An INDEPENDENT energy consulting
company since 1996

◦ No affiliation with any marketer, broker,
agent, utility, pipeline or producer.


More than two decades of experience in
the natural gas and electric industries
Specialize in natural gas and electricity
buying advice for businesses and the
development and implementation of
proactive purchasing plans.
◦ Publications, Seminars, & Consulting
Services
Cost Categories for Business Customers
Utility
7% P/L
8%
DEREGULATED
Commodity
85%
Based on the Henry
Hub, located in
Louisiana
The most volatile
price component
Natural Gas Monthly NYMEX Expirations
$16.000
What has changed …
The long-term price trend
change for natural gas is
going to be more heavily
driven by the cost of other
commodities – crude oil,
NGLs, and coal.
$14.000
$12.000
$10.000
$8.000
$6.000
$4.000
$2.000
01/12
06/11
11/10
04/10
09/09
02/09
07/08
12/07
05/07
10/06
03/06
08/05
01/05
06/04
11/03
04/03
09/02
02/02
07/01
12/00
05/00
10/99
03/99
08/98
01/98
06/97
11/96
04/96
09/95
02/95
07/94
12/93
05/93
10/92
03/92
08/91
01/91
06/90
$-
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Fundamentals
◦ Supply & Demand
◦ Weather
◦ Competing Fuels

Technicals
◦ Support/Resistance
◦ Charts

Financial
◦ Economy

Psychology
◦ Bull/Bear Markets
Trillion cubic feet per year
Source: Early Release: EIA Annual
Energy Outlook 2012
NOTE: Imports have disappeared
Since 2000, shale gas production
has increased 17-fold and is now
about 30% of U.S. production.
Shale gas production increases from
5 Tcf in 2010 to 13.6 Tcf in 2035.



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Estimates will continue to change as new
wells provide additional data and
technologies change
Long-term productivity remains untested
Only portions of plays are tested
Unknowns of “stacked plays”
• Ongoing
advancements in
technologies
• Multi-stage
fracturing process
increases
productivity
• No fears over a
supply shortfall
Source: Wood Mackenzie Long Term View – April 2011
From ExxonMobil LDC Forum Presentation: Fall 2011 Chicago

Productive
portion
comparisons
◦ Marcellus
Shale:
95,000 square
miles
◦ Barnett Shale
(Texas):
5,000 square
miles

Lies beneath the
Marcellus Shale
◦ Stacked plays
◦ Still many unknowns


Estimated to hold as
much as 25 billion
barrels of oil
May be the largest
domestic discovery of
oil in 50 years

Associated Natural Gas: Gas that is produced
as a byproduct of crude oil production
◦ Producers have moved drilling rigs from natural gas
to crude oil plays due to economics
◦ Drilling for crude oil has increased natural gas
supply levels through the production of associated
gas
◦ The amount of associated gas being produced has
been greatly underestimated
Drilling Rig Counts
1,800
Crude Oil Drilling Rig Count
1,600
Natural Gas Drilling Rig Count
1,400
Oct 2008: Price of natural gas: $7.50 per MMBtu
Apr 2012: Price of natural gas: $2.50 per MMBtu
1,200
Crude oil @ $103/barrel = $17.76 per MMBtu
1,000
Source: Baker Hughes
800
600
400
200
6/1/2012
6/1/2011
6/1/2010
6/1/2009
6/1/2008
6/1/2007
6/1/2006
6/1/2005
6/1/2004
6/1/2003
6/1/2002
6/1/2001
6/1/2000
6/1/1999
6/1/1998
6/1/1997
6/1/1996
6/1/1995
6/1/1994
6/1/1993
6/1/1992
6/1/1991
6/1/1990
0
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Dry gas vs. wet gas
Natural Gas Liquids (NGLs)
◦ Wet natural gas contains
impurities and hydrocarbons
◦ NGLs are stripped away and sold
separately based on crude oil
prices
◦ NGLs include ethane, propane,
normal butane, isobutane,
pentane, and natural gasoline
◦ Natural gas production
curtailments are taking place in
the most inefficient and drier
natural gas plays, which contain
little or no NGLs

Revenue supplements
◦ NGLs
◦ Associated natural gas production

Break-even prices have fallen
◦ Expenses have fallen (lower rig rental rates, less
labor needed, falling real estate prices)
◦ Higher well productivity levels (more gas from
single rig, higher reserve finds)
◦ Improved efficiencies (average time to drill to total
depth has fallen by more than 25% in past two
years)
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

Disconnection between rig count, production
levels and price
Investors want active companies
Backlog of wells ready to come on-line
◦ Supply exists and will be produced at the right price

New attitudes toward the market
◦ Producers say they will increase spending at $5 and cut
spending at $3.50 per MMBtu
◦ One year ago, they said they would increase spending at
$6 and cut spending at $4 per MMBtu
◦ Producers are hedging 2013 supplies

Supply is positive for consumers
U.S. Natural Gas Production and Imports
billion cubic feet per day (bcf/d)
annual change (bcf/d)
72
9
70
8
68
7
66
6
64
5
62
4
60
3
58
2
56
1
54
0
52
-1
50
-2
2010
2011
2012
2013
Federal Gulf of Mexico production (right axis)
U.S. non-Gulf of Mexico production (right axis)
U.S. net imports (right axis)
Total marketed production (left axis)
Marketed production forecast (left axis)
Source: Short-Term Energy Outlook, September 2012


