Natural Gas Outlook Presentation to: 2010 Fertilizer Outlook and Technology Conference Savannah, Georgia November 17, 2010 By: John A. Harpole 1
Fertilizer Industry vs. Natural Gas Industry Source: http://www.search.com/reference/lucy_van_pelt 2
What will impact natural gas prices during the next 5 years? Shale gas/productivity gains (We aren t exploring, we are manufacturing gas.) Lower EPA Air Standards (demand increase) Renewable Portfolio Standards (in an inexpensive gas environment?) Coal to gas conversion (demand increase) Demand in Mexico (potential demand increase) LNG exports from North America (China is waiting) 3
Historical NYMEX Prices $10.000 $8.000 $/MMBtu $6.000 $4.000 $2.000 $0.000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year NYMEX - Average last 3 days of close as reported in Platts Gas Daily Report, A McGraw Hill Publication 4
BENTEK Expects The Forward Curve To Fall Further $7 $6 $5 NYMEX $4 BENTEK Est. $3 $2 $1 $0 11/1/2010 2/1/2011 5/1/2011 8/1/2011 11/1/2011 2/1/2012 5/1/2012 8/1/2012 11/1/2012 2/1/2013 5/1/2013 8/1/2013 11/1/2013 2/1/2014 5/1/2014 8/1/2014 11/1/2014 2/1/2015 5/1/2015 8/1/2015 11/1/2015 $/MMBtu Source: BENTEK 5
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Part 1: Shale Gas 7
EVOLUTION IN GAS WELL COMPLETION TECHNOLOGY - THE KEY TO TODAY S NATURAL GAS REVOLUTION Source: America s New Natural Gas, America s Natural Gas Alliance 8 8
NEW SHALE PLAYS IN NORTH AMERICA - A Game Changer Horn River Montney Deep Basin Colorado Group Cody Gammon Bakken Utica Mowry Antrim Baxter/Mancos Niobrara Marcellus/Ohio/Huron Mancos New Albany Mulky Lewis Pierre Woodford Fayetteville Barnett/Woodford Floyd-Neal Barnett Haynesville Eagle Ford Source: America s Natural Gas Alliance website 9
Eastern U.S. Gas Shale Basins Resource Endowment (Tcf) Produced/Proved Reserves (Tcf)* Undeveloped Recoverable Resource (Tcf)* Barnett 250 19 40 Fayetteville 320 3 50 Woodford 300 2 30 Haynesville 790 1 130 Marcellus 1,760-220 Total 3,420 25 470 *As of end of 2008 U.S. Proved Natural Gas Reserves as of 2005: 192.5 Tcf Source: Gas Shales Drive the Unconventional Gas Revolution, Vello A. Kuuskraa, Advanced Resources International, Inc., 3/5/2010 10
Production Continues To Climb Average Daily Consumption (Bcfd) 65.0 60.0 55.0 50.0 Comparison of Marketed Production -2% 1% Freeze-offs Hurricanes 5% TD 6%QTD Maintenance 2008 2009 2010 Q-1 Q-2 Q-3 Q-4 45.0 1/1Jan2/1 3/1 4/1Apr5/1 6/1 7/1Jul 8/1 9/1 10/1 Oct11/1 12/1 Data through October 28, 2010 Source: BENTEK Supply and Demand Report 11
Historic Relationship Between Rig Count & Production No Longer Holds 09 Production Grew By Nearly 3%, But The Rig Count Fell By 42% Average Daily Production (Bcfd) 68.0 66.0 64.0 62.0 60.0 58.0 56.0 54.0 52.0 50.0 3,000 Gross Production (wet) Active Rig Count 2,500 2,000 1,500 1,000 Active Rig Count 500 0 Jul-10 Apr-10 Jan-10 Oct-09 Jul-09 Apr-09 Jan-09 Oct-08 Jul-08 Apr-08 Jan-08 Oct-07 Jul-07 Apr-07 Jan-07 12 Source: BENTEK, RigData
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Longer Laterals & Increased Fracing Drive Production Gains Experience of Newfield Exploration Co in Woodford 7,500 7.0 Average Lateral Length (Ft) 6,000 4,500 3,000 1,500 5 Stages 5 Stages 9 Stages 11 Stages 6.0 5.0 4.0 3.0 2.0 1.0 Estimated Ultimate Recovery (EUR) (Bcfe) 0 2006 2007 2008 2009 0.0 Source: BENTEK 16
Technological Advances Enable Multi-Well Pads & Increase Recovery Rates 17 Stage Frac Legal Activity Limit Drilling Unit Boundary 12 Stage Frac 5 Additional Frac Stages = 1.250 MMcf EUR / Well @ $4.50 per Mcf = $5,625,000 Source: BENTEK 17
Multi-Well Pad Drilling Reduces Land Disruption 18 Source: BENTEK
Why Is Production Growing With Low Prices? Avg. 2008 - $8.85 Avg. 2007 - $6.94 Since 1/1/09 - $4.19 Source: ICE 19
U.S. Active Rig Is Scattered & Focused On Both Oil and Gas Williston Basin Bakken Shale (Oil Play) Pinedale/Jonah Tight Gas Oil & Liquids Fairway Niobrara Shale (Oil Play) Woodford Shale Gas Play Marcellus Shale Gas Play Horizontal Rigs Directional Rigs Vertical Rigs Permian Basin- Oil Targets Granite Wash Tight Gas Barnett Shale Gas Play Emerging Eagle Ford Shale Play Fayetteville Shale Gas Play Haynesville Shale Gas Play U.S. Active Rigs 1000 800 600 400 200 RigData: Lower 48 States, Aug 2010 0 Dir Ver Hor 20
The Forward Curves Encourage Drilling $7.00 $/Mcfe $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 $4.42 Winter 10-11 $3.82 September 10 $5.26 Apr 11 to Dec 13 12-1 Crude to Gas Ratio Source: BENTEK 21
