© 2016 IHS

Presentation

ihs.com

IHS

Struggling to Find Balance

North American Natural Gas and Crude Oil Markets:

Ed Kelly, Managing Director, +1 832-209-4524, ed.kelly@ihs.com

February 2016

ENERGY

IHS Presentation to the 2016 Gas/Electric Partnership Conference Houston, Texas, February 3, 2016

© 2016 IHS 2

The North American Gas Market: Will demand

ever catch up?

© 2016 IHS 3

Searching for demand to balance supply

Market balance turns toward lower prices

© 2015 IHS

50502-S4

Source: IHS Energy

Utica

shale

El Nino

Winter

© 2016 IHS

4.00

3.00

2.00

1.00

0.00

-1.00

7.00

6.00

-7.00

5.00

1,000 1,500

-8.00

-9.00

500

8.00

2,000

-2.00

-3.00

-4.00

-5.00

-6.00

Avera

ge B

reak

-Even

$/M

cf

Tcf

Marcellus PA

Haynesville

Bakken

Utica

Marcellus

WV

Montney

Wolfcamp Delaware

Eagle Ford

Wolfcamp Midland

Horn River

Wattenberg

Anadarko Wash

Woodford Cana

Woodford Arkoma

Cotton Valley

SCOOP/STACK

Barnett

Upper Devonian

Anadarko

Pennsylvanian

N Am Gas Resource Chart:

Reserves and Cost

• ~ 850 Tcf at $3.00

• ~ 1350 Tcf at $4.00

© 2016 IHS

Key takeaways–Big picture

• IHS Energy’s new supply forecasting methodology is showing a massive resource base that could

potentially continue getting bigger with improving well EURs and a Utica play that still hasn’t been

proven up.

• Well costs and breakeven prices continue to fall and now look to stay below $4/MMBtu in real terms

through 2040.

• Upstream transition from exploration to manufacturing type operation means we can drill it up faster

than we can grow demand or build infrastructure.

• Power generation demand growth is real but the industry still hasn’t adequately dealt with how to pay

for firm supply for lower load factor generation, necessary for grid reliability.

• Massive pullback in rig activity is causing well costs to fall. Slower long term demand growth argues

against much pricing pressure in the future.

• The gas market was somewhat in balance in summer 2015 but fall Marcellus/Utica supply surge drove

storage balances to record levels and into injection constraints.

• North America and global energy markets (oil, coal, LNG, NG) expected to be demand-constrained

with excess capacity pressuring utilization levels.

• The North American market is looking at long-term gas-on-coal and gas-on-gas competition.

5

© 2016 IHS

40

45

50

55

60

65

70

75

80

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

US lower 48 dry gas production growth

Notes: Bcf/d = billion cubic feet

Source: EIA and IHS Energy © 2016 IHS

Bc

f/d

US lower-48 gas production growth

6

Several years of

production at

around 50 Bcf/d

Barnett,

Fayetteville,

Woodford shales

dominate growth

January 2007

49.7 Bcf/d Hurricanes Katrina, Rita

Hurricane Ike

September 2009

54 Bcf/d

57% fall in rig count

drives 3% reduction in

production

Haynesville,

Marcellus shale

plays drive

growth

Shift to wet gas and

oil drilling

Outlook

December 2014

73.7 Bcf/d, up over

24 Bcf/d from

January 2007

© 2016 IHS

-4

-2

0

2

4

6

8

10

12

14

16

18

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

US Lower 48 Canada

Projected supply growth in the US Lower 48 and Canada (from Jan 2014 levels)

Source: EIA, Canadian pipeline data scrapes, IHS Energy © 2016 IHS

Bc

f/d

North American production growth centers on the Marcellus/Utica

Marcellus/Utica infrastructure

expansions

7

© 2016 IHS 8

IHS Energy has implemented a quintiles-based North

American gas supply forecast model

Performance Evaluator categorization of Marcellus wells by quintile per peak

production in barrel oil equivalent

© 2016 IHS

Source: IHS

Peak production (boe)

