Dont Hold Your Breath For $70 Oil and The Beginning of the End For - - PowerPoint PPT Presentation

Slide 1 Labyrinth Consulting Services, Inc. artberman.com

Don’t Hold Your Breath For $70 Oil and The Beginning of the End For the Bakken

Art Berman Labyrinth Consulting Services, Inc. Illinois Oil & Gas Association Evansville, Indiana March 3, 2017

Slide 2 Labyrinth Consulting Services, Inc. artberman.com

Oil Markets In Early Recovery From The Second of Two Major Production Bubbles

• The 1st Bubble 1974-1980: oil shocks and price increase from $23 to $117/barrel led to

massive E&P investments, over-production, demand destruction & oil-price deflation until 1998.

• Second Bubble: 1999-2014: flat global output & growing Asian demand led to increasing oil

prices from $17 to $148/barrel by 2008.

• After the 2008 Financial Collapse, OPEC cut production then, declining OPEC spare capacity,

falling OECD inventories, & near-zero interest rates led to the longest period of high oil prices in history from 2011-2014.

• Over-investment resulted in a massive over-supply.
• The bubble burst in 2014 and prices collapsed.

52 53 54 55 56 57 58 59 60 61 62 63 64 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Millions of Incremental Barrels of Crude Oil & Condensate Per Day

U.S. + Canada Incremental Ouput: The Major Contributor to Low Oil Prices

Iraq Iran Russia Brazil Saudi Arabia U.S. Canada

Kuwait UAE Angola Venezuela Mexico Algeria

Nigeria Base

Libya

Indonesia-Ecuador-Qatar-Gabon Source: EIA , Labyrinth Consulting Services, Inc. & Crude Oil Peak OPEC, U.S., Canada, Russia & Brazil account for 66% of world crude oil & lease condensate production

U.S. + Canada 4.4 mmb/d Increase (44% of incremental production in Mar 2015)

$52.50

$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 $160

Jan-70 Feb-71 Mar-72 Apr-73 May-74 Jun-75 Jul-76 Aug-77 Sep-78 Oct-79 Nov-80 Dec-81 Jan-83 Feb-84 Mar-85 Apr-86 May-87 Jun-88 Jul-89 Aug-90 Sep-91 Oct-92 Nov-93 Dec-94 Jan-96 Feb-97 Mar-98 Apr-99 May-00 Jun-01 Jul-02 Aug-03 Sep-04 Oct-05 Nov-06 Dec-07 Jan-09 Feb-10 Mar-11 Apr-12 May-13 Jun-14 Jul-15 Aug-16

CPI Adjusted WTI Prices (July 2016 Dollars Per Barrel)

Oil Shocks

• ->

Massive E&P Investment (North Sea, Mexico, Siberia) Over-Supply, Demand Destruction & Price Deflation Debt-Fueled Economic Expansion & Rapid Growth in China & East Asia Massive E&P Investment (Shale, Deep Water, Heavy Oil) Over-Supply, Demand Destruction & Price Deflation

Current $54 Oil Price Is 60% Higher Than Jan 1986 - Jan 2004 Average in December 2016 Dollars

Source: EIA, U.S. Bureau of Labor Statistics & Labyrinth Consulting Services, Inc.

Avg 1986-2004 $34/barrel Avg 2005-2015 $86/barrel

All Prices in Constant December 2016 Dollars

Avg 1974-1985 $70/barrel Avg 1950-1973 $23/barrel

$50/barrel

1st Bubble: 1974-1980 2nd Bubble: 1999-2014

Slide 3 Labyrinth Consulting Services, Inc. artberman.com

The 2016 OPEC Cut

• First mention of a production “freeze” in February 2016 when oil prices were $26/barrel.
• Expectation of OPEC action & improving fundamentals lifted prices to $43 average for 2016.
• Prices dropped when a freeze agreement failed in August; failure to act in November would have

sent prices into the mid-$30 range.

• The cut was more about setting a price floor than about raising prices.
• OPEC agreed to cut production in November partly because it was incapable of sustaining output

at 2016 levels.

• By July 2016, surplus production capacity was 0.92 mmb/d—the all-time low was 0.71 mmb/d in

late 2004.

