BNP Paribas Fortis North American energy monthly - Virtual Metals

Merchant Banking
INVESTMENT RESEARCH
BNP Paribas Fortis
North American energy monthly
October 2009
Crude oil, middle distillates,
gasoline, thermal coal, natural
gas, power, nuclear.
VM Group
Tel. +44 20 7569 5930
info@vmgroup.co.uk

BNP Paribas Fortis/VM Group October 2009 | BNP Paribas Fortis North American energy monthly | 1
Contents
Analysis 2
Focus 5
Hedge funds activity 8
Crude oil 9
Middle distillates 9
Gasoline 10
Steam coal 11
Natural gas 12
Power 13
Nuclear 14
Disclaimer and copyright 15
About VM Group 17
BNP Paribas Fortis Bank North American Energy Monthly is an exclusive
energy research joint venture between Fortis Bank SA/NV and VM Group.

2 | BNP Paribas Fortis North American energy monthly | October 2009 BNP Paribas Fortis/VM Group
Analysis
Analyst: Paul Hannon
VM Group
Tel: +44 20 7569 5930
Email: paul@vmgroup.co.uk
Analyst: Gary Mead
VM Group
Tel: +44 20 7569 5930
Email: gary@vmgroup.co.uk
M&A back in fashion
The 2008-09 recession and credit crisis effectively crippled merger and
acquisition activity in the US, but as the signs of economic recovery are
gathering force, the M&A bandwagon is on the move again.
Superheroes and oil services are not usually linked but when Walt Disney
announced its generous $4bn cash-and-paper purchase of Marvel Entertainment
on the same day in late August as oilfield group Baker Hughes bought a major
competitor for $5.5bn, it was the starting signal for a new wave of M&A
business.
The takeovers stood out more than usual because August traditionally sees little
M&A activity, as dealmakers normally take a short summer break to run
numbers that eventually translate into headlines later in September and October.
Furthermore, the latest wave of takeovers reveals a shift in emphasis with
companies more intent on actively searching for suitable opportunities that do
not necessarily need to be done rather than picking through the bones of
companies in distress.
Oil and gas deals globally, $bn Oil and gas deals by region, $bn North American deals by sector, $bn
350
140
90
300
250
120
100
80
70
60
80
50
200
60
40
150
40
30
20
100
20
10
50
0
2005 2006 2007 2008
0
North America
Europe
Russia
2007 2008
Rest of world
International
0
Upstream
Midstream
Downstream
2007 2008
Services
Source: PricewaterhouseCoopers, O&G Deals 2008
Annual Review
Source: PricewaterhouseCoopers, O&G Deals 2008
Annual Review
Source: PricewaterhouseCoopers, O&G Deals 2008
Annual Review
Whereas the logic behind the Disney takeover might appeal to franchise-hungry
film producers, the reacquisition of BJ Services was more to do with Baker
Hughes regaining a foothold in pressure pumping and the growing international
demand to enhance oil recovery rates. As a result of the merger, Baker Hughes,
which originally spun off BJ Services in 1990, will see its pressure pumping
activities increase to more than 20% of revenue compared with less than 1%
before the deal. BJ shareholders will now own 27.5% of the combined company.
Even though Baker Hughes was prepared to pay a 16% premium on BJ
Services’ stock price, caution remains a watchword among acquisitive boards
with many smaller deals being done for specific assets rather than buying an
entire company. For example, Exco Resources sold half of its midstream assets
in Texas and Louisiana in early August to BG Group for $249m and then
followed it in late September with sales of Oklahoma assets worth $540m to
Sheridan Holdings and Ohio gas properties valued at $145m to EV Energy
Partners. Dallas-based Chief Oil & Gas sold a 30% stake in its Marcellus Shale
gasfield to Enerplus Resources Fund for $406m in late August and, on the same
day as the Disney/Baker Hughes announcements, Kinder Morgan Energy agreed

BNP Paribas Fortis/VM Group October 2009 | BNP Paribas Fortis North American energy monthly | 3
to buy the natural gas business of Crosstex Energy for $266m. The lesson that is
being applied everywhere is that takeovers priced between $250m-$500m that
subsequently turn out to have been misjudged are unlikely to seriously affect the
financial health of a company compared with a mismatched target costing $5bn.
Textbook example of rise and decline
Then of course there is Chesapeake Energy. Here is a classic example of a
company enjoying a meteoric rise – up to the point of almost setting up its own
television service promoting the benefits of gas shale – and then being forced to
retrench just as quickly as it attempted to reduce its crippling debt. Whereas
some investors in Chesapeake have taken exception to the $112m payout
(including a one-off $75m bonus) for CEO Aubrey McClendon at a time when
Chesapeake’s fortunes have been under attack, McClendon has been tireless in
spotting potential weaknesses in the company and plugging them with asset
sales and refinancing operations.
The company’s most recent divestment occurred in late September with the sale
of a 50% stake in its midstream assets in the Barnett Shale in Texas, as well as
non-shale midstream assets in the Arkoma, Anadarko, Delaware and Permian
Basins. In return for $588m in cash, Chesapeake is injecting these assets into a
50:50 joint venture with Global Infrastructure Partners. But there may be more
to Chesapeake than restructuring its assets for a quick cash fix. With a share
price currently trading around $27, Chesapeake has a market capitalization of
about $17bn. McClendon is currently in the business of talking up gas prices –
and the prospects for his own company – when the US economy stages a
recovery so his recent forecast that gas will be fetching between $6-$8 MMBtu
by next summer should be taken with a grain of salt. If McClendon proves to be
correct, however, Chesapeake will have weathered its worst financial crisis since
being set up 20 years ago. But as gas prices rise, Chesapeake will become all the
more attractive as a takeover opportunity with a price tag of about $25bn.
Mention Chesapeake and the name Petrohawk also springs to mind. Over the
past five years, this Houston-based independent has absorbed such companies as
Wynn-Crosby, Mission Resources and KCS Energy on its path to greatness, but
the collapse in gas prices has left it dangerously exposed to predators. By late
September, Petrohawk had announced the sale of Permian Basin properties to a
privately-owned company for $376m in cash. This asset sale follows on the
heels of August’s stock issue that raised almost $600m which was intended to
pay down debt and, somewhat optimistically, fund new acquisitions. With a
share price of about $23, Petrohawk has a market capitalization of just under
$7bn, which is well within the resources of some of the larger oil companies.
Large acquisitions
But is there something bigger in the offing? There has been constant speculation
over the past three years that ExxonMobil would make a bid for BG Group, the
UK gas group. So what has changed in the meantime to make a bid more likely
now? First of all, ExxonMobil has been sitting on the record profits it earned
from the spike in oil prices last year and it desperately needs to make a sound
value-for-money acquisition. The attraction of BG Group in the meantime has
been enhanced by its participation in one of the largest discoveries of oil ever
made in the southern hemisphere. BG has a 30% stake in the Guara discovery in
the Santos Basin offshore Brazil and along with field partners Petrobras (45%)
and Repsol (25%) is preparing to develop this surprise jackpot. By BG’s own
account, the discovery, which was made in June 2008, has since been judged
capable of an initial production output of 50,000 b/d and the field has estimated
recoverable volumes of up to 2bn barrels of oil equivalent. It is one of the ironies
of the modern oil and gas industry that a major discovery which would normally
underpin the future prospects of a company for decades may have made BG
more vulnerable to a takeover. BG has a current market value of about £36bn
($57bn) and any takeover offer would need to apply at least another £8bn
premium to current stock values.

