Factors Affecting -Gas Competition

Todd Snitchler Group Director, Market Development Stanford Natural Gas Initiative American Institute October 15, 2018

AmericanUpdated Petroleum October Institute 2018 10/25/18 1 Key messages

§ Natural gas enabled -related CO2 emissions in the United States to decrease by more than 14% below 2005 levels § The flexibility of natural gas-fired generation is essential for grid reliability and resiliency as the share of renewables increases within the overall energy mix § Potential alternatives, such as utility-scale battery storage, remain an order of magnitude more expensive that natural gas § Coal consumption is under pressure globally, but remains a substantial and viable part of the energy mix

American Petroleum Institute 10/25/18 2 Brattle study: Diversity of reliability attributes – a key component of the modern grid

American Petroleum Institute 10/25/18 3 Increased U.S. natural gas use and energy efficiencies have reduced CO2 emissions as energy demand has grown

§ Since 2005, total energy-related CO2 emissions declined faster than total , due largely to natural gas substitution for coal in power § As energy consumption grows in the future, energy efficiency improvements and increased renewables and natural gas use should restrain CO2 emissions

Quadrillion Btu Billion metric tonnes CO2 125 8 2018 100 6

75 4 50

2 25

0 0 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 Total energy consumption Energy-related CO2 emissions source: EIA AEO (2018)

American Petroleum Institute 10/25/18 4 is important to the U.S. energy mix, and natural gas has delivered the greatest benefits

More than 40% of U.S. is used for electricity generation Natural gas has increased to 32% of U.S. electricity net generation from 19% in 2005

U.S. shares of primary energy U.S. electricity net generation % Million megawatt hours 100 Residential/Commercial 4000 Renewables Industrial 75 3000 Nuclear Transportation 50 2000 Oil Natural gas

25 Power 1000 generation Coal

0 0 2016 2005 2007 2009 2011 2013 2015 2017 source: EIA SEDS (2018) source: EIA

American Petroleum Institute 10/25/18 5 Natural gas has generated savings for Americans

As natural gas use in electricity generation rose and natural gas prices decreased, consumers enjoyed lower electricity prices Residential electricity prices versus natural gas prices 2018 cents per kilowatthour 2018 dollars per million BTU 16 12

12 9

8 6

4 3

0 0 2005 2007 2009 2011 2013 2015 2017

U.S. average residential electricity price Natural gas

sources: EIA, BLS

American Petroleum Institute 10/25/18 6 U.S. energy spending in 2016 was more than $618 billion below that of 2010, adjusted for price inflation

Americans spent nearly $2.2 trillion on energy in 2016, compared with $2.8 trillion in 2010 Expenditures on oil products decreased the most at nearly $356 billion, followed by industrial spending down by $153 billion and residential/commercial down $110 billion

Changes Billion 2018$ dollars 2010 to 2016 (2018$) 0 200 400 600 800 1,000 Total: -618.4

Residential / Commerical -110.3

Transportation -355.5

Industrial -152.6

Power generation -74.6 Coal Oil Natural gas Electricity Other

source: EIA SEDS (2018). To avoid double-counting with electricity spending by end use sector, energy input costs in power generation are not included in the total

American Petroleum Institute 10/25/18 7 Drilling specifically for natural gas has become increasingly predominant and cost-effective in the U.S.

With strong productivity gains, the burden to keep the energy renaissance going shifts to the market potential for natural gas demand U.S. gas production by play type Breakeven prices for selected gas plays*

Billion cubic feet per day (Bcf/d) $/MMBtu 80 0 1 2 3 4 Henry Hub Associated gas from spot price 60 Appalachia - Ohio liquids plays (July 2018)

Appalachia - NE PA 40

Appalachia Appalachia - SW PA 20

Other dry gas plays Haynesville 0 2010 2012 2014 2016 2018 July 2018 2014 source: EIA Drilling Productivity Report *Half cycle breakevens assuming 10% discount factor and play-specific costs source: BTU Analytics (July 2018)

American Petroleum Institute 10/25/18 8 EIA’s 2018 AEO moved toward the high oil & gas resource and technology case

Between 2018 and 2040, EIA’s high oil & gas resource and technology case suggests a 70% production increase with steady prices at $3.00/MMBtu Natural gas spot prices at Henry Hub Dry natural gas production 2017$/MMBtu Billion cubic feet per day (Bcf/d) 2017 150 2017 10 High Oil & Gas Resource and Technology

