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Operating In The New Natural Gas Bubble… Financial Planning In Low Volatility Crude Oil Currency

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Operating In The New Natural Gas Bubble Financial Planning In Low Volatility Crude Oil Currency October 2010 DrD * War With Iraq/Oil Prices * * Everett and Elba ... – PowerPoint PPT presentation

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Title: Operating In The New Natural Gas Bubble… Financial Planning In Low Volatility Crude Oil Currency


1
Operating In The New Natural Gas
BubbleFinancial Planning In Low
VolatilityCrude Oil Currency
October 2010
DrD
2
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE
SAFE HARBOR PROVISIONSOF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The following presentation includes
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities
Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors
created thereby. You can identify our
forward-looking statements by words such as
anticipates, expects, intends, plans,
projects, believes, estimates, and similar
expressions. Forward-looking statements relating
to ConocoPhillips operations are based on
managements expectations, estimates and
projections about ConocoPhillips and the
petroleum industry in general on the date these
presentations were given. These statements are
not guarantees of future performance and involve
certain risks, uncertainties and assumptions that
are difficult to predict. Further, certain
forward-looking statements are based upon
assumptions as to future events that may not
prove to be accurate. Therefore, actual outcomes
and results may differ materially from what is
expressed or forecast in such forward-looking
statements. Factors that could cause actual
results or events to differ materially include,
but are not limited to, crude oil and natural gas
prices refining and marketing margins potential
failure to achieve, and potential delays in
achieving expected reserves or production levels
from existing and future oil and gas development
projects due to operating hazards, drilling
risks, and the inherent uncertainties in
interpreting engineering data relating to
underground accumulations of oil and gas
unsuccessful exploratory drilling activities
lack of exploration success potential disruption
or unexpected technical difficulties in
developing new products and manufacturing
processes potential failure of new products to
achieve acceptance in the market unexpected cost
increases or technical difficulties in
constructing or modifying company manufacturing
or refining facilities unexpected difficulties
in manufacturing, transporting or refining
synthetic crude oil international monetary
conditions and exchange controls potential
liability for remedial actions under existing or
future environmental regulations potential
liability resulting from pending or future
litigation general domestic and international
economic and political conditions, as well as
changes in tax and other laws applicable to
ConocoPhillips business limited access to
capital or significantly higher cost of capital
related to illiquidity or uncertainty in the
domestic or international financial markets.
Other factors that could cause actual results to
differ materially from those described in the
forward-looking statements include other
economic, business, competitive and/or regulatory
factors affecting ConocoPhillips business
generally as set forth in ConocoPhillips filings
with the Securities and Exchange Commission
(SEC), including our Form 10-K for the year
ending December 31, 2008. ConocoPhillips is
under no obligation (and expressly disclaims any
such obligation) to update or alter its
forward-looking statements, whether as a result
of new information, future events or
otherwise. Cautionary Note to U.S. Investors
The U.S. Securities and Exchange Commission
permits oil and gas companies, in their filings
with the SEC, to disclose only proved reserves
that a company has demonstrated by actual
production or conclusive formation tests to be
economically and legally producible under
existing economic and operating conditions. We
may use certain terms in this presentation such
as oil/gas resources, Syncrude, and/or
Society of Petroleum Engineers (SPE) proved
reserves that the SECs guidelines strictly
prohibit us from including in filings with the
SEC. U.S. investors are urged to consider
closely the oil and gas disclosures in our Form
10-K for the year ended December 31, 2008.
3
Were Living In A Black Swan
...or are we?
4
The Wall Street Bombing 1920 1201 p.m. on
September 16, 1920, in the Financial District of
New York City. Thirty-eight were killed and 400
people were injured by the blast.A horse-drawn
wagon passed by lunchtime crowds. The wagon then
stopped across the street from the headquarters
of the J.P. Morgan bank one of the financial
districts busiest corners. Inside, 100 pounds
of dynamite with 500 pounds of heavy, cast-iron
sash weights exploded in a timer-set detonation,
sending the slugs tearing through the air. The
horse and wagon were blasted into small
fragments.
  • A small group if Italian Anarchists were
    suspected but were never charged due to lack of
    evidence. Their motive was revenge for the
    deportation and jailing of some of their group.
  • The bombing caused renewed investigation into the
    activities and movement of foreign radicals,
    stimulating the development of the U.S. Justice
    Departments General Intelligence Division of the
    Bureau of Investigation (forerunner of the FBI).

