24 September 2015 NORTH AMERICAN GAS OUTLOOK

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1 NORTH AMERICAN GAS OUTLOOK

2 WORKING GAS STORAGE FORECAST (BCF) 4,5 4, 3,996 3,5 3, 2,5 2, 1,5 1, 5 1,93 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec range Source: Bloomberg New Energy Finance 1

3 SUPPLY DEMAND FORECASTS US VS. THE EIA (BCFD) Power Industrial Dry production Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep Jul Aug Sep 15 Oct 15 Nov 15 Dec 15 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16 Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep BNEF vs. EIA EIA BNEF Net pipeline imports Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16 BNEF vs. EIA EIA BNEF LNG exports BNEF vs. EIA EIA BNEF Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16 BNEF vs. EIA EIA BNEF BNEF vs. EIA EIA BNEF 1. Several large new industrial projects (mostly ammonia plants) are online over the next 12 months. But a strong dollar poses downside 2. The EIA expects LNG exports in October? Not going to happen. We foresee a sputtering start to Sabine Pass T1, with baseload operations only in April We expect production seasonality from Appalachia, especially Northeast Pennsylvania. Source: Bloomberg New Energy Finance 2

4 ANALYZING STEO S RESCOMM FORECAST The EIA is calling for a much milder winter than the last two years, in line with NOAA s forecast of a strong El Nino. Offsetting this somewhat is increasing gas-intensity more Bcf are used per HDD. We attribute most of this to the continued switch off of fuel oil in the Northeast. If this is wrong, using last year s intensity of 8.16Bcf/HDD, total heatingseason ResComm demand would drop by 166Bcf (1.1Bcfd). Upside is purely weatherdriven. Downside may be weatherdriven, or come from overly aggressive intensity assumptions. 8 September 215 EIA STEO ResComm gas demand over heating season* against HDDs** /11 211/12 212/13 213/14 214/15 215/16 Bcf of heating-season ResComm consumption per HDD /11 211/12 212/13 213/14 214/15 215/16 Source: Bloomberg New Energy Finance Note: *1 Nov-31 Mar; **National, gas-weighted HDDs Bcfd HDD 1YHDD Bcf/HDD 3

5 OCEANIC NIÑO INDEX (ONI) Niño 3.4 Region anomaly 4 3 We are right on track with the strong El Niño winter of 1997/ Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec The ONI (Oceanic Niño Index) is the tool NOAA uses to monitor El Niño and La Niña conditions. NOAA considers El Niño conditions to be present when the ONI is at least +.5. In other words, El Niño conditions exist when the three-month average sea surface temperature in the Niño 3.4 region is at least.5 C warmer than average. The ONI shows that we are entering strong El Niño conditions. 4

6 US DRY GAS PRODUCTION, YOY GROWTH (BCFD) Appalachia continues to lead the way The Permian and Eagle Ford begin to exhibit year-on-year declines The Haynesville declines mildly from its H1 215 comeback Forecast uncertainty is mostly in Other less about the Big 5 and more about the Little Net year-on-year, 215 vs. 214: +3.9Bcfd Net year-on-year, 216 vs. 215: +1.2Bcfd Haynesville Permian Eagle Ford Appalachian Other Total -2-4 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Source: Bloomberg New Energy Finance 5

7 THE LITTLE 5 We (and others) actively observe the largest production areas, monitoring drilling and completion activity, well inventory/deferrals, and midstream infrastructure, when that is a binding constraint. We do not monitor every production area, however. And even if we did, production in many is not dictated by rig counts, type curves, or midstream constraints, so forecasting is less straightforward. The chart to the right shows two things: Structurally, growth is coming from the large production areas (the grey line is trending upwards while the green line is trending downwards). On a month-to-month basis, though, variance in total production is due almost exclusively to variance at smaller plays, which still account for ~17Bcfd of production, in aggregate. Hence, forecast uncertainty is dominated by production from the Little 5 all those production areas that analysts do not spend much time tracking (and listed in the notes below). L48 gas production total vs. lesser plays (Bcfd) Lesser plays Short-term production variance stems from the Little 5 14 Oct 14 Jan 15 Apr 15 Jul 15 Total "Lesser" plays L48 Source: Bloomberg New Energy Finance, EIA, LCI Energy Note: Lesser plays are defined as total L48 production less Marcellus, Utica, Rockies, Eagle Ford, Permian, Federal Gulf of Mexico, Haynesville, Barnett, Fayetteville and Woodford. 6

