32963846 BMO Oil Gas Global Cost Study June 2010

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Oil & GasGlobal Cost Study

Randy Ollenberger (403) 515-1502 BMO Nesbitt Burns Inc. (Canada)

Jim Byrne, P. Eng., CFA (403) 515-1557 BMO Nesbitt Burns Inc. (Canada)

Mark Leggett, CFA (403) 515-1508 BMO Nesbitt Burns Inc. (Canada)

Alan Laws, CFA (303) 436-1125 BMO Capital Markets Corp. (U.S.)

Mike Mazar, CFA (403) 515-1538 BMO Nesbitt Burns Inc. (Canada)

Christopher Brown, P.Eng. (403) 515-1574 BMO Nesbitt Burns Inc. (Canada)

Gord Tait, CFA (403) 515-1501 BMO Nesbitt Burns Inc. (Canada)

Dan McSpirit (303) 436-1117 BMO Capital Markets Corp. (U.S.)

this report was prepared in part by analysts employed by a canadian affiliate, bmo nesbitt burns inc., and a uk affiliate, bmo capital markets ltd., authorised and regulated by the financial services authority in the uk, and who are not registered as research analysts under finra rules. for disclosure statements, including the analyst’s certification, please refer to pages g3 to g5.

BMO Capital Markets Oil & Gas Research

Co-Heads of Equity Research

Paul Campbell (416) 359-5424 R. Jackson Blackstock, CFA (212) 885-4113

Associates:

Jason Chang (403) [email protected]

Graham Cooke, CFA (403) [email protected]

Jared Dziuba (403) [email protected]

Peter Kranz (403) [email protected]

Peyton B. Mason (303) [email protected]

North American CoverageRandy OllenbergerBMO Nesbitt Burns Inc. CanadaNorth American Energy(403) [email protected]

Alan Laws, CFABMO Capital Markets Corp. U.S.North American Oilfield Services(303) [email protected]

Mike Mazar, CFABMO Nesbitt Burns Inc. CanadaNorth American Oilfield Services(403) [email protected]

International CoverageChristopher Brown, P.Eng.BMO Nesbitt Burns Inc. CanadaO&G Producers(403) [email protected]

Canadian CoverageMark Leggett, CFABMO Nesbitt Burns Inc. CanadaO&G Producers(403) [email protected]

Gord Tait, CFABMO Nesbitt Burns Inc. CanadaOil & Gas Royalty Trusts(403) [email protected]

United States CoverageJim Byrne, P.Eng., CFABMO Nesbitt Burns Inc. CanadaIntegrateds/Refiners/Producers(403) [email protected]

Dan McSpiritBMO Capital Markets Corp. U.S.O&G Producers(303) [email protected]

Jason Zhang (403) [email protected]

Chris Sloan (303) 436-1115 [email protected]

Matthew Brink (403) [email protected]

Chris Bolton (403) 515-1503 [email protected]

EnErgy & UtilitiEs ___________integrated Oils/refiners

Randy Ollenberger 403-515-1502Jim Byrne, P. Eng. 403-515-1557

Oil & gas: north American E&PRandy Ollenberger 403-515-1502Jim Byrne, P. Eng. 403-515-1557Dan McSpirit 303-436-1117Mark Leggett, CFA 403-515-1508Gordon Tait, CFA 403-515-1501

Oil & gas: international E&PChristopher Brown, P. Eng. 403-515-1574

Oil & gas: services & EquipmentAlan Laws, CFA 303-436-1125Mike Mazar, CA, CFA 403-515-1538

Electric Utilities & independent PowerMichael S. Worms 212-885-4031Michael McGowan, CA, CFA 416-359-5807

PipelinesCarl Kirst, CFA 713-546-9756

MAcrO _______________________Portfolio strategy

Ben Joyce 416-359-4659Jack A. Ablin, CFA 312-461-7756Don Coxe Coxe Advisors LLC

EconomicsDr. Sherry Cooper 416-359-4112Douglas Porter, CFA 416-359-4887Michael Gregory, CFA 416-359-4747Sal Guatieri 416-359-5295

Quantitative/technicalMark Steele 416-359-4641Ken Hartviksen, CFA 416-359-6211Qin Lu 416-359-6187

commoditiesBart Melek 416-359-4906

currency/Public PolicyAndy Busch 312-845-4080

small capsAndreka Lapchinski, CFA 416-359-5767

MAtEriAls ___________________Metals & Mining

Tony Robson 416-359-4034David Radclyffe +44 (0)20 7246 5433David Cotterell +44 (0)20 7246 5430Edward Sterck +44 (0)20 7246 5421 Meredith Bandy 303-436-1113

Precious MetalsDavid Haughton 416-359-4052Andrew Breichmanas, P.Eng. 416-359-8387

Mining Exploration & DevelopmentJohn Hayes, P. Geo. 416-359-6189Andrew Kaip, P. Geo. 416-359-7224

Paper & Forest ProductsStephen Atkinson 514-286-7309

FertilizersEdwin Chee 416-359-6193Joel Jackson, P.Eng., CFA 416-359-4250

cAPitAl gOODs & sErVicEs ___services - Education & staffing

Jeffrey M. Silber 212-885-4063

services - Marketing & AdvertisingDaniel Salmon 212-885-4029

services - Equipment DistributionBert Powell, CFA 416-359-5301

services - Engineering & constructionAvram Fisher 212-885-4094

transport - railsFadi Chamoun, CFA 416-359-6775

transport - trucks & logisticsJason Granger, CA, CFA 416-359-4293

transport - AirlinesClaude Proulx, CFA 514-286-3501

Diversified industrialsCharles D. Brady 617-960-2363Claude Proulx, CFA 514-286-3501 Bert Powell, CFA 416-359-5301

tEch/tElEcOM/MEDiA _________tech - Enterprise hardware

Keith Bachman, CFA 212-885-4010

tech - communications EquipmentTim Long 212-885-4101

tech - softwareThanos Moschopoulos, CFA 416-359-5428

tech - semiconductors Ambrish Srivastava, Ph.D 415-591-2116

tech - specialty hardware Brian Piccioni, CFA 416-359-5761

telecom servicesPeter Rhamey, CFA 416-359-6191

Media - Digital Entertainment Edward S. Williams 212-885-4054

Media - Entertainment & cableJeffrey B. Logsdon 213-228-2234Tim Casey, CFA 416-359-4860

FinAnciAls ___________________Financial services strategist

Hugh Brown, CFA 416-359-4303

canadian BanksJohn Reucassel, CFA 416-359-4379

Us BanksLana Chan 212-885-4109Peter Winter 212-885-4108

insuranceTom MacKinnon, FSA, FCIA 416-359-4629

Diversified FinancialsJohn Reucassel, CFA 416-359-4379Atul Shah 416-359-4691David Chiaverini, CFA 212-885-4115

Exchanges & Discount BrokersMichael Vinciquerra, CFA 404-926-1580

real Estate investment trustsPaul E. Adornato, CFA 212-885-4170Richard Anderson 212-885-4180Karine MacIndoe 416-359-4269

cOnsUMEr ___________________retail - Broadlines/hardlines

Wayne Hood 404-926-1590

retail - Apparel & specialtyJohn D. Morris 212-885-4016

retail - Food & DrugPeter Sklar, CA 416-359-5188Karen Short 212-885-4123

Food & Ag ProductsKenneth Zaslow, CFA 212-885-4017

household & Personal care Products Connie M. Maneaty 212-885-4004

toys & leisureGerrick L. Johnson 212-883-5192

gamingJeffrey B. Logsdon 213-228-2234

Auto PartsPeter Sklar, CA 416-359-5188

Diversified consumerStephen MacLeod, CFA 416-359-8069

hEAlthcArE _________________Pharmaceuticals/Major & specialty

Robert Hazlett 212-885-4091

Medical technologyJoanne K. Wuensch 212-883-5115

Managed care/Benefit ManagersDave Shove 212-885-4146

BiotechnologyJason Zhang, Ph.D. 212-885-4179

co-heads of Equity researchR. Jackson Blackstock, CFA 212-885-4113 Paul Campbell 416-359-5424

Equity Research

1 First Canadian Place, P.O. Box 150, Toronto, ON M5X 1H3 416-359-4000 • Tour McGill College, 1501 McGill College Ave., Suite 3200, Montreal, PQ H3A 3M8 • Dome Tower, 333 7th Ave.S.W., 22nd fl., Calgary, Alberta, T2P 2Z1 • 95 Queen Victoria Street, London, U.K., EC4V 4HG • 3 Times Square, New York, NY 10036 212-885-4000 • Tower Place 200, 3348 Peachtree Rd. NE, Suite 1430, Atlanta, GA 30326

175 Federal Street, 8th Floor, Boston, MA 02110 617-451-0670 • 600 17th Street, Suite 2240, South Tower, Denver, CO 80202 • 700 Louisiana Street, Suite 4400, Houston, TX 77002 713-546-9746601 South Figueroa Street, Suite 1730, Los Angeles, CA 90017 213-228-2161 • 100 Pine Street, Suite 2400, San Francisco, CA 94111 415-591-2100

Table of Contents

Executive Summary .................................................................................................................................................... A1

Post-Crash Relief..................................................................................................................................................... A8

2009 Reserve Replacement Costs – An Improvement, but Is It Just Timing? ..........................................................A11

Big Improvement at Home .....................................................................................................................................A12

Breakeven Oil Prices ..................................................................................................................................................A16

Lacklustre Returns Continue ..................................................................................................................................A18

A Temporary Reprieve ...........................................................................................................................................A19

Unconventional Implications..................................................................................................................................A21

The Myth of 6:1 .....................................................................................................................................................A24

Company Rankings: Low Cost = Higher Share Price ................................................................................................A27

Upstream Revenue: Bust After the Boom ..................................................................................................................A35

Costs: Relieving Some Pressure ..................................................................................................................................A38

Worldwide Breakeven Oil Price ..................................................................................................................................A44

A Global View ........................................................................................................................................................A47

Integrateds and Supermajors .....................................................................................................................................A53

Upstream Revenue..................................................................................................................................................A53

Upstream Cost Performance .....................................................................................................................................A55

Breakeven Oil Price ................................................................................................................................................A61

Peer Comparison: Integrated Oils and Supermajors ...............................................................................................A63

North American Senior Producers .............................................................................................................................A68

Upstream Revenue .................................................................................................................................................A68

Cost Performance ...................................................................................................................................................A71

Breakeven Oil Price: Senior Producers ....................................................................................................................A77

Peer Comparison: North American Senior Producers ................................................................................................A79

North American Intermediate/Junior Producers .......................................................................................................A85

Revenue ..................................................................................................................................................................A85

Cost Performance ......................................................................................................................................................A86

Breakeven Oil Price ....................................................................................................................................................A92

Intermediate/Junior Producers Peer Comparison .......................................................................................................A93

International Producers ..........................................................................................................................................A100

Revenue ...............................................................................................................................................................A100

Cost Performance ....................................................................................................................................................A101

Breakeven Oil Price ..............................................................................................................................................A106

International Producers Peer Comparison ............................................................................................................A108

Methodology and Limitations .................................................................................................................................A112

Peer Groupings .....................................................................................................................................................A114

Integrated Oils

BP PLC (BP - NYSE) ..................................................................................................................................................B1

Cenovus Energy (CVE - TSX, NYSE) .......................................................................................................................B11

Chevron (CVX - NYSE) ............................................................................................................................................B19

China Petroleum and Chemical Corporation (Sinopec) (SNP - NYSE) .....................................................................B29

CNOOC (CEO - NYSE) ............................................................................................................................................B37

ConocoPhillips (COP - NYSE) ..................................................................................................................................B46

Eni S.P.A. (E - NYSE) ................................................................................................................................................B56

Exxon Mobil (XOM - NYSE) ....................................................................................................................................B65

Hess Corp. (HES - NYSE) .........................................................................................................................................B75

Husky Energy Inc. (HSE - TSX) ................................................................................................................................B85

Imperial Oil (IMO - TSX; IMO - AMEX) .................................................................................................................B94

Marathon Oil Corp. (MRO - NYSE) ....................................................................................................................... B102

Murphy Oil Corp. (MUR - NYSE) .......................................................................................................................... B112

Petrobras (PBR - NYSE) ........................................................................................................................................ B122

PetroChina Company Limited (PTR - NYSE) ......................................................................................................... B131

Royal Dutch Shell Plc. (RDS - NYSE) ..................................................................................................................... B139

Statoil A.S.A. (STO - NYSE) ................................................................................................................................... B149

Suncor Energy Inc. (SU - TSX, NYSE) .................................................................................................................. B159

Total S.A. (TOT - NYSE) ........................................................................................................................................ B169

North American Senior Producers

Anadarko Petroleum Corp. (APC - NYSE)..................................................................................................................C1

Apache Corp. (APA - NYSE) .....................................................................................................................................C11

ARC Energy Trust (AET.UN - TSX) .........................................................................................................................C21

Cabot Oil & Gas (COG - NYSE) ...............................................................................................................................C28

Canadian Natural Resources (CNQ - TSX, NYSE) ...................................................................................................C35

Canadian Oil Sands Trust (COS.UN - TSX) ..............................................................................................................C45

Chesapeake Energy Corp. (CHK - NYSE) .................................................................................................................C53

CNX Gas Corp. (CXG - NYSE) ................................................................................................................................C60

Crescent Point Energy Corp. (CPG - TSX) ................................................................................................................C67

Devon Energy Corp. (DVN - AMEX) .......................................................................................................................C74

Encana Corp. (ECA - TSX, NYSE) ...........................................................................................................................C83

EOG Resources Inc. (EOG - NYSE) .........................................................................................................................C92

Equitable Resources Inc. (EQT - NYSE) .................................................................................................................C101

Forest Oil Corp. (FST - NYSE) ...............................................................................................................................C108

Newfield Exploration Co. (NFX - NYSE) ...............................................................................................................C115

Nexen Inc. (NXY - TSX, NYSE) .............................................................................................................................C125

Noble Energy (NBL - NYSE) ..................................................................................................................................C135

Occidental Petroleum Corp. (OXY - NYSE) ............................................................................................................C145

Penn West Energy Trust (PWT.UN - TSX) ..............................................................................................................C155

Petrohawk Energy Corporation (HK - NYSE) .........................................................................................................C162

Pioneer Natural Resources (PXD - NYSE) ..............................................................................................................C169

Plains Exploration & Production Co. (PXP - NYSE) ...............................................................................................C179

Quicksilver Resources (KWK - NYSE) ....................................................................................................................C187

Range Resources (RRC - NYSE) .............................................................................................................................C194

Southwestern Energy (SWN - NYSE) ......................................................................................................................C201

Talisman Energy Inc. (TLM - TSX, NYSE) .............................................................................................................C208

Ultra Petroleum (UPL - AMEX) .............................................................................................................................C218

XTO Energy Inc. (XTO - NYSE) .............................................................................................................................C227

Canadian Intermediate / Junior Producers

Advantage Oil & Gas (AAV - TSX) ............................................................................................................................ D1

Anderson Energy Ltd. (AXL - TSX) .......................................................................................................................... D7

Angle Energy Inc. (NGL - TSX) ............................................................................................................................... D13

Baytex Energy Trust (BTE.UN - TSX) ..................................................................................................................... D19

Birchcliff Energy Ltd. (BIR - TSX)........................................................................................................................... D25

Bonavista Energy Trust (BNP.UN - TSX) ................................................................................................................. D31

Celtic Exploration Ltd. (CLT - TSX) ........................................................................................................................ D37

Compton Petroleum (CMT - TSX) ........................................................................................................................... D43

Crew Energy Inc. (CR - TSX) ................................................................................................................................... D49

Delphi Energy Corp. (DEE - TSX) ........................................................................................................................... D55

Ember Resources (EBR - TSX) ................................................................................................................................. D61

Enerplus Resources Fund (ERF.UN - TSX) ............................................................................................................. D67

Fairborne Energy Ltd. (FEL - TSX) ......................................................................................................................... D73

Freehold Royalty Trust (FRU.UN - TSX) ................................................................................................................. D79

Galleon Energy Inc. (GO - TSX) .............................................................................................................................. D85

Iteration Energy Ltd. (ITX - TSX) ............................................................................................................................ D91

Legacy Oil + Gas Inc. (LEG - TSX) ......................................................................................................................... D97

Midnight Oil Exploration Company (MOX - TSX) .................................................................................................D103

Midway Energy Ltd. (MEL - TSX) ..........................................................................................................................D109

NAL Oil & Gas Trust (NAE.UN - TSX) .................................................................................................................D115