5
October 29 1929 Decatur Evening Herald
6
The Great Depression1929-1933
  • Production at factories, mines, and utilities
    fell by more than 50.
  • Real disposable income fell by 28.
  • Stocks dropped to a tenth of their pre-depression
    levels.
  • The number of unemployed rose from 1.6 million in
    1929 to 12.8 million by 1933.
  • 1 of every 4 workers were unemployed
  • People were left with the feeling that massive
    economic contractions could occur at any
    momentwithout warningWITHOUT CAUSE!!
  • FEAR drove most decisions for the rest of their
    lives.

7
Borrowing, At A Glance
8
Its The Economy
9
Scariest Unemployment GraphEVER!
10
Unemployment Longevity
11
North America Our PlanetsMost Mature
Hydrocarbon Provence
First commercial oil well in North America Edwin
Drake - Titusville, Pennsylvania August 27,
1859 2009 150th anniversary
12
Near Universally held beliefs about Natural Gas
at turn of the Century
  • Indigenous natural gas supplies would not be
    sufficient to supply North America in the Longer
    Term
  • Most stranded gas deposits could not be
    commercially developed in the near term
  • Natural gas was not plentiful enough to be a game
    changer
  • Natural gas was a backwater commodityat best.
  • That isuntil Summer 2000

13
The Energy Fundamental Themes
  • Growing long-term demand
  • Economy ? Electricity ? Fuels
  • Baseline price of crude oil drives country
    wealth.
  • Environmental and climate regulation
  • Power Coal ?, Renewables
  • Growing supplyin natural gasmaybe oil, too
  • Unconventional production Shale
  • Global market horizon
  • Imports LNG
  • Changing flows and supply/demand variability
  • Volatility
  • No growth in demand, yet, but increased
    infrastructure degrees of freedom

