Solutions for Today | Options for Tomorrow

AIChE: Natural Gas Utilization WorkshopOvercoming Hurdles of Technology ImplementationNatural Gas in the United States:An Overview of Resources and Factors Affecting the Market

November 2, 2016

Justin M. Adder, Energy Markets Analysis Team

West Virginia

Texas

o Materials Performanceo Alloy Development/Manufactureo Geospatial Data Analysis

o Process Systems Engineeringo Decision Science o Functional Materialso Environmental Sciences

o Energy Conversion Deviceso Simulation-Based Engineeringo In-Situ Materials Characterizationo Supercomputer Infrastructure

Oil and Gas Strategic Office

Oil and Gas Strategic Office

Alaska

Pennsylvania

Oregon

The Fossil Energy LaboratoryONE LAB System

2

3

Core Competencies

Computational Science &

Engineering

High Performance Computing

Data Analytics

Materials Engineering & Manufacturing

Structural & Functional

Design, Synthesis & Performance

Geological & Environmental

Systems

Air, Water & Geology

Understanding & Mitigation

EnergyConversion

Engineering

Component & Device

Design & Validation

Systems Engineering& Analysis

Process & System

Optimization, Validation & Market Economics

MethaneHydrates

Transmission& Delivery

EnhancedResource Production

EnvironmentallyPrudent Development

OIL & GAS

4

Natural Gas Prices – Various CasesHenry Hub Spot Prices ($/MMBtu) Under Various EIA Cases

$0

$2

$4

$6

$8

$10

2000 2005 2010 2015 2020 2025 2030 2035 2040

$/M

MB

tu (2

015$

)

Low Oil & Gas Resource

Historical AEO 2016 Forecast

High Oil Price

High Oil & Gas Resource

Reference

Low Oil Price

There are several determinants of future natural gas prices

Source: EIA, AEO 2016

5

Determinants of Natural Gas PricesDirect and Indirect Determinants of Natural Gas Prices

Direct Forces Time Horizon Likely Effect Secular Demand Long Rising, thus prices rise; incentive for more supply

Cyclical Investment Behavior Short to Medium Pro-cyclical behavior increases amplitude of price fluctuations

Gas Storage Short to Medium If well behaved, counter-cyclical effect on price. Issue as to whether there will be enough storage

Pipeline Infrastructure Medium to Long Delays in permitting and constructing gathering lines and transmission projects moving gas from high supply areas to high demand areas

LNG Exports Short to MediumForeign markets where natural gas prices are higher; thus putting upward pressure on domestic prices

Access to Resources Medium to Long Advanced technology and federal lands could increase supply. Low natural gas prices could hinder production

Indirect Forces Industrial Use Short to Long Increased manufacturing adds structural element

to gas demand

Transportation Use Short to Long NG and NGL Vehicles and fleets add structural element to gas demand

Coal Power Short to Long Environmental regulations reduce use; structural element added to gas demand

Nuclear Power Short to Long Cheapest marginal operating cost, retirements add structural element to gas demand if coal unavailable

6

World Proved ReservesWorld Proved Natural Gas Reserves, 2015

U.S., 369 tcf (5.6%)

Saudi Arabia, 294 tcf (4.5%)

UAE, 215 tcf (3.3%)

Venezuela, 198 tcf (3%)

Nigeria, 181 tcf (2.7%)

Algeria, 159 tcf (2.4%)

Russia1,140 tcf (17.3%)

Iran1,201 tcf (18.2%)

Rest of World1,359 tcf (20.5%)

Turkmenistan617 tcf (9.4%)

Qatar866 tcf (13.1%)

World Total 6,599 tcf

Source: BP Statistical Review of World Energy 2016, http://www.bp.com/ (May not equal 100% due to rounding)

7

World ProductionWorld Natural Gas Production, 2015

Russia,20.2 tcf (16.1%)

Iran,6.5 tcf (5.4%)

Qatar, 6.4 tcf (5.1%)Turkmenistan,

2.6 tcf (2.0%)

U.S.,27.1 tcf (22.0%)

Saudi Arabia, 3.8 tcf (3.0%)

UAE, 2.0 tcf (1.6%)

Venezuela, 1.1 tcf (0.9%)

Nigeria, 1.8 tcf (1.4%)

Canada, 5.8 tcf (4.6%)

