The Changing World of Natural Gas – A New Vision for North America

DI SPUTES & I NVEST I G ATI ONS • ECONO MI CS • F I NANCI AL ADVI SORY • MANAGEMENT CONSULT I NG

©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy.

April 17, 2013

The Changing World of Natural Gas – A New Vision for North America

LNG 17George R. Brown Convention Center1001 Avenida de las AmericasHouston, Texas 77010

2©2012 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. E N E R G Y

Important Notice

This presentation was prepared by Navigant Consulting, Inc. exclusively for the benefit

and internal use of the LNG 17 and its attendees at the George R. Brown Convention

Center on April 18, 2013. No part of it may be circulated, quoted, or reproduced for

distribution without prior written approval from Navigant. This presentation is incomplete

without reference to, and should be viewed solely in conjunction with the presentation

provided by Navigant.

April 18, 2013

©2012 Navigant Consulting, Inc. All rights reserved. Navigant is not a certified public accounting firm and does not provide audit, attest, or public accounting services. See www.navigantconsulting.com/licensing for a complete listing of private investigator licenses. Investment banking, private placement, merger, acquisition and divestiture services offered through Navigant Capital Advisors, LLC., Member FINRA/SIPC.

http://www.navigantconsulting.com/licensing


Navigant’s Global Geographical Presence

Navigant Overview

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Legend

Office includes Energy PracticeOffice includes other practices

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e

Montreal

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Boulder


Company Overview

Navigant is a Global Consulting Firm Providing Services in the Energy, Construction, Healthcare and Financial Industries.

North American Dispute &

» Publicly traded since 1996 (NYSE: NCI)» Combination of technical skills and deep industry

knowledge» Large engagement capability – more than 2,500

employees in 40 principal offices globally» 2012 revenues of $844 million» Nationwide platform, international presence» Independent – rigorously objective; no audit opinions

to defend

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Valuation and Financial Risk

Management - US

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Global Investigations and Compliance


According to the EIA, U.S. Annual Average Natural Gas Production at the End of 2012 Was at its All Time High, Exceeding the Previous High of 21.7 in 1973 by 2.3 Tcf.

U.S. Historical Annual Average Dry Gas Production

14,000

16,000

18,000

20,000

22,000

24,000

26,000

Bcf

21.7 Tcf

24.0 Tcf

1930 1960 19900

5,000

10,000

15,000

20,000

25,000

30,000

Bcf

Source: EIA/ Navigant

Source: EIA/ Navigant


Abundant Natural Gas has Changed the Vision of the North American Energy Future.

N.A. Shale Map

Source: EIA


U.S. Natural Gas » Supply Assessment

In Navigant’s North American Natural Gas Supply Assessment Released In July 2008, we first indicated what was to come.


Industry/Governmental Associations Have Confirmed What Navigant First Identified Years Ago (in 2008).

• In our “North American Natural Gas Supply Assessment” we estimated U.S. natural gas resources at over 2,200 Tcf, driven significantly by shale gas resources (842 Tcf) becoming technically recoverable, as well as simply being recognized. At current consumption rates, that is more than 90 years of supply.

• Last week, the Potential Gas Committee estimated U.S. potential future natural gas supply is almost 2,700 Tcf (mean) (based on 2,384 Tcf of potential resources plus 305 Tcf of proved reserves), or more than 110 years of supply at current consumption rates. The PGC’s latest increase is driven by a more than 50% increase in its shale gas resource estimate, from 687 Tcf (2010) to 1073 Tcf in two years, to more than double EIA’s current estimate of 482 Tcf.

Shale Abundance Confirmed

Source: Potential Gas Committee / Colorado School of Mines Report, 4/9/13


U.S. Natural Gas » U.S. Gas Shale Production

In 2012 US shale production was up to over 28 Bcf per day – shale making up 43% of a 65 Bcfd US gas market.

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

5

10

15

20

25

30

0.9 0.9 1.0 1.2 1.4 1.5 1.7 2.2 2.9

5.5

7.9

10.6

16.0

23.3

28.2

Bcfd


US Shale Gas Production is Furthermore Expected to Continue to Increase Over the Long Term

U.S. Natural Gas » U.S. Gas Shale Production

Source: Navigant’s North American Natural Gas Market Outlook, Fall 2012

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

0

10

20

30

40

50

60

70Woodford

Utica

Fayetteville

Barnett

Eagle Ford

Haynesville

Marcellus


Comparative U.S. Oil vs Gas

Horizontal Gas Rig Counts Fell Significantly in 2012. A Potential Risk Factor.

Jan-0

8

Jul-0

8

Jan-0

9

Jul-0

9

Jan-1

0

Jul-1

0

Jan-1

1

Jul-1

1

Jan-1

2

Jul-1

2

Jan-1

30

200

400

600

800

1,000

1,200

1,400

1,600

1,800

U.S. Rig Count Split

GAS HORZ Gas DIR GAS VERT OIL

Co

un

t

Sources: Navigant / Schlumberger

Oil Rigs Exceed

Gas Rigs


US Gas Prices Have Responded to Supply Abundance

Natural Gas Prices

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00Historical Monthly Average Henry Hub Gas Price

$/M

MB

tu

2008

Pre-Shale Revolution

Shale Revolution


Gas Prices Have Plummeted From Prices of Over $13 per MMBtu in August 2008 to $2.03 per MMBtu at Henry Hub in May 2012, Before Returning to Current Prices (4/9/13) for May 2013 contracts of $4.02 per MMBtu for Henry Hub Natural Gas and $94.20 ($16.17 per MMBtu) for WTI Oil—An Oil Price About 4X the Gas Price per MMBtu Equivalent.

Gas Price Changes

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13$0

$2

$4

$6

$8

$10

$12

$14

$0

$4

$8

$12

$16

$20

Average Monthly Natural Gas and Crude Oil Prices

Sumas AECO-C Henry Hub

$/M

MB

tu

WT

I ($

/MM

Btu

)

Sources: Navigant/Platts


Navigant’s U.S. Forecast Gas Shale Production to 2020

Despite Recent Switching to Oil Directed Drilling, Navigant Expects Strong Gas Shale Production Growth to Continue - To a 57% Share of Total Production by 2020 – From 7% in 2006 – in Only 15 Years.

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

0

10

20

30

40

50

60

70

80

90

100

U.S. Dry Production by Type

Bcfd

Shale

Conventional7% Shale93% Conven-tional

57% Shale43% Conven-tional

Source: Navigant’s North American Natural Gas Outlook, Fall 2012


» So as we’ve seen, the dramatic increase in domestic gas shale has had significant fundamental consequences on the North American gas market over the last 5 years.

» The new ‘manufacturing model’ of gas shale production has reformed gas pricing and may assure low gas prices for the long term.

The Gas Game Has Changed Over the Last Five Years.

The Gas Story Ahead

Source: Navigant’s North American Natural Gas Outlook, Fall 2012

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00Monthly Prices

Oneok, Okla Kern River, Opal plant

SoCal Gas Carthage Hub

Dominion, South Point PG&E City-Gate

TCPL Alberta, AECO-C Henry Hub

Real$

/MM

Btu


The New Paradigm – LNG Exports from North America?

Source: Canadian National Energy Board

» Gas shale potential is situated across North America, including Canada, which has three approved projects at Kitimat, BC.

» Cheniere Energy’s Sabine Pass announced sale to its 6th major customer (Centrica) in March 2013 , following announced sales to BG, Gas Natural Fenosa, Korea Gas, GAIL, and to Total. The facility is likely to be the first US LNG export project on-line, in 2015.

» Currently, 17 major U.S. (2 West Coast, 2 East Coast, 13 Gulf) and 3 Canadian projects with combined capacity of about 35 Bcfd are going through the export and construction approval process.

» Not all projects are likely to go ahead.

LNG Exports


North American LNG Exports—Approximately 30 Bcfd at DOE and 5 Bcfd at NEB Filed or Approved

Navigant has assisted in analysis for 8 out of 17 US LNG export projects (highlighted)

13

123

46 5 7

8

9

11

12

14

1013151617

No. Project Location Capacity (Bcfd) Project Sponsor Regulatory Status

1 Kitimat, BC 0.75 / 1.5 Apache Canada Ltd. Approved by NEB

2 Douglas Island, BC 0.23 BC LNG Export Cooperative Approved by NEB

3 Kitimat, BC 3.4 Shell / Mitsubishi / Mitsui Approved w/ NEB

4 Cameron Parish, LA 2.2 (+.52) Cheniere - Sabine Pass LNG DOE Non-FTA Approved, FERC Approved (4 Trains)

5 Freeport, TX 2.8 Freeport LNG (2) Filed w/ DOE

6 Corpus Christi, TX 2.1 Cheniere - Corpus Christi LNG Filed w/ DOE

7 Lake Charles, LA 2.0 Southern Union Filed w/ DOE

8 Cove Point, MD 1.0 Dominion - Cove Point LNG Filed w/ DOE

9 Coos Bay, OR 1.2 FTA/0.8 non-FTA Jordan Cove Energy Project Filed w/ DOE

10 Hackberry, LA 1.7 Sempra - Cameron LNG Filed w/ DOE

11 Brownsville, TX 2.8 Gulf Coast LNG Export LLC Filed w/ DOE

12 Warrenton, OR 1.25 Oregon LNG Filed w/DOE

13 Pascagoula, MS 1.5 Gulf LNG Liquefaction Company, LLC Filed w/DOE

14 Elba Island, GA 0.5 Southern LNG Company Filed w/DOE

15 Calhoun County, TX 1.38 Excelerate Liquefaction Solutions I, LLC Filed w/DOE

16 Sabine Pass, TX 2.6 Golden Pass Products LLC Filed w/DOE

17 Offshore LA 3.22 Main Pass Energy Hub, LLC Filed w/DOE (FTA)

18 Plaquemines Parish, LA 1.07 CE FLNG, LLC Filed w/DOE

19 Lake Charles, LA 0.54 Magnolia LNG Filed w/DOE (FTA)

20 Corpus Christi, TX 1.09 Pangea LNG Filed w/DOE (FTA)

1819 20


North American West Coast

LNG Export Assumptions


1 Kitimat, BC 0.75 / 1.5 Apache Canada Ltd. Approved by NEB2 Douglas Island, BC 0.23 BC LNG Export Cooperative Approved by NEB3 Kitimat, BC 3.4 Shell Approved by NEB

9 Coos Bay, OR 1.2 FTA; 0.8 non-FTA Jordan Cove Energy Project Filed w/ DOE

12 Warrenton, OR 1.25 Oregon LNG Filed w/DOE Valdez, Alaska 2.5 Exxon TCPL Conoco PotentialKitimat, BC TBA Alta Gas/Idemitsu Kosan PotentialPrince Rupert, BC 3.0 Progress Energy/Petronas PotentialPrince Rupert, BC TBA BG PotentialPrince Rupert, BC TBA Nexen, INPEX PotentialPrince Rupert, BC TBA SK E&S (Korea) PotentialPrince Rupert, BC TBA Woodside (Australia) PotentialPrince Rupert, BC TBA Imperial/Exxon Potential


US East Coast



8 Cove Point, MD 1.0 Dominion - Cove Point LNG Filed w/ DOE14 Elba Island, GA 0.5 Southern LNG Company Filed w/DOE


Gulf Coast


No. Project Location Capacity (Bcfd)

Project Sponsor Regulatory Status

4 Cameron Parish, LA 2.2 Cheniere - Sabine Pass LNGDOE Non-FTA Approved, FERC Approved

5 Freeport, TX 2.8 Freeport LNG (2) Filed w/ DOE6 Corpus Christi, TX 1.8 Cheniere - Corpus Christi LNG Filed w/ DOE7 Lake Charles, LA 2.0 Southern Union Filed w/ DOE

10 Hackberry, LA 1.7 Sempra - Cameron LNG Filed w/ DOE11 Brownsville, TX 2.8 Gulf Coast LNG Export LLC Filed w/ DOE13 Pascagoula, MS 1.5 Gulf LNG Liquefaction Company, LLC Filed w/DOE 15 Calhoun County, TX 1.38 Excelerate Liquefaction Solutions I, LLC Filed w/DOE16 Sabine Pass, TX 2.6 Golden Pass Products LLC Filed w/DOE (FTA)17 Offshore LA 3.22 Main Pass Energy Hub, LLC Filed w/DOE (FTA)18 Plaquemines Parish, LA 1.07 CE FLNG, LLC Filed w/DOE19 Cameron Perish, LA 0.16 Waller Point LNG Filed w/DOE (FTA)20 Corpus Christi, TX 1.09 Pangea LNG Filed w/DOE (FTA)


Impact of U.S. LNG Exports to Domestic Gas PricesImpact of U.S. LNG Exports to Domestic Gas Prices

Navigant Has Found That U.S. LNG Exports Will Lead to Less Than a 10 Percent Increase in Henry Hub Prices Across All Projects Studied*. Such Price Increases Are Small in Comparison to Historical and Forecast Intrinsic Gas Price Volatility.

• In addition, percentage impacts are even less when compared to delivered gas prices. For example, the percentage increase versus Northwest Natural’s residential rate ($11.93/MMBtu) is closer to 1-2%.* Caution should be taken in reviewing the published results from multiple projects. (1) Due to the differences in the

underlying assumptions, forecasted price responses from different projects should not be directly compared. (2) Most listed LNG export projects are currently under regulatory review. It is unlikely that all projects will be approved. Navigant projects that the total U.S. LNG exports by 2020 will be in the range of 5-6 Bcfd. (3) Price increments from multiple LNG export projects should not be considered as additive.

Sabine Pass

Lake Charles

Corpus Christi

Cove Point

Jordan Cove

Oregon LNG

Gulf LNG

Southern LNG

HH Histor-

ical Volatil-

ity 2000-

12

HH Fore-casted Volatil-

ity 2012-

35

0%

10%

20%

30%

40%

50%

60%

70%Increase of Henry Hub Prices in Response to LNG

Export Projects

2020 2025 2030 2035


Constraining Factors include:

» Proliferation of emerging gas shale resources around the world, including large resources in many countries in Europe and in the Asian Pacific region.

» Existence of plentiful gas supply and LNG resources in Qatar and Australia. In Qatar, gas is produced at very low or zero cost due to value of being associated with high value oil production.

» Limited likely impact of the Panama canal expansion due to passage rates tied to arbitrage value of commodity going through the canal.

» Possible de-linkage of international LNG prices to oil over the long term, diminishing the market value of LNG exports.

In the End, the Development of LNG Export Projects in the U.S. Will Be Constrained by a Number of Factors, Mostly Linked to International Competition.

Not All LNG Export Projects Will Materialize

All things considered, Navigant estimates that total U.S. LNG exports will ultimately be in the range of 5-6 Bcfd, spread widely around the country and serving both Atlantic and Pacific basins--about 7% -9% of US gas demand at 70 Bcfd.


Implications and Challenges of U.S. LNG Exports

» LNG exports appear to offer a ‘solution’ to the current demand-constrained North American gas market, which is in need of sustainable markets to support supply abundance, thus fostering U.S. energy security.

» LNG exports would also provide: • economic benefits to the local region through job creation and to the

national economy through balance of trade and GDP enhancements,• environmental and climate change benefits (lower global GHG emissions),

and • a free market-solution to market needs, continuing the fundamental tenets

of free trade and market competition as key policies for the U.S., which has itself imported natural gas for many years.

» However, North American LNG export opportunities are not assured to last forever. The global natural gas and energy market is subject rapid change, and opportunities in the face of competitive developments may be fleeting. The challenge for LNG is to be able to seize the opportunity available now (by completing licensing, contracting, financing and permitting) and so by providing significant benefits to the U.S. and the U.S. natural gas market.

Implications and Challenges Ahead for North American LNG Exports

KeyC O N T A C T S


KeyC O N T A C T S


KeyC O N T A C T S


KeyC O N T A C T S


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E N E R G Y

Gordon Pickering | DirectorRancho Cordova, CA [email protected] direct

Gordon Pickering | DirectorRancho Cordova, CA [email protected] direct

Rick Smead | DirectorHouston, Texas [email protected] direct

Rick Smead | DirectorHouston, Texas [email protected] direct

The Changing World of Natural Gas – A New Vision for North America

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