Exporting North American Natural Gas, closing the worldwide price disparity Vail VALUEx 2012 Greg Merrill

Strategic Asset Management Twitter @merrillmatter greg.merrill@sasm.com www.sasm.com http://merrillovermatter.blogspot.com/

Nat gas prices around world

16.75*6 = 100.5

Never has the seasonal low in inventories been this high!

Will we run out of storage this winter? United States

Source: http://ir.eia.gov/ngs/ngs.html

Alberta

Source: First Energy Capital Corp

Right now need < 6 Bcf/day(42/week) to fill up before seasonal peak (Mid November) most recent weekly fill rate running at 67 (June 14) Source: http://ir.eia.gov/ngs/ngs.html

Tangent: Fuel switching between Coal, Nat gas, Nuclear

Coal prices dropping along with Natural Gas Nuclear, nat gas, coal are Big 3 of electricity production
Source: EIA

Coal etf KOL

Arbitrage opportunity, enter LNG

What is LNG
Liquefied Natural Gas natural gas chilled to -260 F, 600 times denser (60% energy density of diesel) CNG compressed natural gas, ~ 1% volume of nat gas (25% energy density of diesel) Costs ~ $5 for liquefaction, transport and gasification Liquefaction $5 billion / 1.2 Bcf/Day / 3-4 years construction (Cheniere/Sabine LA) Gasification $850 Million / 0.7 Bcf/Day / 2 years construction (India Petronet / East Coast India) Also water based (on older retrofitted LNG ships) for both liquefaction and gasification. Advantage over natural gas pipeline; can now transact with world, not just connecting from point A to B.

LNG ships expensive, 150+ $USD million, technical to build, small but
growing fleet to ?match? growing supply

N.A. LNG export facilities planned

Location Owner license FEED Bcf/day Startup Bcf/Day % Annual Tcf

Douglas Island, BC
Kitimat, BC Sabine, LA Hackberry, LA: Freeport, TX Lavaca Bay, TX Cove Point, MD Sabine, LA

Douglas Channel Energy Partnership

Apache 40, EOG 30, Encana 30 Cheniere Sempra Freeport Excelerate Energy Dominion Cheniere 2nd & 3rd Train

2/3/2012
10/14/2011 9/11/2010 1/1/2012 2/1/2012

0.25
0.7 1.26 1.7 1.9 0.42

2013.75
2016 2016 2016.7 2017 2017 2017.3 2018

0.25
0.95 2.21 2.65 4.55 4.97 5.55 6.81

0.30%
1.14% 2.64% 3.17% 5.44% 5.94% 6.64% 8.15%

0.09
0.35 0.81 0.97 1.66 1.81 2.03 2.49

11/7/2011 9/11/2010

1 1.26

Lake Charles, LA
Warrenton, OR Corpus Christi, TX Coos Bay, OR Brownsville, TX Prince Rupert, BC Kitimat BC Elba, Savannah, GA

Energy Transfer & BG

Oregon LNC, Oregon pipeline Cheniere Jordan Cove Energy Project Gulf Coast LNG export -- Michael Smith Shell Canada, Petro China Petronas/Progress Energy Resources Corp. Southern LNG aka El Paso

5/1/2011

2
1.26 1.8

2018
2018 2018.01 2020 2020 2020 2020 2020

8.81
10.07 11.87 13.07 15.87 17.55 18.55 19.05

10.54%
12.05% 14.20% 15.63% 18.98% 20.99% 22.19% 22.79%

3.22
3.68 4.33 4.77 5.79 6.41 6.77 6.95

3/6/2012 applied

1.2 2.8 1.68 1 0.5

10+ Bcf/day in 3 years compared to ~84 Bcf/day N.A. Production We should have clarity on majority of planned facilities within 12 months.

LNG export impact

These are predictions, about the future. Timing and number of these LNG export facilities will change In the future as facilities break ground. Not all planned will go ahead Timing of when each facilities comes online But well know whether its going to be a massive rush of demand or more gradual

Politics! Winners and losers will lobby for their case.

Teekay world LNG expectations

Source: Teekay NAPTP presentation, May 2012

Geopolitics of Energy

Would you rather get your nat gas from Russia and Iran or Australia, US and Canada?

