1

Natural Gas Outlook

November 17, 2010By:

John A. Harpole

Presentation to:2010 Fertilizer Outlook and Technology Conference

Savannah, Georgia

2

Fertilizer Industry vs. Natural Gas Industry

Source: http://www.search.com/reference/Lucy_van_Pelt

3

What will impact natural gas prices during the next 5 years?

• Shale gas/productivity gains (We aren’t exploring, we are manufacturing gas.)

• Lower EPA Air Standards (demand increase)• Renewable Portfolio Standards (in an

inexpensive gas environment?)• Coal to gas conversion (demand increase)• Demand in Mexico (potential demand increase)• LNG exports from North America (China is

waiting)

4

Historical NYMEX Prices

$0.000

$2.000

$4.000

$6.000

$8.000

$10.000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Year

$/M

MB

tu

NYMEX - Average last 3 days of close as reported in Platts Gas Daily Report, A McGraw Hill Publication

5

$0

$1

$2

$3

$4

$5

$6

$7

11/1

/201

02/

1/20

115/

1/20

118/

1/20

1111

/1/2

011

2/1/

2012

5/1/

2012

8/1/

2012

11/1

/201

22/

1/20

135/

1/20

138/

1/20

1311

/1/2

013

2/1/

2014

5/1/

2014

8/1/

2014

11/1

/201

42/

1/20

155/

1/20

158/

1/20

1511

/1/2

015

$/M

MB

tu

BENTEK Est.

BENTEK Expects The Forward Curve To Fall Further

NYMEX

Source: BENTEK

6

Part 1: Shale Gas

7

88Source: America’s New Natural Gas, America’s Natural Gas Alliance

EVOLUTION IN GAS WELL COMPLETION TECHNOLOGY

- THE KEY TO TODAY’S NATURAL GAS REVOLUTION

9

Cody

PierreFayetteville

Haynesville

Eagle Ford

Horn River

Montney

Deep Basin Colorado Group

Mowry

Gammon

Bakken

Baxter/Mancos

Mancos

Barnett/Woodford

Barnett

NEW SHALE PLAYS IN NORTH AMERICA- “A Game Changer”

MulkyNew Albany

Antrim

Marcellus/Ohio/Huron

Utica

Woodford

Floyd-Neal

Niobrara

Lewis

Source: America’s Natural Gas Alliance website

10

Eastern U.S. Gas Shale BasinsResource

Endowment (Tcf)

Produced/Proved Reserves (Tcf)*

Undeveloped Recoverable

Resource (Tcf)*

Barnett 250 19 40

Fayetteville 320 3 50

Woodford 300 2 30

Haynesville 790 1 130

Marcellus 1,760 - 220

Total 3,420 25 470*As of end of 2008

U.S. Proved Natural Gas Reserves as of 2005: 192.5 Tcf

Source: Gas Shales Drive the Unconventional Gas Revolution, Vello A. Kuuskraa, Advanced Resources International, Inc., 3/5/2010

11

45.0

50.0

55.0

60.0

65.0

1/1 2/1 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10/1 11/1 12/1

Comparison of Marketed Production

Production Continues To Climb

Source: BENTEK Supply and Demand Report

Jan JulApr Oct

Aver

age

Dai

ly C

onsu

mpt

ion

(Bcf

d)

-2% 1%

Data through October 28, 2010

200820092010

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

Hurricanes

Maintenance

Freeze-offs

5% TD 6%QTD

12

Historic Relationship Between Rig Count & Production No Longer Holds

50.052.054.056.058.060.062.064.066.068.0

0

500

1,000

1,500

2,000

2,500

3,000

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Active Rig CountGross Production (wet)

Act

ive

Rig

Cou

nt

Average Daily Production (B

cfd)

Source: BENTEK, RigData

09 Production Grew By Nearly 3%, But The Rig Count Fell By 42%

13

13

14

14

15

15

16

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

0

1,500

3,000

4,500

6,000

7,500

2006 2007 2008 2009

Estim

ated

Ulti

mat

e R

ecov

ery

(EU

R) (

Bcf

e)