• Announcing a cut is a good way to cover the reality that commercial reserve limits have been

reached.

• Low OPEC spare capacity has usually led to a major oil-price increase (e.g., 2004 & 2007).

$0 $20 $40 $60 $80 $100 $120 $140 $160 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Brent Price (October 2016 Adjusted Dollars Per Barrel) OPEC Surplus Crude Oil Production Capacity (mmb/d)

Low Spare Capacity Was A Key Factor In The OPEC Output Cut

Incremental OPEC Spare Capacity BASE

Source: EIA and Labyrinth Consulting Services, Inc.

Brent Price (RHS)

0.92 mmb/d 0.86 mmb/d 0.71mmb/d Financial Collapse

20 40 60 80 100 120 $0 $10 $20 $30 $40 $50 $60 $70 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17

Oil-Price Volatility Index NYMEX WTI Futures Prices ($/Barrel)

Oil Prices Have Not Exceeded $54 Per Barrel Since Early 2015 Daily Futures Price (LHS) Daily Oil-Price Volatility Index (RHS)

$61 Per Barrel Ceiling $54 Per Barrel Ceiling

Source: EIA, CBOE, Bloomberg & Labyrinth Consulting Services, Inc.

OPEC "Freeze" Proposed OPEC Cut Sept 28 Agreed Nov 30 $43 $26 OPEC Doha Freeze Meeting Failed $40

Slide 4 Labyrinth Consulting Services, Inc. artberman.com

There Never Was An OPEC Strategy or Price War

• Analysts created a narrative that OPEC’s strategy was to hurt U.S. tight oil producers.
• This story line is unfounded but widely accepted because of American hubris.
• Cartel’s inaction since the 2014 price collapse reflected unwillingness to repeat the mistake
• f 1979-85 when OPEC cut 14 mmb/d with no affect on over-supply, demand or oil prices.
• Saudi Arabia cut 7 mmb/d 1980-1985.
• Cuts lowered OPEC market share and greatly reduced revenue.
• “We met with non-OPEC producers, we asked ‘what are you going to do?’ They said
• nothing. We said the meeting is over.” –Ali Al-Naimi, February 2016.
• The 2016 OPEC cut happened because Russia participated along with rest of OPEC.

$0 $20 $40 $60 $80 $100 $120 $140

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10 20 30 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

World Oil Price in 2015 Dollars Millions of Barrels of Liquids Per Day Compared to 1979

OPEC Cut Production 14 mmb/d from 1979-1985 With No Effect on World Supply Surplus or Oil Price OPEC Prod (LHS) World Prod (LHS)

OPEC production decreased 14 mmbpd

World production decreased 9.5 mmbpd

Source: BP and Labyrinth Consulting Services, inc.

Oil Price (RHS)

Slide 5 Labyrinth Consulting Services, Inc. artberman.com

Tight Oil Is Not A Threat To OPEC

300 269 171 158 143 104 98 80 60 48 37 37 30 25 25 16 12 11.6 9… 8.4 8.3 50 100 150 200 250 300 350 Venezuela Saudi Arabia Canada Iran Iraq Kuwait UAE Russia Deep Water Libya Nigeria USA Kazakhstan Qatar China Brazil Algeria U.S. Tight Oil Mexico Angola Ecuador Billions of Barrels of Crude Oil & Lease Condensate

Oil Sands Are Saudi Arabia's Chief Reserve Competition, Not U.S. Tight Oil

Source: EIA, Hyperdynamics and Labyrinth Consulting Services, Inc. Tight Oil Deep Water Oil Sands Oil Sands

• Tight oil has never been a long-term threat to OPEC because the reserves are relatively

small.

• EIA year-end 2015 data indicates that U.S. tight oil proven reserves are less than 12 billion

barrels.

• Deep water reserves are more substantial than tight oil but are still small compared with

OPEC reserves.

• Canada’s and Venezuela’s combined oil sands reserves exceed 350 billion barrels.
• Oil sands are Saudi Arabia’s and OPEC’s chief reserve competition, not U.S. tight oil.

Slide 6 Labyrinth Consulting Services, Inc. artberman.com

World Production Surplus Is Moving Unevenly Toward Market Balance

• Supply and demand fundamentals improved in 2016 but progress has been uneven.
• The global production surplus is ~0.75 mmb/d, the average for 2016, but excursions have

included +2 to -1.5 mmb/d.

