North American Shale Gas Boom May 2012

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Slide deck by David Givens for presentation on how shale gas production has changed natural gas transportation markets in North America. Givens is head of natural gas and power services for Argus Media in Washington, D.C.

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North American Shale Gas Boom May 2012

  1. 1. London, Houston, Washington, New York, Portland, Calgary, Santiago, Singapore, Beijing, Tokyo, Sydney, Dubai, Moscow, Astana, Kiev, Hanover, Porto and Johannesburg Energy and commodity price benchmarking and market insights
  2. 2. North American shale boom drives new challenges for transport sector David Givens May 2012
  3. 3. Who is Argus?
  4. 4. • Report prices globally for o Gas o Power o NGL & LPG o Emissions o Coal and coke o Refined products o Crude o Fertilizers • Over 400 staff globally with numerous offices • Rapid growth in spot and term contract indexation, swap market indexation Argus Media
  5. 5. London Houston Washington Moscow Singapore New York Tokyo Sydney Astana Johannesburg Kiev Beijing Dubai Santiago Berlin
  6. 6. • 100 daily (day-ahead) indexes • Delivery on the next working day – sent to subscribers the same day • 82 bid week (month- ahead) indexes • Trades collected on the last 5 working days of the month for delivery in the following month Argus Natural Gas Americas
  7. 7. • Abundant pipeline capacity from shale plays • Firm transportation devalued in benign regulatory environment • Crude, NGL production drives gas output • Basis narrows*, except in US Northeast * Except in abnormal weather Takeaways
  8. 8. Gas, crude and NGL fundamentals
  9. 9. US crude, gas production rising 1,400 1,550 1,700 1,850 2,000 2,150 145 155 165 175 185 195 Dec-08 Oct-09 Jul-10 Apr-11 Feb-12 Tcf/month '000bl/month Crude production vs gas Crude Gas
  10. 10. Three years of divergence 0.0 5.0 10.0 15.0 20.0 25.0 Dec-08 Oct-09 Aug-10 Jul-11 May-12 $/mmBtu US crude, gas Btu comparison Henry Hub ASCI
  11. 11. NGL prices rise relative to gas 1.5 3.0 4.5 6.0 7.5 50 100 150 200 250 Dec-08 Oct-09 Aug-10 Jul-11 May-12 $/mmBtu ¢/USG Propane and butane vs gas Mt Belvieu propane Mt Belvieu butane Henry Hub gas
  12. 12. 8 May, 2012 $/mmBtu
  13. 13. • Value of natural gas vs. splitting CH4 into NGLs • Each NGL is assumed a representative % of barrel • Each NGL distinct heating value • Fuel used to frac (shrink) • Btu value of some NGLs weaker recently Fractionation spread
  14. 14. Seen in Eagle Ford, Bakken
  15. 15. Midstream paradise 0.5 1.5 2.5 3.5 4.5 5.5 4-Jan 3-Feb 4-Mar 3-Apr 3-May $/mmBtu Mont Belvieu fractionation spreads Non-LDH (Non-TET) Ethane Propane Normal Butane Iso-Butane Pentanes Plus
  16. 16. Possible ethane rejection 0.5 1.5 2.5 3.5 4.5 4-Jan 3-Feb 4-Mar 3-Apr 3-May $/mmBtu Conway fractionation spreads Ethane-Propane Mix Propane Normal Butane Iso-Butane Pentanes Plus
  17. 17. NGL fracs roll up to high margins
  18. 18. Continuing growth 18,000 21,000 24,000 27,000 30,000 33,000 Dec-08 Oct-09 Jul-10 Apr-11 Feb-12 '000bl Source: EIA Ethane-ethylene production
  19. 19. Price/mmBtu for 15pc ROR • SW Marcellus, wet: $1.85 • SW Marcellus, dry: $3.19 • NE Marcellus, dry: $3.60 Source: LyondellBasell • “Super Rich Marcellus” ROR: 55pc Source: Credit Suisse Low breakevens, high RORs narrow basis
  20. 20. • Shale plays drive midstream oil pipelining: o Bakken o Eagle Ford o Permian Basin • Light sweet imports into US should continue to drop and eventually even disappear altogether Crude pipeline projects boom
  21. 21. What does it mean for US natural gas?
  22. 22. • No requirement to update gas pipeline tariff • No “major” FERC rulemakings in 20 years* • New pipeline tariffs are negotiated • New construction weighted toward incremental pricing * Order 712 US natural gas regulatory fundamentals
  23. 23. • Pipeline tariffs disconnected from markets • Producers subsidized bullet pipes from shales • Gas, storage everywhere devalues firm transport • All regions have adequate gas • Basis spreads do not support transport costs • Generic FERC policy considered to restructure tariffs on legacy pipes due to shale Recent dynamics