14
Market Wildcards
Oil Prices
MarketWildcardsthat canMove theMarket
Speculative Participation
Double-Dip Recession
Cross-Commodity Competition
Strength of La Niña/Winter
15
Since We Last Met
16
Since We Last Met
17
Most Of Reasons For Water Storage Continue
18
Energy Prices and Exchange Rates
Inflation is Increasingly Foreign Sourced ??
Current and Future Monetary Policy is
Inflationary ?? Exchange Rates are a Major
Transmission Mechanism for Inflation ?? Domestic
Cost Inflation Constrained by Cheaper Foreign
Labor ?? Exchange Rate Intervention Shelters
Foreign Labor Costs ?? U.S. Excess Liquidity
Spent on Emerging Market Exports Exchange Rate
Changes Exert a Nominal Impact on Oil Prices ??
Dollar Depreciation Leads to Higher Oil Prices
When Depreciation Occurs as a Result of Printing
More Money ?? Disproportionate Change in Oil
Prices Relative to Depreciation Reflects Oils
New Role as a Financial Asset Exchange Rate
Changes Exert a Real Impact on Oil Prices ??
Dollar Appreciation Leads to Higher Oil and
Natural Gas Prices When Appreciation Occurs as a
Result of Financial Risk ?? Higher Oil Prices
Reflect Oils Role as Black Gold
19
Oil Price Correlation to U.S. Dollar Pre-2004
20
Oil Price Correlation to U.S. Dollar 2004-2010
21
Commodity Index Investments And Credit Crisis
Source NYMEX/CME
22
Uncertainty Over Crude OilPrice Forecasts Remain
High
Notes Confidence intervals calculated using
NYMEX market data for the five trading days
ending April 1, 2010. Intervals not
shown for months with little trading in
"close-to-the-money" options contracts.
Reuters News Service and CME Group
23
Normal and Respectable Volatility
Source NYMEX/CQG
24
Natural Gas And The Jitters!
Source NYMEX/CQG
25
VolatilityNatural Gas Is Silent
Source NYMEX/CQG
26
NYMEX Natgas Weekly Chart
Supply and Drilling Response To High PricesLNG
Talk
First Big Deliverability ShockAnd A Very Cold
Winter
First Cold Winter
First Real Supply Glut
Source NYMEX/CQG
27
Existing, Proposed and Potential North American
LNG Terminals
CONSTRUCTED A. Everettt, MA 1.035 Bcfd
(Tractebel - DOMAC) B. Cove Point, MD 1.0 Bcfd
(Dominion - Cove Point LNG) C. Elba Island, GA
0.68 Bcfd (El Paso - Southern LNG) D. Lake
Charles, LA 1.2 Bcfd (Southern Union -
Trunkline LNG) E. Gulf of Mexico 0.5 Bcfd (Gulf
Gateway Energy Bridge - Excelerate
Energy) APPROVED BY FERC 1. Lake Charles, LA
0.6 Bcfd (Southern Union - Trunkline LNG) 2.
Hackberry, LA 1.5 Bcfd (Cameron LNG - Sempra
Energy) 3. Bahamas 0.84 Bcfd (AES Ocean
Express) 4. Bahamas 0.83 Bcfd (Calypso
Tractebel) 5. Freeport, TX 1.5 Bcfd
(Cheniere/Freeport LNG Dev.) 6. Sabine, LA 2.6
Bcfd (Cheniere LNG) 7. Elba Island, GA 0.54
Bcfd (El Paso - Southern LNG) 8. Corpus Christi,
TX 2.6 Bcfd (Cheniere LNG) 9. Corpus Christi,
TX 1.0 Bcfd (Vista Del Sol
ExxonMobil) 10. Fall River, MA 0.8 Bcfd
(Weaver's Cove Energy/Hess LNG) 11. Sabine, TX
1.0 Bcfd (Golden Pass - ExxonMobil) 12. Corpus
Christi, TX 1.0 Bcfd (Ingleside Energy -
Occidental Energy Ventures) APPROVED BY
MARAD/COAST GUARD 13. Port Pelican 1.6 Bcfd
(Chevron Texaco) 14. Louisiana Offshore 1.0
Bcfd (Gulf Landing - Shell) PROPOSED TO
FERC 15. Long Beach, CA 0.7 Bcfd
(Mitsubishi/ConocoPhillips - Sound Energy
Solutions) 16. Logan Township, NJ 1.2 Bcfd
(Crown Landing LNG - BP) 17. Bahamas 0.5 Bcfd,
(Seafarer - El Paso/FPL ) 18. Port Arthur, TX
1.5 Bcfd (Sempra) 19. Cove Point, MD 0.8 Bcfd
(Dominion) 20. LI Sound, NY 1.0 Bcfd
(Broadwater Energy - TransCanada/Shell) 21.
Pascagoula, MS 1.0 Bcfd (Gulf LNG Energy
LLC) 22. Bradwood, OR 1.0 Bcfd (Northern Star
LNG - Northern Star Natural Gas LLC) 23.
Pascagoula, MS 1.3 Bcfd (Casotte Landing -
ChevronTexaco) 24. Cameron, LA 3.3 Bcfd
(Creole Trail LNG - Cheniere LNG) 25. Port
Lavaca, TX 1.0 Bcfd (Calhoun LNG - Gulf Coast
LNG Partners) 26. Freeport, TX 2.5 Bcfd
(Cheniere/Freeport LNG Dev. - Expansion) 27.
Sabine, LA 1.4 Bcfd (Cheniere LNG -
Expansion) 28. Hackberry, LA 1.15 Bcfd
(Cameron LNG - Sempra Energy - Expansion) 29.
Pleasant Point, ME 0.5 Bcfd (Quoddy Bay,