• Consumption growth was 1.3 mmb/d, less than average since the Financial Collapse but

slightly better than forecasts.

• 2016 was the lowest average oil price ($2016) since 2003 and 12% less than 2015 and yet,

demand growth was mediocre.

• The weak global economy is an important consideration for supporting higher oil prices.
• Most of 2016 was without bad economic news to depress markets.

3.20 1.90 1.14 2.50 3.15 2.03 3.33

0.60

1.13 0.21 0.69

• 0.17

0.42 1.62 2.10 0.73 $0 $20 $40 $60 $80 $100 $120 $140

• 2.0
• 1.0

0.0 1.0 2.0 3.0 4.0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16

Brent Price ( October 2016 Dollars Per Barrel) Market Balance (Supply minus Consumption Millions of Barrels Per Day)

The World Production Surplus Peaked in January 2016 & Has Since Moved Unevenly Closer To Market Balance

Source: EIA STEO December 2016 & Labyrinth Consulting Services, Inc.

Market Balance (LHS) Brent Price (RHS) Increasing Surplus Decreasing Surplus

1.2 1.7 1.9 0.5 0.3 1.5 0.9 0.8 1.5 1.7 0.2 2.1 0.8 2.0 1.7 1.9 1.2 2.2 2.1 2.4 2.0 0.4 0.7 0.9 0.5 0.5 1.5 1.7 2.4 1.6 0.7 2.3 1.6 1.6 2.2 0.6 $0 $20 $40 $60 $80 $100 $120 0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Brent Price ($/Barrel) Year-Over-Year Consumption Growth (mmb/d)

2016 Consumption Growth: 1.3 mmb/d: A Good Year After All

YOY Consumption Growth (LHS) Annual Consumption Growth Brent Price (RHS)

Source: EIA December 2016 STEO, Labyrinth Consulting Services, Inc. & Crude Oil Peak

1.15 mmb/d 1.5 mmb/d 1.3 mmb/d

Slide 7 Labyrinth Consulting Services, Inc. artberman.com

The OPEC Production Cut Will Not Bring The Market Into Balance Quickly

• Production is not supply and consumption is not demand.
• Inventory is part of supply and is also a component of demand.
• IEA forecasts a supply deficit by Q1 2017 yet OECD inventories > 400 mmb above 5-yr average.
• Stocks will have to be drastically reduced over the next 3 weeks for that to occur.
• What IEA is showing as “demand/supply balance” is really demand-production balance.
• If OPEC cuts as announced, consumption may exceed production in Q1 & Q2 2017 &

withdrawals from storage will occur—legitimate demand increase.

• But, the billions of barrels of working capacity in inventory are not considered part of supply!
• Inventory is like a savings account—separate from checking but certainly part of available

money.

$0 $20 $40 $60 $80 $100 $120 $140 $160 2.5 2.6 2.7 2.8 2.9 3 3.1 3.2 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Brent Price ($/Barrel) Billions of Barrels of Incremental Liquids

OECD Incremental Inventories Are At Record High Levels Although Absolute Inventories Have Flattened in Recent Months U.S. Inventories (LHS) Base

Source: EIA & Labyrinth Consulting Services, Inc.

OECD Minus U.S. Inventories (LHS) Brent Price (RHS)

~550 mmb Incremental Inventory Since December 2013

Slide 8 Labyrinth Consulting Services, Inc. artberman.com

Comparative Inventory Provides Context For Market Balance & Oil Prices

• Comparative inventories index current storage levels against a moving average of values for

the same calendar date over the previous 5 years.

• OECD comparative inventories (C.I.) are at an all-time high level of more than 300 million

barrels (absolute inventories > 3.1 billion barrels).

• C.I. ~ zero corresponds to periods of high oil prices (>$80 per barrel) over the past decade.
• Cross-plot of C.I. vs Brent price suggests current ~$56/barrel is at least $10 over-valued.
• C.I. must fall >200 mmb to support $70 prices.
• OPEC cuts will accelerate movement toward market balance but massive stock reductions

will occur over a year or more.