4 | BNP Paribas Fortis North American energy monthly | October 2009 BNP Paribas Fortis/VM Group
BG has displayed takeover aspirations of its own but these have been thwarted
recently. Just as it was making its Brazilian discovery last year, BG was
unveiling a hostile tilt at Origin Energy, the largest coal seam gas producer in
Australia. Its unwelcome US$13.1bn cash bid was eventually superseded by an
agreement between ConocoPhillips and Origin to form a joint venture for the
Australian market. Stock markets traditionally frown on failed bids, judging
them to be a sign of weakness that leaves the bidder exposed to takeover itself.
To a large extent, BG has been spared that indignity because of the unfolding of
the banking crisis and the subsequent unraveling of the North American
economy. It may have been lucky to escape ExxonMobil last year, but the
chances are growing that BG will be subject to a $70bn takeover bid this
autumn.
Other targets
Other large-scale takeover targets abound in the US, with the prospect that
foreign rather than domestic buyers will be calling the shots. Marathon Oil,
which produced net income of $3.5bn in 2008, currently has a market
capitalization of just $22bn and would provide a useful international presence
for companies like the diversified Norwegian energy group StatoilHydro or even
the French oil and petrol retailing group Total.
Most new waves of M&A activity start tenuously as boards look for signs within
their own industrial sector and within the broader economy that the bad times
are over. As economic indicators increasingly show that the worst of the
recession is behind the US, energy companies are once again wondering whether
it is safe to stick their heads above the parapet. They know from past experience
that if they are not in a strong enough position to launch a takeover, there will
come a point when they find themselves on the receiving end of a bid. It is safe
to guess that board meetings of the country’s energy companies over the next
three months will display an unusual mixture of financial soul-searching and
basic survival instincts.

BNP Paribas Fortis/VM Group October 2009 | BNP Paribas Fortis North American energy monthly | 5
Focus
Analyst: Paul Hannon
VM Group
Tel: +44 20 7569 5930
Email: paul@vmgroup.co.uk
RIP for RIK
The principle that oil and gas companies should pay royalties promptly to the
US government was underscored in mid-September when Interior Secretary
Ken Salazar announced he was phasing out the royalty-in-kind program.
With plotlines reminiscent of a television soap opera, the drama surrounding the
US government’s controversial royalty-in-kind (RIK) program has finally come
to an end. It took years of warnings about the systematic abuse of an innovative
royalty system before Ken Salazar finally pulled the plug on what he described
as a blemish on the good name of the Department of Interior (DOI). At the root
of the scandal, officials at the DOI’s Minerals Management Service (MMS)
were deemed to have suffered ethical lapses that resulted in the government
being shortchanged by millions of dollars.
As with any in-kind system, the MMS program operated on payments of
physical oil and gas rather than cash as royalties for production on federal
property. Furthermore it relied totally on the integrity of the producing
companies to report accurately their output. Set up in 1992 on a trial basis, the
RIK program grew rapidly because it simplified the way in which oil and gas
companies paid the government its cut of their production. In effect, it shifted
the administrative load from the producers to the bureaucrats and it expanded to
the point that about half of last year’s $12bn in royalties paid to the US
government was paid on an in-kind basis. Administered from headquarters in
Denver, Colorado, the scheme became the subject of allegations that some
employees were engaged in sexual and drug-related practices with members of
the oil industry. Dirk Kempthorne, Interior Secretary at the time, expressed his
outrage at the lapse in standards but kept the program intact.
Growth in RIK oil volumes
135,000
Growth in RIK gas volumes
900,000
130,000
125,000
800,000
Barrels/day
120,000
115,000
MMBtu/day
700,000
600,000
110,000
105,000
500,000
100,000
2006 2007 2008 2009
400,000
2006 2007 2008 2009
Source: US Department of Interior/ Minerals Management Service
Source: US Department of Interior/ Minerals Management Service
The final nail in the coffin of the RIK scheme surfaced in mid-September when
a report by the Government Accountability Office revealed that the program had
not collected $21m due to it last year, while a separate report revealed that
producers may have underreported drilling revenue and underpaid $160m in
royalties during 2006-07. Using these reports as a lever, Salazar acted quickly
and decisively.
The American Petroleum Institute (API) saw the loss of up to $21m in a
different light. API President Jack Gerard described the existing RIK program as
“an effective means of ensuring that the American people receive fair
compensation for development of federal resources” and termination of it ran the
risk of raising administrative costs for companies to determine the value of oil