8

100 6 AEO 2017 Reference AEO 2017 Reference

4 50 High Oil & Gas Resource 2 and Technology

AEO 2018 Reference AEO 2018 Reference 0 0 2000 2010 2020 2030 2040 2000 2010 2020 2030 2040 source: EIA AEO(2017, 2018) 9 American Petroleum Institute 10/25/18 9 EIA’s estimation of U.S. natural gas markets hinges on LNG exports and to a lesser extent industrial and power growth

Without the healthy evolution of LNG markets and continued free trade, upstream U.S. natural gas development could be stymied U.S. domestic natural gas consumption plus exports Reference case High Oil & Gas Resource and Technology 2018 to 2040 Billion cubic feet per day (Bcf/d) changes (Bcf/d) 150 2017 2017 Reference High

Net exports 18.8 29.2 100 Net exports

Electricity generation 3.1 15.7 Electricity generation 50 Industrial Industrial 7.5 9.8

Residential / Commercial Residential / Commercial and all other 0 and all other 0.1 0.6 2000 2010 2020 2030 20402010 2020 2030 2040 source: EIA AEO (2018) 10

American Petroleum Institute 10/25/18 10 With globalization, natural gas markets could more than double by 2040

Global natural gas by source LNG exports LNG imports BCFD BCFD BCFD 600 Gas traded by pipeline 100 Gas traded as LNG 100 Others Domestic production N. America Europe Russia OECD Asia 80 80 Middle East India 400 Africa China Australia Other Emerging Asia 60 Others 60

40 40 200

20 20

0 0 0 2016 2040 1990 2000 2010 2020 2030 2040 1990 2000 2010 2020 2030 2040 source: BP (2018)

American Petroleum Institute 10/25/18 11 Low U.S. natural gas prices motivate LNG production and exports

U.S. natural gas prices have remained less than one-third of many international levels

Global natural gas landed prices ($/MMBtu) – August 2018 sources: U.S. FERC (September 2018), METI

UK $7.60

Cove Point Belgium $10.00 $2.82 Spain Korea $8.25 $10.05 Japan China $9.80 Lake Charles $10.05 Mexico $2.68 India $9.60 $10.00

Argentina $9.72

American Petroleum Institute 10/25/18 12 U.S. natural gas market to Asia Pacific grew the most through approvals, buyer participation, and free trade

Bloomberg anticipates about 20 Bcf/d of U.S. LNG export capacity by 2030 – a 7X increase from 2018 North American LNG projects Final Investment Decision (FID) Plant name BNEF likelihood Status 2030 capacity (Bcf/d) LNG Canada Unlikely Planning FID 3.2 Billion cubic feet per day (Bcf/d) Corpus Christi Train 4 Unlikely Under regulatory review 3.0 Plaquemines Unlikely Planning FID 2.6 40 Freeport LNG Train 4 Unlikely Under regulatory review 2.6 Alaska LNG Unlikely Planning FID 2.6 Golden Pass Unlikely Waiting to FID 2.1 Lake Charles Unlikely Waiting to FID 2.0 “Unlikely” Delfin FLNG Unlikely Waiting to FID 1.3 30 Kitimat LNG Unlikely Waiting to FID 1.3 Goldboro LNG Unlikely Planning FID 1.3 Monkey Island (SCT&E) Unlikely Under regulatory review 1.3 Port Arthur LNG Unlikely Under regulatory review 0.7 Magnolia LNG Likely Waiting to FID 1.1 20 Rio Grande LNG Likely Planning FID 3.6 Driftwood Likely Planning FID 3.3 “Likely” Texas LNG Likely Planning FID 0.5 Woodfibre LNG Likely FID taken 0.3 Calcasieu Pass Highly Likely Planning FID 1.3 10 Corpus Christi Tr. 1-3 In operation/definite Under construction 3.0 Freeport LNG Tr. 1-3 In operation/definite Under construction 2.6 Cameron LNG In operation/definite Under construction 2.0 Elba Island In operation/definite Under construction 0.3 Definite Cove Point In operation/definite Operational 0.7 0 Sabine Pass In operation/definite Operational 3.6 2010 2015 2020 2025 2030 source: Bloomberg New Energy Finance (August 2018)

American Petroleum Institute 10/25/18 13