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U.S. Gas Markets: Coal vs Gas and the GrowingU.S. Gas Markets: Coal vs Gas and the Growing Challenge
NCCI Summer Trade MeetingNCCI Summer Trade MeetingMyrtle Beach, SCJuly 16, 2012
David PrunerSenior Vice President
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North American gas and coal markets: mixed messages
The opportunities… The challenges…
…drives down prices and returns…but ILB is expanding…is the ship sinking?
More low-cost resource…CAPP producers are squeezed out…Liquids buoy returns…
…plans won’t translate into demand for years…how much market for North American exports and China take a pause
Plans to capitalize on low-cost gas gain momentum…Global energy and commodity prices remain relatively high exports and China take a pause
…sidelined for now until premium markets develop…distant supplies feature deep price
remain relatively high…$5.50/mmbtu gas plays: good assets eventuallyNot your father’s supply area: Gulf Coast …distant supplies feature deep price
discounts …but global headwinds are strengthening
Not your father s supply area: Gulf Coast price premiumsThe low-cost resource base offers jobs and an improved trade balance
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Producers established additional low-cost resource potentialMore low-cost resource…More low cost resource…
Shale gas and tight oil plays
$2012
Bossier
Haynesville
Barnett-Woodford
Utica (Can.)
$7
$8
HaynesvilleArkoma
WoodfordCollingwoodFayettevilleBarnett Horn River Duvernay
Ohio $5
$6
$/m
mbt
u
10 tcfe
Marcellus NE
Marcellus SW
Montney
Bone Avalon
Utica
Eagle Ford
Anadarko Woodford
$3
$4
US shalesCanadian shalesTight oil
100 tcfe
50 tcfe
WolfcampMississipian
MontereySpringBakken EF
oil
g gas
$2
2000 2005 2010 2015 2020 2025 2030
Tight oilLiquid-rich shales
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Sources: Wood Mackenzie (North America Gas Service, Unconventional Gas Service)Year production > 250 mmcfd
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US drilling declines have been severe but improved drilling efficiency, rising associated gas and high-grading reduce impactassociated gas, and high-grading reduce impactChesapeake and Haynesville drilling reductions have been most pronounced
US rig fleet gas productivityShort-term US Production by type70
60
65
70
10
12
1,000
1,200
1,400
45
50
55
bcfd
6
8
bcfd
600
800
1,000
Rig
s
30
35
40
2
4
200
400
30Oct-11 Apr-12 Oct-12 Apr-13 Oct-13
Other Gulf of MexicoWet gas shales
Associated gasDry gas shales
Delayed CompletionsShut-ins Without shut-ins
0Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12
0
Associated Eagle Ford Other rich-gasMarcellus SW Marcellus NE HaynesvilleOther lean gas Gas rigs Oil rigs
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Source: Wood Mackenzie (North American Gas Service)
Shut ins t out s ut s
Source: Wood Mackenzie (North America Gas Service)
Other lean-gas Gas rigs Oil rigs
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And the rush to liquids plays continues…Liquids buoy returns…Liquids buoy returns…
Devon rig counts
70
1US lower 48 capex outlook for 12 US drillers1
25
50
60
70
20
25
30
40
10
15
billi
ons
0
10
20
5
0Jan.'08
Jul.'08
Jan.'09
Jul.'09
Jan.'10
Jul.'10
Jan.'11
Jul.'11
Jan.'12
Gas NGL Oil
02008 2010 2012 2014
Gas Oil Liquids-Rich1 - Companies included in analysis: Anadarko Apache BG BHP ENI EXCO Hess Newfield
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Source: Wood Mackenzie (North America Gas Service) Source: Wood Mackenzie Upstream Service
1 Companies included in analysis: Anadarko, Apache, BG, BHP, ENI, EXCO, Hess, Newfield, Noble, Range, Samson & Talisman
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Summer displacement levels will be high, but gas capacity will be sufficient—with coal markets accommodating very high gas burn
Year-over-year gas-fired generation growth
with coal markets accommodating very high gas burn
Gas S-D balance and Henry Hub prices
2 35
2.45
2.55
2.65
-1.5
-1.0
-0.5
0.0
6
8
10
2.05
2.15
2.25
2.35
$/m
mbt
u
3 5
-3.0
-2.5
-2.0
bcfd
0
2
4
bcfd
1.75
1.85
1.95
2.05
-5.0
-4.5
-4.0
-3.5
-6
-4
-2
Mar. 23
Apr. 6
Apr. 2
0May
. 4May
. 18
Jun.
