API Industry Outlook. Third Quarter R. Dean Foreman, Ph.D. Great Plains and EmPower ND Energy Conference October 8, 2018.

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1 API Industry Outlook Third Quarter 2018 R. Dean Foreman, Ph.D. Chief Economist American Petroleum Institute Great Plains and EmPower ND Energy Conference October 8, 2018 American Updated Petroleum September Institute /5/2018 1

2 Key Points U.S. natural gas and oil set records for production & exports, but challenges escalated Economic and oil market outlook Remarkable natural gas & oil production progress so far in 2018, but headwinds persist Global oil markets appeared at a slight deficit in Q3 2018, without further OPEC actions North Dakota has played an increasing role in U.S. oil production, and EIA projects it should continue to do so for decades to come August 2018: North Dakota 1.2 million barrels per day (mb/d), U.S mb/d Strong domestic energy production and lower prices have benefitted consumers North Dakota s energy spending in 2016 was $3.4 billion that of

3 Energy is everything, and natural gas and oil are integral Transportation Heating and Cooling Electric power Materials (Industry & Manufacturing) 3

4 Global Economy and Oil Markets 4

5 Global economic and energy demand growth go hand-in-hand As the global economy grows, so does energy demand Since 2010, every one percent rise in global GDP has typically generated a 0.6 percent increase in energy demand GDP (Trillion 2010$, market exchange rate basis) 80 Quadrillion Btu GDP Energy demand sources: IEA, EIA IEO (2017) 5 0

6 Global economic and financial headlines - a roller coaster Bloomberg consensus expectations suggest solid but slower economic growth as uncertainties rise 6

7 Financial markets Physical market fundamentals Global oil market fundamentals sustained higher oil prices in Q Heat map of year-to-year percentage changes OECD Non-OECD Non-OPEC OPEC Decreased Physical market fundamentals Financial market Supply Increased Supply Demand Demand Crude inventories Crude inventories Product inventories Product inventories Drilling activity Drilling activity Prices Prices Brent-WTI differential Brent-WTI differential Open interest long/short Open interest long+short USD Broad forex USD Broad forex Energy Geopolitical Geopolitical policy & Policy/efficiency/tax Middle east /Saudi Arabia hotspots technology hotspots sources: Energy API policy Monthly & Statistical Policy/efficiency/tax Report, IEA, EIA, Bloomberg, U.S. Federal Reserve, Baker Hughes, U.S. Commodity technology Futures Trading Commission Q3 highlights U.S. supplies met virtually all global demand growth Inventories fell Drilling up worldwide Prices diverged Geopolitical risk premium Stimulative 7

8 EIA estimates suggest the global oil market has remained in a slight deficit The EIA has estimated that Non-OPEC countries, led by the U.S., will add 2.6 MBD of production by Q4 2018, compared with Q EIA global supply/demand estimates as of September 2018 Million barrels per day $/Bbl 125 EIA supply/demand estimates Supply less demand (mb/d) Brent (2018$/Bbl) sources: EIA STEO (September 2018), Bloomberg 0 8

9 The U.S. energy revolution has been an insurance policy that has enabled the U.S. domestic & international agenda VS U.S. CRUDE OIL PRODUCTION U.S. NATURAL GAS PRODUCTION U.S. CO 2 EMISSIONS (% BELOW 2005 LEVELS) -2.9% -14.1% NET IMPORTS (EXPORT/IMPORT) BALANCE U.S. PETROLEUM IMPORTS AMERICAN JOBS SUPPORTED WTI CRUDE PRICE HENRY HUB NATURAL GAS PRICE sources: EIA, API Monthly Statistical Report 1) Annual average ; 2) August YTD; 3) million barrels per day; 4) gross withdrawals, billion cubic feet per day; 5) Jobs in millions; 6) Nominal $/Bbl; 7) Nominal $/million Btu 9

10 U.S. oil imports are at their lowest levels since the 1960s Million barrels per day 15 Crude oil and NGL production Petroleum net imports In 2018, U.S. petroleum net imports fell to their lowest levels in more than 50 years 10 5 With liquids production growth of more 2 million barrels per day so far this year, the United States has supplied virtually all global oil demand growth and compensated for OPEC s decreases sources: EIA, API Monthly Statistical Report 10

11 With innovation and productivity, U.S. oil drilling has become increasingly cost-effective and resilient Primary tight oil producing regions appear on average to be economic at recent oil prices U.S. gas production by play type Breakeven prices for selected oil plays* Million barrels per day (mb/d) 12 Bakken 8 Permian Permian - Delaware Basin Permian - Midland Basin Dollars per barrel WTI spot price (Q3 2018) 4 Other U.S. East Eagle Ford source: EIA Drilling Productivity Report Bakken Q *Half cycle breakevens assuming 10% discount factor and play-specific costs source: BTU Analytics (Q3 2018) 11

12 U.S. oil and gas industry has made record investments in the U.S. $2.5 trillion over 10 years Industry growth has been driven primarily by the strong economy, energy demand, and exports of crude, natural gas and products Headwinds Higher costs: tariffs and quotas on imports of steel for pipelines, drilling and new plants (Section 232) Reduced global market access: China retaliatory tariffs on U.S. LNG, with crude oil next (Section 301) Uncertain Congressional action on U.S., Mexico, Canada Agreement a once-in-a-generation opportunity for energy collaboration U.S. Dollar appreciation: A challenge to maintain global competitiveness 12

13 The U.S. economic outlook expected to slow, and North Dakota s economy has lagged the U.S. as a whole Bloomberg consensus expectations broad but weakening each year to 2020 Latest state GDP highlighted the divergence among state economic performances U.S. real GDP growth y/y% Average ( ) Bloomberg consensus range Q sources: U.S. Bureau of Economic Analysis, Bloomberg State GDP Growth Q Selected states seasonally-adjusted annualized rates (%) Colorado Texas Louisiana United States Pennsylvania Oklahoma Ohio Alaska New Mexico North Dakota

14 Oil & gas infrastructure benefit North Dakota, its consumers, and businesses North Dakota pipeline infrastructure Enables Bakken egress and connects production with the mid-continent refining complex Alliance, Northern Border/Bison pipelines connect U.S. and Canadian natural gas markets 14

15 North Dakota has played an increasing role in U.S. oil production, and EIA projects it should do so for decades to come EIA - U.S. Lower 48 crude oil production High oil & gas resource and technology case Million barrels per day 15 Dakotas / Rocky Mountains EIA projects U.S. crude oil production could reach as high as 16.5 mb/d in Southwest Other U.S. North Dakota s oil production nearly quadrupled between 2010 and 2018 and in EIA s high case could nearly double again by sources: EIA AEO (2018) 15

16 North Dakota s energy spending in 2016 was $3.4 billion or 42% below that of 2013, adjusted for price inflation North Dakota spent $4.8 billion on energy in 2016, compared with $8.2 billion in 2013 Expenditures on transportation decreased the most at $1.9 billion, followed by industrial energy spending down by $1.3 billion Billion 2018$ dollars Changes 2013 to 2016 (2018$) Total: $3.4 Residential / Commerical -0.2 Transportation -1.9 Industrial -1.3 Power generation 0.0 Coal Oil Natural gas Electricity Other source: EIA SEDS (2018). To avoid double-counting with electricity spending by end use sector, energy input costs in power generation are not included in the total 16

17 Resources: Chief Economist s section at

18 Final thoughts for discussion 18