

Technologies to recover it were refined as
natural gas prices rose to $10 per MMBtu
Locations of shale gas were known for
decades
◦ Discovery rates are very high
◦ Reduces producer expenses

Volume was greatly underestimated
◦ Estimates continue to change with a consistently
upward-sloping trend
 New wells provide additional data and technologies
change

Long-term productivity remains untested

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

Revenue supplements
◦ NGLs
◦ Associated natural gas production (greatly
underestimated)

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)
◦ Bigger, more powerful equipment
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
1,400
6/1/1993
1,600
6/1/1992
6/1/1991
6/1/1990
1,800
U.S. Active Drilling Rig Count
Crude Oil Rig Count
Natural Gas Rig Count
Source: Baker Hughes
1,200
1,000
800
600
400
200
0



Disconnection between rig count, production
levels and price
Investors want active companies
New infrastructure is allowing a backlog of wells
ready to come on-line
◦ Supply exists and will be produced at the right price

New attitudes toward the market
◦ Periodic price rallies allow producers the opporutnity to
hedge forward production

Supply is positive for consumers

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

LNG Exports
◦ U.S. becomes a net exporter in 2016 or later.
◦ The price of U.S. natural gas will influence LNG
exports far more than LNG exports will influence
domestic prices.
 Projections of 2 Bcf/day to 6.4 Bcf/day by 2030 and
only a modest impact on natural gas prices
 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

Natural Gas Vehicles (NGVs)
◦ Needs improved infrastructure.
◦ Transportation sector still accounts for just 1.5
Bcf/day of demand in 2030.

Consumer Demand
◦ Residential and Commercial demand unresponsive
to natural gas prices.
◦ Industrial/Manufacturing sector to have the
greatest impact but previous efficiency gains
remain in place.
Few additions after 2018
Source: Goldman Sachs Equity Research

On price alone, at sub-$3 price levels, 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
Balance between emission reductions and
prices
Estimated 4-6 Bcf/day rise in demand from
the electric power sector between 2014-2018


Coal is viewed as both the floor and cap for
natural gas prices
As natural gas prices rise, there may be a
larger amount of fuel switching back to coal
◦ Reduces natural gas demand
◦ Stockpiles of coal decline, increasing coal prices

As natural gas prices fall, there may be a
larger amount of fuel switching to natural gas
◦ Natural gas demand rises
◦ Stockpiles of coal rise, reducing coal prices

Renewables have a large impact as well.

A change in the perception of the future
balance between supply and demand
◦ Caused by ??
◦ Economy, storage, weather, demand

Influence from speculative players
◦ They still decide when the bottom is in, but they
need support from the fundamentals.



Waterless fracking
Global shale production
Production ownership

Changes in the outlook for crude oil prices
◦ Economic data becomes increasingly positive
◦ Non-OPEC countries experience large and
persistent oil 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
◦ Ethane rejection

Natural Gas
◦ EPA regulations placing restrictions on coal-fired
emissions from power plants struck down
◦ 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 (not delayed to 2014)
◦ 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