CONVENTIONAL NATURAL GAS SUPPLY COSTS IN WESTERN CANADA AN UPDATE

Transcription

1 Updated to Include Natural Gas Liquids (NGLs) Study No. 136 Update CANADIAN ENERGY RESEARCH INSTITUTE CONVENTIONAL NATURAL GAS SUPPLY COSTS IN WESTERN CANADA AN UPDATE Canadian Energy Research Institute Relevant Independent Objective

2

3 CONVENTIONAL NATURAL GAS SUPPLY COSTS IN WESTERN CANADA AN UPDATE

4 Conventional Natural Gas Supply Costs in Western Canada An Update Copyright Canadian Energy Research Institute, 2013 Sections of this study may be reproduced in magazines and newspapers with acknowledgement to the Canadian Energy Research Institute ISBN Author: Julie Dalzell Acknowledgements: The author wishes to acknowledge those involved in the production, reviewing, and editing of the material, including but not limited to Peter Howard and Megan Murphy. CANADIAN ENERGY RESEARCH INSTITUTE 150, Street NW Calgary, Alberta T2L 2A6 Canada Printed in Canada Front Cover Photo Courtesy of

5 Conventional Natural Gas Supply Costs in 1 Western Canada An Update Introduction The abundance of shale gas developments in the United States has led to sustained low natural gas prices across North America, making the majority of Canada s dry gas resources uneconomic to develop. 1 The exception is those resources that contain significant amounts of natural gas liquids (NGLs). This report updates CERI Study No. 136, Conventional Natural Gas Supply Costs in Western Canada released in June 2013 to include the supply cost of producing gas on a liquids-basis (that is, including the revenues and costs for both dry gas and NGLs) for numerous areas across Western Canada. Previously, the study only looked at supply costs on a dry-gas basis, effectively ignoring the liquids component. Produced natural gas is primarily methane (CH 4 ), but it also contains heavier hydrocarbons that are separated from the natural gas stream as liquids, including ethane (C 2 H 6 ), propane (C 3 H 8 ), butane (C 4 H 10 ) and pentanes plus (C 5 H 12 and greater). With the price of NGLs generally linked to oil prices instead of natural gas prices, the presence of liquids in the gas stream improves the potential returns from developing these types of resources. The higher the spread between natural gas prices and oil prices, the higher the incentive to extract the liquids. The supply cost calculation provides an indicator of the economic viability of producing gas in each of the study areas. With the inclusion of NGLs in the analysis, this update presents a more realistic evaluation of the economic viability of natural gas production in liquids-rich areas across Western Canada. Results The supply cost represents the natural gas price that is required to recover all costs (capital, operating, royalties and taxes) and earn a positive return on investment (10 percent real). Simply put, if the supply cost is lower than the current natural gas price, that area is considered economically viable to develop. (Note that the supply cost calculation assumes a price for NGLs, it does not solve for the price of NGLs.) 2 The presence of liquids improves the economics of gas extraction. The analysis shows that the dry-gas portion of the supply cost can decline significantly in the presence of liquids. In some cases, the dry-gas costs are almost completely offset by revenues from the liquids. Given the favourable economics for liquids-rich gas, there has been a substantial shift in drilling towards exploiting these resources across Western Canada. The share of new connections in southeast Alberta, a typically dry-gas region, dropped from 41 percent in 2011 to 20 percent in 2012, while the share in the foothills region of Alberta, a typically liquids-rich region, increased 1 CERI Study No. 136 Conventional Natural Gas Supply Costs in Western Canada, June Available for download at 2 The AECO-C price averaged $2.07/mcf in 2012 while the Henry Hub price averaged $2.64/mcf. All results are in 2012 Canadian dollars.

