LNG & LPG US Supply & Infrastructure Trends June 19, 2013 Chris Sighinolfi, CFA (212) 707-6420 csighino@jefferies.com Jefferies LLC
We need to export more of our goods. Because the more products we make and sell to other countries, the more jobs we support right here in America. So tonight, we set a new goal: We will double our exports over the next five years, an increase that will support two million jobs in America. We have to seek new markets aggressively, just as our competitors are. If America sits on the sidelines while other nations sign trade deals, we will lose the chance to create jobs on our shores. - President Obama 2010 State of the Union Address
US LNG A Paradigm Shift Early/Mid 2000s: Domestic dry gas production seemingly unable to grow Sizable imports from Canada Volatile pricing Growing LNG imports (viewed as the bridge supply) Present Day: Abundant domestic dry gas supplies Growing exports to Canada & Mexico Muted price volatility Pursuing LNG export
Shale Gas Unleashes Domestic Supply 1550 68 Natural Gas Rigs 1350 1150 950 750 Hurricane Impacts 65 62 59 56 53 50 Dry Gas Production (Bcf/d) 550 47 350 44 1/15/1997 1/15/1999 1/15/2001 1/15/2003 1/15/2005 1/15/2007 1/15/2009 1/15/2011 1/15/2013 12-Month Average Gas Rigs (LHS) Dry Gas Production (RHS) From 1997-2007, US gas-directed rig activity increased by >3.5x, yet daily dry gas production grew by <1% Unconventional resources changed the productive landscape, leashing ~25% growth in daily US dry gas output since 2007 and lowering the cost of supply Source: EIA & Baker Hughes
Affecting Flows North of the Border US Pipeline Imports from Canada US Pipeline Exports to Canada Bcf/d 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 Bcf/d 3.00 2.50 2.00 1.50 1.00 0.50 0.00 US Pipeline Net Imports From Canada Bcf/d 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 Pipeline net imports from Canada have fallen ~45% since 2007 Source: EIA
South of the Border & From Seaborne Trade US Pipeline Exports to Mexico Bcf/d 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00 Pipeline exports to Mexico have more than doubled since 2007 2.25 US LNG Imports 1.50 Bcf/d 0.75 0.00 While LNG flows to the US have all but ceased Source: EIA
Curtailing Domestic Prices $8.00 $7.25 $6.50 Gas Price ($/MMBtu) $5.75 $5.00 $4.25 $3.50 2014 NYMEX Strip 2015 NYMEX Strip 2016 NYMEX Strip Source: FactSet
And Mitigating Price Volatility $8.00 Northeast Basis Spreads ($/MMBtu) $6.00 $4.00 $2.00 $0.00 ($2.00) ($4.00) ($6.00) ($8.00) Northeast Basis Spreads $8.00 Rockies Basis Spreads ($/MMBtu) $6.00 $4.00 $2.00 $0.00 ($2.00) ($4.00) ($6.00) ($8.00) 4/24/2006 4/24/2007 4/24/2008 4/24/2009 4/24/2010 4/24/2011 4/24/2012 4/24/2013 Rockies Basis Spreads Source: SNL Energy Note: Northeast basis is Henry Hub to Dominion South Point; Rockies is Henry Hub to Cheyenne Plains
Attracting Growth From Domestic Users 60.0% Composition of US Electric Power Generation 4,500 50.0% 4,000 Market Share 40.0% 30.0% 20.0% 3,500 3,000 Total Gen (MM MWh) 10.0% 2,500 0.0% 2005 2008 2009 2010 2011 2012 2,000 Coal Natural Gas Nuclear All Other Total Power Generation $6.00 Y/Y Coal-to-Gas Substitution 8.0 $6.00 Coal-to-Gas Substitution Since 2008 12.0 Spot Prices ($/MMBtu) $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 6.0 4.0 2.0 0.0 (2.0) (4.0) Bcf/d (estimate) Spot Prices ($/MMBtu) $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 10.0 8.0 6.0 4.0 2.0 0.0 (2.0) Bcf/d (estimate) NYMEX Monthly Natural Gas Price (LHS) Implied Y/Y Natural Gas Fuel Switching (RHS) NYMEX Monthly Natural Gas Price (LHS) Implied Natural Gas Fuel Switching (RHS) Source: EIA, FactSet, and Jefferies estimates
And Interest From International Consumers Isle of Grain, UK $9.50 Altamira, Mexico $16.55 Lake Charles, LA $3.44 Canaport, NB $4.04 Cove Point, MD $3.72 Barcelona, Spain $10.15 Sakai, Japan $15.05 Rio de Janeiro, Brazil $15.07 Dahej, India $13.55 Kaohsiung, Taiwan $14.55 Bahia Blanca, Argentina $15.07 Global landing prices for LNG (July 2013) Source: Waterborne LNG