8 NYMEX HENRY HUB FUTURES, NEXT 12 MONTHS ($/MMBTU) Probability distributions σ Strike σ 1.5 Oct 15 Nov 15 Dec 15 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16 Source: Bloomberg 7

OUT OF APPALACHIA 18BCFD OF TAKEAWAY ONLINE OVER 215-218 Michigan/ Ontario New

9 OUT OF APPALACHIA 18BCFD OF TAKEAWAY ONLINE OVER Michigan/ Ontario New England/ Quebec Midwest +2,559 Northeast/ Mid-Atlantic (1,662) Southeast Gulf Coast 8

10 APP BASIN TAKEAWAY CAPACITY AND PRODUCTION FORECAST (BCFD) We think 2 major pipeline projects with combined incremental takeaway capacity of 17Bcfd will be built from Sept 215-Nov 218. Growth in takeaway capacity outpaces production growth basis should narrow substantially by 217/ Jan '14 Jul '14 Jan '15 Jul '15 Jan '16 Jul '16 Jan '17 Jul '17 Jan '18 Jul '18 Jan '19 Jul '19 Source: Bloomberg 9

11 APPALACHIAN BASIN GAS EXPORTS (BCFD) Appalachia is already exporting 6Bcfd to the Gulf Coast (USGC), Midwest, Southeast and Canada. This will rise as new pipelines and continued reversals push more gas in all directions Canada TGP Southeast Transco Midwest REX Midwest TETCO USGC TGT USGC TETCO USGC TGP -1-2 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Source: Bloomberg New Energy Finance 1

TRANSCO Z6 DYNAMICS Lower NY Bay Lateral Lower NY Bay Lateral used to be 547MDth/d to Long Beach. It operated at those levels (ie, full) during winter.

12 TRANSCO Z6 DYNAMICS Lower NY Bay Lateral Lower NY Bay Lateral used to be 547MDth/d to Long Beach. It operated at those levels (ie, full) during winter. Rockaway Lateral is new build to a new point (Rockaway), for 647MDth/d. Lower NY Bay Lateral expanded by 1MDth/d. Gas sourced from Station 195. Net-net, the Rockaway Lateral will NOT add 647MDth/d of capacity into NY, but only 1MDth/d. Not only that, but National Grid was already buying gas at Station 195 last winter (5-6MDth/d a day). 11

13 WHAT CAUSES ALGONQUIN PRICES TO SPIKE? PIPELINE MAP Pipeline/point name: 214/15 heating season average flow (214/15 heating season peak daily flow) TGP: 1,141 (1,239) PNGTS: 57 (146) M&NE (inc Canaport): 222 (767) LNG (ex Canaport): 79 (463) AGT (Southeast): 1,337 (1,465) AGT (Oxford): 1,41 (1,29) AGT to IGT: 27 (41) No indigenous supply or storage Strong winter peak Underpiped LNG imports & gas-to-oil switching in the power sector 12

14 WHAT CAUSES ALGONQUIN PRICES TO SPIKE? LOGIC MAP Gas-to-fuel oil switching Cold temperatures High demand Constraints on pipeline network High prices (spikes) LNG imports Mean daily temp ( F, lh axis) System demand (MMcfd, rh axis) ,3 1,2 Oxford compressor flow Oxford compressor capacity 35 3 Prices Oil generation (GWh/d, lh axis) LNG sendout (MMcfd, rh axis) , , Apr Jun Aug Oct Dec Feb 6 Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb 13