• Also assumes that non-OPEC production falls or remains static.

314

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50 150 250 350 $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 $160 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Comparative Inventory (Millions of Barrels of Liquids) Brent Price (December 2016 Dollars/Barrel)

OECD Comparative Inventories Are At An All-Time High & Need to Fall 200-300 mmb To Support $70-$80 Per Barrel Oil Prices Brent Price Comparative Inventory

Source: EIA STEO & Labyrinth Consulting Services, Inc.

C.I. = 0

Slide 9 Labyrinth Consulting Services, Inc. artberman.com

U.S. Production Will Not Remain Static

• Output fell 1 mmb/d from April 2015-September 2016 but is now increasing.
• EIA forecast is for 9.8 mmb/d by December 2018.
• WTI does not reach $60/barrel and falls below $50 in February for half of 2017.
• The tight oil horizontal rig count has increased by 144 (57%) since the OPEC production cut was first

announced in September 2016.

• 69% of the increase has been in the Permian basin where the rig count has increased 95.
• Eagle Ford has made a come-back in recent weeks.
• This suggests that U.S. production will increase.
• Increased production from Nigeria and Libya plus U.S. tight oil may cancel OPEC/NOPEC production cuts.
• Lack of frack crews & poor condition of frack equipment are a concern for near-term production growth.

9.63 8.57 8.86 9.28 9.78

$0 $20 $40 $60 $80 $100 $120 0.00 2.00 4.00 6.00 8.00 10.00 12.00 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18

WTI Price ($/Barrel) Millions of Barrels of Crude Oil Per Day

EIA Forecast is 9.8 mmb/d by December 2018

April 2015 Source: EIA STEO Febuary 2017 & Labyrinth Consulting Services, Inc.

• 1.06 mmb/d

Oil Production (LHS) WTI Price (RHS)

Jan 2017 Dec 2017

+0.29 mmb/d

Sept 2016 Dec 2018

+0.92 mmb/d Jan 2017-Dec 2018

20 40 60 80 100 120

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2 4 6 8 10

Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 NYMEX WTI Price ($/Barrel) & Oil Price Volatility Index Weekly Rig Count Change

Eagle Ford (LHS) Bakken (LHS)

NYMEX Price (RHS) Oil-Price Volatility Index (RHS) 144 Tight Oil Rigs Added Since Mid-Sept 2016: 67% Are In The Permian Basin

Apr-June 2015 Price Rally Source: Baker Hughes, EIA, Bloomberg & Labyrinth Consulting Services, Inc.

Permian (LHS)

Slide 10 Labyrinth Consulting Services, Inc. artberman.com

Record U.S. Crude Oil Inventories Reflect Over-Valued Oil Prices

• U.S. crude oil inventories are at all-time high levels: 520 million barrels.
• That is 44 million barrels above 2016 and 140 million barrels above the 5-year average.
• The 14 million barrel addition the week ending February 3 was the 2nd highest in history—the highest

was in October 2016 when WTI was $5/barrel lower.

• Comparative inventories are also at record high levels.
• The trend line shows that oil prices are at least $6 to $7 per barrel over-valued.
• Comparative inventories must fall ~220 mmb to support $70 oil prices.

$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110

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20 40 60 80 100 120 140 160 180 200 220 240

Oil Prices Are ~$6 Per Barrel Over-Valued Mar-June 2015 Price Rally 2006-2007 2014-2017 Latest Data $40 $54

Source: EIA & Labyrinth Consulting Services, Inc.

Comparative Inventory (Millions of Barrels) WTI Price ($/barrel)

C.I. Must Fall ~220 Million Barrels To Support $70 Oil Prices

250 300 350 400 450 500 550 JanJanJanJan

Millions of Barrels of Crude Oil

2016

2015 2013 2014 2012 2011 +44 mmbo above 2016 level; +140 mmbo above the 5-year average

Source: EIA & Labyrinth Consulting Services, Inc.