Catalyzing a Debate on US LNG Exports Why the Debate? The Natural Gas Act (NGA) requires the DOE to authorize exports unless they will not be consistent with the public interest The NGA provides that exports to an FTA country are deemed to be in the public interest and shall be granted without modification or delay The world s largest LNG importers do not have FTAs with the US DOE receives flood of LNG export applications following its approval of Sabine Pass for non-fta export in May, 2011 Points of Contention For Non-FTA Export: Social Policy (perception of domestic winners & losers) Economic Environmental
In Response, the DOE Commissioned Studies Microeconomic Impact Study (EIA January 2012) Increased domestic prices Higher domestic production Reduced domestic consumption Elevated consumer costs for natural gas and electricity Macroeconomic Impact Study (NERA December 2012) A net economic benefit results in all analyzed scenarios US economic welfare increases as the volumes of natural gas exports increases While net benefits exist, the composition of income is altered by exports
Meanwhile, the Permit Backlog Grows Existing North American LNG Import/Export Terminals Proposed/Potential North American LNG Import/Export Terminals Source: FERC Office of Energy Projects
And Projects Jockey For A Place in the Queue LNG Project Company Proposed Volume (Bcf/d) FTA Approval DOE Non- FTA Approval DOE Sabine Pass Liquefaction Cheniere Energy (LNG) 2.2 Approved Approved Freeport LNG Expansion & FLNG Liquefaction ConocoPhillips (COP) 1.4 Approved Approved Lake Charles Exports, LLC Energy Transfer Partners (ETP) & BG Group (BG) 2.0 Approved Under Review Dominion Cove Point LNG, LP Dominion Resources (D) 1.0 Approved Under Review Freeport LNG Expansion & FLNG Liquefaction ConocoPhillips (COP) 1.4 Approved Under Review Cameron LNG, LLC Sempra Energy (SRE) 1.7 Approved Under Review Jordan Cove Energy, L.P. Veresen, Inc. (VSN-TSE) 1.2 (FTA) & 0.8 (non-fta) Approved Under Review LNG Development Co, LLC N/A 1.3 Approved Under Review Cheniere Marketing, LLC Cheniere Energy (LNG) 2.1 Approved Under Review Excelerate Liquefaction Solutions I, LLC N/A 1.4 Approved Under Review Carib Energy (USA) LLC N/A 0.3 (FTA) & 0.1 (non-fta) Approved Under Review Gulf Coast LNG Export, LLC N/A 2.8 Approved Under Review Southern LNG Company, LLC El Paso Pipeline Partners (EPB) 0.5 Approved Under Review Gulf LNG Liquefaction Co, LLC Kinder Morgan (KMI) & General Electric (GE) 1.5 Approved Under Review CE FLNG, LLC Cambridge Energy Group 1.1 Approved Under Review Golden Pass Products LLC Exxon Mobile (XOM), Qatar Petroleum, ConocoPhillips (COP) 2.6 Approved Under Review Pangea LNG (North America) Holdings N/A 1.1 Approved Under Review SB Pow er Solutions Inc. N/A 0.1 Approved N/A Main Pass Energy Hub, LLC N/A 3.2 Approved N/A Waller LNG Services, LLC N/A 0.2 Approved N/A Magnolia LNG, LLC N/A 0.5 Approved N/A Trunkline LNG Export, LLC Energy Transfer Partners (ETP) 2.0 Approved Under Review Gasfin Development USA, LLC N/A 0.2 Approved N/A Freeport-McMoRan LLC N/A 3.2 Approved Under Review Sabine Pass Liquefaction Cheniere Energy (LNG) 0.3 Pending Approval Under Review Sabine Pass Liquefaction Cheniere Energy (LNG) 0.2 Pending Approval Under Review Venture Global LNG N/A 0.7 Pending Approval Under Review Total Applications Received 30.6 Bcf/d 29.21 Bcf/d Source: DOE Office of Fossil Energy Note: Listed in the order DOE will process
Where Does The Process Stand Today? May 17 th - DOE Authorizes Freeport LNG for 1.4 Bcf/d Non-FTA Export 2 nd proposed facility to be authorized and first since EIA & NERA studies Dow Chemical publishes support for the decision (has an interest in the facility) May 21 st Ernest Moniz sworn in as US Energy Secretary Initially indicates further review may be needed before making any final decisions However, tells House Energy Committee on June 13 th he is committed to further decisions on export applications this year May 29 th President Obama Tells the crowd at a Democratic Congressional Campaign Committee (DCCC) fundraiser in Chicago by 2020, we ll be a net exporter of natural gas May 29 th Jon Wellinghoff announces his resignation from FERC FERC Commissioner since 2006 FERC Chairman since 2009
