The Impact of Developing Energy and Environmental Policy on the Gas Industry Plus Impacts of the Current Economic State Gas / Electric Partnership Conference XVII Gas Compression from Production thru Transmission February 10, 2009 Houston, Texas Contact: Kevin R. Petak Vice President, Gas Market Modeling ICF International 703-218 218-27532753 kpetak@icfi.com 2006 ICF International. All rights reserved.
Disclaimer This presentation presents the views of ICF International. The presentation includes forward-looking statements and projections. ICF has made every reasonable effort to ensure that the informat ion and assumptions on which these statements and projections are based are current, reasonable, and complete. However, a variety of factors could cause actual market results to differ materially f rom the projections, anticipated results or other expectations expressed in this presentation. The information in this presentation is proprietary and confiden tial. It should not be distributed to third parties. 1
Contents ICF s Near-term Outlook ICF s Long-term Projection Energy and Carbon Policy Impacts 2
ICF s Near-term Outlook Gas Supply / Demand Balance (Bcfd) Recovery Recession Response Year 2007 2008 2009 2010 2011 Production 54.5 56.2 56.5 53.4 54.6 Declines with Lag Net Canadian Imports 8.4 7.7 7.1 6.4 6.1 Declines LNG Imports 1.9 0.8 0.9 2.8 2.5 Rebounds with Recovery Net Storage 0.5 0.1 (0.5) 0.2 1.2 Balances Market Total Supply 65.3 64.8 64.0 62.7 64.4 Declining Power Generation 16.4 15.9 15.3 14.8 15.9 Declining Residential / Commercial 21.6 22.5 22.4 22.2 21.9 Steady Industrial 19.8 18.9 18.7 19.0 19.1 Declining Other 5.7 5.8 5.8 5.5 5.6 Steady Total Consumption 63.5 63.0 62.2 61.4 62.5 Declining Mexico Exports 0.8 1.0 1.1 0.8 1.0 Steady Total Demand 64.3 64.0 63.3 62.2 63.5 Declining Balance 1.0 0.8 0.7 0.6 1.0 3
ICF Base Case vs. NYMEX Futures Strip $14 $12 $'s per MMBtu $10 $8 $6 $4 $2 $0 Jan-07 May-07 Sep-07 Jan-08 May-08 ICF Base Case Sep-08 Jan-09 May-09 Sep-09 Jan-10 4 May-10 Sep-10 Jan-11 May-11 NYMEX Strip Sep-11 Jan-12
Drilling Activity Oil and Gas Prices Average Active Rigs 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 $24.00 $22.00 $20.00 $18.00 $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 Average Price ($/MMBtu) Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Active Rigs Henry Hub Price WTI Price 5
ICF Base Case Forecast Gas Demand Recession appears to be a bump in the road and not a major sinkhole for natural gas. 35 30 25 20 U.S. & Canada Gas Consumption (Trillion Cubic Feet, Tcf) Power Generation Delta 2007-2015 Delta 2007-2030 1.7 4.9 15 Industrial 0.3 0.4 Growth is expected with or without Carbon Policy 10 5 Commercial Residential Other 0 2000 2005 2010 2015 2020 2025 2030 0.0 0.0 0.2 0.5 0.0 0.2 Recession Consumption Decline Gas is the Fuel of Choice for Power Generation Aggressive Growth 6 Total 2.2 Tcf 6 Tcf Other Technologies May Prevail Uncertain Growth
ICF Base Case CO 2 Allowance Prices Year $/Tonne CO 2 Natural Gas ($/MMBtu) Coal ($/MMBtu) Gasoline ($/MMBtu) Gasoline ($/gallon) Before 2014 $0 $0 $0 $0 $0 2015 $25 $1.33 $2.38 $2.06 $0.26 2020 $38 $2.02 $3.61 $3.13 $0.39 2025 $57 $3.03 $5.42 $4.69 $0.59 2030 $86** $4.57 $8.17 $7.08 $0.89 ** equals $50 / Tonne CO 2 in real $2008 / Tonne. Carbon policy will add significant costs to gas consumers, but g as will fare better than other hydrocarbons. 7
Power Generation In the next ten years, gas-based power generation will grow to around 25 percent of total generation. Growth in market share of gas-based generation will slow after 2020 as new clean coal units, renewable capacity, and some new nuclear units enter the market. 6,000 5,000 4,000 3,000 2,000 1,000 0 8 Power Generation (Billion kilowatthours) Hydro Nuclear Renewables Coal Gas 2000 2005 2010 2015 2020 2025 2030 Gas Generation as Percent of U.S. Total Generation Oil 2006: 20% 2017: 24% 2030: 25%