Part 2: EPA EPA has promulgated National Ambient Air Quality Standards (NAAQS) for six pollutants: Ozone (1Hr & 8HR O3) Particulate Matter (PM10, PM2.5) Sulfur Dioxide (SO2) Nitrogen Oxide (NO2) Carbon Monoxide Lead (Pb) Source: The SIP Planning Process: An Overview of The Clean Air Act s (CAA) Requirements for State Implementation Plan (SIP) Development & Approval, January 8, 2010 22 22
EPA s Effort to Tighten Air Standards Lisa Jackson at EPA is moving to change the 75 ppb standard for ozone to a new standard within the range of a 60-70 ppb. On January 6, 2010, EPA proposed to strengthen the NAAQS for ground-level ozone, the main component of smog. EPA will issue final standards by December 1, 2010. Source: Fact Sheet Proposal to Revise the National Ambient Air Quality Standards for Ozone 23
EPA Effort (cont d) Estimated Timeline for Implementing the Proposed Ozone Standards January 2011: States must recommend areas to be designated attainment, nonattainment or unclassifiable. July 2011: EPA makes final area designations. August 2011: Designations become effective. December 2013: State Implementation Plans (SIP), outlining how states will reduce pollution to meet the standards, are due to EPA. Source: Fact Sheet Proposal to Revise the National Ambient Air Quality Standards for Ozone 24
Counties With Monitors Violating the March 2008 Ground-Level Ozone Standards 0.075 parts per million (Based on 2006 2008 Air Quality Data) 322 of 675 1 monitored counties violate the standard Notes: 1. Counties with at least one monitor with complete data for 2006 2008 2. To determine compliance with the March 2008 ozone standards, the 3-year average is truncated to three decimal places. Source: Air Quality Management Overview Presentation, RAQC Board Meeting, March 5, 2010, Paul R. Tourangeau 25 25
Counties With Monitors Violating Proposed Primary 8-hour Ground-level Ozone Standards 0.060 0.070 parts per million EPA will not designate areas as nonattainment on these data, but likely on 2008 2010 data which are expected to show improved air quality. 515 counties violate 0.070 ppm 93 additional counties violate 0.065 ppm for a total of 608 42 additional counties violate 0.060 ppm for a total of 650 Notes: 1. No monitored counties outside the continental U.S. violate. 2. EPA is proposing to determine compliance with a revised primary ozone standard by rounding the 3-year average to three decimal places. Source: Air Quality Management Overview Presentation, RAQC Board Meeting, March 5, 2010, Paul R. Tourangeau 26 26
Part 3: Renewable Portfolio Standards (RPS) The IPAMS/Bentek Study Wind is intermittent, not dispatchable Coal plants cycle down to accept wind into the grid Cycling coal plants are inefficient and produce more pollution than wind generation saves 27
Output is Not Correlated with Load Typical 100 MW Wind Plant Generation vs. Hourly System Load 100 90 80 70 60 50 40 30 20 10 0 5500 5000 4500 4000 3500 3000 2500 2000 12:00 AM 1:00 AM 2:00 AM 3:00 AM 4:00 AM 5:00 AM 6:00 AM 7:00 AM 8:00 AM 9:00 AM 10:00 AM 11:00 AM 12:00 PM 1:00 PM 2:00 PM 3:00 PM 4:00 PM 5:00 PM 6:00 PM 7:00 PM 8:00 PM 9:00 PM 10:00 PM 11:00 PM 28 Wind Generation (MW) System Load (MW) Wind Generation (MW) Load (MW) Source: Brett Oakleaf, Invenergy LLC
When Wind Blows At Night, Coal Gen Ramps Down Xcel Defined Wind Event: 7/2/2008 Coal Wind Gas 4:00 AM 8:00 AM Source: PSCo Training Manual 29
The Problem Lies In The Interaction Between Wind and Coal Generation Wind Causes PSCO To Cycle Its Coal Plants, Which Raises Emissions Hourly Coal Generation (MW) Noon Noon Noon Noon Noon May 10 2008 May 11 2008 May 12 2008 May 13 2008 May 14 2008 30 Source: CEMS data
Emissions At Nonattainment Area Coal Plants Impacted By Cycling Are Rising Valmont +173% +3% +2% Pawnee +17% -- -- Arapahoe +14% +6% +9% Denver Nonattainment Area Cherokee +43% +9% +5% Legend Plant Name Pct Chg SO2 06-09 Emission Rate Pct Chg NOX 06-09 Emission Rate Pct Chg CO2 06-09 Emission Rate Comanche -39% --33% -- Source: CEMS, BENTEK Energy 31 31
Part 4: Coal to Gas Conversion Barclays Capital analysts estimate 27,000 megawatts of production, or more than 2% of U.S. [coal fired electric] generating capacity, could close in four to five years. Source: Coal Plants Face Tight Pollution Regulations, Mark Peters, The Wall Street Journal, 2/10/2010 32
