Prospects For Recovery: An Economic Update Karr Ingham Petroleum Economist Texas Alliance of Energy Producers Webinar, May 24, 2016

Disclaimer “Participants in this webinar and other users of these webinar materials should not in any manner rely upon or construe the information or resource materials contained herein as legal, regulatory, tax, forecasting, economic, investment, or other professional advice and should not act or fail to act based upon the information in these materials without seeking the services of competent legal entities or other professionals. The webinar material is for information purposes only.”

The Texas Alliance of Energy Producers Texas Petro Index Composite Index based at in January 1995 Composite Index based at in January 1995 Calculated using a comprehensive group of Texas E&P indicators Calculated using a comprehensive group of Texas E&P indicators Tracks growth rates and business cycles in Texas upstream energy E&P economy Tracks growth rates and business cycles in Texas upstream energy E&P economy

Texas Petro Index - Components Crude oil and natural gas wellhead prices Crude oil and natural gas wellhead prices Rig count Rig count Drilling permits Drilling permits Well completions Well completions Volume & value of Texas crude oil & natural gas production Volume & value of Texas crude oil & natural gas production Industry E&P employment Industry E&P employment

The Texas Petro Index January 1995 – April 2016 Texas Petro Index has lost 47.5% of its value since November 2014 peak

Crude Oil Price/bbl WTI Posted – Monthly Average

Natural Gas Price - Month Avg Physical Delivery Price for Waha and Houston Ship Channel January 1995 – April 2016

Texas Rig Count Monthly Avg January 1995 – April 2016

Texas Original Drilling Permits Monthly January 1995 – April 2016

Texas Crude Oil Production Volume Bbls/day January 1995 – April 2016

Texas Crude Oil Production Volume 12-Month Moving Average Jan 1995 – Apr 2016

Texas Crude Oil Production Volume Annual 1995 – 2015 (2015 annual estimate)

Texas Natural Gas Production Volume 12-Month Moving Avg Jan 1995 – Apr 2016

Texas Oil & Gas Payroll Employment Monthly January 1995 – April 2016

Texas Oil & Gas Payroll Employment “Extraction” and “Support Activities” Monthly January 1995 – April 2016

US Crude Oil Production Moving 12-Month Total Jan 1996 – Apr 2016

US Crude Oil Storage

Global Crude Oil Supply and Demand What caused all of this? A lousy 2 million barrels per day

Production Growth 2006 – 2015 Saudi Arabia, OPEC, and US

Growth in Crude Oil Production between 2005 and 2015 – Saudi Arabia, OPEC, and US

Conclusions Price improvement since February, but is it the ‘real deal’? Price improvement since February, but is it the ‘real deal’? Supply and demand still sets prices (and at times, in the short term, expectations about future supply and demand) Supply and demand still sets prices (and at times, in the short term, expectations about future supply and demand) At least a portion of recent price increase can be attributed to concerns about supply disruption in Canada (fires near production regions) and Nigeria At least a portion of recent price increase can be attributed to concerns about supply disruption in Canada (fires near production regions) and Nigeria

Conclusions Production has peaked and begun to decline but still remains generally elevated Production has peaked and begun to decline but still remains generally elevated US Crude oil in storage still at record levels US Crude oil in storage still at record levels Saudi, OPEC, and other non-OPEC (Russia in particular) production remains elevated; Iran now moving crude oil into the global supply pipeline Saudi, OPEC, and other non-OPEC (Russia in particular) production remains elevated; Iran now moving crude oil into the global supply pipeline In other words, global supply is still a problem – the ‘glut’ has not been significantly alleviated In other words, global supply is still a problem – the ‘glut’ has not been significantly alleviated

Conclusions Don’t count on Saudi Arabia or OPEC (or OPEC and Russia) to decrease production, though they may decide to manage supply in some fashion at some point. Saudis and OPEC are not reducing production in low- price environment; neither did they raise production in high-price environment Don’t count on Saudi Arabia or OPEC (or OPEC and Russia) to decrease production, though they may decide to manage supply in some fashion at some point. Saudis and OPEC are not reducing production in low- price environment; neither did they raise production in high-price environment US was the game-changer in terms of raising globe crude oil supplies; others are looking to the US to reduce production (or at least waiting for it to happen) US was the game-changer in terms of raising globe crude oil supplies; others are looking to the US to reduce production (or at least waiting for it to happen)

Conclusions Texas and US production decline should accelerate in 2016, GRADUALLY helping to rebalance the global market Texas and US production decline should accelerate in 2016, GRADUALLY helping to rebalance the global market

What does “recovery” mean? - No expectation that crude oil prices will return to $100/bbl anytime soon - BUT, costs continue to decline, dramatically lowering ‘break-even’ cost of production - What am I looking for? Continued evidence of production decline in the US, and declining levels of crude oil in storage. Crude prices above $50/bbl in 2016, improving to $60-65 in 2017.

Prospects For Recovery: An Economic Update Karr Ingham Petroleum Economist Texas Alliance of Energy Producers Webinar, May 24, 2016