Bentek 2012 Shale Gas Outlook

BENTEK North American Market Overview & Outlook
To Illinois State University Institute for Regulatory Policy Studies Springfield, IL

October 30, 2012
1
Agenda
Drilling Efficiencies and Oil & NGL Production Will Sustain Annual Growth of Gas Volumes Demand Is Responding to Low Prices Prices Will Be Low and Stable as Supply Continues to Overwhelm Demand Changes in Intra-Regional Flow Dynamics Will Impact Local Prices, Particularly Out West
www.BENTEKENERGY.com
2
Massive Displacement Forcing Gas Into New Markets
Source: BENTEK Cell Model
Supply
U.S. Production Slows But Sustains YOY Growth

66 64 62 60 Bcf/d 58 56 54 52 50 Jan Feb Mar Apr May 2009
2012 Avg: 63.5 Bcf/d
2011 Avg: 61.6 Bcf/d 2010 Avg: 57.1 Bcf/d
2009 Avg: 55.1 Bcf/d
Jun 2010
Jul 2011
Aug
Sep
Oct
Nov
Dec
2012 YTD
5
Source: BENTEK Supply/Demand Balance History
Massive Shift of Rigs to Oil & Liquids Plays
7/+4
OTHER ROCKIES
214/+133
WILLISTON
2/-1 28/-2
31/+22
POWDER RIVER OTHER
MICHIGAN
WIND RIVER
6/+0
ILLINOIS
MARCELLUS DRY
43/+25 MIDCONTINENT
D-J
GREEN RIVER
27/+23
UTICA
70/-6
36/+11
13/-10
PICEANCE UINTA SAN JUAN
103/+65
ANADARKO
9/+1 16/-21
42/+24
MARCELLUS WET
ARK FAYETTEVILLE
3/-9
42/+14
CALIFORNIA
6/-2
PERMIAN
219/+96
EAST TX
OTHER APPALACHIAN
ARK WOODFORD
6/-23
75/-34 43/-50
ARKLA
30/-99
470/+251
FT WORTH
14/+3
AL-MS-FL
TOTAL
70/+11
TX GULF
24/+9
LA GULF
2006
CHANGE
Rig Increases Dry Gas Focused Areas Rig Increases Liquids-Rich/Oil Focused Areas Rig Declines
260/+200
TX GULF EAGLE FORD
95/+11
OFFSHORE
+716
Source: BENTEK, October 2012
Active rig count: October 5, 2012 / Change in rig count from Jan. 1, 2010
Source: BENTEK Regional Production Monitors, September 2012
IRRs Shift Production to Oil/NGL-Rich Plays

Horn -1% 16% Montney WCSB 0%
Bakken 56% Pinedale Piceance Uinta 32% 3% Niobrara 4% 51% Cleve/Tonk 98% 94%Miss.Lime 4% Fayetteville 7% 68% Marcellus
Dry Gas Play NGL Play Oil Play

Granite 84% 1% Wash Permian 89%Ark/Wood
0% Haynesville
50% Eagle Ford

Source: Company Presentations, Quarterly Reports, and News Releases
Numerous Plays Become Attractive Again at $4 Gas

Horn -1% WCSB 0%
Pinedale 3%
27% 43%
7%
22%41%
Marcellus Fayetteville 1% @ Current $ @ $4 @ $5

4%
16% 29%
Ark/Wood
0% Haynesville
8%
19%
8
Source: Company Presentations, Quarterly Reports, and News Releases
Technology Gains Drive Gas Production

2007 Q1 2008 Q1 2010 Q1 2011 Q1 +166% +137% +138% -58% 20 8
Drill Time (Days) Wells Per Yr. Avg. Lateral 30 Day Ave. Per Rig Length ( Feet) Prod Rate (Mcfd)
Source: Southwestern Energy Financials
SWN Energy Fayetteville Shale
+533% 116,148
43
4,985
2,673 +8% 1,006 18,360 $2.8
18
2,104
$2.6
IP Additions Per Rig Per Yr. (Mcf/d)
Drill & Complete Costs ($MM)

