EMERGING GAS DEMAND

Henan XU, CFA, ERP Energy Analyst June, 2016

• Coal-to-gas switching could partially reverse in the near term

• The industrial renaissance is contingent upon commodity and end-products prices

• Res/Comm demand faces competition from electric heating as well as efficiency gains

• Transportation demand shows potential yet won’t move the needle

• Emerging demand in emerging markets? Don’t be too optimistic

Power

0

5

10

15

20

25

30

Bcf

/d

Power

Industrial

0

5

10

15

20

25

30

Bcf

/d

Key Takeaways

2

Power

Industrial

ResComm

0

5

10

15

20

25

30

Bcf

/d

BENPOSIUM 2016

Source：Clean Fuels

POWER BURN

1

Power 39%

Industrial 30%

Rescomm 31%

0%

5%

10%

15%

20%

25%

30%

35%

Coal Market Share Gas Market Share

Generation Market Share Changes between 2020 and 2030

2020 2030

Can’t Switch Back under the Clean Power Plan

Source: Platts Bentek Source: EPA Regulatory Impact Analysis

BENPOSIUM 2016 4

020406080

100120140

Mill

ion

shor

t ton

Clean Power Plan Emissions Reduction

Reduction neededRetiring units' emission in 2015Reduction from 2015-2030

INDUSTRIAL DEMAND

2

Power 39%

Industrial 30%

Rescomm 31%

Gas Consumption by the Manufacturing Industry

BENPOSIUM 2016 6

Chemicals 39%

Petroleum and coal products

16%

Primary Metals

10%

Food 10%

Paper 7%

Nonmetallic Mineral Products

5%

Fabricated Metal Products

3%

Transportation Equipment 2%

Plastics and Rubber Products

2% Other 6%

15.7 Bcf/d in 2010; 84% of Total Industrial Gas Demand

Source: MECS 2010

Fertilizer; Methanol

Gas-to-liquids

Direct-reduced Iron

More than 4 Bcf/d of Industrial Feedstock Projects Tracked; Only 2 Bcf/d of Growth in the Forecast

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2015 2016 2017 2018 2019 2020 2021

Bcf

/d

GTLDRIMethanolFertilizer

Source: Platts Bentek Industrial End-user Tracker

BENPOSIUM 2016 7

Nitrogen Fertilizers – Ammonia-based Products

BENPOSIUM 2016 8

Fertilizer Form % N Anhydrous Ammonia

Gas, applied as liquid from pressurized tank 82%

Urea Solid 46%

Urea-ammonium nitrate solutions

Liquid 28% - 32%

Source: Yara

50% -> Corn farming

50% of nitrogen consumption comes from imports

31 MMBtu gas /Metric ton of ammonia

Ammonia

Robust Margins for Fertilizer Producers

BENPOSIUM 2016 9

Source: CF Industries

Cash Margin for North American Producers

0100200300400500600700800900

1000

$/to

n of

Anh

ydro

us A

mm

onia

Retail Ammonia Price v.s. Gas Feedstock Costs

Illinois Anhydrous Ammonia PriceGas Feedstock Cost

What is Methanol Used for?

BENPOSIUM 2016 10

Source: Methanex

32 MMBtu/metric ton of Methanol

Methanol Margins Are Challenged

BENPOSIUM 2016 11

Source: Methanex

Returns are Challenged

0100200300400500600700800900

1000

1/20

05

8/20

06

3/20

08

10/2

009

5/20

11

12/2

012

7/20

14

3/20

16

$/M

etric

ton

of M

etha

nol

Methanol Price V.S. Gas Feedstock Costs

Methanol $/MTGas Feedstock Cost ($/Metric ton of Methanol)

What is Direct-reduced Iron Used for?

