Capital Trends and Risks Associated with Natural Gas-Related Investments (January 2013)


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In the January 2013 issue of NG Market Notes, Raoul Nowitz, Director with Navigant Capital Advisors, analyzes capital investing in the oil and gas sector and provides insights on how to effectively navigate through future boom and bust cycles.

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Capital Trends and Risks Associated with Natural Gas-Related Investments (January 2013)

  1. 1. A publication by Navigant’s Energy Practice » January 2013Contents Lessons from the Natural Gas Market1 Lessons from the Natural Gas Market Capital Trends and Risks Associated with Natural Gas- – Capital Trends and Risks Associated with Natural Gas-related Investment related Investment7 Natural Gas Market Charts The unprecedented opportunities for natural gas markets, resulting principally from10 Legislative and Regulatory Highlights the continuing evolution of hydraulic fracturing technologies in North American13 About Navigant shale fields, has created both substantial investment opportunities and capital needs over the past few years. Readily available capital raised prior to the 2008 recession helped to fund successful investments by many companies well-positioned to pursue and exploit shale gas exploration opportunities. This capital availability, however, became a catalyst for failure of certain companies that did not appropriately evaluate the risks resulting from issuing debt during a period of significant market shifts. The oil and gas sector has historically attracted significant investment capital, which typically ebbs and flows through boom and bust market cycles. The current environ- ment of aggressive borrowing to fund sector growth and investment will inevitably lead to future financial distress in the sector, just as it has in the past. Understanding trends, lessons learned during sharp price declines, and how certain non-traditional parties have successfully profited during such times of adversity, provides insight on how to effectively navigate future cycles and the uncertainty they bring. Significant Sector Changes Over Time For the years that led up to the 2008 recession, natural gas prices got to an unprec- edented point where they were stubbornly high. The discovery and development of low-cost, low-risk shale gas picked up speed as the commercialization of horizontal drilling kicked off a shale gas “land rush” by the industry. Market participants were active in securing strong leasehold positions and services businesses were bulking up in support of anticipated growth in the unconventional sub-sector. Merger and acquisition (M&A) activity in the natural gas sector was robust, driven largely by confidence in conventional drilling activity and an expectation of sustained high pric- ing levels supporting healthy margins (with capital also being directed to unconven- tional drilling activity during this period). Transaction and investment activity was strongly supported by a debt financing market that provided the necessary capital to support funding of both M&A activity in the sector and related investment needs. As the financial meltdown ensued, exacerbated by an anticipated glut in natural gas led by large discoveries of unconventional shale gas and the collapse in natural gas demand, the natural gas industry experienced a significant and swift decline in prices and rig counts. Capital markets froze, adding stress to an already troubled sector, resulting in a slowdown in transactional activity. Energy sector bankruptcies rose, re- flecting a dearth of critical capital availability to support companies ineffectively po- sitioned to sustain the falling commodity price environment and challenging capital markets that followed. The hydraulic fracturing story, as an area of growth, contin-
  2. 2. January 2013ued to build momentum during this Merger & Acquisition Activity »» A change in regionaltime with select companies restruc- Reflecting Strategic Views of Buyers transportation and infrastructureturing and repositioning for a greater and Sellers demands to allow for more rapidshare of this growing opportunity. The current market dislocation, driv- development of upstream assets.Many natural gas producers began to en by abundant natural gas supply, Weakness in the price of natural gasredirect to liquid-rich plays (oil and has created a recovery in M&A activ- has been a key driver of transactionwet gas), acquiring lead positions ity in the oil and gas sectors starting flow in the Exploration and Produc-where they had the capital availabil- in 2010, including