Mexico, 1.9 tcf (1.5%)

Norway, 4.1 tcf (3.3%)

China, 4.9 tcf (3.9%)

Indonesia, 2.6 tcf (2.1%)

Algeria,2.9 tcf (2.3%)

Rest of World,31.3 tcf(24.8%)

World Total125 tcf

Source: BP Statistical Review of World Energy 2016, http://www.bp.com/ (May not equal 100% due to rounding)

8

U.S. Rig Count and ProductionOil and Natural Gas Rig Count and Natural Gas Production

0

10

20

30

40

50

60

70

80

90

0

500

1,000

1,500

2,000

2,500

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Bcf/d

U.S

. Rig

Cou

nt

oil rigs

total rig count

natural gas rigs

natural gas production

Natural gas production increases despite fall in rig count

Source: Baker Hughes, Inc. rig count, EIA Monthly Total Marketed Production

9

U.S. Drilling & Completion CostsU.S. Oil & Natural Gas Drilling & Completion Cost Reductions (indexed to Dec 2012)

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

$5.50

$6.00

30

40

50

60

70

80

90

100

110

120

130

Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15

Henry H

ub Spot Price$ per M

illion Btu

Prod

ucer

Pric

e In

dex

by In

dust

ryD

ec. 2

012

= 10

0

Drilling

Frac Sand

Support

Henry Hub

From Feb 2014 to Feb 2016 the PPI by industry classification showed the following changes:• Rates for drilling activities, which represent fees for contractors to drill oil and gas wells, declined by 28.7%• Rates for support activities, which include surveying, cementing, casing, and treating wells, declined by 3.1%• The price of sands primarily used for hydraulic fracturing declined 20.0%

Source: United States Bureau of Labor Statistics, Industry Producer Price Indexes and EIA Henry Hub Spot Price

10

Marcellus Shale Drilling PermitsDrilling Permit Count and Natural Gas Production By Quarter

0

2

4

6

8

10

12

14

16

18

20

0

200

400

600

800

1,000

1,200

1,400

Production (Bcf/d)

Perm

it C

ount

Source: DI Analytics, DrillingInfo and EIA Drilling Productivity Report

11

Drilled but Uncompleted WellsGas Region DUC Well Inventory

-

200

400

600

800

1,000

1,200

1,400

Num

ber o

f DU

Cs

Haynesville Marcellus Utica

Source: U.S. Energy Information Administration, Drilling Productivity Report, September 2016.

12

U.S. Natural Gas Production ProjectionsU.S. Natural Gas Production (Tcf) by EIA Case, 2015-2040

0

10

20

30

40

50

60Tr

illio

n C

ubic

Fee

t

Reference Case 2016 Reference Case 2015 High Oil PriceLow Oil Price High Resource Case Low Resource Case

Source: U.S. Energy Information Administration, http://www.eia.gov/naturalgas/data.cfm and Annual Energy Outlook 2016

Alternative price and resource/technology assumptions could be quite different

13

U.S. Natural Gas Supply SourcesUnconventional Gas: Major Impact on U.S. Gas Supply Sources (Reference Case)

0

20

40

60

80

100

120

140

0

10

20

30

40

50

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

Billion C

ubic Feet per Day

Trill

ion

Cub

ic F

eet

History Projections

Shale gas

Tight gas

Alaska

U.S. shale gas grows to 69 percent of total U.S. production by 2040

Other lower 48 onshore

Coalbed methaneLower 48 offshore

Source: EIA, Annual Energy Outlook 2016, Tables 13 and 14

14

U.S. Shale Gas ProductionU.S. Dry Shale Gas Production – Through June 2016

0

5

10

15

20

25

30

35

40

45

2000 2002 2004 2006 2008 2010 2012 2014 2016

Bill

ion

Cub

ic F

eet p

er D

ay Marcellus (PA & WV)Eagle Ford (TX)Haynesville (LA & TX)Barnett (TX)Fayetteville (AR)Woodford (OK)Bakken (ND)Antrim (MI, IN, & OH)Utica (OH, PA & WV)Rest of US 'shale'

Marcellus region provides nearly 40% of total U.S. shale gas production

Source: EIA, Natural Gas Weekly, Released July 2016

15

Gross Natural Gas Withdrawals by StateNatural Gas Withdrawals by State, Bcf/d

0

5

10

15

20

25

30B

cf/d

Texas Federal GOM Wyoming Oklahoma New Mexico Louisiana

Alaska Colorado Ohio Pennsylvania West Virginia

Pennsylvania, West Virginia and Ohio production continues to increase due to new wells being brought online in the Marcellus & Utica shale plays.

