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Free Markets&

Natural Gas

October 14, 2011By:

John A. Harpole

Presentation to:CREA Energy Innovations Summit

Denver, CO

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Forward Looking Statements/Cautionary Note

This presentation is incomplete without reference to, and should be viewed solely in conjunction with the oral briefing provided by Mercator Energy.

Except for the historical information contained herein, the matters discussed in this presentation are forward-looking statements that are based upon current expectations. Important factors that could cause actual results to differ materially from those in the forward-looking statements include risks inherent in exploratory drilling activities, the timing and extent of changed in commodity prices, unforeseen engineering and mechanical or technological difficulties in drilling wells, availability of drilling rigs and other services, land issues, federal and state regulatory developments and other risks.

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Presentation to Senate Business and Commerce Committee & Senate Natural Resources Committee, April 15, 2008.

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Lost in Beijing

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Free Markets

“Consider for a moment that any one person can only know a fraction of what is going on around him. Much of what that person believes will be false rather than true…”

- F.A. Hayek in his “The Constitution of Liberty”

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Free Markets

“It is because every individual knows so little and, in particular, because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it.”

- F.A. Hayek in his “The Constitution of Liberty”

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Range of Levelized Cost of New Generating Technologies Due To Regional Cost Differences, 2016

Source: Institute for Energy Research, Levelized Cost of New Electricity Generating Technologies, Updated February 1, 2011; Energy Information Administration, Annual Energy Outlook 2011, http://www.eia.doe.gov/oiaf/aeo/electricity_generation.html

Plant Type

Range for Total System Levelized Costs (2009 ¢/megawatt hour)

Minimum Average Maximum

Conventional Coal 8.55 9.48 11.08

Advanced Coal 10.07 10.94 12.21

Natural Gas-fired  

- Conventional Combined Cycle 6.00 6.61 7.41

- Advanced Combined Cycle 5.69 6.31 7.05

Advanced Nuclear 10.97 11.39 12.14

Wind 8.19 9.70 11.50

Wind - Offshore 18.67 24.32 34.94

Solar PV 15.87 21.07 32.39

Solar Thermal 19.17 31.18 64.16

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Scientific Observation

Science is common sense at its best that is rigidly accurate in observation and merciless to fallacy in logic.

- Thomas Huxley

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Output is Not Correlated with LoadTypical 100 MW Wind Plant Generation vs. Hourly System

Load

0102030405060708090

100

12:0

0 A

M1:

00 A

M2:

00 A

M3:

00 A

M4:

00 A

M5:

00 A

M6:

00 A

M7:

00 A

M8:

00 A

M9:

00 A

M10

:00

AM

11:0

0 A

M12

: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

10:0

0 P

M11

:00

PM

Win

d G

en

era

tio

n (

MW

)

2000

2500

3000

3500

4000

4500

5000

5500

Sy

ste

m L

oa

d (

MW

)

Wind Generation (MW) Load (MW)

Source: Brett Oakleaf, Invenergy LLC

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Xcel Defined Wind Event: 7/2/2008

Coal Wind

Gas

Source: PSCo Training Manual

4:00 AM 8:00 AM

When Wind Blows At Night, Coal Gen Ramps Down

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Cycling of Coal Plants Has Increased With Greater Wind Generation

Cycling event is defined as a > 5% change in generation output hour over hour

ERCOT

Incidence ofCoal Cycling

Source: Bentek Energy

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Generation Stacks Differ Across The Country

NatGas56%

NatGas47%

Nuclear11% ERCOT

CAISO

Nuclear 4%

Nuclear24%

NatGas17%

NatGas4%

MISO

BPA

Source: Bentek Energy

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Average US Cost For Saving CO2: $56/ton

Assumes tax subsidy of $22/MWh, with pre-tax value of $34/MWh

MW

of

Win

d N

eed

ed T

o S

ave

1 T

on

CO

2

Source: Bentek Energy

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Colorado as a Laboratory

37Cleaner Air

Cheaper Energy

The Renewable Energy Standard Promise:

2004 Campaign Yard Sign

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Expensive Laboratory

• Bills for Xcel Energy’s 1.4 million electricity customers in Colorado are up 21 percent in the past six years

• Over the next six years, rates are expected to increase another 20 percent

Source: http://www.denverpost.com/fdcp?1297096466537

18Source: Informational Briefing before the Colorado Public Utilities Commission, HB10-1365, Clean Air/Clean Jobs Act Air Quality Implementation, Paul R. Tourangeau, Colorado Department of Public Health & Environment, April 26, 2010

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ME

NHVT

MARI

NY

NJ

DEMD

PA

VA

NC

WV

OH

MIWI

MN

IA

IL IN

KY

TNSC

FL

GAAL

MS

LA

AR

MO

TX

OK

KS

NE

NM

CO

WY

MT ND

SD

UT

AZ

NV

ID

WA

OR

CA

CT

3%4 plants

5% 3 plants

5% 3 plants

6% 5 plants

7% 6 plants

8% 6 plants

8% 8 plants

13% 9 plants

14% 8 plants

3%3 plants

3%3 plants

4%2 plants

2% 3 plants

2% 4 plants

1% 1 plant

1% 1 plant

1% 1 plant

1% 1 plant

1% 1 plant

1% 1 plant

0.4% 1 plant

0.3% 1 plant

75 Worst Coal Power PlantsPercent of Total Pollution

Sources: “Dirty Kilowatts – America’s Most Polluting Power Plants”, Environmental Integrity Project (July 2007),EIA-860 December 2008, Analysis/Summary by F.P. LeGrand