Weekly injections/withdrawals are a
measurement of supply and demand
Expectations vs. reality create a volatile
market environment on Thursdays
U.S. Working Natural Gas in Storage
billion cubic feet
deviation from average
5,000
210%
Forecast
4,000
180%
3,000
150%
2,000
120%
1,000
90%
0
60%
-1,000
30%
-2,000
0%
-3,000
Jan 2008
-30%
Jan 2009
Jan 2010
Jan 2011
Jan 2012
Jan 2013
Note: Colored band around storage levels represents the range between the minimum and maximum
from Jan. 2007 - Dec. 2011.
Source: Short-Term Energy Outlook, September 2012

Storage Inventories
◦ Currently 3,402 Bcf (395 Bcf higher than last year)
◦ Ending inventories are projected to exceed 4,000
Bcf. Maximum practical storage capacity is
estimated to be 4,340 Bcf.
 It will be the smallest summer build since 1991
◦ Limits on storage capacity will limit overall
injections
◦ Physical system constraints occur when storage
gets too full

Most growth from the electric
power sector
◦ Near-term: Increased coal-to-natural
gas fuel switching because of price
◦ Long-term: Coal-fired plant
retirements could drive a 4-6 Bcf/day
rise in demand from the electric power
sector through 2018
◦ Unknowns: Compliance timing and
requirements with new EPA rules

Additional demand growth from
LNG and pipeline exports
Source: Goldman Sachs Equity Research

Natural gas has become a competitive fuel
choice for electric generation
◦ Gas peaking units in the Southeast outcompete
most base load coal units


Central Appalachian (CAPP) Coal @ $57/ton =
$2.85/MMBtu
Long-term: Coal-fired plant retirements
could drive a 4-6 Bcf/day rise in demand
from the electric power sector between 20142018
Source: Dominick Chirichella

LNG Exports
◦ LNG exports should begin in 2015 By 2020, 2-4
Bcf/day is projected to be exported
 LNG export costs from Gulf of Mexico
 Europe: Henry Hub Price + $3.80 ($2.60 in liquefaction
costs + $1.20 for shipping)
 Japan: Henry Hub Price + $5.30 ($2.60 in liquefaction
costs + $2.70 for shipping)
◦ $12-$18 per MMBtu overseas due to price link to crude oil
U.S. becomes an LNG
exporter in 2015.

Weather: Flip a coin!
◦ Summer heat
◦ Winter cold
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


Hurricanes
Economic recovery and industrial demand
Natural Gas Vehicles: Lack of infrastructure
Anticipated political actions
U.S. Natural Gas Consumption
Production still expected to outpace
year-over-year increases in demand
billion cubic feet per day (bcf/d)
annual change (bcf/d)
100
7
90
6
80
5
70
4
60
3
50
2
40
1
30
0
20
-1
10
-2
0
-3
2010
2011
2012
2013
Electric power (right axis)
Residential and comm. (right axis)
Industrial (right axis)
Other (right axis)
Total consumption (left axis)
Consumption forecast (left axis)
Source: Short-Term Energy Outlook, September 2012
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Price downside limited due to fuel switching
A lack of storage capacity could depress
near-term spot market prices
No concerns over supply meeting demand

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A change in the perception of the future
balance between supply and demand
Structural “permanent” shifts in demand
Electric generation
◦ Coal plant retirements / Coal displacement


LNG exports
Speculators will likely decide when the
bottom is in (watch for herd mentality)

EIA
◦
◦
◦
◦

2010:
2011:
2012:
2013:
$4.39
$4.04
$2.58
$3.22
per
per
per
per
MMBtu (Actual)
MMBtu (Actual)
MMBtu
MMBtu
Long-term projections
◦
◦
◦
◦
2013: $2.75-$4.00/MMBtu
2014: $3.50-$4.25/MMBtu
2015: $4.00-$4.50/MMBtu
After 2015: $5-$6/MMBtu

Changes in the outlook for crude oil prices
◦ Economic data becomes increasingly positive
◦ Non-OPEC countries experience large and
persistent supply disruptions

Changes in the outlook for coal commodities
◦ Coal prices tumble causing natural gas demand to
significantly decline
◦ Restrictive EPA policies that support a faster
transition to natural gas-fired electric generation

Changes in the outlook for NGLs
◦ Economics of NGL supplements declines

Natural Gas
◦ Fracking issues (earthquakes, water supply)
 Technologies of “waterless” fracking implemented
◦ Economics of accessing “stacked plays” declines
◦ Draft EPA Fracturing Study to determine the
potential impact of fracking fluids on drinking
water, human health and the environment to be
released at end of 2012
◦ Legislation which dramatically alters the number of
players participating in futures market trading
◦ LNG export market doesn’t evolve as anticipated
Valerie Wood
Verona, WI 53593
Tel: (608) 848-6255
E-mail: [email protected]
Industry info at www.energysolutionsinc.com