1st Quintile

2nd Quintile

3rd Quintile

4th Quintile

5th Quintile

© 2016 IHS

New US lower-48 supply outlook focuses more

production growth in Appalachia

0

10

20

30

40

50

60

70

80

90

100

110

120

130

20

14

20

16

20

18

20

20

20

22

20

24

20

26

20

28

20

30

20

32

20

34

20

36

20

38

20

40

Other Bakken Barnett

Cotton Valley Eagle Ford Fayetteville

Haynesville Marcellus Major Permian Plays

Pinedale/Jonah Utica Woodford/SCOOP

October 2015 lower-48 natural gas

productive capacity outlook

Source: IHS Energy, IHS North American Supply Analytics, IHS North American

Performance Evaluator © 2015 IHS

Bcf/

d

0

10

20

30

40

50

60

70

80

90

100

110

120

130

20

14

20

16

20

18

20

20

20

22

20

24

20

26

20

28

20

30

20

32

20

34

20

36

20

38

20

40

Other Bakken Barnett

Cotton Valley Eagle Ford Fayetteville

Haynesville Marcellus Major Permian Plays

Pinedale/Jonah Utica Woodford/SCOOP

September 2015 lower-48 natural gas

productive capacity outlook

Source: IHS Energy, IHS North American Supply Analytics, IHS North

American Performance Evaluator © 2015 IHS

Bcf/

d

9

© 2016 IHS

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

bc

f/d

Marcellus PA Marcellus WV Utica Barnett Eagle Ford

Fayetteville Haynesville Permian plays Smaller plays DUC

Other - Dry Gas Other - Wet Gas Other - Gassy Oil Other - Oil CBM

GoM Deep GoM Shelf

Source: IHS© 2015 IHS

Sustained lower prices and increasing focus on capital

discipline keeping a lid on near-term production growth

10

Marcellus PA

US total gas production by quarter

© 2016 IHS

75 74

• The Marcellus and Utica

shales are the primary

drivers of production growth

through the forecast period.

Marcellus and Utica

productivity gains outstrip

infrastructure growth in the

near-term, keeping the

regional basis depressed.

Weather could also play a

role as forecasts indicate

the possibility of a warm

winter.

• IHS projections for two

quarters of sub-$45 WTI oil

prices is a major component

of the outlook for associated

gas.

• Increased focus on capital

discipline in 2016 in both oil

and gas directed drilling will

be a key factor affecting

development plans and rig

counts.

73

© 2016 IHS

-

10

20

30

40

50

60

70

80

90

100

bcf/

d

Associated Gas Marcellus PA Marcellus WV Utica BarnettFayetteville Haynesville Smaller Plays DUCs Other - Dry GasOther - Wet Gas CBM GOM Deep GOM Shelf

Source: IHS © 2015 IHS

Full US gas production with associated gas

11

US total gas production by major contributing sources

© 2016 IHS

• Using play-level production

data, IHS estimates

associated gas at ~25% of

total Lower-48 production.

Near-term, associated gas

contributions are projected

to fall due to an oil drilling

decline driven by low oil

prices.

• A rebound in associated gas

volumes is forecast to begin

in late-2016/early-2017.

• Increasing activity in the

Eagle Ford and Permian

Unconventionals are the

key drivers of associated

gas through the forecast

period.

Associated Gas

Marcellus PA

© 2016 IHS

North American gas demand will surpass 140 Bcf/d by

2040

12

0

15

30

45

60

75

90

105

120

135

150

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

Residential Commercial Industrial Power Vehicles LNG exports Mexico exports Other

North American natural gas demand

Source: IHS Energy, EIA and Statistics Canada © 2016 IHS

Bc

f/d

© 2016 IHS

Components of North American gas demand growth—

A longer-term slowdown

13

-10

0

10

20

30

40

50

60

70

80

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

Residential Commercial Industrial Power Vehicles Other LNG Exports MX Exports

North American gas demand growth over 2010 levels

Source: IHS Energy, EIA and Statistics Canada © 2016 IHS

Bc

f/d

3.4 Bcf/d 1.4 Bcf/d

© 2016 IHS

Future pipeline expansion

14

Future natural gas infrastructure

© 2015 IHS

Note: UC = Under construction.