NuVista Energy Ltd. (NVA - TSX) ..........................................................................................................................D121

Orleans Energy Ltd. (OEX - TSX) ...........................................................................................................................D127

Paramount Energy Trust (PMT.UN - TSX) .............................................................................................................D133

Paramount Resources Ltd. (POU - TSX) .................................................................................................................D139

Pengrowth Energy Trust (PGF.UN - TSX) ..............................................................................................................D145

PetroBakken Energy Ltd. (PBN - TSX) ...................................................................................................................D151

Petrobank Energy and Resources Ltd. (PBG - TSX) ...............................................................................................D157

Peyto Energy Trust (PEY.UN - TSX) .......................................................................................................................D165

Progress Energy Resources Corp. (PRQ - TSX) .......................................................................................................D171

ProspEx Resources Ltd. (PSX - TSX) ......................................................................................................................D177

Provident Energy Trust (PVE.UN - TSX) ................................................................................................................D183

Rock Energy Inc. (RE - TSX) ..................................................................................................................................D189

Storm Exploration (SEO - TSX) ..............................................................................................................................D195

Trilogy Energy Trust (TET.UN - TSX) ....................................................................................................................D201

Twoco Petroleums Ltd. (TWO - TSXV) ...................................................................................................................D207

Vermilion Energy Trust (VET.UN - TSX) ................................................................................................................D213

Vero Energy (VRO - TSX) .......................................................................................................................................D219

West Energy (WTL - TSX) .......................................................................................................................................D225

Zapata Energy Corp. (ZCO - TSXV) .......................................................................................................................D231

Zargon Oil & Gas (ZAR.UN - TSX) .......................................................................................................................D237

International Producers

Antrim Energy (AEN - TSX) .......................................................................................................................................E1

Bankers (BNK - TSX; BNK - AIM) ............................................................................................................................E7

Cirrus Energy (CYR - TSXV) ....................................................................................................................................E13

Gran Tierra (GTE - TSX, GTE - AMEX) .................................................................................................................E19

Niko Resources Ltd. (NKO - TSX) ............................................................................................................................E25

Pacific Rubiales (PRE - TSX) ....................................................................................................................................E31

Pan Orient Energy (POE - TSXV) .............................................................................................................................E37

Petrolifera Petroleum Ltd. (PDP - TSX) ....................................................................................................................E43

Petrominerales (PMG - TSX).....................................................................................................................................E49

Santos Ltd. (STO - ASX; STOSY - NYSE) ...............................................................................................................E55

TransGlobe Energy (TGL - TSX) ..............................................................................................................................E61

Winstar Resources (WIX - TSX) ................................................................................................................................E67

U.S. Micro Caps

Bill Barrett Corporation (BBG - NYSE) ......................................................................................................................F1

Brigham Exploration Company (BEXP - Nasdaq) ......................................................................................................F7

Carrizo Oil & Gas Inc. (CRZO - Nasdaq) .................................................................................................................F13

Comstock Resources Inc. (CRK - NYSE) ..................................................................................................................F19

Energy XXI Ltd. (EXXI - Nasdaq) ...........................................................................................................................F25

Gasco (GSX - AMEX) ..............................................................................................................................................F31

Goodrich Petroleum Corp. (GDP - NYSE) ................................................................................................................F37

Kodiak Oil & Gas Resource Corp (KOG - AMEX) ...................................................................................................F43

Mariner Energy Inc. (ME - NYSE) ............................................................................................................................F49

NGAS Resources Inc. (NGAS - Nasdaq) ..................................................................................................................F55

Penn Virginia Corporation (PVA - NYSE) .................................................................................................................F61

Unit Corp. (UNT - NYSE) ........................................................................................................................................F67

W&T Offshore Inc. (WTI - NYSE) ............................................................................................................................F73

Warren Resources Inc. (WRES - Nasdaq)..................................................................................................................F79

Oil & Gas Global Cost Study Page A1

See pages G1 to G2 for analyst coverage.

Executive Summary

Crude oil and natural gas prices have been anything but stable over the last decade, con-tinually confounding investors. West Texas Intermediate (WTI) crude oil prices increased by more than tenfold from their lows in 1999 to a peak of roughly $145/bbl in July 2008, before falling back with the collapse of global capital markets and ensuing recession, and bottoming out again at $35/bbl early in 2009. Prices have since recovered, largely trading in the $60–80/bbl range since mid-2009, but remain volatile. North American natural gas prices have also been volatile, trading as low as $2/Mcf and as high as more than $15/Mcf, but the level has generally been lower since mid-2008.

The rise in global commodity prices since 1999 has generally been fuelled by the combina-tion of rising demand for energy from emerging market economies and rising supply costs. The economic recession in 2009 and recent European credit market uncertainty have slowed the rate of growth in global energy demand somewhat, but longer-term global energy demand is still expected to grow with expanding emerging market economies. By 2020, we believe that global oil demand could be roughly 14.6 million b/d higher than demand in 2010. This demand growth (and the decline in existing sources of production) will need to be met by new supplies of crude oil and natural gas. In the case of crude oil, the new sources of supply are generally higher cost than those being currently consumed. New sources of supply, such as deepwater Brazil, the Canadian oil sands or tight oil plays such as the Bakken, generally require crude oil prices in excess of $50/bbl to generate economic rates of return on investment. As more of these sources are required, the global supply cost for crude oil will naturally rise. The story for natural gas is somewhat different, which in part explains why the ratio between North American natural gas prices and crude oil prices has increased from roughly 8x in 1999 to more than 17x currently. For natural gas, new sources of supply, such as shale gas or liquefied natural gas (LNG), are becoming more economic; that is, the supply cost is falling. To us this suggests that crude oil and natural gas prices could remain “decoupled” for a long period of time.

This study provides a global review of the oil and gas industry’s cost structure based on the reported results of the Multi-National Oils, North American Integrated Oils, Senior Producers, North American Junior/Intermediate Producers and International Producers. In total, this report compiles the historical results for more than 200 companies, which have over the years been consolidated into 114 companies with aggregate worldwide crude oil production of 20.1 million b/d and worldwide natural gas production of approximately 89 Bcf/d. The group spent $1.4 trillion over the last five years to add roughly 89.8 billion boe in proved reserves, and $266 billion in 2009 to add 21.6 billion boe in proved reserves. We have translated the historical cost data (reserve replacement cost, production cost, G&A and other, income taxes and royalties) into “breakeven oil prices,” which we define as the crude oil-equivalent price that is required to recover all of the reported costs, including a 10% return on capital. Essentially, this represents the industry’s average supply cost. We then translate the breakeven oil price to a “required WTI price,” which is the price level that WTI would need to be at in order for the company to generate sufficient revenue to cover its costs, taking into consideration the quality of the product it produces relative to WTI. Key findings of the study include:

Note: All values in U.S. dollars

Page A2 Oil & Gas Global Cost Study


• Timing Is Everything. Worldwide proved reserve replacement costs improved considerably in 2009, falling 45% to $12.30/boe from $22.38 in 2008. The reasons for the dramatic improvement likely include companies focusing on their best prospects as well as an easing in inflationary pressures. However, more importantly, reserve bookings finally caught up with capital spending, as evident by the more modest reduction in the three-year weighted average to $16.04/boe from $17.54/boe the prior year. We believe that the three-year average is a better indication of worldwide reserve replacement costs.

Chart 1: Worldwide Reserve Replacement Costs (US$/boe)

Source: BMO Capital Markets, Company reports

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• Supply Costs Fall With Lower Spending. The global supply cost on a WTI equivalent basis improved in 2009 to $51.98/boe after spiking to $85.78/boe in 2008. The improvement in the global supply cost reflected a combination of improved reserve replacement performance coupled with reduced operating costs. The required WTI price based on three-year average reserve replacement costs declined by 17% to $61.54/boe from $73.73/boe in 2008.



Chart 2: Worldwide Breakeven Oil Price (US$/boe)


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Op Costs F&D Return Taxes Quality/Royalty

3-Year Average


• Levelling the Playing Field. Asia continued to generate the lowest breakeven prices, with a three-year average WTI-equivalent oil price requirement of $54.93/boe. South America was again the region that required the highest breakeven oil price on the three-year basis, at $67.16/boe. However, the regional disparity decreased significantly in 2009 with the required breakeven oil price of Asia only 18% lower than that for South America. In contrast, in 2008 the breakeven price required in Asia was roughly 50% lower than that required in South America.



• Keeping It in Focus. Reduced cost pressures and high-grading of opportunities in 2009 led to a substantial improvement in reserve replacement costs and supply costs. However, single-year results can be misleading due to timing differences in reserve additions and capital spending. Moreover, our analysis relies on proved reserves only, whereas most developments will ultimately include additional probable reserves. Consideration of longer time periods helps to address these challenges. Charts 4 and 5 detail the one-, three-, five- and 10-year performances of both worldwide proved reserve replacement costs and breakeven oil prices. We think the three- and five-year results are representative of the industry’s average cost structure, with worldwide reserve replacement costs in the range of $15–16/boe and breakeven oil prices between $59/boe and $62/boe.

Chart 3: Worldwide Breakeven Oil Price Regional Performance – 3-Year Average (US$/boe)

Source: BMO Capital Markets, Company Reports

$54.93$57.61

$75.82

$67.16$64.39

$59.79

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Chart 4: Long-Term Reserve Replacement Costs (US$/boe) Chart 5: Long-Term Average Worldwide Breakeven Oil Price (US$/boe)

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Source: BMO Capital Markets, Company reports Source: BMO Capital Markets, Company ReportsNotes: Includes Production and G&A/other costs

Chart 6: North American Natural Gas Supply Costs (US$/Mcfe)


• “New” Sources of Supply Shift the Cost Structure. The supply cost for natural gas had been moving steadily higher over the last decade, rising from $3.03/Mcfe in 1999 to $12.96/Mcfe in 2008. The emergence of unconventional natural gas in North American (specifically shale gas) has fundamentally altered the natural gas industry’s cost structure due to advances in drilling and fracing technology coupled with operating experience. As a result, in 2009 the one-year proved supply cost fell to $5.92/Mcfe.

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Gas Supply Cost Shale Gas Supply Cost



• Unconventional Oil Improving. We estimate that the supply cost has fallen for many oil sands projects to the $45–60/bbl range, which is below the global average supply cost of roughly $63/bbl. This is due to the combination of a shift to in situ developments without upgraders as well as an overall lessening in inflationary pressures due to lower activity. Tight oil plays such as the Bakken in North Dakota and Western Canada also represent a source of unconventional oil. Like unconventional gas, the supply costs for tight oil have fallen with advances in drilling and fracing technology. We estimate that the supply cost for Bakken oil is below $50/bbl. However, unlike shale gas, we do not believe the resource is large enough to fundamentally alter the global supply cost for crude oil.

Chart 7: Unconventional Crude Oil Supply Costs (US$/boe)


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Worldwide Average Tight Oil Integrated Oil Sands In Situ Oil Sands

• The Myth of 6-to-1 Natural Gas Conversion. The 6-to-1 ratio represents the energy equivalency between crude oil and natural gas; however, it has rarely held when it comes to the actual prices of the commodities in North America due to differing supply and demand dynamics. To show the effect that the use of the 6-to-1 ratio has on proved reserve replacement costs and supply costs, we have also run our industry analysis of using the 10:1 ratio to more closely match historical market conditions. The impact can be significant, especially for gas-weighted producers. For example, in 2009 the reserve replacement cost of $12.30/boe under the traditional 6:1 gas-to-oil ratio rises to $14.69/boe under the 10-to-1 scenario. Using 10:1 would increase the worldwide supply cost in 2009 from $51.98/boe to $62.24/boe.



• Top Performers of 2009. Based on 2009 results, the Senior Producers generated the lowest required WTI-equivalent oil prices, at $47.41/boe, helped by lower-cost additions from unconventional resource plays. The North American Intermediate/Juniors Producers group had the highest required breakeven, at $55.52/boe, followed by the International Producers at $54.25/boe and the Integrateds & Multinationals at $52.51/boe. The three companies with the lowest implied required oil price based on 2009 results were Peyto, Southwestern Energy and CNX Gas. Based on three-year weighted average costs, the top performers were Southwestern, Peyto and Cenovus.

Chart 8: Worldwide Breakeven Oil Price Peer Comparison (US$/boe)


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Post-Crash Relief

The breakeven oil price (think of it as the industry’s average supply cost) and WTI have demonstrated a reasonably tight correlation since 1975, as illustrated in Chart 10. Sup-ply costs in the oil and gas industry tend to track prices because rising prices generate more cash flow than can be deployed, which leads to higher costs as companies compete with each other for limited inputs and pursue higher-risk, more marginal prospects. But prices can also track supply costs, particularly if supply is limited and demand is rising because the marginal cost of supplying the incremental unit of demand becomes the primary driver.

Chart 9: Share Price Performance of Top Quartile vs. Bottom Quartile (2007–2009)

Source: BMO Capital Markets, Bloomberg

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• Costs Matter. We believe that the share prices of companies that consistently achieve lower full-cycle costs (breakeven prices) should outperform those with higher cost structures. Lower breakeven prices should over time translate into higher returns on capital employed, which in turn should generate faster growth in underlying book value and net asset value. Chart 9 compares the share price performance of the top quartile (lowest cost) from our cost study compared to the bottom quartile (highest cost) over the last three years. As illustrated, those companies with lower cost structures, on average, have outperformed relative to the higher cost structure companies.




Chart 10: Worldwide Supply Cost vs. WTI Price (US$/boe)

1 Half-cycle economics refers to the phenomenon whereby producers ignore sunk exploration costssuch as land and evaluate prospects based solely on the cost of drilling and completing an incremental well. This same dynamic is now in the North American natural gas market due to massive potential of shale gas plays.

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Another notable aspect of Chart 10 is that there have been periods (1975–1988) where supply costs and oil prices were decoupled; specifically, the price was at times well below the supply cost and over time the supply costs declined to the level of oil prices. We believe this decoupling between prices and supply costs was enabled by the over-investment that occurred during the high price cycle from 1973 to 1985, which created surplus produc-ing capacity. This meant that rising demand could be met from the existing inventory of producing prospects, essentially “half-cycle” economics1.

Equally important, reserve bookings and costs during the period were relatively volatile as many assets were nationalized. However, the 1985–1999 period of relatively low crude oil and natural gas prices stimulated global energy demand, which over time absorbed the surplus production and refining capacity that existed, as shown in Charts 11 and 12. We do not believe that prices and costs can remain decoupled in the current market, as no such similar inventory of prospects exists (perhaps with the exception of shale gas in North America) that can be drawn down.



Chart 11: Surplus Global Oil Production Capacity Chart 12: Surplus Global Refining Capacity

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Chart 13: Worldwide Reserve Replacement Costs (US$/boe) Chart 14: Worldwide Operating Costs (US$/boe)

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Source: BMO Capital Markets Source: BMO Capital Markets, Company ReportsNotes: Includes Production and G&A/other costs

We estimate that the price of WTI (equivalent) required in order to generate sufficient revenue to recover all of the costs incurred in finding, developing and producing a bar-rel of crude oil and/or natural gas on a worldwide basis has risen to $51.98/boe in 2009 from $16.97/boe in 1999. Two primary factors have driven the increase in the breakeven oil price (or gas price): rising finding and development costs (reserve replacement costs), and operating costs. Worldwide reserve replacement costs have increased to $12.30/boe in 2009 from $3.87/boe in 1999, while worldwide operating costs (including G&A/Other) have expanded to $13.93/boe in 2009 from $4.60/boe in 1999.



Other elements of the industry’s cost structure, such as income taxes, have also increased, contributing to an increase in total costs from approximately $15/boe in 1999 to $50/boe in 2009 (including return on capital), as illustrated in Chart 15. At the same time, the average quality of crude oil has deteriorated and the share of revenue captured by the resource owner (typically governments) has increased, which has resulted in revenue growth lagging the increase in commodity prices. As shown in Chart 16, net revenue received by the industry has not kept pace with the increase in benchmark crude oil prices, such as WTI. The net result is that the global oil and gas industry requires a significantly higher commodity price level in order to recover its costs, including a return on capital.

