Natural Gas & Crude Oil: supply/demand & prices outlook to 2015

1. Natural Gas & Crude Oil:supply/demand & pricesoutlook to 2015 knowledge to bridge the gap February 2009

2. Waiver of Liability • Petral Consulting Company (PCC) is not liable for any use or misuse of the contents of this presentation • PCC provides no express or implied warranty regarding the accuracy of the information contained in this segment of the presentation. • PCC does not advocate trading strategies, feedstock acquisition strategies, or feedstock marketing strategies. Any actions taken by attendees to the ISM Feb 2009 meeting based on this presentation are at your own risk. Petral Consulting Company knowledge to bridge the gap

3. Sir, where should we look for oil? question posed by young geologist • Oil is found within the minds of men Wallace Pratt -- chief geologist for Esso Petral forecasts account for technology improvements in seismic, exploration, and production … we are not members of the peak oil club Petral Consulting Company knowledge to bridge the gap

4. HISTORICAL FACTOID • an official Senate inquiry concluded in 1916 that U.S. crude oil production had already passed its peak and would be exhausted by 1941 – • U.S. production in 1916 averaged 824 thousand bpd • production increased for 55 years to a peak of 9.6 million bpd Petral Consulting Company knowledge to bridge the gap

5. most other consulting firms nothing goes right – pessimists are right and gas production IS declining in spite of premium prices – merchant power producers expand capacity continuously gas inventories do not grow in spite of repeated price spikes Petral View higher prices stimulate exploration & production grows higher prices discourage demand growth in power generation & industrial markets higher prices encourage LNG production; imports increase, gas inventories reach higher levels & ease fears during winter months Natural Gas Supply/Demand & Price Outlookwhat do you believe? Petral Consulting Company knowledge to bridge the gap

6. U.S. Natural Gas Reserveshistorical trends & 2008 forecast • When gas prices increased to levels that supported more aggressive exploration activity (Dec 2000/Jan 2001), exploration companies immediately recorded increases in producing reserves • In 2007, proven reserves increased in all regions by 8-10% except the Rocky Mountains which recorded a 25% increase • Exploration companies perfected shale reservoir technology & shale plays popped up all over Petral Consulting Company knowledge to bridge the gap

7. Growth in Natural Gas Reserves:new fields, new reservoirs, & extensions(lower 48 only) Petral Consulting Company knowledge to bridge the gap

8. U.S. Natural Gas R/P Ratiohistorical trends • For 12 years, the ratio of reserves to production was relatively flat at 8.5-9.0 years • As the jump in exploration activity began to pay off, the R/P ratio began to increase because … • reserves additions outpaced the industry’s capability to construct new natural gas gathering system pipelines to bring discoveries to the market Petral Consulting Company knowledge to bridge the gap

9. U.S. Natural Gas Productionhistorical trends & 2008 forecast • Even though exploration activity was at “maintenance” during 1985-1999, total natural gas production in the U.S increased to 58 bcfd in 2001 • The exodus of offshore drilling rigs from the shallow water Gulf of Mexico led to a steady decline in GOM production during 2002-2006 -- hurricane Katrina also caused extensive supply disruption for several months • As production from new discoveries began to kick in, total production increased to about 60 bcfd in 2008 Petral Consulting Company knowledge to bridge the gap

10. U.S. Natural Gas Demand2008 forecast & comparison vs 2005 • 2008 forecast for power generation demand is higher than 2005 forecast • supply growth exceeded expectations & pricing incentives supported stronger demand growth • 2008 forecasts for demand in the industrial & residential/commercial sectors are nearly unchanged Petral Consulting Company knowledge to bridge the gap

11. U.S. Natural Gas Demandelectric power generation market • Demand in the power generation market is sensitive to relative price strength • residual fuel oil is the alternative fuel supply of choice for power plants with dual fuel capability • demand response to price spikes is nearly instantaneous Petral Consulting Company knowledge to bridge the gap

12. Balanced or Tight Supply Producers flow wells at full rates year-round Buyers worry that inventories will not reach levels that will cover peak winter demand Colder winters strain the capability to withdraw supply from storage fast enough Adequate to Plentiful Supply Some producers have to curtail production during the late summer & early fall Full production rates push inventories to storage capacity; some storage operators have containment problems Inventories are sufficient to meet demand even during colder winters Important Natural Gas Price Drivers Petral Consulting Company knowledge to bridge the gap

13. Natural Gas PricingHouston Ship Channel minus 1% S resid • Market balance was tight during 2000-2005 & prices maintained premiums versus 1%S resid • Supply growth began to outstrip demand growth in 2007 & prices weakened with persistent discounts versus 1%S resid • Prices are forecast to remain discounted versus resid through 2015 Petral Consulting Company knowledge to bridge the gap