6 | BNP Paribas Fortis North American energy monthly | October 2009 BNP Paribas Fortis/VM Group
and gas output. However in sidestepping the issue of possible deliberate underreporting
Gerard is at risk of ignoring the new mood in Washington.
Federal onshore royalty estimates
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
Oil volume (million barrels) 105 104 103 102 100 97
Oil royalties ($m) 560 632 687 713 739 767
Source: US Department of Interior/ Minerals Management Service
Discrepancies in totals may occur due to rounding.
Federal offshore royalty estimates
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013
Oil volume (million barrels) 478 553 696 813 844 812
Oil royalties ($m) 2,971 3,875 5,316 6,445 6,867 6,773
Source: US Department of Interior/ Minerals Management Service
Open to abuse
Several times during recent years, the RIK program has been cited as an area
open to abuse and any system that relies on the integrity of companies to report
accurately their extraction of government-owned resources on federal property
will always draw a small number of operators who are tempted to muddy the
figures.
No discussion about royalty schemes in the US is complete without mention of
Jack Grynberg. Dismissed by many as a professional litigant, Grynberg has long
maintained that huge swathes of the oil and gas industry in the US have
systematically underreported their production levels on which they pay royalties
to the government. Having decades of experience in the industry himself,
77-year-old Grynberg says he knows how production flow meters can be
tampered with without detection and that manufacturing standards of meters are
so lax that they represent an invitation to defraud the government. Grynberg has
a multi-billion dollar lawsuit pending under the False Claims Act, which if
successful means he could be awarded up to 30% of the damages awarded by a
court. So far Grynberg has sued 300 oil and gas companies, including Shell and
ExxonMobil, in 73 separate suits. He has won more cases than he has lost and in
the process earned millions of dollars in out-of-court settlements. His most
recent victory occurred on 30 th September when a Denver District Court
confirmed that Colorado-based integrated natural gas company Williams
Production had to pay Celeste Grynberg (Jack Grynberg’s wife) $2.4m plus
legal costs for underreporting of gas volumes and overcharging for transport
services. Whether you like him or loathe him, Grynberg has been one of the
most consistent critics of metering and monitoring practices on leases
administered by the MMS. Without constant badgering from him and other
vigilantes on the royalty issue, it seems highly unlikely that Salazar would have
decided that the RIK system was fatally flawed.
Variable royalty rates
When Salazar announced the demise of the RIK system, which House Natural
Resources Committee Chairman Nick Rahall described as “opportunity for
mischief”, he also spoke of the DOI’s intention of introducing a more flexible
royalty structure that would have a higher royalty rate on relatively-easy-to-find
oil and gas assets, but a lower rate for wildcatting in areas where oil and gas
have not yet been discovered.
Twenty years ago, wildcatters usually had a one-in-five chance of striking oil or
gas, but even then the size of the deposit might not be adequate to justify actual

BNP Paribas Fortis/VM Group October 2009 | BNP Paribas Fortis North American energy monthly | 7
production. By the middle of this decade, the success rate had improved to a
record 45%, or almost one in two wells striking oil or gas. This ratio has been
boosted by the wider presence of coal-bed methane drilling. But not all
wildcatters are equally good at finding unknown deposits and the success rate
can vary enormously according to the geological composition of an area.
Nevertheless, although wildcatting has been largely the preserve of small
independent companies in the US, the new wildcatting royalty rates may entice
some of the major oil companies back into the unknown.
In line with Salazar’s approach to improving the royalty reward to the risk
involved in new exploration, royalty rates are also actively under discussion in
Canada. Fearful that the current downturn in oil prices will keep many drillers
on the sidelines or even push them into bankruptcy, the Alberta provincial
government has introduced a 5% royalty for the first year of production on all
new wells that begin producing conventional oil and natural gas between April
2009 and next March. The rate applies up to a maximum of 50,000 barrels of oil
or 500 million cubic feet of natural gas.
Expected upturn
Even though it is only a 12-month sweetener to drillers, it has already had
results. Energy Minister Mel Knight also introduced a royalty credit of C$200
(US$184) for every meter of well drilled on a sliding scale based on production
levels from last year. Knight hopes that this measure will have the maximum
impact on small and mid-sized producers, while freeing up available capital for
the entire sector. Knight estimates that the drilling of each new oil or gas well
directly and indirectly supports 120 jobs in a local economy and that an average
well drilled to a depth of 2,300 meters generates approximately C$1.65m in
economic activity.
After eight years of generous handling by the Bush administration, the oil and
gas industry is now faced with an Interior Secretary determined to engage in
some financial catch-up. Few would doubt that the US is a safe place to invest in
oil and gas – especially compared with Nigeria and Venezuela – but the country
has also been relatively generous in its royalty structure so far. A report
produced by the Government Accountability Office in 2007 observed that US
offshore royalty rates in the Gulf of Mexico were generally more favorable than
those of other producing countries. While the US government’s combined
royalty-and-tax for offshore production in the Gulf of Mexico varied from
between 38%-42% for deep water and between 48%-51% for shallow water, the
story was different elsewhere. For example, the government of Trinidad &
Tobago had an offshore take of between 48%-50%, while Australian offshore
production yielded a government take of between 53%-56%. At the higher end
of the scale, the Egyptian government takes between 79%-82% of offshore
production value, and Venezuela came out at the top with the highest
government take of between 88%-93%.
Whatever Salazar has in mind, the easy carefree days of lax stewardship that
characterized the oil and gas industry in the past are certainly over. As a prerequisite
to curtailing further abuse of royalties by producers, Salazar should
raise the ante by increasing the penalties tied to any company found to be
defrauding his department. Furthermore, he should take a lesson out of Jack
Grynberg’s playbook and start pursuing companies that underreport their
production. One or two high-profile cases will be sufficient to get the rest of the
industry back on the straight and narrow path of fair dealing.