15 ALGONQUIN S/D DYNAMICS, 214/15 HEATING SEASON LOGIC MAP IN ACTION 1 8 Mean daily temp ( F, lh axis) System demand (MMcfd, rh axis) Nov Dec Jan Feb Mar 1,25 Oxford compressor flow Oxford compressor capacity 1,15 1, Nov Dec Jan Feb Mar 35 Prices Nov Dec Jan Feb Mar 15 Oil generation (GWh/d, lh axis) LNG sendout (MMcfd, rh axis) Nov Dec Jan Feb Mar The price spike that shouldn t have been an LNG vessel British Merchant arrived outside Canaport on 22 February but was forced to wait until 26 February to unload due to poor weather. (It had loaded up at Point Fortin on 15 February.) The resulting drop in LNG sendout caused a severe price spike and a corresponding uptick in oil generation. 14

16 LOGISTIC MODEL OF ALGONQUIN PRICE SPIKE DETERMINING FREQUENCY We run three regressions, one for the entire winter, and then two others for early winter (Nov-Jan) and late winter (Feb-Mar). We then lay these curves on actual and simulated winter temperatures to arrive at an unbiased guess as to how many spikes should occur. Chance of "price spike" 11% 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% Chance of "price spike" 7% 65% 6% 55% 5% 45% 4% 35% % Daily mean temperature ( F) Entire winter Early winter Late winter 3% Daily mean temperature ( F) Entire winter Early winter Late winter 15

17 SPIKE TO WHERE? DETERMINING LEVELS 213/14 winter spikes needed to spike higher than 214/15, as fuel oil was more expensive (crude oil prices started their drop in summer 214). Currently, fuel oil prices are around $ /MMBtu. Since many plant co-fire gas and fuel oil, they will have similar heat-rates, allowing for a direct price comparison between the fuels Algonquin price vs. fuel oil price vs. oil generation 14, 12, 6 1, 5 8, 4 6, 3 4, 2 1 2, Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13 Aug 13 Nov 13 Feb 14 May 14 Aug 14 Nov 14 Feb 15 Algonquin citygate price ($/MMBtu) Fuel oil price ($/MMBtu) Oil generation (GWh/d) 16

18 ALGONQUIN BASIS OUTLOOK /98 1Y avg Fair value Nov Dec Jan Feb Mar 17

NEW ENGLAND PIPELINE ADDITIONS Project Name Pipeline In-Service Date Volume (MMcfd) CT TGP Nov 216 72.

7 IGT and PNGTS Nov 217 3 NED TGP Nov 218 1,3 Access Northeast AGT Nov 218 9 Pipelines are proposed from all directions via Canada, New

19 NEW ENGLAND PIPELINE ADDITIONS Project Name Pipeline In-Service Date Volume (MMcfd) CT TGP Nov Expansion AIM AGT Nov Atlantic Bridge SONO and C2C AGT Nov IGT and PNGTS Nov NED TGP Nov 218 1,3 Access Northeast AGT Nov Pipelines are proposed from all directions via Canada, New York, and Connecticut to reach demand in central New England. The proposed pipelines will increase capacity by 7% (+3.Bcfd) by winter 218, including a 1.3Bcfd project (Northeast Energy Direct, NED) spearheaded by Kinder Morgan. 18

20 LONGER-TERM OUTLOOK

21 CHANGE IN PRODUCTION, Canada +1.3 Production growth remains dominated by Appalachia, but the MidContinent supplies a lot of gas to USGC facilities ROX +1.6 App MidCon +4.5 F vill e -.4 Perm +1.4 Barnett +.1 H ville +4.3 All other -6.6 Eagle Ford +.8 2

22 CHANGE IN DEMAND, PacNW +1.2 Canada +3. The USGC dominates demand, although power sector growth in the Northeast, Mid-Atlantic and Southeast, and exports to Mexico, are considerable. New England -.1 CA -.5 ROX +.5 Midwest +.7 Northeast/ Mid- Atlantic +2.7 SW +.6 MC +1. South east +1. Mexports +3.2 USGC +1.3 FL

