thntha i dnth t usnt lg mktthe north american and...

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Th N th A i d N th t US N t l G M k tThe North American and Northeastern US Natural Gas Markets

A Wood Mackenzie Presentation

NECPUC 2012NECPUC 2012

May 22, 2012

Delivering commercial insight

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Near-term North American Gas Markets: Not What They Seem

Current prices are NO indicator of long-term value, or cost of natural gas.The current situation has resulted from a coincidental production high and• The current situation has resulted from a coincidental production high and demand low; both factors will reverse

But – the intense competition between gas and coal will last several years• Rising Gas prices will reflect the shift as gas will lose coal displacement

demand, indicating less gas to meet displacement demand

• Limited volatility, as displacement demand elasticity remains strong

Longer Term – gas prices are defined by the marginal cost of productionLonger Term gas prices are defined by the marginal cost of production• Not $4 or even $5, but…$5.50 - $6.00; this is still indicative of a well-supplied

commodity market

Delivering commercial insight© Wood Mackenzie 2

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25 1 600

The next five years… Gas and liquids prices, gas drilling

20

25

1,400

1,600

Intense competition between gas and coal through 2015; <$5.00/mmbtu price

15

20

1,000

1,200Brent

coal through 2015; $5.00/mmbtu price• Gas supply growth is driven by liquids• Some recovery in lower-cost dry

drilling will occur as prices recover• Limited alternate markets

10$/

mm

btu

600

800

gas

rigs

WTI

• Limited alternate markets • Independents continue to market dry

gas assets and focus on liquids• Gas monetization strategies are

considered

5400NGL Barrel

consideredBy 2016

• Large scale, long term investments built on low cost gas resource and environmental rules drives up demand $4.00s

02008 2009 2010 2011 2012 2013 2014 2015 2016 2017

0

200Henry HubGas Rigs

p• Prices improve to >$5.00/mmbtu by

2020• Drilling in dry gas plays recovers


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The next few years will bring broader reconciliation in gas and coal markets

8

CAPP (adj.) and gas supply curvesCAPP producers have announced prod ction c ts of 26 mst ith more to

5

6

7Cheap gas causes marginal coal mines to be shut down

production cuts of 26 mst, with more to comeUtilities are aggressively pushing back on coal contracts

3

4

5

$/m

mbt

u

With gas prices defined by coal

• Big Rivers renegotiated its contract with Patriot and Oxford, citing coal quality shortfalls

• Dynegy using Danskammer bankruptcy to terminate expensive coal contract

0

1

2

0 2 4 6 8 10

With gas prices defined by coal, Haynesville drilling is uncompetitive, and declines in favor of liquids-rich plays

terminate expensive coal contract

• Xinergy had a customer buy out an expensive coal contract

• Duke Energy is bidding below cost power into MISO to manage inventories 0 2 4 6 8 10

bcfde

2011 CAPP coal 2011 gas2011 CAPP coal 2011 gas2015 CAPP coal 2015 gas

MISO to manage inventories


Source: Wood Mackenzie (NA Gas Tool, Coal Market Service)

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The US economy is recovering, but not quickly enough for gas and coal producersproducers…

Annual Real GDP Growth

15 %WM ForecastWM Forecast

106

Real GDP Index (Q1 2008 = 100)

10 %

WM Forecast

100

102

104

5 %94

96

98

0 %88

90

92

0 %

2007 2008 2009 2010 2011 2012 2013

China India South Korea Brazil

88

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2007 2008 2009 2010 2011 2012 2013

Germany JapanUKUSA


Source: Thomson Reuters Datastream, Wood Mackenzie Forecast

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Longer Term – Coal, then Cost


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Federal Regulation, Demand Side: Longer term, environmental uncertainties and moderate prices support demand growth

Retirements?

and moderate prices support demand growth

LegendProposal to Final

Cross-State

Clean Water Act 316(b)

Air Toxics Rule

Final Rule to First Compliance

Proposal to Final Rule

First Compliance Potential support f

Significant support for gas

Cross State Rule

Ash Rule

GHG PSD (Tailoring Rule) ∞

to Final Compliance

for gas, eventually?

Clean Air Interstate Rule

Regional Haze Rule (Clean Air Visibility Rule) (2064 →)1999

GHG PSD (Tailoring Rule) ∞

2004 20202006 2008 2010 2014 20182012 2016

Clean Air Interstate Rule

Clean Air Mercury Rule


TodaySource: EPA; Wood Mackenzie North America Power Service

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Accelerating coal plant retirements will offset declines in displacement as gas prices rise slightly relative to coal pricesgas prices rise slightly relative to coal prices

US coal retirements

60 14

US power sector gas demand growth

(vs. 2011)

40

50

60

Mercury MACT

6

8

10

12

14

20

30

0

GW

0

2

4

6

bcfd

0

10

-6

-4

-2

2012 2014 2016 2018 2020 2022 20242011 2013 2015 2017 2019

South Atlantic East North CentralEast South Central West North CentralMid Atlantic Other