8 | BNP Paribas Fortis North American energy monthly | October 2009 BNP Paribas Fortis/VM Group
Hedge funds activity
Hedge Fund returns in commodities, %
monthly
12
10
8
6
4
2
0
-2
-4
-6
-8
Jan-07 Sep-07 May-08 Jan-09 Sep-09
All hedge funds
All with some commodity investment
Funds with >50% AUM in commodities
Source: VM Group from Barclay Hedge Fund
Database
Hedge fund returns in energy, % monthly
30
20
10
0
-10
-20
-30
Jan-07 Nov-07 Sep-08 Jul-09
Funds with >50% in energy
Reuters CRB energy index
Source: VM Group from Barclay Hedge Fund
Database
Hedge Fund AUM ($bn)
1,200
1,000
800
600
400
200
0
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Source: VM Group from Barclay Hedge Fund
Database
Aug-09
News
• Sept 24 th : The UK National Association of Pension Funds joined the swelling
ranks of those unimpressed with the EU’s proposals for hedge fund
regulation, expressing concern that the proposed reforms will increase costs
for investors and limit choice.
• Sept 24th: United States Commodity Funds (USCF) announced plans to
restructure the current portfolio of its United States Natural Gas Fund (UNG)
to pre-empt the introduction of new position limit regulations by the CFTC.
• Sept 30th: After experiencing an estimated 30-40% collapse in tax revenues
the Cayman Islands negotiated with the UK to secure an interim loan of
$60.65m. The “tax-neutral” territory has so far resisted any significant reform
of its hedge fund-friendly taxation system.
• Sept 30th: The Securities Exchange Commission (SEC) and the CFTC expect
to issue a joint report outlining ways to bridge the gaps between their
respective planned regulatory frameworks. The harmonization process is
intended to “reduce regulatory arbitrage, avoid unnecessary duplication and
close regulatory gaps” according to SEC chairperson Mary Schapiro. The
report is expected to be issued on 15th October, a bit behind the schedule laid
out by the Obama Administration.
Analysis
• Hedge funds chug along in run-up to fourth quarter.
Growing by a monthly average of 1.24% over 2009 so far hedge fund returns
seem to have been playing tortoise to the hares of the Dow Jones Industrial
Average and the S&P 500, both of which surged up about 15% from July to
September. Hedge Funds in our database returned an average of 1.4% in August
while funds with significant commodity exposure returned 0.67%, lagging the
recovery that the commodity sector posted at the end of the quarter. Returns for
funds in energy turned positive to 0.70% while those in metals returned 0.93%
and softs funds returned 0.83%. Of course we are due another month of data
before we can pass judgement on our funds performance for this quarter.
There is concern however that the hares may be running out of breath; key
macroeconomic data at the end of the quarter was conflicting – increased
consumption spending was reported in the US together with a higher than
expected growth in jobless claims. If the stock market has been guilty of overoptimism
about the economic recovery then investors might be pleased at the
hedge fund industry's ability to just chug along – to do better in downturns is
after all meant to one of their prime advantages over ordinary investments.
Managed money has upped its stakes in crude oil futures on Nymex, according
to CFTC data issued as of September 22 nd : net long positions increased from
89,910 to 98,031 on the week. Oil prices hovered around $71/b during the same
period. Money managers reduced their net short positions in natural gas futures
at the same time from 122,232 lots to 108,115 lots.
Outlook
The announcement by the United States Natural Gas Fund (UNG) that it
will preemptively rebalance its portfolio of natural gas investments in
anticipation of a CFTC clamp-down on position sizes, by reducing positions
in listed natural gas futures in favor of increasing holdings of over-thecounter
natural gas swaps, is a significant indication of the shape of funds to
come. Regulatory zeal has just become one more thing to hedge against –
inevitably some will do it more successfully than others. UNG managed to
re-jig its portfolio to include such a so-called “regulators hedge” while
retaining a majority of its holdings in listed natural gas futures; smaller
funds might find this sort of move more difficult to pull off, and so the
consolidation continues.

BNP Paribas Fortis/VM Group October 2009 | BNP Paribas Fortis North American energy monthly | 9
Crude oil
Nymex light crude ($/b)
74
72
70
68
66
64
62
60
01-Sep 10-Sep 21-Sep 30-Sep
Oct-09 Nov-09
Source: Reuters Ecowin
IPE Futures Brent crude ($/b)
74
72
70
68
66
64
01-Sep 10-Sep 21-Sep 30-Sep
Oct-09 Nov-09
Source: Reuters Ecowin
US crude oil stocks (ex strategic reserve),
(million barrels)
390,000
370,000
350,000
330,000
310,000
290,000
270,000
250,000
Oct-08 Jan-09 Mar-09 Jun-09 Sep-09
2008/2009 2007/2008
2006/2007
Source: Reuters Ecowin
News
• Sept 30 th : The US Senate introduced a draft climate change bill that seeks to
cut carbon emissions by 20% by 2020 through a cap-and-trade system.
• Sept 29 th : US imports of crude oil from Canada rose 5.4% in July to hit a
record 2.11m b/d, according to the Energy Information Administration
• Sept 25 th : The number of oil and gas rigs active in the US in September rose
by 18 to 1,017, compared with 1,995 a year ago, according to Baker Hughes.
• Sept 21 st : The Libyan Investment Authority agreed a C$316m (US$291m)
takeover of Calgary-based Verenex Energy.
Analysis
• Unwelcome message from Obama
It is the sort of language no oilman wants to hear and when Barack Obama made
several references to “phasing out fossil fuel subsidies” in the run-up to the G-20
economic summit in Pittsburgh, the reaction was understandable. The American
Petroleum Institute described the proposition as a “giant tax hike on American
consumers”. What irked many in the industry was the release by the
Environmental Law Institute (ELI) of a study that claimed US fossil fuel
subsidies during 2002-08 amounted to a staggering $79bn, dwarfing the $29bn
given to renewable fuels, principally corn-based ethanol. The subsidies fall
broadly into two categories of tax breaks and direct expenditure on research and
development. ELI Senior Attorney John Pendergrass observed: “With climate
change and energy legislation pending on Capitol Hill, our research suggests that
more attention needs to be given to the existing perverse incentives for ‘dirty’
fuels in the US Tax Code.”
Rebounding stock markets and stronger oil prices have resulted in a noticeable
recovery in the value of the Alaska Permanent Fund which at the end of
September was valued at $33.1bn compared with a trough of $29bn in January
and a peak of $40bn last year. The good news has not translated into much joy
for ordinary Alaskans who were told on 23 rd September that this year’s dividend
to people living for more than 12 months in the state will be $1,305. This
compares with a payout of $2,069 for 2008, which was topped up with a further
$1,200 to cover higher energy bills.
Mexican President Felipe Calderón took the sensible step of replacing Jesus
Reyes Heroles as head of Pemex with former banker Juan Jose Suarez in early
September before the release of Pemex’s eight-month production figures. And
what a sad story those production figures have turned out to be. Production fell
during the period to 2.61m b/d from the year-ago figure of 2.82m b/d, with
output in August dropping to 2.54m b/d. Suarez has been given a mandate, and
the capital, to put the situation right but this is easier said than done.
The forecast so far: In January we projected that the price of West Texas
Intermediate would rise steadily through the year with prices expected to trade
near $70/barrel by the start of the final quarter of 2009. So far we have been
impressively accurate with WTI closing on 1 st October at $70.82. Our forecast
for an end-year price of $82.50 also looks achievable.
Outlook
Political uncertainty in the Middle East returned as a factor in supporting
higher oil prices and until the Iranian nuclear standoff is resolved this will
account for $3-$5 in the spot price. Although a stronger dollar briefly
pulled prices back under $70/barrel, an economic recovery remains the
main driving force in higher prices and as fresh data confirm an upturn,
prices will be heading towards $80/barrel before the end of the year.

