North American Natural Gas Market Outlook Energy Trends & Impacts On Gas Infrastructure Prepared For: Gas/Electric Partnership, Conference XVIII Darryl Rogers February 10, 2010
Agenda Introduction to Purvin & Gertz, Inc. GDP, Crude Oil and Gas Price Outlook U.S. Gas Supply and Demand Outlook Implications to U.S. Gas Logistics Summary and Conclusions 2
Purvin & Gertz - Background Founded in 1947 in business for over 60 years Independent firm owned by active consultants Total employees = 83 Global Presence with offices in: Houston (Headquarters), Los Angeles, Calgary, London, Singapore, Buenos Aires, Moscow and Dubai Consulting staff of Chemical Engineers/MBAs 44 full-time consultants Technical, commercial and financial experience An average of 22 years of industry experience Strategic Alliance with CMAI since 1992 Serve several industries energy through petrochemicals Perform work on a project basis (single-client, special projects) and ongoing analyses of energy markets (multi-client subscription services) About Purvin & Gertz 3
Our global presence provides worldwide assistance to our clients Calgary London Moscow L.A. Houston Dubai Singapore Buenos Aires 4
Industries Served Crude Oil Market Analysis and Pricing Petroleum Products Refining and Marketing NGLs/LPG Gas Processing and Marketing Natural Gas/LNG Markets and Infrastructure Petrochemicals Feedstock Markets About Purvin & Gertz 5
Typical Purvin & Gertz Assignments: Single-client and Subscription Services MARKET ANALYSIS PROJECT-RELATED ASSIGNMENTS Subscription Services Short-term Long-term Mergers/Acquisitions Asset Valuations Due Diligence Fundamental Industry Analysis: Supply/Demand/Trade and Pricing Topical Studies Canadian Oil Sands LNG / Nat Gas Markets Petrochemical Feeds World LPG Markets Crude/Condensate Markets and Pricing Independent Engineer Technical Review Market Study Project Economics Profit Improvement Commercial Review PIMS LP Analysis Technical/Optimization Market Studies for downstream projects Other Special Studies Defined by our clients and tailored to meet their specific needs 6 6
Agenda Introduction GDP, Crude Oil and Gas Price Outlook U.S. Gas Supply and Demand Outlook Implications to U.S. Gas Logistics 7
World Economy Stimulus The crisis has passed (hopefully!), but Monetary policy remains expansionary Interest rates remain at historic lows Fiscal policy is extremely supportive of economic activity Money continues to be spent on Keynesian Rescue Packages High unemployment will pressure governments to continue stimulus Low commodity prices contributed to stimulus but are starting to rise Inflation will become a Clear and Present Danger 8
World Economy Bad News & Good News The Bad News: The world economy experienced a severe recession it began slow but accelerated rapidly The recession appears to be over but we remain in a period of high uncertainty The Good News: Comparisons to the Great Depression are overblown Unemployment in the 7% to 10% range is not good, but is manageable The decline was rapid and severe, the recovery is expected to be rapid, too 9
Global economic growth is expected to resume 15 10 GDP Growth, Percent World China U.S. India Middle East Europe Forecast 5 0-5 1995 2000 2005 2010 2015 10
U.S. GDP has increased to 3.6% for 2010; Outlook for 2011 GDP growth is 3.4%; Expecting a new GDP high by 4Q10 8 U.S. GDP % of growth (Quarter-to-Quarter Seasonally Adjusted Constant Terms) 6 4 2 0-2 -4 U.S. GDP Actual U.S. GDP -6-8 Q105 Q305 Q106 Q306 Q107 Q307 Q108 Q308 Q109 Q309 Q110 Q310 Q111 Q311 11
Energy markets are affected by a variety of issues 12 12
WTI short term price outlook 150 $/Bbl 140 130 120 110 100 90 80 70 60 50 40 30 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 13
