3Q11 Natural Gas Update
August 2011
Dr. Jim Duncan
1
CAUTIONARY STATEMENT
FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS
OF 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 management’s 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, 2010. 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 SEC’s 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, 2010.
2
Today’s Topics
Q on Q … Review…YoY?
Tactical Sitrep
The Economy
NG Supply Bubble Update
Global NG/CL Market Drivers
What Might Happen Next?
3
Summer Scorecard
Last Summer
2010
Winter Season
This Summer
2011
ECONOMY
WEATHER
DEMAND
STORAGE
SUPPLY
Price Pressure
DOWNWARD
Ref: Various Sources
DOWNWARD
4
2011 YTD Summary

Shale gas has been a game changer in the natural gas industry…
•
•


Demand is brisk after colder-than-expected winter and warm summer
Longer term technical signals suggest bounce
•
•

Market is well-supplied
Forward curve pivot
Re-test of $3.80 for 3rd time forecast bounce
Supportive Weather
Dec - Feb
'09-'10 13th coldest out of 60 years
'10-'11 16th coldest out of 60 years
Summer to Date
'09-'10 2nd hottest out of 60 years
'10-'11 The hottest out of 60 years
Volatility has reappeared…
5

The Economy & Money Flows
6
U.S. Economy Stumbling?
Source: Bureau of Labor Statistics
7
Commodities Have Been Strong
8
But Could There Be Weakness Ahead?
CRB Weekly Chart
52 week avg
9

Supply
10
11
Rig Count Distribution
75.0%
65.0%
55.0%
Vertical
45.0%
Horizontal
35.0%
25.0%
Shift to shale
15.0%
Ja
n1
1
Ja
n1
0
Ja
n0
9
Ja
n0
8
Ja
n0
7
Ja
n0
6
Ja
n0
5
Ja
n0
4
Ja
n0
3
Ja
n0
2
Ja
n0
1
Ja
n0
0
5.0%
Source: Baker Hughes
12
Rig Count Distribution
Oil %
Gas %
90%
80%
70%
Average Weekly Change
60%
Since 2011
50%
+ 8 Oil
40%
- 1 Gas
30%
20%
Shift to oil
10%
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Source: Baker Hughes
13
Gas Rig Count Flat to Lower
Range
2010
2011
5 Yr Avg
52
49
46
43
40
37
34
31
28
25
22
19
16
13
10
7
4
1
1,600
1,550
1,500
1,450
1,400
1,350
1,300
1,250
1,200
1,150
1,100
1,050
1,000
950
900
850
800
750
700
650
Week Number
14
The North American Shale Re-evolution
Woodford
3%
Muskwa
(Horn River)
Montney
Marcellus
19%
Other
7%
Barnett
10%
Basin Horizontal
Rig Distribution
Eagle Ford
16%
Fayetteville
5%
Bakken
Haynesville
21%
Antrim
Mancos
Marcellus
Niobrara
Lewis
Woodford
Barnett
Fayetteville
Haynesville
Eagle Ford
Granite Wash
19%
Geologic Age
Tertiary
Cretaceous
Jurassic
Triassic
Carboniferous
Miss-Devonian
Devonian
Ordovician
Cambrian
15
Storage: Increasing Supply Cushion
 The 44 Bcf injection last week brought supplies to 2,758 Bcf…186 Bcf
behind 2010 and 68 Bcf below the 5-year average
 IF NOTHING CHANGES, may be hard to refill storage to last year’s levels
due to being only 4 Bcfd oversupplied
 As of 2011, ~ 4.4 Tcf of working gas capacity with ~ 100 Bcfd of withdrawal
capability serves U.S. markets
Source: US Energy Information Agency
16
 Global
Shale Implications
17
Global Shale Reserves
18
Foreign Investment In U.S. Shale
$12.1 B
$5.4B
BHP Plans to Acquire Petrohawk
PetroChina/Encana
Reliance/Atlas
$1.7B
ITOCHU/MDU Resources
$.4B
Statoil/Chesapeake
$1.3B
$3.4B
CNOOC/Chesapeake
$1.0B
BG/EXCO
BHP/Chesapeake
$4.8B
Statoil/Talisman
Reliance/Pioneer
$1.3B
$1.3B
$1.3B
$2.1B
CNOOC/Chesapeake
BG/EXCO
$1.5B
KNOC/Anadarko
19
LNG (Import)/Export Balances
TCF per Year
2.0
1.0
0.0
(1.0)
(2.0)
(3.0)
(4.0)
Africa
Asia
Australia
Europe
North
America
South
America
Source: EIA
20
Recoverable Shale Reserves: 6622 Tcf
Africa
Asia
Australia
Europe
North America
South America
16%
30%
21%
18%
6%
9%
Source: EIA
21
Global Gas Prices
UK
$8.21
Altamira
$4.14
Everett $4.27
Cove Pt
$4.13
Gulf
$3.92
Spain
$8.71
Korea
$11.17
China
$11.47
Japan
$11.27
As of 8/28/2011
22
U.S. LNG Import Projections
90.00
80.00
70.00
50.00
66 MTPA
40.00
30.00
39 MTPA
20.00
10.00
24
20
23
20
22
20
21
20
20
20
19
20
18
20
17
20
16
20
15
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
0.00
20
MTPA
60.00
Year
Source: EIA
2006 AEO
2011 AEO
Shale Gas has already added significant volumes of LNG to the marketplace
23
North American Liquefaction Projects
Kitimat
5 MTPA
Sabine Pass
15 MTPA
Freeport
1.4
BCF/D
10 MTPA
Could add more LNG into the global marketplace
Source: DOE
24
 Demand
25
Update/Remove
Greater Than Normal Nuke Outages
Total Operating MW
100,000
95,000
90,000
85,000
80,000
75,000
70,000
65,000
May11
Mar11
Jan11
Nov10
Sep10
Jul10
May10
Mar10
Jan10
Nov09
Sep09
Jul09
May09
Mar09
Jan09
60,000
26
Coal to Natural Gas Competition
Summer
2009
Winter
2009-2010
Summer
2010
Winter
2010-2011
Summer
2011
27