10 | BNP Paribas Fortis North American energy monthly | October 2009 BNP Paribas Fortis/VM Group
Middle distillates
Gulf coast diesel ($/gallon)
1.82
1.80
1.78
1.76
1.74
1.72
1.70
1.68
1.66
01-Sep 10-Sep 21-Sep 30-Sep
Source: Reuters Ecowin
US pump diesel price ($/gallon)
2.68
2.67
2.66
2.65
2.64
2.63
2.62
2.61
04-Sep 11-Sep 18-Sep 25-Sep
Source: Reuters Ecowin
Nymex Heating Oil No.2 ($/gallon)
1.90
1.85
1.80
1.75
1.70
1.65
01-Sep 10-Sep 21-Sep 30-Sep
Oct-09 Nov-09
Source: Reuters Ecowin
News
• Sept 24 th : Pennsylvania received a $1.5m grant to overhaul the diesel engines
on the Champion Coal towboat in the Port of Pittsburgh.
• Sept 21 st : The Californian Air Resources Board fined waste hauler Athens
Disposal $270,000 for failing to inspect vehicles during 2005-06.
• Sept 18 th : US refiner Valero said it would delay a $250m expansion of its
refinery in St Charles, Louisiana until 2012.
• Sept 15 th : Construction work began on a 3.8m litre/year pilot jatropha
biodiesel plant in the Mexican state of Chiapas.
• Sept 14 th : Funding was approved to replace a further 483 diesel trucks in the
Ports of Long Beach and Los Angeles.
• Aug 28 th : US refining capacity increased by 100,000 b/d to 17.7m b/d during
the past 18 months, according to the Energy Information Administration.
Analysis
• Taste for biodiesel
Valero has got the taste of biofuel and wants more of it. Having successfully
turned the calamitous wreckage of the failed VeraSun ethanol plants into profit
centers, leading refiner Valero announced in mid-September it plans to set up a
joint venture with Darling International, a Texas food by-products recycler. The
venture will convert waste grease – mainly animal fats and used cooking oil –
into renewable diesel at a rate of 10,000 barrels a day or 135m gallons a year. At
a time the broader refining industry is suffering pinched profit margins, Valero
is pushing into new areas that might offer brighter prospects in a more buoyant
economy. Even though Darling and Valero have applied for a government loan
guarantee for the venture, the two companies are optimistic about the synergy of
the scheme that gives Darling an outlet for its animal by-product waste and
allows Valero to bring its refining expertise to another part of the renewable
fuels market.
The US Navy took a further step forward in diversifying its jet fuel supply in
early September by awarding a contract to Montana renewable fuel company
Sustainable Oils to supply it with 40,000 gallons of camelina-based jet fuel. The
fuel will be studied as part of the Navy’s certification program of alternative
fuels and if successful it will herald a breakthrough for camelina producers in
the US. A distant relative of canola, camelina is the latest hot thing in biodiesel
research. Planted in March and harvested in late July, camelina produces small
seed pods about the size of a pea but which contain about 35% oil. With its
origins in northern Europe where it is known variously as gold-of-pleasure, false
flax, or German sesame, camelina has transferred well to the US Midwest where
low rainfall does not impact much on its growth. Sustainable Oils, which is a
joint venture between Seattle-based Targeted Growth and Green Earth Fuels,
started its camelina seed breeding program in 2005 and has conducted more than
140 trials over the past four years, making it the largest camelina research
organizer in the US. Scott Johnson, president of Sustainable Oils, said: “Our
camelina-based bio-jet fuel has already performed as well as its petroleum
counterparts in aviation tests involving a Boeing 747-300. We’re expecting
similar performance with different, and even more demanding aircraft.” The
Navy contract includes an option to supply a further 150,000 gallons of camelina
fuel for testing.
Outlook
The recent run-up in retail diesel prices hit a brick wall in September as
demand eased and inventories remained high. No surprise then that the
average national price of the fuel slipped 7 cents to $2.60/gallon. But by
early October, New York Harbor ultra-low sulfur diesel for November
delivery was quoted in Nymex spot trading rebounded at $1.86/gallon, a
6-cent rise in four weeks.

