Editor’s note: This essay wascompiled from Don Reynolds’keynote speech at the 2010PESA Annual Meeting.

In order to give a soundeconomic analysis, you have toask yourself one question:“What’s really going on in theworld today?” But, before I getto that, I’d like to deliver thepunch line in the beginning. Idon’t think anything so

succinctly describes my personalfeeling toward the economicenvironment as this:As aninvestor, I am 100 percent all in.

Recovery

Last year, we had a horriblehangover and were trying towork our way out of a crisis. Wewent from “how bad is it going

Volume 64, Number 2 May 2010 www.pesa.org

PESANewsIN THE NEWS

PESA Chairmen’sPlanning SessionJune 24, 201011:00 a.m. to 1:00 p.m.IntercontinentalHotel,Houston

Oil 101Oct. 25-26, 20108:00 a.m. to 4:30 p.m.NorrisConferenceCenter atCityCentre,Houston

FFoorr mmoorree iinnffoorrmmaattiioonn oonntthhiiss oorr aannyy ootthheerr PPEESSAA eevveenntt,,ccaallll ((771133)) 993322--00116688..

EVENT CALENDAR

Annual Meeting 2010

Economy, stock markets to rebound for near-term growth

PESA Elects Officersat Annual Meeting

CChhaaiirrmmaannBill Coates, Schlumberger

VViiccee CChhaaiirrmmaannJohn Gremp,FMC Technologies, Inc.

11sstt VViiccee PPrreessiiddeennttChristopher E. Cragg,

Oil States International, Inc..IImmmmeeddiiaattee PPaasstt CChhaaiirrmmaann

Robert Workman, National Oilwell VarcoPPaasstt CChhaaiirrmmaann

Galen Cobb, HalliburtonTTrreeaassuurreerr

James Renfroe, Wood Group Well Support

SSeeccrreettaarryyPaul Butero, Baker Hughes, Inc.GGuullff CCooaasstt DDiissttrriicctt--TTeexxaass

Joe Winkler, Complete Production Services, Inc.GGuullff CCooaasstt DDiissttrriicctt--LLoouuiissiiaannaa

Gary Halverson,Cameron Surface SystemsMMiidd--CCoonnttiinneenntt DDiissttrriiccttPaul Coppinger, Circor

International, Inc. - Energy GroupMMeemmbbeerrsshhiipp

Charles S. Currie, SchlumbergerEExxpplloorreerrss ooff HHoouussttoonnCharles E. Jones,

Forum Oilfield Technologies, Inc.EEmmeerrggiinngg LLeeaaddeerrss LLiiaaiissoonn

Bob Potter, FMC Technologies, Inc.EEnneerrggyy EEdduuccaattoorrss

Pat Bond, Smith Drilling & Evaluation

Oil in for strongrecovery; gas tomaintain $5

� See Economy, Page 3

Oil is poised for a strong andlong-term recovery, while gaswill hover at current rates, saysMarshall Adkins, Managing Director for Oilfield Services atRaymond James & Associates.

Adkins forecasts that oilprices will move steadily higherwith prices averaging more than$100 over the next five years onvery strong fundamentals.However, the oil to gas pricedisconnect will continue for atleast the next 3 years and asmuch as 5 years with gas pricesaveraging $5 mcf—but $5 gas,he says, is not a disaster.

Demand Drives Oil

The international side of theindustry is driven by oil, hesays. Historically, analysts consulted oil inventories forpricing data, but that correlationhas fallen apart. Crude pricestoday are driven by demand.

One hundred eighty members andspouses registeredfor the 2010 AnnualMeeting—the themewas “ManagingThrough Global andEconomic Uncertainty.”The meeting featured six leadingindustry speakers ontwo panels, eminenteconomist DonReynolds, body language expert JanHargrave, andmore. Planning forthe meeting was ledby incoming PESAChairman Bill Coates(Schlumberger).

� See Markets, Page 9

PPEESSAA CChhaaiirrmmaannBill Coates, Schlumberger

PPEESSAA VViiccee CChhaaiirrmmaannJohn Gremp, FMC Technologies, Inc.

PPEESSAA 11sstt VViiccee PPrreessiiddeennttChristopher Cragg,

Oil States International, Inc.

PPEESSAA PPrreessiiddeennttSherry A. Stephens

PPEESSAA VViiccee PPrreessiiddeennttMichael Perini

PPEESSAA DDiirreeccttoorr ooff CCoommmmuunniiccaattiioonnssChris Evans

PESA, Petroleum Equipment Suppliers Association, and the PESA logo are allregistered marks of the Petroleum Equipment Suppliers Association.

PPEESSAA NNeewwss iiss ppuubblliisshheedd bbyy::Petroleum Equipment SuppliersAssociation1240 Blalock, Suite 110Houston, Texas 77055Phone: (713) 932-0168Fax: (713) 932-0497© 2010, PESA

2 PESA News EDITORIAL

I’m no longer ‘slightly’ optimisticIf you haveideas for thecoming year,give us a call

Those of you who know meare aware that one of the things Ilike to do is talk about what’sgoing on in the business.

Last fall, I gave a presentationat a PESA luncheon on where Ifelt the industry was headingafter the downturn. At the verylast minute, I changed the title ofmy presentation from “An Optimistic View of 2010” to “ASlightly Optimistic View of2010.” I was a little nervousabout the coming year.

I’m going to retract my“slightly optimistic” comment.Revenue in the U.S. and Canadawas obviously higher than lastyear. And the rig count—one ofthe reasons that I was onlyslightly optimistic—was a littlehigher than we had forecast.