Load New coal capacityCoal displacement Coal retirementsPower


Source: Wood Mackenzie (NAGS, NAPS, Coal Markets Service)Source: Wood Mackenzie (NAPS, Coal Markets Service)

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Demand-side investments are underway—but generally will take several years to materializeyears to materialize

Annual gas demand growth Cumul. demand growth (vs. 2010)

25Spectra NY-NJ ChevronPhillips, Dow,

20

Power load

NGVs

1 bcfd

Res/com conv.

ppipe

p , ,Formosa, Shell, Sasol

petchem

15

bcfd

Power load

Coal

Industrial

Mercury & Air

Nucor DRI

Essar DRI

Nucor DRI

Various ethylene

exp.

5

10retirements

LNG exports

yToxics Standards

Sabine Pass

FreeportBCCameron

0

5

2015 2020

2011 2013 2015 2017 2019


Source: Wood Mackenzie North America Gas ServiceSource: Wood Mackenzie North America Gas Service

2015 2020

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What additional demand-side opportunities are available with forecast gas prices?

Res/Com

2015-'16: Mercury MACT pushes 34 GW of coal plant retirements

2015-'18: Several major petchem, steel investments

Coal retirements

Industrial

Shor

t

Demand potential

NGVsCarbon bill

Tim

e ho

rizon

potential

2025 demand

2020 demand

2015 demand

Long

T 2015 demand

1 bcfd

2016: First LNG exports, from Sabine Pass

Plug-in hybrids

Additional capital investment required 10 bcfd

5 bcfd

Significant Minimal

LNG exportsGTL

2021: 50 000 bbl/d GTL project in G C it l R i t


Additional capital investment required 10 bcfd2021: 50,000 bbl/d GTL project in western Canada

Gas Capital Requirement

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There is no real consensus (yet) on the likely volume and ramp-up of US LNG exportsLNG exports

Order of filing Of Non-FTA Applications WM View of Possible US LNG Export Capacity and Flows (H2 ’11) with EIA Report Overlay

100

70

80

90

100 12 bcfd

80

100

120

12 bcfd

30

40

50

60

mm

tpa

6 bcfd

40

60

mm

tpa

6 bcfd

brownfieldgreenfield

0

10

20

30

Woodmac H2 110

20

Pass

epor

tharl

esPointnsio

nmero

nCoas

t CoveChris

ti

brownfieldgreenfield & not yet applied for non-FTA license

2015 2016 2017 2018 2019 2020 2021 2022Sabine Pass FreeportLake Charles CameronCove Point Freeport ExpansionCorpus Christi Gulf Coast EIA Slow Ramp-up EIA Rapid Ramp-upW d H2 11

Sabine P Free

pLak

e Cha

Cove P

Freepor

t Exp

ans

Came

Gulf Co

Jord

an C

Corpu

s Ch


Source: DOE Filings, EIA, Wood Mackenzie Estimates

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The current Wood Mackenzie View…4 NA Export Facilities; a 6-year Ramp-up to 6 8 BcfdRamp-up to 6.8 Bcfd

WM Current View of N AM LNG Export Flows

North American LNG exportsReflects political and market constraints North American LNG exports

6 000

7,000

8,000

market constraints• US approvals – to a

point; so long as gas is inexpensive

• Longer term,

3,000

4,000

5,000

6,000

mm

cfd

gincreased Asian supply options

• Our view is closest to EIA’s “Slow Ramp” view

-

1,000

2,000

2010 2013 2016 2019 2022 2025 2028 2031

Ramp viewImpact on gas prices are likely to be limited (<$1.00)Canadian and Alaska

Sabine Pass Freeport Cameron Western CanadaLNG exports provide another “wild-card”


Source: Wood Mackenzie Estimates

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Will Oil and Natural Gas Ever Get Together Again in North America? Unlikely

Oil and Gas Commodity Price ForecastsAverage price WTI Crude Oil:

• 2011-15: $92.11

• 2016-20: $97.6045.00

Plentiful exploration and reservoir performance risk in this oil outlook longer term, in contrast to US gas.Avg Henry Hub (real):

30 00

35.00

40.00

• 2012: $2.68

• 2013-15: $4.01

• 2016-20: $5.10

2021 30 $5 8820.00

25.00

30.00

1$ /

mm

btu

$2011/mmbtu

Average WTI Oil to Henry Hub Gas Differential

• 2021-30: $5.88

5.00

10.00

15.00 201

1

$2011/mmbtu2000-2010 3.822012 14.832013-2020 11.36

(5.00)

-

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

WTI 1% GC No 2 HH WTI-Henry Spread WTI/Henry Ratio


2021-2030 13.27WTI 1% GC No. 2 HH WTI-Henry Spread WTI/Henry Ratio

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The Northeastern US – Major Shifts in Storej


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Northeast US Supply and Demand – No Need for Massive Backhauls(?)