U.S. drilling rig activity dropped by half due to the collapse in natural gas prices (Low in Mid July) $14.00 Henry Hub Price, $/MMBTU Number of Gas-Oriented Drilling Rigs in the U.S. 1,800 $12.00 USGC Prices, $/MMBtu Gas Rigs 1,600 1,400 $10.00 1,200 $8.00 1,000 $6.00 800 $4.00 600 400 $2.00 200 $0.00 0 Jan-97 Nov-97 Sep-98 Aug-99 Jun-00 Apr-01 Mar-02 Jan-03 Nov-03 Oct-04 Aug-05 Jun-06 May-07 Mar-08 Jan-09 14
Natural gas storage levels set a new record high in 2009 and are expected to remain relatively high in 2010 (winter demand continues to be a wildcard) 4.0 3.5 3.0 2.5 Trillions of Cubic Feet Five Year Range Max 2010 Forecast 2009 2008 2.0 1.5 1.0 0.5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 15
Henry Hub short term price outlook 14 $/MMBTU 13 12 11 10 9 8 7 6 5 4 3 2 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 16
The Crude-To-Gas ratio is trending towards historical norms 25 WTI Cushing ($/Bbl) / HH ($/MMBTU) 23 21 19 17 15 13 11 9 7 5 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 17
Gas prices are expected to remain at a discount to residual fuel oil and distillate 22 New York Burner Tip - Dollars per Million BTU, Current Dollars 20 Distillate 18.3% S Resid 16 Natural Gas 14 12 10 8 6 4 2 1990 1995 2000 2005 2010 18
Agenda Introduction GDP, Crude Oil and Gas Price Outlook U.S. Gas Supply and Demand Outlook Implications to U.S. Gas Logistics Summary and Conclusions 19
The U.S. natural gas market supplies were economically constrained in the 2000s which stimulated gas supply development (both internationally via LNG and domestically) to serve an expanding U.S. gas market $14.00 $12.00 $10.00 U.S. Lower 48 Weekly Gas Directed Rig Count USGC Prices, $/MMBtu Gas Rigs 1,800 1,600 1,400 1,200 $8.00 1,000 $6.00 800 $4.00 600 400 $2.00 200 $0.00 0 Jan-97 Nov-97 Sep-98 Aug-99 Jun-00 Apr-01 Mar-02 Jan-03 Nov-03 Oct-04 Aug-05 Jun-06 May-07 Mar-08 Jan-09 Dec-09 20
The large proportion of liquefaction capacity additions planned in the early 2000s were oriented as Pacific Basin supply projects to support intra-basin demand with some portion of the capacity pointed towards the west (Europe and the U.S.) 1.4 Russia (Bcfd) Qatar (Bcfd) Indonesia (Bcfd) Yemen (Bcfd) Peru (Bcfd) Australia (Bcfd) Liquefaction Capacity Additions (Bcfd) 1.2 1 0.8 0.6 0.4 0.2 0 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 21
Global liquefaction capacity additions will increase considerably over the next few years to meet the expected shortfall between U.S. supply and demand and plans will change and markets will adjust given the surge in U.S. domestic supply 1.4 Liquefaction Capacity Additions (Bcfd) Cumulative Liquefaction Capacity Additions (Bcfd) 12 Liquefaction Capacity Additions (Bcfd) 1.2 1 0.8 0.6 0.4 0.2 ~11 Bcfd or 4,000 Bcf per year 0 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 10 8 6 4 2 Cumulative Capacity Additions (Bcfd) 0 EOY 2008 Liquefaction Capacity ~26 Bcfd and Growing to ~37 Bcfd by EOY 2011 22
LNG imports into the U.S. are expected to increase in the short term resulting from reductions in gas directed rig activity in the U.S. and Canada and the wave of LNG capacity coming online 6,000 5,000 U.S. Gas Imports - Billion Cubic Feet Per Year Alaska LNG Canada (net) Forecast 4,000 3,000 2,000 1,000 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 23
LNG imports into the U.S. are driven by global LNG demand (push / pull dynamics), relative global energy prices and LNG producer netbacks, and U.S. domestic supply strength Global Capacity and U.S. Gas LNG Imports - Billion Cubic Feet Per Year 15,000 12,500 Global Liquefaction Capacity Global LNG Demand U.S. LNG Imports Forecast 10,000 7,500 5,000 2,500 0 2005 2006 2007 2008 2009 2010 2011 24
U.S. oil directed rig count has recovered ahead of the gas directed rig count but gas directed rigs will come back (but not likely to 2007 and 2008 levels) Rig Count 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Jan-97 U.S. Lower 48 Weekly Oil & Gas Directed Rig Counts Oil Gas Percent Gas Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% % Gas Rigs 25