unconventional oil tion (E&P) sector. The upstreamity or ability to issue debt. and gas. Activity in the services and sector remains an area of high M&AWhile hydraulic fracturing has been midstream sectors, as represented in activity in terms of the aggregatevalidated through substantial in- Figure 1, while down in 2012 relative number of transactions, as represent-creases in production capacity, a to a significant year of transactional ed in Figure 2. Transaction volume“new normal” has emerged in terms activity in 2011, has principally been has been led by shifting interestsof a low priced but stable natural gas directed by: of diversified E&P operators, withpricing environment likely to prevail »» A rapid shift from natural gas divestitures attracting both indus-for a meaningful period of time. Un- drilling and production to oil and try buyers and private equity firmsconventional drilling activity has not liquids-rich directed plays. looking for undervalued businessesonly created an abundance of supply, demonstrating cash flow generation, »» An increase in the impact ofbut also a significant shift in inter- including in a joint venture format in development drilling, the use ofest to ”wet” or liquids rich natural certain instances. Seller motivations hydraulic fracturing technology.gas development and a shift to oildirected drilling exploration. Rigs are FIGURE 1: OIL AND GAS M&A - SELECT SUB-SECTORSmigrating to oil, and while oil prices Transaction Volume - number of transactions (closed and/or effective)have declined recently they have heldtheir comparative heat value price 300advantage to natural gas. Hydraulicfracturing has incented drilling for 250oil, and as a result, both significant Oil and Gas Storage andcapital investment and rigs previous- 200 Transportationly used for natural gas are now being Oil and Gas Refining andearmarked for oil. And, this activity Marketing 150is changing market dynamics. Oil and Gas Equipment and ServicesThe United States now has the po- 100 Oil and Gas Drillingtential to become more self-sufficientfor its oil needs. LNG import termi- 50nals are being retooled for anticipatedsignificant future export activity, and 0 2006 2007 2008 2009 2010 2011 2012access to capital markets has returned Source: S&P Capital IQ LCDin a meaningful way due to improvinglender and investor confidence. Theconfluence of these factors is creatingattractive opportunities for companies. 2
  3. 3. January 2013include a desire to prune non-core FIGURE 2: OIL AND GAS EXPLORATION AND PRODUCTION M&Abusinesses from their existing port- Transaction Volume - number of transactions (closed and/or effective)folios, public company pressures tocontinue demonstrating growth from 700existing asset bases, pressures to di-vest assets and application of cash 600proceeds towards necessary capital 500expenditures, drilling activities, orparing of debt. 400Recent declines in M&A activity re- 300flect a temporary sense of pause byacquirers. This slowdown in the 200number of transactions comes as aresult of a need for buyers to fully 100integrate recently completed acquisi- 0tions, to evaluate the impact of global 2006 2007 2008 2009 2010 2011 2012trends and secular shifts on future Source: S&P Capital IQ LCDlevels of demand, to interpret theconsequences of energy price lev-els, and time for buyers to digest and FIGURE 3: OIL AND GAS LOAN VOLUME BY PURPOSEconsider the effects of possible future Q1 - Q3 2012regulation and governmental policies.Loan and High-Yield Fixed DebtFinancings Provide Fuel forHeightened Transactional ActivityBanks and institutional investors Refinancing Acquisitionhave traditionally been key sources of 32% 34%capital for growth in the energy sector,most recently demonstrating a greaterpropensity to lend to oil and gas busi-nesses as part of a broader financingmarket recovery. Through the third Projectquarter of 2012, more than 55 percent Recap/General Financing/Misc. LBO Recap Corp Purpose 18%of the total loan volume for oil and 0% 11% 2%gas investment was issued for growth Recap/Dividend DIPpurposes—including acquisition fund- 2% 1%ing, new investment activity, and proj- Source: S&P Capital IQ LCDect financing including investment inunconventional drilling activities asshown in Figure 3. Lender loan returnexpectations in the sector have reducedsignificantly relative to the 2008 reces-sion, indicating that capital supply iscurrently exceeding demand. For ex-ample, the cost of bank debt on tradingdebt is averaging 5-6 percent, substan-tially lower than the 9-10 percent rangeseen during the height of the recession. 3
