The McGraw-Hill Companies

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The McGraw-Hill Companies
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About Platts

• A division of The McGraw-Hill Companies (NYSE
  MHP)
• World's leading provider of energy information.
  With over 10,000 customers across 150 countries,
  600 employees in 17 offices around the world, and
  nearly a century of business experience, Platts
  is the most recognized and respected information
  company in the energy industry.
• Our real-time news, price reports, analytical
  services and conferences are essential to
  enabling Governments to operate with transparency
  and efficiency. Traders, Risk Managers, Analysts,
  and Executive Management depend on Platts to help
  them make better, faster, more effective
  decisions.

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Platts Global Coverage
Calgary
Boston
Boulder
Beijing
New York
Houston
Tokyo
Mexico City
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News Pricing

Platts is a specialist energy publisher founded
by Warren Platt nearly 100 years ago, and owned
by publisher McGraw-Hill
Transactions
Assessments
Market Reports
Breaking news
Impartial and independent
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Platts Price Discovery

• Platts publishes more than 8,000 indexes and
  assessments each day
• Platts assesses actual market levels
• We use highly structured methodologies to
  determine accurate and precise market values
• Commodities have implicit values, even when not
  traded and prices can be discovered through a
  process of market examination and analysis
• Transparency, consistency and verification

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A few observations

• Gasoline prices have been low!
• because gasoline has been the runt of the
  litter
• Structural changes may be making that permanent
• But refiners are adaptablehow fast will they
  adapt?
• US has become a decent-sized exporter as a result
  of some of these changes

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But misunderstandings linger..

• The three-headed monster keep your eye on all
  three heads!
• Gasoline prices need to catch up. Or do they?
• Normal catch-up may be on a new standard.

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Gasoline to crude big change
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The laggard
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Why did diesel surge?

• Long-time consumption trends, particularly in
  Europe
• The configuration of refineries was always to
  make more gasoline
• The Bolivian and Argentina gas messes
• New sulfur rules in the US and Europe
• But companies reactingenuity and greed triumph,
  eventually

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Ramping it up
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Returning to normalcy?
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The ethanol impact

• Ethanol having an enormous impact on the relative
  price of gasoline
• Despite the controversy, mandates for it are set
  to grow
• Iowa first in the nation caucus
• ButMcCain has never been an ethanol backer
• US tariff is simply sending Brazilian material
  elsewherewith US bearing the transportation
  costs.
• Currently 6.6 of US gasoline consumption
• Showing up in conventional markets.

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More common misunderstandings..

• The curve predicts prices
• Prices are a function of percentages.
• Speculators pulling out of the market led the
  price down
• BUTif speculators were at fault, where were the
  inventories?
• More likely the diesel-driven surge ended
  because of softer demand, refiner reaction

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Things you will hear this election

• The US has no energy policy.
• The US has an energy policy that has been largely
  bipartisan.
• Minimal taxation of gasoline
• Restricted drilling.
• Limits on nuclear power
• Turn food into fuel
• Cleaning up the fuel pool
• This constitutes a policy, because there are
  clear choices being made.

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The coming gas revolution

• Transformative technologies might be in
  hydrocarbons
• The shale plays Barnett, Haynesville,
  Marcellus.
• Aubrey McLendon, the Pied Piper of shale natural
  gas
• Retrofit 25,000 gas stations at a cost of
  400,000 per station.
• Fill up at 2.50/gallon equivalent, which is
  20/Mcf. Current price less than 9/Mcf.

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More McLendon

• Told the House Select Committee on Energy
  Independence and Global Warming that US gas
  producers could increase production by by 5
  annually for the next 10 years, providing enough
  natural gas to fuel 10 of America's cars and
  generate enough power to prevent the building of
  any new coal-fired generation plants.

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Natural gas as an alternative

• The same characteristics as oil
• Lower CO2 intensity
• Lower emissions on almost everything
• Suddenlyan abundant supply?
• And thats without expanded offshore drilling
• Can wind/solar/biomass compete against this?

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What alternatives face, or Why I decided to love
oil as an energy source.

• Tremendously dense
• Easily stored
• Easily transported
• As a result invisible to society at large
• Even at these prices, still beats all alternates.

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Could research have beaten this curve?
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The broad factorsmostly bullish

• World supply remains constrained Mexico, Russia,
  and expected declines
• The return of nationalism Chavez and Putin
• Repeated failure of non-OPEC targets to be
  reached IEA projected 4Q 08 at 51.8 last Dec
  most recent, 51.3
• The controversy over Saudi Arabia/Ghawar
• The rising demand giants
• Commodity bull markets often run 18-20 years

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Ominous warning John Hess

• "An oil crisis is coming."
• When looking at the tight squeeze in the
  supply/demand balance, "it's hard to see any
  relief in sight." Hess said in the opening
  session.
• Growth in oil demand is "unrelenting" and the
  world needs "a sense of urgency, or the
  consequences will be severe."

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REAL demand destruction

• Late 1997 IEA estimates 98 demand will be 75.6
  million b/d
• By April 99, IEA estimated world demand plunged
  to 73.8 million b/d
• Supply went from 75.6 million b/d to 75.3 million
  b/d 4Q 97 to 4Q 98
• Result Lowest real crude price ever

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Current demand destruction nowhere near as much

• Outright, no demand destruction at all
• 4Q 07 87.2
• Projected 4Q 09 89 million b/dup 1.8 million
  b/d
• Supply strains to keep up
• Non-OPEC49.7 rising to 50.6
• Asking OPEC to produce by 4Q 2009 32.3 million
  b/d
• Latest Platts estimate 32.77 million b/d

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Shorter-term downward pressure

• That OPEC output is higher than the call for
  both fourth quarter and first quarter 2009
• Fourth quarter call 31.3 million b/d
• First quarter call 30.3 million b/d
• OPEC meeting well be good boys!
• Main players concerned with demand destruction

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What to watch for..

• Upside potential Non-OPEC output continues to
  disappoint
• Mexicos train wreck gets even worse
• Venezuela joins in on the highway to hell
• The whispers about Saudi production turn out to
  be true
• Can Iraq save the day?
• Downside potential demand retreats furtherbut
  that might mean the economy isnt too hot!

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What to watch for, cont

• Does natural gas pull down the price of oil?
• The big breakthrough oil shale, at the Mahogany
  play

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• Questions?