API Industry OutlookFirst Quarter 2020

March 19, 2020

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Key points – Q1 2020Even before the coronavirus (COVID-19) appeared, strong U.S. oil & gas productivity plus new pipelines

enabled February 2020 production records despite low prices and less drilling activity. Implications:

➢ WTI-Brent price differentials narrowed with Permian pipeline growth – to par in March with oil near $20/Bbl

➢ EIA projects U.S. oil & natural gas production to decrease year-on-year starting in Q4 2020

Markets have responded to COVID-19 prevention measures that EIA projects will dissipate in coming

quarters, but with oil prices that could remain low due to OPEC supply increases. Implications:

➢ EIA and IEA forecasts previously assumed OPEC would increase supply cuts, rather than supply

➢ Low oil prices have corresponded with a more rapid decrease in U.S. drilling – and less expected

associated natural gas and natural gas liquids (NGL) production per EIA

Silver linings that have reinforced market resilience:

1. Low energy prices bolster household budgets and disproportionately benefit low-income households

2. New U.S. trade agreements with China, Mexico and Canada should eventually boost U.S. energy exports (EIA)

3. IMO 2020 regulatory changes since January 1 have been smooth

4. Natural gas generation rose to a record 38% of U.S. net electricity generation in 2019

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API industry health dashboard – Q4 2019

Q4 2019 averagesBrent $63.41/bblWTI $56.96/bblNGL composite $5.36/mmbtuHenry Hub $2.40/mmbtu

Revenues

$680 B

Net

income

$(14.6) B

Capital

expenditures

$69.0 B

U.S. oil & total

gas production

33.7 mb/doe

U.S. drilling

activity

821 rigs

U.S. refinery

throughput

16.9 mb/d

U.S. petroleum

demand

20.7 mb/d

* Financial compilation based on API 200 companies with shares listed on U.S. stock exchangessources: EIA, API MSR, Bloomberg, Baker Hughes, API Team Analysis

Quarterly highlights

Demand at the top of the 5-year range

Despite drilling activity at a 5-year low and having fallen in Q4

2019, record oil & gas production continued due to

productivity gains and new pipeline capacity enabling drilled

but uncompleted wells to come on stream

Capital expenditures increased along with ongoing project

commitments

Net income fell with fourth quarter write-offs that were in the

middle of the 5-year range (vs. 2015 lows)

Increase vs. prior quarter

Decrease vs. prior quarterKey to the graphic:

5-year range

maximumminimum Quarterly increase to top of 5-year range

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0

20

40

60

80

100

Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19

Equipment, Services and EPC

Downstream

Midstream

Global Integrated

Specialty Petrochemical

Investing for the long-haul: the industry’s capital expenditures totaled $69 billion in Q4 and $266 billion for 2019

Capital expenditures increased by 6.0% between the third and fourth quarters, with increases in most sectors but

less in the midstream due to major pipeline completions

Capital expenditures by industry segment

* All other oil & gas industry companies sources: Bloomberg, publicly-available company reports

Billion dollars

Q4 2019 change

(%q/q)

Total: 6.0

18.0

-7.4

-9.6

+31.5

Upstream

+8.6-+41.1

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76 Pipelines $20.1 B

24 Refinery

expansions $27.3 B

14 LNG $189 B

36 PetChem$108 B

11 Gas storage $145 M

Industry capital projects mapAcross the energy value chain, an estimated 161 oil & gas-related projects are under construction

Refineries

LNG

Petrochemical

Gas Storage

Pipeline sources: S&P Market Intelligence, Oil & Gas Journal, American Chemistry Council, API Team calculations as of Feb. 1, 2020

in estimated industry

projects under construction

344 Billion

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Global economy & oil markets

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Petroleum demand uncertainties and Non-OPEC production growth

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API’s economic indicator: The API D-E-I™ - Feb. 2020

-4

-3

-2

-1

0

1

2

3

-20

-15

-10

-5

0

5

10

15

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Recession (left axis) Industrial production (left axis) DEI (right axis)

The D-E-I™ value of -0.3 for February 2020 and three-month average of -0.2 suggests a continued slowing of

industrial production

sources: API Monthly Statistical Report, EIA, CME Group, Moody’s, Federal Reserve Board

Industrial production Percentage change year-over-year (3-month average)

API D-E-I™

Percentage change year-over-year (3-month average)

