WARD PETROLEUM ORPORATION Through The Pipeline · 2014-05-04 · The October 2013 Great Plains blizzard affected the Northwest, Rockies and much of the Midwest. Rapid City South

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WARD PETROLEUM CORPORATION

Through The Big Picture

The Pipeline

Rick Tozzi

Executive VP-

Finance

April 2014

During the last 3 years, we have experienced extreme weather pat-

terns throughout the United States (U.S.). No area in the continen-

tal U.S. has escaped these record temperature changes during

2013. Extreme cold during the winter months creates high demand

for natural gas, as does extreme heat during the summer months.

The effect of these periods of extreme weather, as opposed to

“normal” weather patterns, impacts demand, which in turn affect’s

storage numbers and ultimately the price paid for natural gas at the

well head. The following are some samples of extreme weather ex-

perienced in the U.S. during 2013:

Weather

1. In January 2013, Salt Lake City had an average temperature of

19.4 F, which became the coldest month on record since 1949.

2. On March 28, Orlando, Florida recorded a low temperature of

41.0F. 2 degrees below the record set in 1955. The lowest mini-

mum of 1971 was also broken in West Palm Beach, Florida,

where a temperature of 48.0F was recorded on March 28.

3. On May 1 – 3, a late snow storm occurred across the central

U.S. from Arkansas to Minnesota. The storm formed from deep

upper level through which became a cut-off low. The event was

named “Achilles” by the Weather Channel. This storm broke

records for depth of snow and lateness in the season and was

cited as the worst May snow since 1947 and believe it or not, I

remember that snow storm.

Natural Gas and Crude Oil Review

2013—Another Year of Extremes

The Big Picture 1-8

Quotes & Puzzle 9

Recipe & FYI 10

Calendar,

Birthdays &

Anniversary's

11

Around W ard 12

Inside this issue:

Continued on Page 2

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4. The October 2013 Great Plains blizzard affected the Northwest, Rockies and much of the Midwest. Rapid City

South Dakota, was engulfed in close to two feet of snow, which exceeded the amount of snow that city has ever

recorded during any whole month of October. The storm system also included thunderstorms that brought iced

precipitation, significant rain and over 6 tornadoes to Nebraska and Iowa. Over 120 miles of interstate 90 were

shut down from South Dakota to Wyoming.

5. The average temperature of 52.4 degrees for 2013 exceeded the previous century's average. Yet it was the coolest

year since 2009, coming after the 2012 heat record-breaker.

Storage/Prices

Energy traders use storage volumes to determine the price they are willing to pay for natural gas at any one

period of time. The effects of our extreme weather (increased demand) and supplies of natural gas impacted storage

as follows:

Storage at the end of December 2012 ended almost even with the same period in 2011. However, the significantly in-

crease in demand due to the extreme winter weather across the U.S. in January, February, March and April 2013,

caused the differential between years to reach a negative 795 Bcf. This differential had an impact on gas prices which

rose to $3.85 per mcf. The demands for natural gas lessen during the summer months and the differential was reduced

to a negative 120 Bcf in October 2013. Severe winter weather again returned in December 2013 and January and Feb-

ruary 2014, causing significant draws from storage and the differential between years became a negative 905 Bcf. Nat-

ural gas prices increase to $5.10 per mcf for February gas deliveries. There was over a 360 degree change in the dif-

ferential numbers between April 2013 and February 2014.

Current Year

Storage Amounts

(Bcf)

Monthly Draw()/

Fill Prior Year

Storage Amounts

(Bcf)