1Ju
n. 15
Henry Hub Imbalance Imbalance lagged
-8Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12
Displacement Weather Other Total
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Sources: Wood Mackenzie (North America Power Service, North America Gas Service, Coal Market Service North America)
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Coal retirements add a significant increment of gas demand—but rising prices unwind displacement and load growth is limitedprices unwind displacement, and load growth is limited
US coal exports and gas and coal generationMajor coal export capacity expansions
Gas displaces coal
Gas prices rise
Retirements, exports
Terminal Operator Basin Cap. Cost (million $) Start Date
IC Rail Marine Expansion Foresight Energy ILB 4-8 72 Existing
Houston KM/Peabody Col. 2 18 2011
Lambert's Point Norfolk Southern CAPP 15 2011/12
IMT Marine KM/MEE CAPP 4-6 70 2012
M bil WLT/D d SAPP 5 9 5 2012Mobile WLT/Drummond SAPP 5 9.5 2012
Burnside Trafigura Various 11 128 2012/13
Gateway Peabody PRB 27 500 2014/15
Millennium Arch/Ambre Energy PRB 6 100 2014/15Energy
Baltimore CONSOL NAPP 8 Unspecified
Ram Terminals Armstrong ILB 6 Unspecified
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Source: Wood Mackenzie (North America Gas Service, Coal Market Service)
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WTI and NGL prices drop and gas drilling recovers as markets developWhat plays are at most risk to lower liquids values?
$120
What plays are at most risk to lower liquids values?
Gas, Oil, and NGL commodity prices Drilling outlook
1000 50
$100
$120
$16
$20
700
800
900
1000
35
40
45
50
$60
$80
$/bb
l
$8
$12
$/m
mbt
uIndicative NGL barrel range (% of WTI):
60%400
500
600
Rig
s
20
25
30
$20
$40
$4
$8 $35%
0
100
200
300
0
5
10
15
$02000 2004 2008 2012 2016 2020 2024
$0
Brent WTI NGL barrel Henry Hub
0
2010 2012 2014 2016 2018 2020
0
Gas Tight oil Other oil Oil-gas ratio
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Source: Wood Mackenzie (North America Gas Service) Source: Wood Mackenzie (North America Gas Service)
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Oil prices and tight oil are supportive of increased gas volumesBut the big driver is rich-gas and NGL support of growing shale gas volumesBut the big driver is rich gas and NGL support of growing shale gas volumes
US associated gas forecast
10
US shale production by gas richness
35
6
8
25
30
35
Lean
4
6
bcfd
10
15
20
bcfd
Lean
0
2
2011 2013 2015 2017 20190
5
10
2010 2011 2012 2013 2014 2015
Rich
2011 2013 2015 2017 2019
Bakken Mississippian Hz OILPermian Barnett OIL SHOOther tight oil Conventional oilEagle Ford Oil
2010 2011 2012 2013 2014 2015Ohio Utica Eagle FordAnadarko Woodford Marcellus southwest Barnett HaynesvilleMarcellus northeast Marcellus CentralFayetteville Arkoma WoodfordOther shales Associated Gas
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Source: Wood Mackenzie (North America Gas Service)Source: Wood Mackenzie (North America Gas Service)
Other shales Associated Gas
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Core areas of existing plays are likely to be sufficient to meet demand growth until 2018—returns improve latergrowth until 2018—returns improve laterSub-$4.00/mmbtu gas plays are core gas assets
Production from low-cost plays Production from more marginal areas of these plays
Falls from 8 8 bcfd inStrong growth in low-cost P d ti f llRamps to 14.8 bcfd in
40
45
50
40
45
50Falls from 8.8 bcfd in 2012 to 5.8 bcfd in 2014; at 2012 levels in 2018