6 Area 1 Area 2 Area 3 Area 4 Area 5 Area 6 Area 7 Area 8 Area 9 Area 10 Area 11 Area 12 Area 13 Area 14 Area Area Area 15 Area 16 Area 17 Area 18 Area 19 Area 23 Area 30 Area 31-A9030 Area 31 Area 34-F5000 Area 34 Area 41 Area 42 Wells completed 2 Canadian Energy Research Institute from 39 percent in 2011 to 62 percent in The Montney formation in British Columbia has also emerged as a key producing region over the past 5 years. These changes are primarily driven by the shift towards liquids-rich gas resources as producers take advantage of the additional revenue associated with the production of NGLs. Figure 1 shows the number of wells completed in Alberta and British Columbia, by study area since Total drilling rates have been declining since 2008, in line with the decline in natural gas prices and the advent of horizontal drilling and multi-stage hydraulic fracturing. The shift to liquids-rich resources is also evident, as areas that had traditionally shown strong gas production, such as southeast Alberta (Area 1), have shown steep declines over the past three years. In the case of southeast Alberta, wells completed dropped from over 1,000 wells in 2010 to only 36 in ,400 Figure 1: Number of Wells Completed in Alberta and British Columbia, ,200 1, Source: CERI Those areas with the largest drilling and completion rates are those with a strong liquids-rich gas resource. Figure 2 shows the number of wells completed in 2012 and the average liquids content of those areas. Only a handful of areas in Western Canada had completion rates of above 100 wells in 2012, and those areas generally have an average liquid content of over 40 bbls of NGLs per mmcf of gas. 3 ERCB, ST :Alberta s Energy Reserves 2012 and Supply/Demand Outlook , May For a map and list of study areas see Appendix A

7 Area 1 Area 2 Area 3 Area 4 Area 5 Area 6 Area 7 Area 8 Area 9 Area 10 Area 11 Area 12 Area 13 Area 14 Area Area Area 15 Area 16 Area 17 Area 18 Area 19 Area 23 Area 30 Area 31-A9030 Area 31 Area 34-F5000 Area 41 Area 42 Wells completed Average liquid content (bbls/mmcf) Conventional Natural Gas Supply Costs in 3 Western Canada An Update Typically, liquid-rich plays in Alberta run from the northwest near Grand Prairie diagonally southeast to the Medicine Hat area encompassing the Duvernay, Montney and Muskwa formations. 5 Liquid-rich plays in British Columbia are centered on the Montney formation in the northeast of the province. Figure 2: Wells Completed and Average Liquid Content by Area Wells completed in Source: CERI Table 1 shows the supply costs for all areas on a dry-gas basis (as in CERI Study No. 136) and on a liquids basis (updated to include NGLs). The new supply cost is then split into a gas portion and liquids portion. The liquids portion reflects the amount of the supply cost that is covered by revenues from liquids produced. The gas portion is then calculated as the gas price required to cover the remaining costs and earn a positive rate of return. It is the gas portion that should be compared to the current gas price to determine the economic viability of gas production. The areas in bold represent those areas with a completion rate of more than 100 wells in It is evident that for these areas, the liquids revenue makes up a greater proportion of the total supply cost, resulting in a lower gas portion, and greater profitability. Note that the addition of NGLs in the supply cost calculation causes the total supply cost for each area to increase from the dry-gas estimate. This is because additional operating and 5 AGS, Summary of Alberta s Shale- and Siltstone-Hosted Hydrocarbon Resource Potential, October 2012

8 4 Canadian Energy Research Institute processing costs for the liquids have been included (gas processing/liquids extraction, NGLs transportation, fractionation, etc.). However, after accounting for the additional revenues gained from the liquids, the gas price required to cover the remainder of the costs falls (the gas portion). Liquids content (bbls per mmcf) Table 1: Supply Cost Summary Table All Areas Dry-gas basis Vertical wells Supply cost ($/mcf) Liquids Gas basis portion Liquids portion Dry-gas basis Horizontal wells Supply cost ($/mcf) Liquids Gas basis portion Liquids portion Area ALBERTA Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area Area BRITISH COLUMBIA Area Area Area Area Area 34-A Area 34-F Area Area Area Area