2017 Inventory

Crude Oil Inventories Are At Record Levels 140 mmb Above the 5-Year Average

Slide 11 Labyrinth Consulting Services, Inc. artberman.com

1,227 1,190 1,177 1,191 1,169 1,203 1,211 1,202 1,188 1,162 1,171 1,182 1,153 1,122 1,119 1,111 1,047 1,027 1,027 1,030 982 972 1,044 1,034 942

5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 700 800 900 1,000 1,100 1,200 1,300 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Number of Producing Wells Oil Production (kbpd) & Number of Wells Waiting-On-Completion

Bakken Production Declined 92,000 bopd (9%) in December

Waiting-On-Completion Wells Number of Producing Wells

Oil production declined 285 Kbopd (-23%) since December 2014

Oil Production (kbopd) Current Wellhead

• il price:

$42.50

Source: North Dakota DMR & Labyrinth Consulting Services, Inc.

Demise of The Bakken: Production Has Declined 285 kbpd since December 2014

• Bakken production fell 92,000 bopd in December—a 9% drop in one month.
• Some of the decline is probably weather-related but also because of a sizeable decrease in the number
• f producing wells—why?
• Current wellhead price is $42.50 per barrel.

Slide 12 Labyrinth Consulting Services, Inc. artberman.com

Considerable Area Is Commercial at $45 Wellhead Prices

• A detailed reserve analysis of the 8 top
• perators indicates that a 1.2 million acre area

is commercial at $50/barrel wellhead prices.

• There are currently 5,500 producing wells in

that area yielding an average well density of 215 acres per well.

• Operators suggest 40-120 acre infill spacing

for tight oil plays, favoring the lower end of that range.

• 215 acre spacing suggests considerable down-

spacing and potential for several years of production growth at higher oil prices.

Slide 13 Labyrinth Consulting Services, Inc. artberman.com

EUR, Gas-Oil Ratios & Water Cut Trends Suggest Declining Output More Likely

• EUR decreased & decline rates increased for

wells with 1st production after 2013.

• Gas-oil ratios increased & then decreased.
• Water cuts increased for all wells with 1st

production after 2013.

• These trends suggest depletion and that the

play has been over-drilled—not conclusive without pressure data.

100 200 300 400 500 600 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960 Oil Production (Barrels of Oil Per Day) Months of Production

Oil Production Decline Rates For Recent Years Are Greater Than For Previous Years For Top 8 Bakken Producers 2016 2015 2014 2013 2012 2016 Declining Faster Than All Previous Years Despite Higher Initial Rates 2015 Declining Faster Than Previous Years 2014 Declining Faster Than Previous Years

Source: Drilling Info & Labyrinth Consulting Services, Inc.

20% 25% 30% 35% 40% 45% 50% 55% 60% 1 2 3 4 5 6 7 8 9 10111213141516171819202122232425262728293031323334353637383940414243444546474849505152535455565758 Percent Water Months of Production

Water Cut Increased In The Last 3 Years For Top 8 Bakken Producers

2016 2015 2014 2013 2012

Source: Drilling Info & Labyrinth Consulting Services, Inc.

500 1,000 1,500 2,000 2,500 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960 Gas-Oil Ratio (Cubic Feet Per Barrel) Months of Production

Gas-Oil Ratio Increases Every Year For Top 8 Bakken Producers 2016 2015 2014 2013 2012

Source: Drilling Info & Labyrinth Consulting Services, Inc.

Slide 14 Labyrinth Consulting Services, Inc. artberman.com

Long Lateral Lengths & Focused Drilling Suggest Maximum Optimum Development 2015-2016 Wells Only All Wells

Parshall-Sanish Early Drilling/Shorter Laterals

• 2015-2016 drilling has collapsed to the commercial core area so declining EUR suggests well interference.
• Most of the core area has been drilled with 8,000-12,000 ft laterals.
• It is reasonable that 215 acre/well exceeds optimum infill spacing.
• Shorter laterals probably reflect earlier Parshall-Sanish development.

Slide 15 Labyrinth Consulting Services, Inc. artberman.com

No Company Breaks Even At Current Wellhead Prices ($42.50) Based On Average Well EUR

• No operator is breaking even at current

wellhead prices although COP is close.

• EOG, Marathon & XTO break even < $50.
• Other companies need $55-$65 prices.
• Bakken wellhead prices ~$10 < WTI so average
• f key operators break-even is $65 ($55-$75).
• This is typical of the resource plays because

lease positions are taken before the core is well defined.

