Beyond The Gas PumpBeyond The Gas PumpEnergy From Oil & GasEnergy From Oil & Gas

Oil at $100 a barrelOil at $100 a barrel

Historical Energy Use Historical Energy Use by Type of Fuel (%) by Type of Fuel (%)

0

10

20

30

40

50

60

70

% Of Total Usage

1850 1900 1950 2000

WoodCoalOil & GasNuclearHydro Other

SPE 77506 – World Energy Beyond 2050, Arlie Skov

Significant Global Energy Significant Global Energy EventsEvents

OPEC Sets 55 percent Minimum Tax Rate (1970) U.S. Institutes Price Controls (1971) Arab Oil Embargo Against U.S. (1973)

EPCA Authorizes Strategic Petroleum Reserve (1975) Windfall Profits Tax (1980) Iran/Iraq War – Oil Prices Doubled (1978-1980) World Oil Glut - $29 BBL Oil – U.S. Synfuels Shutdown (1983) Chernobyl Nuclear Accident (1986) Alaska’s Prudhoe Bay Production Peaks (1988)

Iraq Invades Kuwait – Prices Soar ($36 BBL) (1990) Clean Air Act – Changes Gasoline & Diesel Fuels (1990) U.S. Imports More Oil & Refined Product Than It Produces

(1993) Asian Financial Crisis – Oil Prices Plummet (1997-1998) German Government/Utilities Agree to Phase Out of Nuclear Power

(2000)

U.S. Petroleum Consumption – All Time High (19.7 Million BPD) (2001)

Terrorist Attacks on the U.S. (2001)

1970

2001

1983

Recent Global Energy EventsRecent Global Energy EventsForeign Oil Dependence Rises to 65 percent (2004) Northeast Blackout Leaves 50 Million People in the Dark Natural Gas Prices Triple from 1990 Levels Oil Passes $50/Barrel Gasoline Exceeds $3/Gallon Hurricanes Damage Oil/Gas Rigs Venezuela Moves to Nationalize Resources Oil Breaks $75/Barrel Nigeria Kidnaps Oil Workers

Experts State Oil Production May Have Peaked Iran Threatens Nuclear Capabilities

Chad Orders Chevron to Leave BP Forced to Repair Pipeline Leaks China Extends Credit to Oil Nations Iran, Russia, Others Discuss Gas OPEC Texas Utilities Cancel 8 of 11 Coal Plants Oil Breaks $83/Barrel

$100.00 bbl OIL FEB. 2008

2004

2007

2005

U.S Energy Supply SourcesU.S Energy Supply Sources

Canada17%

Mexico15%

Venezuela14%Saudi

Arabia13%

Other No OPEC14%

Other OPEC27%

World Energy SupplyWorld Energy Supply

Oil34.3%

Coal25.1%

Natural gas20.9%

Nuclear6.5%

Waste0.2%

Renewable13.1%

Renewable EnergyRenewable EnergyWood 35%, Hydro, Wind 45%& Grain Wood 35%, Hydro, Wind 45%& Grain

15%15%

6%

81%11%

2%

Coal Oil Nuclear Renewables

Distribution of proved (oil) Distribution of proved (oil) reserves 1986, 1996 and 2006reserves 1986, 1996 and 2006

Just Over The Horizon…Just Over The Horizon…Forecasting Oil & Gas SupplyForecasting Oil & Gas Supply

WSJ 7-10-07, “The industrialized world’s WSJ 7-10-07, “The industrialized world’s energy watchdog added to rising concerns in energy watchdog added to rising concerns in some quarters that oil and natural gas some quarters that oil and natural gas production won’t keep up with the world’s production won’t keep up with the world’s growing thirst for energy in coming years, growing thirst for energy in coming years, highlighting worries over supplies and highlighting worries over supplies and prices.” (Referencing the recently published prices.” (Referencing the recently published International Energy Agency “Oil Market International Energy Agency “Oil Market Report” )Report” )

A Significant ChallengeA Significant Challenge

A SURGE:A SURGE: The surge in demand is expected to The surge in demand is expected to arise from rapid economic growth in such fast-arise from rapid economic growth in such fast-developing countries as China and India, as well developing countries as China and India, as well as mounting consumption in the U.S., the as mounting consumption in the U.S., the world's biggest energy market.”world's biggest energy market.”

