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© 2016 IHS

Presentation

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IHS ENERGY

North American Natural Gas: Linkages amid

Change

North American Integrated Energy Research

February, 2017

Gas/Electric Partnership 2017: Opportunities in Infrastructure

Ed Kelly, Managing Director, North American Gas, [email protected]

mailto:[email protected]

© 2016 IHS

North American Power, Gas, Coal and Renewables: A

fully integrated IHS offering for interdependent energy

markets

The integration of the North

American energy markets

means that technologies

and fuels are increasingly

interdependent.

North American Gas,

Power, Coal, and

Renewables offering

highlights fully integrated

fuels and business areas.

2

IHS Energy: North American Power, Gas, Coal and Renewables

Source: IHS Energy © 2016 IHS

A fully integrated offering for interdependent

energy markets

Gas

Coal

Renewables

Power

Policy and

regulatory

analysis

Market

forecasting

Technology

costs

Market

fundamentals

© 2016 IHS

Key Power Themes: Renewables, Gas/Coal Competition

• Supportive policies and technology cost declines support a boom in US wind and solar

PV capacity additions through the early 2020s. Federal tax code changes have the

potential to moderate the boom, however.

• Utility scale solar PV is the largest renewable segment to 2025 and opportunities expand

beyond California.

• The missing money paradox continues to plague the power industry; conventional plant

retirements continue, owing to weak market fundamentals and public policy.

• A new competitive fuel dynamic has been established between natural gas- and coal-

fired power generation that will increase fuel demand volatility—in response to higher

natural gas prices, US coal-fired power generation is expected to increase by more

approximately 10% in 2017, contributing an increase in annual CO2 emissions of

approximately 4%.

• The CPP is unlikely to prevail as a final federal rule; a state patchwork of policies will

complement market forces in determining power sector CO2 emissions to at least 2025.

• Battery cost declines and targeted policies have given rise to niche power applications,

but further cost declines are required to be competitive with gas-fired peaking generation.

3


© 2016 IHS

Key Themes for Natural Gas: Demand Challenge,

Moving up a Flat Resource Cost Curve

• Large resource base:

Shale Gas Reloaded research found 1,400 trillion cubic feed (Tcf) of economic natural

gas resource at less than $4.00/MMBtu and over 700 Tcf at sub $3.00 with major

implications across the entire North American energy landscape.

• Risks from concentration of production:

Creates pipeline expansion dependency and challenge of matching supply growth to

demand growth.

Oil price and associated gas production not correlated to natural gas market.

Tight 2017 with higher prices and gas to coal switching.

Likely excess thereafter on capex surge to oil and pipeline expansion completions.

• Global Gas Reset:

Shale and US LNG exports changing how global gas prices get set.

Excess global LNG liquefaction likely concurrent with surge of US production.

Variable cost pricing leaves US exports uncompetitive until the global market grows into

the capacity.

4


© 2016 IHS

The “Trump Effect” on Natural Gas and Oil Pricing and

Production?

• Marginal:

Does not change the reality of the resource base on largely private lands; if the shale

revolution occurred under Obama, it is not likely to be slowed by Trump

However, toward the end of the Obama administration, obstacles to infrastructure

developments and new drilling were gathering force and momentum; intervenors are no

longer likely to be joined by a supportive federal government

As such, infrastructure development, and drilling plans, may experience an

“interregnum” in which industry investments may occur largely on schedule

The energy industry is likely strenuously to oppose a “border adjustment tax,” and the

fungibility of natural gas would make such a tax difficult to manage

• Price and supply impacts:

Oil: unlikely that large new territories will be effectively opened to drilling. Large oil

projects often take longer than 4 years, and require investment certainty (if territory is

opened by Trump it could be closed again by a later president).

Natural gas: Appalachian supplies may be more unleashed (limiting price appreciation),

with timely completions of planned pipeline projects. Exports to Mexico unlikely to be

affected, but do face risk from Mexico political uncertainty.

