Www.woodmac.com Delivering commercial insight Interesting Times: Navigating the Uncertainties in the North American Gas Market Ed Kelly Vice President.

www.woodmac.com

Delivering commercial insight

Interesting Times:

Navigating the Uncertainties in the North American Gas Market

Ed KellyVice President North American Gas and PowerWood Mackenzie

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Risks and Uncertainties – On the Supply Side

The Resource Base is Vast, but Production Levels and Cost Remain Uncertain

1) Environmental resistance – especially hydraulic fracturing regulations.

• Environmental resistance, and political attention, continue to build

• Regulatory costs and permitting delays could slow development considerably

• And increase the ultimate cost, and gas price, substantially

2) Ultimate shale/unconventional production performance

• By 2013-2014, we will know much more about how shale wells perform longer term, and will have a much better idea of ultimate recoveries and production potential for a given well

3) Competition with oil for upstream dollars and services

• Companies moving toward oil are moving away from dry gas - gas shale plays must compete for horizontal rigs and crews

• A booming opportunity in oil could raise target IRRs on gas plays as producers seek the best margins

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Risks and Uncertainties – On the Demand Side

Demand Opportunities Require Major Capital Commitment or Policy Help, while Risks are Few

1) Carbon and environmental policy – coal retirements are the lever

• Wide range of possibilities w. carbon depending on the targets, timing, price and investment focus

• EPA regulation and pressure on older coal units—how many retire?

2) A weak economy – 1 year of recession takes 2-3 years of demand growth off the table

3) New (or renewed) markets for gas

• Gas-intensive industries represent an opportunity, but depend on liquids and global dynamics

• NGVs? Difficult competition from plug-in hybrids for passenger cars and energy density issues for long haul heavy duty vehicles

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So How is it Looking?

For Supply – Stronger Potential, but…• Haynesville, Marcellus, Fayetteville, Eagle

Ford, and Canadian shales all look stronger

• How much capital is reallocated toward oil drilling, and how much new capital enters?

• How threatened is hydro-fraccing? What will be the results of the ongoing EPA study, and what conditions will the Interior Department place on drilling on federal lands?

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Led by Key Shales, US Supply Growth Continues: for a Few More Months

Over the last six months, Haynesville, Fayetteville, and Marcellus production climbed by 1.5 bcfd

US Production currently (Feb) running an estimated 1.5 Bcfd above year earlier levels

Ann Avg production expected to peak this year and next at 60.5 Bcfd dry.

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Jan-0

8

Apr-0

8

Jul-0

8

Oct-0

8

Jan-0

9

Apr-0

9

Jul-0

9

Oct-0

9

Jan-1

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1

Apr-1

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bc

fd

46.0

48.0

50.0

52.0

54.0

56.0

58.0

60.0

62.0

bc

fd

Haynesville Marcellus Fayetteville Total

US production

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Setting the stage—The next 18 months; breaking beyond coal competition

Short-Term Price OutlookFlat supply, firmer global markets, and power demand supports price rebound from current lows

• Prices below $4.00/mmbtu are likely short-lived (end mid 2011)

For 2011, prices recover into the mid $4.00s ($4.60 nom) as the market remains well-supplied

• Drilling levels are vulnerable late in year

• Market support develops by winter 2011/2012 ($5.41 2012 price)

$6.00 by late 2012

Source: Wood Mackenzie

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Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

$/m

mb

tu

CAPP spot Henry Hub CAPP contract

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55.5

56.0

56.5

57.0

57.5

58.0

58.5

59.0

59.5

2009 2010 2011 2012 2013 2014

bc

fd

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200

300

400

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600

US Production Key Shale Other Rigs

2012: Declining rig counts cut into supply and gas demand, and price recovery is hampered by loss of coal displacement demand

Power sector summary

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2007 2009 2011 2013 2015

bc

fdNormalized gas demand Displacement

Weather effect Disp $5-6

Disp. $4.50-5 Disp. $4-4.50

Total gas demand

Drilling and supply

Decline in 2012 production…

…pulls down 2012 power demand by limiting displacement

Sources: Wood Mackenzie, Smith Bits Source: Wood Mackenzie

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How many rigs does it take to hold production flat?

About 900, and we’re at the Tipping Point. But – it depends on where those rigs are.