Price
28
Natural Gas Weekly Chart
Source: CME/NYMEX
29
Natural Gas Weekly Chart-12 Month Strip
Staying in the box …
52 week avg
Source: CME/NYMEX
30
Natural Gas Forward Curve
Pivot Point
Source: CME/NYMEX
31
Natural Gas Forward Curve
Source: CME/NYMEX
32
Natural Gas Forward Curve
Source: CME/NYMEX
33
Trading Activity Remains in Front Months
NYMEX NG Futures Open Interest
250,000
Last Year
This Year
150,000
100,000
50,000
Se
p
Ju
l
ay
M
ar
M
Ja
n
No
v
Se
pt
Ju
l
ay
M
ar
M
Ja
n
No
v
0
Se
p
Contracts
200,000
Source: CME/NYMEX
34
 Oil
35
Crude Oil Weekly Chart
52 week avg
Source: CME/NYMEX
36
Crude Oil/Natural Gas Ratio
Ratio broke trend line and moving avg support …
Source: CME/NYMEX
37
Crude Oil Price Timeline
Financial Crisis
Debt Concerns
Global Demand
Growth and
Increased Investment
in Commodities
First Gulf War
Arab Spring
Second Gulf War
38
The Arab Spring
Close interconnection between regional states through finance, security, labor,
language, culture as well as the demonstration effect has led to rapid contagion
Unlike Eastern Europe in 1989, future trajectories are likely to be more uneven
owing to wide variance in local conditions
39
WTI-Brent Spread
Brent reflects geopolitical risk, WTI only a U.S. benchmark …
Source: CME/NYMEX
40
OPEC Spare Capacity Available
Current Output and Spare Capacity
Light
Algeria: Production 1,460 mb/d,
spare capacity 0 mb/d
41
UAE: Production 2,500 mb/d, spare
capacity 230 mb/d
Qatar: Production 820 mb/d, spare
capacity 150 mb/d
Weighted Average API
39
37
Saudi Arabia: Production 9,100 mb/d,
spare capacity 3,400 mb/d
Libya: Lost
35
production
1,350 mb/d
33
Syria: Production 340 mb/d, spare
capacity 0 mb/d
Kuwait: Production 2,430 mb/d,
spare capacity 200 mb/d
31
29
Heavy
Yemen: Production 220 mb/d, spare
capacity 0 mb/d
Oman: Production 800
mb/d, spare capacity 0
mb/d
Iran: Production 3,690 mb/d, spare
capacity 0 mb/d
27
-
0.5
1.0
1.5
2.0
2.5
3.0
Weighted Average Sulfur Content (%)
Sweet
Sour
Solid bubbles = Available spare capacity
Circles = Production
OPEC has enough spare capacity to meet the loss of most other
Middle East producers, though with relatively sour barrels
Source: PFC Energy
41

