David Givens presentation to Devon Energy October 2015

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Market Reporting
Consulting
Events
Market review for Devon Energy
Oklahoma City, Oklahoma
David Givens
26 October 2015

illuminating the markets
• Coal’s slide is inevitable as air rules mount
• Buyers have an array of supply options
• Midwest markets already affected
• Exports to Mexico jump far ahead of LNG
• Argus working to provide constructive solutions
Many new forces drive gas market in 2015-16
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Market Reporting
Consulting
Events
Coal, gas are switching places in generation

• Q1 2016 gas
◦ Not competitive for generation in Gulf Coast, midwest
◦ On the bubble in West, midcontinent
• Additional coal to gas switching may be limited now
◦ Coal prices falling
◦ Locational dispatch directives
• EIA:
◦ Coal's share of generation unchanged at 35pc in 2016
◦ Gas’ share could fall 1 percentage point to 31pc
◦ Most coal plants scheduled to retire in 2016 cut deliveries
Gas may not advance in generation next year

• Coal-fired generation in PJM fell by 7.4pc in August
• MISO August coal burn decreased by 14pc
• Natural gas generated 9pc more electricity in
September in Texas
• Southwest coal-fired generation down 13pc in
September
Yearly gas gains in generation are impressive

Market Reporting
Consulting
Events
Gas expected to benefit from multiple air rules

• Expected Federal Register publication 23 October
• Some states used Freedom of Information Act to get
documents on the plan’s publication process
• EIA: plan could result in retirement of another 90GW
of coal-fired generation from 2014 to 2040, double
EPA estimate
Clean power plan release was imminent

• EPA sent new ozone standard to White House
◦ 65-70 ppb, down from 75ppb
◦ Possible December release
• SO2, NOX budgets for 13 states under cross-state rule
invalidated
o Rule sent back to EPA but still in effect
• Clean Power Plan for existing units
◦ Could lower SO2, NOX and particulates by 25pc by 2030
Coal seems pancaked with regulations

• Mercury and Air Toxics Rule back at the D.C. Circuit
• EPA expects to respond in spring
• Court must decide vacate or remand
◦ Vacate: 165 power plants that received one-year compliance
extensions avoid installing pollution controls
◦ Remand: keep the regulations intact
States succeed in stalling mercury rule

Market Reporting
Consulting
Events
Utilities are in the driver’s seat

• Local distribution companies buying gas reserves
◦ Black Hills in plains, Rockies
◦ NextEra’s FP&L gets Woodford supply from PetroQuest
◦ Wexpro supplies Questar in Utah, Wyoming
◦ Louisiana: Entergy, AEP, Cleco may examine all options
◦ AGL negotiating with regulators in Virginia
• Capitalization versus long-term hedging
• Financed through the rate base; regulator-approved
• LDCs on Atlantic coast choose infrastructure
Overcoming reluctance for long-term reliance on gas

• Renewables targeted at 50pc in 2030 for power
• Forecast for decline in gas use for power
• End-use growth only up 1pc annually
• Unusual policy focus: Expecting big gains from CHP,
biogas for transport
California is the outlier

• Drought in California suggested another power panic
• Stout summer basis at citygates again
• Utilities outside of California cannot ignore low gas prices
• Gas use not growing in state, but may not fall
• Several occasions California gas demand at 6 Bcf/d in
summer as renewables generate 17pc of power
Western grid dodges the bullet

Market Reporting
Consulting
Events
LNG exports remain on the horizon

Five US facilities under construction
• Peak capacity of 71mn t/yr (9.8 Bcf/d)
• Contracted capacity 57.2mn t/yr
• Qatari output is 77mn t/yr

• Sabine Pass
• 20mn-25mn t/yr
• Commissioning cargo Q4 2015
• Trains 1-4 Mar 2016-Aug 2017
• Cove Point
• 4.6mn-5.75mn t/yr
• One train late 2017
• Cameron
• 12mn-14.95mn t/yr
• Freeport
• 13.2mn-15.4mn t/yr
• Corpus Christi
• 7.7mn-10mn t/yr
Most US capacity expected on line after 2018
0
10
20
30
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50
60
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80
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
Sep-18
Dec-18
Mar-19
Jun-19
Cumulative peak capacity (mn t/yr)
Cumulative baseload capacity (mn t/yr)

• 46.5 Bcf/d, or 363mn
t/yr, to FTA nations
• 42 Bcf/d, or 328mn
t/yr, to non-FTA nations
• Both more than current
global LNG market
US project totals would dominate LNG trade
0
50
100
150
200
250
300
350
400
FTA Non-FTA 2015 market
mnt/yr

• Proposals total 344mn t/yr,
about as much as the US
• Most in western Canada
o Use Canadian shale gas
o Target Asia
o Likely oil-linked contracts
o More expensive than US
but cheaper shipping
Canadian proposals also extensive
• Four projects in eastern
Canada totaling 38mn t/yr
o Target Europe
o Could use cheap US
Marcellus gas
o Will need US non-FTA
license
o Could also use western
and eastern Canadian gas

• Chevron sees 70mn t/yr of
unsanctioned capacity
needed by 2025
• Global demand expected to
reach 440mn t/yr by 2025
• Expects 70mn t/yr of US
capacity to be built and
80mn t/yr outside of US
• US could account for most of
70mn t/y of unsanctioned
capacity
US likely to meet most of future demand
70
80
70
Needed production by 2025
(mn t/yr)
US
Non-US
Up for grabs

