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Marcellus Gas: understanding the supply, price dynamics Webinar Jason Womack and Haik Gugarats 14 November 2013
Key takeaways Marcellus and Utica shale growth drives North American production trends Spot prices at northeast US hubs are among lowest in North America Low prices and negative basis will prevail until Appalachian shale gas finds new markets
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Marcellus is driving US gas output growth
US natural gas output Gas output at record-high levels, despite low 2013 gas prices and a sharp downturn in drilling activity Gross domestic gas production hits all-time high of 74.82 Bcf/d (2.1bn m³/d) in August, up by 3.1pc from a year earlier Gas drilling activity in August slows by about a fifth over that same period
Liquids, efficiency gains drive US gas output Increased activity in fields rich with liquids such as oil and NGLs Drilling efficiency improvements More wells with less equipment Shift to pad drilling Backlog of wells that insulated the market from a rig count drop New infrastructure that allowed new supplies to reach market
Shale driving US output higher Unconventional output o 29 Bcf/d in June o Up by 8.5pc y-o-y Associated gas surges Marcellus becomes top US gas field by volume 30 24 18 12 6 Shale gas output (Bcf/d) EIA 0 Jan-00 May-03 Sep-06 Jan-10 Jun-13 Antrim (MI, IN, and OH) Fayetteville (AR) Haynesville (LA and TX) Eagle Ford (TX) Rest of US Barnett (TX) Woodford (OK) Marcellus (PA and WV) Bakken (ND)
Liquids drive producing region gas output Eagle Ford shale Reached 3 Bcf/d in June Up by 49pc y-o-y Barnett shale Dropped to 4.6 Bcf/d Down by 4pc y-o-y Haynesville shale Fell to 5.6 Bcf/d A 20pc y-o-y decline
Bcf/d Marcellus surpasses Haynesville output Marcellus becomes top US gas field in Aug 2012 Haynesville tips into decline 10 8 6 Economics drive output growth, drop 4 2 Jan-11 Oct-11 Aug-12 Jun-13 Haynesville Marcellus Source: EIA
Bcf/d Barnett output stabilizes Eagle Ford shows uplift from oil Barnett benefits from expertise, liquids, low costs But begins to see the impact of pullback 6 5 4 3 2 1 0 Jan-11 Oct-11 Aug-12 Jun-13 Barnett Eagle Ford Source: EIA
Bcf/d Fayetteville, Eagle Ford trends diverge 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Jan-11 Oct-11 Aug-12 Jun-13 Fayetteville Eagle Ford Source: EIA
Marcellus shale output Output from West Virginia and Pennsylvania tops 11 Bcf/d in September, nearing 12 Bcf/d Marcellus production up by 45pc from a year earlier Could produce 20 Bcf/d by 2020 Northeast US demand is about 10 Bcf/d
Marcellus production drivers Operators drilling huge wells Liquids-rich areas of the field New pipelines, processing capacity International investment, JVs
Why are these changes so clear now? 2012 prices helped mask the supply picture Prices at 10-year lows stoked power generation demand Rebound in prices backed out demand, loosening the supply-demand balance New infrastructure comes on line
Impact on northeast US markets
Impact of Marcellus glut on northeast US Fundamentals have changed New projects to feed emerging demand-growth regions Prices at discount to Gulf coast and midcontinent Differentials at key hubs widen
Infrastructure build drives basis Producers keep wells in inventory until infrastructure projects are completed Summer construction schedule creates flow bottlenecks New Marcellus infrastructure projects typically have come on line in November
$/mmbtu TGP 300 Line work lowered Marcellus prices at zone 4 4 3 2 1 0 6-Sep 20-Sep 4-Oct 18-Oct 1-Nov 2012 2013
Marcellus major pipeline expansions in 2013 Pipeline Project name Capacity (mn cf/d) Anchor shippers Tetco, Algonquin Gas Transmission Tennessee Gas pipeline Tennessee Gas pipeline New Jersey New York 800 Northeast Upgrade 636 MPP 240 Chesapeake Energy, Statoil, ConEdison of New York Chesapeake Energy, Statoil Chesapeake Energy, Southwestern Energy Dominion Transmission Tioga 270 Shell, Penn Virginia Transco Northeast Supply Link 250 Hess, Anadarko Petroleum, Mitsui, Williams
$/mmbtu But basis narrowed as projects came on line 0.0 Price differentials to the Henry Hub -0.5-1.0-1.5-2.0-2.5 12-Oct 17-Oct 22-Oct 27-Oct 1-Nov TGP zone 4 Marcellus Leidy Line
$/mmbtu New England and New York basis widens 16 Price differentials to Henry 12 8 4 0-4 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Algonquin Citygates Transco zone 6 NY Tetco zone M-3
Tetco zone M-2 and M-3 supply sources change 30" line 2010-11 24" line 30" line 2012-13 Marcellus, 1,747 Marcellus Other sources 24" line Rockies Express Clarington Lebanon (ANR, PEPL, REX) Other sources Lebanon (ANR, PEPL, REX) Rockies Express Clarington Source: Spectra Energy
$/mmbtu Basis inverts at Tetco s northeast segment Zone M-2 in Appalachia at discount to W La 4.25 4.00 Tetco monthly averages Gas flows from zone M-2 push to M-3 and Gulf coast 3.75 3.50 3.25 3.00 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 zone M-2 zone W La