Bernstein Research Forecast Existing coal fired generation plants are expected to decline by nearly 400 million MWh by 2015.* Model assumes all coal fired power plants must install SO2 scrubbers to meet EPA emissions standards for mercury and acid gases.* U.S. gas consumption would have to increase by at least 2.1 Tcf per year. This implies a 10% increase in U.S. consumption of natural gas by 2015. *Source: Bernstein Research, Black Days Ahead for Coal presentation, March 19, 2010 33
75 Worst Coal Power Plants Percent of Total Pollution WA ME CA OR ID NV UT AZ Population < 1 million 1-5 million 5-10 million 10-15 million > 15 million Shale plays MT WY CO NM ND 1% 1 plant SD NE TX KS OK 4% 2 plants MN IA AR LA WI 1% MO 1 plant IL 1% 1 plant MS TN 1% 1 plant 5% MI 3 plants KY AL OH IN 13% 8% 9 plants 8 plants 3% 3 plants 3% 3 plants 5% 3 plants GA 6% WV 5 plants VA NC 8% 6 plants PA 14% 8 plants FL NY MA CT 3% MD DE1% 4 plants 1 plant 2% 3 plants 7% 6 plants SC 2% 4 plants 1% 1 plant VT0.4% NH 1 plant 0.3% NJ 1 plant RI Sources: Dirty Kilowatts America s Most Polluting Power Plants, Environmental Integrity Project (July 2007), EIA-860 December 2008, Analysis/Summary by F.P. LeGrand 34
Part 5: Demand in Mexico During the next 10 years, Mexico plans to build an incremental 25,000 MW of electric power generation (POISE) This could equal 4.5 BCF per day of new gas demand (1.64 TCF per year) Mexico is currently looking for new pipeline interconnects into the U.S. for incremental supply at: Monterrey Chihuahua Baja 35
Part 6: LNG Exports from North America 36
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Presentation to Senate Business and Commerce Committee & Senate Natural Resources Committee, April 15, 2008. 3939
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Chengdu, China, September 2010 41
Don t be fooled 42
China Growth From 2000 onward, more than half of the growth in the global energy demand came from China. In the last decade, China s energy consumption has more than doubled. In 2003, China became the world s second largest oil consumer, surpassing Japan. In 2010 China surpassed the U.S. in total energy consumed. A position that the U.S. had held for over 100 years. Nobuyuki Higashi, Natural Gas in China: Market evolution and strategy, June 2009 Michael J. Economides with Xina Xie, Energy: China's Choke Point 43
China Growth In the 12 th Five-Year Plan, China s annual investment for infrastructure (highway construction, pipeline construction, etc.) will be $165 billion per year. 1 20% of China s total energy is consumed in the production of concrete China s natural gas demand is 10% of U.S. demand From a regulatory and consumption standpoint they are where the U.S. was in the 1930-1940 s 30% of China s natural gas supply is imported According to PetroChina, only the third horizontal shale natural gas well was completed in all of Asia this past summer. 1 1 Source: China Daily 11/09/2010, page 13 Nobuyuki Higashi, Natural Gas in China: Market evolution and strategy, June 2009 Michael J. Economides with Xina Xie, Energy: China's Choke Point 44
What can you do? Buy gas in the ground to lock in a favorable price. Industrial customer example West coast utility example Volumetric Production Payments and long term fixed price supply contracts (HB 1365) 45
Summary Most experts project flat gas prices for the next 5 years. In 20 years, we have never seen flat gas prices. The billion dollar question: Will EPA, RPS and LNG issues counter balance new shale gas productivity? 46
Citations for Report All of the information utilized for this report is a compilation of information pulled from the following data sources: Bentek Energy Institute for Energy Research (IER) Energy Information Administration (EIA) Bernstein Research Brett Oakleaf, Invenergy LLC Paul R. Tourangeau, Colorado Dept. of Public Health & Environment Electric Power Research Institute (EPRI) EnCana Mark Peters, The Wall Street Journal, 02/10/2010 America s Natural Gas Alliance Nobuyuki Higashi, Natural Gas in China: Market evolution and strategy, June 2009 Michael J. Economides with Xina Xie, Energy: China's Choke Point Train pictures: http://www.darkroastedblend.com/2009/03/train-wrecks.html 47
Contact Information John A. Harpole President Mercator Energy LLC 26 W. Dry Creek Circle, Suite 410 Littleton, CO 80120 www.mercatorenergy.com (303) 825-1100 (work) (303) 478-3233 (cell) 48