Population < 1 million 1-5 million 5-10 million10-15 million > 15 million

Population < 1 million 1-5 million 5-10 million10-15 million > 15 million Shale plays

2020Source: America’s New Natural Gas, America’s Natural Gas Alliance

EVOLUTION IN GAS WELL COMPLETION TECHNOLOGY

- THE KEY TO TODAY’S NATURAL GAS REVOLUTION

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Cody

PierreFayetteville

Haynesville

Eagle Ford

Horn River

Montney

Deep Basin

Colorado Group

Mowry

Gammon

Bakken

Baxter/Mancos

Mancos

Barnett/Woodford

Barnett

NEW SHALE PLAYS IN NORTH AMERICA

MulkyNew Albany

Antrim

Marcellus/Ohio/Huron

Utica

Woodford

Floyd-Neal

Niobrara

Lewis

Source: America’s Natural Gas Alliance website

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Eastern U.S. Gas Shale BasinsResource

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

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Forecasts for Shale Gas Resource?

• 2008 - 347 TCF - Energy Information Administration (EIA)

• 2008 - 840 TCF - Navigant for Clean Skies Foundation

• 2009 - 616 TCF - Potential Gas Committee (PGC)

• 2011 - 827 TCF - Energy Information Administration (EIA)

“In 2010, U.S. shale gas production reached 4.87 Tcf, up from 0.39 Tcf in 2000, and total domestic natural gas production was 21.2 Tcf.”*

Source: Various resource estimates

*Docket No. 10-161 LNG, In the Matter of: Freeport LNG Expansion, L.P., FLNG Liquefaction, LLC; Motion for Leave to Answer and Answer of Freeport LNG Expansion, L.P. and FLNG Liquefaction, LLC to Motion for Leave to Intervene and Protest of the American Public Gas Association

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Concerns About Fracing Are Misplaced

Water Aquifer

Several ThousandFeet of

ImpermeableRock

Fracture Stimulation

Cement Casing

Upper Well Close-upSource: BENTEK

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$3.4B

$1.3B

$1.7B

$1.3B

$1.0B

$1.3B

$5.4B

$2.1B

$1.5B

$4.8B

$.4B$1.3B

PetroChina/Encana

ITOCHU/MDU Resources

CNOOC/Chesapeake

CNOOC/Chesapeake

BHP/Chesapeake

KNOC/Anadarko

BG/EXCO

BG/EXCO

Reliance/Pioneer

Reliance/Atlas

Statoil/Chesapeake

Statoil/Talisman

$12.1 B

BHP Plans to Acquire Petrohawk

Foreign Investment in U.S. Shale

Source: Dr. Jim Duncan, ConocoPhillips, Decoding the Relevance of Abundant Supply, 2011 COGA Presentation

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Conclusions• Coal: The free market and the regulatory

environment have spoken…coal fired electric generation will never again see the dominant market share that it has enjoyed over the last century.

• Wind and Solar: In tough economic times, there will be much more ratepayer scrutiny on the real economics and subsidies of both forms of renewable energy.

• Emission savings due to wind generation vary by territory based on fuel mix of offset. The greater the market share of natural gas, the lower the savings potential.

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• Cost of offsetting carbon through wind generation is far above values implied by recent legislative efforts for most of US suggesting that subsidizing wind generation is not a cost-effective means of reducing CO2

• Emission savings rates from wind will decline as the market share of natural gas increases. Therefore, policies to promote wind are in conflict with efforts by the EPA to tighten limits on air pollution.

Conclusions (cont’d)

Source: BENTEK, The Wind Energy Paradox, 2011 MITEI Symposium

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Conclusions (cont’d)• Natural Gas: An overabundance of supply will create

new demand in U.S. and overseas export markets.

• Analysts in the U.S. gas market have historically utilized linear model forecasts to predict the long term price for natural gas. The fundamental assumptions behind those static linear projections have been incomplete in the past and are subject to the same deficiencies in the future.

• The ever changing “human element” behind natural gas supply and demand does not fit a smooth, predictable linear curve.

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Citations for ReportAll 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 ResearchDr. Jim Duncan, ConocoPhillipsElectric Power Research Institute (EPRI)EnCanaSteve Mufson, Washington Post, 01/02/2011America’s Natural Gas AllianceJames Dominick, Xcel EnergyRobert BryceAmerican Wind Energy AssociationWestern Energy AllianceJohn Eagleton, Kinder MorganBill Bradley, EnterprisePaul R. TourangeauBrett Oakleaf, Invenergy LLCTad TrueStephen Moore, Wall Street JournalGeorge H. Wayne, El Paso Pipeline Group

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John A. HarpolePresident

Mercator Energy LLC26 W. Dry Creek Circle, Suite 410

Littleton, CO 80120harp@mercatorenergy.com

(303) 825-1100 (work)(303) 478-3233 (cell)

Contact Information