Source: IHS Energy, CFE, CRE

Existing–NPS

Existing–Third-party pipelines

Third-party pipelines – UC/Awarded

Proposed or tender

Waha 1

2

3

4

5

6

7 8 9

12

18

19

20 17

14

13

11

Nueces

16

15

10

Pipeline

1 Sasabe – Guaymas

2 Guaymas – El Oro

3 El Oro – Mazatlan

4 Ojinaga – El Encino

5 El Encino – La Laguna

6 Waha – Presidio

7 Waha – San Elizario

8 San Isidro-Samalayuca

9 Samalayuca – Sásabe

10 Tuxpan – Tula

11 Supply to BCS

12 Colombia – Escobedo

13 Tula-Villa de Reyes

14 Villa de Reyes – Guadalajara

15 Texas – Tuxpan

16 Nueces – Brownsville

17 Laguna – Aguascalientes

18 Los Ramones I

19 Ramones II – North

© 2016 IHS

Pipeline exports to Mexico will reach 5.6 Bcf/d by 2025,

double the 2015 levels

15

0

1

2

3

4

5

6

2010 2013 2016 2019 2022 2025

US lower-48 net pipeline exports to Mexico

Source: IHS Energy, EIA © 2016 IHS

Bc

f/d

© 2016 IHS

North American LNG projects in the current outlook

North American regasification facilities and advanced liquefaction projects

© 2016 IHS

40802-1B_02 11

Source: IHS Energy

16

Potential export site

Existing regas and

potential export site

Under-construction

export site

© 2016 IHS

North American LNG exports in the current outlook

signs point to a potentially looser market

17

0

2

4

6

8

10

12

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Canada capacity Canada volumes US lower-48 capacity US lower-48 volumes

US lower 48 and Canada liquefaction capacity and exports

Source: IHS Energy © 2016 IHS

Bc

f/d

© 2016 IHS

Rapid demand growth leads to higher natural gas prices, but

they remain under $4 per MMBtu until late 2021

18

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

$5.50

$6.00

$6.50

Jan-14 Dec-14 Nov-15 Oct-16 Sep-17 Aug-18 Jul-19 Jun-20 May-21 Apr-22 Mar-23

Marginal cost range 2 Henry Hub

IHS forecast, January 2016 NYMEX, 11 January 2016

January 2016 Henry Hub history and forecast

Notes: MMBtu = million Btu.

Source: IHS, CME, Intelligence Press © 2016 IHS

$/M

MB

tu

OUTLOOK

© 2015 IHS 19 Client Name | Report Title | Report Type | Revision Number | MM YYYY

Crude Oil Markets – Closer to Rebalancing

© 2016 IHS

Current low oil prices are reducing upstream investment –

eventually oil supply will drop to meet demand

© 2016 IHS

Balance will (eventually) be reached and the price will rise materially

• The low oil prices are being met with banks and other analysts revising down their near- term price forecasts (which IHS has also done) along with extending their views of the depth and breadth of the price decline (which IHS is not doing at this time).

• These are the key data points we are watching to help inform us if we need to adjust our base case to an extended low price track rather than a recovery year

• US production declines: Relatively slow shale slowdown has been offset with higher Gulf of Mexico production. These declines are expected to continue in our current base case.

• Iran’s return: We expect another ~400,000 b/d from Iran by mid-year. We are watching for signs of stronger and sustained production increases as well as the potential to trigger an active market share battle with Saudi Arabia which causes them to increase production even further.

• Non-OPEC/non-US: We forecast no significant growth in this supply source and potentially declines, expecting an end to the production growth caused as some projects have come on slightly faster and field maintenance was shortened.

• Demand: Despite stronger headline economic growth, we do expect slower demand growth this year, but at 1.2 MMb/d, it is still sufficient to tighten the market at this level when combined with lower production.

• Stocks: One of the key assumptions in some analysts earlier low price predictions was “running out of storage space” which would indicate a very high contango, pushing the prompt price downward. While stocks are up, there is still an indication of available storage capacity.

• Longer term, to move to a lower price track, costs will need to fall even further, allowing investment to continue.

21

© 2016 IHS

Benchmark crude price outlook Brent will lower to $46.46/bbl in 2016, rising to $55.71/bbl by 2017

22

Assumptions

Low prices continue to put pressure on

US production

OPEC maintains production and

incremental Iranian barrels begin

entering the market . Additional 400,000

b/d by mid-2016.

Demand growth slows relative to 2015’s

strong growth but remains well above 1

MMb/d.