Monthly Draw()/

Fill

Difference between

years Nymex Prices

Center-Point Prices Paid Okla-

homa

28-Dec-12 3,517 -391 28-Dec-11 3,494 -453 23 3.63 3.57

25-Jan-13 2,802 -715 25-Jan-12 3,004 -490 -202 3.35 3.24

22-Feb-13 2,229 -573 25-Feb-12 2,536 -468 -307 3.26 3.16

29-Mar-13 1,687 -542 29-Mar-12 2,466 -70 -779 3.43 3.28

26-Apr-13 1,777 90 26-Apr-12 2,572 106 -795 3.98 3.85

30-May-13 2,252 475 30-May-12 2,868 296 -616 4.15 4.03

28-Jun-13 2,605 353 28-Jun-12 3,096 228 -491 4.15 4.04

26-Jul-13 2,845 240 26-Jul-12 3,213 117 -368 3.71 3.54

30-Aug-13 3,188 343 30-Aug-12 3,398 185 -210 3.46 3.42

27-Sep-13 3,487 299 27-Sep-12 3,642 244 -155 3.57 3.43

25-Oct-13 3,779 292 25-Oct-12 3,899 257 -120 3.50 3.37

29-Nov-13 3,614 -165 29-Nov-12 3,814 172 -200 3.50 3.47

27-Dec-13 2,974 -805 27-Dec-12 3,536 -278 -562 3.82 3.57

31-Jan-14 1,923 -1,051 31-Jan-13 2,701 -835 -778 4.41 4.41

21-Feb-14 1,348 -575 21-Feb-13 2,253 -448 -905 4.56 Est. 5.10

Continued on Page 3

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The 4 year graph of natural gas prices shows a rising

prices from a low of $1.90 in June 2012 to the recent

high of $5.10 for February 2014. As of March 6,

2014, the NYMEX 12 month strip was $4.70, which

exceeds the strip price on March 10, 2013 by more

than $0.95.

A more dramatic presentation of natural gas prices is included below.

Discounting the effects on prices of the 2 hurricanes,

back to back in 2008, prices have gone from $6.00 in Au-

gust 2009 to a low of $1.90 in June 2012 and now to a

semi reasonable price of approximately $4.60 in 2014.

Supplies

Natural gas set new records in 2013 for both supply

and demand. In December 2013, monthly dry natural gas

production reached a record high of 2,090 billion cubic

feet (Bcf) and total consumption is a record for any month

on record at 2,912 Bcf.

The EIA’s new data on natural gas supply and demand

for 2013 presented the following:

Total dry gas production reached a record at 24,280 Bcf

Total consumption reached a record at 26,034 Bcf

Deliveries to commercial consumers were the largest ever reported at 3,289 Bcf

Deliveries to residential and industrial customers were at the highest levels realized since 2003

Deliveries to electric power consumers was the only sector that declined in volume from 2012 to 2013

Additionally, the data showed that natural gas production ticked up in the United States by about 1% last year. This modest growth; however, masks massive changes in the geography of domestic gas production, which has strained operating conditions on at least one major interstate natural gas pipeline in the Northeast. The primary pipe-lines that serve the Northeast originate in the Gulf Coast, which has historically been the primary U.S. producing region. As a result, natural gas has traditionally flowed from south to north. That is changing and changing fast. The abrupt decline of production at the Haynesville Shale formation in Texas has reduced the flow of gas from south to north. Meanwhile, the equally abrupt and dramatic production gains in Pennsylvania’s portion of the Marcellus have increased the flow of gas from north to south.

Continued on Page 4

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This reversal is happening so rapidly that Do-

minion Transmission, Inc., a subsidiary of Richmond,

VA-based Dominion that operates about 7,800 miles of

pipeline in Pennsylvania and five other states, said it

would begin restricting north to south gas deliveries in

western Pennsylvania on its system beginning on Feb-

ruary 1, 2014. Flow patterns both affect and are affect-

ed by pipeline hydraulics, which can be difficult to man-

age during shifts in geographic centers of supply and

demand.

In addition to declining production levels in Loui-

siana and the Gulf of Mexico in recent years, the

Haynesville Shale formation in Texas has experienced

sudden and severe production declines. By contrast,

production has risen more rapidly than anyone had an-

ticipated in the Marcellus Shale formation in Pennsylva-

nia and West Virginia. The Marcellus region, which pro-

duced less than two billion cubic feet per day (Bcf/d) as recently as 2010, is projected to provide a stunning 18% of total

U.S. natural gas production in February 2014. There definitely is a “New Kid on the Block”.

Pennsylvania has become an especially prodigious source of natural gas. From 2011 to 2012, Pennsylvania’s

marketed natural gas production grew by 72% and leaped from the seventh-largest to the third-largest marketed gas-

producing state, according to the EIA’s Natural Gas Annual, 2012. Production growth remained robust in 2013 and

there is no sign of tapering anytime soon. In the meantime, the flow of gas from south to north is likely to decline still

more over the next two years as liquefied natural gas exports increase and Mexican exports ramp up. If it does and the

Marcellus Shale sustains current production growth rates, the Northeast may start exporting gas to the Gulf Coast in a

few years.