9
Shale Rig Counts Peaked in 2010 Yet Production Has Grown 8 Bcf/d Since 2010
18 16 250 14 12 Bcf/d 10 150 8 6 4 50 2 0 2007 0 2008 Fayetteville
300
200
100
2009 Haynesville
2010 Marcellus
2011
2012
Horizontal Rig Count

10
Source: BENTEK Production Monitors
Horizontal Rig Count
Associated Gas, Efficiencies, Stronger Prices Will Sustain Production Growth

80 70 60 50 Bcf/d 40 30 20 10 0 2008 2009 2010 2011 2012 History
+10 Bcf/d By 2017
2013 Forecast
2014
2015
2016
2017
Source: BENTEK Forward Curve Quarterly 2012.09.28
11
U.S. Substantially Less Reliant on Canadian Gas

10 Historic Exports: 6.77 Bcf/d Historic Decline: 0.67 Bcf/d History 8 Forecast Exports: 4.29 Bcf/d ForecastForecast Decline: 0.78 Bcf/d
6 Bcf/d 4 2 0 2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Net Exports To West

Net Exports to Midwest
Net Exports to Northeast

12
Source: BENTEK Canadian Observer Suite and CellCast
Demand
13
Power, Industrial, Mexican Exports Spur Demand Growth

90 History 80 70 60 Bcf/d 50 40 30 20 10 2008 2009 Power
Forecast
+9 Bcf/d Vs. 2012
2010
2011
2012
2013
2014
2015 Pipe Loss
2016
2017
ResComm
Industrial
Exports to Mexico
Does not include forecast LNG exports

14
Over 70 Industrial Demand Expansions Planned By 2017
Source: BENTEK Industrial End Users Report
15
Industrial Demand Forecast to Add 0.3 Bcf/d/year

25
20
15 Bcf/d
10
Summer Demand bottoms baseload has out with recession since increased 1.3 Bcf/d
Winter & Summer to average 1.3 Bcf/d above 2012
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
16
History: BENTEK Supply/Demand Balance Analytic Report History Forecast: BENTEK Forward Curve Quarterly, 2012.09.28
Mexican Exports to Continue Rising

8 7 6 5 Bcf/d 4 3 2 1 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Mexican Demand
Up to 1 Bcf/d of Export Expansions By 2014

Bcf/d
History 2.5 2.0 1.5 1.0 0.5
Projected
U.S. Exports to Mexico
0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 History Forecast 17
Mexican Demand: SENER History: BENTEK Supply/Demand Balance Analytic Report History Forecast: BENTEK Forward Curve Quarterly, 2012.09.28
YOY Gas Demand from Power Up 5 Bcf/d (23%)

40
35
2012 YTD: 26.7 Bcf/d Vs. 2011 YTD: +5.0 Bcf/d Vs. 5-Yr YTD: +6.7 Bcf/d
30 Bcf/d
25
20
15
10
5 Yr. Avg.
2011
Source: BENTEK Supply/Demand Balance History
2012
18
Gas Prices Capable of Capturing Market Share

40 35 30 25 Bcf/d 20 15 10 5 0 Thousand Tons Equivalent 3,000
12-Month Forward HH Avg $3.63 5.2 Bcf/d
2,500
2,000
1,500
2011 HH Avg $3.98 3.0 Bcf/d
1,000
500
PRB
CAPP
NAPP
Illinois
Uinta
Imports
Other
19
Source: EIA, BENTEK Power Burn Report
New Gas-Fired Generation Will Boost Demand

Under Construction Year 2013 2014 2015 2016 2017 Total MW 8,254 6,488 1,350 624 85 19,293
Gas Burn Equivalent 1.7 Bcf/d Under Construction + Proposed Gas Burn Equivalent 5.9 Bcf/d
Gas Burn Equivalent assumes all plants are combined-cycle running at 50% utilization with heat rates of 7.5. www.BENTEKENERGY.com Source: Platts & BENTEK Generation Data 20
Tightening Balance May Support Near-Term Prices; Long-Term Supply Surplus Grows
90 80 70 60 Bcf/d 50 40 30 20 10 2008 2009 2010 Supply
+0.2
+0.1
-0.3
+1.9
+1.8
-0.3
--
-0.9
+0.8
+1.1
2011
2012
2013
2014
2015
2016
2017
Demand (No LNG Exports)

