Natural Gas in an Age of Resource Abundance and Abundant Energy Policy DiscourseJune 2017

Christopher McGillVP Energy Analysis and StandardsAmerican Gas Association

2016 in Review (Quickly!)

• Record year for natural gas consumption, storage.• New highs for natural gas-fired power generation.• Strong exports to Mexico and first LNG shipments.• Record year for solar installations.• Domestic natural gas production lower. Finally!• CO2 emissions lowest in 25 years.• Affordable energy for consumers.

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Inflation-Adjusted Prices to Commercial Customers the Lowestsince the Ford Administration

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02468

10121416

1967 1974 1981 1988 1995 2002 2009 2016

Natural Gas Prices to Commercial CustomersReal (Dec 2016$) Forecast

EIA STEO

$7.42lowest

since 1976.

Source: Energy Information Administration, Short-Term Energy Outlook (Dec. 2016)

PresenterPresentation NotesAn average commercial natural gas customer’s utility bill was $400 in 2015 – the lowest since records began in 2003.

Key Takeaways from the EIA AEO20172017-2040

• United States becomes a net energy exporter• Natural gas production increases despite relatively

low and stable natural gas prices• The primary driver for new electricity generation

capacity is the retirement of older fossil fuel units, largely spurred by the Clean Power Plan (CPP)

• Even if the CPP is not implemented, low natural gas prices and tax credits result in natural gas and renewables as the primary sources of new power generation capacity

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Key Takeaways from the EIA AEO20172017-2040 (cont.)

• Transportation energy consumption peaks in 2018 because rising fuel efficiency outweighs increases in total travel and freight movements

• Despite growth in the number of households and the amount of commercial floor space, improved equipment and efficiency standards contribute to residential and commercial consumption remaining relatively flat or declining slightly from 2016 to 2040

• Energy consumption in energy-intensive manufacturing, non-energy-intensive manufacturing, and nonmanufacturing increases

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6

Source: Bentek Energy

105.9 107.0 104.6

113.5 112.1108.6

116.0

138.7

132.0

122.2

134.9

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Peak Day Natural Gas Consumption (Bcf/d)

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“it is very clear that we cannot afford to expand infrastructure and reliance on fossil fuels, including gas.”

“At the same time, we do need to ensure that coal energy is not backfilled with gas.”

SNL Interview, Daily Gas Report, Lena Moffitt, Beyond Dirty Fuels Campaign Director, Sierra Club, August 19, 2016.

And yet, there are different visions for domestic energy policy.

By April 2017 President Trump had signed more than 20 Executive Orders• An order to expedite environmental reviews for

projects ranging from pipelines to highways.• An order requiring that for each new regulation, at

least two existing regulations must be eliminated, and costs of new regulations must be offset by the elimination of costs from existing ones. Already facing legal pushback.

• An order mandating that agencies establish reform task forces to repeal or replace regulations.

• An order, signed on March 28, that directs the U.S. to pursue reliable electricity and energy through “coal, natural gas, nuclear material, flowing water and other domestic sources, including renewables.”

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By April 2017 President Trump had signed more than 20 Executive Orders and started making Appointments.

• Review of OCS 2017-2022 Leasing Program.• Review of designations with Antiquities Act.• Construction of Keystone and Dakota Access Pipelines. • Permit Streamlining.• Construction of American Pipelines to be Buy American

targets.• EPA reviewing Mercury Standards.• Reviewing EPA methane rules.

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Buy American and Hire American

• Buy American ends the abuse of waivers in the Buy American law that have been used to undermine American industry and bypass American manufacturing.

• Hire American calls for the Departments of Labor, Homeland Security, State and Justice to initiate prompt action to end the abuse of America's work visa programs that have harmed American workers.

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President Trump NominatesFERC Commissioners

• President Donald J. Trump Announces Intent to Nominate Personnel to Key Administration Posts

May 08, 2017 | WhiteHouse.gov

President Donald J. Trump today announced his intent to nominate the following individuals to key positions in his Administration: Neil Chatterjee of Kentucky to be a Member of the Federal Energy Regulatory Commission for the term expiring June 30, 2021. Robert F. Powelson of Pennsylvania to be a Member of the Federal Energy Regulatory Commission for the term expiring June 30, 2020.