Price forecast risks Upside: Iranian barrels do not enter the

market in large quantities. Conventional

production begins to slow more rapidly than

expected. Financial short squeeze pushes

price up in near term.

Downside: Continued bearish news without

a break, balance does not occur until 2017

as production remains too high from US,

non OPEC, non US.

$25

$45

$65

$85

$105

$125

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

Brent LLS WTI

Brent and other benchmark crude oil price outlook to 2017

Qu

art

erl

y a

vera

ge p

rice p

er

barr

el

Source: IHS; Argus Media Limited

Notes: LLS = Louisiana Light Sweet. WTI = West Texas Intermediate.

Outlook

© 2016 IHS

© 2016 IHS

Source: IHS, Argus Media Limited

© 2016 IHS

Despite the oversupply of crude oil we see right now, future barrels

are going to be more expensive to find and produce

0

10

20

30

40

50

60

70

80

90

2005 2010 2015 2020 2025 2030 2035 2040

Shale Found & in productionFound & under development Found & under approvalYet to find

World Crude Oil Development Forecast

Source: IHS Energy © 2015 IHS

Mil

lio

n B

arr

els

pe

r D

ay

© 2016 IHS

US tight oil production will likely peak in the late 2020s

0

1

2

3

4

5

6

7

8

2005 2010 2015 2020 2025 2030 2035 2040

Bakken Eagle Ford Permian Plays Niobrara Woodford Utica Other

US Tight Oil Production

Source: IHS Energy

Mil

lio

n b

arr

els

pe

r d

ay

© 2015 IHS

© 2016 IHS

Thin OPEC spare capacity will become a serious issue in late-2016

25

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2009 2010 2011 2012 2013 2014 2015 2016 2017

OPEC spare crude oil production capacity

Source: IHS

Millio

n b

arr

els

pe

r d

ay

© 2016 IHS

© 2016 IHS

35%

36%

37%

38%

39%

40%

41%

42%

43%

44%

45%

0

10

20

30

40

50

60

70

80

90

100

2010 2015 2020 2025 2030 2035 2040

Non-OPEC OPEC % OPEC

OPEC & Non-OPEC Crude Production (Ex. Seg. Condensates)

Source: IHS © 2015 IHS

Mil

lio

n b

arr

els

per

day

• Canadian oil sands development

growth is reduced but not reversed

• Brazil’s production will be delayed due

to high upstream costs, project delays,

currency devaluation, reduced oil prices

and ongoing corruption scandal

• Kazakh supply growth depends on

successful restart of the Kashagan field,

likely post 2025

• Mexico’s energy reform may stabilize

production in the next decade but

declines will continue medium term

• Low prices will exacerbate the North

Sea production decline

• Russian crude oil output will decline

slowly due to sanctions and oil prices

• Chinese output expected to remain

stable

The call on OPEC production will increase as non-OPEC supply

sources are unable to keep pace with demand

Saudi: only OPEC country intentionally not operating

at capacity, but higher production than in recent years

Iran: Recent lifting of sanctions may increase

production above this forecast

Iraq: Sectarian tensions will delay crude production

Venezuela: economic mismanagement deferring

needed investments

Nigeria: hard to find capital for deepwater projects

Libya: failed state - expect production below capacity

Non-OPEC

OPEC

© 2016 IHS

The base case for Brent crude oil included an oversupply mini-

cycle following a recovery period

© 2016 IHS

• Saudi crude oil output could be above our projected 10 million barrels per day,

thus lowering global spare capacity below 2.5 million barrels per day and exposing global

markets to potentially very high prices in the case of a market disruption

• IHS assumes that North American tight oil production crests next decade and that

the scale of its success is not replicated elsewhere

• IHS assumes that key OPEC countries will be able to overcome their critical

aboveground issues; these include Venezuela, Iraq, Iran and Libya

• We expect crude oil growth to be lighter through 2025 driven by North American tight

oil; longer term the light sweet crude growth will subside and be replaced by heavier oil;

an extension of the North American tight oil production would impact our assumptions

around light heavy spreads and the call on OPEC

• The Rivalry (Base Case) scenario assumes competition among primary energy

sources, with natural gas and renewables gaining share among transportation

fuels. Failure of natural gas and renewables to achieve that higher share will likely

increase the call on crude oil.

Risks to the crude oil forecast

IHSTM

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