cash Gas Price @ Henry Hub
Crude Price $/MM Btu
75% of Crude Value 85% of Crude Value
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Existing U.S. Natural Gas Regional Pipeline Infrastructure and Gas Flows
Rockies
Gulf of Mexico
North American Gas Flows
Major Pricing PointsExisting LNG FacilitiesPotential LNG Facilities
Rockies
Gulf of Mexico
North American Gas FlowsNorth American Gas Flows
Major Pricing PointsExisting LNG FacilitiesPotential LNG Facilities
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Pipeline infrastructure is not keeping pace with regional gas supply and demand balances.
Gas Basis for the Rockies and Mid-ContinentJan '00 to Nov '05
-$3.50
-$3.00
-$2.50
-$2.00
-$1.50
-$1.00
-$0.50
$0.00
$0.50
$/M
M B
TU
Rockies Gas Basis Mid-Continent Gas Basis
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Summary: Outlook for 2006
See crude prices (WTI) in the $55 to $65 range. Still susceptible to supply disruptions. Prices will need to stay high to control demand
Natural gas prices at Henry Hub are currently overvalued Fear of winter weather and the lack of incremental gas supplies
causing concerns. By mid-year, Gulf of Mexico production affected by the storms
should be back on line just in time for the next hurricane season. See gas to crude price ratio in the 80% to 90% range or about $7.50
to $9.50 at Henry Hub.
Gas basis for Mid-Continent should narrow from current levels, but remain wide against historical norms.