Source: EIA, Monthly Natural Gas Gross Production Report, July, 2016

16

Natural Gas Production ShiftsU.S. Natural Gas Production in Jan. 2006, Bcf/d

9.24 Bcf/d

7.93 Bcf/d

4.41 Bcf/d

4.41 Bcf/d

3.65 17.03 Bcf/d

5.62 Bcf/d

3.34 0.25

0.59

0.50

Source: EIA, Annual Energy Outlook 2012 and Monthly Natural Gas and Petroleum Report, July 31, 2012

17

Natural Gas Production ShiftsU.S. Natural Gas Production, Jan. 2006 compared to Jan. 2016, Bcf/d

4.46 Bcf/d

3.66

5.34 Bcf/d

22.82 Bcf/d9.64

Bcf/d

3.51Bcf/d

3.23 6.90Bcf/d

5.13 Bcf/d34

%

41%

56%

5.03Bcf/d

1,33

2%

4%

3.51Bcf/d

4.63Bcf/d

39%

3.51Bcf/d

636%

14.23 Bcf/d 2,

312%

Source: EIA, January Monthly Natural Gas and Petroleum Report

18

Natural Gas Pipeline Miles and CapacityAnnual Addition of Natural Gas Pipeline Miles and Capacity, Northeast Region vs. Total U.S. (2000–2020)

05101520253035404550

0

1,000

2,000

3,000

4,000

5,000

6,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Capacity Added (B

cf/d)Mile

s of

Pip

elin

e Ad

ded

Northeast Miles Total U.S. Miles Northeast Capacity Total U.S. Capacity

*Announced

*(Not all announced pipelines will be built)

Source: EIA, http://www.eia.gov/naturalgas/data.cfm#pipelines

19

Natural Gas Infrastructure DevelopmentMajor Natural Gas Pipeline Capacity Additions in the Northeast

EastMidwest

~20 Bcf/d of new natural gas pipeline takeaway capacity from 30+ pipeline builds, expansions and reversals to move gas out of the Appalachian basin by 2019.

Source: RBN Energy and EIA

20

Natural Gas ConsumptionU.S. Natural Gas Consumption by Sector through 2040 (Reference Case)

4.62 4.58

3.22 3.690.93 1.70

9.6111.96

9.09

11.82

0

5

10

15

20

25

30

35

40

2005 2015 2020 2025 2030 2035 2040

Trill

ion

Cub

ic F

eet

Residential

Commercial

Transportation**

Industrial*

Electric Power

Natural gas consumption growth is led by electricity generation and industrial uses; natural gas use rises in all sectors except residential

History Projections

*Includes combined heat-and-power and lease and plant fuel**Includes pipeline fuel

Source: U.S. Energy Information Administration, http://www.eia.gov/naturalgas/data.cfm and Annual Energy Outlook 2016

21

Natural Gas Prices Versus DemandHenry Hub Spot Prices ($/MMBtu) vs. Total Consumption & Production (Tcf)

0

5

10

15

20

25

30

35

40

45

$0

$2

$4

$6

$8

$10

$12

$14

Tcf

$/M

MB

tu (2

015$

)

Henry Hub Price

Total Consumption

Historical AEO 2016 Forecast

Total Production

Source: U.S. Energy Information Administration, http://www.eia.gov/naturalgas/data.cfm and Annual Energy Outlook 2016

22

U.S. Natural Gas Imports and ExportsU.S. Natural Gas Imports and Exports, (Reference Case) Tcf

Lower 48 LNG exports

-6

-4

-2

0

2

4

6

8

10

12

14

16

2000 2005 2010 2015 2020 2025 2030 2035 2040

Lower 48 states LNG exports

Pipeline imports from Canada

LNG imports

2015History Projections

U.S. natural gas exports reflect the spread between domestic natural gas prices and world energy prices

Alaska LNG exports

Source: EIA, Annual Energy Outlook 2016, Tables 13 and 14

23

Thank You