Many analyses showing long-distance backhauls

Northeast US Supply (bars) and Demand (areas)

ignore the size of the Ohio and VA/MD markets.Or, they may overstate potential regional 15,000

20,000

potential regional production.While production grows by ~17 Bcfd, demand grows by 6 Bcfd

10,000

,M

Mcf

d

6 Bcfd.The need for backhauls does arise after 2020, and reaches ~ 1.5 Bcfd.

5,000

The Southeast proves the most attractive market for these excess supplies.

02010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Mid Atlantic New England Ohio VA/MD Marcellus Other E US Supply


Source: Wood Mackenzie North America Gas Tool

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The Result – The Marcellus and Other Regional Supplies Physically Back Everything Else Out

12,000

Demand = areas (Res/com, Ind, Elec)Supply = bars

End Use and Flowing Supply into the Mid Atlantic Region

8 000

10,000 Pipe Use

ELC

IND

LDC

pp yThe Marcellus exceeds 80% of Mid Atlantic end use demand by 2017

6,000

8,000

MM

CFD

LDC

Other

ArkLaTex

Haynesville

Mid-Continent

demand by 2017, and maintains an 80-85% share thereafter.

2,000

4,000Barnett Shale

WCSB

Rocky Mountains

Utica

E t US

The remnant is from the Utica, other eastern supplies (Appalachia), the

-

,

2010 2012 2014 2016 2018 2020 2022 2024 2026 2028

Eastern US

MarcellusWCSB, and some residual Rockies volume.


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Marcellus-driven Pipeline Capacity Additions: Reflecting the SW and NE Play Area Developments 2012 and 2013Area Developments 2012 and 2013

In addition to 2.9 Bcfd of gathering and pipe completions in 2011 2012 will see another 2 9

Western Regional Supplies

in 2011, 2012 will see another 2.9 Bcfd of gathering, and 2.3 Bcfd of pipeline capacity.These completions will enable another supply increase late 2012. 2013: 1.9 Bcfd of pipe completions. 240completions.Few completions truly access new markets; most allow for displacement of long-hauls. 150

240

Additional displacement is available, especially on Transco.


Source: Wood Mackenzie North America Gas Service

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Wood Mackenzie – Who we are…


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Who is Wood Wood Mackenzie is a leading content, analytics and consulting business operating in the global energy and metals industries.

Who is Wood Mackenzie?

It is a knowledge-based business headquartered in Edinburgh with global reach and a trusted world-class brand synonymous with quality.

The company is a premier supplier of ‘must have’ research and knowledge-based consulting to clients in every major company in the energy and metals industries, as well as leading financial services organisations, governments and government agencies across the globe.


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History & Key MilestonesCompetitive Advantage Built Over 30 YearsCompetitive Advantage Built Over 30 Years

1844: Wood Mackenzie founded as Edinburgh-based stockbroking firm1970s Wood Macken ie de eloped into a top rated instit tional broker ith partic lar1970s: Wood Mackenzie developed into a top-rated institutional broker, with particular

emphasis on high quality research and recognised in financial centres across UK, Europe and US

1973: North Sea Service, Wood Mackenzie’s first industry research offering, was launched1980s: Commenced provision of consulting services1981: Entered Life Sciences market1986: Wood Mackenzie purchased by Hill Samuel, the UK merchant bank, with

successive ownership by NatWest and Bankers Trustsuccessive ownership by NatWest and Bankers Trust 1999: Bankers Trust (including Wood Mackenzie) purchased by Deutsche Bank2001: Buy-out from Deutsche Bank by management, employees and Bank of Scotland2005: Refinancing deal involving Candover (a leading European private equity house)2005: Refinancing deal, involving Candover (a leading European private equity house)2007: Secondary investment by Candover, Creation of coal team by acquisitions of Hill &

Associates and Barlow Jonker and divestment of Life Sciences division2008: Acquisition of Brook Hunt


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GLOBAL LNG ONLINE

PVT

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COAL SUPPLY STUDIES PRISM


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Integrated Wood Mackenzie models and methodology

NA Gas Model (GPCM)Henry Hub Price

Global Gas Model (GGM)Henry Hub PriceHenry Hub Price

Basis PricesGas Flows

P M d l C l M d l

Henry Hub PriceGlobal LNG FlowsGlobal Gas Prices

Power Model (AURORA)Power PricesPlant Revenue, OperationsG D d f P

Coal Model (PRISM)Coal Demand & PricesEmissions PricesPl t R t fitGas Demand from Power

Power Supply DecisionsPlant RetrofitsPower Supply Decisions

Upstream ResearchCoal supplyOil SupplyGas Supply

Macro EconomicsGlobal GDPLegislation AssumptionsOil & Product Prices


Gas Supply Oil & Product Prices

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