But that’s not why I’m excitedabout the last half of 2010 andmoving forward. We are in themidst of a fundamental marketshift in our businesses. For thefirst time in both the U.S. andCanada, we have more rigsdrilling horizontal wells thanconventional.

This is not a temporary shift.This is a fundamental and permanent shift. This is a shiftthat I think we can look backand liken to the shale plays coming to prominence—they arrived more suddenly than anyone expected in terms of production, technologies, techniques and the ways inwhich the industry reacted tothat very dramatic change.

We as suppliers in the industrybear a large burden of the research and development fornew products and services. Ithink that in horizontal drilling,we have a lot of opportunity forinnovation. It’s an area in whichI don’t believe we’ve found themost efficient means of deliver-ing maximum value in terms ofextracting hydrocarbons.

The horizontal trend is real,

it’s permanent in the U.S., andit’s eventually going to be exported in a major way into therest of the world. ExxonMobilannounced the world’s longestextended reach well in April,which is the higher end of thismore general trend, but confirmsthe issue of using horizontaltechniques for better extraction.

It’s an absolute game changerin the way we as service andmanufacturing companies thinkabout how we plan the future.

Perhaps you’re thinking,“what am I going to do in myproduct development portfoliosor how am I going to service thismarket in the years to come?” Iwould encourage you to thinkabout the horizontal world goingforward.

Future of PESA

As Robert Workman (NationalOilwell Varco) summarized inthe PESA Annual Report, PESAnot only survived 2009 but actually did extremely well—membership is up and the financial situation has franklynever been better.

We have a few new programsthat are relatively young thathave gotten traction—programsin which if you’re not alreadyinvolved, you should be.

One of these is the Emerging

Leaders program, which wasstarted with a lot of effort fromBob Potter (FMC Technologies).At the time there were a fewcompanies—Schlumberger wasone—that were skeptical aboutthe program’s viability.

The Emerging Leaders committee has turned out notonly to be viable, but a tremendous success. And I thinkif there’s one thing that willguarantee the long-term futureof this organization, it’s theEmerging Leaders committee.Through them, we’ve managedto expose many members of ourcompanies’ younger managementto PESA.

If your company does nothave people in the EL program, Iwould encourage you to seekout Ed Hemphill (GE DrillingSystems), the chairman of theEmerging Leaders Committee,or Chris Evans at the PESA of-fice and get involved. It’s a fan-tastic organization, and a greatway to bridge the generationalgap that many of us feel exists inthe industry.

Finally, I want to thank themembership for entrusting mewith this great role. PESA is awonderful organization, and I’lllook forward to meeting you atour events.

—Bill CoatesPESA Chairman

Thank you to everyone whoattended PESA’s recent annualmeeting in Naples, Florida.

Our program committee puttogether an outstanding program and I believe everyoneenjoyed having the opportunityto see old friends and make afew new ones. One of the greatthings about a PESA AnnualMeeting is we always havesome new members attendingeach year.

Thanks also to the companieswho helped to sponsor ourmeeting. The contributors aredisplayed in our newsletter andwe are very grateful for thesupport they give us.

Each year’s annual meetingmarks the end of a term atPESA and the beginning of anew one. We completed a verybusy and productive year andwe are grateful to last year’sChairman, Robert Workman(National Oilwell Varco), andthe members of the ExecutiveCommittee and CommitteeChairmen who dedicated agreat deal of time and effort toPESA activities and programs.

PESA’s Incoming Chairman,Bill Coates (Schlumberger),has already set up a planningsession for this term’s industryvolunteers.

If you have ideas for programs for the coming year,please give us a call. PESA is amember-driven organizationand we attempt to focus on the issues that are important to you.We thrive on your input and appreciate your ideas.

—Sherry StephensPESA President

Bill Coates

3PESA News2010 ANNUAL MEETING

to get,” to “when will the recovery begin,” to“we’re in recovery.” At the low point, theU.S. had negative 3 percent economicgrowth, and we’re currently running a positive 5.8 percent growth. The horriblemess of the housing sector has bottomed andstabilized. Banks are making money, andmore importantly, they’re raising newmoney to the tune of $500 billion. And $240billion of the much-maligned TARP package, which totaled $350 billion, hasbeen paid back with a $19 billion profit.

So, what has changed and what have welearned? I think we learned that the financialcenter of the U.S. moved from New YorkCity to Washington, D.C. I think we learnedthat economic power has shifted from thedeveloped countries to the developing countries—developed countries are now netborrowers, and developing countries are netlenders.

I think we learned that classic revolutiontheory is alive and well—it goes somethinglike this: the upper class goes to excess,alienates the middle class, who then allywith the lower class to create significantchange. It’s safe to say that’s what happenedwith the last set of elections. I think welearned that it’s not necessary to take over anindustry if the government can pass severalthousand new rules and regulations to control an industry. I think we learned that ifyou borrow too much money, it can causebig problems.

The Cause

It wasn’t long ago that the basic formulafor buying a home was that you can’t get aloan above three times your salary. In somemarkets a few years ago, banks were givingloans at up to nine times annual income. Itwent like this—Fred wants to buy a home,and is convinced that he can afford a homethat is realistically beyond his means. Thebank gives Fred a special 2-percent interest-only loan, which the banker sells toa larger bank. The larger bank is happy tobuy the loan because in 3 years, it’s nolonger a 2-percent interest-only loan, it’s a 7-percent 30-year amortization mortgage. Thebank re-sells Fred’s and similar mortgages tohedge funds. The hedge funds are able toborrow enough to buy $40 billion in mortgages on $1 billion in capital. The fundlooks for someone to guarantee, and AIGobliges. Investment bankers then re-sellthese 7-percent interest yield bearing AAArated American mortgages to internationalbanks, who then put them in their moneymarket fund. Business is great for everyone.