  4. 4. January 2013Through the third quarter of 2012, FIGURE 4: OIL AND GAS LOAN VOLUMEmore than $25 billion in loans and Amount Issued ($ in Billions)approximately $36 billion in non-in-vestment grade bonds were issued in $35Bthe oil and gas sector, as indicated in $30BFigures 4 and 5 respectively. This vol-ume is up sharply, compared to the $25Baggregate of loans and bonds relativeto prior years, reflecting increased $20Bmarket interest in the sector includingsupporting the unconventional drill- $15Bing story backed by capital inflowsand a thirst for yield, added to by $10Bvirtue of a weak interest rate environ-ment driven by governmental mon- $5Betary policies. $0BPast Cycles of Heavy Borrowing YTD 3Q YTD 3Q YTD 3Q YTD 3Q YTD 3Q YTD 3Q 2007 2008 2009 2010 2011 2012Have Been a Prelude to Increased Source: Advantage DataBankruptcies and Restructurings ofDebt-Laden Businesses in the Sector FIGURE 5: OIL AND GAS NON-INVESTMENT GRADE BOND DEBT ISSUANCESector trends demonstrate a cycle of Amount Issued ($ in Billions)high debt borrowing typically fol-lowed by increased business bank- $45Bruptcies with a resulting need to $40Brestructure, sell, or liquidate. The $35Bsignificant debt provided by banksand other lending institutions prior $30Bto the 2008 recession was followed by $25Ban increased level of bankruptcies by $20Bentities exposed to natural gas marketrisks, as reflected in Figure 6. $15B $10BThe causes of financial distress wereseveral, including: $5B»» Lack of adequate planning for $0B YTD 3Q YTD 3Q YTD 3Q YTD 3Q YTD 3Q YTD 3Q the extent of falling natural gas 2007 2008 2009 2010 2011 2012 price dynamics. Many companies Source: Advantage Data took a one-dimensional approach in their business planning efforts, semi-annual borrowing base »» Secular shifts to shale and liquid- with insufficient preparation for redeterminations as a result of rich oil plays. During the early downside “what if” scenarios. declining commodity prices, stages of the shale story, many Contingency planning and related significantly reducing, or even believed the cyclicality of pricing stress case analyses would have eliminating required liquidity. would follow traditional patterns, been relevant planning measures Resulting business decisions were restoring margins to historical but not adequately performed in often reactive, sub-optimal, or levels, a judgment that left the wake of a protracted weak focused on addressing immediate production and service companies natural gas pricing climate. Many needs without considering longer- exposed to significant market risk. E&P companies experienced term planning perspectives. Sector activity moved to emerging significant contraction in their 4
  5. 5. January 2013 FIGURE 6: U.S. NATURAL GAS-RELATED BANKRUPTCIES business owners, but left limited “breathing room” once natural 60 gas prices declined. Restrictions imposed by lenders, including 50 natural gas commodity price Number of Bankruptcy Filings hedges that were subject to 40 potential termination in the event agreements with lenders were 30 violated, also limited flexibility. Investors Have Been Effective in 20 Finding Value in the Sector Business failures invariably create at- 10 tractive opportunities. Despite chal- lenges, non-traditional and private 0 equity investors have found particular 2007 2008 2009 2010 2011 2012 Source: Advantage Data appeal in acquiring businesses at low valuations or in providing capital in the sector at attractive returns, including: shales in pursuit of drilling compromised as evidenced by the »» Buyers capitalizing on successes, however as technologies demonstrated inability of many divestitures by E&P companies. and techniques improved, companies to effectively navigate Non-traditional buyers are the additional investment in the downturn. In addition, poor capitalizing on the needs of equipment and staffing only acquisition and post-merger diversified E&P companies to contributed to additional financial integration activities by upstream divest assets that are either non- pressures especially as the oil and gas producers and many core to their business strategy or successes by drilling added to a production services companies to immediately generate cash. Due sustained period of low gas prices. resulted in an inability to realize to the success in many instances As natural gas drilling activity anticipated revenue enhancements of producing unconventional gas ultimately subsided on switching and cost savings that were core to volumes, yet with the resulting to oil directed drilling (in some the investment thesis. decline in gas prices as a direct cases to the minimum levels »» Too much debt funding for result of such successes, operators necessary to maintain leases) and