Chart 15: Worldwide Cost Structure (US$/boe) Chart 16: Worldwide Net Revenue vs. WTI (US$/boe)

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Source: BMO Capital Markets, Company Reports Source: BMO Capital Markets, Company Reports

2009 Reserve Replacement Costs – An Improvement, but Is It Just Timing?

Worldwide reserve replacement costs have increased fairly steadily from 1999 to 2008 as rising commodity prices led to expanding cash flow and concomitantly higher levels of capital spending. However, the year 2009 marked an improvement in reserve replacement costs, as oil and gas prices plunged at the end of 2008 as a result of the global financial crisis and economic recession, and producers had to high-grade their capital programs. In 2008, producers were spending aggressively to grow production as commodity prices soared with less concern for inflation, but when oil prices sank to lows of roughly $35/bbl at the beginning of 2009, significant asset rationalization was forced to occur. The focus for most companies moved to those assets with the lowest breakeven prices, as several higher-cost plays became marginally economic or uneconomic, at least on a full-cycle basis. With this renewed focus on higher quality assets, overall capital efficiency improved concomitantly with lower finding and development costs. Another factor affecting this year’s reserve replacement costs were higher oil prices toward the end of 2009. Higher oil prices led to positive price-related revisions for many producers, with some adding back what had been removed from the books at the end of 2008. On the downside, natural gas prices remained relatively weak throughout 2009, which led to negative price-related revisions at the end of the year. However, the reserves added through extensions and dis-



coveries, in large part related to shale gas drilling, more than offset price-related revisions for most of the shale-focused players.

The companies included in our study spent approximately $266 billion in 2009 to add 21.6 billion boe of proved crude oil and natural gas reserves. This translates to worldwide reserve replacement costs of $12.30/boe in 2009 compared to $22.38/boe in 2008. Capital spending had been increased fairly steadily from the period of 1999 to 2008 with rising commodity prices and cash flow. But the decline in commodity prices and asset high-grading led to a reduced capital program for most companies. Along with rising reserve replacement costs from 1999 to 2008, reserve performance was also deteriorating, falling to replacement of around 100% of production in 2007 and 2008, which essentially means that reserves were not growing in those years but rather just replacing production, despite significant capital spending. However, as illustrated in Chart 18, this trend was reversed in 2009 with roughly 150% being replaced that year. We believe this is due in part to the timing difference between the relatively higher levels of capital spending between 2006 and 2009 and reserve additions.

Chart 17: Worldwide Capital Spending vs. Reserve Additions

Chart 18: Worldwide Reserve Replacement Performance

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Source: BMO Capital Markets, Company Reports Note: Reserve replacement is reserve addition as % of productionSource: BMO Capital Markets, Company Reports

Big Improvement at Home

Worldwide reserve replacement costs (including revisions) have risen at a compound annual rate of 12% since 1999, with North American costs expanding by an 8% CAGR and International costs climbing roughly 15%. This reversed the trend from 2008, when North American reserve replacement costs were significantly higher than those interna-tionally. In North America in particular, the dramatic improvement in reserve replace-ment costs, in addition to the high-grading mentioned above, can also be attributed to ongoing enhancements in drilling and completion techniques, which have continued to unlock additional oil and gas from the resource plays in a more cost effective manner. While International reserve replacement costs also improved from 2008 levels, the reduc-tion was more subdued.



The positive revisions reported by many of the companies in 2009, whether price related or technically driven, helped to improve overall reserve replacement results. When revi-sions are excluded from the results, the worldwide reserve replacement costs rise to $17.05/boe, as shown in Chart 20. Even when revisions are excluded, North American reserve replacement costs, at $14.28/boe, remain better than those outside of North America, at $20.60/boe.

Chart 19: 2009 Worldwide Reserve Replacement Costs Including Revisions (US$/net boe)

Chart 20: 2009 Worldwide Reserve Replacement Costs Excluding Revisions (US$/net boe)

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Admittedly, single-year reserve replacement costs can provide a misleading indication of reserve replacement performance because of the time lag between capital spending and reserve recognition. As a result, three- or five-year average reserve replacement costs tend to provide a more realistic representation of the industry cost structure and insight into potential industry investment returns. Based on our survey, three-year average reserve replacement costs fell 9% in 2008 to $16.04/boe. Three-year costs in North America de-creased 19% to $17.76/boe, while International costs increased 3% to $14.61/boe.



Chart 21: Worldwide 3-Year Average Reserve Replacement Costs (US$/net boe)


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Table 1: Worldwide Reserve Replacement Cost Summary (US$)

Source: BMO Capital Markets, Company ReportsNote: Reserve replacement costs calculated based on after royalty reserves

Worldwide F&D Cost Summary (US$, net)1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3-Year 5-Year

Production:

Gas Production (mmcf/d) 57,733.8 63,776.6 69,915.8 75,888.1 80,409.7 82,213.8 81,365.9 83,619.5 84,629.7 88,121.2 88,633.8 87,128.2 85,274.0 Liquids Production (b/d) 16,301,762 17,506,174 18,092,090 19,418,334 20,306,790 20,906,548 20,620,255 20,732,758 20,520,121 20,108,532 20,138,434 20,255,696 20,424,020 Total Production (boe/d) 25,924,064 28,135,600 29,744,730 32,066,343 33,708,403 34,608,846 34,181,231 34,669,350 34,625,068 34,795,401 34,910,737 34,777,068 34,636,357 % Gas Production 37% 38% 39% 39% 40% 40% 40% 40% 41% 42% 42% 42% 41%% Oil Production 63% 62% 61% 61% 60% 60% 60% 60% 59% 58% 58% 58% 59%

Proven Reserves:

Gas Reserves (bcf) 296,551 319,036 347,221 364,191 375,571 391,268 403,587 412,149 416,487 426,078 433,089 425,218 418,278 Oil Reserves (mmbbls) 70,535 76,842 78,988 83,946 87,050 86,526 84,726 83,957 81,005 79,733 88,016 82,918 83,487 Total Proven Reserves (mmboe) 119,960 130,015 136,858 144,644 149,645 151,737 151,990 152,649 150,419 150,746 160,197 153,788 153,200% Gas Reserves 41% 41% 42% 42% 42% 43% 44% 45% 46% 47% 45% 46% 46%% Oil Reserves 59% 59% 58% 58% 58% 57% 56% 55% 54% 53% 55% 54% 54%Proven Reserve Life Index 12.8 12.7 12.7 12.4 12.2 12.1 12.2 12.1 11.9 11.9 12.6 12.1 12.1

Proven Net Reserve Additions:

Gas Additions (bcf) 41,441.2 43,419.7 52,152.6 44,010.3 39,130.7 45,400.8 49,423.6 50,208.9 39,285.6 42,583.2 45,753.5 127,622.3 227,254.8Oil Additions (mmbbls) 10,091.7 11,917.5 8,583.1 11,890.9 10,418.3 7,135.9 7,072.4 8,865.5 5,679.4 6,248.3 11,374.5 23,302.2 39,240.1Total Additions (mmboe) 16,998.6 19,154.1 17,275.2 19,225.9 16,940.1 14,702.7 15,309.7 17,233.6 12,227.0 13,345.5 19,000.1 44,572.6 77,115.9

Addition Components (mmboe):

Extensions, Discoveries and Additions 7,920.0 8,903.6 11,028.3 10,293.6 12,367.5 11,645.1 10,551.5 10,110.5 8,940.3 8,701.5 13,409.8 31,051.6 51,713.6Acquisitions 6,895.0 9,285.7 5,057.2 7,865.4 5,720.3 4,300.1 4,926.4 6,857.8 3,049.1 2,068.0 2,172.8 7,289.9 19,074.1Dispositions/Other -2,710.0 -3,327.9 -903.6 -1,684.2 -2,634.9 -1,881.3 -1,625.9 -1,805.8 -4,906.6 -1,732.2 -2,602.9 -9,241.7 -12,673.4Revisions of Estimates 4,893.6 4,292.7 2,093.3 2,751.1 1,487.1 638.7 1,457.7 2,071.1 5,144.2 4,308.2 6,020.4 15,472.8 19,001.6

Components as % of Total Additions (mmboe):

Extensions, Discoveries and Additions 46.6% 46.5% 63.8% 53.5% 73.0% 79.2% 68.9% 58.7% 73.1% 65.2% 70.6% 69.7% 67.1%Acquisitions 40.6% 48.5% 29.3% 40.9% 33.8% 29.2% 32.2% 39.8% 24.9% 15.5% 11.4% 16.4% 24.7%Dispositions -15.9% -17.4% -5.2% -8.8% -15.6% -12.8% -10.6% -10.5% -40.1% -13.0% -13.7% -20.7% -16.4%Revisions of Estimates 28.8% 22.4% 12.1% 14.3% 8.8% 4.3% 9.5% 12.0% 42.1% 32.3% 31.7% 34.7% 24.6%

Additions as % of Production:

Gas 196.7% 186.5% 204.4% 158.9% 133.3% 151.3% 166.4% 164.5% 127.2% 132.4% 141.4% 133.8% 146.0%Oil 169.6% 186.5% 130.0% 167.8% 140.6% 93.5% 94.0% 117.2% 75.8% 85.1% 154.7% 105.1% 105.3%Total 179.6% 186.5% 159.1% 164.3% 137.7% 116.4% 122.7% 136.2% 96.7% 105.1% 149.1% 117.0% 122.0%

Additions as % of Reserves:

Gas 14.0% 13.6% 15.0% 12.1% 10.4% 11.6% 12.2% 12.2% 9.4% 10.0% 10.6% 30.0% 54.3%Oil 14.3% 15.5% 10.9% 14.2% 12.0% 8.2% 8.3% 10.6% 7.0% 7.8% 12.9% 28.1% 47.0%Total 14.2% 14.7% 12.6% 13.3% 11.3% 9.7% 10.1% 11.3% 8.1% 8.9% 11.9% 29.0% 50.3%

Capital Expenditures (US$million):

Exploration $10,557 $13,233 $16,052 $15,560 $16,705 $17,972 $24,011 $33,372 $38,887 $47,290 $42,114 $128,291 $185,675Development $36,664 $44,589 $58,144 $63,079 $85,984 $92,907 $117,304 $148,810 $168,065 $203,219 $171,987 $543,271 $809,385Acquisitions $28,974 $48,245 $31,923 $42,729 $24,544 $38,808 $57,281 $120,935 $54,164 $88,857 $54,862 $197,883 $376,099Other $32 $128 $189 $57 $95 -$637 -$908 -$1,333 -$1,352 -$1,898 -$3,160 -$6,410 -$8,651Total Expenditures $76,226 $106,195 $106,308 $121,424 $127,328 $149,050 $197,688 $301,785 $259,764 $337,468 $265,803 $863,035 $1,362,508

Expenditures as % of Total (US$million):

Exploration 13.8% 12.5% 15.1% 12.8% 13.1% 12.1% 12.1% 11.1% 15.0% 14.0% 15.8% 14.9% 13.6%Development 48.1% 42.0% 54.7% 51.9% 67.5% 62.3% 59.3% 49.3% 64.7% 60.2% 64.7% 62.9% 59.4%Acquisitions 38.0% 45.4% 30.0% 35.2% 19.3% 26.0% 29.0% 40.1% 20.9% 26.3% 20.6% 22.9% 27.6%

Cashflow (US$million) $74,304 $124,469 $115,510 $114,176 $152,983 $182,416 $234,012 $264,692 $282,064 $357,569 $260,105 $899,737 $1,398,441Cashflow (US$/boe) $7.85 $12.12 $10.64 $9.76 $12.43 $14.44 $18.76 $20.92 $22.32 $28.15 $20.41 $23.63 $22.12Recycle Ratio 2.0x 2.6x 1.8x 1.7x 1.9x 1.6x 1.6x 1.3x 1.5x 1.3x 1.7x 1.5x 1.5x

F&D Costs (US$/boe):

Exploration & Development (incl. Revisions $3.69 $4.38 $5.65 $6.03 $7.41 $9.03 $11.77 $14.96 $14.69 $19.26 $11.02 $14.43 $14.07Acquisition Costs $4.20 $5.20 $6.31 $5.43 $4.29 $9.02 $11.63 $17.63 $17.76 $42.97 $25.25 $27.14 $19.72All Sources (incl. Revisions) $3.87 $4.72 $5.85 $5.81 $6.50 $8.99 $11.67 $15.85 $15.16 $22.38 $12.30 $16.04 $15.17

Exploration & Development (excl. revisions) $5.96 $6.49 $6.73 $7.64 $8.30 $9.52 $13.39 $18.02 $23.15 $28.79 $15.97 $21.63 $19.24Acquisition Costs $4.20 $5.20 $6.31 $5.43 $4.29 $9.02 $11.63 $17.63 $17.76 $42.97 $25.25 $27.14 $19.72All Sources (excl. revisions) $5.16 $5.84 $6.61 $6.69 $7.04 $9.35 $12.79 $17.78 $21.67 $31.32 $17.05 $22.51 $19.25

Geographically Segmented Costs

North America $4.90 $5.28 $8.18 $8.63 $9.03 $11.97 $10.45 $19.31 $16.52 $35.03 $10.89 $17.76 $16.53International $3.47 $4.16 $4.45 $4.48 $5.32 $7.12 $13.15 $12.40 $14.03 $15.85 $13.91 $14.61 $13.92



Breakeven Oil Prices

We estimate that the price of WTI required in order to generate sufficient revenue to recover all of the costs incurred in finding, developing and producing a barrel of crude oil and/or natural gas on a worldwide basis has risen to $51.98/boe in 2009 from $16.97/boe in 1999, as illustrated in Chart 22. As noted, one-year costs can provide a misleading indication of reserve replacement performance and resulting breakeven oil price because of the time lag between capital spending and reserve recognition, as well as “noise” from reserve revisions due to reserve reporting regulations. This was particularly true over the last couple of years as reserve replacement costs were skewed due to sizeable revisions. As a result, we believe that using three- or five-year weighted average reserve replace-ment costs tends to provide a more realistic representation of the industry cost structure and insight into potential industry investment returns. Chart 23 provides the estimated breakeven WTI price that is required in order to cover the industry’s costs, including a return on capital, based on three-year average reserve replacement costs. Our analysis suggests that the global oil and gas industry’s breakeven oil price has risen to $61.54/boe in 2009 from $22.48/boe in 2001.

Chart 22: Worldwide Required WTI Oil Price One-Year (US$/boe)

Chart 23: Worldwide Required WTI Oil Price Three-Year (US$/boe)

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On a company-by-company basis, the top performers with regards to three-year required breakeven WTI price were Southwestern, Peyto and Cenovus. The results of the breakeven performance by the Top 30 companies included in the study are provided in Table 2, below.