21
N.America Becomes Net LNG Exporter By 2016

Net LNG Exports (Bcf/d)
1.6 1.2 0.8 0.4 0.0 (0.4) (0.8)
First Ex Q1 2016, Net Ex Q3 2016
Source: BENTEK Special Report LNG Surge
22
Regional Dynamics
23
Massive Displacement Forcing Gas Into New Markets
24
Marcellus to Remain Cheapest Gas Due to Production Growth and Takeaway Constraints
Northeast Production
16 14 12 10 Bcf/d 8 6 4 2 0
Incremental 7.4 Bcf/d by 2016
Northeast Inflows
16 14 12 10 Bcf/d 8 6 4 2 0 2008 2009 Canada 2010 Midcon 2011 Southeast LNG
Source: BENTEK Northeast Production Monitor and BENTEK Cell Model
Legacy Production
Lean Marcellus
Wet Marcellus
Utica
2012
25
Canadian Production Declines But Exceeds 12 Bcf/d

18 Annual Production: 15.2 Bcf/d Annual Decline: 0.52 Bcf/d Actual 16 Annual Production: 13.1 Bcf/d Projection Annual Decline: 0.29 Bcf/d
14 Bcf/d 12 10 8 2007 2008 Alberta

2009 BC Other
2010 Montney
2011
2012
2013
2014
2015 NWT NB
2016 NS
26
Horn River
Saskatchewan
Source: BENTEK Canadian Production Monitor Monthly
Rockies Production To Stay Flat

History 12 Forecast
10
8 Bcf/d
DJ
Other
Piceance
Powder River
GR-O
Uinta
27
Source: BENTEK Rockies Production Monitor
Anadarko Basin Drives MCP Growth

Midcon Producing Production Forecast
8 7 6 5 Bcf/d 4 3 2 1 0 2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: BENTEK Midcon Production Monitor
28
Expansions Will Support Bakken Growth

1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0
Williston Basin Expansions

ONEOK Stateline II
HESS Tioga Plant Expansion ONEOK Stateline I ONEOK Garden Creek
Bcf/d
330 MMcf/d of Planned Processing Expansions Over Next Three Years
Gross Production
Flared
Processing Capacity
Source: BENTEK Midcon Production Monitor
29
Midcon Sources Gas From Other Areas

Market Share of Midcon Imports Northeast 1%
2007
MCP 10%
Northeast 3%
2012
MCP 13% Rockies 21%
Rockies 23%
SE Gulf 23%
Canada 43%
Canada 31% SE Gulf 32%
Source: BENTEK Midcon Observer
30
Midcon Demand Stagnant

25
-0.3 Bcf/d per year
+0.2 Bcf/d per year
20
15 Bcf/d 10 5 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 RCI - History
Power - History
RCI - Forecast
Power - Forecast
31
Source: BENTEK CellCast and Midcon Observer
Midcon Market Gas Power Demand Rising

2.5 60,000
2.0
1.5 Bcf/d
30,000 1.0 20,000 0.5
10,000
0.0 3-Year Average Gas Burn

2011 Total Power Generation

32
2012 YTD
Source: BENTEK Midcon Observer History and Energy Information Administration
MW Generated
Gas Burn: YTD: 1.99 Bcf/d +0.75 Bcf/d above 2011 YTD +0.9 Bcf/d above 3-Yr YTD
50,000
40,000
Supply Shifts and Production Growth Will Moderate Prices

Opal
$0.35 $0.15 -$0.05 -$0.25
Tetco M3 Chicago
$0.35 $0.15 -$0.05 -$0.25 $0.35 $0.15 -$0.05 -$0.25
Dominion S.
SoCal
$0.35 $0.15 -$0.05 -$0.25 $0.15 -$0.05 -$0.25 $0.35
Waha
$0.35
$0.15 -$0.05
Henry Hub
$5.00 $4.00 $3.00 $2.00 $1.00 $0.00
-$0.25
Source: ICE/Clearport and BENTEK Natural Gas Price Matrix
33
CASW Inbound Pipelines Are At ~80% Capacity