cyclical businesses. By its face liquidity constraints as they moratoriums on drilling permits nature, businesses exposed to labor to sustain cash flow from were put in place as the result of natural gas can be cyclical and lower priced production and in environmental impact reviews this require appropriate levels of order to maintain lease acreage caused demand for natural gas capital flexibility and prudent positions and other payments until oilfield services to weaken. financial policies in order to gas prices increase. Several E&P»» The fear of being left behind and “weather the storm” during severe companies have been active in execution missteps. Companies market downturns. However selling gas reserves at historically were enticed to become invested in the abundance of debt capital low valuations, with aggressive the sector (attracted by the appeal building leading up to 2008 was and perhaps better capitalized of elevated natural gas prices too attractive for many companies buyers believing that acquiring without fully appreciating the to pass up. This led to a surge in these assets in the low commodity investment thesis and its attendant borrowing to fund purchases of price “market trough” will yet risks). As a result of the exuberance equipment or drilling, acquisitions allow for attractive returns over to become involved, diligence was of businesses, or dividends paid to the longer term. 5
  6. 6. January 2013»» Lenders disinterest in assuming »» Operators requiring equity or excess capacity. As a caution, own- long-term ownership stakes. less rigid debt capital to address ers, operators and asset managers are As a result of the difficulties deficiencies in their working best advised to apply prudent finan- experienced by the E&P capital facilities. As is often cial measures to their businesses with companies, lenders have taken the case, companies operating a goal of maximizing financial flexi- ownership of businesses in the in the gas sector may carry too bility. This is to enable the business to sector through bankruptcies, much debt and as a result face be adequately capitalized in the event foreclosures, and consensual problems due to sustained low that a low priced natural gas environ- handovers—with investors playing gas prices, or other operational ment endures for an extended period to lender motivations for clean and challenges causing them to of time, or more recent investments quick transactions. In assessing the continue to turn to non-traditional in liquid-rich leasehold positions or relationship between the company and expensive sources of capital related businesses do not achieve and its lender base, this can shed when commercial banks and forecasted levels of success. Measures light on whether or not lenders other capital market lenders turn should include a process of match- will continue to serve as partners them down. If this strategy is ing a suitable level and profile of debt for business, including those not successful, the Chapter 11 to assets exposed to cyclical natural acquired through bankruptcy or bankruptcy route can provide an gas related markets, and ensuring by other means, thus determining avenue for financing or acquisition that sufficient liquidity is in place to the extent of support lenders will of liabilities-free assets, with fund necessary operations, capital for provide or, alternatively, creating minimized challenges to the sale, drilling programs, and growth. The the opportunity to acquire assets and relatively straight forward alternative outcome, as demonstrated from highly motivated lenders assignment of key contracts, albeit in the past, is unexpected and swift focused on near-term exits. on less optimal terms. lender-driven curtailment of critical»» Investors buying debt trading Fundamental shifts in the natural liquidity as well as defensive lender at significantly low levels with gas sector in North America have actions creating a significant diminu- an ownership strategy through a drawn interest from capital provid- tion in value that oftentimes inures to business restructuring. Activist ers, in both the unconventional gas the benefit of third-party investors. lenders are prepared to take over and oil industries. Generally down- Proactive decision-making, long- assets through a foreclosure or ward trending gas commodity prices term scenario planning, and forward bankruptcy. In a recent situation, since 2009 have enticed buyers and thinking should help to alleviate the lenders acquired a business as financiers of attractively priced natu- number of risks and facilitate optimal the incumbent private equity ral gas-related assets and redirected value