Natural Gas, Liquids and Crude Oil Market Outlook North America 2012 and Beyond August 14th, 2012 On behalf of: for: 1
BENTEK Energy Market Information Agenda: U.S. Supply, Demand and Storage Outlook Macro Supply Implications on North American Market Liquids and Crude Oil Forecast Demand Response for Nat Gas and Impact on Henry Hub 2
Dom Prod LNG Can Imports Supply Power Industrial Res/Com Demand US Net Long 1.2 Bcf/d Year to Date Supply Side Demand Side 4.9 3.1 2.2-3.8 1.0-0.5-0.4-0.1 3
Bcf/d Production Catching Up To Demand Pushing Out LNG and Canadian Imports 70.0 65.0 60.0 1990 3.74 Bcf/d 2000 11.34 Bcf/d 2011 3.75 Bcf/d 55.0 50.0 45.0 40.0 35.0 30.0 25.0 20.0 Dry Production Total Demand Source: EIA Canadian Imports/LNG/Storage 4
Storage Surplus Starts Injection Season at Over 900 Bcf 1000 800 600 400 200 0-200 Inventories Vs. Rolling Five Year Average (Bcf) 927 Bcf 2 years 6 Weeks Shed 541 Bcf in 18 Weeks 386 Bcf Inventory Surplus Source: EIA, ICE 5
Storage Headed for Record Highs 4.5 U.S. Storage Inventories (Tcf) 4.2 3.9 3.6 3.3 3.0 2.7 2.4 2.1 1.8 1.5 Assumes ending Inventory of 3.96 Tcf average weekly injection of 60 Bcf over next 12 weeks. 927 Bcf 386 Bcf 334 Bcf 5 Year Avg 2011 2012 Forecast Operational Capacity Source: BENTEK Storage Analytic Report and Data Warehouse 6
Bcf/d U.S. Production Reaches New Highs 66.0 64.0 62.0 60.0 58.0 56.0 54.0 52.0 50.0 48.0 Maintenance & Freeze-offs 2010 Avg. = 57.1 Bcf/d 2011 Avg. = 61.5 Bcf/d 2012 YTD Avg. = 63.7 Bcf/d 2010 2011 2012 2012 Fcst Source: BENTEK Supply and Demand Report, Dry Production 7
Active Rig Count Dry Gas Production (Bcf/d) Gas Rigs Plummet as Producers Turn to Oil and Liquids 3,500 3,000 2,500 2,000 1,500 1,000 500-70 60 50 40 30 20 10 - Gas Seeking Rigs Oil Seeking Rigs Dry Gas Production 8
$/MMbtu Liquids Providing Uplift, Under Pressure Lately 25 20 WTI HH MB NGL 15 10 5 0 9
Rates of Return Falling, Even in Wet Plays Bakken 48% Pinedale 19% Niobrara Uinta 29% 49% 5% Piceance Cleve/Tonk Miss Lime 53% 60% 22%/ 13% MarcellusDry 69% 40% MarcellusWet Dry Gas Play Granite Wash 154% 47% 29% Cana-Wood Permian 80% 5% 3% Arkoma-Wood Haynesville Oil and/or Liquids Play Eagle Ford Oil/Wet 64%/ 44% 63% Price Assumptions: Gas = 12 month forward average curve for each regional pricing point (price range $3.26-$3.49/Mcf) Oil = 6 month WTI +/- differential (price range $74.98-$96.85/barrel) NGLs = weighted average $/barrel, based on current Mt. Belvieu prices and the typical composition in each region (range $27.78-$51.92 barrel) Source: BENTEK 10
Oil Plays Remain at the Top of the IRR Stack 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Price Assumptions: Gas = 12 month forward average curve for each regional pricing point as of June, 2012 (price range $3.26-$3.49/Mcf) Oil = 6 month average WTI +/- differential as of June, 2012 (price range $74.98-$96.85barrel) NGLs = weighted average $/barrel based on current Mt. Belvieu prices and the typical composition in each region (range $27.78-$51.92/barrel) 11
000s b/d Crude Oil Production Forecast Through 2016 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1973 1900-2007 2008-2010 2011-2016 Source: BENTEK, EIA, Excludes NGLs and Other Liquids 12
Oil Rigs Keep Gaining Ground 222/+143 21/+12 3/-3 38/+13 82/+44 3/-5 16/+12 40/+22 234/+121 513/+302 275/+191 Liquids Rich/Oil Focused Areas Note: Active rig count: May 2012 / Change in rig count from January 2010 13
Unconventional Oil Plays Turning The Corner Bakken +770 Niobrara +254 Anadarko +250 Growth 2011 2016 3.5 MMb/d Permian +969 +1224 Eagle Ford Source: BENTEK Crude Awakening Report 14
Drilling Rig Equivalencies One Rig Haynesville Gas Production Equivalent 53.7 36.8 1.0 1.5 1.9 2.0 2.1 2.6 4.0 6.8 12.8 13.0 15