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http://service.meltwaternews.com/mnews/redirect.html?docId=8355221&userId=396208&cId=110390&pId=11&agentId=547987&type=3&etype=USER_CREATED&t=President+Donald+J.+Trump+Announces+Intent+to+Nominate+Personnel+to+Key+Administration+Posts&cdt=1494252180000&sn=WhiteHouse.gov&cc=United+States&surl=http://www.whitehouse.gov&an=Clicked+from+Archive,+Newsfeed,+or+Newsletter&ue=joshea@aga.org&url=https://www.whitehouse.gov/the-press-office/2017/05/08/president-donald-j-trump-announces-intent-nominate-personnel-key

Positioning DomesticNatural Gas Production in 2017

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30

35

40

45

50

55

60

65

70

75

80

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Bcfd

Daily Dry Natural Gas ProductionUS Lower-48

Four-Year Range 2007-2010

2016

Steady production

to begin 2017

2017

Natural Gas Directed Rig Operations

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Domestic Shale Production by Basin

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Horizontal Drilling

15Source: Bentek

Downhole Steerable Drill Strings

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Single Pad Multi-Well Drilling

17Source: American Oil and Gas Reporter.

Multi-Well, Single-Pad Drilling

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Source: Energy Information Administration with permission from Statoil.

PresenterPresentation NotesHere's Bentek's view of "drilled but uncompleted" gas wells. #'s dropped from 3,000 to 1,500 during 2015.

Multi-Lateral Drilling

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Source: aramcoexpats.com

PresenterPresentation NotesHere's Bentek's view of "drilled but uncompleted" gas wells. #'s dropped from 3,000 to 1,500 during 2015.

Micro Seismic Technology

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Source: MicroSeismic.

PresenterPresentation NotesHere's Bentek's view of "drilled but uncompleted" gas wells. #'s dropped from 3,000 to 1,500 during 2015.

Appalachian Basin Pipeline Build-Out

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Source: Bloomberg New Energy Finance.

PresenterPresentation NotesThe Appalachian region of Ohio, Pennsylvania and West Virginia are home to the Utica and Marcellus shale plays. These three states currently produce 22.2 billion cubic feet (Bcf) of gas per day, filling the 22.5Bcfd of takeaway pipeline capacity out of the region. To ease this constraint, many pipeline projects are underway to move gas out of this region and into markets. This report outlines the projects that plan to come online in the next few years. These will allow an additional 16Bcfd of gas to flow out of the region by the end of 2018.

Takeaway pipeline capacity, or what we call “first mile” pipelines, are the bottleneck in Appalachian production. Therefore, it is no surprise that many projects are under way to increase this takeaway capacity. Some projects plan to expand capacity on existing pipelines in the region or reverse the direction of pipes that were originally designed to move gas into the North-Atlantic.

Appalachian Basin Pipeline Build-Out

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Source: Bloomberg New Energy Finance.

Rex Z3 Capacity Enhancement (800)

Clarington, OHMoultrie, IL

Lebanon, OH

●Solidly outlined arrows are expansions of existing capacity

●Dashed outlined arrows are new pipelines

●Non-outlined arrows are where new pipelines have contracted capacity on existing pipelines

●Number in () is MMcfd

*Note: This leg of ET Rover will have a total capacity of 3.25Bcfd, however, we do not anticipate the full capacity will be available initially. See next slide for more details. Source: Bloomberg New Energy Finance

3Q 2017 pipeline Build-Out

Midwest Hub

●Solidly outlined arrows are expansions of existing capacity

●Dashed outlined arrows are new pipelines

●Non-outlined arrows are where new pipelines have contracted capacity on existing pipelines

●Number in () is MMcfd

*Note: We expect initial flows on ET Rover to the Midwest Hub to begin in 3Q 2017. However, we anticipate these to be less than full capacity, with the remaining capacity coming online in 1Q 2018. See slides for 3Q 2017 for more details. Source: Bloomberg New Energy Finance

1Q 2018 pipeline Build-Out

Midwest Hub

Columbia Gas Transmission

Dawn Hub

● Solidly outlined arrows are expansions of existing capacity

● Dashed outlined arrows are new pipelines

● Non-outlined arrows are where new pipelines have contracted capacity on existing pipelines

● Number in () is MMcfd

Source: Bloomberg New Energy Finance

2Q 2018 pipeline Build-Out

Columbia Gas Transmission

140350

Chippawa, Ontario

WB Xpress(800)

Broad Run(200)

Kanawha Co, WV

Leach, KY

Cleveland Station, WV

● Solidly outlined arrows are expansions of existing capacity

● Dashed outlined arrows are new pipelines

● Non-outlined arrows are where new pipelines have contracted capacity on existing pipelines