outcomes. owner was unwilling to reinvest, new capital and industry resources — Raoul Nowitz believing that the business was to unconventional oil and wet gas. About the Author » Raoul Nowitz serves as a poorly positioned for the secular The recent surge in the supply of Director with Navigant Capital Advisors, Navigant’s shifts in shale drilling activity. debt financing commencing in 2010 corporate finance arm, where he focuses on providing Activist funds bought the business and the recent volume of debt be- restructuring advisory services and solutions, mergers debt at levels significantly ing placed on companies in the sec- and acquisitions advisory services, and capital raisings below face value, recapitalized tor is a catalyst for the next round to middle market companies in a variety of industries. Assistance in this article was provided by other it, and emerged as new owners of winners and losers in the sector. members of Navigant Capital Advisors team including through a formal restructuring. What may follow this recent surge in Greg Hagood, Kim Brady, and George Koutsonicolis. This business subsequently capital investment may be the next recovered meaningfully through phase of increased distress in the sec- The opinions expressed in this article are those of the a refined strategy, new board, and tor as a result of failing producers, authors and do not necessarily represent the views of repositioning for shale activity, underutilized service providers, and Navigant Consulting, Inc. resulting in a substantial financial infrastructure asset owners carrying return to the activist lenders. 6
  7. 7. January 2013Natural Gas Market Charts MONTHLY GAS INDEX PRICE DAILY GAS PRICE $10 $22 $20 $18 $8 $16 $14 $6 $12 $/MMBtu $/MMBtu $10 $4 $8 $6 $2 $4 $2 $0 $0 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Chicago Opal New York Chicago Opal New York Sources: Navigant/Gas Daily Sources: Navigant/Gas Daily AECO-C SoCal Gas Henry Hub AECO-C SoCal Gas Henry Hub Monthly index gas prices continued rising last month, with Henry Hub The daily spot prices ended the month down 6% from November, increasing 7% to $3.71/MMBtu for December from $3.47 for November. with Henry Hub at $3.41/MMBtu. NYMEX FUTURES SETTLEMENT PRICES AT CLOSE MONTHLY PRICES: OIL AND NATURAL GAS GULF COAST $5 $24 Nov $18 Dec Jan$/MMBtu $/MMBtu $4 $12 $6 $3 $0 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 WTI (Cushing, OK), Crude Oil Sources: Navigant/NYMEX Henry Hub - Natural Gas Sources: Navigant / Platts The average 12-month strip price decreased to $3.58/Mmbtu from Most recent comparison shows a narrowing but still large monthly $3.85. price spread, with Henry Hub natural gas price at $3.71 versus WTI crude oil price at $13.77, an equivalent energy ratio of 3.7 times. 7
  8. 8. January 2013Natural Gas Market Charts U.S. DRY GAS PRODUCTION U.S. WELLHEAD SHALE GAS PRODUCTION 68 30 66 25 64 20 62 Bcf/day Bcf/day 60 15 58 10 56 5 54 52 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Marcellus Eagleford Woodford Sources: Navigant 2009 2010 2011 2012 Fayetteville Haynesville Barnett Shale / LCI Sources: Navigant / EIA Other U.S. dry gas production continues above 66 Bcfd. Total U.S. shale gas production continues to increase, to just over 29 Bcfd. U.S. WEEKLY NATURAL GAS RIG COUNT U.S. GAS STORAGE 1,800 4,500 1,600 4,000 1,400 3,500 1,200 3,000 Rigs 1,000 2,500 Bcf 800 2,000 600 1,500 400 1,000 200 500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2008 2009 2010 2011 2012 Range (2002-2011) 2008 2009 2010 2011 2012 Sources:Navigant/ Baker Hughes Sources: Navigant / EIA U.S. natural gas rig count rose to 432, its highest level in 12 weeks. U.S. storage levels continue strong, moving to 3% above the top of the 10-year range for December. 8
  9. 9. January 2013Natural Gas Market Charts CANADA GAS STORAGE U.S. MONTHLY NATURAL GAS DEMAND 750 100 650 90 550 80 450 Bcf/d 70Bcf 350 60 250 50 150 50 40 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Range (2006-2011) 2008 2009 2008 2009 2010 2011 2012 2010 2011 2012 Sources: Navigant / Enerdata Sources: Navigant / EIA Canadian storage inventories are following seasonal patterns at the Demand is showing a normal seasonal increase, and exceeds the top of the 5-year norm for this time of year. average level of the prior four years at this time by about 8%. U.S. TEMPERATURE OUTLOOK NAVIGANT PRICE PREVIEW 2013 Price Forecast Source (Nominal $/MMBtu) EIA $3.68 Barclay’s $3.70 Goldman $4.25 Survey Average $3.88 Navigant $3.45 Sources: Navigant Survey/Navigant The temperature outlook is for above normal temperatures for most Price forecasts average about $3.75 for 2013. of the southern U.S., and for below normal temperatures for most of Montana and North Dakota. 9