Some shales are being exploited and others are less economic (can be exploited at a certain price) 26
Total U.S. gas resource base has increased with higher prices and technological advancements (for bringing both conventional and unconventional gas to market) 1,200,000 1,000,000 U.S. Lower 48 Reserves Billion Cubic Feet Technically Recoverable Reserves (Bcf) 800,000 600,000 400,000 200,000 0 2000 2002 2004 2006 2008 27
U.S. gas resource estimates have increased significantly over the past few years with shale gas leading the way 1,200,000 1,000,000 800,000 U.S. Lower 48 Reserves Billion Cubic Feet West Coast Southeast East Coast MidWest Rocky Mountain States New Mexico Oklahoma Texas Louisiana 600,000 400,000 200,000 0 2006 2008 28
Gas directed rig recovery has been led by activity in the U.S. gas shale formations and increases are expected thereby adding unconventional supplies and replacing some conventional supplies 450 400 350 300 250 200 150 100 50 0 Gas Directed Rig Counts: Barnett, Fayetteville, Haynesville, Woodford and Marcellus Rig Count - 5 Big Shales 2009 2010 2011 29
U.S. shale gas production is not new and improvements in hydraulic fracturing and horizontal drilling have positively impacted gas production economics 12 11 10 9 8 7 6 5 4 3 2 1 0 U.S. Shale Gas Production - Billion Cubic Feet Per Day Barnett Fayetteville Woodford Haynesville Marcellus Antrim Forecast 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 30
U.S. gas directed drilling activity will recover and production efficiency improvements (wells/rig, EUR, etc.) will push down gas directed rig fleet utilization as compared to 2007 and 2008 levels 1,600 1,400 1,200 1,000 800 U.S. Lower 48 Annual Average Gas Directed Rig Count Louisiana Texas Oklahoma New Mexico Rocky Mountains Other States TOTAL LOWER 48 Forecast 600 400 200 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 31
Total U.S. non-associated gas production is increasing and U.S. gas shale formations contributions to the U.S. supply mix will increase significantly over the next few years 30,000 U.S. Lower 48 Gas Production - Billion Cubic Feet Per Year Non-shale Lower 48 Non-Associated Gas 25,000 20,000 Lower 48 Shale Gas (Gross) Forecast 15,000 10,000 5,000 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 32
Total U.S. non-associated gas supplies have increased in Louisiana and Texas led by production growth from gas shale formations; gas production from other states shale gas formation (i.e. Marcellus) has increased and is expected to continue to increase Lower 48 Non-associated Gas Production - Billion Cubic Feet Per Year 30,000 25,000 20,000 North Louisiana South Louisiana Federal OCS South Texas Deepwater Texas Upper Gulf Coast Central Texas East Texas West Texas Tx Federal OCS Texas Deepwater Oklahoma New Mexico Rocky Mountain States West Coast Other States 15,000 Forecast 10,000 5,000 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 33
Summarizing: U.S. associated and non-associated gas production has momentarily slowed to rebalance supply and demand and will recover and expand 30,000 25,000 U.S. Lower 48 Gas Production - Billion Cubic Feet Per Year Associated Non associated Forecast 20,000 15,000 10,000 5,000 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 34
Canadian net pipeline imports to the U.S. have been decreasing and are expected to continue to decrease the rate of decline and recovery is uncertain (but we have a view) 30,000 25,000 U.S. Lower 48 Gas Supplies - Billion Cubic Feet Per Year LNG Imports Alaska Gas flows Net Pipeline Imports Lower 48 Dry Gas Production Forecast 20,000 15,000 10,000 5,000 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 35
U.S. Census Bureau Regions: An Analysis of Demand 36