Although the prospects for shale gas production are promising, there remains considerable uncertainty regard-

ing the size and economics of this resource. Many shale formations, particularly the Marcellus, are so large that only a

limited portion of the entire formation has been extensively production-tested. Most of the shale gas wells have been

drilled in the last few years, so there is considerable uncertainty regarding their long-term productivity. Another uncer-

tainty is the future development of well drilling and completion technology that could substantially increase well produc-

tivity and reduce production costs.

By 2035, shale gas has been projected to account for

approximately 42% of natural gas produced that year.

Continued on Page 5

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Rig Utilization

The number of working drilling rigs on March 8, 2012 was 1973. On Feb 28, 2014 that number decreased 204 rigs to

1769. In addition, the number of rigs drilling gas well dropped 335 rigs to 335 – a 50% reduction. In the past, the number of gas-

oriented drilling rigs in a particular region has been a common metric for estimating the production of natural gas. However, tech-

nological advances have led the way to the widespread use of new oil and natural gas extraction techniques that have opened up

a hydrocarbon resource base dramatically larger than previous estimates. Because of these new methods of extraction, generally

in wide use since 2007, natural gas production has steadily risen, while the number of active rigs characterized as targeting natu-

ral gas has fallen dramatically as presented in the graph below.

The number of wells drilled nationwide that have produced both oil and natural gas increased from 37% in 2007 to 56% in 2012

(see chart below). This increase helps explain why natural gas production can rise (as it has) even as the number of rigs character-

ized as drilling for natural gas has fallen.

Using historical data (starting from 2007, cor-

responding to large-scale adoption of horizon-

tal drilling and multistage hydraulic fracturing

by industry), EIA developed a process model to

estimate production trends and volumes in six

major shale plays, which is one part of EIA's

monthly drilling productivity report (DPR).

The DPR combines rig count data with well production data to calculate variables such as:

Drilling efficiency (the number of wells drilled per rig per month)

Lag times between drilling and the start of production

Production declines from existing wells

Initial rates of oil and natural gas production per well

Expected new production per drilling rig observed

The DPR also includes a forecast of production through the month following the report release.

Continued on Page 6

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To estimate production for the most recent months, DPR uses the total observable rig count, along with recent trends in

the key relationships between drilling and production. Using the expected productivity from all drilling rigs to estimate the oil and

gas production coming from all resultant wells improves upon simple rig count models. Specifically, it does not break drilling into

categories based on drilling targets (oil or gas), well type (vertical, directional, horizontal), or operator. The most relevant infor-

mation for the DPR comes from the total number of rigs drilling, where those rigs are drilling, and the average efficiency and

productivity of those regions.

The Drilling Productivity Report uses recent data on the total number of drilling rigs in operation along with estimates of

drilling productivity and estimated changes in production from existing oil and natural gas wells to provide estimated changes in

oil and natural gas production for six key fields. EIA's approach does not distinguish between oil-directed rigs and gas-directed rigs

because once a well is completed it may produce both oil and gas; more than half of the wells produce both.

While shale resources and production are found in many U.S. regions, at this time EIA is focusing on the six most prolific areas,

(see map above) which are located in the Lower 48 states. These six regions accounted for nearly 90% of domestic oil production

growth and virtually all domestic natural gas production growth during 2011-12.

The DPR report for October 2013 and subsequent months can be found at this web site address.

http://www.eia.gov/petroleum/drilling/archive/dpr_oct13.pdf

Crude Oil

While the United States has historically been a significant net importer of both crude oil and petroleum products, stagnating do-

mestic product demand combined with very competitive refinery infrastructure and strong global product demand turned the

United States into a significant net exporter of petroleum products starting in 2011.

Continued on Page 7

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By value, crude oil imports were down 16% year-over-year in 2013. EIA's February Short-Term Energy Outlook forecasts

continued rapid growth in domestic crude oil production in both 2014 and 2015, which should further reduce the volume of net

crude oil imports over this period. Given the continued flatness in domestic demand and continued access of U.S. refiners to do-

mestic crude streams and relatively low-cost natural gas to fuel their refineries, the U. S. is likely to maintain its current role as a

major net exporter of distillate fuels and other products to external markets, especially those in the Atlantic Basin. The upper lim-

its to near-term product export growth are likely to be defined by refinery capacity, while the lower limits to product exports like-

ly depend on potential weakness in foreign product demand, perhaps responding to weaker-than-expected economic conditions.