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0

10

20

30

40

50

2017 Baseline Year 1 Year 2

Crude oil Refined products LNG Coal

The U.S.-China phase one trade deal calls for increased U.S. energy exports

China committed cumulatively to purchase $52.4 billion of

U.S. energy over two years, over and above a 2017 baseline

amount, including crude oil, LNG, metallurgical coal and

specific refined products*

API estimates the two-year commitment could include more

than 1.0 mb/d of crude oil, 0.5 mb/d of refined products

and 100 LNG cargoes, but these volumes rise as prices fall

Given EIA’s expected growth in U.S. production, export

capacity and marine logistics – including ability to utilize the

Panama Canal – at least some of China’s purchases are

likely not to be incremental growth of U.S. exports, but

directionally should boost U.S.-China energy trade, provide

a welcome de-escalation of trade tensions, and spur new

opportunities for engagement on phase two trade issues

Billion dollars

China’s commitments to buy U.S. energy exports

$18.5 B

$33.9 B

* Refined products under the agreement include naphtha, methanol, petroleum coke, propane, butane and other LPGssources: ITC , China customs statistics

source: API Monthly Statistical Report (Dec. 2019)

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Global economic growth has consistently required fossil fuels

Linkages between global GDP growth and energy demand in total and for oil and natural gas have remained consistent

0

150

300

450

600

750

15 35 55 75 95

Real GDP (Trillion 2010$)

Quadrillion BtuGlobal primary energy demand versus GDP*

*Market exchange rate basissources: EIA, IEA, Bloomberg, IMF, API Team calculations

1970

Great Financial Crisis

(2008-2009)

2019Total primary energy

Oil

Natural gas

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EIA’s short-term projected changes in global oil demand and supply

OPEC expands

production

U.S. supply

contracts in 2021

Non-OPEC

growth in 2020

Million barrels per day

Global oil demand changes - EIA

source: EIA

0 0.5 1

Rest of World

U.S.

China

2019

2020

2021

Million barrels per day

source: EIA

-4 -2 0 2

Rest of Non-OPEC

U.S.

OPEC

2019

2020

2021

Global oil supply changes - EIA

China’s demand

picks up in 2021

U.S. demand

grows slightly

Rest of World

demand growth

hampered in

2020

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After a near-term dip, EIA expects the global oil market to rebalance by Q4 2020

0

20

40

60

80

100

120

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2015 2016 2017 2018 2019 2020 2021

Supply less demand Brent crude oil prices Column1

2020$/Bbl

sources: EIA STEO (Mar. 2020), Bloomberg

EIA global supply/demand and Brent price estimates as of March 2020

EIA estimates

Million barrels per day

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U.S. oil cost effectiveness and productivity improved, but market prices have recently fallen

BTU Analytics’ estimated breakeven prices fell among most major crude oil production areas, while EIA’s productivity

estimates rose

0 20 40 60

Permian - Midland

Permian - Delaware

Eagle Ford - East

Bakken

Eagle Ford - West

WTI spot price

Mar. 9, 2020

*Half cycle breakevens assuming 10% discount factor and play-specific costs source: BTU Analytics

Dollars per barrel ($/Bbl.)

U.S. oil productivity – monthly new well

production per rig

0

500

1,000

1,500

2,000

2,500

3,000

2015 2016 2017 2018 2019 2020

Eagle Ford

Bakken

source: EIA Drilling Productivity Report(Mar. 2020)

Barrels per day oil-equivalent

Permian

Feb. 2020

Feb. 2019

Oil estimated breakeven prices by production

area – Feb. 2020*

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During initial months of IMO 2020, the refining industry has been flexible to consumers’ benefit

Million barrels

Residual fuel oil inventories and production

0

100

200

300

0

10

20

30

40

50

2010 2013 2016 2019

As we have suggested since 2018, the U.S. refining industry has been well

positioned for IMO2020

Initial months of IMO2020 implementation show the industry has flexibly been

able to produce less residual fuel oil and more ultra-low sulfur fuel oil, with a

muted price response and inventory adjustments

sources: JODI Oil World Database, EIA

0

1

2

3

4

5

2005 2010 2015 2020 2025

Sulfur content, %

IMO 2020: Maximum marine fuel

sulfur content

Outside emissions control

areas (ECAs)

Within ECAs

U.S. inventories

Dollars per gallon

U.S. residual fuel oil and diesel prices

sources: New York Harbor prices, CME Group and Bloomberg

0

1

2

3

4

2010 2013 2016 2019

Ultra-low sulfur diesel (ULSD)

Residual fuel oil No. 6 (1% sulfur) *

U.S. production

Rest of World inventories

Million barrels

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Motor gasoline and diesel fuel prices have generally moved with crude oil, and EIA expects limited impact from IMO 2020

0

1

2

3

4

2015 2016 2017 2018 2019 2020

West Texas Intermediate crude oil Gasoline - U.S. average Diesel - U.S. average

2020$ per gallon

Crude oil, retail gasoline and diesel fuel prices, adjusted for consumer price inflation

sources: EIA, AAA, Bloomberg, BLS

EIA estimates

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U.S. household spending is disparate by income group

0

25

50

75

100

125

150

175

200

Average U.S.household

Lowest 20% income Second 20% income Third 20% income Fourth 20% income Highest 20% income

Housing ex energy Food Transportation ex fuels Healthcare Energy Education Personal insurance Entertainment%

