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1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts Denver, CO
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1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Page 1: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

1

Natural Gas Pricing:What Does the Future Hold?

October 24, 2012By:

John A. Harpole

Presentation to:Denver Association of Lease and Title Analysts

Denver, CO

Page 2: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

22Source: America’s New Natural Gas, America’s Natural Gas Alliance

EVOLUTION IN GAS WELL COMPLETION TECHNOLOGY

- THE KEY TO TODAY’S NATURAL GAS REVOLUTION

Page 3: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Page 4: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

4

100% LF

85% LF

Supply Available for ExportBase Case

Cheyenne Plains 170 expansion

Cheyenne Plains 560 expansion

REX West 1800 expansion

High Case

Ruby 1500 expansion

MMcf/d Bison 407 expansion

Kern River 145 expansion

Kern River 266 expansion

Winter Peak Month

Summer Peak Month

Source: George Wayne, Wyoming Gas Fair – Rockies Market Update – 9/15/2011 presentation 4

Page 5: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Page 6: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Page 7: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Liquids Plays: 2.8 Bcfd

Lean Gas Plays: 1.7 Bcfd

Quarter 4 - 2011 Versus Quarter 4 - 2010

Eagle Ford

PermianMarcellusAnadarko HaynesvilleFayette-ville

Other Wet

Other Dry

U.S. Liquids Plays Contributed 61% Of Incremental Volumes In Q4 - 11

Source: Bentek Energy

Page 8: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

8

US Production Is Up Nearly 7 Bcfd from

2011

Source: BENTEK Supply and Demand Report

Jan JulApr Oct

Ave

rag

e D

aily

Pro

du

ctio

n

(Bcf

d)

Data through February 8, 2012

Q-2Q-1 Q-3 Q-4

Pre-2010 US Production High

Comparison of Dry Production

6.7 Bcfd

Page 9: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

9

$3.4B

$1.3B

$1.7B

$1.3B

$1.0B

$1.3B

$5.4B

$2.1B

$1.5B

$4.8B

$.4B$1.3B

PetroChina/Encana

ITOCHU/MDU Resources

CNOOC/Chesapeake

CNOOC/Chesapeake

BHP/Chesapeake

KNOC/Anadarko

BG/EXCO

BG/EXCO

Reliance/Pioneer

Reliance/Atlas

Statoil/Chesapeake

Statoil/Talisman

$12.1 B

BHP Plans to Acquire Petrohawk

Foreign Investment in U.S. Shale

Source: Dr. Jim Duncan, ConocoPhillips, Decoding the Relevance of Abundant Supply, 2011 COGA Presentation

Page 10: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

10

Global Shale Reserves

Page 11: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

11

16%

21%

6%9%

18%

30%

Africa Asia Australia Europe North America South America

Recoverable Shale Reserves: 6622 Tcf

Source: EIA

Page 12: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

12

A Cautionary Note• Forecasts Count on Real-Business-Cycle

(RBC) Theories• RBC Theories/Models offer

“no closed-form solution due to the interaction of linear and nonlinear elements”1

• Solution clarity? Causality?• RBC studies presume perfect

information on data input

1 Loglinear approximate solutions to RBC models: An Illustration and some observations, Sau-Him Paul Lau and Philip Hoi-Tak Ng, University of Hong Kong, January 2004

Page 13: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Linear Calculations in a Very Non-Linear World

Page 14: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

14

The Crystal Ball for Demand

Page 15: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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4 Significant Demand Factors to Consider

• LNG Exports• Industrial Demand Growth• Coal to Gas Electric Generation Fuel Switching• CNG/Natural Gas Vehicles

Page 16: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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No Immediate Relief

• It is difficult to foresee any demand response within the next three years (before 2015) that can significantly change the current natural gas price environment.

Page 17: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

17

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

NYMEX Henry Hub Natural Gas Price* 1996 - 2015

Actual/Forecast**

Source: *Average of last three days of trading as published in the Platts Gas Daily Report

** Future forecasts based on NYMEX Henry Hub indices in Clearport Software as of 9/26/2012

$ p

er

MM

Btu

$ p

er M

MB

tu

Page 18: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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LNG Exports

Page 19: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

19

Cove Point Cove Point

Lake Charles Lake Charles

Sabine Pass Sabine Pass

CameronCameron

Export Terminals

Source: Office of Oil and Gas Global Security and Supply, Office of Fossil Energy, U.S. Department of Energy; U.S. Federal Energy Regulatory Commission

U.S. LNG Export Projects

Jordan CoveJordan Cove

Company Capacity(Bcf/d)

DOE Filing

FERC Filing

Sabine Pass Liquefaction

2.2 Corpus Christi Liquefaction

1.8 *Freeport LNG Expansion

2.8 *Lake Charles Exports

2.0 Dominion Cove Point

1.0 Jordan Cove Energy Project

1.2

Cameron LNG 1.7 Gulf Coast LNG Export

2.8

Freeport Freeport

Corpus Christi Corpus Christi

Gulf LNG Gulf LNG

* FERC Pre-Filing Process

Slide from U.S. LNG Exports & Unconventional Gas presentation, Charif Souki, Cheniere Energy, Inc.

