Son of a Beast Utica Triggers Regional Role Reversal

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1 Son of a Beast Utica Triggers Regional Role Reversal

2 KEYTAKEAWAYS Son of a Beast Utica Triggers Regional Role Reversal Overview only. Contact BENTEK to subscribe. For more information about BENTEK s industry-leading analysis and data on energy markets and energy commodities, please contact: Scott Raber Field Marketing Manager

3 SON OF A BEAST: UTICA TRIGGERS REGIONAL REVERSAL October 2013 Son of a Beast Utica Triggers Regional Role Reversal TABLEOFCONTENTS KEYTAKEAWAYS 2 Overview 5 Recent Supply & Demand Trends 7 Production Trends 7 Imports from Canada and LNG 11 Demand Trends 12 Power Burn 13 Regulation 15 Industrial Sector Demand 17 US Gas Exports to Mexico 17 US Supply and Demand Outlook 19 US Production Forecast 20 Basin Overview 20 Appalachian (Marcellus and Utica) 20 Marcellus 20 Utica 22 ARKLA (Haynesville) 23 Arkoma (Fayetteville) 24 East Texas 24 Fort Worth (Barnett) 24 Offshore Gulf 25 Texas Gulf Coast (Eagle Ford) 25 Permian 26 Anadarko 27 Williston (Bakken) 28 West & Rockies 28 Other Basins 29 Production Summary 29 Demand Forecast 31 Power Outlook 32 Industrial Demand Outlook 34 New Projects 36 Gas-to-liquids 37 Methanol 38 Nitrogen Fertilizer 39 Regional Outlook 39 LNG Exports 45 Global LNG Market Conditions 47 Global LNG Supply & Demand 47 Project Evaluation 49 LNG Export Projects 51 Expected Projects in the Southeast, Texas, Northeast 51 Sabine Pass 52 Freeport LNG 53 Lake Charles LNG 53 Cameron LNG 54 Southern LNG (Elba Island) 54 Dominion Cove Point LNG 55 Other US Projects 55 Expected Canadian LNG Export Projects 55 Douglas Channel LNG 56 Kitimat LNG 57 LNG Canada 58 Forecast Summary 58 Mexico Outlook 60 Regional Market Outlook 65 Northeast 65 Regional Supply & Demand Balance 66 Gas Processing and NGL Pipeline Projects 71 Gas Pipeline Expansions and Backhaul Projects 72 Marcellus Northeast Delivery Projects: 73 Marcellus, Utica Delivery to Other Regions 76 Regional Summary 78 Market Impacts from Fundamentals, Expansions 79 3

4 SON OF A BEAST: UTICA TRIGGERS REGIONAL REVERSAL Southeast/Gulf Coast 82 Regional Supply & Demand Balance 82 Regional Gas Flows The I 84 Demand Epicenter and I Flow Changes 87 Texas 90 Regional Supply & Demand Balance 90 Midcontinent 94 Regional Supply & Demand Balance 94 Midwest 97 Regional Supply & Demand Balance 97 Rockies 100 Regional Supply & Demand Balance 100 Southwest 103 Regional Supply & Demand Balance 103 Mexico Summary 104 Southwest Region Gas Supply 105 Southwest Inbound Flows & Constraints 105 Rockies Corridor 106 Pacific Northwest Corridor 106 Texas Corridor 107 Canada 108 Conclusions 109 CONTRIBUTORS&ACKNOWLEDGEMENTS 114 4

5 SON OF A BEAST: UTICA TRIGGERS REGIONAL REVERSAL LNG Exports, Liquids-Rich Plays Utica, Marcellus Power, Exports to Mexico Mexico LNG Exports, Power, Industrial Demand Figure 1. SOURCE: BENTEK Overview The North American gas market is about to turn upside down as a series of major reversals accelerate over the next 10 years. The Northeast is poised to switch from the nation s largest demand region to a net supply region, courtesy of production growth from the Marcellus Shale dubbed the Beast in the East by Bentek in 2010 and now the emerging Utica shale play, the apparent Son of the Beast in the East. In contrast, the Southeast region is racing to become a much larger net demand region after being a major supplier to the US gas market over the past five years. The US could become a net gas exporter as soon as 2017 from historically being a net importer, as global energy companies have gone far beyond just taking notice of the US shift toward natural gas abundance from the shortages projected a decade ago. These market changes, particularly the role reversals of the US Northeast and Southeast regions, will require a widespread repurposing of the nation s pipeline grid, and will forcefully redirect gas flow patterns, gas prices and basis relationships. This market alert examines these trends and provides insight into likely market impacts by region and across the continent, including forecasts for supply and demand balances, inter-regional pipeline corridor flows and basis implications. These upcoming market changes will be unprecedented. For example, the Marcellus and the Utica shales in the Appalachian Basin are likely to add 9 Bcf/d of production in 10 short years, and planned processing and pipeline infrastructure create a risk that growth from these plays could be even higher. Most of the growth to date has been in the dry gas production portion of the Marcellus, but more than 5.2 Bcf/d of gas processing capacity is planned to support production growth from the liquidsrich producing areas of the Marcellus and the Utica. In addition, 40 Northeast pipeline expansions are planned, and more than 20 of them (totaling more than 9 Bcf/d of capacity) would be geared toward boosting takeaway capacity out of the production areas in the Northeast. Most of the remaining projects will increase 5