23 GAS BREAKEVENS IN-BASIN PRICING (IE, NO BASIS) ($/MMBTU) The cost of gas supply is as low as it has been for the past two decades we think D&C has come down fairly permanently Utica condy 4.18 Utica wet 4.25 Jonah 4.31 NE Marcellus core 4.33 SW Marcellus super-rich 4.91 Utica dry 5.69 SCOOP Core Condy 6.99 Haynesville core choked Fayetteville core SW Marcellus dry NE Marcellus fairway Cana condy Pinedale Piceance Williams Fork Hz Central Marcellus Barnett liquids Greater Natural Buttes Haynesville core unrestricted North Montney gassy Hoadley Glauconite Greater Sierra (Horn River & Liard Basin) Wattenberg Hz high-gor Fayetteville Tier 2 SW Marcellus wet Piceance Williams Fork Vt Barnett high-eur Cotton Valley liquids Barnett core Vermillion Almond PRB CBM Granite Wash Cana gassy Kaybob Duvernay gassy Arkoma Woodford SCOOP Core Gas Haynesville Tier 2 Hawkville (Eagle Ford) Cleveland Wattenberg Vt Miss Lime Tier 2 Source: Bloomberg New Energy Finance 22

24 OIL BREAKEVENS ($/BBL WTI) SCOOP Core Oil 66.2 Permian Midland Central Wolfcamp Hz Eagle Ford East vol oil Permian Del Basin Hz (Bone Spring) South Montney oily 7.44 San Juan (Mancos Shale) Permian Del Basin Hz (Wolfcamp) 76.7 Wattenberg Hz oil Bakken (Nesson East) Eagle Ford East condy Eagle Ford West vol oil Tuscaloosa Marine Shale Permian Midland Southern Wolfcamp Hz Permian Yeso Vt Pembina oily Permian Midland Spraberry Vt PRB Sussex/Shannon Hz Permian Central Basin Platform Hz Eagle Ford West condy Bakken (Nesson West) Miss Lime Core Permian Del Basin Vt (Wolfbone) Kaybob Duvernay oily Permian Central Basin Platform Vt Permian Yeso Hz Permian Cline Shale Hz Uinta Vt Wattenberg Hz Tier 2 Permian Del Basin Hz (Avalon) Marmaton (Shelf) Eaglebine Bakken (Elm Coulee) Uinta Hz Tonkawa STACK Permian Midland stacked Vt Pembina gassy Cana oily Source: Bloomberg New Energy Finance 23

25 BNEF LONG-RANGE HENRY HUB GAS PRICE FORECAST (REAL 215$/MMBTU) /H1 217: Glut eases as ex- Northeast supply drops/demand rises slightly H2 217/H1 219: Rapidly growing demand forces producers back into Haynesville, MidCon and Canada : Demand continues to grow, but at a less jarring pace relative calm 224+: More Canadian LNG exports, permanent declines in the Haynesville and the Marcellus plateauing push prices to a higher steady-state Price (monthly) Price (ann avg) Source: Bloomberg New Energy Finance 24

26 COPYRIGHT AND DISCLAIMER This publication is the copyright of Bloomberg New Energy Finance. No portion of this document may be photocopied, reproduced, scanned into an electronic system or transmitted, forwarded or distributed in any way without prior consent of Bloomberg New Energy Finance. The information contained in this publication is derived from carefully selected sources we believe are reasonable. We do not guarantee its accuracy or completeness and nothing in this document shall be construed to be a representation of such a guarantee. Any opinions expressed reflect the current judgment of the author of the relevant article or features, and does not necessarily reflect the opinion of Bloomberg New Energy Finance, Bloomberg Finance L.P., Bloomberg L.P. or any of their affiliates ("Bloomberg"). The opinions presented are subject to change without notice. Bloomberg accepts no responsibility for any liability arising from use of this document or its contents. Nothing herein shall constitute or be construed as an offering of financial instruments, or as investment advice or recommendations by Bloomberg of an investment strategy or whether or not to "buy," "sell" or "hold" an investment. 25

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OIL AND GAS OUTLOOK: HOW ARE THE ENERGY MARKET AFFECTING METALS? Nicole Leonard, Project Manager, Oil & Gas Consulting Services November 2015

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