5


© 2016 IHS 6

North American Natural Gas: A Resource in

Search of Markets


© 2016 IHS

2016 shale gas reloaded update

1,400 Tcf North American supply at Henry Hub <$4

7


12

9

6

3

-3

-6

-9

-12Av

era

ge

bre

ak

-ev

en

He

nry

Hu

b p

rice

($

/MM

Btu

)

2,0001,5001,0005000

Tcf

0

Source: IHS Energy © 2016 IHS: 60204-1

Break-even price at Henry Hub for natural gas resources

Figure 3

1,400 Tcf <$4/MMBtu

Break-even price at Henry Hub for natural gas resources

© 2016 IHS 60204-1Source: IHS Energy

Demand

to 2040

Demand

to 2025

© 2016 IHS

Porting shale technology from gas to oil

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1/1

/20

06

7/1

/20

06

1/1

/20

07

7/1

/20

07

1/1

/20

08

7/1

/2008

1/1

/20

09

7/1

/20

09

1/1

/20

10

7/1

/20

10

1/1

/2011

7/1

/20

11

1/1

/20

12

7/1

/20

12

1/1

/20

13

7/1

/20

13

1/1

/20

14

7/1

/20

14

1/1

/20

15

7/1

/20

15

1/1

/20

16

7/1

/20

16

1/1

/20

17

7/1

/20

17

Actual Forecast

US Lower 48 oil production growth relative to January 2006

Source: IHS

Lo

we

r4

8 o

il p

rod

uc

tio

ng

row

th (

1,0

00

s b

bl/

d)

© 2015 IHS

8

Global Energy Forum: North American Gas

© 2016 IHS

Driving rapid expansion of associated gas production

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1/1

/20

06

7/1

/20

06

1/1

/20

07

7/1

/20

07

1/1

/20

08

7/1

/2008

1/1

/20

09

7/1

/20

09

1/1

/20

10

7/1

/20

10

1/1

/20

11

7/1

/20

11

1/1

/20

12

7/1

/20

12

1/1

/20

13

7/1

/20

13

1/1

/20

14

7/1

/20

14

1/1

/20

15

7/1

/20

15

1/1

/20

16

7/1

/20

16

1/1

/20

17

7/1

/2017

Actual Forecast

Lower 48 associated gas production growth relative to January 2006

Source: IHS

Lo

we

r 4

8 a

ss

oc

iate

d g

as

pro

du

cti

on

© 2015 IHS

9


© 2016 IHS

Concentration of production

Price risk with going oily and Appalachian

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan-1

4

Jul-1

4

Jan-1

5

Jul-1

5

Jan-1

6

Jul-1

6

Jan-1

7

Jul-1

7

Jan-1

8

Jul-1

8

Jan-1

9

Jul-1

9

Jan-2

0

Jul-2

0

US lower 48 production

© 2016 IHS

Perc

en

tag

eo

f to

tal U

S L

48 p

rod

ucti

on

Notes: Aligns with North American Forecasting Service October 2016 outlook.

Source: IHS

10


Appalachia

Other gas plays

Associated Gas

© 2016 IHS

North American gas reloads and reconnects

11


Global demand

• Commodity super cycle

• Econometrics

• Politics

Global oil

• Demand constrained

• US swing supplier

• Changing foreign sources/cycles

North American oil

• Global price driver

• NGLs/Petchem

• Associated gas

North American gas

• Dry gas on the margin

• Expanding resource base

• Falling costs

• Coal/gas competition

• Global integration

© 2016 IHS

Appalachia and oil economics drive production growth

12

MoGas market analysis / February 2017

0

10

20

30

40

50

60

70

80

90

Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18

Associated Gas Marcellus PA Marcellus WV Utica

Barnett Cotton Valley Fayetteville Haynesville

Pinedale Woodford (Arkoma) Gulf of Mexico Other - Dry Gas

Other - Wet Gas CBM

US gas production history and outlook by major play

Notes: Aligns with North American Forecasting Service January 2017 outlook.