Average Lateral Len

gth (Ft)

Longer Laterals & Increased Fracing Drive Production Gains

5 Stages 5 Stages

11 Stages

9 Stages

Experience of Newfield Exploration Co in Woodford

Source: BENTEK

17

Technological Advances Enable Multi-WellPads & Increase Recovery Rates

Drilling U

nit Boundary

Lega

l Act

ivity

Lim

it

12 Stage Frac

17 Stage Frac

5 Additional Frac Stages = 1.250 MMcf EUR / Well

@ $4.50 per Mcf = $5,625,000

Source: BENTEK

18

Multi-Well Pad Drilling Reduces Land Disruption

Source: BENTEK

19

Why Is Production Growing With Low Prices?

Source: ICE

Avg. 2008 - $8.85

Since 1/1/09 - $4.19Avg. 2007 - $6.94

20Vertical Rigs

Horizontal Rigs

Directional Rigs 0200400600800

1000

Dir Ver Hor

U.S. Active Rigs

Barnett Shale Gas

Play

Marcellus Shale Gas

Play

Fayetteville Shale Gas

Play

Haynesville Shale Gas

Play

Woodford Shale Gas

Play

Pinedale/Jonah Tight Gas

Granite Wash Tight Gas

Williston BasinBakken Shale (Oil Play)

Emerging Eagle Ford Shale Play

Permian Basin-Oil Targets

U.S. Active Rig Is Scattered & Focused On Both Oil and Gas

RigData: Lower 48 States, Aug 2010

NiobraraShale (Oil Play)

Oil & LiquidsFairway

21

The Forward Curves Encourage Drilling

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$/M

cfe

$5.26 Apr 11 to Dec 13

$4.42 Winter 10-11

$3.82 September 10

12-1 Crude to Gas Ratio Source: BENTEK

22

Part 2: EPA

EPA has promulgated National Ambient Air Quality Standards (NAAQS) for six pollutants:

• Ozone (1Hr & 8HR O3)• Particulate Matter (PM10, PM2.5)• Sulfur Dioxide (SO2)• Nitrogen Oxide (NO2)• Carbon Monoxide• Lead (Pb)Source: The SIP Planning Process: An Overview of The Clean Air Act’s (CAA) Requirements for State Implementation Plan (SIP) Development & Approval, January 8, 2010

22

23

EPA’s Effort to Tighten Air Standards

• Lisa Jackson at EPA is moving to change the 75 ppb standard for ozone to a new standard within the range of a 60-70 ppb.

• On January 6, 2010, EPA proposed to strengthen the NAAQS for ground-level ozone, the main component of smog.

• EPA will issue final standards by December 1, 2010.

Source: Fact Sheet Proposal to Revise the National Ambient Air Quality Standards for Ozone

24

EPA Effort (cont’d)

Estimated Timeline for Implementing the Proposed Ozone Standards

– January 2011: States must recommend areas to be designated attainment, nonattainment or unclassifiable.

– July 2011: EPA makes final area designations.– August 2011: Designations become effective.– December 2013: State Implementation Plans (SIP),

outlining how states will reduce pollution to meet the standards, are due to EPA.

Source: Fact Sheet Proposal to Revise the National Ambient Air Quality Standards for Ozone

25

Counties With Monitors Violating the March 2008 Ground-Level Ozone Standards0.075 parts per million

322 of 6751 monitored counties violate the standard

(Based on 2006 – 2008 Air Quality Data)

Notes:1. Counties with at least one monitor with complete data for 2006 – 20082. To determine compliance with the March 2008 ozone standards, the 3-year average is truncated to three decimal places.

Source: Air Quality Management Overview Presentation, RAQC Board Meeting, March 5, 2010, Paul R. Tourangeau 25

26

Counties With Monitors Violating Proposed Primary 8-hour Ground-level Ozone Standards0.060 – 0.070 parts per million

EPA will not designate areas as nonattainment on these data, but likely on 2008 – 2010 data which are expected to show improved air quality.