Table 2: Worldwide Required WTI Oil Price (US$/boe) – Top 30

Table 3: Worldwide Required Henry Hub Price (US$/Mcfe) – Top 15 Gas-Weighted Companies

Source: BMO Capital Markets, Company ReportsNote: Results ranked on the basis of three-year average

Source: BMO Capital Markets, Company ReportsNote: Includes companies with production weighted 70% or more toward natural gas in 2009

Weighted AvgRank Company 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3-Year 5-Year1 Southwestern SWN 16.58 22.60 18.20 18.50 28.41 24.30 36.06 49.36 45.69 31.19 21.91 28.55 30.68 2 Peyto PEY.UN - - - - 23.35 35.90 41.58 48.16 34.46 58.22 19.57 29.57 46.22 3 Cenovus CVE - - - - - - - - 34.43 92.36 28.95 38.79 na4 Storm SEO - - - - - 90.34 41.57 52.60 50.97 29.88 74.30 39.58 40.86 5 Ultra Petroleum UPL (0.28) 13.83 13.20 15.89 21.19 22.59 31.62 38.56 42.00 48.14 34.96 41.40 39.38 6 CNX Gas CXG na na na na 40.83 36.87 29.62 28.74 74.52 81.45 22.02 41.78 36.97 7 Royal Dutch RD 15.19 19.56 18.10 31.27 37.42 67.61 55.57 45.76 49.55 67.72 37.07 44.62 45.80 8 Equitable Resources EQT 7.05 18.56 192.00 24.63 339.62 31.65 30.16 37.13 42.59 63.11 35.76 44.88 40.70 9 Advantage AAV - - 24.36 20.86 77.74 46.56 50.82 73.92 43.72 69.45 41.89 45.97 57.31 10 Gran Tierra GTE - - - - - - 143.42 106.99 78.55 54.55 36.67 46.55 57.54 11 EOG EOG 17.16 21.21 25.32 24.06 30.44 38.59 45.19 51.06 50.79 57.78 37.52 46.86 47.19 12 ARC Energy AET 16.39 21.38 24.49 22.73 26.01 39.23 45.07 59.29 54.80 59.08 35.21 47.54 48.15 13 Birchcliff BIR - - - - - - 99.00 86.75 63.22 50.42 28.28 47.61 52.06 14 ProspEx PSX - - - - - 112.04 61.20 66.23 55.20 77.23 49.81 47.84 53.25 15 BP Plc BP 14.71 23.78 17.92 20.03 26.33 29.54 42.51 37.60 45.49 57.69 45.44 48.67 45.59 16 Delphi DEE - - - - 35.75 60.02 65.23 107.27 70.62 55.80 30.29 48.80 80.61 17 Santos Ltd. Santos - - 45.25 21.63 29.54 45.20 50.73 49.03 51.37 60.84 34.93 48.83 48.98 18 Petrohawk HK 36.23 23.27 51.69 112.10 15.16 39.58 86.52 56.96 61.85 106.29 30.98 48.99 53.59 19 Trilogy TET - - - - - - 50.14 36.98 29.70 46.89 41.36 49.44 42.53 20 Bill Barrett BBG - - - 47.35 39.96 51.65 74.55 55.97 53.63 50.75 44.43 49.48 51.83 21 Canadian Natural* CNQ 14.39 24.70 27.89 45.54 33.43 43.23 42.82 58.71 52.62 54.07 50.44 50.00 49.76 22 Bonavista BNP.UN - - - - 33.62 33.08 45.72 54.01 62.25 56.14 41.39 50.26 49.84 23 Celtic CLT - - - 26.18 33.78 43.85 65.33 59.92 71.03 45.53 47.90 50.41 54.24 24 EnCana ECA na 26.81 28.14 24.43 27.06 35.19 37.89 42.97 49.46 54.84 58.37 50.65 44.63 25 Comstock CRK 15.82 20.23 22.89 19.65 35.62 45.37 87.79 31.53 50.53 118.99 33.29 50.80 45.98 26 Carrizo CRZO 11.09 16.05 28.52 24.85 28.82 28.99 43.71 68.64 41.15 71.84 38.86 51.15 51.22 27 PetroBank PBG - - - - 80.32 48.63 62.01 96.47 57.51 70.72 41.27 51.18 56.74 28 Paramount Energy Trust PMT.UN - - - 19.15 168.72 70.56 65.78 71.55 53.46 55.29 54.72 52.42 56.54 29 Mariner ME 33.91 21.70 13.75 18.44 31.93 29.31 42.84 49.78 46.85 70.90 44.01 53.91 55.10 30 Devon DVN 12.49 21.61 28.18 24.99 30.98 34.13 38.99 51.68 48.88 59.11 32.42 54.26 50.60

Worldwide Average 16.97 22.92 25.05 24.87 29.60 39.08 53.57 61.28 60.55 85.78 51.98 65.18 62.28

We have also segmented the companies into gas-weighted and oil-weighted to provide a better comparison. The required breakeven Henry Hub prices for the top 15 gas-weighted companies are provided in Table 3 below. The top three gas-weighted companies on the basis of three-year average required breakeven Henry Hub-equivalent price were South-western, Peyto and Storm.

Weighted AvgRank Company 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3-Year 5-Year1 Southwestern SWN 2.76 3.77 3.03 3.08 4.74 4.05 6.01 8.23 7.61 5.20 3.65 4.76 5.11 2 Peyto PEY.UN - - - - 3.89 5.98 6.93 8.03 5.74 9.70 3.26 4.93 7.70 3 Storm SEO - - - - - 15.06 6.93 8.77 8.50 4.98 12.38 6.60 6.81 4 Ultra UPL (0.05) 2.30 2.20 2.65 3.53 3.76 5.27 6.43 7.00 8.02 5.83 6.90 6.56 5 CNX Gas CXG - - - - 6.80 6.14 4.94 4.79 12.42 13.57 3.67 6.96 6.16 6 Equitable EQT 1.18 3.09 32.00 4.10 56.60 5.28 5.03 6.19 7.10 10.52 5.96 7.48 6.78 7 EOG EOG 2.86 3.53 4.22 4.01 5.07 6.43 7.53 8.51 8.46 9.63 6.25 7.81 7.86 8 Birchcliff BIR - - - - - - 16.50 14.46 10.54 8.40 4.71 7.93 8.68 9 ProspEx PSX - - - - - 18.67 10.20 11.04 9.20 12.87 8.30 7.97 8.88 10 Delphi DEE - - - - 5.96 10.00 10.87 17.88 11.77 9.30 5.05 8.13 13.43 11 Santos STOSY - - 7.54 3.61 4.92 7.53 8.46 8.17 8.56 10.14 5.82 8.14 8.16 12 Petrohawk HK 6.04 3.88 8.62 18.68 2.53 6.60 14.42 9.49 10.31 17.72 5.16 8.17 8.93 13 Trilogy TET - - - - - - 8.36 6.16 4.95 7.81 6.89 8.24 7.09 14 Bill Barrett BBG - - - 7.89 6.66 8.61 12.42 9.33 8.94 8.46 7.41 8.25 8.64 15 Celtic CLT - - - 4.36 5.63 7.31 10.89 9.99 11.84 7.59 7.98 8.40 9.04

Average Gas Weighted 3.03 3.57 4.46 4.14 5.48 6.32 7.93 9.16 8.86 12.96 5.92 9.04 9.10

The required breakeven WTI prices for the top 15 oil-weighted companies are provided in Table 4, below. The top three oil-weighted companies on the basis of three-year average required breakeven WTI price were Gran Tierra, BP and Canadian Natural Resources.



Table 4: Worldwide Required WTI Equivalent Oil Price (US$/boe) – Top-15 Oil-Weighted Companies

Source: BMO Capital Markets, Company ReportsNote: Includes companies with production weighted 55% or more toward crude oil in 2009

Chart 24: Worldwide Cash Flow Recycle Ratio Chart 25: Worldwide DD&A vs. F&D (US$/boe)

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Lacklustre Returns Continue

The dramatic increase in crude oil prices over the past decade has not translated into a “windfall” for the global oil and gas industry. Chart 24 shows that the worldwide cash flow recycle ratio (cash flow from operations divided by reserve replacement costs) has actually declined despite an increase of more than 400% in crude oil prices, which sug-gests that full-cycle returns on capital employed have not improved. In addition, capital depreciation charges (DD&A) have not kept pace with the rise in reserve replacement costs. We believe that future capital depreciation charges may have to increase significantly if reserve replacement cost performance does not improve, which could materially impair future earnings and returns on capital employed.

Weighted AvgRank Company 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3-Year 5-Year1 Gran Tierra GTE - - - - - - 143.42 106.99 78.55 54.55 36.67 46.55 57.54 2 BP Plc BP 14.71 23.78 17.92 20.03 26.33 29.54 42.51 37.60 45.49 57.69 45.44 48.67 45.59 3 Canadian Natural CNQ 14.39 24.70 27.89 45.54 33.43 43.23 42.82 58.71 52.62 54.07 50.44 50.00 49.76 4 Petrobank PBG - - - - 80.32 48.63 62.01 96.47 57.51 70.72 41.27 51.18 56.74 5 Vermilion VET.UN - - - - 22.62 42.43 39.22 53.08 65.89 83.63 32.90 54.48 50.43 6 Pan Orient POE - - - - - - 103.60 41.51 50.71 65.99 49.51 55.75 76.84 7 Freehold FRU.UN 9.78 18.14 28.80 13.94 22.19 33.99 72.44 35.41 74.38 52.12 31.41 57.50 63.19 8 Canadian Oil Sands COS 14.44 24.91 19.85 18.42 25.59 27.76 34.24 50.51 53.51 68.56 65.48 58.11 51.45 9 Petrominerales PMG - - - - - - - 60.52 52.83 83.84 46.11 59.47 61.18 10 ExxonMobil XOM 18.98 20.79 23.61 22.21 29.03 30.93 39.58 41.67 46.50 91.13 54.12 60.03 50.56 11 Occidental OXY 13.01 15.78 15.77 19.06 19.99 28.81 45.29 60.62 65.59 86.10 39.38 60.22 57.57 12 Nexen NXY 20.47 21.56 25.04 25.69 46.57 31.20 64.10 106.94 62.49 74.99 65.90 63.98 68.06 13 PetroChina PTR 15.38 18.31 21.10 23.37 29.04 32.82 46.94 46.34 56.45 86.71 54.50 65.01 57.53 14 Baytex BTE.UN 24.04 29.03 39.87 26.97 27.43 44.68 40.64 52.02 64.02 78.59 60.18 68.31 59.21 15 West Energy WTL - - - - - 41.04 186.63 70.29 82.08 53.44 74.94 68.92 78.67

Average of Oil Weighted 17.05 22.50 24.64 23.75 28.27 37.57 50.62 57.08 62.55 85.07 54.20 66.55 62.41



Chart 26: Return on Capital Employed vs. WTI Oil Price


Most tellingly, the industry’s return on capital employed has declined steadily since 2005, despite increasing underlying commodity prices through 2008. With comparatively weaker commodity prices in 2009, returns fell even further. The continued fall in returns has reflected both the increase in the cost of inputs such as land and labour, and the steady decline in reserve replacement performance. Although the trend for reserve replacement performance was reversed in 2009, weaker commodity prices more than offset given the downwardly sticky cost of inputs. While high-grading and asset rationalization improved reserve replacement performance, we believe that the industry’s costs will begin to trend higher again over time as producers struggle to replace reserves from mature oil basins globally. This could translate to stagnant returns on capital employed in over the next few years and a weaker-than-historical valuation for the industry.

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A Temporary Reprieve

Commodity prices were substantially weakened at the beginning of 2009 in response to the financial crisis and global economic downturn. The oil and gas industry responded to the drop in commodity prices by significantly reducing capital spending. This in turn led to some moderation in the industry’s cost structure, particularly for drilling and completion, which accounts for roughly 40–60% of the industry’s total spending. However, given the specialized rigs and completion equipment used in the resource plays, demand for those services remained relatively strong. Therefore, cost reductions for drilling and completion costs were not as substantial as were seen for other contributors to reserve replacement costs, such as acquisition costs, as shown in Chart 27.



Chart 27: Worldwide Reserve Replacement Costs by Type (US$/boe)

Source: U.S. Energy Information Administration, BMO Capital Markets

We do not believe the reduction in the industry’s cost structure will be sustained, for three reasons. First, labour markets have loosened due to the slowdown in economic growth; however, we still have not seen a material reduction in wages. Moreover, the shortage of technical staff, such as engineers and geologists as well as skilled trades has not been resolved. Thus, we expect that rising wage rates and reduced productivity would again become factors pushing costs higher as the economy recovers. Second, the prices of inputs, such as steel, have also declined with slower economic growth, but again we believe that the drop in prices could prove transitory—particularly as output in emerging economies such as China and India begins to increase. Third, we estimate that approximately 40% of the increase in reserve replacement costs is due to finding less oil and gas. In contrast, during prior oil price cycles the sustained decline in the industry’s cost structure resulted from a shift to half-cycle economics that was enabled by the discovery of the North Sea and Alaska North Slope, which created an inventory of low-cost opportunities that facili-tated a reduction in the cost structure. No such analogy currently exits for the global oil industry, although the emerging shale gas plays in North America have similar implica-tions for North American natural gas prices.

As a result, we expect to see reserve replacement costs rise in 2010, albeit still well below the high-water mark set in 2008. We believe companies will continue to pursue higher-margin projects, especially for natural gas projects in North America, given the volatility in that market and the significant supply that could be associated with shale gas development. Overall, we expect that worldwide reserve replacement costs could increase by roughly 22% to the $15/boe level in 2010. Taken together with a 10% overall increase in operating costs for the year, we estimate the breakeven oil price for the industry could rise to just under the $65/boe range in 2010.

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Chart 28: Reserve Replacement Costs by Region (US$/boe)

Chart 29: Worldwide Required WTI Oil Price (US$/boe)

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Unconventional Implications

Unconventional oil and gas resources continue to attract increased attention from oil and gas companies and investors. In Canada, the primary focus has been on developing the oil sands resource base and, more recently, “tight oil” plays such as the Bakken, while in the United States companies are focused on unlocking the potential of shale gas, which is estimated to hold more than 800 Tcf of recoverable resource. These unconventional resources also exist in other countries outside of North America; however, with the ex-ception of the Venezuelan oil sands there has been no significant development thus far. The attraction of unconventional resource development is largely due to the size of the resource because this provides an opportunity for lower and more stable reserve replace-ment costs, and in turn lower commodity prices are required in order to generate accept-able investment returns. However, the costs of developing unconventional resources have also moved higher in tandem with rising crude oil and natural gas prices, as competition for the inputs has increased—particularly in the oil sands due to its relatively high capital intensity.

The supply cost for natural gas in North America had been moving steadily higher over the last decade, rising to $12.96/Mcfe in 2008 from $3.03/Mcfe in 1999. The emergence of unconventional natural gas in North American (specifically shale gas) has fundamentally altered the natural gas industry’s cost structure. Advances in drilling and fracing tech-nology coupled with operating experience have lowered the supply in some plays below $4/Mcfe. However, actual reported results based on proved reserves do not seem to bear this out, which has led to some scepticism regarding company claims. The disconnect between company slide show presentations and reported results is largely due to the fact that a significant portion of the resource potential will not be booked as proved reserves for many years. This makes the upfront capital spending and supply costs appear very high. Our Monte Carlo simulations for the major shale gas plays directionally support



Chart 30: North American Natural Gas Supply Costs (US$/Mcfe)


the company claims, although care must be taken to account for the differences in “half-cycle” and “full-cycle” costs2. The results in 2009 are also supportive, with the one-year proved supply cost falling to $5.92/Mcfe.

2 See our October 2009 report “Unconventional Gas: Montney Carlo Revisited.”

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The rise in crude oil supply costs has made it economic to consider the development of unconventional source of oil supply. One of the main beneficiaries has been the Canadian oil sands, which has seen more than $100 billion of capital invested over the last decade. This heavy level of investment coupled with labour market constrains dramatically drove up the supply costs for oil sands to more than $90/bbl by 2008 from $20/bbl in 1999. We estimate that the remaining established resource base requires a weighted average WTI price of approximately $64/bbl to justify investment, excluding any potential changes to environmental regulations, as shown in Chart 31.

The cost of developing an integrated oil sands development (production and local upgrad-ing) is expected to fall somewhat due to the slower pace of development under a relatively lower oil price environment. However, we believe that it will be difficult to capture signifi-cant cost savings, as labour remains relatively tight in Alberta and competition for inputs will again intensify as soon as projects come back onto the drawing board. Consequently, we estimate that the typical integrated oil sands development will continue to require a crude oil price of at least $70/bbl to justify investment. We estimate that the supply cost has fallen for many oil sands projects to the $45–60/bbl range, which is below the global average supply cost of roughly $63/bbl. This is due to the combination of a shift to in situ developments without upgraders as well as an overall lessening in inflationary pressures due to lower activity.



Chart 31: Breakeven Oil Price for Oil Sands Resource Base


Tight oil plays such as the Bakken in North Dakota and Western Canada also represent a source of unconventional oil. The Bakken play is relatively mature, with the boundaries of the play in Saskatchewan largely delineated. Development of the play has been largely through 11-stage single leg horizontal wells. However, companies are currently experiment-ing with rising frac intensity, as well as other completion and recovery methods, including water flooding and dual leg horizontals. In North Dakota, industry has reported strong initial production rates on higher frac intensity.

In contrast to the Bakken, the Cardium play is still in the early stages of development, but has garnered significant attention on the identification of a new oil resource play. Similar to the Bakken’s evolution during the initial stages of development, the areal extent of the play is still being delineated, with prospective Cardium acreage covering a large area across Alberta. As such, there is a significant number of companies with potential Cardium holdings. Given the early stage of development, operating assumptions and characteristics of the play are still being determined. This includes drilling and completion techniques, which continue to be refined. Our bias is toward improved economics on higher recovery rates and lower operating costs.

Our breakeven analysis on single leg horizontals for the Bakken and Cardium wells is based on half-cycle economics and currently available public information. As previously mentioned, the Cardium play is still in the early stages of development and our analysis will be updated with further visibility. We estimate a WTI breakeven oil price of ~$44/boe and $47/boe for a Bakken and Cardium single leg horizontal well, respectively. Our relatively low estimated breakeven oil price highlights the impact of horizontal drilling, which has changed the operating landscape for industry. Specifically, in addition to the

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Chart 32: Unconventional Oil Supply Costs (US$/bbl)


unlocking of previously untapped reserves, there has been a significant reduction in the commodity price required to drill due to stronger production rates and higher recoverable reserves. We note that our breakeven oil price is positively impacted by the royalty incen-tives for the Bakken (2.5% royalty on first 37,500 barrels, additional incentive for deeper wells) and Cardium (5% royalty over various time horizons and production volumes based on measured depth). On a full-cycle basis, our estimated breakeven oil price would result in a higher range. However, we are biased to the low end of the range given that land has already been largely consolidated in the Bakken, while acreage positions and existing infrastructure are already in place for the Cardium on legacy assets.