BENPOSIUM 2016 12

9.8 MMBtu/ton of DRI

Removal of oxygen; Lower temperature than blast furnace; reducing iron ore without melting it

Steel (Electric arc furnaces)

DRI Production Contingent upon Steel and Scrap Prices

BENPOSIUM 2016 13

0

50

100

150

200

250

0100200300400500600700800

1/20

13

3/20

13

5/20

13

7/20

13

9/20

13

11/2

013

1/20

14

3/20

14

5/20

14

7/20

14

9/20

14

11/2

014

1/20

15

3/20

15

5/20

15

7/20

15

9/20

15

11/2

015

1/20

16

3/20

16

5/20

16

MM

cf/d

$/sh

ort

ton

Nucor’s Gas Consumption at its DRI Plant V.S. Steel Prices

Nucor Scheduled Volume Steel (Flat Cold Rolled Coil CIF $/st)

Equipment failure

Maintenance and deliberately suspended production

Gas-to-liquids (GTL)

BENPOSIUM 2016 14

GTL Project Returns in Single Digit

BENPOSIUM 2016 15

Why We Sliced Industrial Demand Growth Potential by Half

BENPOSIUM 2016 16

Bullish Bearish

RES/COMM DEMAND

3

Power 39%

Industrial 30%

Rescomm 31%

Residential and Commercial Largely Driven by Weather

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Bcf

/d (G

as E

quiv

alen

t)

Energy Consumption in ResComm

Fuel Oil LPG Natural GasSource: EIA, Platts Bentek

BENPOSIUM 2016 18

Demand in remote and constrained

areas

Polar Vortex

Space Heating Market Shifts between 2010-2014

Fuel with Largest Market Share Gains in Space Heating Fuel with Largest Market Share Losses where Propane Gained Market Share

Yellow: Electric heat pump gained market share

Green: Propane replaced distillate fuel oil

Source: ICF

BENPOSIUM 2016 19

Efficiency Gains over the Past Few Years; Energy Usage Behavior Needs to Cross the Chasm

50

55

60

65

70

75

MM

Btu

/y

Total Energy Consumption per Capita

Commercial Residential Source: EIA, Platts Bentek

Crossing the Chasm

BENPOSIUM 2016 20

Vehicle Gas Consumption v.s. Alternative Fuel Prices

0

20

40

60

80

100

120

2010

2011

2012

2013

2014

2015

MM

cf/d

Natural Gas Vehicles Gas Consumption

OthersArizonaTexasNew YorkCalifornia

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

4/10

/00

7/22

/02

11/1

5/04

2/21

/07

10/2

/08

4/2/

2010

9/30

/201

13/

29/2

013

10/1

/201

4

$ pe

r Gas

olin

e G

allo

n Eq

uiva

lent

Retail Fuel Prices

GasolineCNGDiesel

Source: EIA, Alternative Fuels Data Center

BENPOSIUM 2016 21

Payback Period to Fleet Owners has Increased

BENPOSIUM 2016 22

LNG Powered Vessels Emerging

Source: Tri-Zen

BENPOSIUM 2016 23

• First LNG oil service vessel and bunkering terminal in Port Fourchon, Louisiana

• First LNG powered containership will operate between Jacksonville, Florida, and San Juan, Puerto Rico.

• First LNG-conversion-ready product tanker

So What?

BENPOSIUM 2016 24

5.4

2.1

2.3

1.0

12.2

3.6

7.7

0.9

Total

Industrial

Power Burn

ResComm

Demand Growth

2009-2015 2015-2021

Domestic demand growth will be slower

WHAT IS HINDERING CHINA’S GAS DEMAND?

4

Fun fact! US re-exported 6 Bcf of LNG to China in 2011 at $11/MMBtu

China’s Gas Market = 1/3 US’s Gas Market

BENPOSIUM 2016 26

0

5

10

15

20

25

30

35

40

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Bcf

/d

China's Gas Supply Mix: Actual and Forecast

Domestic - Conv Domestic - Unconv Import - LNG Import - Pipeline Target

Forecast

High Gas Prices Prevent Economic Switching in the Power Sector

BENPOSIUM 2016 27

Qin

ghai

Sha

anxi

Sic

huan

Inne

rmon

golia

(eas

t)

Cho

ngqi

ng

Hun

an

Inne

rmon

golia

(wes

t)