Notes:1. No monitored counties outside the continental U.S. violate.2. EPA is proposing to determine compliance with a revised primary ozone standard by rounding the 3-year average to three decimal places.

515 counties violate 0.070 ppm

93 additional counties violate 0.065 ppm for a total of 60842 additional counties violate 0.060 ppm for a total of 650

Source: Air Quality Management Overview Presentation, RAQC Board Meeting, March 5, 2010, Paul R. Tourangeau 26

27

Part 3: Renewable Portfolio Standards (RPS)The IPAMS/Bentek Study

• Wind is intermittent, not dispatchable• Coal plants “cycle down” to accept wind

into the grid• “Cycling coal plants” are inefficient and

produce more pollution than wind generation saves

28

Typical 100 MW Wind Plant Generation vs. Hourly System Load

0102030405060708090

100

12:0

0 A

M1:

00 A

M2:

00 A

M3:

00 A

M4:

00 A

M5:

00 A

M6:

00 A

M7:

00 A

M8:

00 A

M9:

00 A

M10

:00

AM

11:0

0 A

M12

:00

PM

1:00

PM

2:00

PM

3:00

PM

4:00

PM

5:00

PM

6:00

PM

7:00

PM

8:00

PM

9:00

PM

10:0

0 P

M11

:00

PM

Win

d G

ener

atio

n (M

W)

20002500300035004000450050005500

Syst

em L

oad

(MW

)

Wind Generation (MW) Load (MW)

Source: Brett Oakleaf, Invenergy LLC

Output is Not Correlated with Load

29

Xcel Defined Wind Event:7/2/2008

Coal Wind

Gas

Source: PSCo Training Manual

4:00 AM 8:00 AM

When Wind Blows At Night, Coal Gen Ramps Down

30

The Problem Lies In The Interaction Between Wind and Coal Generation

Wind Causes PSCO To Cycle Its Coal Plants, Which Raises Emissions

May 102008

May 132008

May 122008

May 112008

May 142008

Noon Noon Noon Noon Noon

Source: CEMS data

Hou

rly C

oal G

ener

atio

n (M

W)

31

Cherokee+43%+9%+5%

Comanche-39%--33%

--

Pawnee+17%

----

Source: CEMS, BENTEK Energy

LegendPlant NamePct Chg SO2 06-09 Emission Rate Pct Chg NOX 06-09 Emission RatePct Chg CO2 06-09 Emission Rate

Emissions At Non-attainment Area Coal Plants Impacted By Cycling Are Rising

Denver Nonattainment Area

Arapahoe+14%+6%+9%

Valmont+173%+3%+2%

31

32

Part 4: Coal to Gas Conversion

“Barclays Capital analysts estimate 27,000 megawatts of production, or more than 2% of U.S. [coal fired electric] generating capacity, could close in four to five years.”

Source: Coal Plants Face Tight Pollution Regulations, Mark Peters, The Wall Street Journal, 2/10/2010

33

Bernstein Research Forecast• Existing coal fired generation plants are expected

to decline by nearly 400 million MWh by 2015.*• Model assumes all coal fired power plants must

install SO2 scrubbers to meet EPA emissions standards for mercury and acid gases.*

• U.S. gas consumption would have to increase by at least 2.1 Tcf per year.

• This implies a 10% increase in U.S. consumption of natural gas by 2015.