12
10
8 Bcf/d
Jan-09 Jul-09 El Paso North TransWestern (W.Thoreau)

Jan-10
Jul-10 El Paso South Kern (Veyo)
Jan-11
Jul-11
Jan-12
Jul-12
PG&E (Redwood) Aggregate Capacity

34
Source: BENTEK West Coast Observer
Demand & Export Growth Will Test CASW Capacity

12 10
8 Bcf/d
2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Flows Mexican Expansions (Fully Utilized) Capacity
Source: BENTEK West Coast Observer, CellCast, and Forward Curve
Projected Flows Forecast CA/SW Demand Growth
35
California Features Highest Demand Prices

3.50 3.00 Cash ($/MMBtu) 2.50 2.00 1.50 1.00 0.50 0.00 Apr-12 PG&E
May-12 SoCal Henry
Jun-12 Chicago
Jul-12
Aug-12
Sep-12
Transco Z6
FGT Z3
36
Source: CME/NYMEX Clearport and BENTEK Natural Gas Price Matrix
Another Shift Looms With LNG Exports
37
Basis Tightening Continent-Wide

AECO 2009 -$0.44 Sumas 2009 -$0.13 2010 -$0.28 2011 -$0.11 2012 -$0.12 NW Rox 2009 -$0.82 PG&E 2009 $0.21 2010 $0.16 2011 $0.25 2012 $0.33 2009 SoCal 2009 -$0.30 2010 -$0.13 2011 $0.07 2012 $0.15 Waha 2009 -$0.51 2010 -$0.22 2011 -$0.12 2012 -$0.08 2009 $3.92 Henry Hub (Cash) 2010 $4.37 2011 $3.99 2012 $2.53 38 $0.31 Dominion South 2010 $0.21 2011 $0.12 2012 $0.02 2009 $0.72 2010 -$0.47 2011 -$0.23 2012 -$0.17 2009 $0.00 Chicago (Nicor) 2010 $0.08 2011 $0.12 2012 $0.07 Tetco M3 2010 $0.74 2011 $0.63 2012 $0.22 2009 $0.95 $0.32 $0.37 $0.39 $0.29 Transco Z6 2010 $1.03 2011 $0.99 2012 $0.47 2010 -$0.49 2011 -$0.32 2012 -$0.42 2009 2010 Dawn 2011 2012
2012 prices are average of year-to-date as of 2012.09.24
Price Outlook
39
Prices To Remain Range Bound Between $3 to $3.50

$3.50 $3.00 $2.50 U$/MMBtu $2.00 $1.50 $1.00 $0.50 $0.00
NYMEX
BENTEK
40
Source: BENTEK Market Call 2012.09.28 NYMEX is 30-day average as of 2012.10.14
Significant Resistance at $5 Mark

$5.00 $4.50 $4.00 $3.50 U$/MMBtu $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 2013 2014 NYMEX
2015 BENTEK
2016
2017
NYMEX is last seven-day average as of 2012.10.14

Source: BENTEK US Forward Curve 2012.09.28
41
Key Takeaways
Despite Weak Gas Prices Supply Will Remain Abundant Structural Demand Growing But Not Pacing Supply Basis Will Flatten Until LNG Exports Become Established Until Then Gas Will Struggle to Break $5 Mark
42
BENTEK Energy
BENTEK is an energy market analytics company focused on the natural gas market and related energy sectors.
Rick Margolin Direct: 720.214.3807 rmargolin@bentekenergy.com AIM: BentekRickM Or Contact Any Analyst at 303.988.1320
DISCLAIMER. THIS REPORT IS FURNISHED ON AN AS ISBASIS. BENTEK DOES NOT WARRANT THE ACCURACY OR CORRECTNESS OF THE REPORT OR THE INFORMATION CONTAINED THEREIN. BENTEK MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE USE OF ANY INFORMATION CONTAINED IN THIS REPORT IN CONNECTION WITH TRADING OF COMMODITIES, EQUITIES, FUTURES, OPTIONS OR ANY OTHER USE. BENTEK MAKES NO EXPRESS OR IMPLIED WARRANTIES AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANT- ABILITY OR FITNESS FOR A PARTICULAR PURPOSE. RELEASE AND LIMITATION OF LIABILITY: IN NO EVENT SHALL BENTEK BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFIT) ARISING OUT OF OR RELATED TO THE ACCURACY OR CORRECTNESS OF THIS REPORT OR THE INFORMATION CONTAINED THEREIN,WHETHER BASED ON WARRANTY, CONTRACT, TORT OR ANY OTHER LEGAL THEORY.
43