9 Conventional Natural Gas Supply Costs in 5 Western Canada An Update Liquids Vertical wells Horizontal wells content Supply cost ($/mcf) Supply cost ($/mcf) Area (bbls per mmcf) Dry-gas basis Liquids basis Gas portion Liquids portion Dry-gas basis Liquids basis Gas portion Liquids portion Area Area Area Area Area Source: CERI The analysis shows that those areas that experienced significant drilling in 2012 are also areas that enjoy high liquids content, with most of those areas enjoying a liquids content of over 50 bbls/mmcf. While this pattern is generally true, there are also areas within Alberta and British Columbia that show high liquids content but low drilling and completion activity. In these cases the production profile of both gas and liquids do not make the economics of extraction attractive. The biggest uncertainty in analyzing NGLs is the price that producers receive for liquids. Two sensitivity analyses were undertaken to examine this uncertainty. Since prices for NGLs (C 3 +) are generally linked to the price of oil, a high and low oil price scenario was examined. In addition, given recent fluctuations in the price of propane, a high and low propane price scenario was also analyzed. The results show that a high oil price brings about more favourable economics for liquids-rich gas development as producers are receiving a higher price for their liquids. This leads to greater revenue from liquids, and therefore a lower gas price required to make the development economically viable. The opposite is true for low oil prices. In total, the supply cost for each area changes very little with the change in oil prices, however, it is the breakdown between the gas and liquids portion that is more important. Figure 3 shows the sensitivity analysis results for just one area, Area 13 in central western Alberta. The total supply cost under the high oil price case is $0.11 higher, with the liquids component increasing $0.29 and the gas component falling $0.18. The propane sensitivity scenarios show the same relationship as the oil price scenarios, but to a lesser extent. Full sensitivity analysis results are presented in Appendix B.

10 6 Canadian Energy Research Institute Figure 3: Sensitivity Analysis Example, Area 13 Gold Creek to Edson Area Supply Cost Proportion of Gas and Liquids $4.50 $3.50 $3.00 $2.50 $1.50 $1.00 $0.50 $4.07 $4.12 $4.03 $2.40 $2.54 $2.25 $2.69 $2.11 $1.67 $1.57 $1.77 Base case High propane price Gas portion Low propane price $4.18 $1.49 High oil price Liquids portion $3.97 $1.86 Low oil price 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 59% 62% 41% 38% Base case High propane price Gas portion 56% 44% Low propane price 64% 36% High oil price Liquids portion 53% 47% Low oil price Source: CERI Plays such as the Montney and Duvernay, along with other liquid-rich resources, are set to remain the focus of development in the Canadian gas industry into the future. Given the outlook for sustained low natural gas prices, developers will continue to pursue those resources that produce the highest economic value-added. The expansion of the Canadian shale gas industry and the continued refinement of production processes will only result in better economics for these liquid-rich plays. Appendix B presents detailed supply cost estimates for those areas with completion rate of 100 or more in Methodology and Assumptions The overall supply cost method and assumptions are the same as those used in CERI Study No Only those that are different or new are outlined below. Liquids content Natural gas reserve and composition data was used to derive the average liquid content of each study area. These data were provided by the Alberta Energy Resources Conservation Board (ERCB) now the Alberta Energy Regulator (AER) and the British Columbia Oil and Gas Commission (BCOGC). The gas and liquid composition of each area is a weighted average based on the remaining producible volumes of natural gas. Liquids recovery Two liquid recovery scenarios were developed: Shallow cut and Deep cut. The Deep cut scenario has been used as the main scenario for this analysis.

11 Conventional Natural Gas Supply Costs in 7 Western Canada An Update Table 2: Liquids Recovery Rate Assumptions Shallow cut Deep cut Ethane 1% 90% Propane 90% 95% Butane 99% 99% Pentanes + 99% 99% Operating costs CERI Study No. 136 presented supply cost estimates that were measured at the field gate, that is, it did not include the costs of transportation or processing. This report has updated the supply cost estimates to include these costs for both the dry gas and liquids components. NGL operating cost estimates include: Processing and treating - estimated by CERI from various company data NGL raw mix transportation estimated by CERI from various company data NGL fractionation fractionation costs estimated from the Alberta Department of Energy fractionation allowance While the same operating costs have been assumed for all areas, some areas may have higher or lower operating costs depending on their individual circumstances, and this would change the results. Transportation costs Gas transport costs and NGL product transport costs were estimated by CERI from various company data NGL prices Unlike the natural gas price, which is a product of the supply cost calculation, NGL prices are exogenous to the model. Ethane Typically trades at gas value plus a premium. Ethane prices have been calculated as NOVA Inventory Transfer (NIT) purchase prices with uplift calculated by CERI. Propane, butane and pentanes plus typically trade as a proportion of WTI, prices have been assumed as 30, 80 and 106 percent of WTI, respectively. Sensitivity analysis two sensitivity scenarios are presented in Appendix B: Low/High Propane Price the low propane price scenario assumes a propane price equivalent to 20 percent of WTI, while the high propane price scenario assumes a propane price of 40 percent of WTI.