Bcf/d $/mmbtu Marcellus gas at TGP zone 4 cheapest in North America 3.0 TGP zone 4 supply Spot monthly average discount to HH 0.00 2.5 2.0-0.50 1.5-1.00 1.0 0.5 winter 09-10 winter 10-11 winter 11-12 winter 12-13 -1.50 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Source: Kinder Morgan TGP zone 4 Marcellus TGP zone 0 South
$/mmbtu Argus forward curves for Dominion, Columbia Gas Appalachia -0.10-0.25-0.40-0.55-0.70 2014 2015 2016 2017 2018 2019 Dominion Columbia Gas
Marcellus and Utica gas are finding new markets Projects to move gas to midcontinent and Gulf coast Tetco; Transco; Columbia Gas/Columbia Gulf; TGP; Rex LNG exports (Dominion s Cove Point) Regional demand New York fuel oil conversion New England gas fired power
Impact on southeast US markets
LNG, pipeline exports drive southern US demand Gulf coast LNG export terminals Pipeline exports to Mexico Power generation demand Increase in petrochemical plants
Southeast US power sector Southeast has largest potential for growth in power sector Combination of new gas-fired plants and existing, competing coal-fired plants Potential for growth has spurred companies to build pipeline projects from NE and also in the SE for displaced volumes
Power sector demand seen rising US demand for gas from the power generation sector rose to a high of nearly 25 Bcf/d in 2012 on low prices EIA projects demand to reach about 22 Bcf/d this year not as high as last year but high by historical standards Combination of power plant retirements and shift to a cleaner-burning source fuel
Power sector consumption
Sabal Trail pipeline Spectra Energy, NextEra Energy to build new $3.2bn intrastate pipeline by 2017 Takes gas from the Transco system in Alabama Targeting onshore supplies Feeding three more modern FPL plants in Florida
$/mmbtu Argus forward curves for FGT Z3, Transco Z4 0.15 0.12 0.09 0.06 0.03 0.00 2014 2015 2016 2017 2018 2019 Transco zone 4 FGT zone 3
Bcf/d Pipeline exports to Mexico are rising Daily exports up in the 1H of 2013 by 17pc July exports to Mexico top 2 Bcf/d 2.5 2.0 1.5 1.0 0.5 Jan-09 Jul-10 Jan-12 Jul-13 Source: EIA
US is expanding export capacity to Mexico Pipeline projects targeting Mexico could double export capacity Projects potentially will add 3.5 Bcf/d, doubling existing capacity by year-end 2014, EIA The largest project, a 2.1 Bcf/d pipeline, will tap supplies from the Eagle Ford shale Most US exports into Mexico are from the Eagle Ford
LNG exports New markets for domestic supply LNG export terminals to create some of the nation s biggest buyers Four terminals with the potential to export 6.37 Bcf/d to non-ftas, or about 9pc of US consumption in 2012 Sabine Pass is the only terminal under construction
Conclusions Northeast US supply growth to outpace demand Southeast US demand will grow strongly Northeast US negative basis will become permanent
Any questions?
Argus forum and reception: What's the future of bid week for North American natural gas buying and selling? Thursday, 21 November 2013 3:30 p.m. - 7:00 p.m. Houston Club Join Argus for a complimentary industry forum as we explore the origins of bid week and discuss whether there is a more efficient way to price monthly gas deliveries. The forum will be followed by a cocktail reception. Keynote speakers: Kyle Cooper, managing partner at IAF Advisors Brad Ledbetter, former Vice President, Origination & Optimization at Cardinal Gas Storage For more information or to register please contact Chloe Bazille at chloe.bazille@argusmedia.com or +1 713 429 6343
Jason Womack jason.womack@argusmedia.com +1 713 968 0061 Haik Gugarats haik.gugarats@argusmedia.com +1 202 349 2870 Copyright notice All intellectual property rights in this presentation and the information herein are the exclusive property of Argus and and/or its licensors and may only be used under licence from Argus. Without limiting the foregoing, by reading this presentation you agree that you will not copy or reproduce any part of its contents (including, but not limited to, single prices or any other individual items of data) in any form or for any purpose whatsoever without the prior written consent of Argus. Trademark notice ARGUS, ARGUS MEDIA, the ARGUS logo, DeWitt, FMB, FUNDALYTICS, ARGUS publication titles and ARGUS index names are trademarks of Argus Media Limited. Visit www.argusmedia.com/trademarks for more information. Disclaimer All data and other information presented (the Data ) are provided on an as is basis. Argus makes no warranties, express or implied, as to the accuracy, adequacy, timeliness, or completeness of the Data or fitness for any particular purpose. Argus shall not be liable for any loss or damage arising from any party s reliance on the Data and disclaims any and all liability related to or arising out of use of the Data to the full extent permissible by law.