BNP Paribas Fortis/VM Group October 2009 | BNP Paribas Fortis North American energy monthly | 11
Gasoline
Nymex RBOB gasoline ($/gallon)
1.90
1.85
1.80
1.75
1.70
1.65
1.60
01-Sep 10-Sep 21-Sep 30-Sep
Oct-09 Nov-09
Source: Reuters Ecowin
US pump gasoline ($/gallon)
2.68
2.67
2.66
2.65
2.64
2.63
2.62
2.61
2.60
04-Sep 11-Sep 18-Sep 25-Sep
Source: Reuters Ecowin
US gasoline stocks (million barrels)
250
230
210
190
170
150
Oct-08 Dec-08 Mar-09 Jun-09 Sep-09
2008/2009 2007/2008
2006/2007
Source: Reuters Ecowin
News
• Sept 23 rd : The US Environmental Protection Agency filed a lawsuit against
ethanol producer Midwest Renewable Energy for excess CO 2 emissions.
• Sept 22 nd : Nasdaq stock exchange officials threatened to delist Pacific
Ethanol unless its share price rises above $1 by next March.
• Sept 22 nd : Jamaican Energy Minister James Robertson said only gasoline with
a 10% ethanol blend will be sold in the country from November.
• Sept 21 st : More than 70 Baltimore police patrol cars were put out of action
due to an unusually high concentration of ethanol in their fuel supply.
• Sept 15 th : Sunshine Gasoline paid $18m for 35 Shell gasoline stations in
Florida.
• Sept 14 th : BP said it expects biofuels to take a 25% share of the US gasoline
market by 2030.
• Sept 4 th : Global Energy Holdings revealed it had sold its mothballed ethanol
plant in Blairstown, Iowa to waste recycler Fiberight.
Analysis
• More cash for hybrids
Having already bailed out some of the largest carmakers in the US, the federal
government shifted its sights in September to funding some innovative car
designs that will make a sizeable contribution to cutting gasoline use. Energy
Secretary Steven Chu produced the goods for Fisker Automotive with a huge
$528m conditional loan to develop two lines of plug-in hybrids which will save
an estimated 800m gallons of gasoline and offset 8Mt of greenhouse gas
emissions by 2016. At the core of Fisker is the $88,000 luxury four-door Karma,
which will receive $169m in funding to prepare it for its launch next summer.
Although final assembly of the Karma will be carried out overseas, more than
65% (based on cost) of the parts required for Karma will be sourced from US
suppliers. Fisker has also received a chunkier $359m to develop the cheaper
($39,000) family sedan called the Nina. Annual sales of this plug-in hybrid,
which will be manufactured in the US, will be between 75,000-100,000 vehicles,
according to Fisker. Roll-out of the Nina is planned for 2012. Prior to the Fisker
announcement, federal funding for alternative technology vehicles had been
principally directed towards larger manufacturers and Tesla.
Sharply higher gasoline prices last year had only a marginal impact on driving
habits of American motorists, according to data released by the US Census
Bureau. Its latest American Community Survey Data, published in mid-
September, showed that the percentage of workers who drove alone to work
decreased only slightly from 76.1% in 2007 and to 75.5% last year. This
represented an estimated 108.7m motorists compared with 106m in 2007. The
0.6% decline in motorists driving by themselves to work means more workers
were opting for carsharing which increased from 10.4% in 2007 to 10.7% in
2008. The driving pattern is not uniform across the country. In fact, in 12 states,
80% or more of workers drove alone in 2008 with the trend most noticeable in
southern states. In just three states, (Alaska, Hawaii, and New York) and the
District of Columbia, less than 70% of workers drove alone in 2008. Whereas
owner-driver commuting is still the dominant form of transport, the number of
people using public transport as a means of getting to work finally hit the 5%
level for the first time. The rate of uptake on public transport typically increases
by 0.1% annually.
Outlook
We were expecting higher retail prices for gasoline in September but they
failed to materialize because inventories remained high for most of the
month and crude oil prices lost their impetus. Instead, Nymex trading in
early October saw New York Harbor RBOB gasoline for November regain
some lost ground to show a 4-cent month-on-month fall to $1.76/gallon.

12 | BNP Paribas Fortis North American energy monthly | October 2009 BNP Paribas Fortis/VM Group
Steam coal
Nymex Central Appalachian coal ($/ton)
52
51
50
49
48
47
46
45
44
43
42
01-Sep 10-Sep 21-Sep 30-Sep
Oct-09
Source: Reuters Ecowin
HWWA coal index (2000 = 100)
260
258
256
254
252
250
248
Nov-09
01-Sep 10-Sep 21-Sep 30-Sep
Source: Reuters Ecowin
News
• Sept 23 rd : The Tennessee Valley Authority said it would close some of its
oldest coal-fired power plants.
• Sept 15 th : The US Mine Safety and Health Administration awarded grants
totaling $500,000 to fund training programs in six organizations.
• Sept 8 th : The US Environmental Protection Agency released a survey of 584
coal ash sites in 35 states.
Analysis
• EPA returns to the mountaintop
The increasingly controversial practice of mountaintop mining returned to the
political agenda in September with the Environmental Protection Agency (EPA)
ordering the suspension of 79 mining permits in Appalachia pending further
review. The freeze was announced on 11 th September and immediately drew
condemnation from Hal Quinn at the National Mining Association for the
damage it will inflict on “a weak economy struggling to recover in the worst
recession in post-war history.” Quinn questioned the right of the EPA to impose
its own process and criteria for reviewing coal mine permits that are the
responsibility of the Army Corps of Engineers. A fortnight later, the EPA
announced without much fanfare that it was setting up an ad hoc panel under the
guidance of its Science Advisory Board to produce an assessment of the
ecological impact of mountaintop mining and subsequent valley-fill of displaced
debris. In a background note in the Federal Register, the EPA said: “Recent
published scientific information reveals that mountaintop mining and valley-fill
operations in Southern Appalachia may be linked to degraded water quality and
adverse impacts on in-stream biota.” The priority for the EPA is establishing the
impact of mountaintop mining on the environment without much consideration
of consequences to human activity in the region. The EPA stressed that
“cultural, aesthetic and human health impacts that may be associated with this
mining technique are not part of the scope of this current assessment.”
Trailblazing tests of carbon storage kicked off in Appalachia in early September
when Consul Energy, West Virginia University and the National Energy
Technology Laboratory (NETL) started a two-year trial of injecting carbon
dioxide (CO 2 ) into an unmineable coal seam. Aims of the first-of-its-kind field
trial include monitoring the point at which surrounding coalbed methane and
water resources become contaminated by the CO 2 . Costing $13m, the trial is
located in Marshall County, West Virginia because the area has typical
Appalachian topography and geology. As part of the test, researchers drilled
injection wells at five locations on a 200-acre site and plan to inject CO 2 at a rate
of about 27 tons/day at a pressure of up to 700 pounds per square inch. The
injection will be stopped when either 20,000 tons of CO 2 have been stored or the
coalbed methane from peripheral or overlying wells becomes polluted with CO 2.
The battle over the controversial Sithe Global Desert Rock coal-fired power
station in New Mexico continues to provide a bonanza for the legal profession
with the latest courtroom twist prompting a further review by the Environmental
Protection Agency. Governor Bill Richardson summed up the situation: “We
have long argued that the Bush Administration was wrong not to look at harmful
greenhouse gas emissions in issuing this permit. I have full confidence that the
EPA will do the right thing the second time around.”
Outlook
Lower coal prices have filtered through to the spot market as power
demand eases and coal stockpiles remain stubbornly high. Higher priced
grades such as Central Appalachia were fetching $52/short ton in
September, but expect a 10% drop in spot prices during this month. Lowerpriced
grades will prove more resilient in the short term.