12 8 Canadian Energy Research Institute Low/High Oil Price the low oil price scenario assumes an oil price 15 percent lower than the WTI, while the high oil price scenario assumes an oil price 15 percent higher than WTI. Please refer to CERI Study No. 136 for all other assumptions.

13 Conventional Natural Gas Supply Costs in 9 Western Canada An Update Appendix A: List and Map of Study Areas Table A.1: Western Canadian Sedimentary Basin Natural Gas Supply Cost Study Areas Area ID Province Description PIA GAS Alberta Suffield Medicine Hat Area PIA GAS Alberta Bow Island Area PIA GAS Alberta Foothills Area west of Calgary PIA GAS Alberta Hussar to Princess Area PIA GAS Alberta Didsbury to Hussar Area PIA GAS Alberta Nevis and Ghostpine Area PIA GAS Alberta Bens Lake to Princess (North Lateral) Area PIA GAS Alberta Bens Lake to Canendish (East Lateral) PIA GAS Alberta Edson to Caroline (Plains Mainline) PIA GAS Alberta Notikewin formation PIA GAS Alberta Rock Creek formation PIA GAS Alberta McLeod to Caroline (Foothills Mainline) PIA GAS Alberta Glauconitic formation PIA GAS Alberta Glauconitic formation PIA GAS Alberta Glauconitic formation PIA GAS Alberta Edmonton Area PIA GAS Alberta Bens Lake upstream to Calling Lake PIA GAS Alberta Gold Creek to Edson Area PIA GAS Alberta Spirit River formation PIA GAS Alberta Blue Sky formation PIA GAS Alberta Cadomin formation PIA GAS Alberta Vahalla to Gold Creek Area PIA GAS Alberta Doig formation PIA GAS Alberta Montney formation PIA GAS Alberta Judy Creek, Kaybon to Edson and McLeod PIA GAS Alberta Doe Creek to Teepee Creek Area PIA GAS Alberta Heart River Wolverine Creek Area PIA GAS Alberta Darling Creek to Slave Lake Compressor PIA GAS Alberta Fort McMurray Area PIA GAS Alberta Owl Lake Area PIA GAS Alberta Thunder Creek to Tanghe Creek PIA GAS Alberta Zama Lake to Meikle Compressor PIA GAS Alberta Princess to Empress Mainline

14 10 Canadian Energy Research Institute Source: CERI Area ID Province Description PIA30-X9999-GAS British Columbia Pine River Lateral PIA31-X9999-GAS British Columbia Tupper Creek/Noel Area PIA31-A9030-GAS British Columbia Deep Basin Area PIA32-X9999-GAS British Columbia Groundbirch Area PIA33-X9999-GAS British Columbia Dawson Creek PIA34-X9999-GAS British Columbia Fort St John Area PIA34-A6200-GAS British Columbia Montney Area PIA34-A9022-GAS British Columbia Northern Montney PIA34-F5000-GAS British Columbia Montney formation PIA35-X9999-GAS British Columbia Chinchauga River PIA36-X9999-GAS British Columbia Ring Area PIA37-X9999-GAS British Columbia Kahntah Area PIA38-X9999-GAS British Columbia Shekilie Area PIA39-X9999-GAS British Columbia Peggo-Pesh Area PIA40-X9999-GAS British Columbia Helmut North Area PIA41-X9999-GAS British Columbia Fort Nelson to CS2 PIA41-A9022-GAS British Columbia Montney Area PIA42-X9999-GAS British Columbia Fort Nelson to NWT Border PIA45-X9999-GAS British Columbia CS2 To Summit Lake Area

15 Conventional Natural Gas Supply Costs in 11 Western Canada An Update Figure A.1: Map of Alberta Study Areas

16 12 Canadian Energy Research Institute Figure A.2: Map of British Columbia Study Areas

17 Conventional Natural Gas Supply Costs in 13 Western Canada An Update Appendix B: Detailed Supply Cost Results The following pages present the supply cost estimates for the top drilling areas in Western Canada in For each area, two figures and one table are presented: Figure 1: Comparison of Supply Cost - Dry and With Liquids Table 1: Supply Cost Breakdown Figure 2: Supply Cost Sensitivity Analysis

