CFC s Financial Webinar Series CERA: The state of the North American power business. How to Submit Your Question

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1 CFC s CERA: The state of the North American power business How to Submit Your Question Step 1: Type in your question here. Step 2: Click on the Send button.

2 CFC s CERA: The state of the North American power business To start the program: Michael Burn, Account Director Cambridge Energy Research Associates Today s speaker: Dr. Marie Fagan, Senior Director Cambridge Energy Research Associates

3 As a result of this session you will be able to: Describe the state of natural gas in North America. Describe the change in attitude that has taken place toward production. Describe the impact the national and international economy has on power production. Today s speaker: Dr. Marie Fagan, Senior Director Cambridge Energy Research Associates North American Natural Gas Highlights

4 Gas Market Assumptions in the Global Redesign Scenario Plentiful shale gas supply potential. Regulatory policy does not derail the Shale Gale. Power is the main driver of growth in natural gas demand. Moderate environmental policies. World oil prices remain consistently strong, oil sands investment continues steadily throughout the forecast period. North American Natural Gas Productive Capacity: Global Redesign Scenario North American Natural Gas Demand: Global Redesign Scenario Bcf per 40 Day Electric Industrial Commercial Residential

5 Technology Counters Threats to Gas Drilling Low Gas Frac Crew Methane Too Much Ethane Prices Shortages Emissions Fear of Frac Fluid Rising Well Water Fear of Methane Infrastructure Costs Disposal in Aquifers Hydraulic fraccing Horizontal drilling Microseismic Wet gas Best practices Green completions Deeper surface casing Water recycling Logging and inspection More wells per pad More frac stages 12 Historical Growth in Shale Gas Production Unconventional Gas Has Led to Very Rapid Production Increases in the US Lower August 2011, 62.8 Bcf per day, despite completion crew constraints. Shale nears 30% of US production year-to-date. Bcf Per Day July 2008, 56.1 Bcf per day Marcellus, Eagle Ford, Haynesville Shales Barnett, Fayetteville, Woodford Shales September 2009, 53.9 Bcf per day, shut-ins due to low prices January 2007, 49.7 Bcf per day Hurricane Ike 45 Hurricanes Katrina, Rita 40 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Source: IHS CERA, US Energy Information Administration (EIA).

6 Gas Production Is Not Falling at Current Drilling Levels in the US Lower 48 2, ,700 Monthly Gas Rig Count Production 60 Rigs 1,400 1, Bcf per Day North American Unconventional Gas Plays Horn River Montney Cardium Viking Utica/ Collingwood Utica Bakken Jonah / Pinedale Niobrara Utica Marcellus Woodford Granite Wash Bone Spring / Avalon Wolfcamp Wolfberry Spraberry Barnett Eagle Ford Fayetteville Haynesville Productive Capacity from Major Unconventional Gas Plays Horn River Bcf per Day Montney Marcellus Woodford Barnett Fayetteville 10 Eagle Ford Deep Bossier 5 Haynesville Source: EIA, IHS CERA.

7 Steady Growth in the Marcellus Production now exceeds 3 Bcf per day and growing by 107 MMcf per per day each month Activity remains strong Over 100 rigs operating in the play since July 2010 Bcf Per Day Rigs Drilling regulations proposed in Pennsylvania NGL handling capacity no longer a bottleneck unlocks further growth in the area Productive 1 Capacity Rig Count (PA) Source: IHS CERA, Baker Hughes. Note: MMcf = million cubic feet. Tight Oil Is Driving Additional Gas Production: Associated Gas Production from the Bakken, Fear of Fraccing: Shifting in a More Practical Direction THEN NOW

8 From Moratoria to Regulation New York Announced proposed regulations on September 28, 2011 Prohibit fracturing operations within 4,000 feet of an unfiltered surface water supply watershed, 2,000 feet of any public water source and 500 feet of a primary aquifer Require operators to disclose all fracturing water additives Generally require a closed system of piping and equipment versus open pits Pennsylvania Proposed legislation for safer well construction including: Disclosure of chemicals used in hydraulic fracturing Lower maximum allowable well pressures Raise standards for well cement and pipes Require restoration of any water sources polluted as a result of drilling Increased bonding amounts ($) for wells Increase setback from private and public water sources Tighten penalties for violations Source: Oil & Gas Law Brief, Williamsport Sun-Gazette, Alston & Bird LLP, NY Department of Environmental Conservation From Moratoria to Regulation Montana New disclosure requirements for hydraulic fracturing fluids Requirements to report estimated volume of fracturing fluid and names and amounts of principal chemicals on permit applications Texas New rule to require operators to disclose the complete makeup of fraccing fluids, including water (suggests use of FracFocus, a hydraulic fracturing chemical registry website, aiming to provide the public with factual information on fraccing and operators disclosures on frac chemicals used) Suppliers are not required to disclose information that is entitled to trade secret protection, unless the claim has been successfully challenged under Texas Government Code Louisiana Rule intent is to improve transparency of operations A work permit needs to be obtained from the Office of Conservation (OC) prior to initiating hydraulic fracture stimulation operations on a well Following completion of hydraulic fracturing operations, information on fracturing fluid composition and volumes are to be reported to the Office of Conservation or to a publicly accessible registry Source: Louisiana Department of Natural Resources, the Railroad Commission of Texas, fracfocus.org Well Cost Escalation: A Hurdle, but Not Insurmountable Well cost is important, but it is only one part of the full-cycle unit cost (FCC). Escalation in well cost as a result of several regulatory contingencies have been considered, including: Heavier grade casing requirements. Requirement to extend surface casing deeper. Mandatory green completion setup. Requirement to run casing integrity log before and after each frac treatment. Additional cost to truck in water, and cost to recycle. Cost escalations as a result of regulatory contingencies affect the FCC and could add up to $0.50 per Mcf, perhaps $1.00 per Mcf under severe regulations as assumed in our Meta scenario, which raises the cost curve but does not materially cause a supply reduction.