LLC)
PROPOSED TO MARAD/COAST GUARD 30. California
Offshore 1.5 Bcfd (Cabrillo Port - BHP
Billiton) 31. So. California Offshore 0.5 Bcfd
(Crystal Energy) 32. Louisiana Offshore 1.0
Bcfd (Main Pass McMoRan Exp.) 33. Gulf of
Mexico 1.0 Bcfd (Compass Port
-ConocoPhillips) 34. Gulf of Mexico 1.5 Bcfd
(Beacon Port Clean Energy Terminal -
ConocoPhillips) 35. Offshore Boston, MA 0.4
Bcfd (Neptune LNG - Tractebel) 36. Offshore
Boston, MA 0.8 Bcfd (Northeast Gateway-
Excelerate Energy) POTENTIAL SITES IDENTIFIED BY
PROJECT SPONSORS 37. Coos Bay, OR 0.13 Bcfd
(Energy Projects Development) 38. California -
Offshore 0.75 Bcfd (Chevron Texaco) 39. St.
Helens, OR 0.7 Bcfd (Port Westward LNG
LLC) 40. Galveston, TX 1.2 Bcfd (Pelican
Island - BP) 41. Philadelphia, PA 0.6 Bcfd
(Freedom Energy Center - PGW) 42. Astoria, OR
1.0 Bcfd (Skipanon LNG - Calpine) 43.
Robbinston, ME 0.5 Bcfd (Downeast LNG - Kestrel
Energy/Dean Girdis) 44. Boston, MA 0.8 Bcfd
(AES Battery Rock LLC - AES Corp.) 45. Calais,
ME ? Bcfd (BP Consulting LLC) 46. Baltimore,
MD 1.5 Bcfd (AES Sparrows Point AES
Corp.) 47. Elba Island, GA 0.9 Bcfd (El Paso -
Southern LNG) CANADIAN APPROVED AND POTENTIAL
TERMINALS 48. St. John, NB 1.0 Bcfd (Canaport
- Irving Oil) 49. Point Tupper, NS 1.0 Bcf/d
(Bear Head LNG - Anadarko) 50. Quebec City, QC
0.5 Bcfd (Project Rabaska - Enbridge/Gaz
Met/Gaz de France) 51. Rivière-du- Loup, QC 0.5
Bcfd (Cacouna Energy - TransCanada/PetroCanada) 5
2. Kitimat, BC 0.61 Bcfd (Galveston LNG) 53.
Prince Rupert, BC 0.30 Bcfd (WestPac
Terminals) 54. Goldboro, NS 1.0 Bcfd (Keltic
Petrochemicals) MEXICAN APPROVED AND POTENTIAL
TERMINALS 55. Altamira, Tamulipas 0.7 Bcfd
(Shell/Total/Mitsui) 56. Baja California, MX
1.0 Bcfd (Sempra) 57. Baja California -
Offshore 1.4 Bcfd (Chevron Texaco) 58.
Lázaro Cárdenas, MX 0.5 Bcfd
(Tractebel/Repsol) 59. Puerto Libertad, MX 1.3
Bcfd (Sonora Pacific LNG) 60. Offshore Gulf, MX
1.0 Bcfd (Dorado - Tidelands) 61. Manzanillo,
MX 0.5 Bcfd 62. Topolobampo, MX 0.5 Bcfd
53
52
51
50
49
54
48
45
43
29
42
35
A
22
44
36
39
10
37
20
16
41
B
46
19,47
30
15
31
C
7
38
56
17
21
57
6,27
D
2,28
24
23
3
4
5,26
59
11
1
8
33
32
18
9
12
E
34
25
14
40
62
13
60
55
US Jurisdiction FERC US Coast Guard
61
58
US pipeline approved LNG terminal pending
in Bahamas These projects have been approved
by the Mexican and Canadian authorities
As of January 19, 2006
Office of Energy Projects
28
LNG import capability provides backup
Canaport, NB / 1.0 Bcfd
2011 LNG Capacity 18.3 Bcfd Average 2008-2009
Utilization 10
Everett, MA / 0.7 Bcfd Northeast Gateway, MA /
0.5 Bcfd Neptune, MA / 0.4 Bcfd
Cove Point, MD / 1.6 Bcfd
Terminal Name / Capacity
Elba Island, GA / 0.9 Bcfd
Lake Charles, LA / 1.8 Bcfd
Freeport, TX / 1.5 Bcfd
Cameron, LA / 1.5 Bcfd
Sabine, LA / 2.6 Bcfd
Gulf Gateway, LA / 0.5 Bcfd
Manzanillo, Mex. / 0.5 Bcfd
Gulf Clean Energy, MS / 1.3 Bcfd
Altamira, Mex. / 0.5 Bcfd
Golden Pass, TX / 2.0 Bcfd
Costa Azul, Mex. / 1.0 Bcfd
Multiple domestic terminals provide supply
optionality
29
NYMEX Natgas Weekly Chart
Supply and Drilling Response To High PricesLNG
Talk
First Big Deliverability ShockAnd A Very Cold
Winter
First Cold Winter
First Real Supply Glut
FinallyShift Change In Supply/Demand Dynamics
Due To Shale Gas Development
Volatility
Source NYMEX/CQG
30
Seasons of Supply Development
NYMEX Natural Gas
Source NYMEX/CQG
31
Rig Type Distribution
1640 Total Rigs
539 33
895 54
217 13
32
Oil Gas Rig Split
1640 Total Rigs
985 60
565 40
33
ProductionL48
Bcfd
Month
Source US Department of Energy/EIA
34
L48 Shale Plays
35
The North American Shale Revolution
36
Traditional Gas Development The Rocks
Paradigm Employed to Find Natural Gas Until
Recently
The Prize
Mature organic-rich source rocks in "hydrocarbon
kitchen"
  • Hydrocarbons generated in mature, organic-rich
    source rock
  • Migration pathway from source to high-quality
    reservoir rock
  • Seal rock above reservoir to provide an effective
    buoyancy trap
  • Preservation of hydrocarbons over geologic time