18 14 Canadian Energy Research Institute Area 4 Hussar to Princess Alberta Figure 1: Comparison of Supply Cost - Dry and With Liquids $8.00 $7.00 $6.00 $5.00 $3.00 $4.74 $4.74 Gas portion Liquids portion $5.38 $5.59 $1.28 $1.57 $4.10 $4.02 $8.00 $7.00 $6.00 $5.00 $3.00 $6.56 $6.56 $7.18 $7.44 $1.16 $1.50 $6.01 $5.94 $1.00 $1.00 Dry With liquids - 1% With liquids - 90% Dry With liquids - 1% With liquids - 90% Table 1: Supply Cost Breakdown Dry With liquids* Dry With liquids $ $/mcf $ $/mcf $ $/mcf $ $/mcf Capital costs 356, , ,291, ,291, Operating costs - Gas 104, , , , Operating costs - Liquids , , Royalties Methane 25, , , , Liquids 48, , Taxes 21, , , , Total costs 507, , ,557, ,766, *Base case - assumes 90%

19 Conventional Natural Gas Supply Costs in 15 Western Canada An Update Figure 2: Supply Cost Sensitivity Analysis, Change from Base Case -$0.30 -$0.20 -$0.10 $0.00 $0.10 $0.20 $0.30 -$0.30 -$0.20 -$0.10 $0.00 $0.10 $0.20 $0.30 Low propane prices prices (20% of WTI) -$0.09 -$0.02 $0.07 -$0.09 -$0.03 $0.06 High propane prices (40% of WTI) -$0.07 $0.09 $0.02 Gas portion Liquids portion Net impact -$0.06 $0.09 $0.03 Low oil Low prices oil prices (-15%) -$0.19 -$0.06 $0.13 -$0.18 -$0.07 $0.12 High oil High prices oil prices (+15%) -$0.13 $0.06 $0.19 -$0.12 $0.07 $0.18

20 16 Canadian Energy Research Institute Area 6 Nevis and Ghostpine Alberta Figure 1: Comparison of Supply Cost - Dry and With Liquids $8.00 $7.00 $6.00 $5.00 $3.00 $1.00 $5.71 $5.71 $6.76 Dry With liquids - 1% $7.06 $2.13 $2.55 $4.63 $4.51 With liquids - 90% $8.00 $7.00 $6.00 $5.00 $3.00 $1.00 Gas portion $4.34 $4.34 Liquids portion $5.37 Dry With liquids - 1% $5.76 $1.92 $2.42 $3.45 $3.34 With liquids - 90% Table 1: Supply Cost Breakdown Dry With liquids Dry With liquids $ $/mcf $ $/mcf $ $/mcf $ $/mcf Capital costs 934, , ,192, ,192, Operating costs - Gas 104, , , , Operating costs - Liquids , , Royalties Methane 57, , , , Liquids 153, , Taxes 55, , , , Total costs 1,151, ,409, ,565, ,398, *Base case - assumes 90%

21 Conventional Natural Gas Supply Costs in 17 Western Canada An Update Figure 2: Supply Cost Sensitivity Analysis, Change from Base Case -$0.40 -$0.30 -$0.20 -$0.10 $0.00 $0.10 $0.20 $0.30 $0.40 -$0.40 -$0.30 -$0.20 -$0.10 $0.00 $0.10 $0.20 $0.30 $0.40 Low propane Low propane prices prices (20% of WTI) -$0.14 -$0.04 $0.11 -$0.14 -$0.04 $0.10 High High propane propane prices prices (40% of WTI) -$0.11 $0.04 $0.14 Gas portion Liquids portion Net impact -$0.10 $0.04 $0.14 Low oil prices Low oil prices (-15%) -$0.32 -$0.10 $0.22 -$0.30 -$0.11 $0.19 High oil prices (+15%) High oil prices -$0.22 $0.10 $0.32 -$0.19 $0.11 $0.30

22 18 Canadian Energy Research Institute Area 9 Edson to Caroline (Plains Mainline) Alberta Figure 1: Comparison of Supply Cost - Dry and With Liquids $12.00 $10.00 $8.00 $6.00 $8.85 $8.85 Dry With liquids - 1% $10.31 $10.69 $2.90 $3.42 $7.40 $7.27 With liquids - 90% $12.00 $10.00 $8.00 $6.00 Gas portion $3.24 $3.24 Liquids portion $4.67 Dry With liquids - 1% $5.16 $2.66 $3.31 $1.86 With liquids - 90% Table 1: Supply Cost Breakdown Dry With liquids Dry With liquids $ $/mcf $ $/mcf $ $/mcf $ $/mcf Capital costs 2,223, ,223, ,132, ,132, Operating costs - Gas 800, , , , Operating costs - Liquids , ,338, Royalties Methane 166, , , , Liquids 400, ,740, Taxes 148, , , , Total costs 3,339, ,989, ,489, ,730, *Base case - assumes 90%

