From the Piceance Basin to the Pacific Rim How Expanded U.S. LNG Exports Could be critical to the Development of Natural Gas Reserves in Western Colorado’s Piceance Basin Presented By !1 From the Picence Basin to the Pacific Rim How Expanded U.S. LNG Exports Could be critical to the Development of Natural Gas Reserves in Western Colorado’s Piceance Basin AUTHOR’S NOTE Every effort has been made to make this a “plain spoken” white paper. It is designed to appeal to the average person on the street (from Grand Junction, Colo., to the potential ! LNG purchaser in Asia), not just industry experts. The most by John Harpole difficult challenge for a non-natural gas industry reader will be the constant use of a variety of measurements related to Author’s Note ............................1 natural gas, plus the scale and meaning of that measurement [i.e., MCF (thousand cubic feet), BCF (billion cubic feet), TCF Introduction ...............................1 (trillion cubic feet), MMBtu (million British thermal units), cubic meters (m3)]. In an effort to assist the reader, the first U.S and Piceance Basin Production exhibit in the Appendix presents a comparison of those and Reserves .............................5 measurements discussed in this white paper. They will help Williams Fork ....................6 the reader better understand the scale of natural gas from the producing wellhead to its final point of consumption. I Deep Mancos Shale ........7 would encourage you to review that two-page Appendix on scale prior to reviewing this analysis. Long Term Transactions in the Piceance ...........................8 INTRODUCTION Midstream Infrastructure ........10 Thanks to the combination of hydraulic fracturing and horizontal drilling in shale formations, the U.S. is Natural Gas Pipeline experiencing an energy revolution. According to a story in Transportation out of Western the Seattle Times on June 29, 2014, “Last fall, Wallace Tyner, Colorado .......................11 an energy economist at Purdue University, estimated in a study that the shale revolution was adding some $473 billion Natural Gas Pipeline per year to the U.S. economy, or about 3 percent of the Transportation out of the gross domestic product. Energy consulting firm IHS recently Rockies ...........................14 estimated that more than 2.1 million jobs in the U.S. are now supported by shale-related oil and gas activity.” That “Shale Rockies Express Pipeline 17 Revolution” has not gone unnoticed by the rest of the world. Ruby Pipeline .................20 Emerging world demand for liquefied natural gas may likewise increase demand and create new markets for LNG Exports ............................23 western Colorado Piceance Basin production. That is Conclusion. ..............................28 especially true for a Buyer of natural gas that is looking for price security and marketability over a 20-year time frame. What is liquefied natural gas (LNG)? When natural gas is cooled to a temperature of approximately -256 degrees Fahrenheit (-161 degrees centigrade), it condenses into a liquid form. By freezing natural gas, you reduce its size 600 times, enough so that an average LNG ship can hold 3 BCF of gas. That is enough natural gas to heat 40,000 homes for one year. The LNG delivery chain includes exploration and production, liquefaction, shipping and storage and regasification (warming the liquid natural gas up and converting it into a gaseous state). Exhibit A illustrates the components of the LNG delivery chain. Exhibit A – The LNG Delivery Chain ! Source: King & Spalding Energy Newsletter, August 2014 This analysis will describe the unique attributes of the Piceance Basin and explain why its reserves are best suited for worldwide liquefied natural gas (LNG) purchasers who want to integrate vertically, from the production wellhead to their final burnertip. By acquiring Piceance Basin reserves, those long-term purchasers of gas can eliminate or, at the very least, minimize the price uncertainty of natural gas. According to the Energy Information Administration (EIA), the U.S. is now the world’s No. 1 producer of natural gas. Seven years ago, due to a projected shortfall of natural gas supply, most experts projected the need to import LNG into the U.S. to meet growing demand. Those “experts” expected that at least 20 percent of U.S. demand would be met by foreign imports through the early part of this century. The need for LNG imports into the U.S. was the accepted assumption until the “U.S. Shale Revolution” became a reality. Historically, producers of natural gas in the lower 48 states and Canada could only access and satisfy demand on this continent. The super abundance of natural gas in North America now requires producers to reach beyond North American shores to access worldwide markets. According to