U.S. natural gas demand will be led by the power generation sector and with all regions increasing over time given our outlook for population growth, consumer choices, and efficiency gains (in the res/com sector) 30,000 25,000 U.S. Lower 48 Gas Demand - Billion Cubic Feet Per Year New England Middle Atlantic East North Central West North Central South Atlantic East South Central West South Central Mountain Pacific Contiguous Forecast 20,000 15,000 10,000 5,000 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 37
U.S. gas demand is expected to continue to increase over time and will reach pre-recessionary levels within the next 2 years 30,000 25,000 U.S. Lower 48 Gas Demand - Billion Cubic Feet Per Year Residential Commercial Vehicle Industrial Power Generation Lease/Plant Fuel Pipeline Fuel 20,000 Forecast 15,000 10,000 5,000 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 38
Total U.S. Electric Demand is expected to increase with a growing economy while carbon legislation and high crude oil prices will provide an uplift to generating sources powered by renewables and gas 6,000 5,000 U.S. Electric Demand - Billion Kilowatt-hours Per Year Coal Petroleum Gas Nuclear Hydroelectric Renewable Forecast 4,000 3,000 2,000 1,000 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 39
Agenda Introduction GDP, Crude Oil and Gas Price Outlook U.S. Gas Supply and Demand Outlook Implications to U.S. Gas Logistics Summary and Conclusions 40
U.S. Lower 48 natural gas logistics will undergo changes over the next several years -1.7 (Canada) Changes in Gas Flow: 2008 2020 in BCF per Day -2.9 (Canada) -0.11 (Canada) +0.2 (Canada) Pacific Northwest - 1.8 (Canada) New England -0.3-0.5 + 1.3 Mountain I +0.5 West North Central -2.1 East North Central Middle Atlantic -0.1-0.2 +0.2 (LNG) California +0.7 +0.0 (LNG) -0.01 +0.21-2.1 Mountain II +2.7-0.1-0.1 +0.1-1.1 +0.7 West South Central 41 +2.6 +3.5 (LNG) East South Central +4.2-0.1 +0.5 (LNG) South Atlantic -0.9 +0.4 (LNG) +1.7 +0.2 Florida
Changes in supplies will have an influence on Lower 48 northern and southern supply tiers as increasing Rocky Mountain, U.S. Gulf Coast, Northeast domestic supplies and LNG imports replace declining Canadian net imports of gas into the U.S. -0.5 California +0.7 +0.0 (LNG) -1.7 (Canada) Pacific Northwest -0.01 +0.21 Changes in Gas Flow: 2008 2020 in BCF per Day +0.5 + 1.3 West North Rockies Mountain I Tier Central -2.1-2.1 Mountain II +2.7-0.1-0.1-2.9 (Canada) +0.1-1.1 +0.7 USGC Tier West South Central 42 +2.6 +3.5 (LNG) -0.11 (Canada) East North Central East South Central +4.2-1.8 (Canada) +1.7 Middle Atlantic -0.1-0.2-0.1 South Atlantic -0.9 +0.2 Florida +0.2 (Canada) New England -0.3 NE Tier +0.2 (LNG) +0.5 (LNG) +0.4 (LNG)
THANK YOU FOR YOUR ATTENTION
About this Presentation This analysis has been prepared for the sole benefit of the client. Neither the analysis nor any part of the analysis shall be provided to third parties without the written consent of Purvin & Gertz. Any third party in possession of the analysis may not rely upon its conclusions without the written consent of Purvin & Gertz. Possession of the analysis does not carry with it the right of publication. Purvin & Gertz conducted this analysis utilizing reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are based on information available at the time of review. Changes in factors upon which the review is based could affect the results. Forecasts are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen including the actions of government, individuals, third parties and competitors. NO IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY. Some of the information on which this analysis is based has been provided by others. Purvin & Gertz has utilized such information without verification unless specifically noted otherwise. Purvin & Gertz accepts no liability for errors or inaccuracies in information provided by others. 44
Darryl Rogers dwrogers@purvingertz.com 713-331-4000 (Main)