Source: IHS © 2017 IHS

Bcf/

d

© 2016 IHS

Oil-related economics advancing associated gas

production

13


0

5

10

15

20

25

Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18

Anadarko Penn Anadarko Wash Woodford - Cana Woodford - Ardmore

SCOOP/STACK Bakken Eagle Ford Mississippian Lime

Permian Wattenberg Niobrara Fracture Play Other - Gassy Oil

Other - Oil

Associated gas production by play



Bcf/

d

© 2016 IHS

Appalachian gas production to continue rising with

progressively fewer infrastructure hindrances

14


0

5

10

15

20

25

30

35

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18

Marcellus Shale PA Marcellus Shale WV Utica Shale Other Appalachia

Appalachia gas production history and outlook



Bcf/

d

© 2016 IHS

Future production growth is driven foremost by

Appalachia and associated gas

0

10

20

30

40

50

60

70

80

90

100

Associated Gas Marcellus PA Marcellus WV Utica Barnett

Fayetteville Haynesville Smaller Plays DUCs Other - Dry Gas

Other - Wet Gas CBM GOM Deep GOM Shelf

US lower-48 total gas production

© 2016 IHS

Bcf/

d

Notes: Aligns with North American Gas April outlook.

Source: IHS

15

Associated gas

Marcellus PA


© 2016 IHS 16

Pipeline expansions delays owing to lengthy regulatory

processes (both intervention and regulatory capacity) and

low prices

0

1

2

3

4

5

6

7

8

9

2015 2016 2017 2018

East North Central East South Central Eastern Canada

Middle Atlantic New England South Atlantic

West South Central

Contracted expansion capacity as of March 2015

Notes: Contracted capacity shown is for a subset of all announced projects, i.e.,

those designated as an outlet for additional production to reach markets.


Bcf/

d

Prior to the collapse of late

2015/early 2016, the expected

pipeline expansion buildout

was relatively strong for

2016–17.

0

1

2

3

4

5

6

7

8

9

2015 2016 2017 2018 2019 2020East North Central East South Central Eastern Canada

Middle Atlantic New England South Atlantic

West South Central

Contracted expansion capacity as of October 2016

Notes: Contracted capacity shown is for a subset of all announced projects, i.e.,

those designated as an outlet for additional production to reach markets.


Bcf/

d

Projects previously expected to enter service in

2016–17 are pushed back. At least 4.5 Bcf/d

(15%) of capacity has been delayed by an

average of 19 months. Further project delays are

expected, pushing IHS expectations for project in-

service dates as far as 2020.

© 2016 IHS

0

5

10

15

20

25

30

35

Ja

n-1

1

Ju

l-1

1

Ja

n-1

2

Ju

l-1

2

Ja

n-1

3

Ju

l-1

3

Ja

n-1

4

Ju

l-1

4

Ja

n-1

5

Ju

l-1

5

Ja

n-1

6

Ju

l-1

6

Ja

n-1

7

Ju

l-1

7

Ja

n-1

8

Ju

l-1

8

Ja

n-1

9

Ju

l-1

9

Ja

n-2

0

Ju

l-2

0

Anadarko Penn Anadarko Wash Woodford—Cana Woodford—Ardmore

SCOOP/STACK Bakken Eagle Ford Mississippian Lime

Permian Conventional Permian Unconventional Wattenberg Niobrara Fracture Play

Other—Gassy oil Other—Oil

US lower-48 associated gas production

© 2016 IHS

Bcf/

d

Notes: Aligns with North American Forecasting Service October 2016 outlook

Source: IHS

Associated gas will grow steadily between 2018 and

2020 led by Permian, Eagle Ford, and SCOOP/STACK

17

Eagle Ford

SCOOP/STACK

© 2016 IHS

The influence of oil on our natural gas markets?

• It is growing – but for those with long memories, is not and will not be as

much as in the 1980s, and the effects are much longer term:

Very little direct switching capability

• Influences are multi-faceted:

Absolute oil price: a rise in absolute oil prices will encourage associated gas

production, adding to gas supplies

Relative oil and gas prices: Rise in oil relative to gas will (all else equal)

Increase US export demand, eventually

Increase associated gas production at the expense of dry gas production (likely net supply decline

depending on relative returns from oil and gas drilling)

Increase interest and investment in natural gas vehicles, and long-term gas demand potential.

