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GLOBAL ENERGY TRENDS

GLOBAL ENERGY TRENDS. Art Smith, PHD. Theories of Exhaustive Resources. Thomas Robert Malthus 1766-1833. M. King Hubbert 1903-1989. Malthusian Theory. An Essay on the Principle of Population

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GLOBAL ENERGY TRENDS

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  1. GLOBAL ENERGY TRENDS Art Smith, PHD

  2. Theories of Exhaustive Resources Thomas Robert Malthus 1766-1833 M. King Hubbert 1903-1989

  3. Malthusian Theory • An Essay on the Principle of Population • observed that sooner or later population will be checked by famine and disease, leading to what is known as a Malthusian catastrophe(Wikipedia) • Subsistence grows linearly, population grows exponentially • 1800 world population was 1 billion • 2014 7 billion • 2100 est 10.85 billion art.smith@agrimarservices.com

  4. Hubbert’s Theory of Peak Oil • Peak oil is the point in time when the maximum rate of petroleum extraction is reached, after which the rate of production is expected to enter terminal decline (Wikipedia) • By late 1990’s it was believed that peak oil & natural gas production in North America (NA) had been reached. • This led to the construction of ~ 11 bcfpd of LNG gasification (import) facilities in NA by 2007 • NA was running out of light sweet crude supplies and thus the major investments in the late 1990’s and early 2000’s by NA refiners in heavy crude ~ coking capacity art.smith@agrimarservices.com

  5. Innovation in Markets the past 40 years • 1974 Arab Embargo: THE START • 1978 NYMEX Heating Oil Futures • 1981 IPE Gas Oil Futures • 1982 NYMEX Leaded Gasoline Futures • 1983 NYMEX WTI Crude Futures • 1986 NYMEX WTI Crude Options • 1988 ICE Brent Futures • 1989 First discussion on allowing swap transactions art.smith@agrimarservices.com

  6. Innovation in Markets the past 40 years • 1991 NYMEX Henry Hub Natural Gas Futures • 1992 Swaps approved by Government regulators • 1994 J.P. Morgan’s 4:15 report, first published firm wide Value-at-Risk (VAR) report, aka “Rise of the Quant” • 1997 IPE National Balancing Point Natural Gas Futures • 2000 Commodity Exchange Modernization Act – allowed for the clearing of standardized OTC energy contracts • 2005 Energy Policy Act of 2005 aka Renewable Fuel Standards • 2008 CME purchases NYMEX; all markets, all the time electronic • TODAY there is in excess of 2000 cleared OTC standardized contracts

  7. Viability of existing futures markets as notional value drivers • Discussion that WTI & Henry Hub futures contracts have lost or will lose their relevancy for worldwide hydrocarbon pricing. 1). These two markets are “classic” Terminal Markets (physical delivery) 2). Basis changes over time, both in the short run and long run 3). These markets have deep liquidity across their respective forward curves, are transparent, backed by a clearinghouse. Anyone with the financial means can trade in these markets: 4). Formula-pricing legacy: forward contracts in petroleum and natural gas are settlement formulas that have these futures contracts engrained as the notional price driver

  8. NA Crude Supply Solutions circa 2000 ANS Cushing IMPORTS IMPORTS IMPORTS

  9. Projection of US Crude Production 2014-2040 MMbpd EIA 2014 Outlook

  10. Brent – WTI Spread Weekly Continuation Sept 2010 – October 2014 Pre 2011 Normal Range CQG

  11. Projections of US Imports of Crude 2014-2040 % EIA 2014 Outlook

  12. Projected Disposition of US Refined Products 2014-2040 MMbpd EIA 2014 Outlook

  13. NA Crude Supply Solutions circa 2018 ANS CAN EXPORT CAN EXPORT WB GOM to EC Imports GOM EXPORTS Crude & Products RAIL

  14. NA Nat Gas Supply Solutions circa 2000 Alaska/Beaufort Alberta E. Canada Onshore West LNG LNG DW GOM

  15. Projected US Natural Gas Production 2014-2040 TCF/yr EIA 2014 Outlook

  16. Projection US Imports (+) of Natural Gas 2014-2040 TCF/yr EIA 2014 Outlook

  17. NA Nat Gas Supply Solutions circa 2018 LNG Marcellus Export LNG

  18. Market Cycles High Differentials Increasing Supply and Demand Build Infrastructure (Pipelines, Barges, Rail, etc) Low Differentials Kevin Bass, BP 2001

  19. A Bit of Economic Jargon • The cure for high prices (spreads) is high prices • Demand Destruction • Substitutes • Increased production or investment • The cure for low prices (spreads) is low prices • Increased Demand • Decreased production or investment

  20. NYMEX WTI/Henry Hub NG…..Monthly Continuation 1993-October 2014 Pre- 2009 Normal Range CQG

  21. art.smith@agrimarservices.com Argus - CME

  22. Argus - CME art.smith@agrimarservices.com

  23. Energy Demand • Energy Elasticity (EE) – The percentage change in energy consumption vis-à-vis percentage in GDP • Developing countries have an EE greater than 1 • Developed countries (OECD) tend to have an EE less than 1 • Increased demand from Petroleum and Natural Gas will be driven by the developing countries • Over the next 15 years crude demand is estimated to increase by 20% or 16-17 MMbpd art.smith@agrimarservices.com

  24. art.smith@agrimarservices.com American Petroleum Institute

  25. theenergycollective art.smith@agrimarservices.com

  26. Mean Reversion: Defining the Forward Curve art.smith@agrimarservices.com

  27. Global Energy Trends • Crude & Nat Gas Production Technology Renaissance - A worldwide phenomena? - How long does Innovation put off Peak Oil reality? • Worldwide GDP Growth - Sustainable or cyclical? • Environmental Regulations • Transparent & Liquid Markets - Best in Class Enterprise Risk Management Systems (Market, Credit & Operation) are required art.smith@agrimarservices.com

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