6 gas deliveries to the Premium Northeast market and to markets in other regions, putting downward pressure on prices and basis in the Northeast and in other markets and supply areas. The timing of these impacts, however, is unclear: Will there be enough pipeline takeaway capacity to prevent much deeper basis declines in Appalachia over the next few years? Will pipeline constraints between the Northeast and Southeast, lead Appalachian basis weakness to rapidly spread across many other North American supply areas in the near term? Will rapid Utica production growth and backhaul pipeline capacity additions keep drilling in the Haynesville dormant for decade? This analysis provides Bentek s best estimates of the timing and market impact of these fundamental changes. It also examines the speed at which Southeast demand will accelerate because of LNG export terminals, gas-intensive industrial projects and new gas-fired power plants. LNG exports from four proposed terminals in the Southeast are expected to climb to 5.7 Bcf/d in 2023 from zero today. Adding the Freeport terminal in Texas to that total brings the growth up to 7.5 Bcf/d in Meanwhile 135 industrial expansion projects are planned for the Southeast, including several gasintensive methanol, fertilizer and gas-to-liquids facilities. Bentek conservatively expects industrial demand will grow by 1.3 Bcf/d between 2013 and If all 135 projects were built and operated at full capacity, the industrial gas demand gains in the Southeast could total 4.1 Bcf/d. On top of that, more than 4,800 MW of new gas-fired power generation are planned or under construction in the region and gas demand from power is expected to The remaining pages of this Market Alert have been omitted from this overview. Scott Raber at for more details. SON OF A BEAST: UTICA TRIGGERS REGIONAL REVERSAL continue growing rapidly. In addition, more than 14,000 MW of new gas generation is planned in neighboring Texas. These expected demand changes point to growing upward pressure on Henry Hub prices and basis at key locations in the Southeast. But in the short-term, as Northeast production grows rapidly, Henry Hub is likely to face downward pressure due to Southeast long-haul pipeline supply being displaced. Henry Hub is forecast to average about $3.79 over the next five years, rising to about $4.25 from 2019 to 2023 after LNG exports and large industrial projects come online. Another important trend to watch over the next decade in the North American gas market will be substantial gas production growth from liquids-rich plays in Texas (Permian), the Midcontinent (Anadarko), the Midwest (Bakken) and the Rockies (Niobrara). These plays hold tremendous potential, and growth from these areas could exceed current expectations. Supply competition among these areas and the Northeast is likely to put substantial downward pressure on gas prices. Oil and NGLs are the targeted commodity in most producing areas today. With a large amount of oil and NGLs in the production stream, producers can earn high rates of return regardless of gas price direction. Consequently, gas production growth from all of these areas will further exacerbate oversupplied conditions until demand rises and pipelines are built to bring burgeoning supply to markets. Most of the demand growth will be concentrated in the Southeast, which eventually will put upward pressure on Southeast region prices at the same time that production growth in other regions is putting downward pressure on prices in those regions. This is expected to reverse a number of traditional price and basis relationships, leading to widespread and long-term market changes. The pace at which infrastructure is developed to manage these changes will play a large role in the timing of market changes. 6

7 CONTRIBUTORS&ACKNOWLEDGEMENTS Rocco Canonica, Director Energy Analysis Justin Carlson, Manager, Energy Analyst Eason Jostad, Analyst Tony Sweet, Senior Energy Analyst Ellen Nelson, Senior Energy Analyst/Writer Darrell Proctor, Senior Energy Analyst/Writer Rick Notarianni, Energy Analyst Javier Diaz, Energy Analyst II Tony Scott, Manager Oil & Consulting Services Diana Oswald, Manager, Energy Analyst Jeff Moore, Energy Analyst Ryan Smith, Energy Analyst Bob Yu, Quantitative Analyst Stephanie Angle, Energy Analyst Denis Kasule, Energy Analyst Luke Jackson, Energy Analyst Warren Waite, Senior Energy Analyst Ross Wyeno, Energy Analyst Sheetal Nasta, Manager, Energy Analysis Anne Swedberg, Senior Energy Analyst Tricia Bulson, GIS Analyst For information online: 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 MERCHANTABILITY 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.

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