With horizontal rigs at record highs and increased rig productivity, rig counts required to maintain production have dropped significantly

Rig counts to maintain production at 2010 year-end levels depend strongly on activity levels in key growth shales

• The rig count to sustain production could be even lower once a majority of shale drilling switches to pad rigs, after acreage constraints ease

Rig counts required to maintain production at 2010 year-end levels

Total Rigs Haynesville Eagle Ford Fort Worth Marcellus Fayetteville & Woodford

Non-shale horizontal

Low emerging shale 1,050 75 70-85 110 90 40 190Base case 900 100 90-105 90 90 40 160High emerging shale 780 125 115-135 50 90 40 120

Current 974 172 58 88 90 45 205

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The Resource Base is There: Supply Analysis by Region Shows the Potential for Broad-based Growth (Bcfd, dry)

Supply overall increases by 27 Bcfd in the US 2010-2030.

The largest increases are in the Gulf Coast and the Northeast.

This represents an increase of 5.1 Bcfd in 2025 in the US from Wood Mackenzie’s previous long-term view.

Not only do we not need LNG – for the first time we do not need an AK pipe, either.

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2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

bcf

d

Rockies San Juan Gulf Coast Gulf of Mexico MidContinentPermian Fort Worth Northeast West Coast AlaskaWCSB East Coast Arctic

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2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030

bcf

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Barnett Fayetteville WoodfordHaynesville Marcellus Eagle FordHorn River Montney & Duverney

But – Will we be Allowed to Get to It? The Supply Mix Depends on Shales, and Hydraulic Fracturing

Close to 50% of total supply longer term will be affected by regulations on hydraulic fracturing.

Still, strong growth potential - 28.5 Bcfd in the known shale plays by 2025!

Marcellus – to 10 Bcfd

Haynesville – to 8-8.5 Bcfd

Horn River – to 5 Bcfd

Fayetteville – to 4-4.5 Bcfd

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So How is it Looking?

For Demand – Promising Signals• Several announcements about methanol and ammonia capacity being

restarted—new capacity announcements to come?

• Many petchem producers lightening their feedslates

• Several proposed LNG export facilities have signed MOUs, and global gas prices have recovered more quickly than expected

• Coal mining costs look likely to support a higher cost structure—but how fast can retirements come while preserving grid stability?

• Will high oil prices jeopardize fragile economic recovery?

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Short-term economic outlook has improved, but significant risks remain

Impact of high oil prices on consumer spending?

Long-term GDP growth looks weaker, with slower pace of productivity growth

• “New normal” unemployment rate at higher levels?

US GDP growth

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2010

2011

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2013

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2015

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2019

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2022

2023

2024

2025

Sept. 2010 Prelim Apr. 2011

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And ammonia restarts and ethylene capacity conversions suggest a stronger long-term pace of industrial demand growth

Medium term growth as capacity is restarted

Improved environment for US manufacturing generally, as the dollar depreciates and massive trade imbalances subside

US industrial gas demand

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fd

East North Central East South Central Mid Atlantic

Mountain New England Non-Contiguous

Pacific South Atlantic West North Central

West South Central Sept. 2010 outlook

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While robust gas demand in Asia, and cost inflation in Australia, look likely to support at least a couple North American LNG export projects

LNG exports from Gulf Coast to Europe LNG Exports from Gulf Coast to Asia

Feedgasprice

Capitalcost

Commoditycharge

Plantlosses

Shipping Regas

$/m

mb

tu

Regasified (Europe): HH + $4/mmbtu

11% Brent; $75/bbl

11% Brent; $100/bbl

Feedgasprice

Capitalcost

Commoditycharge

Plantlosses

Shipping Regas

$/m

mb

tu

Regasified (Asia): HH + $5.50/mmbtuRegasified (Asia; Panama Canal): HH + $4.85/mmbtu

15% Brent; $75/bbl

15% Brent; $75/bbl; Panama Canal exp.

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Gas and coal production costs are moving in opposite direction—although carbon legislation now looks less likely to close this gap

Gas prices Coal and carbon prices

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CAPP Sept. 2010 CAPP Apr. 2011 prelim

Carbon Sept. 2010 Carbon Apr. 2011 prelim

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HH Sept. 2010 HH Apr. 2011 prelim

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…likely supporting more coal plant retirements

What is ultimately going to replace CAIR?—Differences between Transport Rule and Carper bill

• State-level caps

• Higher in aggregate, but many regional dislocations

How quickly can plants be retired?

