BENTEK North American Market Overview & Outlook To Illinois State University Institute for Regulatory Policy Studies Springfield, IL October 30, 2012 1
Agenda Drilling Efficiencies and Oil & NGL Production Will Sustain Annual Growth of Gas Volumes Demand Is Responding to Low Prices Prices Will Be Low and Stable as Supply Continues to Overwhelm Demand Changes in Intra-Regional Flow Dynamics Will Impact Local Prices, Particularly Out West 2
Massive Displacement Forcing Gas Into New Markets Source: BENTEK Cell Model 3
Supply 4
U.S. Production Slows But Sustains YOY Growth 66 2012 Avg: 63.5 Bcf/d 64 62 60 2011 Avg: 61.6 Bcf/d 2010 Avg: 57.1 Bcf/d Bcf/d 58 56 2009 Avg: 55.1 Bcf/d 54 52 50 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2009 2010 2011 2012 YTD Source: BENTEK Supply/Demand Balance History 5
Massive Shift of Rigs to Oil & Liquids Plays 36/+11 42/+14 CALIFORNIA 7/+4 OTHER ROCKIES 28/-2 2/-1 Rig Increases Dry Gas Focused Areas 6/-2 31/+22 214/+133 POWDER RIVER WIND RIVER GREEN RIVER 13/-10 PICEANCE UINTA SAN JUAN PERMIAN 470/+251 Rig Increases Liquids-Rich/Oil Focused Areas WILLISTON 43/+25 D-J ANADARKO 219/+96 75/-34 FT WORTH OTHER MIDCONTINENT 103/+65 EAST TX 260/+200 70/+11 6/-23 43/-50 30/-99 TX GULF EAGLE FORD ILLINOIS 9/+1 ARK FAYETTEVILLE 16/-21 ARK WOODFORD 95/+11 24/+9 MICHIGAN 14/+3 6/+0 27/+23 Rig Declines Source: BENTEK, October 2012 ARKLA AL-MS-FL LA GULF TX GULF UTICA OFFSHORE 3/-9 OTHER APPALACHIAN 70/-6 42/+24 MARCELLUS DRY MARCELLUS WET TOTAL 2006 CHANGE +716 Active rig count: October 5, 2012 / Change in rig count from Jan. 1, 2010 Source: BENTEK Regional Production Monitors, September 2012 6
IRRs Shift Production to Oil/NGL-Rich Plays Horn -1% Montney WCSB 16% 0% Dry Gas Play NGL Play Oil Play Bakken 56% Pinedale 3% Niobrara Piceance 4% 51% 7% Uinta 32% 68% Cleve/Tonk Marcellus 98% 94% Miss.Lime Granite Wash 84% Fayetteville 1% 4% Permian 89% Ark/Wood 0% Haynesville 50% Eagle Ford Source: Company Presentations, Quarterly Reports, and News Releases 7
Numerous Plays Become Attractive Again at $4 Gas Horn -1% 0% WCSB Pinedale 3% 27% 43% 7% Marcellus 22%41% @ Current $ @ $4 @ $5 1% Ark/Wood 4% Fayetteville 16% 29% 0% Haynesville 8% 19% Source: Company Presentations, Quarterly Reports, and News Releases 8
Technology Gains Drive Gas Production 2007 Q1 2008 Q1 2010 Q1 2011 Q1 SWN Energy Fayetteville Shale +533% 116,148 +166% +137% -58% +138% 43 4,985 2,673 +8% 20 8 18 2,104 1,006 18,360 $2.8 $2.6 Drill Time (Days) Wells Per Yr. Per Rig Avg. Lateral Length ( Feet) 30 Day Ave. Prod Rate (Mcfd) IP Additions Per Rig Per Yr. (Mcf/d) Drill & Complete Costs ($MM) Source: Southwestern Energy Financials 9
Bcf/d 18 16 14 12 10 8 6 4 2 Shale Rig Counts Peaked in 2010 Yet Production Has Grown 8 Bcf/d Since 2010 300 250 200 150 100 50 Horizontal Rig Count 0 2007 2008 2009 2010 2011 2012 Fayetteville Haynesville Marcellus Horizontal Rig Count 0 Source: BENTEK Production Monitors 10
Associated Gas, Efficiencies, Stronger Prices Will Sustain Production Growth 80 +10 Bcf/d By 2017 70 60 50 Bcf/d 40 30 20 10 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 History Forecast Source: BENTEK Forward Curve Quarterly 2012.09.28 11
U.S. Substantially Less Reliant on Canadian Gas 10 Historic Exports: 6.77 Bcf/d Historic Decline: 0.67 Bcf/d History Forecast Exports: 4.29 Bcf/d Forecast Forecast Decline: 0.78 Bcf/d 8 6 Bcf/d 4 2 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Net Exports To West Net Exports to Midwest Net Exports to Northeast Source: BENTEK Canadian Observer Suite and CellCast 12
Demand 13
90 80 Power, Industrial, Mexican Exports Spur Demand Growth History Forecast +9 Bcf/d Vs. 2012 70 60 Bcf/d 50 40 30 20 10-2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Power ResComm Industrial Exports to Mexico Pipe Loss Does not include forecast LNG exports Source: BENTEK Forward Curve Quarterly 2012.09.28 14