Gas Supply (Tcf per Year) Domestic gas resources are abundant. Drilling is sensitive to gas price. Gas deliverability responds relatively quickly to development activity due to high reserves per well. Prices at or above $5 per MMBtu will be needed to support growth of nonconventional supplies. Tcf per Year 40 35 30 25 20 15 10 5 0 Shale (not LNG) is the gas supply of the future LNG Nonconventional Conventional 2000 2005 2010 2015 2020 2025 2030 9
New Gas Supplies Affect Regional Flow Patterns Greatest increases in supply are from the Rockies and the Mid-continent shales. LNG imports and Arctic Gas are important, but not until the long-term. Costa Azul 349 553 231 (119) (487) (82) Blue Lines indicate LNG Gray Lines indicate an increase Red Lines indicate a decrease (275) (55) (84) 114 (50) 74 840 (329) (321) 674 382 (248) (91) (65) Manzanillo 506 2684 (37) (600) 254 2371 (625) 46 Lazaro Cardenas Alaska and Mackenzie +7,250 174 416 (711) (36) (697) 1523 (1153) 10 1700 433 38 (433) (12) (29) (806) Altamira 1098 (146) 108 1867 23 (365) 3556 (63) 1389 1834 (253) (72) (60) (117) 364 (630) 630 427 (984) (3259) 727 524 15 700 1497 1965 234 855 1347 Gulf LNG 0 1018 Energy 68 1137 < Freeport and Golden Pass Delta Flow 2008-2030 (MMcf /day) 5 1461 207 (534) (661) (1625) (39) (579) 259 Elba Island 473 < Lake Charles, Gulf Gateway, Sabine Pass and Cameron (645) 536 (41) 61 Florida (Offshore) Canaport 317 NE Gateway 262 Everett Cove Point
New Pipeline Capacity will be Needed Alaska and Mackenzie +7,500 Delta Capacity 2008-2030 (MMcf /day) Canaport 383 500 1700 1300 1300 3350 2250 700 447 230 1075 445 71 NE Gateway 800 700 Everett 145 411 333 2100 3600 1500 Cove Point 100 Costa Azul 1000 100 125 3100 4700 3700 1500 Elba Island 2400 1300 Blue Lines indicate LNG Gray Lines indicate an increase Red Lines indicate a decrease Manzanillo 1500 1250 Lazaro Cardenas Altamira 1000 11 2100 < Freeport and Golden Pass 1655 1000 Gulf LNG Energy < Lake Charles, Gulf Gateway, Sabine Pass and Cameron Florida (Offshore)
Projected Annual Average Henry Hub Gas Price (Nominal$/MMBtu) Fuel Prices (Nominal Dollars per MMBtu) $30 $25 $20 $15 $10 $5 $0 Recession arrests recent growth in prices. 2000 2005 2010 2015 2020 2025 Sources: Historical data from Platts Gas Daily and EIA Prices will continue upward as the economy rebounds. Distillate Residual Oil Natural Gas WTI $160 $140 $120 $100 $80 $60 $40 $20 $0 2030 WTI $'s per Barrel 12
Summary of ICF January 2009 Base Case The recent economic downturn will delay growth in gas demand by two years. But, significant growth is expected after the next two years, particularly in the power sector. Growth will occur with or without carbon policy, but greater gro wth is expected with carbon policy. Growth outside of the power sector will be more modest. DSM, conservation, and efficiency will limit opportunities for growth. Incremental gas supply will predominately come from nonconventional domestic resources. New pipeline capacity will be mainly supply driven. Gas prices will remain relatively low throughout the recession, but rise thereafter. 13
Carbon and Energy Policy Impacts on the Natural Gas Market
U.S. GHG Emissions in 2006 Millions Tonnes CO 2 equivalent 2,500 2,000 1,500 1,000 500 0 Residential Commercial Industrial Agriculture Transportation Power Gas Other Fuels Largest CO 2 emissions are from the power and transportation sectors. Gas accounts for 16% of total emissions. 15