Coal-gas price spread

-2.50

-2.00

-1.50

-1.00

-0.50

-

0.50

1.00

1.50

2.00

2011

2013

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$/m

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tu

Sept. 2010 coal-gas spread Prelim Apr. 2011 coal-gas spread

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Tim

e H

ori

zon

Sh

ort

Res/Com

Industrial

NGVs

Coal retirements

Carbon bill

Circle size reflects demand potential

LNG exports

Will Gas Find Other Markets? Could the long-term price outlook—and the gap with oil—fuel additional market opportunity?

Capital Investment Required

Lo

ng

Significant Minimal

Plug-in hybrids


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(Other) Risks to the Outlook

Spread of Civil Unrest

Fiscal indebtedness Currency swings

Political uncertainty

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Speaking of Which, On the Oil Side - Developing Economies (demand pull) will exert greater influence on global oil demand

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2005 2010 2015

Share

in g

lobal o

il dem

and

Africa

FSU

Latin America

Middle East

Non-OECD AsiaPacif ic

OECD AsiaPacif ic

Europe

North America

DevelopingEconomy

AdvancedEconomy

Source: History - IEA; Forecast - Wood Mackenzie

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As a Result: OPEC Spare Capacity Reduced Through 2015 : Our base case view shown with the impact of lower than expected oil demand in the same period – and this reduction is pre-crisis

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US

$/bb

l

WTI Real WTI NominalSource: History - Thomson Datastream, Forecast - Wood Mackenzie

The Result: WTI Crude Oil Price Forecast to 2015 (Real and Nominal) and Risk Factors

Upward price riskPolitical turmoil in key producing nations

Attack on Iran nuclear facilitiesLagging upstream investment

Downward price riskSlower than expected GDP growth to 2015

Iraq supply wildcard OPEC production restraint eases too much too soon

Price Volatility RiskFinancial investors shift stance

Source: History – Thomson Datastream; Forecast - Wood Mackenzie

Oil prices return to $100 (nominal) on annual basis by 2013; $92 in real terms.

$95 real, $116 nominal by 2015.

Oil demand growth averages near 1.5 millions Bbls/day annually, reaches 100 MMBbls/day by 2020.

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Despite Increasing Prices, Gas Remains Cheap—Oil and Gas Remain Apart

Oil and Gas Commodity Price Forecasts

Average price WTI:

• 2010-15: $89.46

• 2016-20: $92.21

2021-30: $105.26

Plentiful exploration risk, and reservoir performance risk in this oil outlook, in contrast to US gas.

Preliminary Avg Henry Hub (real):

• 2011: $4.60

• 2011-15: $5.71

• 2016-20: $5.75

• 2021-30: $6.12

$2010/mmbtu

2000-2008 2.83

2009 6.88

2010-2020 10.03

2021-2030 12.02

Average WTI to Henry Hub Differential

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$201

0/M

MB

tu Distillate

WTI

Resid

Henry Hub

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The New Big Picture: Gas is Available in Any Feasible Quantity, but Not at $4.00 ----- and That’s IF the Industry is Allowed to Get To IT

Through 2012…Sluggishness and Gas as a Coal-derived Fuel

• With sluggish economic recovery and supply strength; coal displacement continues to influence the gas market

Late 2012 – 2016…Growth Potential

• With an increasing call on production as demand growth resumes, there is potential for growing pains as the market transitions from retrenchment to expansion; prices rise to the $5.75 - $7 range.

2016 and Beyond – a Collision Course?

• Demand pressure appears likely, with the pace of growth shaped by coal retirements, potential carbon legislation and a discount to oil.

• If the upstream is allowed to invest at pace, pricing remains moderate: $6.50 - $7.00

• BUT – if not, we could be needing that LNG, and that Alaska Pipeline after all!

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Www.woodmac.com Delivering commercial insight Interesting Times: Navigating the Uncertainties in the North American Gas Market Ed Kelly Vice President.

Documents

production levels

us production slide

production potential

bcfd us production

gas demand

gas price

marcellus production

production flat