Weather
42
This Summer
43
Cyclogenesis…Beginning of Season
44
Cyclogenesis…Beginning of July
45
Cyclogenesis…Height of Season
46
African Sand Layer…Less
Active…On Schedule
47
Sahel Percolating
48
Sahel is Definitely More Active
49
50
51

Legislative Issues With Supply
Implications
52
Fracking
“Hearing was ‘ban
fracking now! Vs. ‘drill,
baby, drill!’”
Big U.S. oil companies
face growing concern on
fracking.
Fracking poses environmental
and public health challenges for
Texas.
UK Panel: No water risk
from fracking.
O’Malley’s [MD governor]
executive order that halts
fracking seen as political
maneuver.
Disclose chemicals used in
fracking.
U.S. panel to report on natgas
drilling safety by mid-August.
States aren’t backing fracking.
Morgantown passes fracking
ban.
53
U.S. Coal Fleet: Capacity By Age of Plant
MW By Year of Plant Start-Up
16,000
•Average Age = 36 years
14,000 •71 GW > 45 years
12,000
•31 GW > 40 years, small*
& inefficient**
10,000
8,000
The loss of 30 GW of 10,000 Btu/KWh Coal Generation
would increase demand by 7.2 Bcf/d
6,000
4,000
2,000
0
1940
1950
1960
1970
1980
1990
2000
2010
Between 30 and 70 GW (10-20% of coal fleet) could be shuttered due to more
stringent environmental regulations
Source: Ventyx Velocity Suite
*Less than 300 MW
** Heat rate > 10,000 Btu/KWh
54
54
Worldwide Nukes
55
Dodd-Frank and End-Users
“A consistent
Congressional directive
throughout all drafts of
this legislation, and in
Congressional debate,
has been to protect end
users from burdensome
costs associated with
margin requirements
and mandatory
clearing.”
“[W]e focused on
creating a regulatory
approach that permits
the so-called end users
to continue using
derivatives to hedge
risks associated with
their underlying
businesses, whether it
is energy exploration,
manufacturing, or
commercial activities.”
“[Imposing the clearing
and exchange trading
requirement on
commercial end-users
could raise transaction
costs where there is a
substantial public
interest in keeping such
costs low (i.e., to provide
consumers with stable,
low prices, promote
investment, and create
jobs.)”
“End users did not
cause the financial
crisis of 2008. They
were actually the
victims of it.”
“[The] definitions are not
intended to include an
electric or gas utility that
purchases commodities
that are used either as a
source of fuel to produce
electricity or to supply gas
to retail customers and
that uses swaps to hedge
or manage the commercial
risks associated with its
business.”
56
Natural Gas Outlook
Short-Term
 Potential for some further upside in natgas IF weather remains supportive and supply/demand
balance doesn’t loosen

Gas rig counts need to continue to decline to eliminate year-on-year supply growth
Longer-Term
 Shift to oil drilling should reduce chronic supply overhang for natgas
 Demand growth for natgas will remain sluggish even with potential for increased CNG in vehicles;
will need shift away from coal / nuclear and/or greater economic recovery to stimulate demand
Threats to Forecast
 Legislation
 Economic double-dip
 Normal weather
57
Natural Gas Hedging Strategies
Short-Term
 Consumers should layer in hedges via caps or collars to allow for some participation in a potential
move to the downside

Storage owners should consider selling optionality to cover carrying costs
Longer-Term
 Consumers should investigate swaps and/or collars as caps still relatively expensive
58
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