  10. 10. January 2013Legislative and Regulatory Highlights EPA Issues Progress Report on its Study of the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources On December 21, the U.S. Environmental ProtectionNational Agency issued a Progress Report on its Study of the Potential Impacts of Hydraulic Fracturing on Drink-DOE-Commissioned Study on Macroeconomic Impacts ing Water Resources, which was requested by Congressof LNG Exports Released in 2009. The Progress Report describes the 18 researchOn December 5, the U.S. Department of Energy’s Office projects currently underway to help answer questionsof Fossil Energy posted the final version of the DOE- around the five stages of the hydraulic fracturing watercommissioned report by NERA Economic Consulting cycle: water acquisition, chemical mixing, well injection,entitled “Macroeconomic Impacts of LNG Exports from flowback and produced water, and wastewater treatmentthe United States.” The report is the second of two LNG and waste disposal. The research projects are groupedexport studies ordered by DOE; the first was the Energy according to the following five research activities: 1)Information Administration price impact report from analysis of existing data, including chemical and waterJanuary 2012. The NERA report found that across all use at thousands of wells; 2) computer models to analyzemodeled scenarios, “the U.S. was projected to gain net scenarios of subsurface gas and fluid migration, largeeconomic benefits from allowing LNG exports. More- volume water withdrawals, and surface water transportover, for every one of the market scenarios examined, net of treated wastewater; 3) laboratory studies on such mat-economic benefits increased as the level of LNG exports ters as the effectiveness of common wastewater treatmentincreased.” Further, the NERA report concluded that the processes on hydraulic fracturing wastewater, the forma-assumed LNG export levels specified in the EIA study tion of disinfection byproducts, and the effectiveness ofoften would not actually be feasible in the global market analytical detection methods; 4) toxicity assessments ofbecause “in many cases, the world natural gas market chemicals found in flowback and produced water; andwould not accept the full amount of exports assumed in 5) case studies based on sampling near well sites. Thethe EIA scenarios at export prices high enough to cov- report indicates that a draft study should be available forer the U.S. wellhead domestic prices calculated by the public and peer review in 2014.EIA.” Initial comments on the NERA report are due byJanuary 24, 2012. 10
  11. 11. January 2013Northeast/Appalachia California/Pacific NorthwestWilliams Partners’ Transco Pipeline Seeks FERC CPUC Approves Pipeline Safety Plan for PG&E, ButApproval for Virginia Southside Expansion Disallows more than 60 percent of Cost RecoveryWilliams Partners’ Transco pipeline announced on December CPUC Docket R.11-02-019; Decision D.12-12-03019 its filing with FERC for approval to build its Virginia South- On December 20, the California Public Utilities Commis-side Expansion project, designed to provide about 270 MMcfd sion issued a decision approving Pacific Gas and Electricof incremental natural gas transportation capacity to serve Company’s 2012-2014 Pipeline Safety Implementationmarkets in Virginia and North Carolina. The $300 million Plan, under which PG&E will be required to pressureproject would consist of about 100 miles of 24-inch pipeline to test 783 miles of natural gas pipeline, replace 186 miles ofprovide 20 MMcfd capacity to Piedmont Natural Gas Compa- pipeline, upgrade 199 miles of pipeline to allow in-lineny and 250 MMcfd capacity to Dominion Virginia Power. inspection, and install 228 automated shut-off valves. However, the CPUC authorized only 39 percent of theDominion and Caiman Energy II Announce Utica Shale funds PG&E requested, approving $299 million for theJoint Venture three-year period; due to past deficiencies, PG&E share-On December 20, Dominion and Caiman Energy II an- holders will bear the costs of pressure testing pipeline fornounced their formation of a 50-50 joint venture to pro- which test records are missing and the costs of the recordvide midstream services to natural gas producers oper- management improvement project. Due to PG&E’s pastating in the Utica shale in Ohio and Pennsylvania. Blue management decisions that led to the need to under-Racer Midstream LLC will provide gathering, processing, take the massive safety project on an expedited basis, thefractionation, and NGL transportation and marketing