From mid-2004 until 2009, the U. S. was importing 10+ million barrels per day (bpd) of crude oil. From the graph above,

during 2013 daily imports of crude oil were approximately 7.7 million bpd. This reduction in the amount of imported crude oil can

be tied directly to the development of the Bakken region of North Dakota and Montana. Oil production in this area has gone

from approximately 180 thousand bpd to over 1.0 million bpd in December 2013.

The Bakken region now accounts for a little over 10% of total U.S. oil production and is expected to be the fourth region

(along with the Gulf of Mexico, Eagle Ford, and Permian basins) producing more than 1 million bpd in the nation in December.

Infrastructure improvements in the central part of the nation carried more of this oil to refineries in recent months, helping to

narrow the price difference between the Bakken region and West Texas Intermediate, which is priced at Cushing, Oklahoma.

Continued on Page 8

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The growth of crude oil production in the Bakken region is part of a longer-term trend in drilling efficiency gains (see

graph below) and has led North Dakota to rank second in crude oil production in the United States, behind only Texas. These pro-

duction gains have led to increases in gross domestic product in the state as well as increased demand for electricity.

Outlook for 2014 and Beyond

The health of the U.S. energy industry appears to be improving. Natural gas prices are in the mid to high four dollar

range and crude oil production has risen to the point that we are importing less crude oil from other countries. Whether both of

these improvements can hold or increase for the next few years is any one’s guess. The Federal Government’s continued attack

on the tax treatment of our industry casts a big shadow for the foreseeable future. The loss of expensing IDC’s in the year in-

curred, the elimination of Statutory Depletion and the removal of the Passive Loss Activity Exemption will severely impact our

industry. There will be less investment dollars available for exploration, since higher taxes will divert those dollars to the Federal

Government.

The last wishes of Alexander the Great

On his death bed, Alexander summoned his generals and told them his three ultimate wishes:

1. The best doctors should carry his coffin;

2. The wealth he has accumulated (money, gold, precious stones) should be scattered along the procession to the cemetery, and

3. His hands should be let loose, hanging outside the coffin for all to see!!

One of his generals who was surprised by these unusual requests asked Alexander to explain.

Here is what Alexander the Great had to say:

1. I want the best doctors to carry my coffin to demonstrate that, in the face of death, even the best doctors in the world have

no power to heal.

2. I want the road to be covered with my treasure so that everybody sees that material wealth acquired on earth, stays on earth.

3. I want my hands to swing in the wind, so that people understand that we come to this world empty handed and we leave this

world empty handed after the most precious treasure of all is exhausted, and that is TIME.

4. We do not take to our grave any material wealth, although our good deeds can be our travelers' checks. TIME is our most

precious treasure because it is LIMITED. We can produce more wealth, but we cannot produce more time.

5. When we give someone our time, we actually give a portion of our life that we will never take back. Our time is our life!

6. The best present that you can give to your family and friends is your TIME. May God grant you plenty of TIME and may you

have the wisdom to give it away so that you can LIVE, LOVE and DIE in peace.

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Don’t quit. Suffer now and live the rest of your life as a champion. — Muhammand Ali

Take care of your body. It’s the only place you have to live. —Jim Rohn

Success is almost totally dependent upon drive and persistence. The extra energy required to make another effort or try an-

other approach is the secret of winning. —Denis Waitley

Anyone who lives within their means suffers from a lack of imagination. —Oscar Wilde

While money can’t buy happiness, it certainly lets you choose your own form of misery. —Groucho Marx

Income tax returns are the most imaginative fiction being written today. —Herman Wouk

Quotes

Answer on Page 10

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8 ounces uncooked cavatappi pasta

1 pound asparagus, trimmed and cut diagonally into 1 1/2-inch pieces

1 teaspoon minced garlic

3 tablespoons pine nuts

2 ounces diced pancetta

2 tablespoons fresh lemon juice

2 teaspoons extra-virgin olive oil

1/2 teaspoon kosher salt

1/4 teaspoon freshly ground black pepper

1/4 cup (1 ounce) crumbled Parmigiano-Reggiano cheese

Directions:

1. Preheat oven to 400°.

2. Cook pasta according to package directions, omitting salt and fat; add asparagus to pan during last 3 minutes of cooking. Drain. Sprinkle pasta mixture with garlic; return to pan, and toss well.

3. Arrange pine nuts in a single layer on a jelly-roll pan. Bake at 400° for 3 minutes or until golden and fragrant, stirring occasionally. Place in a small bowl.

