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Oil and Gas 102

Price Drivers Economic Growth

Supply & Demand Surplus Capacity

Value of the $

Futures Market

Hedging Speculating

Production

State & Private Federal

Proved Reserves

Potential Reserves

Refining Capacity

Exports

Domestic Oil & Gas

Energy Policy

De Facto Ban on

Frontier Areas Glacial Permitting

Killing Keystone XLPipeline

EPA War on Carbon Alternative Energy

Subsidization

Green State

Mandates

Speculation

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Refined Products and Crude Oil

Crude Oil The Raw Material

Gasoline Distillates

Jet Fuel

Diesel

Heating oil

Other Refined Products

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Crude Oil Product Linkage

1 barrel = 42 gallons

Crude Oil Price

$/bbl $/gal

70 1.67

80 1.90

90 2.14

100 2.38

110 2.62120 2.86

130 3.10

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Crude Oil, Products Price Relationship

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Gasoline Pricing Algorithm

2.42 101.67

$/Gal

$/Bbl

.46

.25

.43

A $10/bbl Change in Crude Cost

A $.24 /gal Change in Gasoline Price

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Crude Oil

Crude Oil is a global commodity

Easily Transported Pipeline

Ship

Easily Stored at Producing andRefining Centers Existing Infrastructure

Loading/unloading facilities

Tankage, Piping, Pumping

In Summary - Crude moves from Producing toConsuming Countries based on Global Economics

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Crude Oil Shipments Worldwide

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Fact or Fallacy

America is exporting oil

Domestic Oil Production is about

6,000,000 barrels per day America exports about 50,000 barrels per

day or about .8% of its crude oilproduction

True

Misleading

False

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Crude Oil Price Drivers

Global Supply/Demand

Global Surplus Capacity

Value of the Dollar

Futures Market Activities

Hedging

Speculating

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Global Demand

Demand driven by Economic Activity

Energy Facilitates Economic Growth Petroleum is a large measure of our

energy portfolio

Construction DieselManufacturing HFODiesel

Transportation Diesel HFO Gasoline

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Petroleum Demand & Economic Growth

World Liquid Fuels Consumption vs GDP Growth

-1

0

1

2

3

4

5

6

2

0

00

2

0

02

2

0

04

2

0

06

2

0

08

2

0

10

2

0

12

GDPGrowth%

70

72

74

76

78

80

82

84

86

88

90

92

LiquidsCons

.MBP

World GDP %Growth

World Liquids Cons.

MBPD

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Countries Driving Economic Growth

Changes in Real GDP Growth (%)

-5

0

5

10

15

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Year

ChangeinRea

lGDP(

Developing Asia

World

USA

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Global Crude Oil Supply

Global Oil Production about 87 million

barrels per day Non-OPEC producers running atcapacity

OPEC accounts for about 40% of

global production Saudi Arabia produces about 10 million

barrels per day

Saudi Arabia only OPEC country with sparecapacity currently about 2 million barrelsper day

Spare Capacity shrinking over time

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OPEC Production & Spare Capacity

25.79

2.91

29.45

4.65

31.01

2.31

0

5

10

15

20

25

30

35

MillionsBP

Jan 2003 Dec 2010 Dec 2011

OPEC Production and Spare Capacity

Spare Capacity

Production

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Global Supply/Demand Summary

Global Economic Growth yields higher

oil demand Surplus Capacity is shrinking

Oil prices heading

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Domestic Crude Production

Domestic crude oil production peaked

at about 10 MMBPD in 1970 Production in 2011 was 5.7 MMBPD

4.4

4.6

4.8

5

5.2

5.4

5.6

5.8

6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Domestic Crude Production MMBPD

14.6%

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Trends in Petroleum Production

New Fracking technology has lead to

a boom on State and Private lands Higher prices have increased marginal

production

Production of Crude and Condensatefrom Federal lands has declined about13% in 2011

Do mestic P etroleum Produc

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

2003

2004

2005

2006

2007

2008

2009

2010

2011

Quad

rillionBTUs

Federal Lands State & P rivate Lan

Note: Production includes crude oil, condensate, plant liquidsand natural gas

11%

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Domestic Crude Oil Reserves

The U.S. accounts for 2% (22

billion barrels) of the WorldsProven Crude Oil Reserves

Yet this is only the tip of theiceberg 400 Billion BBls of Technically

Recoverable petroleum.