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The Myth of 6:1

The application of the commonly used 6-to-1 oil to gas equivalency ratio can have broad-ranging effects when making comparisons and presenting data on a barrel of oil equivalent basis. While the 6-to-1 ratio represents the energy equivalent of crude oil and natural gas, it has rarely held when it comes to the actual prices of the commodities in North America. Over the past 20 years, the average price ratio for the front-month NYMEX natural gas to WTI crude oil has been in the range of 10:1, as illustrated in Chart 33. So while theoretically the two commodities should be trading in closer proximity, this has not been the case historically due to differing supply and demand dynamics; specifically, crude oil has essentially become a transportation fuel whose price is determined by the dynamics of gasoline and diesel markets while natural gas has become a power generation fuel more closely linked to coal.



Chart 33: WTI-Henry Hub Ratio


To show the effect that the use of the 6-to-1 ratio has on proved reserve replacement costs and supply costs, we have also run our industry analysis of using the 10:1 ratio to more closely match historical market conditions. As shown in Charts 34 and 35, below, the impact can be significant, especially for gas-weighted producers. For example, in 2009 the reserve replacement cost of $12.30/boe under the traditional 6:1 gas-to-oil ratio rises to $14.69/boe under the 10-to-1 scenario. Under the 6-to-1 ratio, gas reserves are valued more highly than the market would dictate, skewing the results. This becomes all the more meaningful with the gas-to-oil ratio widening even further over the first five months of 2010, averaging more than 17:1 over the period. The effect of higher reserve replacement costs as well as all other costs, translates to a roughly 20% rise in overall global supply costs to $62.24/boe.

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Chart 34: Worldwide F&D Cost (US$/boe) – Gas Ratio 6:1 vs 10:1

Chart 35: Worldwide Required WTI Equivalent Oil Price (US$/boe) – Gas Ratio 6:1 vs. 10:1

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Chart 36: Worldwide Reserve Replacement Performance

Note: Reserve replacement is reserve addition as % of productionSource: BMO Capital Markets, Company Reports

With regards to reserve replacement performance, as measured by reserve additions as a percentage of production in each year, the results are a bit more mixed. Under the 10:1 scenario, production replacement is higher than under the traditional 6:1 analysis in sev-eral years, as shown in Chart 36. However, for the most part, replacement of production would have been slightly lower had a 10-to-1 ratio been applied instead.

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Chart 37: Three-Year Share Price Performance of Top Quartile vs. Bottom Quartile (2007–2009)


Company Rankings: Low Cost = Higher Share Price

We believe that the share prices of companies that consistently achieve lower full-cycle costs (breakeven prices) should outperform those with higher cost structures. This is because lower breakeven prices over time should translate into higher returns on capital employed, which in turn should generate faster growth in underlying book value and net asset value. Moreover, low-cost companies are afforded with increased capital flexibility, which protects profitability and balance sheet strength through cyclical downturns in commodity prices. Companies that consistently grow asset value faster than their peers, particularly through challenging industry environments, are rewarded with higher valu-ation multiples. Chart 37 compares the share price performance of the top 30 companies with the lowest three-year average breakeven oil prices from our study compared to the bottom 30 over the last three years. As illustrated, those companies with lower cost struc-tures have outperformed those companies with higher costs structures.

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Table 5 ranks the oil and gas producers included in this study by three-year average required WTI-equivalent oil price. Based on three-year weighted average costs, the top performers were Southwestern, Peyto Energy Trust and Cenovus Energy. The five companies with the lowest implied required oil price based on 2009 results were Peyto, Southwestern, CNX Gas, Birchcliff and Cenovus.



Table 5: Worldwide Required WTI Price Ranked by Three-Year Average (US$/boe)


Weighted AvgRank Company 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3-Year 5-Year1 Southwestern SWN 16.58 22.60 18.20 18.50 28.41 24.30 36.06 49.36 45.69 31.19 21.91 28.55 30.68 2 Peyto PEY.UN - - - - 23.35 35.90 41.58 48.16 34.46 58.22 19.57 29.57 46.22 3 Cenovus CVE - - - - - - - - 34.43 92.36 28.95 38.79 na4 Storm SEO - - - - - 90.34 41.57 52.60 50.97 29.88 74.30 39.58 40.86 5 Ultra Petroleum UPL (0.28) 13.83 13.20 15.89 21.19 22.59 31.62 38.56 42.00 48.14 34.96 41.40 39.38 6 CNX Gas CXG na na na na 40.83 36.87 29.62 28.74 74.52 81.45 22.02 41.78 36.97 7 Royal Dutch RD 15.19 19.56 18.10 31.27 37.42 67.61 55.57 45.76 49.55 67.72 37.07 44.62 45.80 8 Equitable Resources EQT 7.05 18.56 192.00 24.63 339.62 31.65 30.16 37.13 42.59 63.11 35.76 44.88 40.70 9 Advantage AAV - - 24.36 20.86 77.74 46.56 50.82 73.92 43.72 69.45 41.89 45.97 57.31 10 Gran Tierra GTE - - - - - - 143.42 106.99 78.55 54.55 36.67 46.55 57.54 11 EOG EOG 17.16 21.21 25.32 24.06 30.44 38.59 45.19 51.06 50.79 57.78 37.52 46.86 47.19 12 ARC Energy AET 16.39 21.38 24.49 22.73 26.01 39.23 45.07 59.29 54.80 59.08 35.21 47.54 48.15 13 Birchcliff BIR - - - - - - 99.00 86.75 63.22 50.42 28.28 47.61 52.06 14 ProspEx PSX - - - - - 112.04 61.20 66.23 55.20 77.23 49.81 47.84 53.25 15 BP Plc BP 14.71 23.78 17.92 20.03 26.33 29.54 42.51 37.60 45.49 57.69 45.44 48.67 45.59 16 Delphi DEE - - - - 35.75 60.02 65.23 107.27 70.62 55.80 30.29 48.80 80.61 17 Santos Ltd. Santos - - 45.25 21.63 29.54 45.20 50.73 49.03 51.37 60.84 34.93 48.83 48.98 18 Petrohawk HK 36.23 23.27 51.69 112.10 15.16 39.58 86.52 56.96 61.85 106.29 30.98 48.99 53.59 19 Trilogy TET - - - - - - 50.14 36.98 29.70 46.89 41.36 49.44 42.53 20 Bill Barrett BBG - - - 47.35 39.96 51.65 74.55 55.97 53.63 50.75 44.43 49.48 51.83 21 Canadian Natural* CNQ 14.39 24.70 27.89 45.54 33.43 43.23 42.82 58.71 52.62 54.07 50.44 50.00 49.76 22 Bonavista BNP.UN - - - - 33.62 33.08 45.72 54.01 62.25 56.14 41.39 50.26 49.84 23 Celtic CLT - - - 26.18 33.78 43.85 65.33 59.92 71.03 45.53 47.90 50.41 54.24 24 Encana ECA na 26.81 28.14 24.43 27.06 35.19 37.89 42.97 49.46 54.84 58.37 50.65 44.63 25 Comstock CRK 15.82 20.23 22.89 19.65 35.62 45.37 87.79 31.53 50.53 118.99 33.29 50.80 45.98 26 Carrizo CRZO 11.09 16.05 28.52 24.85 28.82 28.99 43.71 68.64 41.15 71.84 38.86 51.15 51.22 27 PetroBank PBG - - - - 80.32 48.63 62.01 96.47 57.51 70.72 41.27 51.18 56.74 28 Paramount Energy Trust PMT.UN - - - 19.15 168.72 70.56 65.78 71.55 53.46 55.29 54.72 52.42 56.54 29 Mariner ME 33.91 21.70 13.75 18.44 31.93 29.31 42.84 49.78 46.85 70.90 44.01 53.91 55.10 30 Devon DVN 12.49 21.61 28.18 24.99 30.98 34.13 38.99 51.68 48.88 59.11 32.42 54.26 50.60 31 Range RRC 12.98 32.32 30.40 21.22 27.99 37.63 48.59 64.63 51.21 80.84 36.38 54.34 55.13 32 Vermillion VET.UN - - - - 22.62 42.43 39.22 53.08 65.89 83.63 32.90 54.48 50.43 33 NuVista NVA - - - - 27.09 40.03 53.44 61.66 58.29 69.89 39.93 55.25 55.94 34 Pan Orient POE - - - - - - 103.60 41.51 50.71 65.99 49.51 55.75 76.84 35 Galleon GO - - - - - 71.20 46.36 70.52 67.37 50.12 59.56 56.93 57.56 36 Orleans OEX - - - - - - 44.41 119.39 71.81 58.77 42.00 57.14 72.58 37 Vero VRO - - - - - - 55.26 50.29 43.96 58.42 48.75 57.24 49.42 38 Freehold Royalty FRU.UN 9.78 18.14 28.80 13.94 22.19 33.99 72.44 35.41 74.38 52.12 31.41 57.50 63.19 39 Canadian Oil Sands COS.UN 14.44 24.91 19.85 18.42 25.59 27.76 34.24 50.51 53.51 68.56 65.48 58.11 51.45 40 Midnight MOX - - - - - 23.13 97.91 81.85 98.38 82.28 50.71 59.16 71.01 41 Petrominerales PMG - - - - - - - 60.52 52.83 83.84 46.11 59.47 61.18 42 Angle NGL - - - - - - - - - 66.13 51.57 59.84 na43 Unit Corp. UNT 11.79 15.86 25.64 27.60 34.02 36.63 44.26 44.74 51.58 71.98 53.20 59.93 53.57 44 Quicksilver KWK 18.01 22.60 26.71 17.66 39.79 44.59 51.46 42.96 48.29 69.47 37.69 59.98 56.23 45 ExxonMobil XOM 18.98 20.79 23.61 22.21 29.03 30.93 39.58 41.67 46.50 91.13 54.12 60.03 50.56 46 Forest FST 21.25 12.41 22.09 35.99 30.95 36.22 56.99 50.54 60.49 69.28 44.51 60.05 58.18 47 Occidental OXY 13.01 15.78 15.77 19.06 19.99 28.81 45.29 60.62 65.59 86.10 39.38 60.22 57.57 48 Niko NKO 11.74 (0.05) 9.32 10.98 119.15 78.34 53.20 47.20 38.09 66.74 52.01 60.91 58.98 49 XTO Energy XTO 15.68 14.66 20.95 20.16 26.07 32.41 41.55 44.01 49.96 87.98 39.23 61.16 55.54 50 NAL Oil & Gas NAE.UN 20.41 15.17 17.07 24.60 29.35 53.97 49.20 72.03 62.48 53.35 69.40 61.45 58.51 51 Anadarko APC 22.71 38.45 28.82 31.54 28.72 34.36 51.16 96.08 43.71 86.41 57.03 61.78 76.55 52 Pengrowth PGF.UN 18.74 35.46 23.85 42.59 35.68 39.18 48.94 65.76 60.96 67.45 60.12 61.86 62.61 53 Penn Virginia PVA 20.30 40.12 63.80 25.20 38.00 45.97 70.48 55.91 53.41 64.07 62.66 61.92 60.12 54 Zargon ZAR.UN 16.38 23.39 25.95 28.19 33.32 44.37 51.78 55.79 67.26 56.48 63.65 62.19 59.37 55 Pacific Rubiales PRE - - - - - - - - - 60.54 62.84 62.69 62.69 56 Goodrich Petroleum GDP 16.63 20.40 21.99 41.08 24.84 25.23 48.51 71.25 33.05 110.85 84.82 62.73 63.96 57 Nexen* NXY 20.47 21.56 25.04 25.69 46.57 31.20 64.10 106.94 62.49 74.99 65.90 63.98 68.06





Table 6: Worldwide Required WTI Price Ranked by Three-Year Average (US$/boe) – cont’d.

Weighted AvgRank Company 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3-Year 5-Year58 Newfield NFX 12.08 18.95 28.05 23.53 22.78 32.87 39.87 54.57 59.69 68.81 38.12 64.47 59.95 59 PetroChina PTR 15.38 18.31 21.10 23.37 29.04 32.82 46.94 46.34 56.45 86.71 54.50 65.01 57.53 60 Fairborne FEL - - - - - - 50.27 71.68 83.09 77.55 48.01 65.73 71.56 61 Apache APA 17.03 19.78 19.21 22.01 24.16 29.90 42.17 55.72 53.93 101.01 62.43 67.45 58.40 62 Baytex BTE.UN 24.04 29.03 39.87 26.97 27.43 44.68 40.64 52.02 64.02 78.59 60.18 68.31 59.21 63 Crew CR - - - - 30.31 31.73 52.78 80.58 57.35 109.70 35.49 68.70 71.41 64 Cabot COG 20.00 29.76 43.03 24.07 33.26 37.11 48.98 49.03 57.58 84.46 58.82 68.92 61.75 65 West WTL - - - - - 41.04 186.63 70.29 82.08 53.44 74.94 68.92 78.67 66 Warren Resources WRES - - - - 64.30 185.54 41.50 92.52 172.45 69.74 35.27 68.96 143.21 67 Hess Corp HES 22.88 22.67 31.01 21.99 33.01 44.48 61.03 54.57 62.58 79.60 68.93 69.86 64.81 68 Progress PRQ - - - - - 56.10 53.96 48.55 60.94 66.90 61.74 69.90 64.61 69 Marathon MRO 33.11 33.39 40.05 19.18 30.52 30.10 41.94 57.45 105.50 95.43 47.72 70.62 59.21 70 Zapata ZCO 15.29 21.73 22.69 21.50 35.77 47.75 141.35 110.86 109.00 89.66 46.25 70.86 81.13 71 Husky Energy HSE 58.39 30.35 25.62 33.22 47.45 51.80 48.75 57.16 55.65 93.98 51.96 72.46 62.41 72 Petrobras PBR 12.87 25.80 74.05 17.78 26.75 40.09 60.01 93.00 62.80 174.91 54.35 72.57 71.79 73 Chesapeake CHK 12.15 18.44 29.90 21.75 29.76 33.84 52.34 74.43 59.83 96.72 43.02 72.69 68.06 74 Suncor* SU 22.03 27.80 24.38 21.14 25.90 37.34 60.59 46.25 56.64 72.20 76.38 73.82 69.42 75 Noble NBL 10.50 22.53 26.86 44.44 48.07 29.88 55.48 56.35 53.48 99.07 99.73 74.05 61.24 76 Penn West PWT 18.71 24.37 26.92 30.38 41.22 51.03 65.17 74.85 81.02 88.98 51.48 74.81 74.97 77 ConocoPhillips COP 13.25 11.27 31.45 32.66 28.49 30.10 44.08 67.44 56.16 185.54 57.02 75.37 65.94 78 ENI ENI 19.63 23.19 26.16 26.00 34.50 40.22 100.42 63.47 72.21 83.70 77.53 76.25 76.08 79 Imperial Oil* IMO 12.44 41.51 19.93 31.62 73.35 69.85 51.94 39.72 53.68 90.54 79.57 76.35 58.14 80 CNOOC CEO 16.84 26.16 20.29 20.25 25.24 42.51 45.95 79.94 70.05 127.18 54.16 76.57 71.97 81 Total TOT 15.37 24.43 24.04 21.33 25.46 39.25 48.97 53.34 77.11 76.56 74.57 76.70 65.67 82 Energy XXI EXXI - - - - - - - 79.16 71.30 134.05 59.01 76.87 na83 Ember EBR - - - - - - 173.04 74.15 55.92 100.93 47.59 77.00 79.34 84 Chevron CVX 22.87 20.90 26.31 24.88 26.85 52.38 66.71 73.37 95.75 66.14 104.10 77.43 72.96 85 Murphy MUR 16.82 29.85 27.59 72.78 60.93 43.69 102.56 53.31 102.86 99.93 53.34 78.00 72.04 86 Anderson AXL - - - - - - 51.05 54.75 67.59 116.16 38.47 79.86 62.86 87 Transglobe TGL - - - - 23.01 31.34 48.13 52.94 79.62 170.87 30.20 82.33 65.95 88 Bankers BNK - - - - - - 76.79 171.65 97.65 103.35 60.23 83.71 85.96 89 Crescent Point CPG - - - - 33.98 37.03 65.95 61.26 73.82 72.95 95.51 83.81 76.46 90 Provident PVE.UN - - 17.06 16.67 26.55 62.82 56.17 67.25 58.72 150.34 187.36 85.06 90.73 91 Rock RE - - - - 60.37 78.48 78.69 38.17 105.14 110.11 54.80 86.06 75.93 92 W&T Offshore WTI - - - 28.94 19.56 35.30 49.72 63.99 116.87 84.64 117.79 86.15 92.43 93 Iteration ITX - - - - 35.16 60.99 35.53 65.21 54.17 127.30 68.47 86.35 83.46 94 Sinopec SNP 17.59 21.30 30.14 31.88 61.00 44.49 53.89 67.04 67.95 120.69 95.23 86.51 77.42 95 Twoco TWO - - - - - 29.96 62.13 64.32 64.09 86.85 81.71 88.98 73.81 96 NGAS Resources NGAS 52.78 51.72 55.29 14.64 30.25 58.17 49.18 52.71 145.80 92.53 43.95 91.05 163.78 97 Brigham BEXP 16.43 36.86 22.44 20.26 28.55 73.80 68.00 90.41 149.93 177.11 44.79 93.28 87.55 98 Talisman TLM 25.07 23.24 22.35 35.50 39.56 36.01 69.65 59.71 88.06 162.52 79.32 99.40 81.20 99 Winstar WIX - - - - - - 50.58 52.79 69.61 90.36 93.77 105.98 72.44 100 Statoil STO 42.79 53.74 29.18 27.72 39.71 58.16 69.44 91.38 96.48 190.20 81.03 109.32 101.15 101 Gasco Energy GSX - - - 558.65 122.17 100.05 70.43 77.49 54.10 74.03 54.00 109.86 179.17 102 Kodiak KOG - - - - - - 48.23 93.63 185.37 230.35 68.79 110.38 117.63 103 Enerplus ERF.UN 25.50 15.96 22.03 23.23 35.57 37.47 48.15 67.55 85.40 71.75 158.12 115.56 77.85 104 Pioneer PXD 13.79 24.02 32.70 30.96 30.44 45.10 67.87 84.79 84.02 169.75 142.98 116.10 95.05 105 Repsol REP 18.51 20.97 18.03 24.10 34.97 51.20 110.57 160.90 88.20 119.83 na 121.42 107.54 106 Compton Petroleum CMT 22.89 28.33 26.41 27.51 40.45 49.22 60.98 61.38 82.74 124.02 120.98 131.92 81.39 107 Plains Exploration PXP na 35.37 28.23 25.13 54.93 41.08 80.19 139.48 108.95 133.63 81.91 141.30 138.61 108 Paramount Resources POU 36.53 42.98 143.18 42.45 31.00 45.11 130.21 94.41 30.30 190.22 87.75 147.02 121.23 109 Antrim AEN - - 78.03 46.91 77.22 77.05 61.02 109.54 114.33 288.21 114.83 170.37 133.52 110 Petrolifera PDP - - - - - - 51.20 39.61 68.51 308.35 138.15 205.00 103.96 111 Cirrus CYR - - - - - - 181.61 182.74 135.64 421.64 737.45 509.59 367.66 112 Midway MEL - - - - - - - - - - 62.56 na na113 Legacy LEG - - - - - - - - - - 81.95 na na114 PetroBakken PBN - - - - - - - - - - 102.96 na na