23 Conventional Natural Gas Supply Costs in 19 Western Canada An Update Figure 2: Supply Cost Sensitivity Analysis, Change from Base Case -$0.60 -$0.40 -$0.20 $0.00 $0.20 $0.40 $0.60 -$0.60 -$0.40 -$0.20 $0.00 $0.20 $0.40 $0.60 Low propane prices Low propane prices (20% of WTI) -$0.17 -$0.04 $0.12 -$0.17 -$0.05 $0.11 High propane prices High propane prices (40% of WTI) -$0.12 $0.17 $0.04 Gas portion Liquids portion Net impact -$0.11 $0.17 $0.05 Low oil prices (-15%) Low oil prices -$0.44 -$0.14 $0.30 -$0.42 -$0.16 $0.26 High oil prices (+15%) High oil prices -$0.30 $0.14 $0.44 -$0.26 $0.16 $0.42

24 20 Canadian Energy Research Institute Area 10 McLeod to Caroline (Foothills Mainline) Alberta Figure 1: Comparison of Supply Cost - Dry and With Liquids $12.00 $10.00 $10.21 $11.82 $12.35 $3.19 $3.92 $12.00 $10.00 Gas portion Liquids portion $8.00 $6.00 $10.21 Dry With liquids - 1% $8.63 $8.44 With liquids - 90% $8.00 $6.00 $2.76 $2.76 $4.35 Dry With liquids - 1% $5.01 $2.94 $3.78 $1.41 $1.23 With liquids - 90% Table 1: Supply Cost Breakdown Dry With liquids Dry With liquids $ $/mcf $ $/mcf $ $/mcf $ $/mcf Capital costs 1,805, ,805, ,767, ,767, Operating costs - Gas 800, , , , Operating costs - Liquids , ,061, Royalties Methane 143, , , , Liquids 317, ,123, Taxes 114, , , , Total costs 2,863, ,426, ,831, ,130, *Base case - assumes 90%

25 Conventional Natural Gas Supply Costs in 21 Western Canada An Update Figure 2: Supply Cost Sensitivity Analysis, Change from Base Case -$0.60 -$0.40 -$0.20 $0.00 $0.20 $0.40 $0.60 -$0.60 -$0.40 -$0.20 $0.00 $0.20 $0.40 $0.60 Low propane prices Low propane prices (20% of WTI) -$0.26 -$0.07 $0.19 -$0.26 -$0.08 $0.18 High High propane propane prices prices (40% of WTI) -$0.19 $0.07 $0.26 Gas portion Liquids portion Net impact -$0.18 $0.08 $0.26 Low oil prices Low oil prices (-15%) -$0.48 -$0.15 $0.33 -$0.46 -$0.17 $0.30 High oil prices High oil prices (+15%) -$0.33 $0.15 $0.48 -$0.30 $0.17 $0.46

26 22 Canadian Energy Research Institute Area 13 Gold Creek to Edson - Alberta Figure 1: Comparison of Supply Cost - Dry and With Liquids $6.00 $5.00 $4.47 $5.45 $5.81 $1.97 $2.47 $6.00 $5.00 Gas portion Liquids portion $3.62 $4.07 $3.00 $1.00 $4.47 $3.47 $3.34 $3.00 $1.00 $2.63 $2.63 $1.82 $2.40 $1.79 $1.67 Dry With liquids - 1% With liquids - 90% Dry With liquids - 1% With liquids - 90% Table 1: Supply Cost Breakdown Dry With liquids Dry With liquids $ $/mcf $ $/mcf $ $/mcf $ $/mcf Capital costs 2,340, ,340, ,720, ,720, Operating costs - Gas 801, , , , Operating costs - Liquids , ,282, Royalties Methane 173, , , , Liquids 550, ,315, Taxes 155, , , , Total costs 3,470, ,465, ,028, ,764, *Base case - assumes 90%