BNP Paribas Fortis/VM Group October 2009 | BNP Paribas Fortis North American energy monthly | 13
Natural gas
Nymex Henry Hub natural gas ($/MMBtu)
6.00
5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
01-Sep 10-Sep 21-Sep 30-Sep
Oct-09 Nov-09
Source: Reuters Ecowin
Nymex propane natural gas ($/gallon)
1.00
0.99
0.98
0.97
0.96
0.95
0.94
0.93
0.92
01-Sep 10-Sep 21-Sep 30-Sep
Oct-09 Nov-09
Source: Reuters Ecowin
US natural gas in underground storage
(billion cubic feet)
4,000
3,500
3,000
2,500
2,000
1,500
1,000
Oct-08 Dec-08 Mar-09 Jun-09 Sep-09
2008/2009 2007/2008
2006/2007
Source: Reuters Ecowin
News
• Sept 30 th : TransCanada said it plans to build C$1.2bn (US$1.1bn ) 900 MW
natural-gas powered plant near Toronto.
• Sept 24 th : Chesapeake Energy said it will receive $588m for half of its Barnett
Shale gas pipelines network in North Texas through a joint venture with
Global Infrastructure Partners.
• Sept 17 th : Kinder Morgan and Energy Transfer won federal approval to
expand capacity on their 507-mile Midcontinent Express natural gas pipeline.
Analysis
• Parnell knocks heads together
“Don’t expect any production incentives or generous royalty arrangements until
a deal is struck with your competitors.” That was the message Alaska Governor
Sean Parnell spelled out for TransCanada and ExxonMobil in mid-September as
he tried to steer two competing natural gas pipeline projects into closer
cooperation. Faced with the prospect of having to pay up to $850m even if a
pipeline is not built, Parnell urged a “commercial alignment” between
TransCanada and the rival Denali project partners (BP and ConocoPhillips)
although he stopped short of calling for a single unified pipeline. TransCanada is
planning to hold an open season six months from now, during which it will
solicit producers’ interest in the line, but gas producers are unlikely to commit to
the pipeline unless they know what they will have to pay the state. Although
Parnell is emerging as a more industry-sensitive governor than his predecessor
Sarah Palin, he has thrown down the gauntlet to the pipeline companies, and
looks prepared to do battle if necessary.
The price of natural gas might be snake-belly low, but the industry has decided
the best way to regain its fortunes is to organize an $80m advertising and
lobbying campaign to remind America what a good job it is doing. Aiming its
advertising dollars initially at power blocs inside the beltway, the industry group
America’s Natural Gas Alliance (Anga) showed in September that it knows how
to trot out a range of statistics. For instance, the natural gas industry, as
measured by its value added, has a direct economic impact of $170bn on the US
economy, it employs 1.3m directly and indirectly in all aspects of production
and distribution, which in turn creates a further 1.5m jobs in the broader
economy. Direct employment in the industry has increased steadily over the past
three years from 517,000 in 2006 to 622,000 last year. As comforting as these
numbers are, the real purpose of the Anga campaign is to raise the industry’s
profile during the drafting of the proposed Senate version of legislation on
climate change.
If you are ever stuck in an elevator with either T Boone Pickens and Larmar
McKay, you will leave it convinced of the long-term attractions of natural gas.
McKay, as head of BP Americas, had a much larger audience at a New York
energy conference in late September where he enthused: “Natural gas has the
greatest potential to provide the largest carbon reductions at the lowest cost
using technology that is available today.” Ignoring for a moment the fact that BP
is one of the largest producers of natural gas in the world, with average daily
output of 8.67bn cubic feet in H1 2009, Lamar calculates that about 30% of the
emissions reductions targets set out in current congressional legislation could be
achieved by a switchover to natural gas.
Outlook
Bulls in the natural gas market will have you believe that a price of
$6/MMBtu is not far down the line. For those who are learning to cope with
prices of $4/MMBtu, this will give some encouragement. By early October,
the Nymex November contract was trading at $4.46, adding substance to
our earlier forecasts that a rebound in gas prices is long overdue.