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BENTEK North American Market Overview & Outlook

To Illinois State University Institute for Regulatory Policy Studies Springfield, IL

Massive Displacement Forcing Gas Into New Markets

Source: BENTEK Cell Model

U.S. Production Slows But Sustains YOY Growth

2012 Avg: 63.5 Bcf/d

2011 Avg: 61.6 Bcf/d 2010 Avg: 57.1 Bcf/d

2009 Avg: 55.1 Bcf/d

Source: BENTEK Supply/Demand Balance History

Massive Shift of Rigs to Oil & Liquids Plays

IRRs Shift Production to Oil/NGL-Rich Plays

Dry Gas Play NGL Play Oil Play

Granite 84% 1% Wash Permian 89%Ark/Wood

50% Eagle Ford

Numerous Plays Become Attractive Again at $4 Gas

Marcellus Fayetteville 1% @ Current $ @ $4 @ $5

Source: Company Presentations, Quarterly Reports, and News Releases

Technology Gains Drive Gas Production

SWN Energy Fayetteville Shale

2,673 +8% 1,006 18,360 $2.8

IP Additions Per Rig Per Yr. (Mcf/d)

Drill & Complete Costs ($MM)

Horizontal Rig Count

Source: BENTEK Production Monitors

Horizontal Rig Count

Associated Gas, Efficiencies, Stronger Prices Will Sustain Production Growth

+10 Bcf/d By 2017

Source: BENTEK Forward Curve Quarterly 2012.09.28

U.S. Substantially Less Reliant on Canadian Gas

Net Exports To West

Net Exports to Midwest

Net Exports to Northeast

Source: BENTEK Canadian Observer Suite and CellCast

Power, Industrial, Mexican Exports Spur Demand Growth

+9 Bcf/d Vs. 2012

2015 Pipe Loss

Does not include forecast LNG exports

Over 70 Industrial Demand Expansions Planned By 2017

Source: BENTEK Industrial End Users Report

Industrial Demand Forecast to Add 0.3 Bcf/d/year

Winter & Summer to average 1.3 Bcf/d above 2012

Mexican Exports to Continue Rising

Up to 1 Bcf/d of Export Expansions By 2014

History 2.5 2.0 1.5 1.0 0.5

U.S. Exports to Mexico

YOY Gas Demand from Power Up 5 Bcf/d (23%)

Gas Prices Capable of Capturing Market Share

12-Month Forward HH Avg $3.63 5.2 Bcf/d

2011 HH Avg $3.98 3.0 Bcf/d

Source: EIA, BENTEK Power Burn Report

New Gas-Fired Generation Will Boost Demand

Demand (No LNG Exports)

N.America Becomes Net LNG Exporter By 2016

First Ex Q1 2016, Net Ex Q3 2016

Source: BENTEK Special Report LNG Surge

Massive Displacement Forcing Gas Into New Markets

Source: BENTEK Cell Model

Incremental 7.4 Bcf/d by 2016

Canadian Production Declines But Exceeds 12 Bcf/d

14 Bcf/d 12 10 8 2007 2008 Alberta

Source: BENTEK Canadian Production Monitor Monthly

Rockies Production To Stay Flat

Source: BENTEK Rockies Production Monitor

Anadarko Basin Drives MCP Growth