37
The Shale Revolution The Rocks
The New Paradigm
The Prize
The Source Rock Prize
Mature organic-rich source rocks in "hydrocarbon
kitchen"
  • Hydrocarbons generated in mature, organic-rich
    source rock

Hydrocarbons accessed using horizontal,
fracture-stimulated wells
38
(No Transcript)
39
Perspective
40
Storage Increasing Supply Cushion
  • Inventory levels provide supply cushion to meet
    peak demand
  • As of 2010, 4.4 Tcf of working gas capacity
    with 100 Bcfd of withdrawal capability serves
    U.S. markets
  • Currently, there are 35 storage projects at
    various stages of development which plan to
    create 0.6 Tcf (600 Bcf) of incremental storage
    capacity

41
Short-Term Storage Outlook
42
Total Demand - Bcfd
43
Industrial Demand - Bcfd
44
Electric Demand - Bcfd
45
Short Answers To LNG Attractiveness
May Suggest Dumping?...
46
Bottom Line To Global LNG
47
Panama Canal Expansion
48
Panama Canal Expansion
49
New Canal Opens Optionality For Tankers
50
Potential Liquifaction SitesNorth America
51
Drivers Of Coal/Oil Substitution
52
Wider ECA For North America
53
New Environmental RegulationsDrive To Gas
54
Bottom Line To Near-Term Risks
55
Winter Scorecard
Last Winter 2009-2010
ECONOMY
WEATHER
DEMAND
STORAGE
SUPPLY
Price Pressure
DOWNWARD
DOWNWARD
Ref Various Sources
56
Where will we go next?
High (In-Your-Face)
The Flintstones
Volatile Village
?
Pace of technology change Low
High
?
Low (Little Influence)
Business-As-Usual
The Jetsons
57
12-Month Forward Price and Open Interest

Size of bubble indicates open interest
Source NYMEX and CFTC
58
Winter (Nov-Mar) 2010-2011
59
Winter (Nov-Mar) 2009-2010
60
Winter Forecast Notes
  • Earliest Hints of "Winter-like" weather Very
    warm Great Lakes water surface temperatures could
    trigger anomalous Lake Effect Snowfall (or cold
    Rainfall) as early as late October this year, but
    more likely well see this in November.
  • The 2010-2011 La Niña Even has commenced. A
    gradual transition to a moderate or strong La
    Niña Event is underway, but will not
    significantly play a role in USA Temperature
    patterns for about another month. In the meantime
    (2-5 weeks), La Nina influences should continue
    to be confined to Atlantic Tropical development.
  • Tropics are still active, but not threatening.
  • Analogs The best contemporary reference patterns
    for the coming Winter are that of 2007-2008 and
    2005-2006 (excluding major Sudden Stratospheric
    Warming Event). Older comparisons are that of
    1988-1989, 1973-1974 and 1964-1965.
  • Year-on-Year Several PATTERNS, REGIONS RESULTS
    will be Inverse to that of last year 2009-2010,
    but population-weighted HDDs/Cold should be
    comparablebut with different focus

61
Composite Winter Forecast Comparison
2009-2010
2010-2011
62
What We Have Learned?
  • Natural Gas really is Plentiful, Clean Burning,
    and Efficientand available!
  • Overbuilt natural gas pipeline systems create
    over-liquiditizationsteady-state gridlock
  • North American Producersrespond to market
    gyrations more quickly than they have
    historically.
  • Response to market demand due to economic
    re-strengthening will depend upon readily
    available and cheap sources of energy.
  • The drilling churn will see field service
    companies reap strong rewards. Success will be
    determined by multiple zone completion targets
    well above current averages.
  • Future demand opportunities in a cheap and
    portable energy source will drive innovative
    development.
  • CNG and LNG driven transportation
  • Support system existsand environmentally
    friendlier.
  • Besides

63
The Difference By Next Year
  • Election Year Dynamics
  • New Economic Restrictions
  • Constrained systems have fewer degrees of freedom
  • More news of supply than demand
  • Political Reboot
  • Growth of environmental issueslonger term
  • Path forward is much more clear for end-users

63
64
Moodys Misery Index Predicts More Debt Default
65
Climate Regulation Points
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