9 The Impact of Coal Retirements on Gas Demand* Coal Retirements Cumulative Average Daily Demand 3 GW Bcf per Day *Relative to 2010 generation. Note: GW = gigawatts. North American LNG Trade Can LNG Exports Bring US Gas Prices Up to Global Parity? Kitimat LNG train is expected to come online by late 2016, exporting 750 MMcf per day by about 2017 Gulf Coast outlook includes 1 train of 4.25 mtpa starting in 2016, for a total of 0.62 Bcf per day including losses. A second train of 4 mtpa is added in 2020 and it would require 0.59 Bcf per day worth of feedgas. LNG exports can only add a finite amount to the demand. Even if three identical trains of 0.62 Bcf per day (4.25 mtpa plus losses) were added, that provides a total of 2.61 Bcf per day of demand in terms of export capacity, about 4 percent of current North American dry gas production. Highly elastic supply of shale gas renders that additional demand inconsequential in terms of market dynamics. Exports of LNG are not expected to affect HH prices if the pace of export capacity additions is not frenetic.

10 Henry Hub Price Outlook $6 tu B $5 M M r e p $ S $4 U $3 Nominal Real $ Source: IHS CERA, Intelligence Press. State of the Power Business The US Economy on a Slow Path Slow recoveries are typical in the aftermath of a financial crisis. Consumers and businesses remain cautious, and confidence in US policymaking has hit new lows. Business equipment investment and consumer durables will drive the economy s modest near-term growth. A recovery in housing markets will be the key to more robust economic growth in The key downside risks are from a Eurozone banking crisis or US fiscal policy mistakes. The probability of a double-dip recession is 40 percent. Source: IHS Global Insight.

11 US Economic Growth by Sector (Percent change) Real GDP Consumption Residential Investment Business Fixed Investment Federal Government State & Local Government Exports Imports Source: IHS Global Insight. The Tug-of-War Determining the Growth of Power Use US Power Production,

12 US Energy and Peak Demand, CAGR Peak Energy Demand GDP % 1.9% 3.2% % 1.5% 2.6% % 1.4% 2.4% % 1.7% 2.5% US Reserve Margins, US Power Generating Capacity Retirements,

13 US Current Capacity Mix and Future Capacity Additions Capacity Mix, ,042 GW Capacity Additions, GW Solar Wind 0% 4% Hydro 7% Nuclear 10% Other 3% Coal 31% Geothermal 1% Solar 10% Other 2% Coal 5% Gas CC 15% Oil CC/CT 3% Gas/Oil ST 10% Gas CT 12% Gas CC 20% Wind 33% Gas CT 28% Spring 2011 Global Redesign Scenario. Notes: CC = combined cycle; CT = combustion turbine; ST = steam turbine. Hydro 1% Nuclear 5% Projected Year of Capacity Balance Historical US Coal-fired Generation and 2012 Sensitivities Subject to Varying Natural Gas Price Levels Coal-fired Generation (Terawatthours) 2,100 2,000 1,900 1,800 1,700 1,600 1,500 1,400 1,300 Natural Gas Price ($ per MMBtu) , * * 6 *2011 coal-fired generation is projected coal-fired generation sensitivities were developed by varying the natural gas price while holding all other inputs constant. As a simplification, SO 2 and NO X allowance prices in 2012 were assumed to be zero.

14 Historical US Power Sector Natural Gas Demand and 2012 Sensitivities Subject to Varying Natural Gas Price Levels Natural Gas Price ($ per MMBtu) 2.5 Power Sector Natural Gas Demand (Bcf per day) * * 6 *2011 natural gas demand is projected natural gas demand sensitivities were developed by varying the natural gas price while holding all other inputs constant. As a simplification, SO 2 and NO X allowance prices in 2012 were assumed to be zero. Change in Coal-fired Generation Resulting from a $1 per MMBtu Natural Gas Price Decrease or Increase from a $4 per MMBtu Baseline, % +10% 421-9% +5% % +7% Baseline Coal-fired Generation in 2012 (TWh) Change in Coalfired Generation, fired Generation, Change in Coal- $4 $3 per $4 $5 per MMBtu Gas Price MMBtu Gas Price % +1% % +14% Notes: ERCOT = Electric Reliability Council of Texas; SPP = Southwest Power Pool; WECC = Western Electricity Coordinating Council. Baseline and natural gas price sensitivities were modeled excluding allowance prices for sulfur dioxide or nitrogen oxide emissions. B/O For more information about this presentation or IHS CERA in general, please contact Ken Downey Ken.Downey@ihscera.com

15 For more information about this presentation or IHS CERA in general, please contact... Ken Downey Now let s turn it over to our audience! How to Submit Your Question Step 1: Type in your question here. Step 2: Click on the Send button.

16 Please take a minute to complete the survey. If you are requesting CPE credits, this is a requirement. Events & Training Tab Look for the replay of this program early next week Join us tomorrow at 1 p.m. Eastern Time The Topic: Environmental issues facing power producers today. The Speaker: Kristian Bodek

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