• Projects at existing terminals
• Portfolio companies with deep pockets
• Projects with off-take contracts
• Projects progressing at FERC and MARAD
• Consensus estimate: 8 Bcf/d of exports by 2020
LNG export terminals with best chances

Market Reporting
Consulting
Events
Exports to Mexico grow, market access may not

• DOE approves many export
permits
• Very few of the same
companies have open access
permits authorized by CRE
• Sales are to:
◦ Private pipelines
◦ PEMEX
◦ Industrials
◦ CFE
• Small market exists for
trucked LNG
US has six major points of export to Mexico

• Maximum quantities
authorized by CRE each
month in mn cfd
• Some cross-regional flows
• Intent is to incentivize
efficiencies, minimize costs
• Based on modeling; new
projects will get factored in
• Reynosa, Ciudad Pemex are
VPM pricing locations
Energy regulator CRE authorizes system capacities

• CRE daily hydrocarbons report at
http://www.cre.gob.mx/articulo.aspx?id=394
• VPM means Venta de Primera Mano, or “first hand
sales” by PEMEX and subsidiaries
• US prices change with demand:
◦ TGP south Texas in second week October at 9¢/mmBtu
discount to Henry Hub, widening 2¢/mmBtu from prior week
◦ Exports to Mexico dropped by 5.8pc from previous week
Some transparency already exists

Key takeaway: VPM is discounted to Henry Hub
2.4
2.5
2.6
2.7
2.8
2.9
3.0
2 Jun 15 26 Jun 15 20 Jul 15 13 Aug 15 6 Sep 15 30 Sep 15
$/mmBtu
Mexico first hand sales vs Henry Hub cash
Henry Hub cash Reynosa Ciudad Pemex

• Former PEMEX gas pipeline assets being transferred to CENAGAS
• Focus now is on the legalities of the transfer
• CENAGAS will be responsible for managing excess pipeline
capacity
• Integration: create EBB using Scada data from diverse sources
Now being discussed at CENAGAS

• CRE is approving open access pipeline tariffs
◦ Commodity, capacity charges in pesos/gj
◦ Specificity in total amount invested
◦ Sophisticated environmental impact statements
• Midstream, downstream sales by PEMEX will be
limited to favor the development of efficient and
competitive markets
• Will it be similar to FERC order 436 experience?
“Asymmetric regulation” promised

Market Reporting
Consulting
Events
The Argus advantage in changing times

• Dailies rarely exceeded $3/mmBtu east of Rockies
• Underpiped southeast found cheap supply
• New York City had hottest summer in 140 years
• Atlanta was 16pc warmer than normal, Dallas 9pc
• Pipeline expansions and new projects proceed
Hot summer in diverse regions kept prices up

• TGP Broad Run Flexibility project on line November
◦ Antero takes full 590mn cf/d
• Tetco Ohio Pipeline Energy Network on line mid-
September
o Takeaway of 550mn cf/d from Ohio to Gulf Coast
More backhauls of Marcellus gas expected

• Deliveries into
Midwestern, NGPL, ANR
• REX Zone 3 daily indexes
in a tight range, 3c at
most
• Including Lebanon hub in
SW Ohio, basis to
Chicago has been 8c from
REX Zone 3
• Will flood of Marcellus
gas tighten that basis?
Argus REX indexes anticipate future market flows

New supply sources affect major market center
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0.25
2016 2017 2018 2019 2020 2021 2022
$/mmBtu
Chicago citygates winter basis
July October

• Nipsco index has highest
average value of 3
individual Chicago area
LDCs
• Nispco averaging about 1c
more than Nicor, Peoples
• Joliet hub and NGPL into
Vector usually higher than
citygates, but not always
• Future seasonal results will
show arbitrage possibilities
Chicago-area indexes provide options

• Rapidly providing new indexes
◦ REX
◦ Gulf Coast storage hubs
◦ Chicago area
• Deep understanding of natural
gas market reflected in news and
analysis
• No onerous licensing terms
Argus Natural Gas Americas responds to market

• Increasing number of utilities and LDCs are
including Argus in RFPs
• Producers are transacting on Argus indexes for
spot and term supply contracts
• Pipeline companies have amended tariffs to
include Argus as an index for capacity release
payments
Argus natural gas indexes have taken root

• Gas gets coal market share on price, regulation
• Exports: Mexico now, LNG later
• Supply choices abound: backhauls, pipelines, reserves
• Chicago basis markets already affected
• Argus is a useful tool for midcontinent gas pricing
Domestic, international forces at work in gas

Market Reporting
Consulting
Events
Questions?

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All data and other information presented (the “Data”) are provided on an “as is” basis. Argus makes no warranties, express or implied, as to the accuracy, adequacy,
timeliness, or completeness of the Data or fitness for any particular purpose. Argus shall not be liable for any loss or damage arising from any party’s reliance on the
Data and disclaims any and all liability related to or arising out of use of the Data to the full extent permissible by law.
David Givens
Head of Gas and Power Services, Argus Media
Email:
Office:
Web:
David.givens@argusmedia.com
Washington, DC
www.argusmedia.com

David Givens presentation to Devon Energy October 2015

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