4. Increase oven temperature to 475°.

5. Arrange pancetta on jelly-roll pan. Bake at 475° for 6 minutes or until crisp.

6. Combine lemon juice, olive oil, salt, and pepper, stirring with a whisk. Drizzle over pasta mixture; toss well to coat. Sprinkle with pine nuts, pancetta, and cheese.

Note: Pine nuts are particularly delicious in this dish, but walnuts would also be tasty.

Cooking Light recipe

Photo by Randy Mayor; Styling: Cindy Barr

Crack the hidden secrets of the everyday egg

You think coloring and hiding eggs for Easter is tough? Imagine what those hens have to go through in order to pro-

duce them for you. As the water is boiling on the stove, ponder these interesting facts from the American Egg Board:

• A hen requires 24 to 26 hours to produce an egg. Thirty minutes later, she starts all over again.

• The eggshell may have as many as 17,000 tiny pores over its surface. Through them, the egg can absorb flavors and

odors. Storing them in cartons helps keep them fresh.

• White-shelled eggs are produced by hens with white feathers and white earlobes. Brown-shelled eggs are produced

by hens with red feathers and red earlobes.

• To tell if an egg is raw or hard-cooked, spin it. If the egg spins easily, it is hard-cooked but if it wobbles, it’s raw.

• During the spring equinox, it is said that an egg will stand on its small end. Although some people have reported suc-

cess, it is not known whether such results were due to the equinox or to the peculiarities of that particular egg.

• Egg yolks are one of the few foods that naturally contain vitamin D.

• Yolk color depends on the diet of the hen. Natural yellow-orange substances such as mari-

gold petals may be added to light-colored feeds to enhance colors. Artificial color additives

are not permitted.

• Occasionally, a hen will produce double-yoked eggs throughout her egg-laying career. It is

unusual, but not rare, for a young hen to produce an egg with no yolk at all.

Puzzle Answer: April Fool’s—there are no correct answers!!

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APRIL

BIRTHDAYS

Tim Collins 4-07

ANNIVERSARIES

Gary Guest 4-09-84

30 years

June Webb 4-10-90

24 years

Tom Taylor 4-11-11

3 years

Rick Tozzi 4-16-84

30 years

Donna Graham 4-18-84

30 years

Cheryl Holmes 4-20-81

33 years

Wally Gilbreath 4-20-92

22 years

Mark Jopling 4-25-81

33 years

MAY

BIRTHDAYS

Melodie Turnbow 5-05

Donna Graham 5-09

Holli Bradford 5-20

Tom Taylor 5-27

Gary Hunter 5-29

ANNIVERSARIES

Mike Sparkman 5-28

31 years

As I hurtled through space, one thought kept

crossing my mind - every part of this rocket was

supplied by the lowest bidder. ~John Glenn

Sun Mon Tue Wed Thu Fri Sat

1April

Fool’s Day

2 3 4 5

6 7 8 9 10 11Pay Day 12

13 14 15 16 17 18 19

20Easter 21 22 23 24 25Pay Day 26

27 28 29 30

April 2014

Sun Mon Tue Wed Thu Fri Sat

1 2 3

4 5Cinco de

Mayo

6 7 8 9Pay Day 10

11Mother’s

Day

12 13 14 15 16 17Armed

Forces Day

18 19 20 21 22 23Pay Day 24

25 26Memorial

Day

27Blood

Drive

28 29 30 31

May 2014

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Around WARDWARDWARD

Foreign oil imports did not make this newsletter possible

Famous Quote—

Know what you are doing. Love what you are doing.

And believe in what you are doing. —Will Rogers

www.wardpetroleum.com

Oklahoma City Office

14000 Quail Springs Parkway, Ste 3500

Oklahoma City, OK 73134

Phone: 405-242-4484

Fort Collins Office

215 W. Oak, Ste 1000

Fort Collins, CO 80521

Phone: 970-449-4632

Fax: 970-449-7637

Enid Office

502 S. Fillmore

Enid, OK 73703

Phone: 580-234-3229

Fax: 580-242-6850

Winners of the Irish Stew (and Other Soup)

Contest

1st Place

Judy Bradford– Homemade Chicken & Noodles

Tied for 2nd Place

Jody Kuberskey-Beef Stew

Lea Ann Strait– Clam Chowder

3rd Place

Amanda Goodman—Taco Soup

Documents

WARD PETROLEUM ORPORATION Through The Pipeline · 2014-05-04 · The October 2013 Great Plains blizzard affected the Northwest, Rockies and much of the Midwest. Rapid City South