MMcf/d What Gas Basins Win and What Basins Lose? 800 July 2012 vs. December 2012 Projection 600 400 200 - (200) (400) (600) 16
Barnett Northeast Production Potential 15.5 Bcf/d by 2017 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Northeast Production Profile (Bcf/d) Incremental 10.8 Bcf/d by 2017! Legacy Production Wet Marcellus Lean Marcellus Utica Marcellus 17
U.S. Dry Gas Production Forecast to Grow 12.8 Bcf/d from 2011 to 2017 80.0 70.0 60.0 50.0 +2.3 Bcf/d Per Year 61.5 54.0 55.2 57.1 47.5 48.6 50.9 63.9 64.2 67.1 68.9 72.2 74.3 40.0 30.0 +2.1 Bcf/d Per Year 20.0 10.0 0.0 18
Bcf/d Gas Demand from Power Up 4.9 Bcf/d (24%) in 2012 40.0 37.5 35.0 32.5 30.0 27.5 25.0 22.5 20.0 17.5 15.0 12.5 10.0 Highest weekly avg. burns ever! 5 Yr. Avg. 2011 2012 19
Power Burn Up Significantly in 2012 but Hotter Temps May Suppress YOY Increase 35 Power Burn Per Degree (Bcf/d) 30 3 Bcf 25 20 6 Bcf 15 10 5 0 30 40 50 60 70 80 90 Degrees Fahrenheit 2005 2006 2007 2008 2009 2010 2012 2011 2012 20
Barrage of EPA Regs Hit Power Sector Significant EPA regulations affecting the power industry include: 1. Mercury Air Toxics Standards (MATS) a) Finalized in Dec. 2011. b) Affects about 396 GW of Coal and Oil Power Plants 2. Cross State Air Pollution Rule (CSAPR) a) stayed by the U.S. Court of Appeals on Dec. 30. b) imposes caps on SO2 and NOX emissions in 27 states east of the Rockies. c) States nearly achieved required emissions reductions in 2011 because of Clean Air Interstate Rule requirements in 2005 and low gas prices. 3. Greenhouse Gas Rule (GHG) a) Proposed this March b) Caps CO2 at 1,000 lbs per MWh (typical coal plant emits 1,800 lbs) c) Doesn t Apply to Existing Plants d) Phases in over 30 Years 21
Coal to Gas Switching Leading Demand Push 6.0 Coal to Gas Switching by Region (Bcf/d) 5.0 4.0 3.0 2.0 1.0 PNW SW Rockies TX MCP Midwest NE SE 0.0 22
U.S. Demand Forecast to Grow 12.1 Bcf/d from 2011 to 2017 80.0 75.0 70.0 65.0 60.0 55.0 50.0 45.0 40.0 35.0 30.0 58.2 57.6 +1.2 Bcf/d Per Year 61.7 61.8 62.1 64.2 64.9 77.0 74.0 75.1 72.3 70.2 67.2 +2.0 Bcf/d Per Year 23
$/MMBtu $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 NYMEX Forward Curve Expectations Forward Curve August 10, 2011 Forward Curve August 10, 2012 BENTEK Forecast August 2012 24
Conclusions and Takeaways Production to slow then resume growth as higher oil and liquid prices, uncompleted wells, technological and efficiency gains allow E&Ps to respond to market conditions. Demand push will temper storage overhang this summer, but need weather to show up in winter to balance market. Power demand growth is slowly becoming more systemic, and primary driver in year over year demand gains. Henry Hub prices remain under downward pressure with market rallies stifled by a supply response. Henry averages about $3.50 through 2017. 25
BENTEK Energy BENTEK is an energy market analytics company focused on the natural gas, liquids, crude oil and power sectors. Jack Weixel Director, Client Services jweixel@bentekenergy.com Contact Any Analyst at 303.988.1320 DISCLAIMER. THIS REPORT IS FURNISHED ON AN AS IS BASIS. BENTEK DOES NOT WARRANT THE ACCURACY OR CORRECTNESS OF THE REPORT OR THE INFORMATION CONTAINED THEREIN. BENTEK MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE USE OF ANY INFORMATION CONTAINED IN THIS REPORT IN CONNECTION WITH TRADING OF COMMODITIES, EQUITIES, FUTURES, OPTIONS OR ANY OTHER USE. BENTEK MAKES NO EXPRESS OR IMPLIED WARRANTIES AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANT- ABILITY OR FITNESS FOR A PARTICULAR PURPOSE. RELEASE AND LIMITATION OF LIABILITY: IN NO EVENT SHALL BENTEK BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFIT) ARISING OUT OF OR RELATED TO THE ACCURACY OR CORRECTNESS OF THIS REPORT OR THE INFORMATION CONTAINED THEREIN,WHETHER BASED ON WARRANTY, CONTRACT, TORT OR ANY OTHER LEGAL THEORY. 26