Three years go by, and Fred’s payment adjusts from $1,500 to $3,000 a month. Hecan’t refinance the house, can’t sell it, and so

he’s forced to give up the house. The deadmortgage bounces from the mortgager to theguarantor, and then other similar mortgagesstart to devalue, and a vicious cycle begins.There are thousands of Freds and AIG takesa $160 billion hit on mortgages. The moneymarket funds take a hit, and the whole system unravels.

Today, the real estate market has bottomed,but 22 percent of all homes in America arestill worth less than their loans. Home loansare back to around 3.4 times annual income.Hedge funds will be regulated more. And wewake up to find that some remarkable thingshave occurred with the tax system. The top 1percent of earners pay 40 percent of taxes.The top 10 percent of earners pay 60 percentof taxes. The top 50 percent of earners pay100 percent of taxes. The other 50 percentpay nothing, and of those 50 percent almostthree-quarters get cash back.

Asia and Debt

The U.S. is no longer the world’s primaryengine of economic growth. This year,China’s economy will grow by 8.2 percent;India by 8 percent; Indonesia by 6 percent,and Brazil by 5 percent. The U.S. will be up2.9 percent next year; the Euro-zone will be1.4 percent; and Japan 1.5 percent.

China is aware of its economic power.They’re sitting on $2 trillion of our debt—the U.S. has $6 trillion in debt overseas.China’s new car sales are up 53 percent, corporate profits are up 70 percent, three ofthe four largest banks in the world are basedin China, as are the top two largest insurancecompanies. China, who once sought all comers, are now more difficult to work with.There are policies in place to restrict foreigncompany growth in China.

But China has its problems, such as theworld’s most rapidly aging workforce, a fall-out from the “one child” policy. They realize

this will be a drain on government resources.Political repression is also reportedly on therise in China, and that’s a sign of weakness.They also have a real-estate bubble—the200 million-strong middle class makes$12,000 a year and is buying $150,000apartments, which have been overbuilt.

Back in the U.S., we have serious issueswith the federal budget deficit. Over the next10 years, the government will spend about$47 trillion, of which $9 trillion is borrowed.The deficit by 2020 will be $21 trillion. TheCongressional Budget Office says we canget out of this mess if we grow 4 percentGDP each year, but the historical average ofthe past 25 years is 2.5 percent. We can taxour way out, but we’d have to raise taxes byabout 60 percent. We can inflate our way outif we go 10 percent each year. The real answer is they will tax some, borrow some,and inflate some.

The Future

As I said, as far as the economy and thestock market, I’m fully invested. Here’s mytheory: From 1950 to 1966 the economygoes straight up. From 1966 to 1982 itmoves sideways and goes from 700 to 1,000five times. From 1982 to 2000, it’s straightup again. And from 2000 it goes from14,000 to 7,000, rallies back to 14,000 andback to 7,000. I think we’re beginning toemerge from a lateral-moving economy. Inthe near term, I’m a raging bull and have invested everything. The Dow Jones will getback to 12,000 and back off a little beforeelections. Eventually, we’ll work our way upto 14,000, and then all the bad things cometo roost and we come back down.

My view on energy is simplistic. We use25 barrels per person, India uses 2, andChina uses 0.8 barrels. As their demand goesup, so do prices. So for the long term, I’m allin.

ECONOMYContinued from Page 1

Robert Workman (National Oilwell Varco), Galen Cobb (Halliburton), and Bill Coates (Schlumberger)were among ten volunteers used by Don Reynolds to explain the causes for the economic crisis.

4 PESA News 2010 ANNUAL MEETING

He calls it the great gift—agift to the industry, the nationand the world.

Speaking of unconventionalhydrocarbons, Newfield Exploration President and CEOLee Boothby says that the gamehas truly changed.

“We’re in a different worldtoday—one that we couldn’t

conceive even a few years ago,”he says. “When you think thatwe have a chance to solve someof the problems that we’re confronted with as a nation, it’sexciting. The opportunity is immense, it’s real, it’s here, andwe have a 100 year-plus supply.”

But, he says it’s important forthe entire industry to get on thesame page and make sure thatunconventionals are recognized.

“This gift will fuel our future.It will win in the marketplace,but we’ve all got to do our partto ensure the message is outthere.”

More Oily Plays

Newfield’s portfolio is heavilyweighted toward natural gaswith 70 percent gas and 30 percent oil. The company isnow, however, aggressivelyseeking “oily plays.” The company’s current oil projectsare in Monument Butte in Utah,Williston Basin in North

Dakota, and international projects in Malaysia and China.

“We produce 40,000 barrelsper day, but get 60 percent ofour revenue from oil assets,”says Boothby. “Over 90 percentof our reserves are onshoreNorth America. We’ve added500,000 acres in oily plays inthe past 6 months in SouthernAlberta Basin in Montana, theEagle Ford, and Deepwater Gulfof Mexico.”

The Woodford shale is Newfield’s foundational gasasset. They’ve drilled 300 wellsin the play, starting in 2006.

“Six years ago, there was lessthat 10 mcf coming out of thebasin, and last week we averaged 350,000 mcf per day,”he says. “Most acreage is heldby production, which means asan operator we have the abilityto speed up, slow down, or stopdepending on conditions in themarket.”