What Do We Expect? New US natural gas pipeline capacity will primarily address Supply debottlenecking & ongoing growth in gas-fired electric power generation Continued export growth to Canada and Mexico Limited new long-haul pipeline capacity expected (except FL) Diversified supplies and limited basis differentials negate need for new capacity Underutilized pipes may be repurposed Expect additional DOE & FERC approvals for non-fta LNG export Authorizations unlikely to affect near-term gas outlook Arbitrage opportunities to compress as global capacity comes online US LNG exports to link US storage to global markets Canadian LNG export opportunities to also progress Ongoing debate between consumers/suppliers over price linkages
Natural Gas Liquids (NGLs) Produced as part of the natural gas stream in many locations Separated from dry gas (methane) via gas processing NGLs separated into individual liquid products via fractionation Five component products, each with independent supply/demand factors Ethane (C2) Propane (C3) Normal Butane (C4) Isobutane (C4) Natural Gasoline (C5+) Historically linked to price of crude oil (no longer true)
Liquefied Petroleum Gas (LPG) LPG is composed of propane and butane Used as a fuel in heating appliances Used as an engine fuel Typically, blends have higher propane concentrations in the winter vs. butane in the summer Propane (C3) A popular fuel for rural heating and cooking ( natural gas on wheels ) Used in the production of ethylene and propylene Also used as an engine fuel and for crop drying Butane (C4) Primarily used as a blending agent for motor gasoline Also used as a feedstock for the manufacture of ethylene, propylene, and butadiene
NGL Values Alter Producer Behavior MMBbl 1150 1100 1050 1000 950 900-109 -99 NGL Supply/Demand -95-34 -43 +3 +10 +65 As US natural gas prices weakened beginning in 2009, producers shifted the focus of their drilling efforts on oil and liquid-rich (NGL) plays US NGL supply is up 33% since 2008 850 800 NGLs yielded ~$10-12/MMBtu more than natural gas in 2011-2012 Total NGL Domestic Supply Total NGL Domestic Demand New midstream processing capacity has been announced and is being constructed to keep up with the fast-acting producer community Bcf/d 90 85 80 75 70 65 68.8 US Processing Capacity 80.1 72.3 83.0 84.1 60 2011 2012 2013E 2014E 2015E Source: EIA, Bentek, and Jefferies estimates
Driving an Oversupply of Light-end Products NGL Barrel Composition 2012 US NGL Barrel Volume Breakdown 2012 US NGL Barrel Price Breakdown Natural Gasoline 12% Ethane 41% Natural Gasoline 30% Ethane 16% Isobutane 9% N-Butane 8% Isobutane 16% Propane 27% Propane 30% N-Butane 11% While a majority of the NGL revenue stream is derived from heavies (butane & natural gasoline), more than 70% of the composite barrel volume is light-end products (ethane & propane) Source: EIA & Bentek
Prompting Pricing Relationships to Break Down Year Ethane Propane N-Butane Isobutane Natural Total NGL Gasoline Barrel 2005 46% 68% 81% 86% 94% 65% 2006 41% 65% 77% 79% 91% 61% 2007 46% 71% 83% 86% 97% 67% 2008 37% 60% 71% 73% 88% 57% 2009 32% 58% 74% 81% 89% 55% 2010 31% 61% 79% 84% 97% 58% 2011 34% 64% 81% 90% 103% 61% 1Q12 23% 51% 79% 83% 97% 51% 2Q12 18% 44% 73% 79% 92% 45% 3Q12 15% 41% 65% 74% 92% 42% 4Q12 14% 42% 78% 86% 103% 45% 2012 18% 45% 74% 80% 96% 46% 2013 YTD 12% 40% 65% 67% 96% 41% '02-'11 Average 41% 66% 81% 85% 95% 63% Source: Bentek Note: Mt. Belvieu product prices vs. WTI crude prices
As Strong Supplies Outstrip Domestic Demand 85 80 75 70 Field Level NGL Production ((MMBbls) 65 60 55 50 45 40 2013E 2012 5-yr avg (MMBbls) 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% -50.0% -60.0% -70.0% -80.0% NGL Component Price Relative Performance Since 2012 Ethane Propane N-Butane Isobutane Series5 Natural Gasoline NGL Composite Source: EIA & Bentek