Page 20: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Page 21: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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LNG in the Headlines• Boosting the Economy Through Natural Gas

Exports– Washington Post Editorial Board, March 14, 2012

• “BG Group’s CEO Frank Chapman, suggested that U.S. LNG exports could reach 5.8 BCF/day by 2020”

– Sutherland LNGLawBlog.com, February 10, 2012

• BG is looking at an LNG export project on the West Coast of Canada at Prince Rupert

– Sutherland LNGLawBlog.com, February 10, 2012

• “The United States would probably only export a trickle of gas over the next five years, it could be exporting 4 BCF by 2022 and 15 BCF by 2027.”

– The New York Times Green Blog, April 18, 2012

Page 22: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

22

LNG in the Headlines• Cheniere receives FERC approval for Sabine Pass

LNG Export Terminal– Edward McAllister and Ayesha Rascoe, Reuters, April 17, 2012

• Sempra Energy Unit Signs Commercial Development Agreements with Mitsubishi Corporation, Mitsui & Co., Ltd. to Develop $6 Billion Louisiana Liquefaction Facility

– Sempra Energy PRNewswire, April 17, 2012

• Energy Transfer Equity LP has filed for federal permission to build an export facility at its import terminal at Lake Charles

– The Associated Press, April 17, 2012

Page 23: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

23

LNG in the Headlines• Royal Dutch Shell plc, Mitsubishi Corporation, China

National Petroleum Corporation and Korea Gas Corporation are expected to reach an agreement soon to build a $12.35 billion LNG terminal near Kitimat, British Columbia

– Sutherland LNGLawBlog.com, April 12, 2012

• Cheniere to Submit Resource Reports Soon for Corpus Christi LNG Export Project

– Sutherland LNGLawBlog.com, April 19, 2012

• DOE delays LNG export study– Reuters.com, September 17, 2012

Page 24: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

24

Kitimat LNGIssued license by NEB October 2011

Export Facility

Page 25: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

25

Shipping Routes

Source: http://www.kitimatlngfacility.com/Markets/marketing.aspx

Page 26: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Industrial Demand Growth

Page 27: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Chemical Plant Growth

• Chevron Phillips Chemical• Shell• Dow Chemical• Formosa• Westlake• ExxonMobil

“Chemical Makers Ride Gas Boom”- Wall Street Journal, April 19, 2012

Page 28: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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The Ammonia Story• Current economics

– Ammonia worth $590 per ton in world market– Can be produced for $180 per ton at current U.S NYMEX

natural gas price strip

• 14 Ammonia plants closed in the U.S. between 1998 and 2006 thanks in part to high natural gas prices

• Top 5 world producers would like to build new facilities in the U.S.

• 1 ammonia plant can consume as much as 100,000 MMBtu per day

Page 29: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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• What it could mean to demand for natural gas:• North America imports approximately

12,500,000 tons of nitrogen per year (22% from Canada, 78% from overseas)

• 37 MMBtu is roughly equal to 1 ton of nitrogen• If all overseas imports were eliminated by

domestic production, natural gas demand would increase by approximately 1 BCF per day or 3.6 TCF per year

The Ammonia Story

Page 30: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Page 31: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Petrochemical End Use

AutomobilesAutomobiles

About 600 pounds of petrochemical-derived plastics, composites, rubber, coating and textile products are used in the average vehicle accounting for about 15% of the total vehicle

weight.

ElectronicsElectronics

Home electronics and appliance products contain up to 40% or more

of plastics derived from petrochemicals.

AppliancesAppliances

Source: Bill Bradley, Enterprise

Page 32: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

32

Coal to Gas Electric Generation Fuel Switching

Page 33: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Impact of Mercury and Air Toxics Standards (MATS) and Cross-State Air Pollution Rule (CSAPR)

• “We estimate that by 2015 some 54 GW of coal fired capacity will cease operations rather than incur the cost of compliance with CSAPR and MATS, while 74 GW will be upgraded.”

• “A further 12 GW of coal fired capacity is likely to be retired as these units reach 60 years of age.”

Source: Bernstein Research, U.S. Utilities: The EPA Finalizes Its Mercury and Air Toxics Standards; What Will Be the Impact? December 22, 2011

Page 34: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Natural Gas vs Coal• “The collapse in the price of natural gas since 2008,

combined with recent increases in the cost of Appalachian coal, have caused the variable cost of operation of the average power plant burning Appalachian coal to converge with that of the average combined cycle gas turbine generator.”