DDaayy 11

PPaannee

llU.S. E&P: Independents’ viewNewfield, Southwestern, Petrohawk share insight on domestic production

From left on stage: Richard Stoneburner (Petrohawk Energy Corporation), Lee Boothby (Newfield Exploration), Steven Mueller(Southwestern Energy), and moderator and Incoming PESA Chairman Bill Coates (Schlumberger).

Lee Boothby, President and CEO, Newfield Exploration.

Industry must unite for ‘great gift’ success

� See Boothby, Page 12

5PESA News2010 ANNUAL MEETING

There are unique challenges in building alarge-scale shale gas E&P, says RichardStoneburner, President and COO of Petrohawk Energy Corporation.

Much like the shale plays the companyseeks, Petrohawk’s evolution has been rapid.In mid-2006, they merged with KCS Energy,which included 10,000 acres in the Fayetteville Shale—the company’s firstforay into shale.

“We went into the Fayetteville as a secondor third mover and it was expensive,” saysStoneburner. “We accumulated positions inthe Haynesville and Eagle Ford in 2008 asfirst movers, but still had competition, so itwas expensive as well. When you work inshale gas you need to be clever, bold, aggressive, and have a lot of capital.”

For Petrohawk, much of the capital hasbeen raised through divestment of non-coreassets totaling $1.4 billion.

Today, the company holds 2.75 tcf ofproved reserves with 32 tcf of risked resource potential and about 340 million barrels of condensate or oil potential.

“We doubled proved reserves last year,”he says. “The asset base we have, particularly in the Haynesville and EagleFord, is top of the class for the reserve potential and is higher than anybody else inthose plays.”

The Finish Line

Many forecasters agree that the short tomid-term for natural gas prices will be relatively low, around the $4 to $5 range.

After discovering the Fayetteville shale,Southwestern Energy is looking to repeat.

Currently the thirteenth largest natural gasproducer in the U.S. with 1.2 bcf per day ofproduction, the company is looking beyondArkansas.

“The Fayetteville is the driver of everything we do, it’s 70 to 75 percent of allour work and we have about a $1.5 billionto $2.1 billion budget for the play,” saysSteven Mueller, President and CEO ofSouthwestern Energy. “But we have to replace the Fayetteville, and we think we’vecaptured it in New Brunswick, Canada.”

Southwestern is one of the most focusedE&P companies out there, says Mueller. Thecompany’s production is 99 percent gas andtheir E&P segment operates in Arkansas,Texas, Oklahoma and Pennsylvania.

“Our strategy is built on organic growththrough the drill bit,” he says. “From 2004to 2009, we’ve averaged over 40 percent annual production and reserve growth andannually replaced over 500 percent of ourproduction at a F&D cost of $1.46 per mcf.”

The company’s producing properties include 900,000 acres in the Fayetteville,150,000 acres in the Marcellus, and 100,000acres in east Texas. Management has increased market capitalization from $187million at year-end 1998 to approximately$14 billion today.

In Southwestern’s Fayetteville property,which is the equivalent of 1,400 squaremiles, the company first tried to make theplay work with vertical drilling, then re-started as horizontal.

“We’ve been learning over the past fiveyears,” says Mueller. “We’ve drilled 1,000wells, and know enough that we need 10wells per section, so 10,000 wells need to bedrilled at about 600 a year.”

They have reduced days to drill fromunder 17 days to 11—one was drilled in 4.5

days. In that time, lateral length has doubledand will increase another 1,500 feet in thenear future.

“We grew production by 50 percent lastyear, doubled reserves to 1.5 tcf, all whilemaintaining a flat drilling cost,” he says.“We anticipate participating in 650 to 680wells in 2010, 475 to 500 of which we planto operate.”

In New Brunswick, Canada, the companyholds exploration licenses for more than 2.5million acres within the Maritimes Basin.Work in the area began about a year ago.

“We look to be ahead of the game, to bethe first movers, to repeat the Fayetteville,”says Mueller. “We want to replace theFayetteville, and we don’t want to replace itwith lots of small projects.”

The principal targets are the conventionaland unconventional sandstone and shalereservoirs of the Horton Group. The company has a three-year initial explorationlicense to complete the work program withyearly rentals of $1.55 per acre. There areoptions for multiple five-year extensionleases and a maximum 12.5 percent royalty.

“The shale is 200 to 600 feet thick andmay have oil potential,” says Mueller. “Thenext three years and $47 million will all befor science—more magnetics, more seismic,and we’ll drill test wells toward the end.”

Southwestern has only to drill one wellper block to hold the lease—the blocks arehuge at around 60,000 acres, which equatesto 30 to 40 wells.

Finally, Mueller gave his take on the rigenvironment, rhetorically asking why the industry is adding rigs in a depressed pricemarket.

“The answer is there is a lot of drilling tohold acreage,” he says. “The average lengthleft is 3 to 4 years, and by our count you’dhave to run 550 horizontal gas rigs to holdthat on a risked basis. We’re at 600 today.”

Steven Mueller, President and CEO, Southwestern Energy.

SWN looking to repeat Fayetteville find

Shales are strongproducers, gettingbetter over time

Richard Stoneburner, President and COO, Petrohawk.

� See Stoneburner, Page 11

To see the future of energy,follow the money.

Energy follows GDP, saysPeter Coleman, Vice President,Americas, ExxonMobil Production Company.

“Energy is a fundamental partof economic growth and the twoare inextricably linked,” he says.“By 2030, Asia Pacific will have

the highest GDP of any region inthe world. The U.S. will growbut not at the pace that it hasover the past 25 years; Europewill slow as they work throughfinancial issues; the big growthis Asia Pacific, and it’s burdenedby Japan as their growth will benegligible.”