Over 70 Industrial Demand Expansions Planned By 2017 Source: BENTEK Industrial End Users Report 15
Industrial Demand Forecast to Add 0.3 Bcf/d/year 25 20 15 Bcf/d 10 Demand bottoms out with recession Summer baseload has since increased 1.3 Bcf/d Winter & Summer to average 1.3 Bcf/d above 2012 5-2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 History: BENTEK Supply/Demand Balance Analytic Report History Forecast: BENTEK Forward Curve Quarterly, 2012.09.28 16
Mexican Exports to Continue Rising Bcf/d 8 Mexican Demand 7 6 5 4 3 2 1 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Up to 1 Bcf/d of Export Expansions By 2014 2.5 2.0 History Projected U.S. Exports to Mexico Bcf/d 1.5 1.0 0.5 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 History Forecast Mexican Demand: SENER History: BENTEK Supply/Demand Balance Analytic Report History Forecast: BENTEK Forward Curve Quarterly, 2012.09.28 17
YOY Gas Demand from Power Up 5 Bcf/d (23%) 40 35 2012 YTD: 26.7 Bcf/d Vs. 2011 YTD: +5.0 Bcf/d Vs. 5-Yr YTD: +6.7 Bcf/d 30 Bcf/d 25 20 15 10 5 Yr. Avg. 2011 2012 Source: BENTEK Supply/Demand Balance History 18
Gas Prices Capable of Capturing Market Share 40 3,000 Bcf/d 35 30 25 20 15 10 5 12-Month Forward HH Avg $3.63 5.2 Bcf/d 2011 HH Avg $3.98 3.0 Bcf/d 2,500 2,000 1,500 1,000 500 Thousand Tons Equivalent 0 - PRB CAPP NAPP Illinois Uinta Imports Other Source: EIA, BENTEK Power Burn Report 19
New Gas-Fired Generation Will Boost Demand Under Construction Year MW 2013 8,254 2014 6,488 2015 1,350 2016 624 2017 85 Total 19,293 Gas Burn Equivalent 1.7 Bcf/d Under Construction + Proposed Gas Burn Equivalent 5.9 Bcf/d Gas Burn Equivalent assumes all plants are combined-cycle running at 50% utilization with heat rates of 7.5. Source: Platts & BENTEK Generation Data 20
Tightening Balance May Support Near-Term Prices; Long-Term Supply Surplus Grows 90 80 70 60 +0.2 +0.1-0.3 +1.9 +1.8-0.3 -- -0.9 +0.8 +1.1 Bcf/d 50 40 30 20 10-2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Supply Demand (No LNG Exports) Source: BENTEK Forward Curve Quarterly 2012.09.28 21
N.America Becomes Net LNG Exporter By 2016 1.6 1.2 0.8 0.4 0.0 (0.4) (0.8) Net LNG Exports (Bcf/d) First Ex Q1 2016, Net Ex Q3 2016 Source: BENTEK Special Report LNG Surge 22
Regional Dynamics 23
Massive Displacement Forcing Gas Into New Markets Source: BENTEK Cell Model 24
Marcellus to Remain Cheapest Gas Due to Production Growth and Takeaway Constraints Bcf/d 16 14 12 10 8 6 4 2 Incremental 7.4 Bcf/d by 2016 Northeast Production Bcf/d Northeast Inflows 16 14 12 10 8 6 4 2 0 2008 2009 2010 2011 2012 0 Legacy Production Lean Marcellus Wet Marcellus Utica Canada Midcon Southeast LNG Source: BENTEK Northeast Production Monitor and BENTEK Cell Model 25
Canadian Production Declines But Exceeds 12 Bcf/d 18 Annual Production: 15.2 Bcf/d Annual Decline: 0.52 Bcf/d Actual Annual Production: 13.1 Bcf/d Projection Annual Decline: 0.29 Bcf/d 16 14 Bcf/d 12 10 8 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Alberta BC Other Montney Horn River Saskatchewan NWT NB NS Source: BENTEK Canadian Production Monitor Monthly 26
Rockies Production To Stay Flat 12 History Forecast 10 8 Bcf/d 6 4 2 0 DJ Other Piceance Powder River GR-O Uinta Source: BENTEK Rockies Production Monitor 27
Anadarko Basin Drives MCP Growth 8 Midcon Producing Production Forecast 7 6 5 Bcf/d 4 3 2 1 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: BENTEK Midcon Production Monitor 28
Expansions Will Support Bakken Growth Bcf/d 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Williston Basin Expansions ONEOK Garden Creek ONEOK Stateline II HESS Tioga Plant Expansion ONEOK Stateline I 330 MMcf/d of Planned Processing Expansions Over Next Three Years Gross Production Flared Processing Capacity Source: BENTEK Midcon Production Monitor 29
