A Tale of Two Fuels - Crude Oil and Natural Gas Supply. Private Capital Conference February 24, 2011 Houston, TX

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1 A Tale of Two Fuels - Crude Oil and Natural Gas Supply Private Capital Conference February 24, 2011 Houston, TX

2 Henry Hub Natural Gas vs. WTI Crude $/MMBTU $14 $12 $10 $8 $6 $4 $2 Henry Hub WTI $/bbl Source: ICE 2

3 Natural Gas vs. Crude Oil Even with natural gas prices below $4.00, production continues at all time highs; prices remain under downward pressure International demand for liquids fuels is increasing, pushing up global crude oil prices Price divergence between gas and oil is shifting the economics of production, demand, processing and transportation in North America This is a structural shift that will drive market changes for years if not decades to come 3

4 Spot Henry Hub Below $4.00 $14 $12 $10 Avg $8.85 $/MMBTU $8 $6 Avg $6.94 Since 1/1/09 - $4.16 $4 $2 $0 Source: ICE 4

5 WTI Crude - $40/bbl to $98/bbl $140 $/MMBTU $120 $100 $80 $60 Since 1/1/09 - $40/bbl to $98/bbl $40 $20 $0 Source: ICE 5

6 Crude-to-Gas Price Ratio Crude prices are high relative to natural gas prices High Crude/Gas ratio 5 0 6

7 Natural Gas and Crude Oil Producers shift to oil and liquids rich gas plays Buyers shift to low price gas and plentiful light NGLs Midstream significant opportunities in processing, gathering and transportation 7

8 U.S. Production Still on the Rise Bcf/d Maintenance & Freeze-offs 2009 Avg. = 56.4 Bcf/d 2010 Avg. = 57.8 Bcf/d 2011ytd Avg. = 58.5 Bcf/d /1 2/1 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10/1 11/1 12/ Source: BENTEK Supply and Demand Report, Dry Production 8

9 Shale Production Growth Select Shale Basin Production Growth (Bcf/d) Haynesville Fayetteville Pennsylvania (Marcellus) Source: BENTEK Production Market Model & Production Monitor 9

10 Sub $4.00 Breakevens Drive Resource Plays Horn $4.30 Montney $3.24 $3.54 WCSB $5.30 Bakken Pinedale $2.77 PRB $4.32 $0.00 $5.00 Piceance San Juan $3.80 $5.13 Granite Wash Permian Cana Woodford Barnett $4.01 $0.00 $5.00 Eagle Ford $1.67 $3.42 Woodford $3.17 $4.02 $0.92 $2.29 $4.03 $3.84 $3.66 Fayetteville Haynesville Marcellus $2.86 $2.94 $3.17 Note: Breakevens computed at 12:1 Crude Ratio and 1:1 NGL Ratio Green Circles Breakeven s Computed at $80 Crude and 1:3 NGL Ratio Based on 3Q2010 Financials and State Production Data Source: BENTEK 10

11 Where Did the Gas Go? 4,500 Coal-to-gas switching Weather Reduced Imports 4,000 3,500 3,000 2,500 2, ,500 1/2 3/2 5/2 7/2 9/2 11/2 11

12 2009 Coal Switching Saves the Day Bcf/d of Switching Bcf/d in 2009 $6.00 $5.00 $4.00 $3.00 Price Low of $1.96 $2.00 $1.00 $- Cash Price / Mcf SE Gulf West MW NE Avg. Cash Monthly Low BENPOSIUM

13 2010 Hottest Summer in Last 60 Years Note: Population Weighted Cumulative CDD: June-August 13

14 Winter Demand by Year (Nov. 1 - Feb. 15) Brrrrr 60 th 54 th 45 th 32 nd 27 th 15 th Bcf/d Res/Comm Ind Power 14

15 Canadian Net Imports By Region Canadian Net Exports by Region (Bcf/d) 8.9 Bcf/d 8.2 Bcf/d 6.9 Bcf/d 7.0 Bcf/d West Midwest Northeast Source: BENTEK Canadian Observer and Supply/Demand Report 15

16 US Supply Long: Lower 48 Production Forecast Lower 48 Dry Gas Production Forecast (Bcf) 4.3% Bcf/d 9.1% Bcf/d Source: BENTEK Forward Curve 16

17 Active Rig Additions Since Recent Low - May North-South Liquids Fairway Developing Not all rigs/basins shown on map, total lower than 884 Source: RigData, BENTEK 17

18 Historical U.S. Crude Production 12,000 10,000 8,000 Mb/d 6,000 4,000 2, Crude Oil Crude Oil 2008, 2009 & 2010 Source: EIA, Excludes NGLs and Other Liquids 18

19 Capital Moving to Oil Bakken Shale Oil Play, MT and ND # Active Rigs Horizontal Rigs at All Time High Added 118 Oil Directed Rigs Since May 2009 Total Ver + Dir Hor 19

20 Global Oil Supply MM Bbls/d Gulf of Mexico Alaska Lower 48 Excl GOM Non-OPEC, Excl. U.S. OPEC Source: EIA 20

21 Cushing WTI Oversupply? Source: EIA 21

22 High NGL Prices $/MMbtu $16 $14 $12 $10 $8 $6 $4 $2 $0 Natural Gas Liquids prices have historically followed crude prices Relative to natural gas prices, liquids prices have been at high levels NGLs Henry Hub Gas 22

23 U.S. NGL Production Gas Plants 2,000 Mb/d 1,500 1, Ethane Pentanes Plus Isobutane Normal Butane Propane 0 Source: EIA/Bentek NGL Monitor 23

24 U.S. Ethane Production From Gas Plants 873 Mb/d in Nov. Mb/d Producers are shifting budget dollars to high BTU plays Most new processing plants are high ethane yield cryo plants Source: EIA/Bentek NGL Monitor 24

25 Ethane Supply Overhang? Will Ethane Supply Outpace Demand? 1,400 CP Chem, Eastman, DOW 1,200 1,000 Mb/d Additional Unannounced Projects Possible New Large Cracker (1,700 MM lbs/yr) U.S. Ethane Production Capacity to Crack Purity Ethane Marcellus Ethane Capacity Including E/P 25

26 Conclusions Even with natural gas prices below $4.00, production continues at all time highs; prices remain under downward pressure International demand for liquids fuels is increasing, pushing up global crude oil prices Price divergence between gas and oil is shifting the economics of production, demand, processing and transportation in North America Winners: Producers with oil & rich gas, Gas Processors, Petchems, Industrial & Other Gas Consumers, Gas Fired Power Generation, Environment 26

27 BENTEK Energy, LLC BENTEK is an energy market analytics company, focused on the natural gas market and related energy sectors. E. Russell Braziel Castle Court, Ste. 200 Evergreen, CO Office: