CERI Commodity Report — Natural Gas

June-July 2014 CERI Commodity Report — Natural Gas

Hydrocarbon Gold under the Midnight Sun? exploration efforts will continue until 2018, with Jon Rozhon production potentially starting soon thereafter.

For all practical intents and purposes, the Western Figure 1: Yukon’s Eight Hydrocarbons Basins Canadian Sedimentary Basin (WCSB) ends abruptly at the 60th parallel, along the border between British Columbia and the Yukon Territory. North of 60° there has been little exploration for oil and gas for over 30 years. South of 60°, especially in areas such as the Montney basin, oil and gas activity is now as busy as it has ever been. The difference is especially visible from the air: within Alberta and British Columbia you can see - cut lines crisscrossing the landscape; flying over the Yukon – the renowned Land of the Midnight Sun – the wilderness to this day still appears almost untouched.

Of course, the geologic reality of the situation is that the WCSB extends further north, so there should be significant hydrocarbon resources within the Yukon. Governments know this, E&P companies know this, and so do stakeholders such as First Nations, land owners, and other local residents.

Northern Cross Energy, an affiliate of the Chinese National Overseas Oil Corporation (CNOOC), is one company that has been doing much work in the Yukon’s Eagle Plain basin. In 2011, boosted with a cash infusion from CNOOC, the company was granted exploration permits from the Government of Yukon and dedicated a Sources: Government of Yukon, CERI total of $22 million in work commitments. Since then, Northern Cross has spent more than $100 million in What will Northern Cross do with any discovered oil and Eagle Plain, and though the company states results of its gas resources? Chinese State-Owned Enterprises such as work “are still being analyzed”, their continued and CNOOC are busy throughout the world diversifying their 1 resource holdings with a view to ensuring the country’s increasing funding indicates cause for optimism. 2 Northern Cross’ website shows that the company’s energy security; supplying China with hydrocarbons is the aim. The Yukon assets, though presently small, should be seen as contributing in their own modest way CERI Commodity Report – Natural Gas to China and CNOOC’s goal. Northern Cross asserts that Editor-in-Chief: Dinara Millington ([email protected]) over the medium- to long-term, oil produced in the Contents Featured Article ...... 1 Yukon will “be treated to render it safe for transport then Natural Gas Prices...... 4 shipped to market.” Gas “is expected to be used to heat, Weather ...... 6 provide power, and possibly be sold to viable regional Consumption and Production...... 8 Transportation...... 10 markets if quantities are sufficient.” It appears, then, that Storage ...... 12 Eagle Plain oil could reach Asia, though natural gas may Liquefied Natural Gas ...... 15 not make it quite that far. In any event, CNOOC will be Drilling Activity ...... 17

Relevant • Independent • Objective Page 2 well-positioned in the Yukon and should be able looking to develop that basin, will be facing all of the eventually to use its first-mover advantage within the above constraints. Full economic analysis can be found territory to expand beyond Eagle Plain. within the report, but below are some estimates of major natural gas development costs. Focusing on the gas side of the equation, the benefits could be significant for the Yukon if Northern Cross’ In order to transport 50 MMcf/d of Eagle Plain gas to Eagle Plain holdings can be developed to their potential. Stewart Crossing – the nearest settlement fully Even if there is ultimately no export of natural gas to connected to the Yukon Grid – a 500+ km pipeline would contribute to the territory’s coffers, the Yukon would need to be built at a cost approaching $550 million. At profit from employment and revenues created by Stewart Crossing, an LNG liquefaction plant could be construction and operation of the enormous amount of constructed to serve power needs of off-grid mine sites infrastructure required to get gas to its internal markets: (the LNG would be transported by truck to the mines namely, the Yukon’s mines and electricity generation where it would power small, on-site generators), and a facilities. The environment would benefit, too. combined-cycle natural gas power generator could be Presently, much of the territory’s mining power needs installed to serve the increasing power needs of the are met by diesel imported from Alberta, but natural gas Yukon grid. These projects, when built, would each would present a low-cost, low-emission option to mine consume 12.5 MMcf/d of natural gas; the capital costs operators. Even now, before any wells have been drilled would be $35 million for the liquefaction plant and $65 or pipelines built in the Yukon, mines are looking to million for the electricity generation facility. The switch from diesel to natural gas. The largest mine remaining natural gas, 25 MMcf/d, could be transported development in the history of the Yukon, the Casino 125 km via a new lateral pipeline to serve the Mine, plans to run all of its operations on natural gas that requirements of the Casino Mine. The capital cost of this it plans to import as trucked LNG from British Columbia. pipeline would be in the order of $125 million. If domestic Yukon gas were to become available ata competitive price to the LNG, and it could be shipped by Well construction costs for the Eagle Plain would be pipeline directly to the Casino site, there could be an highest early on in order to drill enough wells to sustain assured market for the gas over the 20+ year lifetime of daily production of 50 MMcf from 2017 onwards. the mine. Figures 2 and 3 estimate yearly well requirements and costs, based on an average well cost of $3.6 million Tax and royalty revenues would be welcomed by the (calculated on a proxy vertical well located in Government of Yukon as two means to decrease reliance northeastern British Columbia). on Ottawa for funding. The Yukon was built on federal funding and is maintained through federal funding. Figure 2: Estimated Eagle Plain Well Requirements for Though it is difficult ever to envision a complete stop, it 50 MMcf/d Natural Gas Production is entirely possible funding could be adjusted downward at some point in the future. Likewise, there are First Nations within the territory that could benefit from oil and gas development on or nearby their lands, strengthening their financial position and becoming more self-reliant.

Building an oil and gas industry in the Yukon will be costly: there is no avoiding it. Infrastructure projects in northern Canada are usually expensive because of the harsh weather conditions, difficult terrain, high labour costs, and long or non-existent supply lines. Distance to markets for the final product is also a problem. The Source: CERI forthcoming CERI study “Economic Impacts of Natural Gas Development Within the Yukon Territory” investigates Eagle Plain natural gas development and finds that Northern Cross, or any other companies

Relevant • Independent • Objective Page 3

Figure 3: Estimated Yearly Eagle Plain Well Drill, One more hurdle that will need to be surmounted is land Case, and Completion Costs access for resource development. The Government of Total Costs Yukon designates lands as available, unavailable, or Year ($CDN 2014 millions) encumbered (unavailable for a period of time, not in 2017 183.6 perpetuity); this land status changes frequently. There are various reasons why some portions of Yukon’s 2018 32.4 hydrocarbon basins many be unavailable or encumbered, 2019 28.8 including regulatory restrictions, First Nations Treaty 2020 28.8 issues, national park land restrictions, and territorial park 2021 32.4 land restrictions. Any corporation looking to develop oil 2022 28.8 or gas in the Yukon must be on top of land access issues 2023 32.4 in order to mitigate project risk. Eagle Plain is right now 2024 28.8 one of the more open basins for development since 73 2025 32.4 percent of the area is available. Compare this to another 2026 28.8 hydrocarbons-rich basin, Liard, which in 2014 has less than 3 percent of its land open for development. 2027 28.8

2028 32.4 There are many reasons why the Yukon has seen so little 2029 50.4 hydrocarbon development over its history, and many 2030 36 reasons why the oil and gas industry does not today 2031 32.4 jump in with both feet. None of these facts appear to be 2032 32.4 dissuading Northern Cross from taking a long, hard look, 2033 36 though. In the end, if hydrocarbon development in 2034 32.4 general – and natural gas development in particular – is 2035 36 to go ahead north of 60° in the Land of the Midnight Sun, it will be based on the cooperation of local stakeholders, Source: CERI accessed resources of more than one basin, and the

efforts of more than one company. The above are estimates and could vary. The point to be made is this: Northern Cross has invested an impressive Endnotes sum so far in Eagle Plain natural gas, but in a region with 1This information and more is available within various no in-place natural gas infrastructure to speak of, getting presentations and news items published on the Northern Cross that gas into production and delivered to local customers website: http://www.northerncrossyukon.ca/ will require much more investment. To bring online 2CNOOC’s Chairman stated earlier this year that the company enough gas to ship overseas through a facility at, for plans on “ensuring [Chinese] national energy security and example, Haynes Alaska, the costs would be many times promoting national economic development” (2013 Annual higher still.3 Report, page 3). 3 LNG export is dealt with in depth in the CERI study.

Relevant • Independent • Objective Page 4

Jan-14 Jan-14 Jul-12 Jul-12 Chicago Southern California Jan-11

Jan-11

Henry Hub Jul-09 Jul-09 Henry Hub Henry Hub/Chicago Henry Jan-08 Jan-08 Differential Differential Henry Hub/Southern CaliforniaHub/Southern Henry Beginning of Next Month Spot Price (US$/MMBtu) Price Spot Month Next of Beginning Beginning of Next Month Spot Price (US$/MMBtu) Price Spot Month Next of Beginning Jul-06 Jul-06 9 7 5 3 1 Jan-05 9 7 5 3 1 Jan-05 -1 -1 -3 -5 -7 15 13 11

15 13 11

SOURCE:CERI, Platts Gas Daily Guide. Price SOURCE:CERI, Platts Gas Daily Guide. Price Jan-14 Jan-14 Jul-12 Jul-12 AECO-C Rockies C - Jan-11

Jan-11

Henry Hub Henry Hub Henry Jul-09 Jul-09 Henry Hub/AECO Henry Henry Hub/Rockies Henry Differential Jan-08 Jan-08 Differential Beginning of Next Month Spot Price (US$/MMBtu) Price Spot Month Next of Beginning Beginning of Next Month Spot Price (US$/MMBtu) Price Spot Month Next of Beginning Jul-06 Jul-06 8 6 4 2 0 Jan-05 9 7 5 3 1 Jan-05 -2 14 12 10 -1

15 13 11

SOURCE:CERI, Platts Gas Daily Guide. Price SOURCE:CERI, Platts Gas Daily Guide. Price

CERI Commodity Report - Natural Gas Page 5 7 6 5 4 3 2 1 0 60 50 40 30 20 10 0 BCFPD BCFPD Jan-14

Jan-14

Jan-13 Jan-13 Consumption Consumption Jan-12 Jan-12 Jan-11 Jan-11

Degree Days Degree

Degree Days Degree Commercial Consumption Commercial US Heating Degree Days vs Days Degree Heating US Jan-10 Jan-10 Residential and Commercial Consumption Commercial and Residential Jan-09 0 Jan-09 Canadian Heating Degree Days vs Residential and Residential vs Days Degree CanadianHeating 0 800 600 400 200 800 600 400 200 1,200 1,000 Degree Days Degree 1,200 1,000

Degree Days Degree

SOURCE:CERI, Canadian Gas Association,Statistics Canada. SOURCE:CERI, NOAA, EIA. D D N N O O 2014 S 2014 S A A 2013 J J 2013 J

M M 5-Year Avg. 5-Year A A 5-Year Avg. 5-Year M US Heating Degree Days Degree US Heating

Canadian Heating Degree Days Degree Heating Canadian F F J J 0 0 900 800 700 600 500 400 300 200 100 800 700 600 500 400 300 200 100

1,000

SOURCE:Canadian Association. Gas SOURCE:NOAA.

Relevant • Independent • Objective Page 6

SOURCE:Environment Canada. SOURCE:NOAA.

CERI Commodity Report - Natural Gas

Page 7

SOURCE:NOAA.

SOURCE:NOAA. SOURCE:Environment Canada.

Relevant • Independent • Objective Page 8 Jan-14 Jan-14 Texas E. Coast E. Jan-13 Jan-13 SK GOM Federal Waters Federal GOM Jan-12 Jan-12

Jan-11 Jan-11 Louisiana By Province/Region (Bcfpd) Province/Region By BC, Yukon, NWT Yukon, BC, Jan-10 Jan-10

Canadian Marketable Production Marketable Canadian

US US (Bcfpd)ProductionMarketable US Total US Jan-09 Jan-09 8 6 4 2 0 0 20 18 16 14 12 10

80 70 60 50 40 30 20 10

SOURCE:Statistics Canada, NEB. SOURCE:EIA. Jan-14 Jan-14 Residential Residential Jan-13 Jan-13 Commercial Jan-12 Jan-12 Commercial By Sector (Bcfpd) Sector By By Sector (Bcfpd) SectorBy Jan-11 Jan-11 Electric Power Electric

US US Consumption

Canadian ConsumptionCanadian Industrial & Power & Industrial Jan-10 Industrial

Jan-10

Jan-09 0 80 60 40 20 Jan-09 8 6 4 2 0 140 120 100

16 14 12 10

SOURCE:Statistics Canada. SOURCE:EIA.

CERI Commodity Report - Natural Gas Page 9 D D N N O O S S 2014 2014 A A J J 2013 2013 J J

2012 2012 A A M M F F East Coast Marketable Production (Bcfpd) Production Marketable Coast East J Alberta Marketable Production (Bcfpd)ProductionMarketableAlberta J 8 6 4 2 0 0.50 0.25 0.00

16 14 12 10

SOURCE:Statistics Canada, NEB. SOURCE:Statistics Canada, NEB. D D N N O O S S 2014 2014 A A J J 2013 2013 J J

2012 2012 A A M M F F J J Saskatchewan Marketable Production (Bcfpd) Production Marketable Saskatchewan BC, Yukon, NWT Marketable Production (Bcfpd) Production Marketable NWT Yukon, BC, 5.0 4.0 3.0 2.0 1.0 0.0

1.0 0.5 0.0

SOURCE:Statistics Canada, NEB. SOURCE:Statistics Canada, NEB.

Relevant • Independent • Objective Page 10 Jun-14 May-14 Alliance Niagara Apr-14 Mar-14 Feb-14 Jan-14 AB-BC Others East (Bcfpd) East - Nov-13 Dec-13 McNeill Iroquois Sep-13 Oct-13 By Export Point Export By Jul-13 Empress Aug-13 Canadian Gas US CanadiantoGas theExports

Emerson

Alberta System Deliveries System (Bcfpd)AlbertaDeliveries May-13 Jun-13 6 5 4 3 2 1 0 8 6 4 2 0

16 14 12 10

SOURCE:CERI. SOURCE:NEB.

D May-14 N

Mar-14 Huntingdon S 2014

Jan-14 Elmore

West (Bcfpd)West -

2013 Nov-13

J Monchy M

2012 Sep-13

A By Export Point Export By System ReceiptsSystem Field

Kingsgate

Jul-13

Canadian Gas Exports to the US totheGas CanadianExports

TransCanada + Westcoast; Monthly Average (Bcfpd) Average Monthly + Westcoast; TransCanada

J May-13

8 6 4 2 0

8 9

16 14 12 10

SOURCE:CERI. SOURCE:NEB.

CERI Commodity Report - Natural Gas Page 11

May-14 May-14 Mar-14 Other Mar-14 East Jan-14 Jan-14 St. Clair St. MidWest Nov-13 Nov-13 Sarnia By US Region (C$/GJ) Region US By By Import Point (Bcfpd)Point Import By Sep-13 Sep-13 West Canadian Gas Gas CanadianImports Courtright Jul-13 Jul-13

Average Canadian Export PriceExportCanadianAverage

May-13 May-13 8 6 4 2 0 4 3 2 1 0

18 16 14 12 10

SOURCE:NEB. SOURCE:NEB. Apr-14 May-14 Feb-14 Mar-14 East Dec-13 Jan-14 Mexico MidWest Nov-13 Oct-13 Canada By US Region (Bcfpd)Region US By Sep-13 Aug-13

West

US Imports of Canadian Gas Canadian ofUS Imports

Jul-13

Jun-13 Total US Pipeline Gas (Bcfpd)Gas PipelineImports Total US May-13 8 6 4 2 0 8 6 4 2 0 Apr-13 14 12 10

12 10

SOURCE:NEB. SOURCE:NEB, EIA.

Relevant • Independent • Objective Page 12

Jun-14 Jun-14 end) - end) Apr-14 Apr-14 - East Feb-14 Feb-14 Producing Region Producing Dec-13 Dec-13 West

West

Oct-13 Oct-13 East Aug-13 Aug-13 US Storage by by Month Storage Region US (Bcf, Canadian Month Region (Bcf, by Canadian Storage Jun-13 Jun-13 0 0 500 900 800 700 600 500 400 300 200 100

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000

SOURCE:CERI, Platts Gas Daily. SOURCE:CERI, Platts Gas Daily. D D N N O O 2014 2014 S S A A J end) end) J - - 2013 2013 J J M M

48 Working Gas Storage

- (Bcf, Month (Bcf, Month A A 5-Year Avg. M 5-Year Avg. M Canadian Working Gas Storage US US Lower F F J J 0 0 500 900 800 700 600 500 400 300 200 100 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000

1,000

SOURCE:CERI, Platts Gas Daily. SOURCE:CERI, Platts Gas Daily.

CERI Commodity Report - Natural Gas Page 13

D N O S 2014 A end) J - 2013 J

(Bcf, Month (Bcf, A 5-Year Avg. 5-Year M F J Eastern Canadian Injections/Withdrawals Canadian Storage Eastern 0 80 60 40 20 -20 -40 -60 -80

-100 SOURCE:CERI, Platts Gas Daily. D D N N end) - O O 2014 S S 2014 A A end) - J J 2013 2013 J J M

WC_IJ_WD (Bcf, Month (Bcf, Canadian Canadian Storage A A 5-Year Avg. 5-Year 5-Year Avg. 5-Year M M F F Injections/Withdrawals Injections/Withdrawals (Bcf, Month J J Western Canada Storage Injections/Withdrawals Injections/Withdrawals Storage Canada Western 0 0 60 40 20 50 -20 -40 -60 -80 -50 150 100 -100 -120 -140

-100 -150 -200 -250

SOURCE:CERI, Platts Gas Daily. SOURCE:CERI, Platts Gas Daily.

Relevant • Independent • Objective Page 14

D D N N O O end) end) 2014 - - S S 2014 A A 2013 J J 2013 J J M US Storage Storage US

A US Eastern Eastern Storage US A 5-Year Avg. 5-Year 5-Year Avg. 5-Year M M F F Injections/Withdrawals (Bcf, Month (Bcf, Injections/Withdrawals Injections/Withdrawals (Bcf, Month (Bcf, Injections/Withdrawals J J 0 800 600 400 200 -200 -400 -600 -800 500 300 100 -1000 -1200

-100 -300 -500 -700

SOURCE:CERI, Platts Gas Daily. SOURCE:CERI, Platts Gas Daily. D D N N O end) - O 2014 S S 2014 A A end) J - J 2013 2013 J J M

(Bcf, Month (Bcf, A A 5-Year Avg. 5-Year M 5-Year Avg. 5-Year M F F US Western Consuming Consuming Region Storage Western US Injections/Withdrawals Month (Bcf, Injections/Withdrawals J J 0 US Producing Region Storage Producing US Injections/Withdrawals 0 50 -50 100 200 100 -100 -150

-100 -200 -300 -400

SOURCE:CERI, Platts Gas Daily. SOURCE:CERI, Platts Gas Daily.