– Comments from the National Petroleum Council’s Comments from the National Petroleum Council’s Draft Report, “Facing Hard Truths about Energy”, Draft Report, “Facing Hard Truths about Energy”, Bhushan Bahree, The Wall Street Journal 7-17-07Bhushan Bahree, The Wall Street Journal 7-17-07

““Our Energy Future”Our Energy Future”Significant Issues of Interest/ImportanceSignificant Issues of Interest/Importance

Enhancing The World’s Standard of LivingEnhancing The World’s Standard of Living

Alternative Fuels / Sources & EconomicsAlternative Fuels / Sources & Economics

Environmental Impact Issues Environmental Impact Issues

Consumption - Improving Energy EfficiencyConsumption - Improving Energy Efficiency

Fueling The World’s Economic GrowthFueling The World’s Economic Growth

Supply Challenge – Supply Challenge – Fueling Economic GrowthFueling Economic Growth

Geo-politicsGeo-politics

Commodities – Price & ValueCommodities – Price & Value

Commodity Savy?? NYMEX Closing Prices 2/16/2008Commodity Savy?? NYMEX Closing Prices 2/16/2008– West Texas Intermediate Crude ($/bbl)West Texas Intermediate Crude ($/bbl)– Natural Gas ($/Mcf) Natural Gas ($/Mcf)

VolumesVolumes– 1 Barrel = 42 gallons = 672 cups1 Barrel = 42 gallons = 672 cups– 1 Mcf = 1000 Std. Cubic Feet @ Standard Temp (60F), Pressure (1atm)1 Mcf = 1000 Std. Cubic Feet @ Standard Temp (60F), Pressure (1atm)

Just for fun!Just for fun!– Grande Latte @ $3.50 (est. = 2 cups)Grande Latte @ $3.50 (est. = 2 cups)– 1 Barrel “Latte” = 672/2 *$3.50 = $11761 Barrel “Latte” = 672/2 *$3.50 = $1176– 1 Barrel of WTI = $99.15, 1 cup of WTI = $0.141 Barrel of WTI = $99.15, 1 cup of WTI = $0.14– Energy contained in 1 cup of crude oil?Energy contained in 1 cup of crude oil?

Assume avg. Car Mileage 25 mpg... Equivalent of 1.6 miles/cup Assume avg. Car Mileage 25 mpg... Equivalent of 1.6 miles/cup

Oil = $99.15/bblGas = $6.38/mcf

Chemical Composition of Chemical Composition of HydrocarbonsHydrocarbons

Crude OilCrude Oil

84-87%84-87%

11-14%11-14%

0.06-2%0.06-2%

0.1-2%0.1-2%

0.1-2%0.1-2%

Natural GasNatural Gas

65 – 80%65 – 80%

1-25%1-25%

0-0.2%0-0.2%

1-15%1-15%

0%0%

CarbonCarbon

HydrogenHydrogen

SulfurSulfur

NitrogenNitrogen

OxygenOxygen

Petroleum ProductsPetroleum Products

Gasoline - 19.5 gallonsGasoline - 19.5 gallons

A Barrel of Crude Oil Provides:A Barrel of Crude Oil Provides:

Fuel Oil - 9.2 gallonsFuel Oil - 9.2 gallons

Jet Fuel - 4.1 gallonsJet Fuel - 4.1 gallons

Asphalt - 2.3 gallonsAsphalt - 2.3 gallons

Kerosene - 0.2 gallonsKerosene - 0.2 gallons

Lubricants - 0.5 gallonsLubricants - 0.5 gallons

Petrochemicals,Petrochemicals,other products - 6.2 gallonsother products - 6.2 gallons

One Barrel =One Barrel =42 gallons42 gallons

American Petroleum Institute, American Petroleum Institute, 20082008

Petroleum ProductsPetroleum ProductsRaw Natural Gas Components - ExampleRaw Natural Gas Components - Example