• On net – high oil prices may increase both gas supply and gas demand,

longer term. Any shorter-term impacts are largely psychological and

trading-based

18


© 2016 IHS

Will the US become “energy independent?” Not

necessarily: The IHS US Crude Balance

19

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2010 2015 2020 2025 2030

Exports

Imports - Other

Imports - Canada

US Production

US Consumption

Bb

ls/d

, 0

00

s

© 2016 IHS

The Oil/gas ratio is expected to recover, led by oil

prices; will it reignite interest in NGVs?

20

Eagle Ford

0

5

10

15

20

25

-

20

40

60

80

100

120

140

160

2010 2015 2020 2025 2030 2035 2040

WT

I $/B

bl

Natural Gas and Oil - A Quicker Oil Recovery

WTI Crude

Henry Hub($/MMBtu -Right axis)

WTI/HenryHub (Rightaxis)

© 2016 IHS

US lower-48 demand to approach 125 Bcf/d by 2040;

exports and vehicles are material contributors

21

0

15

30

45

60

75

90

105

120

135

2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

Residential Commercial Industrial Power Vehicles LNG exports Exports to Mexico Other

US lower-48 natural gas demand, 2010 - 2040

Source: IHS Energy and EIA © 2016 IHS

Bcf/

d

© 2016 IHS 22


Wind and solar capacity additions dominate the outlook to 2025, supported by federal tax credits

available for projects coming online through the early 2020s. Longer term, renewables and natural

gas share the market for new additions.

US total capacity additions by year

0

100

200

300

400

500

600

700

History

0

5

10

15

20

25

30

35

40Other

Solar

Wind

Hydro

Nuclear

NaturalGas

Coal

US Lower-48 total capacity additions, 2011–40

Source: IHS Energy and ABB Velocity Suite

GW

© 2016 IHS

US power generating fuel mix

23


Natural gas and renewable power generation grow at the expense of coal. Penetration of natural

gas and non-hydro renewables reaches 35% and 20%, respectively, by 2030.

History

0

1,000

2,000

3,000

4,000

5,000

6,000

Other

Solar

Wind

Hydro

Nuclear

Natural gas

Coal

US Lower-48 power generation by fuel type, 2008-40

Source: IHS Energy and ABB Velocity Suite

TW

h

© 2016 IHS 24

The US Lower-48 will see nearly 60 Bcf/d of gas demand

growth by 2040 over 2010 levels, moving into higher-

cost supply areas

-10

0

10

20

30

40

50

60

70

2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039

Residential Commercial Industrial Power Vehicles LNG exports Exports to Mexico Other

US lower-48 demand growth relative to 2010

Source: IHS Energy and EIA © 2016 IHS

Bcf/

d

2.5 Bcf per day year-over-year

growth average (2015- 2025)

1.46 Bcf per day year-over-year

growth average (2026- 2040)

© 2016 IHS

Total natural gas demand in heavy goods

transportation: globally, it’s 2/3 an LNG story

Over 3.1 million barrels per day

(185 BCM, BCM/10 ~ 18.5 Bcf

per day) of diesel equivalent gas

demand

Conclusions

• Conversion to natural gas will

slow down with low oil prices,

but not disappear

• Globally, LNG demand in on-

road applications outpaces CNG

demand – but this is very market

specific

• LNG’s use as a bunker fuel

remains a major potential

market

• Rail conversions are “binary,”

based on a few company and

national policies

• Diesel displacement is lower

than natural gas demand

because of efficiency

differences.