Table 7: Top-15 Oil-Weighted Companies by Lowest Three-Year Average Required WTI Equivalent Oil Price (US$/boe)

Source: BMO Capital Markets, Company ReportsNote: Includes companies with production weighted 55% or more toward crude oil in 2009

Table 8: Top-15 Natural Gas-Weighted Companies by Lowest Three-Year Average Required Henry Hub Equivalent Oil Price (US$/Mcfe)

Source: BMO Capital Markets, Company ReportsNote: Includes companies with production weighted 70% or more toward natural gas in 2009

Table 8 ranks the top 15 global natural gas-weighted producers with the lowest three-year average required Henry Hub-equivalent oil prices in our study. Based on three-year weighted average costs, the top gas-weighted performers include Southwestern, Peyto and Storm Exploration.

Weighted AvgRank Company 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3-Year 5-Year1 Gran Tierra GTE - - - - - - 143.42 106.99 78.55 54.55 36.67 46.55 57.54 2 BP Plc BP 14.71 23.78 17.92 20.03 26.33 29.54 42.51 37.60 45.49 57.69 45.44 48.67 45.59 3 Canadian Natural CNQ 14.39 24.70 27.89 45.54 33.43 43.23 42.82 58.71 52.62 54.07 50.44 50.00 49.76 4 Petrobank PBG - - - - 80.32 48.63 62.01 96.47 57.51 70.72 41.27 51.18 56.74 5 Vermilion VET.UN - - - - 22.62 42.43 39.22 53.08 65.89 83.63 32.90 54.48 50.43 6 Pan Orient POE - - - - - - 103.60 41.51 50.71 65.99 49.51 55.75 76.84 7 Freehold FRU.UN 9.78 18.14 28.80 13.94 22.19 33.99 72.44 35.41 74.38 52.12 31.41 57.50 63.19 8 Canadian Oil Sands COS 14.44 24.91 19.85 18.42 25.59 27.76 34.24 50.51 53.51 68.56 65.48 58.11 51.45 9 Petrominerales PMG - - - - - - - 60.52 52.83 83.84 46.11 59.47 61.18 10 ExxonMobil XOM 18.98 20.79 23.61 22.21 29.03 30.93 39.58 41.67 46.50 91.13 54.12 60.03 50.56 11 Occidental OXY 13.01 15.78 15.77 19.06 19.99 28.81 45.29 60.62 65.59 86.10 39.38 60.22 57.57 12 Nexen NXY 20.47 21.56 25.04 25.69 46.57 31.20 64.10 106.94 62.49 74.99 65.90 63.98 68.06 13 PetroChina PTR 15.38 18.31 21.10 23.37 29.04 32.82 46.94 46.34 56.45 86.71 54.50 65.01 57.53 14 Baytex BTE.UN 24.04 29.03 39.87 26.97 27.43 44.68 40.64 52.02 64.02 78.59 60.18 68.31 59.21 15 West Energy WTL - - - - - 41.04 186.63 70.29 82.08 53.44 74.94 68.92 78.67

Average of Oil Weighted 17.05 22.50 24.64 23.75 28.27 37.57 50.62 57.08 62.55 85.07 54.20 66.55 62.41

Weighted AvgRank Company 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3-Year 5-Year1 Southwestern SWN 2.76 3.77 3.03 3.08 4.74 4.05 6.01 8.23 7.61 5.20 3.65 4.76 5.11 2 Peyto PEY.UN - - - - 3.89 5.98 6.93 8.03 5.74 9.70 3.26 4.93 7.70 3 Storm SEO - - - - - 15.06 6.93 8.77 8.50 4.98 12.38 6.60 6.81 4 Ultra UPL (0.05) 2.30 2.20 2.65 3.53 3.76 5.27 6.43 7.00 8.02 5.83 6.90 6.56 5 CNX Gas CXG - - - - 6.80 6.14 4.94 4.79 12.42 13.57 3.67 6.96 6.16 6 Equitable EQT 1.18 3.09 32.00 4.10 56.60 5.28 5.03 6.19 7.10 10.52 5.96 7.48 6.78 7 EOG EOG 2.86 3.53 4.22 4.01 5.07 6.43 7.53 8.51 8.46 9.63 6.25 7.81 7.86 8 Birchcliff BIR - - - - - - 16.50 14.46 10.54 8.40 4.71 7.93 8.68 9 ProspEx PSX - - - - - 18.67 10.20 11.04 9.20 12.87 8.30 7.97 8.88 10 Delphi DEE - - - - 5.96 10.00 10.87 17.88 11.77 9.30 5.05 8.13 13.43 11 Santos STOSY - - 7.54 3.61 4.92 7.53 8.46 8.17 8.56 10.14 5.82 8.14 8.16 12 Petrohawk HK 6.04 3.88 8.62 18.68 2.53 6.60 14.42 9.49 10.31 17.72 5.16 8.17 8.93 13 Trilogy TET - - - - - - 8.36 6.16 4.95 7.81 6.89 8.24 7.09 14 Bill Barrett BBG - - - 7.89 6.66 8.61 12.42 9.33 8.94 8.46 7.41 8.25 8.64 15 Celtic CLT - - - 4.36 5.63 7.31 10.89 9.99 11.84 7.59 7.98 8.40 9.04

Average Gas Weighted 3.03 3.57 4.46 4.14 5.48 6.32 7.93 9.16 8.86 12.96 5.92 9.04 9.10

Based on 2009 results, the North American Senior Producers achieved the lowest breakeven oil price, at $47.41/boe, followed by the Integrated Oils and Multinationals group at $52.51. The breakeven price for the International Producers group was $54.25, followed by the North American Intermediates/Juniors at $55.52. Based on the three-year average, the International Producers have the lowest breakeven oil prices, at $58.67/boe, while the North American Juniors maintain the highest, at $62.87/boe.

Table 7 ranks the top 15 global oil-weighted producers with the lowest three-year average re-quired WTI-equivalent oil prices in our study. Based on three-year weighted average costs, the top oil-weighted performers include Gran Tierra, BP and Canadian Natural Resources.



Chart 38: Worldwide Required WTI Oil Price Group Comparisons (US$/boe)


Table 9: Integrateds Worldwide Required WTI Price Ranked by 2009 Results (US$/boe)

Source: BMO Capital Markets, Company ReportsNote: *Including oil sands mining - We use DD&A/bbl as a proxy for oil sands F&D costs given the large timing difference between capital spending and additions. Blended with Conventional F&D results to calculate an adjusted F&D cost and Breakeven for the company

Within the Integrated Oils group, our analysis suggests that Cenovus, Royal Dutch and BP require the lowest WTI oil price in order to break even based on 2009 results, at $28.95/boe, $37.07/boe and $45.44/boe, respectively. We view three-year average reserve replacement costs as a more appropriate indicator of corporate cost structure due to the wide year-to-year fluctuations in the calculation. Using three-year reserve replacement costs, the ranking is unchanged, with Cenovus, Royal Dutch and BP having the lowest breakeven WTI price requirements, while Repsol, Statoil and Sinopec historically have the highest price requirements.

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

$90.00

$100.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Integrateds Seniors Intermed/Juniors Internationals

Weighted Average1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3-Year 5-Year

Cenovus CVE na na na na na na na na 34.43 92.36 28.95 38.79 naRoyal Dutch RD 15.19 19.56 18.10 31.27 37.42 67.61 55.57 45.76 49.55 67.72 37.07 44.62 45.80 BP Plc BP 14.71 23.78 17.92 20.03 26.33 29.54 42.51 37.60 45.49 57.69 45.44 48.67 45.59 Marathon MRO 33.11 33.39 40.05 19.18 30.52 30.10 41.94 57.45 105.50 95.43 47.72 70.62 59.21 Husky Energy HSE 58.39 30.35 25.62 33.22 47.45 51.80 48.75 57.16 55.65 93.98 51.96 72.46 62.41 Murphy MUR 16.82 29.85 27.59 72.78 60.93 43.69 102.56 53.31 102.86 99.93 53.34 78.00 72.04 ExxonMobil XOM 18.98 20.79 23.61 22.21 29.03 30.93 39.58 41.67 46.50 91.13 54.12 60.03 50.56 CNOOC CEO 16.84 26.16 20.29 20.25 25.24 42.51 45.95 79.94 70.05 127.18 54.16 76.57 71.97 Petrobras PBR 12.87 25.80 74.05 17.78 26.75 40.09 60.01 93.00 62.80 174.91 54.35 72.57 71.79 PetroChina PTR 15.38 18.31 21.10 23.37 29.04 32.82 46.94 46.34 56.45 86.71 54.50 65.01 57.53 ConocoPhillips COP 13.25 11.27 31.45 32.66 28.49 30.10 44.08 67.44 56.16 185.54 57.02 75.37 65.94 Hess Corp HES 22.88 22.67 31.01 21.99 33.01 44.48 61.03 54.57 62.58 79.60 68.93 69.86 64.81 Total TOT 15.37 24.43 24.04 21.33 25.46 39.25 48.97 53.34 77.11 76.56 74.57 76.70 65.67 Suncor* SU 22.03 27.80 24.38 21.14 25.90 37.34 60.59 46.25 56.64 72.20 76.38 73.82 69.42 ENI ENI 19.63 23.19 26.16 26.00 34.50 40.22 100.42 63.47 72.21 83.70 77.53 76.25 76.08 Imperial Oil* IMO 12.44 41.51 19.93 31.62 73.35 69.85 51.94 39.72 53.68 90.54 79.57 76.35 58.14 Statoil STO 42.79 53.74 29.18 27.72 39.71 58.16 69.44 91.38 96.48 190.20 81.03 109.32 101.15 Sinopec SNP 17.59 21.30 30.14 31.88 61.00 44.49 53.89 67.04 67.95 120.69 95.23 86.51 77.42 Chevron CVX 22.87 20.90 26.31 24.88 26.85 52.38 66.71 73.37 95.75 66.14 104.10 77.43 72.96 Repsol REP 18.51 20.97 18.03 24.10 34.97 51.20 110.57 160.90 88.20 119.83 na 121.42 107.54 Weighted Group Avg. 16.70 22.70 24.11 23.70 28.59 38.26 54.12 56.41 61.85 84.29 52.51 65.26 61.55



Table 10: Senior Producers Worldwide Required WTI Price Ranked by 2009 Results (US$/boe)

Source: BMO Capital Markets, Company ReportsNote: *Including oil sands mining - We use DD&A/bbl as a proxy for oil sands F&D costs given the large timing difference between capital spending and additions. Blended with Conventional F&D results to calculate an adjusted F&D cost and breakeven for the company

Our comparison of the North American Senior Producers continues to reflect the im-pact of low-cost unconventional natural gas resource plays in North America. Based on 2009 results, unconventional gas producers Southwestern Energy, CNX Gas, Petrohawk, Devon and Ultra Petroleum had the lowest required WTI-equivalent prices in the Senior Producers group. Based on three-year average cost data, Southwestern, Ultra, CNX Gas and Equitable Resources have historically maintained the lowest breakeven oil prices, with required WTI-equivalent prices of $28.55/boe, $41.40/boe, $41.78/boe and $44.88/boe, respectively.