14. Natural Gas PricingHouston Ship Channel price forecasts Petral Consulting Company knowledge to bridge the gap

15. Crude Oil Demand/Supply & Pricing Petral Consulting Company knowledge to bridge the gap

16. Global Crude Oil Demandwhat happens when prices spike? • Before 1978, oil prices were generally $12-15 per barrel. • After the Iranian Revolution, prices spiked to $45 per barrel • Before the price spike, global oil demand growth averaged 2.6% per year or 1.65-1.75 million bpd • As prices moved sharply higher, demand began to decline in 1980 and fell by a total of 8 million bpd (1980-1983) • Equally important, high prices sparked a global surge in exploration & discovery Petral Consulting Company knowledge to bridge the gap

17. Global Crude Oil Supplywhat happens when prices spike? • As crude oil prices moved sharply higher after the Iranian revolution, exploration activity surged & non-OPEC producers made major discoveries all over the world -- North Sea, Mexico, Alaska • Non-OPEC production increased by 12 million bpd during 1975-1985 – growth in non-OPEC production was the bane of OPEC’s existence during 1985-1999 Petral Consulting Company knowledge to bridge the gap

18. Global Crude Oil Supplywhat happens when prices spike? • Non-OPEC producers flow at full capacity all the time • During this period of declining demand, OPEC producers bore the full brunt of both falling demand and rising non-OPEC supply • OPEC producers had more than 10 million bpd of spare capacity by 1985 • Saudi Arabia saw its production fall to a low of 3.4 million bpd in 1985 or more than 6 million bpd less than in 1979 – the Saudi royal family learned some very hard lessons during 1979-1985 Petral Consulting Company knowledge to bridge the gap

19. Global Crude Oil Demandwhat happens when prices spike? • Crude oil demand in the OECD countries (the mature economies of North America, Western Europe, Japan & S Korea) began to decline when prices began to accelerate after 2004 • Government intervention becomes virtually certain as consumers complain about rising prices • U.S. mandates for boosting the average automobile fuel efficiency to 35 mpg by 2020 were in place prior to the election • Demand in OECD countries will continue to decline for several years Petral Consulting Company knowledge to bridge the gap

20. Global Crude Oil Supplywhat happens when prices spike ? • Before 2005, four countries in the Middle East had measureable spare production capacity; no one country had control • During 2005-2007, only Saudi Arabia had spare capacity & exercised control • Does the Saudi royal family remembers the lessons of 1978-1985? • Saudi Arabia increased production capacity to 11.5 mmbpd during 2007-2008 & Kuwait added 0.5 mm bpd of capacity in 2008 Petral Consulting Company knowledge to bridge the gap

21. Global Crude Oil Supplynon-OPEC production trends • Production from non-OPEC sources increased steadily during 1995-2005 but production growth began to accelerate after 2006 -- in response to high prices • U.S. production is forecast to increase by 0.5-1.0 mm bpd during 2010-2015 -- after 25 years of decline • Canadian production is forecast to grow by 0.75-1.0 mm bpd -- not as fast as expected in 2007 but production will continue to grow Petral Consulting Company knowledge to bridge the gap

22. Crude Oil Prices1986 to 1999 déjà vu? OR a more complex world? • the recession: how deep, how long, how widespread & how much impact on crude oil demand? • government mandates: how fast will auto manufacturers shift to producing hybrids and all-electric vehicles? • falling oil prices: how do they impact development of high cost supply sources like the Alberta oil sands & deepwater offshore reserves? • resurgent Russia and nuclear Iran: will they act together to restrict supply development in the Caspian Sea & Middle East? • Iraq: will Iraq achieve political stability & attract foreign capital needed to boost production to 4 to 5 million bpd by 2020? • Saudi Arabia: increased production capacity to 11.5 million bpd but will produce only 7.5-9.0 million bpd for several years; Saudi royal family will TRY to use surplus production capacity to control prices to its geopolitical advantage Petral Consulting Company knowledge to bridge the gap

23. Petral ChroniclesFantasy Headlines WTI spikes to $45 per bbl – Feb 7, 2004 √ Sep 2004 WTI spikes to $60 per bbl – Aug 7, 2004 √ Aug 2005 PCC -- WTI spikes to $100 per bbl – Feb 7, 2005 Goldman Sachs $105 per bbl – Apr 1, 2005 √ Mar 2008 PCC -- Bull Rally Pushes WTI to $150 per bbl – Nov, 2007 √ July 2008 ($145.91) Petral Consulting Company knowledge to bridge the gap

24. WTI at Cushing: Cash Market Petral Consulting Company knowledge to bridge the gap