Source: Bernstein Research, U.S. Utilities: The EPA Finalizes Its Mercury and Air Toxics Standards; What Will Be the Impact? December 22, 2011

Page 35: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Increase in Utility Consumption of Natural Gas Annual (TCF) and Daily (BCF) Average

• U.S. Gas Consumption in 2010: 22.1 TCF 60.50 BCF/D• Increase due to Natural Gas Coal Plant Retirements: 0.3 TCF 0.82 BCF/D• Increase due to EPA Regulation of SO2 and Mercury: 1.7 TCF 4.65 BCF/D• Reduction Due to New Coal Plants: (0.8 TCF) (2.19 BCF/D)

• U.S. Expected Gas Consumption in 2015E: 23.3 TCF 63.01 BCF/D

Source: Bernstein Research, U.S. Utilities: The EPA Finalizes Its Mercury and Air Toxics Standards; What Will Be the Impact? December 22, 2011

Annual Average Daily Average

Page 36: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Range of Levelized Cost of New Generating Technologies Due To Regional Cost Differences, 2016

Source: Institute for Energy Research, Levelized Cost of New Electricity Generating Technologies, Updated February 1, 2011; Energy Information Administration, Annual Energy Outlook 2011, http://www.eia.doe.gov/oiaf/aeo/electricity_generation.html

Plant Type

Range for Total System Levelized Costs (2009 ¢/megawatt hour)

Minimum Average Maximum

Conventional Coal 8.55 9.48 11.08

Advanced Coal 10.07 10.94 12.21

Natural Gas-fired  

- Conventional Combined Cycle 6.00 6.61 7.41

- Advanced Combined Cycle 5.69 6.31 7.05

Advanced Nuclear 10.97 11.39 12.14

Wind 8.19 9.70 11.50

Wind - Offshore 18.67 24.32 34.94

Solar PV 15.87 21.07 32.39

Solar Thermal 19.17 31.18 64.16

Page 37: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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CNG/Natural Gas Vehicles

Page 38: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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How many NGVs to get to 1 BCF per day of Demand?

• “The U.S. currently has about 110,000 NGVs on the road (less than 0.1% of total U.S. vehicles), mostly owned by fleets.”

• “To get to 1 BCF per day would mean a roughly ten-fold increase in the number of U.S. NGVs.”

• It will take the right incentives and plenty of time.

Source: Raymond James & Associates, Inc., Weekly Energy Report 6-13-11

Page 39: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Natural Gas to Power Pickups

• Tuesday, March 6, 2012

• Chevrolet, GMC introduce bi-fuel pickups for 2013 model year

Source: Platts Gas Daily publication, Rodney White

Page 40: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

40

Demand Increase By 2015?

Low Case High Case

LNG 0 BCF/day 2.0 BCF/day

Industrial Demand Growth 1.0 BCF/day 2.0 BCF/day

Coal to Gas 2.0 BCF/day 2.5 BCF/day

CNG/Natural Gas Vehicles 0.3 BCF/day 0.5 BCF/day

Total 3.3 BCF/day 7.0 BCF/day

Page 41: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Oil Production Drives Investment Decisions for Gas

Source: Advanced Resource Intl presentation to Cheniere Board, March 2011; Cheniere Research

• Liquids production from shale plays > 3 million b/d by 2020

• Associated natural gas > 7 Bcf/d of “costless” supply

Bcf/d MMB/d

0

1

2

3

4

5

6

7

8

2010 2011E 2012E 2013E 2014E 2015E 2020E0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Includes Eagle Ford, W. Barnett, Bakken Shales; Granite Wash, Piceance & Uinta Tight Sands

Includes Eagle Ford, W. Barnett, Bakken Shales; Granite Wash, Piceance & Uinta Tight Sands

Liquids

Gas

Annual Production from Unconventional Reservoirs

Slide from U.S. LNG Exports & Unconventional Gas presentation, Charif Souki, Cheniere Energy, Inc.

Page 42: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Conclusions• A significant demand response won’t occur for at least 3-

5 years • Infrastructure investment in the 4 areas of potential new

demand (LNG export facilities, industrial (steel/chemical/ammonia/nitrogen), new gas fired electric generation, NGV) could take 5-8 years to be meaningful

• Marginal cost of gas is moving lower• Natural gas liquids will be the driving force in drilling• BTU value disparity between natural gas and crude oil

will continue for many years• Demand will increase but too slowly• Don’t forget the “tuition” slide

Page 43: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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Citations for ReportAll of the information utilized for this report is a compilation of information pulled from the following data sources: Bentek Energy Charif Souki, Cheniere Energy Inc.; Cheniere ResearchOffice of Oil and Gas Global Security and SupplyOffice of Fossil EnergyU.S. Department of EnergyU.S. Federal Energy Regulatory CommissionInstitute for Energy Research (IER) Energy Information Administration (EIA)Bernstein ResearchEnCanaRaymond James and Associates, Inc.Western Energy AllianceBill Bradley, EnterpriseSutherland LNG Blogwww.Kitimatlngfacility.com

Page 44: 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts.

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John A. HarpolePresident

Mercator Energy LLC26 W. Dry Creek Circle, Suite 410

Littleton, CO [email protected]

(303) 825-1100 (work)(303) 478-3233 (cell)

Contact Information