Source: Midstream Primer:Source: Midstream Primer: Oil & Gas Investor, July 2007Oil & Gas Investor, July 2007

0

10

20

30

40

50

60

70

80

90

100

% Composition

Methane

Ethane

Propane

Normal Butane

Isobutane

Natural Gasoline

Carbon Dioxide

Petrochemical ProductsPetrochemical Products

•Detergents - CosmeticsDetergents - Cosmetics•Fertilizers - Weed KillersFertilizers - Weed Killers•Medicine - Antiseptics - AnestheticsMedicine - Antiseptics - Anesthetics•Plastics - Synthetic FibersPlastics - Synthetic Fibers•Synthetic RubberSynthetic Rubber•Rust PreventativesRust Preventatives•Liquid Petroleum GasLiquid Petroleum Gas

American Petroleum Institute, American Petroleum Institute, 20082008

More Than 3,000 ProductsMore Than 3,000 Products

Historical Oil Prices – 2007 $Historical Oil Prices – 2007 $

Real Oil Prices*

Source:BP

Why High Oil Prices?Why High Oil Prices?Driven by:Driven by:– OPEC behaviour post 1999OPEC behaviour post 1999

– Strong demand growth 2004Strong demand growth 2004

– Low spare capacityLow spare capacity

– GeopoliticsGeopolitics

– Energy as a financial commodityEnergy as a financial commodity

0

0.5

1

1.5

2

2.5

3

2001 2002 2003 2004 2005 Est

ROW FSU China

OPEC Spare Capacity

0

2

4

6

1995 1998 2001 2004

Mill

ion

b/d

Mb/d

World Oil Consumption Growth

Source:BP

OPEC ProductionOPEC Production

1 2 3 4 5 6 7 8 9 10

DEC 2005Production

MILLIONS OF BARRELS PER DAY

SPARE

CAPACITY

Note: Figures exclude Iraq Source: International Energy Agency

Saudi Arabia

Kuwait

Nigeria

Venezuela

Libya

Algeria

UAE

Iran

Indonesia

Qatar

1 2 3 4 5 6 7 8 9 10

DEC 2005Production

MILLIONS OF BARRELS PER DAY

SPARE

CAPACITY

Note: Figures exclude Iraq Source: International Energy Agency

Saudi Arabia

Kuwait

Nigeria

Venezuela

Libya

Algeria

UAE

Iran

Indonesia

Qatar

Natural Gas PricesSOURCE: Historical through 1998 - Oil & Gas Journal Energy Database

1999 - Present - Wall Street Journal

$-

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Year

Natural GasSpot Price -Henry Hub$/MMBTU

$7.88

6/8/07

Supply & DemandSupply & Demand

Airline ticketsAirline ticketsStocksStocksReal EstateReal EstateI-PhoneI-Phone

In a free market – commodity prices are driven In a free market – commodity prices are driven by the balance between supply and demand – by the balance between supply and demand – For hydrocarbon fuels (oil and gas) the price For hydrocarbon fuels (oil and gas) the price equation is becoming evermore dominated by equation is becoming evermore dominated by “supply” related challenges.“supply” related challenges.

Oil & Gas SupplyOil & Gas Supply

– Where did my last gallon of gas come from?Where did my last gallon of gas come from?– OPECOPEC

The politics of oilThe politics of oil

Control by NOC’sControl by NOC’s– GeopoliticsGeopolitics

USUS– ExplorationExploration– Refinery CapacityRefinery Capacity

WeatherWeather

World Energy ConsumptionWorld Energy Consumption

BP Statistical Review of World Energy – December 2007

Oil ConsumptionOil Consumption

BP Statistical Review of World Energy – Jan. 2008

Major oil trade movementsMajor oil trade movements

BP Statistical Review of World Energy – Jan 2008

Proved oil reserves at end 2006Proved oil reserves at end 2006

BP Statistical Review of World Energy Dec. 2007

Remaining Oil??Remaining Oil??