800 Billion BBls of Technically

Recoverable Oil Shale 2.3 Trillion BBls of Undiscoveredresources

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Reserves - Terms of Art

Proved - Reserves already

discovered and being exploited bydrilling

Technically Recoverable

Reserves that can be recoveredusing proven techniques

Undiscovered Reserves

estimated to be present

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Pyramid Of Reserves

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Fact or Fallacy

Oil is scarce. America accounts for only2% of the Worlds Proved Reserves

America has 1.2 trillion barrels ofreserves that can be recovered usingcurrent technology

American has undiscovered reserves ofan additional 2.3 trillion barrels

Note: America uses about 5.5 billion bbls/yr

True

Misleading

False

f

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Domestic Refining

Can process 15 MMbpd of Crude Oil

Runs virtually all domestic production ofabout 6 MMbpd

Imports about 9 MMBPD

Satisfies domestic product demand

Exports the balance Gasoline 480 mbpd

Distillates (including Jet fuel) 957 mbpd

Residual Fuel 431 mbpd

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U.S. Gasoline Supply/Demand balance

Gasoline Exports a relatively new

phenomenon Higher gasoline production

Lower Demand

Domestic Gasoline Refinery Supply and Gasoline Demand

7.00

7.50

8.00

8.50

9.00

9.50

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

MillionsBP

Demand

Supply

U S Di till t S /D B l

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U.S. Distillate Sup/Dem Balance

Distillate Exports a relatively new

phenomenon Higher distillate production

Lower Demand

Domestic Distillate Refinery Supply and Distillate Demand

2.50

3.00

3.50

4.00

4.50

5.00

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

MillionsBP

Demand

Supply

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Fact or Fallacy

America is exporting oil

Domestic refining capacity exceeds

domestic product demand America exports gasoline, distillate and

other refined products

America exports virtually no crude oil

True

Misleading

False

P id t Ob E P li

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President Obamas Energy Policy

De facto ban on leasing federal offshorefrontier areas

Glacial permitting of shallow and deep waterdrilling in the Gulf

Keystone XL pipeline delayed or killed

War on carbon by EPA Alternative energy subsidization

L i F ti A

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Leasing Frontier Areas

1/2009 draft proposal for 2010-2015

31 OCS Lease Sales in the following areas 4 areas off of Alaska

2 areas off the Pacific Coast

3 areas off the Atlantic Coast

3 areas in the Gulf of Mexico

Obamas DOI appointee, delaysimplementation

11/2011 Salazar plan removes all but

already open Gulf Coast area

Gl i l P itti P

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Glacial Permitting Process

4/2010 - Deepwater Horizon disaster

4/2010 -President imposed a 6 monthmoratorium on deepwater drilling

Court battle ensued

Permits

1st deepwater permit issued 2/2011 Shallow water permitting slowed

K t XL Pi li

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Keystone XL Pipeline

Initial permit application in 2008

DOE 2010 assessment XLwould not appreciably increaseGHG emissions

State Dept. EIS reached sameconclusion in 8/2011

President kills project 1/2012

State has not be given enough timeto gather the facts and protect theAmerican people

K t XL Pi li

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Keystone XL Pipeline

150,000 miles of crude and

products pipelines in the U.S. Hundreds of miles of pipelines

already crisscross the Ogallalaaquifer

Do any of these pipelines cross aquifers?Didnt State or the Administration know aboutthe aquifer or the pipelines crossing it?

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Alternative Energy Dj Vu

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Alternative Energy Dj Vu

Subsidization of commercial

alternative energy projects hasnever worked

1980 - Carters SFC program

earmarked $88 billion None of the projects produced adrop of sustained production

1986 - Program was killed.

Taxpayers lost $1 billion

Alternative Energy is the Energy

of the Future and always will be.

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Fact or Fallacy

The Administration is pursuing an

All of the Above Energy Strategy

Production on Federal lands is declining

Permitting has slowed

EPA is regulating carbon emissions

Administration is pushing uneconomic

green energy projects

True

Misleading

False

Renewable Portfolio Standards

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Renewable Portfolio Standards

Renewable Portfolio Standards (RPS)

State Law Enacted in 29 States Each States law different

Requires utilities to deliver Minimum specified of Renewable energy

each year

In most cases the ultimate goal of 20 -33%renewable energy is phased in over 15 years

RPS Oregon

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RPS - Oregon

Renewable Fuels exclude largehydroelectric facilities

Standards apply to all utilities Large utilities (3% or more of Oregons electric)

schedule shown below

Smaller utilities are subject to lower standards

Years % Renewable

2011-2014 5

2015-2019 15

2020-2024 20

2025 25

RPS Why Should I Care?