Interest Grows From International Consumers Announced Propane Export Projects 1) Enterprise Expansion (1Q13) Current Capacity 133 MBbl/d Expanded Capacity 117 MBbl/d Total Capacity 91,250 MBbl/yr 2) Coastal Caverns (1Q13) Expanded Capacity 8 MBbl/d Total Capacity 3,042 MBbl/yr 3) Targa Expansion (3Q13) Current Capacity 33 MBbl/d Expanded Capacity 73 MBbl/d Total Capacity 38,933 MBbl/yr 4) Targa Expansion (3Q14) Starting Capacity 107 MBbl/d Expanded Capacity 60 MBbl/d Total Capacity 60,833 MBbl/yr 5) Vitol Expansion (4Q14) Expanded Capacity 8 MBbl/d Total Capacity 3,042 MBbl/yr 6) Energy Transfer Partners (1Q15) Expanded Capacity 200 MBbl/d Total Capacity 73,000 MBbl/yr 7) Occidental Petroleum (2015) Expanded Capacity 125 MBbl/d Total Capacity 45625 MBbl/yr Incremental Capacity Addition 592 MBbl/d MBbl/d 800 700 600 500 400 300 200 100 0 167 167 167 167 167 2008 2009 2010 2011 2012 2013E 2014E 2015E ~80% of current Field Level Production* *Production as of 1Q13 Propane Export Capacity (MBbl/d) ~40% CAGR in exports from 2008-2015E Capacity 365 Exports *Grey line denotes Jefferies estimates, which assume a 75% utilization on new capacity 433 758 Source: EIA, Bentek, and Jefferies estimates
Where is US Propane Going? Enterprise Products Partners Propane Destinations (2012) Source: EPD Presentation
Limited Regulatory Hurdles = Market Access Propane Supply/Demand Analysis (MBbl/d) 2,000 600 Supply/Demand (MBbl/d) 1,800 1,600 1,400 1,200 1,000 800 600 500 400 300 200 Exports (MBbl/d) 400 200 100 0 0 Propane Supply Propane Demand Propane Exports We expect propane exports to fundamentally tighten the domestic Supply/Demand picture by 2015 2013-2015 estimates assume the following: 1) 100% utilization and a 2.5 GPM recovery on incremental processing capacity; 2) 2% annual demand growth from 2012-2015; 3) a 5% compound annual decline in US imports; 4) flat production from US refineries; 5) 75% utilization on new export capacity; and, 6) 75% utilization on new PDH facility capacity Source: EIA and Jefferies estimates
What Do We Expect? Ongoing growth in field level supplies Driven by producer activity Aided by new natural gas processing capacity Sloppy ethane market until cracking capacity comes online in ~2016 Expect widespread ethane rejection to persist Anticipate ethane will trade near Btu parity with natural gas Propane pricing to strengthen on the back of expanded US exports Assumes normalized weather Aided by Propane Dehydration (PDH) unit build-outs Butane pricing to continue decoupling from crude oil Limited near-term growth in refinery capacity Potential to capture part of the export market share Natural gasoline to maintain crude price relationship Aided by ongoing exports to Canada (via rail)
Important Disclosures Analyst Certification I, Chris Sighinolfi, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Other Important Disclosures Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC ( Jefferies ) group companies: United States: Jefferies LLC, which is an SEC registered firm and a member of FINRA. United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Conduct Authority; registered in England and Wales No. 1978621; registered office: Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0)20 7029 8000; facsimile +44 (0)20 7029 8010. Hong Kong: Jefferies Hong Kong Limited, which is licensed by the Securities and Futures Commission of Hong Kong with CE number ATS546; located at Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen s Road Central, Hong Kong. Singapore: Jefferies Singapore Limited, which is licensed by the Monetary Authority of Singapore; located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore 048624, telephone: +65 6551 3950. Japan: Jefferies (Japan) Limited, Tokyo Branch, which is a securities company registered by the Financial Services Agency of Japan and is a member of the Japan Securities Dealers Association; located at Hibiya Marine Bldg, 3F, 1-5-1 Yuraku-cho, Chiyoda-ku, Tokyo 100-0006; telephone +813 5251 6100; facsimile +813 5251 6101. India: India: Jefferies India Private Limited, which is licensed by the Securities and Exchange Board of India as a Merchant Banker (INM000011443) and a Stock Broker with Bombay Stock Exchange Limited (INB011438539) and National Stock Exchange of India Limited (INB231438533) in the Capital Market Segment; located at 42/43, 2 North Avenue, Maker Maxity, Bandra-Kurla Complex, Bandra (East) Mumbai 400 051, India; Tel +91 22 4356 6000.