27 Conventional Natural Gas Supply Costs in 23 Western Canada An Update Figure 2: Supply Cost Sensitivity Analysis, Change from Base Case -$0.40 -$0.30 -$0.20 -$0.10 $0.00 $0.10 $0.20 $0.30 $0.40 -$0.40 -$0.30 -$0.20 -$0.10 $0.00 $0.10 $0.20 $0.30 $0.40 Low Low propane prices (20% of WTI) -$0.15 -$0.04 $0.11 -$0.15 -$0.05 $0.10 High High propane propane prices prices (40% of WTI) -$0.11 $0.04 $0.15 -$0.10 $0.05 $0.15 Low oil prices (-15%) Low oil prices -$0.30 -$0.09 $0.20 -$0.29 -$0.11 $0.18 High oil prices (+15%) High oil prices -$0.20 $0.09 $0.30 -$0.18 $0.11 $0.29

28 24 Canadian Energy Research Institute Area 14 Vahalla to Gold Creek Alberta Figure 1: Comparison of Supply Cost - Dry and With Liquids $6.00 $5.00 $3.00 $3.68 $4.59 $4.96 $1.86 $2.37 $6.00 $5.00 $3.00 Gas portion $3.13 Liquids portion $4.51 $4.06 $1.71 $2.29 $1.00 $3.68 $2.73 $2.59 $1.00 $3.13 $2.35 $2.23 Dry With liquids - 1% With liquids - 90% Dry With liquids - 1% With liquids - 90% Table 1: Supply Cost Breakdown Dry With liquids Dry With liquids $ $/mcf $ $/mcf $ $/mcf $ $/mcf Capital costs 2,333, ,333, ,963, ,963, Operating costs - Gas 801, , , , Operating costs - Liquids , ,112, Royalties Methane 173, , , , Liquids 636, ,103, Taxes 163, , , , Total costs 3,472, ,638, ,308, ,641, *Base case - assumes 90%

29 Conventional Natural Gas Supply Costs in 25 Western Canada An Update Figure 2: Supply Cost Sensitivity Analysis, Change from Base Case -$0.40 -$0.30 -$0.20 -$0.10 $0.00 $0.10 $0.20 $0.30 $0.40 -$0.30 -$0.20 -$0.10 $0.00 $0.10 $0.20 $0.30 Low Low propane prices (20% of WTI) -$0.14 -$0.04 $0.10 -$0.14 -$0.04 $0.09 High propane prices (40% of WTI) -$0.10 $0.04 $0.14 Gas portion Liquids portion Net impact -$0.09 $0.04 $0.14 Low oil prices Low oil prices (-15%) -$0.28 -$0.09 $0.19 -$0.27 -$0.10 $0.17 High oil prices (+15%) High oil prices -$0.19 $0.09 $0.28 -$0.17 $0.10 $0.27

30 26 Canadian Energy Research Institute Area Montney Formation Alberta Figure 1: Comparison of Supply Cost - Dry and With Liquids $14.00 $12.00 $10.00 $8.00 $6.00 $12.85 $13.89 $14.22 $1.94 $2.39 $12.85 $11.94 $11.83 Dry With liquids - 1% With liquids - 90% $14.00 $12.00 $10.00 $8.00 $6.00 $4.68 $5.64 $6.06 $1.81 $2.33 $4.68 $3.84 $3.73 Dry With liquids - 1% With liquids - 90% Table 1: Supply Cost Breakdown Dry With liquids Dry With liquids $ $/mcf $ $/mcf $ $/mcf $ $/mcf Capital costs 3,222, ,222, ,280, ,280, Operating costs - Gas 800, , , , Operating costs - Liquids , , Royalties Methane 223, , , , Liquids 228, , Taxes 215, , , , Total costs 4,462, ,888, ,662, ,332, *Base case - assumes 90%

31 Conventional Natural Gas Supply Costs in 27 Western Canada An Update Figure 2: Supply Cost Sensitivity Analysis, Change from Base Case -$0.40 -$0.30 -$0.20 -$0.10 $0.00 $0.10 $0.20 $0.30 $0.40 -$0.40 -$0.20 $0.00 $0.20 $0.40 $0.60 Low propane Low propane prices prices (20% of WTI) -$0.14 -$0.04 $0.10 -$0.14 -$0.04 $0.10 High High propane propane prices prices (40% of WTI) -$0.10 $0.04 $0.14 Gas portion -$0.10 Liquids portion Net impact $0.14 $0.04 Low oil prices (-15%) Low oil prices -$0.17 -$0.06 $0.11 -$0.16 -$0.06 $0.10 High oil prices (+15%) High oil prices -$0.32 $0.13 -$0.29 $0.15 $0.45