*Source: Bernstein Research, Black Days Ahead for Coal presentation, March 19, 2010

34

ME

NHVT

MARINY

NJ

DEMD

PA

VA

NC

WV

OH

MIWI

MN

IA

IL IN

KY

TNSC

FL

GAAL

MS

LA

AR

MO

TX

OK

KS

NE

NM

CO

WY

MT ND

SD

UT

AZ

NV

ID

WA

OR

CA

CT

3%4 plants

5% 3 plants

5% 3 plants

6% 5 plants

7% 6 plants

8% 6 plants

8% 8 plants

13% 9 plants

14% 8 plants

3%3 plants

3%3 plants

4%2 plants

2% 3 plants

2% 4 plants

1% 1 plant

1% 1 plant

1% 1 plant

1% 1 plant

1% 1 plant

1% 1 plant

0.4% 1 plant

0.3% 1 plant

75 Worst Coal Power PlantsPercent of Total Pollution

Sources: “Dirty Kilowatts – America’s Most Polluting Power Plants”, Environmental Integrity Project (July 2007),EIA-860 December 2008, Analysis/Summary by F.P. LeGrand

Population< 1 million 1-5 million

5-10 million10-15 million> 15 million

Population< 1 million 1-5 million

5-10 million10-15 million> 15 millionShale plays

35

Part 5: Demand in Mexico• During the next 10 years, Mexico plans to build

an incremental 25,000 MW of electric power generation (POISE)

• This could equal 4.5 BCF per day of new gas demand (1.64 TCF per year)

• Mexico is currently looking for new pipeline interconnects into the U.S. for incremental supply at:

• Monterrey• Chihuahua • Baja

36

Part 6: LNG Exports from North America

3737

38

3939Presentation to Senate Business and Commerce Committee & Senate Natural Resources Committee, April 15, 2008.

4040

41

Chengdu, China, September 2010

42

Don’t be fooled…

43

China Growth

• From 2000 onward, more than half of the growthin the global energy demand came from China.

• In the last decade, China’s energy consumption has more than doubled.

• In 2003, China became the world’s second largest oil consumer, surpassing Japan.

• In 2010 China surpassed the U.S. in total energy consumed. A position that the U.S. had held for over 100 years.

Nobuyuki Higashi, Natural Gas in China: Market evolution and strategy, June 2009

Michael J. Economides with Xina Xie, Energy: China's Choke Point

44

China Growth• In the 12th Five-Year Plan, China’s annual

investment for infrastructure (highway construction, pipeline construction, etc.) will be $165 billion per year.1

• 20% of China’s total energy is consumed in the production of concrete

• China’s natural gas demand is 10% of U.S. demand• From a regulatory and consumption standpoint they

are where the U.S. was in the 1930-1940’s• 30% of China’s natural gas supply is imported• According to PetroChina, only the third horizontal

shale natural gas well was completed in all of Asia this past summer.1

1Source: China Daily 11/09/2010, page 13

Nobuyuki Higashi, Natural Gas in China: Market evolution and strategy, June 2009

Michael J. Economides with Xina Xie, Energy: China's Choke Point

45

What can you do?

• Buy gas in the ground to lock in a favorable price.

• Industrial customer example• West coast utility example• Volumetric Production Payments and long

term fixed price supply contracts (HB 1365)

46

Summary

• Most “experts” project flat gas prices for the next 5 years.

• In 20 years, we have never seen flat gas prices.

• The billion dollar question: Will EPA, RPS and LNG issues “counter balance” new shale gas productivity?

47

Citations for ReportAll of the information utilized for this report is a compilation of information pulled from the following data sources:Bentek Energy Institute for Energy Research (IER) Energy Information Administration (EIA)Bernstein ResearchBrett Oakleaf, Invenergy LLCPaul R. Tourangeau, Colorado Dept. of Public Health & EnvironmentElectric Power Research Institute (EPRI)EnCanaMark Peters, The Wall Street Journal, 02/10/2010America’s Natural Gas AllianceNobuyuki Higashi, Natural Gas in China: Market evolution and strategy, June 2009

Michael J. Economides with Xina Xie, Energy: China's Choke PointTrain pictures: http://www.darkroastedblend.com/2009/03/train-wrecks.html

48

John A. HarpolePresident

Mercator Energy LLC26 W. Dry Creek Circle, Suite 410

Littleton, CO 80120www.mercatorenergy.com

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

Contact Information