By extension, the big energygrowth area is Asia Pacific. Theregion will account for two-thirds of global energy demandgrowth by 2030. North Americanand European demand will remain essentially flat due togains in energy efficiency.

“Asia Pacific does not haveefficiency flow yet—they’re stillbuilding energy infrastructure,and not necessarily energy-efficient infrastructure,” he says.“Coal will be a major part of thegrowth, but oil and gas will increase as well. We need to expand all economic fuelsources to meet growing energydemand through 2030.”

Historically, the U.S. has been

the largest energy user in theworld at about 100 quadrillionBTUs per year. Today, Asia Pacific is the largest user at double the use of the U.S.

“By 2030, Asia Pacific will beby far the largest user at 300quadrillion BTUs,” he says.“This should be an opener forthe industry.”

The growth will be driven bypower generation and by far thegreatest contributor will be coal.However, Asia Pacific totalBTU use of oil and gas will mirror that of the U.S.

China’s drive for power generation is starting to affectthe regional economies and suppliers around China.

“That will affect our industry,particularly with the build-up ofactivities in Australia,” he says.“We’re vying for the same resources as the mining industryin Australia, which is the largestsupplier of coal into China.”

6 PESA News 2010 ANNUAL MEETING

DDaayy 22

PPaannee

llInternational oil: Supermajors’ viewExxonMobil, Total, Raymond James discuss evolving industry

From left: Marshall Adkins (Raymond James & Associates), Victor Obadiah (Total E&P New Ventures), moderator and PESAVice Chairman John Gremp (FMC Technologies, Inc.), and Peter Coleman (ExxonMobil Production Company).

Asia Pacific is the growth area for energy

Peter Coleman, Vice President, Americas, ExxonMobil Production Company. � See Coleman, Next Page

Oil and Gas

Global oil demand is expected to reach 90million barrels per day by 2030. While hesays that non-OPEC crude will continue tobe essential, the big question is OPEC.

“OPEC should be supplying about 28 million barrels a day and will need to growto 37 million by 2030,” he says. “The realityis that OPEC has found it difficult to growover the past 10 to 15 years.”

The industry also will reach a better gassupply and demand balance. Natural gasusage in the U.S. and Europe will be identical at over 60 bcf a day in demand, andAsia Pacific will be over 100 bcf a day.

“In the U.S., the big wedge of growth willbe unconventional,” says Coleman. “In theconventional mix there’s the Alaska gaspipeline, but overall there’s not a rosy forecast for conventional.”

LNG imports are the unknown, he says.Demand for LNG is currently about 175million tons per year, and by 2030 it will be430-plus million tons.

“We have capacity to take in about 10 bcfper day, but we took in 1.5—the LNG wentto Europe,” he says. “In Asia Pacific, gasusage was fairly small in the overall energymix, but the area will consume a large portion of total LNG supply.”

Business environment

ExxonMobil is positioned to get through anumber of business cycles, says Coleman.

“We’re an open weather sailor and wemake course corrections from time to time,but we’re sailing a big ship and can’t makelots of short course corrections,” he says.“Some competitors are re-evaluating theirnear-term business plans and are getting outof certain sectors—we’ll see if these bets arethe right ones.”

Financial markets are stabilizing but in away that a flight to quality is more evident,he says. The pace of economic recovery isuncertain, particularly in the U.S. as recov-ery is happening on a state-by-state basis.

“The supply and demand balance is linkedto economic recovery,” he says. “The recovery will be in two phases—a liquids recovery and slower gas-based recovery.”

In the meantime, ExxonMobil is committed to spending about $125 billion incapital investments over the next five years.About 22 percent will be spent in Canadaand about 15 percent in the U.S.

“The U.S. spend is principally onshore,though the current spending does not includethe XTO acquisition,” he says. “NorthAmerica remains attractive to us and I thinkit will attract us more and more, but it willcome down to opportunities.”

7PESA News2010 ANNUAL MEETING

Victor Obadiah, President and CEO, Total E&P New Ventures.

Total seeks partners for its mega-projects

COLEMANContinued from Page 6

Total is a truly global operator with apresence in nearly every corner of the globe.

The company is on a roll—last year theystrengthened their upstream position andportfolio, production is on schedule to increase, and reserves will build continuously over the next several decades,says Victor Obadiah, President and CEO,Total E&P New Ventures.

“Most of our projects take 6, 8, or 9 yearsbefore they’re done,” he says. “Moving forward we will expand our efforts to formpartnerships and joint ventures. These arebig projects and we like to have partners.”

An important development for Total is itsNorth American portfolio.

“Our company’s strategy in this regionhas evolved as a new focus,” says Obadiah.“We will continue to capitalize on the expertise of certain operators in the U.S.,who are now our partners. We’ve seen a significant increase over the past five yearsin our proved and probable reserves, withproportionate spending increases.”

Through New Ventures, Total signed a$2.25 billion partnership agreement withChesapeake Energy, which gives Total a 25percent stake in their portfolio. The agree-ment includes 300,000 net acres, 90 percentof which is in the core area of the BarnettShale. The agreement gave Total an imme-diate net production of 175 mcf per day.

Total entered into three other partnershipsof similar scale in 2009. They were awardedthe Halfaya field in Iraq with PetroChinaand Petronas, entered a field developmentagreement with Gas de France in Kazakhstan, and signed a partnership agreement in the Ahnet gas field in Algeria.

Total’s 2010 exploration budget is estimated at $1.8 billion providing an exploration risk potential of about 3.6 billion BOE.

