NEWS RELEASE                                                                                                                JULY 2014

Major Changes in Oil and Gas Supply and Demand Outlook

The picture changes day by day in the oil and gas industry. Some recent developments promise to alter many of the forecasts. The developments include:

• Turmoil in the Middle East
• Uncertain Russian gas supply
• Regulations on flaring and completion
• Chinese coal-to-gas program
• Development of small scale LNG and gas-to-liquids plants.
• Movement toward gas-fired vehicles

These new developments have been incorporated into the latest forecasts in McIlvaine Oil, Gas, Shale and Refining Markets and Projects. (www.mcilvainecompany.com)

Turmoil in the Middle East: The strife in Gaza, Iraq, Syria and other Middle East countries continues to threaten the supply of oil and gas from the entire region. EIA boosted the forecast for Brent crude to $109.55 for this year from $107.82. Next year’s forecast was raised to $104.92 from $101.92. Price forecasts were raised primarily because of the problems in Iraq.

Uncertain Russian Gas Supply: Europe and China are both counting on substantial gas imports from Russia. The downing of the Malaysian airlines plane caused oil prices to surge to $3/barrel and reflected concerns about the future of Russian integration into the world market.

Regulations on flaring and green completion: Environmental concerns relative to the emission of methane, CO₂ and organic hazardous air pollutants are resulting in regulations which will change the industry. North Dakota has a new rule to prohibit flaring. This gas will be captured and converted to products adding $100 million/month to oil and gas revenues in the State.

Chinese coal-to-gas program: The various government forecasts of Chinese oil and gas supply and demand have not taken into account the magnitude of Chinese plans to use syngas derived from coal. The following chart compares the industry forecasts to those compiled by McIlvaine.

The Chinese government has decided that it is much more attractive to convert coal in western and northern China into gas and pipe that gas across country. The projects already underway plus those in the planning stages would result in 200 billion cubic meters per year (bcm) of domestically produced gas in 2025. That would be twice as much as would be extracted conventionally and would equal the combined conventional, shale and pipeline imports.

With the McIlvaine forecast based on the very recent announcements by the Chinese government, long-term LNG imports would be lower by more than 40 bcm. This has major implications for LNG exporters in the U.S. and Australia.

Development of small scale LNG and gas-to-liquids plants: The lower demand for LNG in China will lead countries such as Australia to divert a portion of the gas supply from large to small LNG plants. The iron mining industry in Australia can take advantage of stranded shale gas supplies near the mines and can convert this gas to LNG to operate the mining vehicles and supply fuel for heating and power.

Movement toward gas-fired vehicles: The movement toward LNG fired vehicles is accelerating  It is lower in cost and emissions. Demand is coming from the trucking, marine and rail industries.

All these factors promise to materially affect the prices and consumption of oil and gas products. For more information on Oil, Gas, Shale and Refining Markets and Projects, click on: http://home.mcilvainecompany.com/index.php/markets/28-energy/471-n049