Strong growth in low cost plays: from 13.4 bcfd this year to 22.1 bcfd in 2018
Production falls as well locations exhausted
$5.18
$4.64$4.65
2015 breakeven
2025
20
25
30
35
bcfd
20
25
30
35
bcfd
2015 breakeven
$3.59$3.50
$4.26$4.05
$4.31
5
10
15
20
5
10
15
20
$2 00
$2.49
$2.05
$3.37$3.50
Total in more marginal areas
02006 2009 2012 2015 2018 2021 2024
Marc. non-core Utica dry H'ville Tier 1H Ri B tt E l F d d
02006 2009 2012 2015 2018 2021 2024
Utica wet Marcellus core Eagle Ford wetBarnett core H'ville premium Montney
$2.00
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Horn River Barnett non-core Eagle Ford dryBarnett core H ville premium MontneySource: Wood Mackenzie (North America Gas Service) Source: Wood Mackenzie (North America Gas Service)
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Major demand-side investments are underway—but concentrated in the second half of the decadesecond half of the decade
Annual gas demand growth (US & Canada) Cumul. demand growth (vs. 2010)
251 bcfd Spectra NY-NJ pipeChevronPhillips, Dow, Formosa Shell Sasol
20
OtherNGVs
Industrial
Res/com conv.
1 bcfd Spectra NY NJ pipe
Nucor
Formosa, Shell, Sasol petchem
Various th l
10
15
bcfd
Coal retirements
Industrial
Mercury & Air Toxics
Stds.
DRI ethylene exp.
5LNG exports Sabine Pass
Freeport BCCameron
-5
0
2015 20202011 2013 2015 2017 2019 2021
Oil sands
GTL
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Source: Wood Mackenzie (North America Gas Service)Source: Wood Mackenzie North America Gas Service
2015 20202011 2013 2015 2017 2019 2021
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Coal retirements add a significant increment of gas demand—but rising prices unwind displacement and load growth is limitedprices unwind displacement, and load growth is limited
Coal retirements and gas impactWest
Power sector demand growth
Plans to capitalize on gas gain momentum, but plans don’t translate into demand for years…
West North Central
East North Central
Mid Atlantic
1 bcfd
Gas burn6
8
5 GW
Retirements
2
4
bcfd
-2
0
South Atlantic
East South Central
West South Central
-42011 2013 2015 2017 2019
Coal retirements Coal displacement Other power Total
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Central Other power Total
Sources: Wood Mackenzie (Coal Market Service, North America Power Service)
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The market for North American LNG within the Pacific is limited and projects that can get to market quickly are advantagedthat can get to market quickly are advantaged
Pacific/ME Uncontracted Demand-Supply
N d f 4 6 5 3 b fd f LNG35 Need for 4.6- 5.3 bcfd of LNG 2013-17 from Portfolio
Players or QatarPortfolio players can
supply <3 3bcfd
Market conditions depend upon pace of development
25
30
35
supply <3.3bcfdQatar needs to supply
1.3-2 bcfd on top of that already contracted in
2013-16
Canada LNG exports
US LNG exports15
20
bcfd
2013-16
0
5
10
Atlantic/ME Portfolio (excl Qatar)
Possible Speculative
02012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Onstream Under Construction
H1 12 Uncontracted demand
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Source: Wood Mackenzie Global Gas Service H1 12, LNG Tool
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Not all North American LNG projects—even brownfield ones—are created equalequal
Export economicsProject
Greenfield
Brownfield
Kitimat
C P i t
Lake Charles
Freeport
Sabine PassDoE filing order
Proposed sizeWoodMac size
EnvironmentalProject hurdles
Commercial
Shell-CNPC
Gulf Coast LNG
Cameron
Freeport exp.