BP Statistical Review of World Energy Dec. 2007

Proved Natural Gas ReservesProved Natural Gas Reserves

BP Statistical Review of World Energy – Dec. 2007

Proved Coal Reserves 2006Proved Coal Reserves 2006

BP Statistical Review of World Energy –Dec. 2007

Demand ChallengeDemand ChallengeOne Example - Fuel EconomyOne Example - Fuel Economy

Overall fuel economy for cars and light trucks Overall fuel economy for cars and light trucks peaked at 22.1 mpg in 1987. Fell to 20.8 mpg in peaked at 22.1 mpg in 1987. Fell to 20.8 mpg in 2004. Avg. weight of vehicles has increased 2004. Avg. weight of vehicles has increased from 3200 lbs. to 4066 lbs.from 3200 lbs. to 4066 lbs.Federal tax on gasoline = 18.4 cents/gallonFederal tax on gasoline = 18.4 cents/gallonState tax varies (New York 60.8 to Alaska 26.4)State tax varies (New York 60.8 to Alaska 26.4)About 70% of new vehicles purchased in US About 70% of new vehicles purchased in US have 6 cylinders +have 6 cylinders +89% of vehicles in Europe have 4 cylinders or 89% of vehicles in Europe have 4 cylinders or less (average fuel economy is 35 mpg)less (average fuel economy is 35 mpg)

Wall Street Journal – “Fuel Economy Back in The Saddle”

A Sampling of A Sampling of What’s “Cool” About Oil & GasWhat’s “Cool” About Oil & Gas

Technology (eg. Deepwater – Jack)Technology (eg. Deepwater – Jack)

Co2 Flooding – Increasing Recoverable OilCo2 Flooding – Increasing Recoverable Oil

Meeting the world’s needsMeeting the world’s needs

SuppliesSupplies

EfficiencyEfficiency

Environment Environment

Career OpportunitiesCareer Opportunities

Houston Chronicle Jan 2008

Oil production by areaOil production by area

Oil consumption by areaOil consumption by area

Oil product consumption – by Oil product consumption – by regionregion

OECD total commercial oil OECD total commercial oil stocksstocks

Implications for U.S. and World Livestock, Poultry & Food Costs

• U.S. supplies 2/3 of world corn exports, 20-25% of wheat & 35-40% of cotton exports

• Cost of livestock & poultry feed will increase

• Large increase in variability of feed & food costs

• Food aid impacts?• Accelerated ag expansion into areas with

fragile eco systems • Shift livestock industries from U.S. to South

America? • Rural employment implications in U.S.

Ethanol Economics – new plants Ethanol Economics – new plants U. of Minn. 2007 costsU. of Minn. 2007 costs

• $0.10/gal. increase in ethanol price raises break-even Corn price $0.28/bu.

• $1.00/bu. rise in corn price increases cost/gal. $0.36/gal.

Impact of Higher Crude Oil Impact of Higher Crude Oil PricePrice

Increased crude oil price by $10/barrel over the projection Increased crude oil price by $10/barrel over the projection

Margins on ethanol plants increaseMargins on ethanol plants increase

New incentive to invest in added capacity for ethanol New incentive to invest in added capacity for ethanol productionproduction

Eventually, a new equilibrium reached where there is no Eventually, a new equilibrium reached where there is no incentive to invest in or exit the ethanol industryincentive to invest in or exit the ethanol industry

Will demand for ethanol be enough? Will demand for ethanol be enough? – E-10 market will saturate around 15 billion gallonsE-10 market will saturate around 15 billion gallons– Drop in ethanol price will eventually encourage increase in Drop in ethanol price will eventually encourage increase in

demand for the flex-fuel cars demand for the flex-fuel cars

Projected Ethanol Production

0

500

1000

1500

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

million gallons

China EU India

Projected Brazilian Ethanol Production

4000

5000

6000

7000

8000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

million gallons

Brazil

Wholesale Gasoline and Ethanol Prices

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

2006 2008 2010 2012 2014 2016

US$/gallon

Unleaded Gasoline Ethanol

Projected U.S. Ethanol Production

0

2

4

6

8

10

12

14

16

2006 2008 2010 2012 2014 2016

billion gallons

Major Countries with Ethanol Fuels• U.S. – likely production of 14-15 bil. gal.