ser- CPUC required that PG&E shareholders bear the risk ofvices. The venture will leverage Dominion’s existing as- cost overruns.sets in the Utica with $800 million in funding by Caiman,potentially creating 2 bcfd of gathering capacity. FERC Authorizes Construction of GTN’s Proposed Carty Lateral ProjectGulf Region FERC Docket No. CP12-494-000 FERC’s Office of Energy Projects authorized Gas Trans-Cheniere and Total Sign 20-Year Supply Contract from mission Northwest LLC’s request to construct a 24-mile,Planned Fifth LNG Train at Sabine Pass 20-inch natural gas pipeline in Morrow County, OregonOn December 17, Cheniere Energy Partners announced that to provide up to 175 MMcfd of delivery capacity to Port-its subsidiary, Sabine Pass Liquefaction, entered into an LNG land General Electric Company’s planned Carty Gener-supply contract with Total Gas & Power North America Inc. ating Station. The new lateral will begin at the existingto supply about 100 bcf per year of LNG from a fifth liquefac- GTN mainline system at Ione, Oregon, and terminate attion train planned for the project. The 20-year commitment the new power plant 13 miles southwest of Boardman,to Total represents almost half the annual capacity of the ad- Oregon. The proposed in-service date is November 2014.ditional train, which could be in service as early as 2018.Cheniere and Bechtel Sign Turnkey Contract forLiquefaction Trains 3 and 4 at Sabine PassOn December 21, Cheniere Energy Partners announcedthat its subsidiary, Sabine Pass Liquefaction, entered intoa $3.8 billion lump sum turnkey contract for the engineer-ing, procurement and construction of the third and fourthliquefaction trains to be built adjacent to Cheniere’s Sa-bine Pass LNG terminal in Cameron Parish, Louisiana. Afinal investment decision and beginning of constructionis expected in the first half of 2013. Bechtel began con-struction on the first two trains in August 2012. 11
  12. 12. January 2013 Alberta Encana Announces Joint Venture with Chinese Firm to Develop Duvernay ShaleNational On December 13, Encana Corporation announced thatGovernment Approves Acquisition of Progress Energy it entered into a joint venture with Phoenix Duvernayby Malaysia’s Petronas Gas, a subsidiary of PetroChina, to explore and develop 445,000 acres in the Duvernay play in west-central Alber-Petronas, the national oil and gas company of Malaysia, ta. Phoenix paid C$2.18 billion for a non-controlling 49.9and Progress Energy Resources Corporation announced percent interest in the lands, with $1.18 billion in cash aton December 9 the approval by the Government of close and $1 billion to fund 50 percent of developmentCanada’s Ministry of Industry of Petronas’ acquisition of capital over the next four years. Encana will remain asProgress. Petronas plans to combine its LNG develop- operator of the joint venture.ment experience with Progress’ unconventional resourcedevelopment experience to help move forward its Pacific British ColumbiaNorthwest LNG project on Lelu Island near Prince Ru-pert. A final investment decision is expected in late 2014, Chevron and Apache to Partner on Kitimat LNG Projectwith first LNG exports expected 2018. On December 24, Apache Corporation announced that itConference Board Report Forecasts Doubling of signed a joint venture agreement with Chevron CanadaCanadian Natural Gas Demand Limited to build and operate the proposed Kitimat LNG export terminal project. As part of the deal, EOG Re-On December 17, the Conference Board of Canada issued sources and Encana, both 30 percent owners of Kitimata report entitled “The Role of Natural Gas in Powering LNG, sold their shares to Chevron, while Chevron andCanada’s Economy” that forecast a doubling of Cana- Apache agreed to a 50-50 partnership for not only thedian demand for natural gas between 2012 and 2035 Kitimat LNG project, but also the 290-mile Pacific Trail(with most of the gain reached by 2025). The report cites Pipeline and 644,000 acres in the Horn River and Liardthree factors for the increase: increasing production from basins. Chevron will operate the LNG facility, whileAlberta’s oil sands, increasing use of electric generation Apache will operate the upstream assets. The agreementin Alberta and Ontario, and exports of LNG from Brit- is intended to capitalize on Chevron’s LNG developmentish Columbia. The report also estimates that most of the and marketing expertise, as well as on Apache’s up-new demand will be met through declines in Canadian stream operating experience.exports of natural gas to the U.S. 12