32 28 Canadian Energy Research Institute Area 15 - Judy Creek, Kaybon to Edson and McLeod Alberta Figure 1: Comparison of Supply Cost - Dry and With Liquids $12.00 $10.00 $8.00 $6.00 $9.13 $9.13 Dry With liquids - 1% $10.74 $11.27 $3.21 $3.94 $7.53 $7.33 With liquids - 90% $12.00 $10.00 $8.00 $6.00 Gas portion $3.39 $3.39 Liquids portion $4.99 Dry With liquids - 1% $5.65 $2.95 $3.79 $2.04 $1.86 With liquids - 90% Table 1: Supply Cost Breakdown Dry With liquids Dry With liquids $ $/mcf $ $/mcf $ $/mcf $ $/mcf Capital costs 3,006, ,006, ,038, ,038, Operating costs - Gas 801, , , , Operating costs - Liquids , , Royalties Methane 210, , , , Liquids 524, ,015, Taxes 193, , , , Total costs 4,212, ,145, ,143, ,235, *Base case - assumes 90%

33 Conventional Natural Gas Supply Costs in 29 Western Canada An Update Figure 2: Supply Cost Sensitivity Analysis, Change from Base Case -$0.40 -$0.20 $0.00 $0.20 $0.40 -$0.60 -$0.40 -$0.20 $0.00 $0.20 $0.40 $0.60 Low propane Low propane prices prices (20% of WTI) -$0.27 -$0.07 $0.20 -$0.27 -$0.09 $0.19 High propane prices High propane prices (40% of WTI) -$0.20 $0.07 $0.27 Gas portion Liquids portion Net impact -$0.19 $0.09 $0.27 Low oil prices (-15%) Low oil prices -$0.15 $0.34 -$0.47 -$0.17 $0.30 High oil prices (+15%) High oil prices -$0.34 $0.15 -$0.30 $0.17 $0.47

34 30 Canadian Energy Research Institute Area 34-F5000 Montney Formation British Columbia Figure 1: Comparison of Supply Cost - Dry and With Liquids $8.00 $7.00 $6.00 $5.00 $3.00 $1.00 $5.67 $5.67 $6.46 $1.75 Dry With liquids - 1% $7.02 $2.23 $4.71 $4.79 With liquids - 90% $8.00 $7.00 $6.00 $5.00 $3.00 $1.00 Gas portion $3.64 $3.64 Liquids portion $4.49 Dry With liquids - 1% $4.98 $1.91 $2.43 $2.58 $2.55 With liquids - 90% Table 1: Supply Cost Breakdown Dry With liquids Dry With liquids $ $/mcf $ $/mcf $ $/mcf $ $/mcf Capital costs 3,945, ,945, ,778, ,778, Operating costs - Gas 2,122, ,122, ,127, ,127, Operating costs - Liquids , ,747, Royalties Methane 1,070, ,307, ,356, ,863, Liquids 581, ,862, Taxes 340, , , , Total costs 7,479, ,155, ,985, ,101, *Base case - assumes 90%

35 Conventional Natural Gas Supply Costs in 31 Western Canada An Update Figure 2: Supply Cost Sensitivity Analysis, Change from Base Case -$0.40 -$0.30 -$0.20 -$0.10 $0.00 $0.10 $0.20 $0.30 $0.40 -$0.40 -$0.30 -$0.20 -$0.10 $0.00 $0.10 $0.20 $0.30 $0.40 Low Low propane prices (20% of WTI) -$0.15 -$0.04 $0.11 -$0.16 $0.00 $0.16 High propane prices High propane prices (40% of WTI) -$0.11 $0.04 $0.15 Gas portion -$0.16 Liquids portion Net impact $0.00 $0.16 Low oil prices (-15%) Low oil prices -$0.27 -$0.07 $0.20 -$0.29 $0.00 $0.29 High oil prices (+15%) High oil prices -$0.20 $0.07 $0.27 -$0.29 $0.00 $0.29

36