CERI Commodity Report - Natural Gas Page 15

D May-14 Gulf LNG Gulf N Feb-14 O Nov-13 Golden Pass Golden S 2014 A Aug-13 Cameron J 2013 May-13 J Sabine Pass Sabine M 2012 Feb-13 A Nov-12 M

Lake Charles Lake

Weighted Average (US$/MMBtu) LNG Weighted Average Price - F Aug-12 US GoM LNG Imports By By Facility (Bcf)Imports US LNG GoM Freeport J Volume May-12 8 6 4 2 0 8 6 4 2 0

18 16 14 12 10

SOURCE:DOE. US SOURCE:DOE. US May-14 May-14 Yemen Feb-14 Feb-14 Neptune Qatar Nov-13 Nov-13 NE Gateway NE Aug-13 Aug-13 Norway May-13 May-13 Everett Trinidad Feb-13 Feb-13 Elba Island Elba Nigeria Nov-12

Nov-12

US LNG Imports By By Origin ImportsUS (Bcf) LNG Aug-12 Aug-12 Egypt Cove Point Cove Eastern US LNG Imports By Facility Facility Imports(Bcf) US By EasternLNG May-12 May-12 8 6 4 2 0 5 0 16 14 12 10

20 15 10

SOURCE:DOE. US SOURCE:DOE. US

Relevant • Independent • Objective Page 16

May-14 Feb-14 Nov-13 Japan Aug-13 Exports - Brazil May-13 By Destination (Bcf) DestinationBy Feb-13 US Re US LNG Mexico

Nov-12

Aug-12 May-12

7 6 5 4 3 2 1 0

SOURCE:DOE. US SOURCE:DOE. US May-14 Feb-14 Nov-13 Aug-13 Japan May-13

Feb-13

Nov-12 US LNG Exports to(Bcf)Japan Exports US LNG Aug-12 May-12

6 5 4 3 2 1 0

SOURCE:DOE, US NEB. SOURCE:EIA, DOE. US

CERI Commodity Report - Natural Gas Page 17

49 Jan-14 45 Jan-13 41 37 Jan-12 2014 33 Total Rig Drilling Fleet Drilling Rig Total Jan-11 29 2013 25 Jan-10 Week Number Week 21 Weekly Average Weekly Jan-09 17 Weekly Average Active Rigs Active Average Weekly 5-Year Avg. 5-Year 13

Active Rigs Active

Jan-08 9 Western Canada Active WesternRigs Canadian Rig FleetCanadian Rig Utilization Jan-07 5 1 0 Jan-06 900 800 700 600 500 400 300 200 100 - 1,000

800 700 600 500 400 300 200 100

SOURCE:CERI, CAODC. SOURCE:CERI, CAODC. Jan-14 Jan-14 Jan-13 Jan-13 Jan-12 BC Jan-11 WCSB Jan-12

Jan-10 US Weekly Average Weekly SK Jan-09

Jan-11

Jan-08 Jan-10 WCSB Active Active ProvinceWCSB Rigs by North American Active Rigs Active American North Jan-07 0 Jan-06 0 Jan-09 500 700 600 500 400 300 200 100

3,000 2,500 2,000 1,500 1,000

SOURCE:CERI, CAODC, BakerHughes. SOURCE:CERI, CAODC.

Relevant • Independent • Objective Page 18

Jan-14 Jan-13 Onshore Gas-directed Onshore Jan-12 Jan-11 Jan-10

GoM Gas-directed GoM

Jan-09 US Total Active Active US Rigs Total Jan-08 Jan-07 Total Oil-directed Total 0 Jan-06 500

2,500 2,000 1,500 1,000 SOURCE:CERI, Baker Hughes. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jan-14 Jan-14 Jan-13 Jan-13 Gas-directed % Gas-directed Jan-12 Jan-12 Gas-directed Jan-11 Jan-11 Jan-10 Jan-10

Gas-directed

Jan-09 Jan-09 Oil-directed US Total Active Active Rigs US Total Jan-08 Jan-08 US Gulf of Mexico Active Active Mexico US Rigs ofGulf Oil-directed Jan-07 Jan-07 0 Jan-06 Jan-06 800 600 400 200 0 80 60 40 20 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000

120 100

SOURCE:CERI, Baker Hughes. SOURCE:CERI, Baker Hughes.

CERI Commodity Report - Natural Gas