“We renewed our resources base by enhancing our exploration portfolio in the

Gulf of Mexico, Cameroon, Guyana, Egypt,Norway, Azerbaijan, and Vietnam,” he says.“We will continue using joint ventures toexpand our resources while balancing thetype of upstream asset in the portfolio between OECD and non-OECD countries.We will continue in conventional, non-conventional, onshore, and offshore.”

Total began several major projects in2009. The Tahiti project in the Gulf of Mexico will yield 125,000 barrels a day;two projects in offshore Nigeria will yield225,000 barrels; the Qatar Gas II projectwith ExxonMobil began production in 2009and holds the record for the largest LNGtrain, and Yemen LNG began in October.

Obadiah says that Total’s investment levels for 2010 are intended to sustaingrowth objectives. The company expects$18 billion gross with upstream capturingalmost $14 billion.

Among the company’s major investmentprojects is Phase II of the company’s oilsands project in Canada, which is apartnership with ConocoPhillips. Total alsoowns 80 percent of the Laggan and Tormoregas fields in West of Shetland, U.K., alongwith the gas gathering infrastructure—Obadiah says it’s one of the country’slargest infrastructure projects in decades.

By 2014, he estimates that Total will produce 800,000 barrels of oil equivalentper day.

“Among our plans to get there is furtherdevelopment drilling in the Barnett Shale,which alone will provide 250 million cubicfeet per day with a significant increase inunproved reserves,” he says. “We’re alsoseeking a better balance between our conventional reserve portfolio and those thatrequire high technology extraction methods.The bottom line is that since 2004, we notonly have renewed our reserve resources,but also diversified that base from prioryears.”

Formal Night—The Annual Meeting wrapped upwith a black tie dinner.

Henry Cho (top left) entertainedthe crowd, including several bits onhis golf game with Peter Kinnear (FMC Technologies, Inc.).

Couples donned their finest at theevent. From above left to right: Bonnieand Jim Wright (Cameron); John andPatty Royall (Gulf Publishing / WorldOil); Paul and Belinda Coppinger(Circor International, Inc., EnergyGroup); John and Cindy Gremp(FMC Technologies, Inc.); and Brittand Martha Braddick (TIW).

8 PESA News 2010 ANNUAL MEETING—FRIDAY NIGHT

Thank you to our Friday night sponsors

9PESA News2010 ANNUAL MEETING

“As demand started to get ‘less worse,’we saw prices rally with the demand side,”says Adkins. “There’s no doubt demand willbe important in the long term—oil demandin the developed world has to go down toaccommodate the developing world. Chinaand India will be the key drivers.”

Non-OPEC supply declines will be a bigger driver of oil prices in the next fewyears.

“In the first part of the decade we hadphenomenal growth in non-OPEC, but nowthe direction is clearly moving downwardand will continue to do so,” he says. “Weare right at the point of peaking non-OPECcrude supply. By our numbers, in late 2009or early 2010 we will have had absolutenon-OPEC production peaking.”

The key driver is Russia. They had rapidgrowth the first half of the decade, declinedin 2008, bounced up again in 2009, andlikely will be up slightly this year, says Adkins.

“In 2011 and beyond we think Russia willbegin to see a gradual decline in their production,” he says. “Russia is facing whatthe U.S. faced in the 1970s, where we had4,000 rigs drilling, spending was up 20 fold,and production still fell by 35 percent.”

If Russia is left in decline, then the onlygrowing non-OPEC countries will beBrazil, Canada, and the Caspian.

He says that OPEC has done a great jobof managing around demand decline by cutting productions and maintaining prices.Moving forward, the market will focus onexcess capacity. However, Adkins feels thatOPEC’s stated excess capacity is largely anexaggeration—for example Venezuelaclaims 200,000 bpd surplus.

“If you haircut the stated capacity withwhat I think is the real world, you get downto a little less than 3 million barrels of excess capacity,” he says. “If demand returns to historical levels, which it appearsto be doing, you get demand growth of 1.5million to 2 million barrels per day eachyear. If you get no growth in OPEC, in twoyears you’re done and we’ll have a shortageof crude again.”

Overall, Adkins says that forecasting oilis fairly simple.

“Prices will move higher based on deteri-orating non-OPEC supply and falling excess OPEC capacity,” he says. “The market must eventually ration available oilby price, and that will begin within 2 to 3years.”

Natural Gas

The industry has shown that U.S. supplycan grow at $5 mcf, so there’s not a lot ofreason to be above $5, says Adkins. In

addition, LNG imports will surge above $5mcf as will gas to coal switching for utilities.

The reason is shale gas—the game haschanged.

“I was a permabull for a decade becausesupply was falling,” he says. “Now supplyis up sharply in the shales. Barnett wellswere twice as productive in 2006 as an average well, then three times as productivein 2007. And Haynesville wells are 10 timesmore productive.”

He says that the industry will see an expansion of horizontal drilling into alltypes of reservoirs.

“Private operators in the past nine monthshave gone from 20 percent horizontaldrilling to 50 percent,” he says. “The economics are much better and the shift ishere to stay.”

He added that while horizontal drilling iswhat everyone talks about, other thingsdrive lower cost. There was substantialhigh-grading in the market—the rig count is30 percent lower, so Adkins theorizes thatthe industry simply got rid of 30 percent ofthe worst wells.

“Service costs are also down 30 percent,and drilling efficiencies are about 20 percent faster,” he says. “Now you havewells that once took an $8 price to drill,now takes $4.”

He says that a lot of companies are

making money at $5 gas, and rig count is up65 percent.

“So why are companies drilling in a $4world? It’s the oily gas plays,” he says. “Pioneer had 20 mcf a day of gas and 2,000barrels of crude condensate, so it workseconomically.”