Cove Point
Cove Point
TechnicalJordan CoveOregon LNG
Shell-CNPC
Kitimat
Corpus Christi
Jordan Cove
Cameron
Sabine Pass
Freeport
0 2 4 6 8
Shell CNPC
$/mmbtu
Plant & opex Pipe ShippingLake CharlesCorpus Christi
Elba Island
Gulf LNGFLNG
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Plant & opex Pipe ShippingSource: Wood Mackenzie
Gulf Coast LNG
Note: AECO discount included in Plant & opex figures
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A significant portion of North American LNG will likely be routed to Atlantic markets primarily Europemarkets, primarily Europe
North America LNG Flows North America LNG Capacity
7
6
7
5
6
7
3
4
5
bcfd
3
4
5
bcfd
1
2
3
1
2
02011 2013 2015 2017 2019 2021 2023 2025
Alaska US Canada
02012 2014 2016 2018 2020 2022 2024
to Pacific markets to Atlantic markets
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Source: Wood Mackenzie Global Gas Service H1 ‘12
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Industrial announcements accelerate
Ammonia Ethylene 100
Industrial capacity expansions Industrial capacity
150 125 50Global market
30
35
40
Essar
SteelMethanolmmcfd
38%
2011
2012
2013
15
20
25
mill
ion
tonsShell
Nucor Phase II31%
2014
2015
2016
5
10
15m
Koch (various)
PetroLogistics
Incitec
OrascomDow restart
Nucor Phase II
ChevronPhillips
SasolPotash
Lyondell 58%2017
2018
TBD0
Ethylene Ammonia Methanol
Planned expansionsCurrent capacity
Incitec
Nucor Phase I
Methanex
Dow
Formosa
Lyondell
Exxon Mobil
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p y
Source: Wood Mackenzie North America Gas Service
www.woodmac.com
After the 2013 rebound, limited upside in gas demand or pricing
Low-cost resource creates opportunity, but with questions
Price outlook
$20 $120questionsLimited market growth holds down gas and capex through 2015Drilling, price and returns step starting in 2016
$12
$14
$16
$18
$
btu $80
$100
$
l
• Capital projects are completed and increase markets
• Well locations in productive Haynesville and Marcellus cores are limited $6
$8
$10
$12
2011
$/m
mb
$40
$60
2011
$/bb
l
Watch for:• Sensitivity to oil prices—could liquids drilling
step back and support dry gas capex?
• Productivity improvements higher EUR$0
$2
$4
05 07 09 11 13 15 17
$0
$20
• Productivity improvements, higher EUR
• Leverage to global economy
• Can the resource-rich US bolster global growth?
2005
2007
2009
2011
2013
2015
2017
Henry Hub UK NBP CAPP coalILB coal WTI Brent
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Source: Wood Mackenzie (North America Gas Service, Coal Market Service North America, Global Gas Service)
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Key Takeaways
Low-cost resource creates opportunity, but with questionsLimited market growth holds down
US energy balance
400Limited market growth holds down gas and capex through 2015Drilling, price and returns step starting in 2016
• Capital projects are completed -
200
jand increase markets
• Well locations in productive Haynesville and Marcellus cores are limited
Watch for: ( )
(200)
00 m
toe Coal
GasOilWatch for:
• Sensitivity to oil prices—could liquids drilling step back and support dry gas capex?
• Productivity improvements, higher EUR
(600)
(400)'0 Total
higher EUR• Leverage to global economy• Can the resource-rich US
bolster global growth? (1,000)
(800)
005 007 009 011 013 015 017 019 021 023 025
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Source: Wood Mackenzie
200
200
200
201
201
201
201
201
202
202
202
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