OIL AND GAS PRICES

Oil prices are determined in the international markets and are difficult to project. As the historical data shows great swings in the price of oil, there is also considerable uncertainty about future prices. The future price of oil is linked to the unpredictability of world oil supplies and world economics. Major factors affecting oil prices are: a) political stability of producing countries, b) world environmental issues, c) industrialized countries' conservation practices, d) weather related demand for petroleum products, e) production restraints by OPEC countries, f) consumer nations' economies, and g) labor force stability. If crude oil supply and demand for petroleum products are well balanced and refiners have the sufficient downstream capacity to process difficult crudes, the price of crude oil will seek a stable market condition.

Historical oil prices are provided in Appendix F. The projected FY1997/98 through FY2002/03 average Louisiana wellhead crude oil prices are as follows:

The base case assumed that: a) world oil demand will grow at an average annual rate of 2 percent between 1998-2003; b) OPEC will increase their daily production by about a million barrels in 1998 and about 500,000 barrels per year in the following years (The production increase includes Iraq's humanitarian crude oil sales.); c) weather demand will be relatively high, with high heating demand in winter and high cooling demand in late spring and early summer; and d) production will not be disrupted in non-OPEC producing countries.

The low case assumed that: a) world oil demand growth will be insignificant between 1998-2003; b) OPEC countries will produce more than their allowed quotas, and Iraq will be producing more than the proposed UN limit of 1 million barrels per day; and c) weather will be mild.

The high case assumed that: a) world oil demand will grow at a rate higher than 2 percent per year between 1998-2003, despite the economic slowdown occurring in Southeast Asia; b) OPEC countries will not cheat on their quotas; and c) production will be disrupted in non-OPEC producers due to weather, accidents or workers' strikes.

OTHER PROJECTIONS

The Oil & Gas Journal's 1998-2002 Oil Industry Outlook by Robert. J. Beck states that the U.S. wellhead price for crude oil is expected to be on a downward trend until 1997, then crude oil prices will reverse that trend. The downward pressure on crude oil prices is caused mainly by a glut in supply. Worldwide crude oil production capacity is projected to rise rapidly in 1997 and 1998. Production is expected to grow in non-OPEC producers such as Argentina and Colombia in South America, China and South East Asia in the northern Pacific Rim, and Australia in the South Pacific. OPEC producers are also expected to increase their production to protect their market share. The return of Iraq's crude oil to the market will also put a strain on the system. Projected demand for crude oil well into the 21st century is very optimistic. Oil consumption is expected to grow around 2.4% annually in industrialized countries and 4.1% annually in developing countries. For the next three years, supply will increase faster than demand and this will keep crude oil prices at present levels. As supply stabilizes and consumption increases, the downward pressure on crude oil prices will ease.

Provided below are the following projections by calendar year for 1998-2003: the EIA Energy Forecast models average world crude oil price ; the Oil & Gas Journal 1998-2002 Oil Industry Outlook average U.S. wellhead crude oil price; and the Department of Natural Resources, Technology Assessment Division average Louisiana wellhead crude oil price.

The Gas Research Institute (GRI) is forecasting oil prices of $17.05 per barrel in the year 2000, and $17.06 in the year 2005. Data Resources, Inc. (DRI) is forecasting oil prices at $17.29 per barrel in the year 2000, and $19.27 in the year 2005. The WEFA Group (formerly the Wharton Econometric Forecasting Associates) is projecting oil prices at $18.35 per barrel in the year 2000, and $19.05 in the year 2005.

Natural gas prices act differently than crude oil prices. Oil prices are driven by the international oil market. Gas prices are driven by factors such as weather, demand for gas not satisfied by the pipeline system, availability of spot supplies, and competing fuel prices. Natural gas is less traded internationally than oil. It is harder to transport and store, and needs the proper infrastructure (pipelines, compression stations, LNG tanks, etc.). The major cost components of natural gas prices are: cost of in-field production, cost of transportation, cost of marketing, and investment rate of return. As the historical data shows, most components of natural gas prices are stable with the exception of marketing cost. Marketing cost is the only cost that oscillates widely.

Gas prices increased as regulations faded out in the early 80's. With deregulation, natural gas started trading in the spot and commodity markets. Since 1985, this spot market for gas has grown in importance and today it is the major player in the determination of gas prices. In April 1990, natural gas futures contracts started trading in the New York Mercantile Exchange (NYMEX). A NYMEX gas future contract calls for delivery of 10,000 MCF of gas during a specific month, 1 to 12 months in the future. The contract delivery point of the gas is Sabine Pipe Line Co.'s Henry Hub terminal near Erath, Louisiana.

Factors that could affect prices are weather, storage levels, curtailments, market changes, new consumption and NAFTA (North America Free Trade Agreement). Gas prices are also affected by psychological factors. The expectation of soft prices often is enough to bring them about. A good dose of cold winter weather will usually erase much of the psychological element of low gas prices.

Historical gas prices are provided in Appendix F. The projected FY1997/98 through FY2002/03 average Louisiana wellhead natural gas price is as follows:

The base case assumed that: a) U.S. gas demand will grow at an average annual rate of 1 percent between 1998-2003; b) LNG imports will be insignificant; c) weather demand will be relatively normal, high heating demand in winter and high cooling in late spring and early summer; and d) total U.S. gas imports will be only 10-13 percent of total U.S. consumption.

The low case assumed that: a) U.S. gas demand will grow less than half of a percent between 1998-2003; b) total U.S. gas imports will be more than 13 percent of total U.S. consumption; c) inventory levels in storages will be high; and d) weather demand will be low because of mild temperatures.

The high case assumed that: a) U.S. gas demand will grow at a rate higher than 1.5 percent between 1998-2003; b) total U.S. gas imports will be less than 10 percent of total U.S. consumption; c) inventory in storage will be at low levels; and d) some production or distribution disruption will occur due to weather or accidents.

OTHER PROJECTIONS

Provided below are the following projections by calendar year for 1998-2003: the EIA Energy Forecast models average U.S. wellhead natural gas price; the Oil & Gas Journal 1998-2002 Oil Industry Outlook average U.S. wellhead natural gas price; and the Department of Natural Resources, Technology Assessment Division average Louisiana wellhead natural gas price.

JOFREE is projecting an average gas price of $2.10 per MMBTU for 1998. In 1999, JOFREE feels that gas prices will decline, pressured by the abundance of new gas supplies from Canada via Northern Border Pipeline and additional connections of new offshore gas to main lines from the Gulf. GRI is forecasting gas prices around $2.00 per MCF from 1999 through 2015. DRI is forecasting gas prices at $2.05 per MCF in the year 2000, and $2.10 in the year 2005. The WEFA Group (formerly the Wharton Econometric Forecasting Associates) is projecting gas prices between $2.00 and $2.25 per MCF for the next ten years.

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