Southwestern SWN 16.58 22.60 18.20 18.50 28.41 24.30 36.06 49.36 45.69 31.19 21.91 28.55 30.68 CNX Gas CXG na na na na 40.83 36.87 29.62 28.74 74.52 81.45 22.02 41.78 36.97 Petrohawk HK 36.23 23.27 51.69 112.10 15.16 39.58 86.52 56.96 61.85 106.29 30.98 48.99 53.59 Devon DVN 12.49 21.61 28.18 24.99 30.98 34.13 38.99 51.68 48.88 59.11 32.42 54.26 50.60 Ultra Petroleum UPL (0.28) 13.83 13.20 15.89 21.19 22.59 31.62 38.56 42.00 48.14 34.96 41.40 39.38 ARC Energy AET 16.39 21.38 24.49 22.73 26.01 39.23 45.07 59.29 54.80 59.08 35.21 47.54 48.15 Equitable Resources EQT 7.05 18.56 192.00 24.63 339.62 31.65 30.16 37.13 42.59 63.11 35.76 44.88 40.70 Range RRC 12.98 32.32 30.40 21.22 27.99 37.63 48.59 64.63 51.21 80.84 36.38 54.34 55.13 EOG EOG 17.16 21.21 25.32 24.06 30.44 38.59 45.19 51.06 50.79 57.78 37.52 46.86 47.19 Quicksilver KWK 18.01 22.60 26.71 17.66 39.79 44.59 51.46 42.96 48.29 69.47 37.69 59.98 56.23 Newfield NFX 12.08 18.95 28.05 23.53 22.78 32.87 39.87 54.57 59.69 68.81 38.12 64.47 59.95 XTO Energy XTO 15.68 14.66 20.95 20.16 26.07 32.41 41.55 44.01 49.96 87.98 39.23 61.16 55.54 Occidental OXY 13.01 15.78 15.77 19.06 19.99 28.81 45.29 60.62 65.59 86.10 39.38 60.22 57.57 Chesapeake CHK 12.15 18.44 29.90 21.75 29.76 33.84 52.34 74.43 59.83 96.72 43.02 72.69 68.06 Forest FST 21.25 12.41 22.09 35.99 30.95 36.22 56.99 50.54 60.49 69.28 44.51 60.05 58.18 Canadian Natural* CNQ 14.39 24.70 27.89 45.54 33.43 43.23 42.82 58.71 52.62 54.07 50.44 50.00 49.76 Penn West PWT 18.71 24.37 26.92 30.38 41.22 51.03 65.17 74.85 81.02 88.98 51.48 74.81 74.97 Anadarko APC 22.71 38.45 28.82 31.54 28.72 34.36 51.16 96.08 43.71 86.41 57.03 61.78 76.55 EnCana ECA na 26.81 28.14 24.43 27.06 35.19 37.89 42.97 49.46 54.84 58.37 50.65 44.63 Cabot COG 20.00 29.76 43.03 24.07 33.26 37.11 48.98 49.03 57.58 84.46 58.82 68.92 61.75 Apache APA 17.03 19.78 19.21 22.01 24.16 29.90 42.17 55.72 53.93 101.01 62.43 67.45 58.40 Canadian Oil Sands COS.UN 14.44 24.91 19.85 18.42 25.59 27.76 34.24 50.51 53.51 68.56 65.48 58.11 51.45 Nexen* NXY 20.47 21.56 25.04 25.69 46.57 31.20 64.10 106.94 62.49 74.99 65.90 63.98 68.06 Talisman TLM 25.07 23.24 22.35 35.50 39.56 36.01 69.65 59.71 88.06 162.52 79.32 99.40 81.20 Plains Exploration PXP na 35.37 28.23 25.13 54.93 41.08 80.19 139.48 108.95 133.63 81.91 141.30 138.61 Crescent Point CPG na na na na 33.98 37.03 65.95 61.26 73.82 72.95 95.51 83.81 76.46 Noble NBL 10.50 22.53 26.86 44.44 48.07 29.88 55.48 56.35 53.48 99.07 99.73 74.05 61.24 Pioneer PXD 13.79 24.02 32.70 30.96 30.44 45.10 67.87 84.79 84.02 169.75 142.98 116.10 95.05 Weighted Group Avg. 17.35 22.29 25.05 27.78 29.52 36.68 48.76 63.92 56.07 86.48 47.41 62.44 60.07

In 2009, North American Intermediate/Junior producers Peyto, Birchcliff, Delphi, Freehold and Vermilion required the lowest WTI oil prices based on 2009 results, at $19.57/boe, $28.28/boe, $30.29/boe, $31.41/boe and $32.90/boe, respectively. In contrast, Provident, Enerplus and Compton showed the highest required oil prices based on our analysis. The best three-year performance has been delivered by Peyto, Storm, Advantage, Birchcliff and ProspEx, while the weakest three-year performance has been from Paramount Re-sources, Compton and Enerplus. We note that while the Canadian Royalty Trusts currently benefit from low (or often nil) income taxes, this benefit will largely be erased after 2011, when trusts become taxable in Canada. As a result, we expect many of the royalty trust breakeven prices to increase after 2011, reflecting the higher tax burden.



Table 11: North American Junior Producers Worldwide Required WTI Price Ranked by 2009 Results (US$/boe)


We note an interesting twist in recent trends regarding the cost structure of North American Natural gas development. As illustrated in Chart 39, although U.S. natural gas development costs have historically been lower than in Canada, reflecting the impact of the shale gas “boom,” the trend appears to have largely reversed in 2009. Based on 2009 results, the aver-age natural gas price required to break even over the last three years in Canada was roughly $7/Mcfe compared to $7.59/Mcfe the U.S. In 2009, we estimate Canadian gas breakeven at $5.16/Mcfe compared to the U.S. gas breakeven of $6.21/Mcfe. We believe that some of this relative cost structure improvement in Canada reflects a concerted effort by some of the larger natural gas producers in Western Canada to high-grade natural gas development plans, as well as focus on advancing Canadian unconventional natural gas plays.


Peyto PEY.UN - - - - 23.35 35.90 41.58 48.16 34.46 58.22 19.57 29.57 46.22 Birchcliff BIR - - - - - - 99.00 86.75 63.22 50.42 28.28 47.61 52.06 Delphi DEE - - - - 35.75 60.02 65.23 107.27 70.62 55.80 30.29 48.80 80.61 Freehold Royalty FRU.UN 9.78 18.14 28.80 13.94 22.19 33.99 72.44 35.41 74.38 52.12 31.41 57.50 63.19 Vermillion VET.UN - - - - 22.62 42.43 39.22 53.08 65.89 83.63 32.90 54.48 50.43 Comstock CRK 15.82 20.23 22.89 19.65 35.62 45.37 87.79 31.53 50.53 118.99 33.29 50.80 45.98 Warren Resources WRES - - - - 64.30 185.54 41.50 92.52 172.45 69.74 35.27 68.96 143.21 Crew CR - - - - 30.31 31.73 52.78 80.58 57.35 109.70 35.49 68.70 71.41 Anderson AXL - - - - - - 51.05 54.75 67.59 116.16 38.47 79.86 62.86 Carrizo CRZO 11.09 16.05 28.52 24.85 28.82 28.99 43.71 68.64 41.15 71.84 38.86 51.15 51.22 NuVista NVA - - - - 27.09 40.03 53.44 61.66 58.29 69.89 39.93 55.25 55.94 PetroBank PBG - - - - 80.32 48.63 62.01 96.47 57.51 70.72 41.27 51.18 56.74 Trilogy TET - - - - - - 50.14 36.98 29.70 46.89 41.36 49.44 42.53 Bonavista BNP.UN - - - - 33.62 33.08 45.72 54.01 62.25 56.14 41.39 50.26 49.84 Advantage AAV - - 24.36 20.86 77.74 46.56 50.82 73.92 43.72 69.45 41.89 45.97 57.31 Orleans OEX - - - - - - 44.41 119.39 71.81 58.77 42.00 57.14 72.58 NGAS Resources NGAS 52.78 51.72 55.29 14.64 30.25 58.17 49.18 52.71 145.80 92.53 43.95 91.05 163.78 Mariner ME 33.91 21.70 13.75 18.44 31.93 29.31 42.84 49.78 46.85 70.90 44.01 53.91 55.10 Bill Barrett BBG - - - 47.35 39.96 51.65 74.55 55.97 53.63 50.75 44.43 49.48 51.83 Brigham BEXP 16.43 36.86 22.44 20.26 28.55 73.80 68.00 90.41 149.93 177.11 44.79 93.28 87.55 Zapata ZCO 15.29 21.73 22.69 21.50 35.77 47.75 141.35 110.86 109.00 89.66 46.25 70.86 81.13 Ember EBR - - - - - - 173.04 74.15 55.92 100.93 47.59 77.00 79.34 Celtic CLT - - - 26.18 33.78 43.85 65.33 59.92 71.03 45.53 47.90 50.41 54.24 Fairborne FEL - - - - - - 50.27 71.68 83.09 77.55 48.01 65.73 71.56 Vero VRO - - - - - - 55.26 50.29 43.96 58.42 48.75 57.24 49.42 ProspEx PSX - - - - - 112.04 61.20 66.23 55.20 77.23 49.81 47.84 53.25 Midnight MOX - - - - - 23.13 97.91 81.85 98.38 82.28 50.71 59.16 71.01 Angle NGL - - - - - - - - - 66.13 51.57 59.84 naUnit Corp. UNT 11.79 15.86 25.64 27.60 34.02 36.63 44.26 44.74 51.58 71.98 53.20 59.93 53.57 Gasco Energy GSX - - - 558.65 122.17 100.05 70.43 77.49 54.10 74.03 54.00 109.86 179.17 Paramount Energy TrustPMT.UN - - - 19.15 168.72 70.56 65.78 71.55 53.46 55.29 54.72 52.42 56.54 Rock RE - - - - 60.37 78.48 78.69 38.17 105.14 110.11 54.80 86.06 75.93 Energy XXI EXXI - - - - - - - 79.16 71.30 134.05 59.01 76.87 naGalleon GO - - - - - 71.20 46.36 70.52 67.37 50.12 59.56 56.93 57.56 Pengrowth PGF.UN 18.74 35.46 23.85 42.59 35.68 39.18 48.94 65.76 60.96 67.45 60.12 61.86 62.61 Baytex BTE.UN 24.04 29.03 39.87 26.97 27.43 44.68 40.64 52.02 64.02 78.59 60.18 68.31 59.21 Progress PRQ - - - - - 56.10 53.96 48.55 60.94 66.90 61.74 69.90 64.61 Midway MEL - - - - - - - - - - 62.56 na naPenn Virginia PVA 20.30 40.12 63.80 25.20 38.00 45.97 70.48 55.91 53.41 64.07 62.66 61.92 60.12 Zargon ZAR.UN 16.38 23.39 25.95 28.19 33.32 44.37 51.78 55.79 67.26 56.48 63.65 62.19 59.37 Iteration ITX - - - - 35.16 60.99 35.53 65.21 54.17 127.30 68.47 86.35 83.46 Kodiak KOG - - - - - - 48.23 93.63 185.37 230.35 68.79 110.38 117.63 NAL Oil & Gas NAE.UN 20.41 15.17 17.07 24.60 29.35 53.97 49.20 72.03 62.48 53.35 69.40 61.45 58.51 Storm SEO - - - - - 90.34 41.57 52.60 50.97 29.88 74.30 39.58 40.86 West WTL - - - - - 41.04 186.63 70.29 82.08 53.44 74.94 68.92 78.67 Twoco TWO - - - - - 29.96 62.13 64.32 64.09 86.85 81.71 88.98 73.81 Legacy LEG - - - - - - - - - - 81.95 na naGoodrich Petroleum GDP 16.63 20.40 21.99 41.08 24.84 25.23 48.51 71.25 33.05 110.85 84.82 62.73 63.96 Paramount Resources POU 36.53 42.98 143.18 42.45 31.00 45.11 130.21 94.41 30.30 190.22 87.75 147.02 121.23 PetroBakken PBN - - - - - - - - - - 102.96 na naW&T Offshore WTI - - - 28.94 19.56 35.30 49.72 63.99 116.87 84.64 117.79 86.15 92.43 Compton Petroleum CMT 22.89 28.33 26.41 27.51 40.45 49.22 60.98 61.38 82.74 124.02 120.98 131.92 81.39 Enerplus ERF.UN 25.50 15.96 22.03 23.23 35.57 37.47 48.15 67.55 85.40 71.75 158.12 115.56 77.85 Provident PVE.UN - - 17.06 16.67 26.55 62.82 56.17 67.25 58.72 150.34 187.36 85.06 90.73 Weighted Group Avg. 19.53 22.07 23.82 23.12 44.12 39.82 53.61 61.82 56.35 78.18 55.52 61.48 60.70



Chart 39: Required Gas Price United States vs. Canada (US$/Mcfe)

Source: BMO Capital Markets, Company ReportsNote: Includes companies with gas-weighted operations in U.S. and Canada

Table 12: International Producers Worldwide Required WTI Price Ranked by 2009 Results (US$/boe)


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$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Canada Gas U.S. Gas

Canada 3-Yr Average

U.S. 3-Yr Average

Within the International Producers group in 2009, TransGlobe, Santos and Gran Tierra required the lowest WTI oil prices, at $30.20/boe, $34.93/boe and $36.67/boe, respectively. Cirrus, Petrolifera and Antrim had the highest implied breakeven oil prices. Using three-year average costs, the best historical performances have been delivered by Gran Tierra, Santos and Pan Orient.


Transglobe TGL - - - - 23.01 31.34 48.13 52.94 79.62 170.87 30.20 82.33 65.95 Santos Ltd. STOSY - - 45.25 21.63 29.54 45.20 50.73 49.03 51.37 60.84 34.93 48.83 48.98 Gran Tierra GTE - - - - - - 143.42 106.99 78.55 54.55 36.67 46.55 57.54 Petrominerales PMG - - - - - - - 60.52 52.83 83.84 46.11 59.47 61.18 Pan Orient POE - - - - - - 103.60 41.51 50.71 65.99 49.51 55.75 76.84 Niko NKO 11.74 (0.05) 9.32 10.98 119.15 78.34 53.20 47.20 38.09 66.74 52.01 60.91 58.98 Bankers BNK - - - - - - 76.79 171.65 97.65 103.35 60.23 83.71 85.96 Pacific Rubiales PRE - - - - - - - - - 60.54 62.84 62.69 62.69 Winstar WIX - - - - - - 50.58 52.79 69.61 90.36 93.77 105.98 72.44 Antrim AEN - - 78.03 46.91 77.22 77.05 61.02 109.54 114.33 288.21 114.83 170.37 133.52 Petrolifera PDP - - - - - - 51.20 39.61 68.51 308.35 138.15 205.00 103.96 Cirrus CYR - - - - - - 181.61 182.74 135.64 421.64 737.45 509.59 367.66 Weighted Group Avg. 11.74 15.16 22.83 20.40 28.64 34.92 49.26 70.71 59.94 66.23 54.25 59.21 58.69



Chart 40: Upstream Net Revenue by Region (US$/boe)

Source: BMO Capital Markets, Company ReportsNotes: Figures prior to 2009 excludes equity interest results for BP, RD, TOT and XOM

Upstream Revenue: Bust After the Boom

West Texas Intermediate crude oil prices toppled in the wake of the global financial melt-down in late 2008, only shortly after prices had soared to record levels near $145/bbl. The crash brought about relatively weak crude oil and natural gas prices for the bulk of 2009, with WTI crude oil averaging $61.96/bbl compared to $99.63/bbl in 2008, $72.32/bbl in 2007 and $66.24/bbl in 2006. NYMEX natural gas prices crashed even harder, reflecting the dual impact of weakened demand and abundant domestic shale gas supply. NYMEX natural gas prices averaged just $4.17/Mcf in 2009 compared to $8.90/Mcf in 2008. This rapid deterioration in pricing had a significant negative impact on producers’ top-line results in 2009, with average worldwide realized net revenue of only $42.76/boe, which was 36% lower than $66.93/boe in 2008.

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$80.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009




Chart 41: Upstream Net Revenue vs. West Texas Intermediate (US$/boe)

Source: BMO Capital Markets, Company ReportsNote: Figures prior to 2009 excludes equity interest results for BP, RD, TOT and XOM

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Worldwide North America International WTI

Worldwide net revenue has increased at a compound annual rate of 10.8% since 1999. By comparison, WTI crude oil prices have increased at a compound annual rate of 12.4% since 1999. The slight variance in the rate of growth in benchmark commodity prices versus realized prices on production reflects the deteriorating quality of global crude oil production as high-quality, light oil pools are depleted, and production of lower-quality sour and heavy crude oils take their place. Production Sharing Contracts (PSC) also continue to contribute to the ongoing shortfall in net revenue versus benchmark crude oil prices, as they award relatively more of the increase in crude oil price levels to the resource owners, typically host-country governments.



Table 13: Worldwide Netback Summary (US$/boe)


Table 13 provides a summary of the weighted average netbacks for the industry.