● Number in () is MMcfd

Constitution(650)

TCO Pool at Leach, KY

PennEast (990)

Wright Compressor

Trenton-Woodbury Interconnection

Cleveland Station, WV

Fairfax, VA

Mountaineer Xpress (2,700)

● Solidly outlined arrows are expansions of existing capacity

● Dashed outlined arrows are new pipelines

● Non-outlined arrows are where new pipelines have contracted capacity on existing pipelines

● Number in () is MMcfd

4Q 2018 pipeline Build-Out

Source: Bloomberg New Energy Finance

Natural gas for power generationsetting records in 2016.

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PresenterPresentation NotesAll time record for natural gas demand set in July, according to EIA.

Natural Gas-Fired Power Additions 2017

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Source: Energy Information Administration.

PresenterPresentation NotesIn 2017, 13 gigawatts (GW) of natural gas-fired generating capacity is scheduled to come online in the United States, adding to total end-of-2016 natural gas-fired capacity of 431 GW. More than 90% of these capacity additions are coming from combined-cycle power plants, which offer improved efficiency over simple-cycle combustion turbines or steam turbines alone.

Numerous solar and wind generation projectsadded in 2017.

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Source: Energy Information Administration and Bloomberg New Energy Finance.

PresenterPresentation NotesAccording to EIA data, ~5.5 GW of new solar capacity will have come online between November 2016 and September 2017. Most of the new solar capacity will be in California, North Carolina, Texas, Arizona, Florida and Nevada. These states will contain 75% of the expected new solar capacity.To estimate the gas displacement figure from solar new-builds, we: 1) analyzed recent monthly solar generation and capacity factors in these states (from EIA-923 and EIA-860M); and 2) applied estimated forward heat rates from CFVL on the terminal. We expect the increase in new solar output alone will displace an average of 409Mmcfd of gas during the 2017 injections season. On a monthly basis, the forward heat-rates indicate that incremental solar capacity will displace an average of 553Mmcfd of gas-based generation in July and August across the Lower-48.

According to EIA data, ~5GW of new wind capacity will have come online between November 2016 and September 2017. We excluded some of the states where gas generation is a small percentage of overall generation so little or no gas displacement is expected Most of the new wind capacity will be located in the Texas panhandle and in Oklahoma. Texas will increase new wind capacity by ~2.3GW (45.3%) of total new wind projects’ capacity, while Oklahoma will have 573MW (11.4%).We expect that the increase in new wind generation alone will displace an average of 414Mmcfd of gas during the 2017 injection season. Using CFVL ’s forward heat-rates, we estimate the new wind capacity alone will displace an average of 506Mmcfd of gas-based generation from July-August across the Lower-48.

Natural Gas-Fired Generating Capacity Expected to Increase in 2017-2018

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Nine US nuclear reactors have announced intent to retire. This could push natural gas demand up 1.35 Bcf per day.

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US Natural Gas High-Level Market Observations in 2017

•Global Energy Changes• Natural Gas Acquisition Pricing• Greenhouse Gas Emissions

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PresenterPresentation Notes

New border-crossing pipelines are increasing US exports to Mexico.

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US became a net exporter of natural gas during times in November

PresenterPresentation Notes22% rise in exports to Mexico in November year over year.

US gas exports have grown steadily

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PresenterPresentation NotesReflects a larger trend in the electricity space. Coal is being replaced by natural gas and to a lesser extent renewables.

First Commissioning Cargo at Sabine PassLNG Export Terminal (February 2016)

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PresenterPresentation Notes

Sabine Pass Export Breakdown by Country 2016 (Bcf)

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Source: Bloomberg NEF.

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How much US LNG can the global market absorb?Maybe not much .…

Global LNG Supply and Demand Balance (MMTPA)

Source: Bloomberg New Energy Finance, Poten & Partners

0100200300400500600700800900

1,000

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

OtherNorth AmericaRussiaEast AfricaWest AfricaAustraliaNorth AmericaAustraliaOtherRussiaWest AfricaNorth AfricaIndonesiaMalaysiaQatarDemand

Pre-

FID

O

pera

tiona

l, un

der

cons

truc

tion

or

post

-FID

PresenterPresentation NotesLooking towards 50 Bcfd of global LNG supply

Nearly 40 of demand.

