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The Challenge of Energy Policy

The Challenge of Energy Policy. IPAA/TIPRO Leaders in Industry Luncheon January 9, 2008. The Challenge of Energy Policy. Where are we? How did we get here? Where do we go from here? What public policy issues need to be addressed?. Crude Oil Supply. Supply of oil is plateauing:

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The Challenge of Energy Policy

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  1. The Challenge of Energy Policy • IPAA/TIPRO Leaders in Industry Luncheon • January 9, 2008

  2. The Challenge of Energy Policy • Where are we? • How did we get here? • Where do we go from here? • What public policy issues need to be addressed? www.devonenergy.com

  3. Crude Oil Supply • Supply of oil is plateauing: • ― 1980’s excess crude > 10 MMBOD • ― 1999 excess crude = 5 MMBOD • ― Current excess crude = 2 MMBOD • Non-OPEC, Non-FSU supply flat for five years • Most new sources subject to increasing supply • constraints www.devonenergy.com

  4. Supply Constraints • The “easy” oil has already been found • New supply sources are increasingly complex • Light/sweet crude giving way to heavier/sour • Increasing complexity requires more highly qualified people • “People issues” are the industry’s next big challenge www.devonenergy.com

  5. Crude Oil Demand • 2000 – 2007 demand increase ≈ 9.2 MMBOD • Largest increase in demand occurred in last four years • Largest contributors – China, India, Middle East and U.S. • ―China accounted for ≈ 30% of global oil demand • growth Source: International Energy Agency. www.devonenergy.com

  6. Crude Oil Demand • 5-year projected increase in world oil demand 1.3 to 2.0 MMBOD per year • Huge proportion of world’s population still uses minimal amount of oil • Economic growth in developing nations will continue to fuel demand Source: International Energy Agency. www.devonenergy.com

  7. New Light-Duty Vehicle Sales in China Overtake US Sales Overtake Japan Sales Source: International Energy Agency. www.devonenergy.com

  8. Oil Demand’s Surprising Resiliancy WTI in US Dollars and Euros www.devonenergy.com

  9. Crude Oil Dynamics • Continuing upward cost pressures • Rigs, services, refining and people scarcity influencing market • NOCs significantly changing competitive landscape • Much of world’s oil comes from places susceptible to geopolitical strife • Burgeoning resource nationalization www.devonenergy.com

  10. Access to Worldwide Oil and Gas Reserves Full IOC Access NOC Reserves (Equity Access) NOC Reserves Limited Equity Access Reserves Held by New Russian Companies Source: PFC Energy, BP 2004 Statistical Review. www.devonenergy.com

  11. Average of Top 5 IOCs’Reserves Replacement Ratio Source: International Energy Agency. www.devonenergy.com

  12. Global Oil Supply Prospects to 2015 • Oil supply/demand balance is set to remain tight • In total, 37.5 MMBOD of gross capacity additions needed in 2006 - 2015 • 13.6 MMBOD to meet demand and rest to replace decline in existing fields • OPEC and non-OPEC producers have announced plans to add 25 MMBOD • through 2015 • Further 12.5 MMBOD of gross capacity needed or demand growth • curbed • Otherwise, supply crunch cannot be ruled out Source: International Energy Agency. www.devonenergy.com

  13. Crude Oil Prices • Lots of volatility • Sustained higher prices • Effects of alternative energy and current energy policy provisions are years away www.devonenergy.com

  14. Natural Gas Dynamics • Very different dynamics near-term than longer-term • Near-term potential price softness • Longer-term strong fundamentals www.devonenergy.com

  15. U.S. Working GasStorage Data Source: EIA www.devonenergy.com

  16. U.S. Rigs in OperationDirected Towards Natural Gas www.devonenergy.com

  17. U.S. Natural Gas Production Source: EIA www.devonenergy.com

  18. Canadian Rigs in OperationDirected Towards Natural Gas www.devonenergy.com

  19. Canadian Natural Gas Production20 Day Rolling Average www.devonenergy.com

  20. Natural Gas Supply Fundamentals • North American natural gas production essentially flat • No meaningful supply response from this decade’s drilling boom • Unconventional supplies (deep offshore gas, Arctic gas, LNG) take years to develop www.devonenergy.com

  21. Why Has Supply Leveled Off? • Rapidly escalating decline rates across North America • Slowing of imports from Canada • Restrictions on access to resource The causes: www.devonenergy.com

  22. Why Has Supply Leveled Off? • Rapidly escalating decline rates across North America • Slowing of imports from Canada • Restrictions on access to resource The causes: www.devonenergy.com

  23. Average Production Decline Rates Source: Independent Investment Bank www.devonenergy.com

  24. The Number of Wells is Increasing NORTH AMERICA GAS WELLS DRILLED # of Wells Source: EIA for U.S. Data, CAPP and TransCanada data. www.devonenergy.com

  25. But the Production is Plateauing NORTH AMERICA GAS WELLS DRILLED # of Wells BCFD Production Source: BP World Review, EIA for U.S. data, CAPP and TransCanada data. www.devonenergy.com

  26. Why Has Supply Leveled Off? • Rapidly escalating decline rates across North America • Slowing of imports from Canada • Restrictions on access to resource The causes: www.devonenergy.com

  27. Slowing of Imports from Canada • Activity is slowing • High cost structure • ― labor, services, foreign exchange • Changes in royalty trust rules • ― effect on junior companies • Alberta royalty changes • Natural gas consumption in oil sands www.devonenergy.com

  28. Why Has Supply Leveled Off? • Rapidly escalating decline rates across North America • Slowing of imports from Canada • Restrictions on access to resource The causes: www.devonenergy.com

  29. Restricted Access to Resource Source: U.S. Department of Interior Minerals Management Service U.S. Department of Interior Land Management www.devonenergy.com

  30. Natural Gas Prices • Primarily influenced by North American production declines, increased oil prices (less substitution) and slight demand growth • Future prices heavily dependent upon supply availability and weather • Prices will be volatile • With declining supply, we will need all the natural gas that we can get in the long run! www.devonenergy.com

  31. LNG Helps in Longer-Term • Currently 4 BCFD of North American receipt capacity • Growth expectation – 10-12 BCFD by 2010 • High capital costs (export facilities, transportation, import capacity) • Competition for cheap natural gas from China, India and Western Europe • NIMBY www.devonenergy.com

  32. Northern Gas For Illustrative Purposes Only Northern Pipeline Alaska 237 TCF Mackenzie Valley Pipeline Alaska Highway Route www.devonenergy.com

  33. Where Do We Go From Here? • Supply/demand balance will remain relatively tight • Most meaningful supply additions have multi-year • horizons • Need to continue to pursue workable energy policy www.devonenergy.com

  34. Energy Policy Issues • Government policy and regulation must: • Encourage conservation • Provide stable and reasonable fiscal and regulatory • framework – need stability for long-term projects • Facilitate access to resources: • – Improve access to areas currently “off-limits” www.devonenergy.com

  35. Energy Policy Issues (con’t) • Streamline regulatory process: • – Improve regulatory access and timelines • – Reduce “red-tape” • – Reduce jurisdictional overlaps and duplications • Refrain from penalizing success: • – Avoid emotional reactions based on near-term • political pressures • – Be aware of increasing cost www.devonenergy.com

  36. Innovation – The Key to Success We usually find oil in new places with old ideas. Sometimes, we find oil in an old place with a new idea, but we seldom find much oil in an old place with an old idea. Several times in the past we have thought that we were running out of oil, when actually we were running out of ideas. Parke A. Dickey September 15, 1958 www.devonenergy.com

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