• The premature demise of the Bakken is a signal

that the other plays may meet a similar end.

• That scenario is confirmed in the shale gas

plays.

Slide 16 Labyrinth Consulting Services, Inc. artberman.com

Natural Gas Price Is A Fascinating Bet

• Henry Hub prices more than doubled from March 2016 low of $1.73/mmBtu.
• Prices fell in 2017 from almost $3.93 to $2.56 in late February but have risen to $2.82.
• Market is bearish after a warm winter & new Marcellus pipeline approvals.
• Comparative inventories suggest $3.00 mid-cycle price with a potential range of $2.00 - $4.50.
• New pipelines will not be completed in 2017.
• Prices will probably increase in early summer once the reality of tight supply re-surfaces.
• Late summer heat waves are possible (Browning).
• Prices could end 2017 at or above 2016 levels.

$1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00

• 1100
• 1000 -900 -800 -700 -600 -500 -400 -300 -200 -100

100 200 300 400 500 600 700 800 900 1000

Henry Hub Spot Gas Price (Dollars Per MMBTU) Comparative Inventory (Billions of Cubic Feet of Gas)

Source: EIA & Labyrinth Consulting Services, Inc.

Gas Mid-Cycle Price Has Shifted Downward To ~$3/mmBtu or Lower & C.I. Has Turned Positive

March 2013 - March 2014 Trend Aug 2011- March 2013 Trend Previous Trend (May 2016 -Oct 2016)

Jan 2017 Price Drop Latest Data

$1.95 $1.73 $3.30 71.23 10 20 30 40 50 60 70 80

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• 1

1 2 3 4 5 6 7 8 9 10 11 12 13 14 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Dry Gas Production (Bcf per Day) Henry Hub Price ($/mmBtu) and Supply Surplus or Deficit (Bcf per Day)

EIA 2017 Forecast +4.6 Bcf/d With Flat Prices

Source: EIA February 2017 STEO & Labyrinth Consulting Services, Inc.

Dry Gas Production (RHS) Henry Hub Price (LHS) Supply Surplus (LHS) Supply Deficit (LHS)

Mar 2016 Apr 2012

• Avg. $4.06

Flat Production Oct 2011-Jul 2013 Flat Production Apr 2009-Jan 2010

• Avg. $4.11
• Avg. $8.58

Declining Production Feb - Jan 2017 +4.6 Bcf/d Forecast in 2017 Flat Prices >$3.50

Slide 17 Labyrinth Consulting Services, Inc. artberman.com

Don’t Hold Your Breath For $70 Oil Prices

• Oil markets look for every excuse to increase prices because we are conditioned by 4 years of

prices >$90 as normal.

• Expectations for a return to $70 prices are premature given the magnitude of the bubble.
• Over-supply was the price-collapse trigger but was not the sole cause.
• A global economy exhausted by debt, weak demand growth and the high price of energy even at

today’s prices are of at least equal weight.

• Over-supply can be fixed but the other factors are more problematic.
• Inventories are the key—when inventories fall systematically, prices will increase.
• Future curve is not optimistic—suggests flat prices with slight backwardation for next 5 years.
• Under-investment in E&P will result in tight supply over the next several years and prices will

increase to abnormal levels.

• Even with considerable improvement in the global economy, this may be a disaster.

$0 $20 $40 $60 $80 $100 $120 $140 $160 2.5 2.6 2.7 2.8 2.9 3 3.1 3.2 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Brent Price ($/Barrel) Billions of Barrels of Incremental Liquids

OECD Incremental Inventories Are At Record High Levels Although Absolute Inventories Have Flattened in Recent Months U.S. Inventories (LHS) Base

Source: EIA & Labyrinth Consulting Services, Inc.

OECD Minus U.S. Inventories (LHS) Brent Price (RHS)

~550 mmb Incremental Inventory Since December 2013

$44 $46 $48 $50 $52 $54 $56 $58 $60 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 NYMEX WTI Price ($/Barrel)

The Term Structure of WTI Futures Contracts Has Changed Since The OPEC Production Cuts Were Announced In Late November 2016

November 30, 2016 Contracts March 2, 2017 Contracts Expectation for very flat prices with slight backwardation for the next 5 years