The U.S. has seen a huge increase inLNG import capacity. The country canbring in 15 bcf per day, but Adkins says itwon’t happen because there isn’t enoughsupply.

“When we net out global supply and demand issues for LNG, we think we’llhave a net 3 bcf per day more gas in the system than last year, and maybe a 1 to 1.5bcf per day will come here,” he says.“There will be an increase in LNG but itwill be price sensitive—we think gas will be$4.25 this year and $3.50 in the heat of thesummer. If gas were $6, it would be 3 to 4bcf per day.”

Demand also is picking up—industrialdemand has added .5 bcf per day with thesame increase in utilities.

“Coal to gas switching accounted forabout 2 bcf per day more demand last year,and if it goes above $5, it will switch back,”he says.

Finally, he says that the U.S. average rigcount will move higher in 2010, although itwill peak near May. The industry will notneed 2,000 rigs for some time.

MARKETSContinued from Page 1

Marshall Adkins of Raymond James & Associates says that a lack of excess capacity from OPEC—byhis count they have about 3 million barrels per day excess—will have markets rationing oil by pricewithin the next few years, placing oil prices north of $100 again.

The Ritz-Carlton Golf Resort,Naples—home to the PGATour Tiburon Golf Course—provided nearly perfectweather and a scenic Southern Florida backdrop forthe 2010 Annual Meeting GolfTournament.

Golf ChampsFirst Place (Score: 126)Bob Judge (GE Oil & Gas), JackMoore (Cameron), and JohnGremp (FMC Technologies, Inc.).

Second Place (Score: 128)Wayne Wallace (GE Oil & Gas),Larry Kerr (Gardner Denver),and Isaac Joseph (National Oilwell Varco).

Third Place (Score: 129)Barry Pennypacker (GardnerDenver), Haynes Smith (National Oilwell Varco), DonGreenlee (Oil States Industries),and Ron Callaway (Greene,Tweed & Co.).

Longest Drive (Men’s)Russ Laas (Hart Energy Publishing)

Longest Drive(Women’s)Bonnie Wright

(wife of Jim Wright, Cameron)

Closest-to-the-pin(Men’s)

Gary Stratulate (Axon Energy Products)

Closest-to-the-pin(Women’s)Bonnie Wright

10 PESA News 2010 ANNUAL MEETING—GOLF & TENNIS

Tennis TournamentLeft: Jerry Lastovica (Flexitallic) swingsaway at a volley.

Below: The final match pitted JerryLastovica and Danielle Mendes (wifeof Neil—Greene, Tweed & Co.) vs.Linda Newman (wife of Dan—NorrisProduction Solutions) and EricHollingsworth (Wells Fargo). The Newman / Hollingsworth team won.

Golf TournamentFirst Place

Second Place

Third Place

Thank youto our sports tournamentsponsors:

Stoneburner says that the company’s plan forweathering the next few years includes amid to late 2011 finish line.

“By 2011, we’ll have most of our acreageheld by production—we’ll have a flexibilityat that point that will be market-driven,rather than capture-driven.”

The company’s capital program is drivenby lease capture requirements. BecausePetrohawk is ahead of schedule in its Haynesville lease capture program, Stoneburner says the company was recentlyable to reduce its budget by $100 million.

“We have some nice acquisitions of highcondensate yield and oil potential in theEagle Ford play, and with that we wanted tore-allocate some of our gas budget to a liquid style portfolio,” he says. “Our modeling suggests we’ll have $50 millionmore revenue with the new budget.”

He added that since Petrohawk’s budget isdictated by lease capture, hedging is vital.For 2010, the company is hedged at 70 percent with a $5.85 floor.

The Right Spot

If you do your homework and find theright position, it’s hard to pay too much foracreage in the large shale gas plays, saysStoneburner.

The Eagle Ford and Haynesville shalesare similar in nature in that they’re bothfairly deep and higher pressure, whichStoneburner says equates to more gas potential. From the top to the bottom of theformation, he says, it’s all effective payzone.

“In the Haynesville, we assume a 65 percent probability of success; in the Eagle

Ford, we assume an 80 percent probabilityof success, and in the Fayetteville we assume about 50 percent because ouracreage is on the fringe,” he says. “Our rateof return in the Fayetteville is about 20 percent; the Haynesville is 60 percent; theEagle Ford Hawkville dry gas is about 110percent, and the high-condensate Eagle FordBlackhawk is about 1100 percent.”

The company dominates when it comes toresults in the Haynesville, says Stoneburner.Petrohawk holds 368,000 net acres underlease with the average leasehold cost about$5,000 per acre—inexpensive consideringsome $20,000 to $30,000 lease rates duringthe 2008 land rush. In the second half of2009, the estimated well cost was $8.5 to$9.5 million with an average initial production of 18.1 Mmcf per day.

Among the challenges in the Haynesvilleis reducing well costs.

“Our development costs equated $2.02 permcf, but that was a $10.7 million well,” hesays. “This year we can drill at $9 million perwell, and next year in the $8-8.5 million range.”

In the Eagle Ford, Petrohawk was initiallywithout competition. The company holds360,000 net acres total, of which 225,000acres are in oil and condensate window.

“We like to say that we went from firstidea to 10 tcf in 10 months,” he says. “It’s aconsistent area with very little faulting andpretty much productive from tip to tail.”

Petrohawk’s average leasehold cost in theEagle Ford is $400 per acre with an averagewell cost of $4.5 million to $5 million. Theaverage initial production for 11 wells todate is 8.9 Mmcf per day with a gas to oilratio of 6:1 and 10.5 Mmcf per day with agas to oil ratio of 15:1.