Current Status of U.S. Carbon Policy The U.S. debate on regulation of greenhouse gases (GHGs) has changed from if or when to how and how much. The severity of the economic downturn will affect timing. Over half of the States are implementing programs now. Federal legislation has some momentum, but it is in the queue behind economic policies. GHG regulation will create direct compliance obligations and potentially large changes in power and gas markets. Common expectation is that GHG regulation will increase gas demand during the next 15 years. 16
GHG Emission Targets Under Consideration in the U.S. Congress 14,000 Emissions (MMTonne CO2e) 12,000 10,000 8,000 6,000 4,000 2,000 Business as Usual Emissions Em issions from Sources Not Covered in Bill Dingell-Boucher targets Lieberman-Warner targets 0 2008 2014 2020 2026 2032 2038 2044 2050 17
Global Energy Policy Plans Pickens 10-year Plan Generate up to 22% of electricity with wind power. Update electric grid. Natural gas to be used significantly as a transportation fuel. Incentives for energy upgrades and insulation. Reduce oil imports by 33%. 18
Global Energy Policy Plans Obama Energy Plan (from campaign) Increase auto fuel economy. 1 million plug-in hybrids by 2015. 60 billion gallons of biofuels per year. Promote responsible domestic production of oil and gas. Electric Generation 10% renewable by 2012, 25% by 2025. Energy efficiency Energy consumption 15 percent below current trends by 2020. Develop Clean Coal DOE / private partnership to develop first 5 plants. Build Alaska Pipeline. Reduce GHG emissions by 80% by 2050 Comparable to bills in Congress. 19
Targeted Policy Impacts Policy Direction CNG Vehicles 25% Autos by 2030 Plug-in Hybrids 25% Autos by 2030 Upstream technology development Remove Offshore Drilling Moratoria Alaska and Mackenzie Delta Impact Increases Gas Sales Directly Increases Electricity Sales +4% (200 TWh s) Increase Nonconventional Potential Increase Available Domestic Supplies Increase Available Domestic Supplies Approximate Impact on Gas Market +7.5 Bcfd of Consumption +4.5 Bcfd of Consumption A 10% increase in nonconventional supplies +4.0 Bcfd Production +79 Tcf of Reserves +5.5 Bcfd Production +7.5 Bcfd Production ICF Base Case 2030 Gas Consumption: U.S. 74.5 Bcfd - Canada 12.5 Bcfd 20
Targeted Policy Impacts Policy Direction Increase Renewable Generation by 50% Above Base Increase Coal Power Plant Retirement -10% by 2030 Quicker Development of Carbon Capture +10% Coal Capacity New Nuclear Power - +One 2 GW Plant Energy Conservation - Maintain R/C Consumption at 2009 Levels Impact Reduce Power Sector Fossil Fuel Consumption Coal Generation -30 GWs Capacity -225 TWhs Generation Coal Generation +30 GWs Capacity +225 TWhs Generation Reduce Power Sector Fossil Fuel Consumption Lower R/C Growth from 0.2% per year to 0.0% Effect on gas Market -5.5 Bcfd Consumption if all gas (250 TWhs) If replaced by gas, 5.0 Bcfd Consumption If all gas is displaced, -5.0 Bcfd Consumption -0.35 Bcfd Consumption if all gas (16 TWhs) -1.0 Bcfd Consumption 21
Conclusions North American natural gas market will continue to grow after current recession. Domestic shale supplies will continue to grow in importance. Climate and energy policy will have significant impacts in the long-term. The gas market will likely fare well under many of the current policies under consideration. 22
The Impact of Developing Energy and Environmental Policy on the Gas Industry Plus Impacts of the Current Economic State Gas / Electric Partnership Conference XVII Gas Compression from Production thru Transmission February 10, 2009 Houston, Texas Contact: Kevin R. Petak Vice President, Gas Market Modeling ICF International 703-218 218-27532753 kpetak@icfi.com 2006 ICF International. All rights reserved.