from corn in 3.5-5 years

• Brazil –89 new ethanol plants to be built, 2007-2011– 2% biodiesel mandate by 2008 & 5% by 2013

• EU-27 – 5.75% of motor fuel to be renewable • by 2010, 10% in 2020

• Canada – 5% ethanol mandate by 2010, 2% biodiesel by 2012

Biodiesel– Competition for crop land

International Impacts• U.S. ethanol plants under construction to

use 58 mil. tons of corn (doubling use)– 3.5 times the volume of Japan imports of

U.S. corn– 130% of 2006 EU corn crop– 70% of global corn exports

• Strong negative impacts on animal & ag.• Higher food costs ahead• Major risk-management challenges in Ag. & bioenergy

Total 11,693 mil. Bu.

State Avg. Ethanol Rack Prices

                         

          

Dec 12, 2007

Iowa: 2.13

Ill.: 2.21

Ks.: 2.34

Minn.: 2.15

Mo.: 2.34

N. Dk.: 2.23

Nebr.: 2.35

S. Dk.: 2.27

Wisc.: 2.21

Need for Both Ethanol and Animal Agriculture

• 100 million gallon ethanol plant– 37 million bushels of corn– 80 workers directly employed

• 37 million bu corn Direct jobsFarrow-finish 800Or Wean-finish 242Or Beef feedlot 278

Source: Dr. John Lawrence, Head of ISU Beef CenterSource: Dr. John Lawrence, Head of ISU Beef Center

Projected U.S. Biodiesel Production

0

100

200

300

400

500

600

700

800

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

million gallons

Scenario Baseline

U.S. Meat, Egg, and Dairy Price U.S. Meat, Egg, and Dairy Price ChangesChanges

BaselineBaseline ScenarioScenario Percentage Percentage ChangeChange

Beef Retail PriceBeef Retail Price

($/pound)($/pound)

4.524.52 4.624.62 2.2%2.2%

Pork Retail PricePork Retail Price

($/pound)($/pound)

3.303.30 3.353.35 1.5%1.5%

Broiler Retail Broiler Retail PricePrice

($/pound)($/pound)

1.961.96 2.002.00 2.0%2.0%

Turkey Retail Turkey Retail PricePrice

($/pound)($/pound)

1.261.26 1.301.30 3.2%3.2%

Egg Retail PriceEgg Retail Price

($/dozen)($/dozen)

1.631.63 1.681.68 3.1%3.1%

Farm to Retail Food Price SpreadFarm to Retail Food Price Spread

FoodFood Farm Value Farm Value Share of Share of

Retail Food Retail Food PricePrice

FoodFood Farm Value Farm Value Share of Share of

Retail Food Retail Food PricePrice

EggsEggs 5353 Canned CornCanned Corn 2222

BeefBeef 4949 SugarSugar 2727

ChickenChicken 4848 Wheat FlourWheat Flour 1919

MilkMilk 3434 BreadBread 55

PorkPork 3131 Corn FlakesCorn Flakes 44

Orange JuiceOrange Juice 3333 Corn SyrupCorn Syrup 33

Proved ReservesProved ReservesNorth AmericaNorth America 5.0%5.0%

So. & Cen. AmericaSo. & Cen. America 8.68.6

Europe & EurasiaEurope & Eurasia 12.012.0

Middle EastMiddle East 61.561.5

AfricaAfrica 9.79.7

Asia PacificAsia Pacific 3.43.4

What Would You Do If You What Would You Do If You Were Asked To Comment Were Asked To Comment

on What Does All This on What Does All This Mean?Mean?

Airlines, Homebuilder , Refiner, Farmer, Airlines, Homebuilder , Refiner, Farmer, Military, Automobile Industry, Appliances, Military, Automobile Industry, Appliances, Real Estate, Accountant, Marketing, Real Estate, Accountant, Marketing, CEO, Homemaker, Concerned Citizen.CEO, Homemaker, Concerned Citizen.