Becomes a story of east Asian demand. Japan. China. Will the growth materialize. And questions:

Does economic growth in Asia spur more natural gas demand?Will environmental concerns and a push towards switching to natural gas create new demand?

United States – Net Energy Exporter?

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US Natural Gas High-Level Market Observations in 2017

• Global Energy Changes

•Natural Gas Acquisition Pricing• Greenhouse Gas Emissions

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PresenterPresentation Notes

EIA Expects Natural Gas Prices to be Higher in 2017-2018 than in 2016

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Heating Season Natural GasSpot Prices

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PresenterPresentation NotesReference & most side cases show US as net energy exporter.

US Natural Gas High-Level Market Observations in 2017

• Global Energy Changes• Natural Gas Acquisition Pricing

•Greenhouse Gas Emissions

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PresenterPresentation Notes

Energy-related CO2 emissions fall below 5.2 billion metric tons in 2016 year,

lowest since 1992.

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-15

-10

-5

0

5

2014 2015 2016 2017

(percent)

US Energy-Related Carbon Dioxide Emissions Growth

All fossil fuels (percent) Coal (percent)

Petroleum (percent) Natural gas (percent)

Two years consecutive

declines

PresenterPresentation NotesEIA estimates that energy-related emissions of carbon dioxide decreased by 2.7% in 2015. Emissions are forecast to decrease by 1.5% in 2016 and then increase by 0.8% in 2017. These forecasts are sensitive to assumptions about weather and economic growth.

Natural gas system methane emissions have declined. Upstream emissions flat despite record production.

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0

50

100

150

200

250

FieldProduction

Processing Transmissionand Storage

Distribution Total

Methane Emissions from Natural Gas Systems(Million Metric Tons CO2-equivalent)

1990 2005 2011 2012 2013 2014 2015

Tropical wetlands & agriculture dominate global methane emissions

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Costs of decarbonization matter. Lowest cost pathway keeps natural gas as a main space heating fuel

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Christopher McGillVice-President, Energy Analysis and Standardscmcgill@aga.org202.824.7132

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Slide Number 12016 in Review (Quickly!)Inflation-Adjusted Prices to Commercial Customers the Lowest since the Ford AdministrationKey Takeaways from the EIA AEO2017�2017-2040Key Takeaways from the EIA AEO2017�2017-2040 (cont.)Slide Number 6And yet, there are different visions for domestic energy policy. By April 2017 President Trump had signed more than 20 Executive OrdersBy April 2017 President Trump had signed more than 20 Executive Orders and started making Appointments.Buy American and Hire American President Trump Nominates� FERC Commissioners Positioning Domestic�Natural Gas Production in 2017Natural Gas Directed Rig OperationsDomestic Shale Production by BasinHorizontal DrillingDownhole Steerable Drill StringsSingle Pad Multi-Well DrillingMulti-Well, Single-Pad DrillingMulti-Lateral DrillingMicro Seismic TechnologyAppalachian Basin Pipeline Build-OutAppalachian Basin Pipeline Build-Out3Q 2017 pipeline Build-Out 1Q 2018 pipeline Build-Out 2Q 2018 pipeline Build-Out 4Q 2018 pipeline Build-Out Natural gas for power generation� setting records in 2016.Natural Gas-Fired Power Additions 2017Numerous solar and wind generation projects� added in 2017.Natural Gas-Fired Generating Capacity Expected to Increase in 2017-2018Nine US nuclear reactors have announced intent to retire. This could push natural gas demand up 1.35 Bcf per day.Slide Number 32US Natural Gas High-Level Market Observations in 2017New border-crossing pipelines are increasing US exports to Mexico.US gas exports have grown steadilyFirst Commissioning Cargo at Sabine Pass�LNG Export Terminal (February 2016)Sabine Pass Export Breakdown by Country 2016 (Bcf)How much US LNG can the global market absorb?�Maybe not much .…United States – Net Energy Exporter?US Natural Gas High-Level Market Observations in 2017EIA Expects Natural Gas Prices to be Higher in 2017-2018 than in 2016Heating Season Natural Gas�Spot Prices US Natural Gas High-Level Market Observations in 2017Energy-related CO2 emissions fall below 5.2 billion metric tons in 2016 year, lowest since 1992.Natural gas system methane emissions have declined. Upstream emissions flat despite record production. Tropical wetlands & agriculture dominate global methane emissionsCosts of decarbonization matter. Lowest cost pathway keeps natural gas as a main space heating fuelSlide Number 48