Since the drilling pace is not dictated byshort primary terms since the leases containcontinuous drilling clauses, Petrohawk hasbeen working on tests of stimulation theoryin the Eagle Ford.

The company completed two wells with18 stage fracs, using more frac fluid. The result is strong initial production rates withshallower pressure and production declines.The Dora Martin 1850 #1H has an initialproduction of 8.8 Mmcf per day and an average first-30-days production of 8.1Mmcf per day. The Henderson-Cenizo 877#1H has an initial production of 13.2 Mmcfper day with an average first-30-days pro-duction of 10.4 Mmcf per day. These ratesare 35 to 75 percent higher than the averageof the first seven wells in the Eagle Ford.

“We’re finding that shale reserves improve over time—we get smarter andlearn how to treat the wells and producethem better and more efficiently,” he says.

11PESA News2010 ANNUAL MEETING

STONEBURNERContinued from Page 5

Petrohawk’s Richard Stoneburner explains the company’s rates of return on its shale plays.

Gulf Publishing / World Oil’s Ron Higgins and John Royall listen to the Petrohawk presentation.

JJAANN FFEEBB MMAARRKKoorreeaa 3322,,884411 112288,,553300 5555,,553366 SSiinnggaappoorree 6677,,664455 5511,,882200 7744,,228822CCoolloommbbiiaa 3333,,445566 8811,,775511 7788,,332255BBrraazziill 3399,,220044 5533,,004444 7788,,334433UU..AA..EE.. 3322,,556699 3333,,331100 2244,,888822UU..KK.. 2266,,445511 2255,,338877 2288,,331111SSaauuddii AArraabbiiaa 1188,,990000 2233,,884444 2288,,555555CChhiinnaa 3322,,661166 1199,,884433 1144,,112233RRuussssiiaa 1122,,553333 2200,,118833 2211,,335544NNiiggeerriiaa 1144,,551133 1188,,665588 1144,,223355AAnnggoollaa 1177,,886699 1122,,996633 1155,,669911MMeexxiiccoo 1133,,229966 1122,,998877 1133,,999966VVeenneezzuueellaa 1122,,557744 1100,,883388 1122,,337733AAllggeerriiaa 1122,,440044 88,,333311 1133,,775577EEggyypptt 88,,000033 99,,119977 1133,,550000

SSuubbttoottaall:: 337744,,887755 551100,,668866 448877,,226633 AAllll OOtthheerr:: 224422,,668866 220033,,998833 220011,,112233 TToottaall:: 661177,,556611 771144,,666699 668888,,338866

PPEESSAA NNeewwssPPeettrroolleeuumm EEqquuiippmmeenntt SSuupppplliieerrss AAssssoocciiaattiioonn11224400 BBllaalloocckk,, SSuuiittee 111100HHoouussttoonn,, TTXX 7777005555

First ClassUS Postage PaidHouston, TX

Permit No. 04805

U.S. Oil and Gas FieldEquipment ExportsTToopp 1155 DDeessttiinnaattiioonnss ffoorr QQ11 22001100

(in U.S. $1,000)

Source: U.S. International Trade Commission

12 PESA News 2010 ANNUAL MEETING

Last year, despite the financial meltdown and low gasprices, Newfield chose to continue operating—a decisionsupported by their hedge position.

“We felt it was important toremember the crews and serviceproviders and folks in the fieldmaking these plays work,” hesays. “We’ll monitor the market,and we have a strong hedge position through 2011, but because of the oil economic advantage we’re going to continue our push toward oil.”

The Uinta Basin is Newfield’sfoundational oil asset. The company’s 180,000 acres areheld by production with 4,700remaining locations. Productionhas increased from 7,000 barrelsabout 6 years ago, to 20,000barrels today.

“This is an asset that will continue to grow,” he says. “Alittle over a year ago we werelaying oil rigs down in theRockies for preference of gasrigs in the mid-continent. Thisyear, it’s flipped. We’re addingrigs to the Rockies, acceleratingoil projects in Southeast Asia,and backing off the acceleratoron our gas projects.”

Seek Win-Win

Unconventional plays are operations driven, but it takesall players from every part ofthe industry to make them successful.

“It takes every single personin an organization to make thesework—they’re not just capital

intensive, they’re people intensive,” he says. “There isand will be a focused demandfor quality crews and serviceswith reliable performance andequipment.”

Boothby says that unconventional plays have along life cycle and relationshipslead to improved performance.

“The first thing is to sit downand help me understand yoursituation, and I’ll help you understand mine. We can findthat win-win,” he says. “Theviews of the past—the heads Iwin, tails you lose mentality—are gone. We can find that place,and we won’t turn our back onrelationships with those whohave supported us.”

By working together, he saysthe industry can shave off thetops and bottoms of the boomand bust cycle, improve budgetforecasting, and hone the industry’s ability to issue performance guidance.

But the public needs to be educated about the abundanceand true nature of unconventional resources.

“We have this great gift—natural gas is the real bridgefuel—and it’s 50 percent cleanerthan coal is today,” he says.“The great news is that it’sabundant. We all have a part toplay in getting the country educated, though not by fifteen-second sound bytes, and not bypoliticians—we need to get outthere and educate in person andwhile we’re at it, ensure thatyoung people understand thereare great careers in energy.”

BOOTHBYContinued from Page 4

Lee Boothby of Newfield Exploration describes unconventional oil and gasas a great gift to the industry, nation, and world. The success of these resources are not guaranteed, and the industry must “be on the samepage in terms of messaging.”