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RPS Why Should I Care?

Cost - Renewable electricity is 2-3

times more expensive RPS subsidies and grants are

funded by taxpayers

RPS force uneconomic electricityinto the system Utilities roll in high cost renewables

into their rate base

Ratepayers are on the hook PPA contracts run for 20-25 years

Residencies & Businesses pay more

RPS How Much More Will I Pay?

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RPS How Much More Will I Pay?

Beacon Hill Institute and CascadePolicy Institute Study RPS will cost ratepayers 1.73 2.76

Cents/KWH more by 2025

Manhattan Institute Study Compared rates in 7 similar RPS and non-

RPS states In 2001 RPS States had rates 10.91% higherthan non-RPS States

In 2010 RPS States had rates 37.56% higherthan non-RPS States

Actual RPS Projects Electricity Cost 15-20 C/kwh

Douglas County Rates are about 8 C/KWH

That would be an increase of 22-35%

Math 25%@17 c/kwh + 75%@ 8 c/kwh = 10.25 c/kwh

An Increase of 28%

RPS Examples Cape Wind

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RPS Examples Cape Wind

Project Scope Massachusetts offshore wind farm

$6 Billion 468 megawatts 130 wind turbines 25 Square miles

Subsidies from Taxpayers Federal Production Tax Credit $337 million State Green Credits $1.7 BillionAccelerated Depreciation PV $67 million

Ratepayer Ripoff PPA specifies 20 C/kwh for 25 years Rate escalations built into the PPA

RPS Examples Topaz

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RPS Examples Topaz

Project Scope

California Solar PV (solar panels)farm

$2.0 2.4 Billion

550 megawatts

3,500-4,200 Acres

Subsidies from Taxpayers 30% cash grant from Treasury

Ratepayer Ripoff PPA specifies 15 C/kwh for 25 years

Rate escalations built into the PPA

RPS Examples Topaz

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Project Developed by First Solar

EIS Completed and Approved byDOE

25 year PPA with PG&E

Construction began 11/2011

RPS Examples - Topaz

Buffets MidAmerica Energy

Purchases rights to build Topaz fromFirst Solar

MidAmerica contracts First Solar to: Supply Solar Panels

Construct the Project

RPS Examples Topaz

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RPS Examples Topaz

Buffets Project Economics

Topaz Economic Summary

IRR % 10.66

NPV @ 8% $236 Million

Payout 6.4 Years

Almost no risk

Permits approvedTurn key E&C Contract

O&M Contract

PPA 25 years

Speculation in the Oil Markets

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Speculation in the Oil Markets

Factors impacting oil prices in

order of importance Supply/demand balance coupledwith spare capacity of the producers

Feds weak dollar policies have

fueled the prices of all commoditiesincluding oil.

Commercial participants hedgingpractices in tight markets tend to

push prices upward Speculation in the oil markets does

have a modest impact on prices

Speculation - Dueling Models

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Recent Studies done by:

CFTC James Baker Institute for Public

Policy

St. Louis Fed All concluded that S&D is the most

important factor driving price


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CFTCs model concluded no

impact from speculators James Baker Institute for Public

Policy concluded that the value of

the dollar correlates very well withoil price

St. Louis Fed concluded that

Speculation contributes to about15% of the Oil price

Speculation - Cutting Through the Bull

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Speculation - Cutting Through the Bull

Fed has a vested interest in deflecting

blame for commodity inflation

Rational Energy Policy

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Rational Energy Policy

Allow access to Frontier Areas Expedite Permitting

Congressional Oversight of regulations over$100 million

Develop Domestic Resources Oil & Gas Coal

Nuclear Stop Subsidizing favored forms of Energy

Uneconomic Green Projects Ethanol Farm

Eliminate all production subsidies Lower Corporate tax rates and eliminate loopholes Fund only Research

Repeal RPS mandates

oil and gas 102

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