Bentek Energy, the “Shale Gas Revolution” should cause U.S. natural gas production to increase by 23 percent from its current annual average level of 65 BCF/day, up to nearly 80 BCF/day by 2018. While most experts generally agree on the trend line showing increase in production, the wild card in the mix appears to be connected to the demand side of the equation. Five sectors need to be analyzed in any study of demand growth in the U.S. They are 1) Power - Coal to Gas fuel switching in utility power generation, 2) Industrial Demand i.e., new steel plants, chemical !2 October 2014 plants, etc., 3) CNG/LNG Vehicles, 4) LNG Exports and 5) Mexico Exports – U.S. pipeline deliveries to Mexico. A new supply/demand equilibrium for U.S. natural gas production can be met only through significant U.S. LNG exports. The current estimate of new natural gas demand related to new ammonia, urea and nitrogen chemical plants across the U.S. ($80-$100 billion of new capital investment) is approximately 1.4 BCF/day. While that volume is critical to the demand equation for U.S. gas producers, it is only half the volume that Cheniere Energy plans to export out of their Sabine Pass facility on a daily basis. Of all the demand components listed in Exhibit B, the most critical sector for significant growth relates to LNG exports. Three different forecasts, low, mid and high are shown in Exhibit B. Exhibit B - North American Natural Gas Demand Ranges by Selected Sector Significant demand growth is possible in the LNG, transportation/HHP and power sectors through 2020 in Bcf per day. Power 2.5 4.5 10.0+ LNG Export 2.4 6.0 12.0+ Transport/HHP 0.5 2.5 5.0+ Industrial (U.S. and Oil Sands) 2.5 4.5 9.0 Mexico Exports 0.5 1.5 3.5 Lower Demand Middle Upper Demand Range Demand Range Range ! Source: Encana Corporate Presentation, August 2013 An expansion of U.S. LNG export capacity requires a significant financial commitment for actual construction. That opportunity to export U.S. natural gas production to overseas buyers is seen by many economists as a potential economic windfall for the entire U.S. economy. Some of the new natural gas shale plays are experiencing “growing pains” due to a need more immediate than LNG export capacity. Inadequate midstream pipeline infrastructure is creating severe price discounts for the value of natural gas production in some shale natural gas producing regions of the U.S. Many of the new “shale plays” have been discovered in areas where there was no existing historical natural gas production and, correspondingly, where there is no existing natural gas pipeline infrastructure. !3 October 2014 As an example, in the Marcellus Shale play of eastern Pennsylvania, five different index price points (index price points report the value of natural gas in a specific area at a specific time, i.e., daily/ monthly) are trading at a severe discount to their historical values. Discounts are currently ranging from $1.50-$2.50 per MMBtu below the NYMEX Henry Hub Erath, La., price, thanks to an over-abundance of new natural gas production and a lack of natural gas pipeline takeaway capacity. The Piceance Basin of western Colorado is essentially immune to that discounting phenomenon. In fact, the price differential between the Rockies’ natural gas producing areas and the critical pricing point for all natural gas in the U.S., the NYMEX Henry Hub contract (where physical deliveries are accounted for in Erath, La.) have never been more predictable in the last 15 years. The “Northwest-Rockies” basis differential has been as high as a negative $6.50 MMBtu (when NYMEX natural gas prices reached $11.00 MMBtu). It averaged a negative $2.12 MMBtu (as compared to the NYMEX price) from August 2005 through January 2009. See Exhibit C. Exhibit C – Basis Differential Between Northwest-Rockies and NYMEX 2005-2009 $ 0 .0 0 -$ 1 Aug-05 .0 -$ 0 tu 2 Nov-05 B .0 0 M -$ Feb-06 M 3 r .0 e 0 May-06 p -$ 4 .0 0 Aug-06 -$ 5 .0 Nov-06 -$ 0 6 Feb-07 .0 0 -$ ! 7 May-07 .0 Source: Inside FERC’s Gas Marketing0 Report, A McGraw Hill Publication Aug-07 Nov-07 Feb-08 Piceance Basin producers currently enjoy extensive and under-utilized natural gas pipeline and natural gas processing capacity. That capacity allows Piceance Basin producers unrestricted access to markets May-08 from the west coast of the U.S. to the Mid-Atlantic States. Aug-08 Nov-08 Feb-09 May-09 Aug-09 N W R Nov-09 o c k ie s vs . N Y M E X !4 October 2014 That existing midstream infrastructure capacity combined with an abundant gas resource has made the Piceance Basin an attractive area for investment in long-life natural gas reserves. In this analysis, we will explore three critical competitive advantages of the Piceance Basin: proved reserves, potential reserves, and midstream infrastructure (natural gas processing and pipeline export capacity).