14 | BNP Paribas Fortis North American energy monthly | October 2009 BNP Paribas Fortis/VM Group
Power
News
• Sept 28 th : Canadian Hydro bought the rights to develop a 4,400 MW offshore
windfarm in Lake Ontario from Wasatch Wind. No terms were disclosed.
• Sept 17 th : BrightSource Energy said it has abandoned plans to build a
controversial solar power plant in the eastern Mojave Desert.
• Sept 17 th : Sempra Energy bought a half share in BP’s 200 MW Fowler
Ridge 2 windfarm in Indiana.
Analysis
• EPA gathers its carbon data
From next New Year’s Day, 10,000 industrial facilities in the US will have to
collect data on greenhouse gas emissions and submit the information to the
Environmental Protection Agency (EPA). “This is a major step forward in our
effort to address the greenhouse gases polluting our skies,” said EPA
Administrator Lisa Jackson. The new program, details of which were announced
in late September, will cover about 85% of the emission sources in the US and
will be an important stepping stone in creating a nationwide verifiable databank
to combat climate change. The data will also allow individual businesses to track
their own emissions, compare them with similar facilities elsewhere in the
country, and provide guidance on identifying cost-effective ways to reduce
future emissions.
Market manipulation is one of those things that can be easy to suspect but
difficult to prove. Well, the Federal Energy Regulatory Commission (FERC)
went out of its way in mid-September to dispel any doubt that it would pursue
parties involved in the practice when it approved a record $30m settlement
against Energy Transfer Partners (ETP) over allegations that it had manipulated
physical wholesale natural gas prices at Houston Ship Channel over a two-year
period starting in 2003. Under the settlement, ETP will pay a $5m civil penalty
and establish a $25m fund to pay alleged unjust profits to entities that file claims
within a 60-day period after publication in the Federal Register. Any funds left
over after that period will be paid to the US Treasury. Sounding like a vintage
TV crime-fighter, Norman Bay, director of FERC's Office of Enforcement, said
his agency would “investigate, punish and deter manipulation of the energy
markets.”
Since its inception in 2007, the annual GridWeek conference on the future of the
smartgrid has become an essential venue for policymakers, regulators and
utilities alike. This year’s gathering was no exception with Energy Secretary
Steven Chu giving the keynote speech and announcing $144m in government
funding for training a new generation of grid workers. Of the total, $40m will be
available to develop training programs devised by utilities, universities, trade
schools and labor organizations, with a further $60m set aside to actually train
new employees and retrain existing staff about the use of the smartgrid. On top
of this, an additional $44m has been earmarked for training within state public
utility commissions. The government message to this conference was that the
smartgrid had already become an essential part of federal policy aspirations and
that it was prepared to invest heavily to bring it about. With 1,500 delegates
from 22 countries, the conference looked at early smartgrid applications in
Texas, Colorado and California, leaving few doubts that the US has already built
up an enviable lead in this new grid development.
Outlook
The upturn in the economy and the improved prospects of the power sector
are evident if you want to look for them. With the federal government
prepared to pump money into power infrastructure, private investors will
inevitably follow. Next year will prove to be an important watershed.

BNP Paribas Fortis/VM Group October 2009 | BNP Paribas Fortis North American energy monthly | 15
Nuclear
Uranium (U 3 0 8 ), 2007/2008
(spot price, $/pound)
60
55
50
45
40
Oct-08 Dec-08 Mar-09 Jun-09 Sep-09
Source: Reuters Ecowin
News
• Sept 25 th : Canada agreed a nuclear cooperation pact with Kazakhstan.
• Sept 21 st : US Senator Lamar Alexander called for the building of an
additional 100 nuclear power plants within 20 years.
• Sept 16 th : The US signed a nuclear energy research and development pact
with South Africa.
• Sept 16 th : Saskatchewan Premier Brad Wall expressed concern over the high
costs of any nuclear project for the Canadian province.
• Sept 11 th : The US Nuclear Regulatory Commission (NRC) authorized
security personnel at nuclear power plants to carry machineguns.
• Sept 11 th : Bruce Power fired 80 employees at its Ontario nuclear plant for
inappropriate use of the internet.
• Sept 8 th : Fronteer Development said its proposed Michelin uranium project in
Labrador was capable of producing 3,300 tonnes of uranium oxide a year.
• Sept 2 nd : The NRC reached a cybersecurity pact with the Federal Energy
Regulatory Commission for improving information sharing during
emergencies.
Analysis
• Chu emerges as nuclear ally
From being an agnostic when it comes to nuclear power, Energy Secretary
Steven Chu is quietly emerging as the most influential ally of the industry within
the Obama administration. The best evidence of this emerged in late September
when Chu revealed he will lobby for additional federal loan guarantees worth
billions of dollars to the nuclear industry. Current loan guarantees amount to a
maximum of $18.5bn, which would be sufficient to remove the financial
uncertainty in up to five new nuclear power plants. This is in stark contrast to the
18 license applications being considered by the Nuclear Regulatory Commission
for new plant construction. Although Chu dismissed the idea of underwriting a
new fleet of up to 100 new nuclear plants, he indicated that funding might be
available for a further five – in other words a doubling of the current scale of
loan guarantees. Chu’s conversion to the nuclear cause may have more to do
with politics rather than science, as he has been focusing on the longer-term goal
of climate change legislation. He realizes current legislation being drafted in
Congress will only find support from some leading republicans like former
presidential candidate John McCain if nuclear power is included in the equation.
Chu is also believed to be putting pressure within the government to expedite the
creation of a panel to agree a long-term solution to the nuclear waste issue.
Chu’s reputation as a champion of nuclear power was given an additional boost
earlier in the month when he announced that $40m in federal support will be
available to support design and planning work for Next Generation Nuclear
Plants. He said this pump-priming exercise will help bring about a technology
that “holds the promise of safe, cost-effective, zero-emissions energy for major
US industries – like petroleum, plastic and biofuels producers – and allow them
to reduce carbon dioxide emissions, limit their need for fossil fuels, and become
more competitive.”
Outlook
US nuclear industry executives should be able to sleep in their beds easier
this month following a raft of reassuring government announcements in
September. Tangible evidence of firm orders and a more realistic licensing
phase will add weight to the belief that what George Bush set in motion five
years ago might actually happen. Meanwhile, the price of uranium oxide
slipped back a further $3.25 to $42.75/lb during the month – suggesting that
pent-up demand has yet to make itself felt in the spot market.

16 | BNP Paribas Fortis North American energy monthly | October 2009 BNP Paribas Fortis/VM Group
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BNP Paribas Fortis/VM Group October 2009 | BNP Paribas Fortis North American energy monthly | 17
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18 | BNP Paribas Fortis North American energy monthly | October 2009 BNP Paribas Fortis/VM Group
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