Gan

su

Hei

long

jiang

Jilin

Gui

zhou

Yun

nan

Hub

ei

Nin

gxia

Hen

an

Bei

jing

Anh

ui

Sha

nxi Fu

jian

Hai

nan

Gua

ngxi

Jian

gxi

Gua

ngdo

ng

Shan

dong

Liao

ning

Zhej

iang

Heb

ei (N

orth

)

Shan

ghai

Heb

ei (S

outh

)

Tian

jin

Jian

gsu

0

2

4

6

8

10

12

14

16

18

20

$/M

MB

tu

China City Gate vs LNG Import Prices

City Gate Price Traditional LT Price*

LNG Importing Regions Gas switching price (derived from coal on-grid price)

HH SRMC (2017) Delivered

Over Contracted in the Near Term

BENPOSIUM 2016 28

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Bcf

/d

China's LNG Imports

Contracted LNG LNG Import Regasification Capacity (FID'ed)

Key Takeaways

BENPOSIUM 2016 29

• 1-2 Bcf/d of gas-to-coal switching could happen in the near term

• GTL and methanol projects are at risk to be delayed; fertilizer projects are holding strong; potential development in the direct-reduced iron sector

• Minimum growth in Res/Comm demand; gas as a transportation fuel could grow to 0.7 Bcf/d by 2021 depending on oil prices

• Economic growth and price reforms are key to emerging market demand

5.4 Bcf/d Domestic Growth

7.4 Bcf/d of Exports Growth

Q&A

6

Henan XU hxu@spglobal.com 720-264-6655

How is it Made?

BENPOSIUM 2016 31

Natural gas to syngas Natural gas/Coal/Biomass + Steam + Oxygen -> syngas (CO, H2)

Syngas (+ other inputs) to products o Fischer Tropsch Process: → Diesel (C12H23), Jet Fuel (C12H26), Naphtha (C5-C12)... o Methanol Synthesis: Methanol → CH3OH o Haber–Bosch process: Ammonia (Fertilizer) + N2 → NH3

o Direct-reduced Iron + Fe2O3 → Fe + CO2.

The Existence of Substitutes Makes Demand Sensitive to Prices

Source: Platts Bentek

Compete with Oil and NGL

Compete with Anthracite Coal and Petroleum Coke

BENPOSIUM 2016 32

“Subdued Demand, Diminished Prospects” - IMF

BENPOSIUM 2016 33

0

200

400

600

800

1,000

1,200

1,400

1,600

1/20

008/

2000

3/20

0110

/200

15/

2002

12/2

002

7/20

032/

2004

9/20

044/

2005

11/2

005

6/20

061/

2007

8/20

073/

2008

10/2

008

5/20

0912

/200

97/

2010

2/20

119/

2011

4/20

1211

/201

26/

2013

1/20

148/

2014

3/20

1510

/201

55/

2016

USD

MSCI EM (EMERGING MARKETS) Standard (Large+Mid Cap)

Source: MSCI

Coal-to-Gas Switching

BENPOSIUM 2016 34

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

1/20

167/

2016

1/20

177/

2017

1/20

187/

2018

1/20

197/

2019

1/20

207/

2020

1/20

217/

2021

$/M

MB

tu

Henry Hub Dominion Chicago

0

5

10

15

20

25

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Bcf

/d

Gas Prices $/MMBtu

Southeast NortheastMidcon Market TexasMidcon Producing SouthwestRockies

Forecast

Actual Power Burn Trends above Weather Normalized in June

BENPOSIUM 2016 35

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

-5.0-4.0-3.0-2.0-1.00.01.02.03.04.05.0

1/20

104/

2010

7/20

1010

/201

01/

2011

4/20

117/

2011

10/2

011

1/20

124/

2012

7/20

1210

/201

21/

2013

4/20

137/

2013

10/2

013

1/20

144/

2014

7/20

1410

/201

41/

2015

4/20

157/

2015

10/2

015

1/20

164/

2016

$/M

MB

tu

Bcf

/d

Actual - Weather Normalized Power Burn Henry Hub

BENPOSIUM 2016 36