Midcon Sources Gas From Other Areas Market Share of Midcon Imports Northeast 1% 2007 Northeast 3% 2012 Rockies 23% MCP 10% Rockies 21% MCP 13% SE Gulf 23% Canada 43% SE Gulf 32% Canada 31% Source: BENTEK Midcon Observer 30
Midcon Demand Stagnant 25-0.3 Bcf/d per year +0.2 Bcf/d per year 20 15 Bcf/d 10 5-2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 RCI - History Power - History RCI - Forecast Power - Forecast Source: BENTEK CellCast and Midcon Observer 31
Midcon Market Gas Power Demand Rising 2.5 60,000 Bcf/d 2.0 1.5 1.0 Gas Burn: YTD: 1.99 Bcf/d +0.75 Bcf/d above 2011 YTD +0.9 Bcf/d above 3-Yr YTD 50,000 40,000 30,000 20,000 MW Generated 0.5 10,000 0.0 3-Year Average 2011 2012 YTD Gas Burn Total Power Generation - Source: BENTEK Midcon Observer History and Energy Information Administration 32
Supply Shifts and Production Growth Will Moderate Prices $0.35 $0.15 -$0.05 -$0.25 Opal $0.35 $0.15 -$0.05 -$0.25 Chicago $0.35 $0.15 -$0.05 -$0.25 Tetco M3 SoCal $0.35 $0.15 -$0.05 -$0.25 $0.35 $0.15 -$0.05 -$0.25 Waha $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Henry Hub Dominion S. $0.35 $0.15 -$0.05 -$0.25 Source: ICE/Clearport and BENTEK Natural Gas Price Matrix 33
CASW Inbound Pipelines Are At ~80% Capacity 12 10 8 Bcf/d 6 4 2 - Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 El Paso North El Paso South PG&E (Redwood) TransWestern (W.Thoreau) Kern (Veyo) Aggregate Capacity Source: BENTEK West Coast Observer 34
Demand & Export Growth Will Test CASW Capacity 12 10 8 Bcf/d 6 4 2-2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Flows Projected Flows Mexican Expansions (Fully Utilized) Forecast CA/SW Demand Growth Capacity Source: BENTEK West Coast Observer, CellCast, and Forward Curve 35
California Features Highest Demand Prices Cash ($/MMBtu) 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 PG&E SoCal Henry Chicago Transco Z6 FGT Z3 Source: CME/NYMEX Clearport and BENTEK Natural Gas Price Matrix 36
Another Shift Looms With LNG Exports Source: BENTEK Cell Model 37
Basis Tightening Continent-Wide AECO 2009 2010 2011 2012 -$0.44 -$0.49 -$0.32 -$0.42 Dawn Sumas 2009 2010 2011 2012 -$0.13 -$0.28 -$0.11 -$0.12 NW Rox 2009 2010 2011 2012 -$0.82 -$0.47 -$0.23 -$0.17 2009 2010 2011 2012 $0.32 $0.37 $0.39 $0.29 Transco Z6 Chicago (Nicor) 2009 2010 2011 2012 2009 2010 2011 2012 $0.95 $1.03 $0.99 $0.47 $0.00 $0.08 $0.12 $0.07 PG&E 2009 2010 2011 2012 $0.21 $0.16 $0.25 $0.33 SoCal 2009 2010 2011 2012 -$0.30 -$0.13 $0.07 $0.15 Dominion South 2009 2010 2011 2012 $0.31 $0.21 $0.12 $0.02 Waha Henry Hub (Cash) 2009 2010 2011 2012 2009 2010 2011 2012 -$0.51 -$0.22 -$0.12 -$0.08 $3.92 $4.37 $3.99 $2.53 2012 prices are average of year-to-date as of 2012.09.24 Tetco M3 2009 2010 2011 2012 $0.72 $0.74 $0.63 $0.22 38
Price Outlook 39
Prices To Remain Range Bound Between $3 to $3.50 $3.50 $3.00 $2.50 U$/MMBtu $2.00 $1.50 $1.00 $0.50 $0.00 NYMEX BENTEK Source: BENTEK Market Call 2012.09.28 NYMEX is 30-day average as of 2012.10.14 40
Significant Resistance at $5 Mark U$/MMBtu $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 2013 2014 2015 2016 2017 NYMEX BENTEK NYMEX is last seven-day average as of 2012.10.14 Source: BENTEK US Forward Curve 2012.09.28 41
Key Takeaways Despite Weak Gas Prices Supply Will Remain Abundant Structural Demand Growing But Not Pacing Supply Basis Will Flatten Until LNG Exports Become Established Until Then Gas Will Struggle to Break $5 Mark 42
BENTEK Energy BENTEK is an energy market analytics company focused on the natural gas market and related energy sectors. Rick Margolin Direct: 720.214.3807 rmargolin@bentekenergy.com AIM: BentekRickM Or 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. 43