0

50

100

150

200

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2015 2020 2025 2030 2035 2040

LNG - trucks LNG - Bunkers

LNG - Rail CNG

Approximate diesel displacement

Natural Gas Demand - Global

© 2014 IHS

1000 b

bl d

ge / d

ay

Source: IHS

Natural Gas Demand - Global

BC

M

25

© 2016 IHS 26

Australia and US Dominate New Supply Build

280 285

311

340 361

391

413

0

50

100

150

200

250

300

350

400

450

2014 2015 2016 2017 2018 2019 2020

US Australia Other Paciifc

Other Atlantic Middle East Southeast Asia

Africa

Global liquefaction capacity

Note: MMtpa = Million metrics tons per annum


MM

tpa

-10

0

10

20

30

40

2015 2016 2017 2018 2019 2020

US Australia Other Paciifc

Other Atlantic Middle East Southeast Asia

Africa

Incremental liquefaction capacity additions

Note: MMtpa = Million metrics tons per annum


MM

tpa

© 2016 IHS

A steep ramp of North American LNG liquefaction

capacity

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

Chart Title

US Canada

North American LNG exports

Source: IHS Energy, EIA © 2017 IHS

Bc

f/d

27


© 2016 IHS

Global LNG: How big is the oversupply?

250

300

350

400

450

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Global LNG supply unconstrained by demand


Milli

on

to

ns

LN

G

28

Unconstrained

LNG supply

Including forecast of

additional supply

projects

No additional

projects sanctioned

LNG demand


© 2016 IHS

Excess liquefaction capacity reduces US utilization

0

1

2

3

4

5

6

7

8

9

10

Ja

n-1

6

Ju

l-1

6

Ja

n-1

7

Ju

l-1

7

Ja

n-1

8

Jul-18

Ja

n-1

9

Ju

l-1

9

Ja

n-2

0

Ju

l-2

0

Ja

n-2

1

Ju

l-2

1

Ja

n-2

2

Ju

l-2

2

Ja

n-2

3

Ju

l-2

3

Ja

n-2

4

Ju

l-2

4

Ja

n-2

5

Ju

l-2

5

US lower-48 LNG exports

© 2017 IHS

Bc

f/d

Notes: Excludes liquefaction losses.

Source: ABB Velocity Suite, IHS

29

© 2016 IHS 30

Mexico: The “push” to import

0

1

2

3

4

5

6

7

8

9

10

2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040

US lower-48 net pipeline exports to Mexico

Source: IHS Energy, EIA © 2016 IHS

Bcf/

d

Mexican supply sources through 2026 Latest export view: + 0.7 Bcf/d added

since spring, by 2025

Changes on the margin in the past year:

Mainly Mexican production challenges; slower rebound

Small added demand potential

0

2

4

6

8

10

12

2008 2010 2012 2014 2016 2018 2020 2022 2024 2026

Marketed production Pipeline imports LNG imports

Mexico’s natural gas supply outlook


Bc

f/d

IHS Energy: North American Power, Gas,

Coal and Renewables

© 2016 IHS

MISOMISO

MISO

MISO

SPP

SPP

ERCOT

Southeast

Southeast

Southeast

WECC

NYNE

NYNE

PJMPJM

PJM

PJM

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

CAPP NAPP ILB PRB

Coal-to-gas delivery economics for 2016

Bre

ak

-eve

n n

atu

ral g

as

pri

ce

($/M

MB

tu)

Notes: NYNE = New York and New England; WECC = Western Electricity Coordinating Council. CAPP = Central Appalachia basin; NAPP =

Northern Appalachia basin; ILB = Illinois Basin; PRB = Powder River Basin. Coal price adjusted to gas equivalent (10,250 Btu/kWh coal versus

7,800 Btu/kWh gas).


Market balancing with coal/gas switching

31


2017 Henry Hub average price range

2016 Henry Hub average price range

© 2016 IHS

Henry Hub price history and outlook

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

$5.50

$6.00

$6.50

Jan-14Nov-14Sep-15 Jul-16 May-17Mar-18Jan-19Nov-19Sep-20 Jul-21 May-22Mar-23

Marginal cost range 2 Marginal Cost Range Henry Hub

IHS forecast, January 2017 NYMEX, 20 January 2017

January 2017 Henry Hub history and forecast

Notes: MMBtu = million Btu.

Source: IHS, CME, Intelligence Press © 2017 IHS

$/M

MB

tu

OUTLOOK

MC 2014

MC 2016

IHSTM

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