  24. 24. • FERC Order 712 (2008) o Removed price caps on short-term capacity release o Ever-increasing capacity release volumes o Facilitated Asset Management Agreements (AMAs) One reason marketers stay profitable today
  25. 25. “Shale gas in the middle of long haul pipelines presents opportunities to segment more capacity and release more capacity.” Steve Hinton, Engineering Director, Skipping Stone (Capacity Center) What the future holds
  26. 26. “Our industry has evolved toward a market-driven model.” Donald F. Santa, president, Interstate Natural Gas Association of America (and FERC commissioner 1993-1997) The bottom line
  27. 27. • Traditionally served by gas patch • More shale plays exist • Pipeline capacity turnback • Some constrained burnertip markets • Shale gas + capacity release = underutilization • Backhaul prospects everywhere o Tetco o Transco o Columbia o Tennessee Impact on East markets
  28. 28. • Load factor dropping south of Marcellus interconnects • Volumes climbing east of compressor station 219 • 300 line was flowing east to west at one point last year • “Non-straight fixed variable” rates in market zones 4 through 6 Tennessee Gas Pipeline 2011 rate settlement
  29. 29. Tennessee Gas Pipeline in northeast states TGP zone boundaries Pipeline location
  30. 30. Traditional Boston-Gulf Coast spreads 0.45 0.43 0.5 1.10 2.55 1.03 0.00 0.75 1.50 2.25 3.00 2009 2010 2011 $/mmBtu Tennessee Z6 minus 800 leg April-Oct Nov-Mar
  31. 31. Effect on Columbia system 0.16 0.15 0.12 0.21 0.18 0.08 0.05 0.10 0.15 0.20 0.25 2009 2010 2011 $/mmBtu Columbia App minus Onshore April-Oct Nov-Mar
  32. 32. The last great gas market 0 3 6 9 12 15 Jan-09 Aug-09 Apr-10 Nov-10 Jun-11 Feb-12 $/mmBtu Iroquois Zone 2 basis to Henry
  33. 33. Hot Gulf Coast summer 2011 0.01 0.06 0.14 0.17 0.24 0.23 0.00 0.07 0.14 0.21 0.28 2009 2010 2011 $/mmBtu Chicago minus ANR SE April-Oct Nov-Mar
  34. 34. Traditional Midcontinent winter basis 0.08 0.11 0.17 0.27 0.29 0.23 0.05 0.10 0.15 0.20 0.25 0.30 2009 2010 2011 $/mmBtu Chicago minus NGPL South Texas April-Oct Nov-Mar
  35. 35. • Fewer shales, less storage • Weather, capacity issues major drivers • Summer gas basis expected tight with SONGS outage • Effects of Ruby, Rockies Express • GTN tariff amendment to flow gas north • GTN Transmission firm transport 33c/mmBtu • Northwest Pipeline firm transport 44c/mmBtu Western market impact
  36. 36. Western basis volatility 0.11 0.05 0.190.19 0.08 0.32 0.00 0.09 0.18 0.27 0.36 2009 2010 2011 $/mmBtu SoCal border minus El Paso Permian April-Oct Nov-Mar
  37. 37. Canadian deliveries down last year 0 500 1,000 1,500 2,000 27-Jul 9-Aug 22-Aug 4-Sep 17-Sep 30-Sep mncf/d Ruby, GTN flows at Malin Ruby GTN GTN 2010 Source: Ruby, GTN pipelines
  38. 38. Malin premium to Opal has fallen -1.0 -0.5 0.0 0.5 1.0 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 $/mmBtu Malin-Opal basis
  39. 39. Marcellus pushes REX supply west 0.42 0.27 0.14 0.35 0.15 0.14 0.09 0.18 0.27 0.36 0.45 2009 2010 2011 $/mmBtu Malin minus Opal April-Oct Nov-Mar
  40. 40. REX versus Marcellus 0.65 0.320.33 0.15 0.1 0.2 0.3 0.4 0.5 0.6 0.7 April-Oct Nov-Mar $/mmBtu Clarington minus Cheyenne 2010 2011
  41. 41. Winter gas demand in Northwest -2 0 2 4 6 Jan Feb Mar Apr May Jun Jul Jul Aug Sep Oct Nov Dec $/mmBtu Sumas daily cash basis 2009 2010 2011
  42. 42. Lower pressures vs. Ruby start up -1.50 -0.75 0.00 0.75 1.50 Jan Feb Mar Apr May Jun Jul Jul Aug Sep Oct Nov Dec $/mmBtu PG&E gates daily cash basis 2009 2010 2011
  43. 43. Breakout years ahead? 0 6 12 18 24 30 1949 1971 1993 2015 Tcf/yr Source: EIA US Gas Consumption
  44. 44. • Plentiful US gas and transport capacity; basis does not support tariffs • Capacity release volumes keep growing • Btu values of crude, NGLs keep production high • East: backhauls, displacement • Western markets reveal more constraints Takeaways
  45. 45. Any questions?
  46. 46. David Givens Head of Gas & Power, Americas david.givens@argusmedia.com +1 202 349 2891 www.argusmedia.com

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