  13. 13. January 2013Fuels Practice About NavigantGordon Pickering, Director Navigant Consulting, Inc. (NYSE: NCI) is a specialized, global expert services916.631.3249 firm dedicated to assisting clients in creating and protecting value in the of critical business risks and opportunities. Through senior level engagement3100 Zinfandel Drive with clients, Navigant professionals combine technical expertise in DisputesSuite 600 and Investigations, Economics, Financial Advisory, and Management Consult-Sacramento, CA 95670 ing, with business pragmatism in the highly regulated Construction, Energy,Rick Smead, Director Financial Services, and Healthcare industries to support clients in addressing713.646.5029 their most critical business needs.rsmead@navigant.com2 Houston Center, 909 Fannin Out of its Sacramento and Houston offices, Navigant’s Fuels experts focus onSuite 1900 the North American market offering fuels services to utilities and public enti-Houston, TX 77010 ties, financial services companies, independent power producers, natural gas producers, pipelines, LNG developers, and large industrial end-users. AmongBob Gibb, Associate Director512.493.5407 other tasks performed for clients, the Fuels Practice has performed due gence analyses and market analyses/price forecast studies, provided contract98 San Jacinto Boulevard support (transportation, supply, and storage), developed fuel plans, and pro-Suite 900 vided litigation and regulatory support.Austin, TX 78701Rebecca Honeyfield, Associate Director Featured Brochures: Fuels Services619.546.6492rhoneyfield@navigant.com3100 Zinfandel Drive avigant. com Click on each brochureSuite 600 www.nSacramento, CA 95670 to read more about ERED GY Navigant’s Fuels Services ENER V T DELI I NSIGH SERV ICES (LNG) RAL GAS D NATU LIQUEFIE vide clie nts L GAS & erts pro NATURA G) exp op- l gas (LN ncing, d natura tions, fina to liquefie t transac itions us l gas and ss strategies, projec quely pos ’s natura ctive uni busine l perspe Navigant energy r globa ght into rketing . Ou ertise in: with insi and ma tional exp s, trading interna eration estic and e both dom provid planning tegy and nning » Stra and pla t analysis » Marke NGE ry adviso » Reg ulatory otiation CHALLE EXPOR T ercial neg e » Comm diligenc ION: LNG ENT ndent due NGE DOMIN SM » Indepe CHALLE T IMPAC T ASSES EnErgy EXPOR E: LNG N NG E CHENIER SESSMENT SOLUTIO ’s applica tion CHALLE N NATUR AL IMPAC T AS t of Do minion export au- Natural Gas Market In suppor AMERICA SMENT N long term ntries, NORTH PLY AS SES SOLUTIO a detaile d as- to DOE for LNG -Free Tra de cou assess- M GAS SUP and Scenario Analysis odeling provided . to non a report the U.S thority Navigant lysis of provided act of N and ana , Navigant rket imp SOLUTIO nt exports ma Point, d the first sessme act of LNG nt U.S. gas ’s Cove release natu- rket imp partme ing the minion Navigant erican gas ma rgy’s De from Do assess- In 2008, rth Am ere Ene applica tion exports vigant’s y of No poten- for Cheni export ility. Na rket, major stud izing the (DOE) ort nd fac l gas ma recogn . At a na exp Maryla . natura supply pment of Energy s, Louisia the U.S gas sha le ral gas develo ine Pas ted the ment of rcellus shale gas al wisdom for its Sab conduc y- the Ma market tial for con vention t. Navigant industr including ture d in the en the s a de- projec tary was cap vided time wh l gas wa its proprie n basin, orts pro . natura ed lysis with built upo ture rep t U.S ant defi ana model Model astruc and the was tha e, Navig market etition and infr reports resourc por ted a fifty leading e Comp was a clie nt. Both n Navi- clining and sup s Pipelin analysis to the ed upo tus quo n-pre- the Ga expert were bas erican the sta r the the ) and its ant’s rep ort analysis se ove North Am , t increa tes. Tod ay, (GPCM of Navig li- leading n GPCM percen e estima ponent t. The app gant’s built upo min- resourc mble key com projec model t of Do vailing tes rese t of the is at market estima in suppor eniere in suppor vailing breaking ort by Ch export re filed tion in the pre ground for exp and we applica ’s initial, natura l cation and only LNG export Navigant 8, with e the first E ap- ion’s LNG from 200 ac- this tim ed DO 2011. luation being widely e receiv ntri es. tember eva tion t to hav de cou Sep ndance le produc projec -Free Tra gas abu Gas sha im- to non dged. for LNG proval knowle enough . n robust exports has bee by LNG laced n- be rep a substa ports to played erica’s experts rth Am Na vigant No inning in beg tion. tial role sforma l gas tran ©2013 Navigant Consulting, Inc. All rights reserved. Navigant Consulting is not a certified public accounting firm and does not provide audit, attest, or public accounting services. See for a complete listing of private investigator licenses. 13