2018 U.S. household spending by category as a share of after-tax income

Seven spending categories account for the majority of household expenditures

The lowest 40% of households by income generally outspend their after-tax income, so every dollar matters

source: BLS Consumer Expenditure Survey

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Lower household energy spending since 2014 has helped low-income households the most

Ch

an

ge

in

pe

rce

nt o

f a

fte

r-ta

x in

co

me

Change in household energy spending as a share of after-tax income, 2014-2018

-4

-3

-2

-1

0

Average U.S.household Lowest 20% income Second 20% income Third 20% income Fourth 20% income Highest 20% income

Electricity Gasoline and motor fuels Natural gas Fuel oil

source: BLS Consumer Expenditure Survey

For the average U.S. household, decreased energy prices and expenditures freed 1.6% of after-tax income for other

spending needs between 2014 and 2018

The percent of income freed up for non-energy spending was twice as high for the lowest 20% income quintile

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Natural gas

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Global LNG prices have been below historical levels but still generally twice those of the U.S.

Mexico$4.60

UK$4.66

Spain$4.53

India$5.22

Korea$5.42 Japan

$6.70

Belgium$5.32

Argentina$5.05

China$5.42

Lake Charles$2.21

sources: U.S. FERC (Mar. 2020) and METI

Global natural gas landed prices (dollars per million Btu) – December 2019

Canada$6.83

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In 2019, U.S. LNG exports were from just six terminals, but served global markets

2019 U.S. LNG exports by terminal

0.00

0.30

0.60

0.90

1.20

SabinePass

CorpusChristi

Cove Point Cameron Freeport Elba Island

Trillion cubic feet (Tcf)

source: U.S. DOE

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U.S. natural gas production growth has been supported by cost effectiveness and productivity

BTU Analytics estimates breakeven prices among most natural gas-producing regions improved over the past year

EIA estimates Appalachia’s new well productivity slipped in Q1 2020

0

5,000

10,000

15,000

20,000

25,000

2015 2016 2017 2018 2019 2020

Appalachia

Thousand cubic feet per day nat. gas-equivalent0 1 2 3

Appalachia - Ohio

Appalachia - SouthwestPA

Appalachia - NortheastPA

Haynesville

U.S. natural gas productivity – new

production per rig

source: EIA Drilling Productivity Report (Mar. 2020)

Henry Hub spot

price Mar. 9, 2020

Natural gas estimated breakeven prices by

production area – Feb. 2020*

*Half cycle breakevens assuming 10% discount factor and play-specific costs source: BTU Analytics

Dollars per million Btu (mmBtu)

Haynesville

Feb. 2020

Feb. 2019

www.api.org

0

4

8

12

16

20

1976 1981 1986 1991 1996 2001 2006 2011 2016

* sources: EIA spot prices at Henry Hub (1997-Present), WSJ and Reuters (1989 to 1996), EIA wellhead (1976-1988)

Real natural gas prices in Q1 2020 have been the lowest on record for the quarter in 45 years

U.S. natural gas spot prices*

Since the advent of shale gas production, which accelerated after 2010, U.S. natural gas prices and price volatility

have fallen by about half compared with history

2020 dollars per million Btu

Lowest Q1 prices

on record

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Where enabled by pipeline connectivity, the energy revolution has lowered prices across the eastern United States

Natural Gas Spot Price Differences from Henry Hub (annual averages)

In 2010, before the energy revolution, prices at most natural

gas hubs were greater than those at Henry Hub, Louisiana

As Pennsylvania and Ohio became major gas producers,

prices fell across the eastern U.S. except in New England,

which largely failed to expand its pipeline infrastructure

Chicago

Algonquin

Henry Hub

Dawn

Rockies East

Florida Z2

Dominion South Point

-1.0

-0.5

0.0

0.5

1.0

Chicago Florida Gas TransmissionZone 2

Rockies Express Pipeline(East) into Midwestern

Dominion South Point Dawn Algonquin

2010 2019Paid a premium above Henry Hub

Received a discount below Henry Hub

Dollars per million Btu New England: A higher premium due to a lack of infrastructure

source: Bloomberg

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CO2

Power sector emissions by pollutant (million metric tons)

0

2

4

6

1200

1600

2000

2400

2010 2011 2012 2013 2014 2015 2016 2017 2018

Natural gas achieved a record 38% share of U.S. net electricity generation in 2019

As natural gas and renewables have replaced coal in power generation since 2010, U.S. power sector CO2 emissions fell

by 22%, while the region’s SO2 and NOx emissions decreased by 71% and 40%, respectively

SO2 and NOx

sources: EIA Electric Power Annual (2018)

0

1,000

2,000

3,000

4,000

5,000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Coal

OilNatural gas

Nuclear

Renewables

WindSolar

Other

U.S. electricity net generation (million megawatt hours)

Hydroelectric

source: EIA

In 2019, natural gas grew to a 38% percent share of U.S. electricity generation and led gains by all sources

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Resources: Chief Economist’s section at www.api.org