WorldwideNet Revenue 15.29 23.51 21.20 19.88 24.82 30.43 41.46 47.66 51.94 66.93 42.76 53.47 49.99Production Costs 3.68 4.15 4.10 4.19 4.94 5.80 7.53 9.07 10.69 13.04 10.90 11.52 10.26Exploration 0.87 0.78 0.83 0.80 0.77 0.89 1.06 1.34 1.74 1.97 1.66 1.78 1.56DD&A 3.81 4.02 4.55 4.68 5.23 5.86 6.61 7.88 9.24 10.61 9.91 9.92 8.87Other 0.92 1.20 1.59 1.53 1.57 1.61 2.18 2.27 2.74 3.02 3.03 2.93 2.66Pre-tax Earnings 6.00 13.36 10.12 8.68 12.31 16.28 24.07 27.11 27.52 38.30 17.26 27.31 26.64Income Taxes 2.66 6.04 4.55 4.07 5.41 7.52 11.51 13.50 13.61 18.99 8.43 13.49 13.11Net Earnings 3.34 7.32 5.57 4.61 6.90 8.76 12.56 13.61 13.92 19.30 8.83 13.83 13.54


North AmericaNet Revenue 14.67 24.05 22.60 19.17 26.84 31.97 43.16 45.94 49.46 62.83 39.00 50.03 47.90Production Costs 3.86 4.42 4.58 4.60 5.55 6.48 8.64 10.85 12.28 15.00 12.21 13.13 11.81Exploration 0.78 0.77 0.83 0.77 0.77 0.92 1.18 1.37 1.52 1.54 1.62 1.56 1.45DD&A 4.22 4.73 6.04 5.56 6.41 7.05 8.29 10.15 11.92 13.33 13.18 12.83 11.42Other 0.90 1.29 1.79 1.44 1.54 1.72 2.15 1.69 2.41 2.51 2.74 2.56 2.31Pre-tax Earnings 4.91 12.85 9.36 6.79 12.56 15.80 22.91 21.88 21.33 30.45 9.26 19.95 20.90Income Taxes 1.67 4.52 3.09 2.31 4.26 5.40 7.89 6.95 6.76 9.89 2.71 6.32 6.75Net Earnings 3.24 8.33 6.27 4.48 8.30 10.40 15.02 14.93 14.57 20.56 6.55 13.63 14.15


InternationalNet Revenue 15.65 23.19 20.34 20.31 23.59 29.47 40.44 48.67 53.41 69.41 45.02 55.54 51.24Production Costs 3.57 4.00 3.81 3.94 4.57 5.37 6.87 8.03 9.75 11.86 10.11 10.55 9.34Exploration 0.93 0.79 0.84 0.81 0.77 0.87 0.99 1.32 1.87 2.23 1.68 1.92 1.62DD&A 3.59 3.60 3.64 4.14 4.52 5.11 5.61 6.56 7.65 8.97 7.94 8.18 7.36Other 0.94 1.15 1.47 1.58 1.59 1.55 2.20 2.61 2.94 3.32 3.21 3.16 2.86Pre-tax Earnings 6.62 13.66 10.58 9.83 12.15 16.58 24.76 30.16 31.20 43.04 22.07 31.73 30.07Income Taxes 3.22 6.93 5.44 5.14 6.10 8.84 13.67 17.32 17.67 24.49 11.88 17.79 16.89Net Earnings 3.40 6.73 5.14 4.69 6.05 7.74 11.10 12.84 13.53 18.54 10.20 13.94 13.17



Costs: Relieving Some Pressure

The rapid increase in commodity prices up to 2008 drove unprecedented levels of indus-try spending and activity that resulted in rapidly inflated industry costs. However, the world’s more recent state of economic affairs has clearly resulted in a marked decrease in industry activity, which has taken some of the pressure off of demand for scarce materi-als, equipment and skilled labour. We estimate that Global production costs fell 16% in 2009, averaging $10.90/boe compared to $13.04/boe in 2008 and $10.69/boe in 2007. On a worldwide basis, production costs have still increased by more than 196%, rising to $10.90/boe in 2009 from $3.68/boe in 1999, which represents compound annual growth of nearly 12%. Regionally, North American production costs have grown at a relatively faster rate over our survey period, increasing nearly 15% annually from $3.86/boe in 1999 to $12.21/boe in 2009. Outside of North America, production costs have increased at a slower pace of 13% annually, from $3.57/boe in 1999 to $10.11/boe in 2009. Production costs in North America fell by 19% in 2009, while International production costs eased 15%.

Chart 42: Production Costs by Region (US$/boe)

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$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

$20.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


Source: BMO Capital Markets, Company reportsNote: Figures prior to 2009 exclude equity interest results for BP, RD, TOT and XOM

Despite the improvement in 2009, industry costs are somewhat inelastic, and the rapid decline in commodity prices largely outpaced any reduction in cost pressure. The result was an overwhelming decrease in industry margins and profits in 2009. In 2009, average operating earnings (net revenue less production costs, exploration expense, G&A and other costs) fell nearly 45%, to the lowest level since 2004. Operating earnings have risen at a compound annual rate of 10.7% since 1999, with a 9.4% annual growth rate in North America and an 11.4% growth rate internationally.



Standard earnings and cash flow measures fail to consider the impact of reserve replace-ment costs (finding and development costs) in determining the industry’s total cost struc-ture and its ultimate impact on returns on capital. Worldwide upstream capital spending has increased approximately 13% annually since 1999 on average, with a huge 30% jump in 2008 amidst the flurry of industry activity chasing record crude oil prices (Chart 44). However, spending fell 21.2% in 2009 to pre-2008 levels in response to the global economic downturn. As shown in Chart 45, despite the drop-off in industry capital spending, proved reserve additions popped in 2009. We believe this partly reflects positive reserve revisions in 2009 related to higher commodity price decks used by reserve evaluators as compared to year-end 20083, as well as additions related to significant capital spending in previous years (excluding multi-year long-lead-time projects). In addition, the industry slowdown has driven some improvement in major input costs such as drilling equipment and labour. Combined, these results drove a markedly positive improvement in reported reserve replacement costs in 2009.

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$50.00

$60.00

$70.00

$80.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


Source: BMO Capital Markets, Company ReportsNotes: Operating earnings calculated as net revenue less production costs, exploration costs, and Other costs; Figures prior to 2009 exclude equity interest results for BP, RD, TOT and XOM

Chart 43: Upstream Operating Earnings by Region (US$/boe)

3 Prior to 2009, the U.S. Securities and Exchange Commission (SEC) mandated that evaluation of proved reserves be based on year-end commodity prices. Year-end 2008 prices were very low as a result of the global economic collapse, while industry costs were slow to adjust and still very high; the unfortunate combination led to large negative economic reserve revisions for the year. However, the SEC has since changed this rule, allowing reserve evaluations to be based on average commodity prices over the prior 12 months.



Worldwide proved reserve replacement costs have increased to $12.30/boe in 2009 from $3.87/boe in 1999, which represents compound annual growth of 12.3%. In 2009, reserve replacement costs fell by 45% over 2008 due to the combination of positive reserve revi-sions, low capital spending activity and improvements in industry cost inputs.

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$50

$100

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$200

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Including Revisions Excluding Revisions

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009



BMO Capital Markets, Company ReportsNotes: Figures prior to 2009 excludes equity interest results for BP, RD, TOT and XOM

Source: BMO Capital Markets, Company ReportsNotes: Reserve additions calculated after royalties (net)

Chart 44: Upstream Capital Spending by Region (US$ billion)

Chart 45: Worldwide Proved Reserve Additions by Region (million boe)

Chart 46: Worldwide Proved Reserve Replacement Costs (US$/boe)

Regionally, North American reserve replacement costs have increased 8% annually to $10.89/boe in 2009 from $4.90/boe in 1999, while International costs have climbed 15% annually to $13.91/boe in 2009 from $3.47/boe in 1999. In 2009, North American reserve replacement costs decreased almost 70% due to a combination of positive revisions, high-graded drilling programs and additions from longer-lead-time projects for which spending occurred in prior years. International reserve replacement costs declined a more modest 12% on the year.



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$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

$50.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


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$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

$50.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


Source: BMO Capital Markets, Company ReportsNotes: Reserve replacement costs calculated after royalties (net)

Source: BMO Capital Markets, Company ReportsNotes: Reserve replacement costs calculated after royalties (net)

Chart 47: Proved Reserve Replacement Costs by Region (US$/boe)

Chart 48: Proved Reserve Replacement Costs – Excluding Revisions by Region (US$/boe)

Excluding revisions, North American reserve replacement costs were $14.28/boe in 2009, which marks a 41% decrease over 2008 levels, while International costs were $20.60/boe, down 57% from the prior year. These higher ex-revision replacement costs show the posi-tive impact that revisions had in both North America and internationally.

Given the improvement in proved reserve replacement performance in 2009, the flat or declining trend seen by the industry over the last few years was reversed. Despite this falling capital spending during the year, reflecting that the group was able to spend more efficiently, production also rose from 2008 levels, more then offsetting natural declines. The end result has been a reversal of the general trend of the declining overall Reserve



Life Index (RLI) for the group, with the RLI reaching 12.1 years in 2009, now back above 2002 levels.

0

20,000

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mm

boe

(net

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North America International RLI

0

2,000

4,000

6,000

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14,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


Source: BMO Capital Markets, Company ReportsNotes: Reserves presented after royalties (net)

Source: BMO Capital Markets, Company ReportsNotes: Production includes all equity affiliate volumes, some of which are excluded from netback calculations prior to 2009

Chart 49: Worldwide Proved Reserves vs RLI Chart 50: Production by Region (Million boe)

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$60.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

US$/boe

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Recycle Ratio

Operating Earnings Recycle Ratio

Source: BMO Capital Markets, Company ReportsNotes: Operating earnings calculated as net revenue less production costs, exploration costs, and Other costs

Chart 51: Worldwide Operating Earnings vs Recycle Ratio

Chart 51 shows the industry’s cash flow recycle ratio (operating earnings/reserve replace-ment costs) compared to operating earnings. Until 1998, unit operating earnings had been improving each year, while profitability was not, as the recycle ratio has deteriorated steadily since 2000. In 2009, while operating earnings fell significantly with lower com-modity prices given the improvement in reserve replacement performance, the group was able to maintain a recycle ratio of 2.2x.

Worldwide unit DD&A charges expanded to $11.57/boe in 2009 from $4.69/boe in 1999, representing a compound annual increase of roughly 10%. North American charges have increased at a faster pace, rising to $14.79/boe in 2009 from $5.00/boe in 1999, while



$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


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$10.00

$15.00

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$30.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


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$10.00

$15.00

$20.00

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

DD&A Worldwide F&D

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


Source: BMO Capital Markets, Company ReportsNotes: Figures prior to 2009 exclude equity interest results for BP, RD, TOT and XOM




Chart 52: Upstream DD&A and Exploration Costs by Region (US$/boe)

Chart 54: Upstream Income Taxes by Region (US$/boe)

Chart 53: Upstream DD&A vs Reserve Replacement Cost (US$/boe)

Chart 55: Upstream Effective Tax Rates by Region (%)

International charges have grown to $9.62/boe in 2009 from $4.51/boe in 1999. The in-crease in capital spending for reserve replacement continues to outpace DD&A charges, albeit the gap narrowed significantly in 2009 (Chart 53). However, given that the gap has persisted over a number of years, future capital depreciation charges are likely to increase significantly if reserve replacement cost performance does not improve further, which we believe could materially impair future earnings and return on capital employed.

Chart 54 provides upstream income taxes by operating region. Per-barrel income taxes have expanded to $8.43/boe in 2009 from $2.66/boe in 1999, a compound annual grow rate of 12%. As illustrated in Chart 55, both North American and International effec-tive taxes decreased in 2009. In North America, this has continued the general trend of a falling tax rate since 1999, but marked a reversal internationally, where tax rates had generally been rising in recent years.



Net earnings for the industry have grown with rising commodity prices, increasing to $19.44/boe in 2008 from $3.34/boe in 1999, for a compound annual growth rate of ap-proximately 22%. North American earnings from upstream operations have increased to $20.04/boe in 2008 from $3.21/boe in 1999, a 23% compound annual increase. This compares to international earnings, which have increased 21% annually to $19.06/boe from $3.40/boe. Upstream earnings in North America declined slightly through the 2005–2007 period, reflecting the relatively higher operating cost structure for conventional oil and gas assets in Canada and the United States, but increased substantially in 2008 as a result of the swift increase in commodity prices, and were positively impacted by an influx of lower-cost production from natural gas resource plays, particularly U.S. shale gas.

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009



Chart 56: Upstream Net Earnings by Region (US$/boe)

Worldwide Breakeven Oil Price

The goal of this study is to determine the price of crude oil and/or natural gas that is required in order to cover the costs of finding, developing and producing crude oil and natural gas globally. The preceding section acknowledges that rising commodity prices have led to expanded earnings and cash flow for the oil and gas industry. However, the concomitant increase in reserve replacement costs has prevented an improvement in overall economics for oil and gas producers in general.

In this section, we translate total industry cost data into “breakeven oil prices,” which we define as the crude oil price required to recover all of the reported costs (production, reserve replacement, G&A/Other and taxes), plus provide a 10% return on capital employed. We then translate the breakeven oil price into a “required WTI price,” that is, a breakeven oil price plus a differential reflecting the difference in oil quality of the production base rela-tive to WTI. We use reserve replacement costs as the capital replacement cost rather than DD&A, as we believe reserve replacement costs are a more current indicator of underlying cost trends and are more representative with the industry’s marginal costs.



Using this approach, we estimate that the level of WTI-equivalent prices that is necessary in order for the industry to fully cover its costs and provide an incentive to invest has increased to $51.98/boe in 2009 from $16.97/boe in 1999, as illustrated in Chart 57. Based on reserve replacement cost results in 2009, we estimate a required WTI-equivalent price of $48.35/boe is required for North American operations while international operations imply a required price of $55.05/boe. Given the more recent return in industry activity, especially in certain plays, we expect overall industry costs to rise from 2009 levels. As a result, we expect that the breakeven oil price for the industry could rise in 2010 to just over $63.00/boe.

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E



Chart 57: One-Year Required WTI Oil Price by Region (US$/boe)

Admittedly, single-year reserve replacement costs can provide a misleading indication of reserve replacement performance, and thus skew the implied breakeven oil price because of the time lag between capital spending and reserve recognition. As a result, three- or five-year average reserve replacement costs tend to provide a more realistic representa-tion of the industry cost structure and insight into potential industry investment returns. Chart 58 provides the estimated breakeven WTI price that is required in order to cover the industry’s costs, including a return on capital, using three-year average reserve replace-ment costs. On this basis, our analysis suggests that the industry’s breakeven oil price has risen to $61.54/boe in 2009 from $22.48/boe in 2001. Assuming a similar modest rise in the industry’s cost structure in 2010, we estimate that the three-year average price should climb to roughly $66.00/boe in 2010.



Table 14 provides the underlying cost data that builds up to the Breakeven Oil Price and Required WTI Price estimates.

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E


Weighted AverageWorldwide 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3-Year 5-YearOperating Costs 3.68 4.15 4.10 4.19 4.94 5.80 7.53 9.07 10.69 13.04 10.90 11.52 10.26 Exploration Expense 0.87 0.78 0.83 0.80 0.77 0.89 1.06 1.34 1.74 1.97 1.66 1.78 1.56 G&A/Other 0.92 1.20 1.59 1.53 1.57 1.61 2.18 2.27 2.74 3.02 3.03 2.93 2.66 F&D Costs 3.87 4.72 5.85 5.81 6.50 8.99 11.67 15.85 15.16 22.38 12.30 16.04 15.17 Return on Capital 3.13 3.84 4.70 4.57 5.01 6.88 9.04 12.14 11.45 16.91 9.88 12.35 11.69 Income Taxes 2.49 3.17 3.84 4.03 3.93 5.91 8.28 12.04 10.46 16.25 9.44 11.65 11.07 Breakeven Oil Price 14.97 17.86 20.92 20.93 22.72 30.08 39.77 52.70 52.24 73.57 47.21 56.28 52.41 Quality/Royalty 1.99 5.06 4.13 3.95 6.88 9.00 13.80 8.58 8.30 12.21 4.77 8.90 9.87 Required WTI Price 16.97 22.92 25.05 24.87 29.60 39.08 53.57 61.28 60.55 85.78 51.98 65.18 62.28

Weighted AverageNorth America 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3-Year 5-YearOperating Costs 3.86 4.42 4.58 4.60 5.55 6.48 8.64 10.85 12.28 15.00 12.21 13.13 11.81 Exploration Expense 0.78 0.77 0.83 0.77 0.77 0.92 1.18 1.37 1.52 1.54 1.62 1.56 1.45 G&A/Other 0.90 1.29 1.79 1.44 1.54 1.72 2.15 1.69 2.41 2.51 2.74 2.56 2.31 F&D Costs 4.90 5.28 8.18 8.63 9.03 11.97 10.45 19.31 16.52 35.03 10.89 17.76 16.53 Return on Capital 3.57 3.98 5.99 6.09 6.32 8.52 8.43 16.29 14.03 29.46 10.26 15.51 14.20 Income Taxes 1.85 2.16 2.95 3.14 3.24 4.42 4.43 7.58 6.51 14.17 4.25 7.19 6.77 Breakeven Oil Price 15.85 17.91 24.32 24.68 26.46 34.03 35.28 57.09 53.28 97.70 41.96 57.72 53.08 Quality/Royalty 1.89 3.91 2.62 4.08 4.91 6.57 11.15 7.37 7.61 10.07 6.40 8.55 8.86 Required WTI Price 17.74 21.82 26.94 28.75 31.37 40.60 46.42 64.46 60.89 107.77 48.35 66.27 61.95

Weighted AverageInternational 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3-Year 5-YearOperating Costs 3.57 4.00 3.81 3.94 4.57 5.37 6.87 8.03 9.75 11.86 10.11 10.55 9.34 Exploration Expense 0.93 0.79 0.84 0.81 0.77 0.87 0.99 1.32 1.87 2.23 1.68 1.92 1.62 G&A/Other 0.94 1.15 1.47 1.58 1.59 1.55

Documents

32963846 BMO Oil Gas Global Cost Study June 2010