Important Disclosures This material has been prepared by Jefferies employing appropriate expertise, and in the belief that it is fair and not misleading. The information set forth herein was obtained from sources believed to be reliable, but has not been independently verified by Jefferies. Therefore, except for any obligation under applicable rules we do not guarantee its accuracy. Additional and supporting information is available upon request. Unless prohibited by the provisions of Regulation S of the U.S. Securities Act of 1933, this material is distributed in the United States ("US"), by Jefferies LLC, a US-registered broker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of 1934. Transactions by or on behalf of any US person may only be effected through Jefferies LLC. In the United Kingdom and European Economic Area this report is issued and/or approved for distribution by Jefferies International Limited and is intended for use only by persons who have, or have been assessed as having, suitable professional experience and expertise, or by persons to whom it can be otherwise lawfully distributed. Jefferies International Limited has adopted a conflicts management policy in connection with the preparation and publication of research, the details of which are available upon request in writing to the Compliance Officer. For Canadian investors, this material is intended for use only by professional or institutional investors. None of the investments or investment services mentioned or described herein is available to other persons or to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario). For investors in the Republic of Singapore, this material is provided by Jefferies Singapore Limited pursuant to Regulation 32C of the Financial Advisers Regulations. The material contained in this document is intended solely for accredited, expert or institutional investors, as defined under the Securities and Futures Act (Cap. 289 of Singapore). If there are any matters arising from, or in connection with this material, please contact Jefferies Singapore Limited. In Japan this material is issued and distributed by Jefferies (Japan) Limited to institutional investors only. In Hong Kong, this report is issued and approved by Jefferies Hong Kong Limited and is intended for use only by professional investors as defined in the Hong Kong Securities and Futures Ordinance and its subsidiary legislation. In India this report is made available by Jefferies India Private Limited. In Australia this information is issued solely by Jefferies International Limited and is directed solely at wholesale clients within the meaning of the Corporations Act 2001 of Australia (the "Act") in connection with their consideration of any investment or investment service that is the subject of this document. Any offer or issue that is the subject of this document does not require, and this document is not, a disclosure document or product disclosure statement within the meaning of the Act. Jefferies International Limited is authorised and regulated by the Financial Conduct Authority under the laws of the United Kingdom, which differ from Australian laws. Jefferies International Limited has obtained relief under Australian Securities and Investments Commission Class Order 03/1099, which conditionally exempts it from holding an Australian financial services licence under the Act in respect of the provision of certain financial services to wholesale clients. Recipients of this document in any other jurisdictions should inform themselves about and observe any applicable legal requirements in relation to the receipt of this document.
Important Disclosures This report is not an offer or solicitation of an offer to buy or sell any security or derivative instrument, or to make any investment. Any opinion or estimate constitutes the preparer's best judgment as of the date of preparation, and is subject to change without notice. Jefferies assumes no obligation to maintain or update this report based on subsequent information and events. Jefferies, its associates or affiliates, and its respective officers, directors, and employees may have long or short positions in, or may buy or sell any of the securities, derivative instruments or other investments mentioned or described herein, either as agent or as principal for their own account. Upon request Jefferies may provide specialized research products or services to certain customers focusing on the prospects for individual covered stocks as compared to other covered stocks over varying time horizons or under differing market conditions. While the views expressed in these situations may not always be directionally consistent with the long-term views expressed in the analyst's published research, the analyst has a reasonable basis and any inconsistencies can be reasonably explained. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of the investments referred to herein and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. This report has been prepared independently of any issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of securities. None of Jefferies, any of its affiliates or its research analysts has any authority whatsoever to make any representations or warranty on behalf of the issuer(s). Jefferies policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer prior to the publication of a research report containing such rating, recommendation or investment thesis. Any comments or statements made herein are those of the author(s) and may differ from the views of Jefferies.
Important Disclosures This report may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor s. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Jefferies research reports are disseminated and available primarily electronically, and, in some cases, in printed form. Electronic research is simultaneously available to all clients. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Jefferies. Neither Jefferies nor any officer nor employee of Jefferies accepts any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use of this report or its contents. For Important Disclosure information, please visit our website at https://javatar.bluematrix.com/sellside/disclosures.action or call 1.888.JEFFERIES 2013 Jefferies Group LLC