Energy security
Lithuania - June 2012 Proposed LNG import facility will supply 25% of nat gas, passes legislature 109-9. Currently Gazprom supplies 100% of nat gas. Estimated completion December 2014 Ukraine Jan 2009 Gazprom shuts off all natural gas to Ukraine Qatar LNG has to go through Strait of Hormuz and past Iran

http://www.naturalgaseurope.com/lithuania-klaipeda-lng-terminal http://www.nytimes.com/2009/01/01/world/europe/01iht-gazprom.4.19039279.htm?_r=1

Japan

Japanese LNG import facilities

Fukushima earthquake shut down all their nuclear capacity, switching to LNG & everything else

Source: EIA Today in Energy, May 30, 2012 And FirstEnergy Capital Corp

This weekend Japan turned on first two of their nuclear power plants back on

Can natural gas production grow by 10+ Bcf/Day in 3 years?

85.0 15%

80.0 Total North America in Bcf/day 3 year % change 75.0

10%

5%

70.0

0%

65.0

-5%

60.0

-10%

55.0

-15%

50.0

-20%

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: BP Statistical review

2010

Year

Problems with that additional supply

Best (Cheapest) Shale already drilled?

Economic Winners while LNG export facilities built

US Industrial companies using it as feedstock - DuPont Example Celanese ethanol from nat gas cheaper than plant based Nitrogen Fertilizer companies (Agrium AGU) CNG/LNG trucking, cars how do you change habits? WSJ Monday, June 18 Shell $300 million LNG fueling stations LNG as fuel for ships Shipping (Will they overbuild?) LNG shippers Golar GLNG Gaslog GLOG Teekay LNG shippers TPG North American Pipelines (PPI+index tolling) + Financial repression by Federal Reserve

Oil sands Steam assisted gravity drainage (SAGD), using steam (energy, aka nat gas) to move bitumen to surface. Cenovus (CVE) an example. Lower nat gas prices improve their input costs. Oil sands also have supply problem, getting supply out. (More oil pipelines under construction)

Source: http://www.albertaoilmagazine.com/2012/06/sagd-extraction-set-to-play-a-larger-role-in-oil-sands/

LNG shippers
Expensive ships 150+ $US million, technical to make, very profitable right now. 1 year charter rate 69,500/day on 12/31/10 Source: Fearnleys - shot up post Fukushima Most are fixed contract, long term, Teekays are almost on a NNN basis 359 ships in 2011 but will they oversupply (like bulk and tankers) ?

Teekay world LNG expectations

Source: Teekay NAPTP presentation, May 2012

LNG Shippers detail

Teekay TGP Limited Partner structure - long term NNN ship lease Golar GLNG ships and liquefaction Limited Partner subsidiary - GMLP Gaslog GLOG recent IPO, multiple ships on order All provide ships, FSRU under long term contracts, length differs between company. All are ordering ships / looking to expand Will shippers overbuild? can they overbuild? These are not bulk cargo ships, more technical to build and operate.

million tonnes

2010

2011

shipments
export cap

220.2
269.58

240.8
278

import cap tankers tanker order book shipments / tanker 53 ships of 2011 order book to be delivered in 2013 or later 360 20 0.61

640 359 59 0.67

Source: www.giignl.org/fileadmin/user_upload/pdf/A_PUBLIC_INFORMATION/Publications/GNL_2011.pdf

Economic winners After N.A. LNG comes online LNG Shippers LNG demand will keep shipping demand high Coal There are coal export facilities in planning stages on West Coast (Kinder Morgan in Oregon, Cherry Point WA, Ambre energy Oregon + Fuel switching from nat gas back to coal Nat gas & Nat gas service companies

LNG exporters? If under cost & can sell at profit?

Economic losers? All companies relying on relative cheap N.A. natural gas (Westport, Clean Energy?)

Source: http://ambreenergy.com/projects/millennium

Predictions are hard, especially about the future.

Timing and extent of events will change in the future so the question is how wrong will I be? How will world natural gas spread shrink with US prices going up, world coming down, or both?

Energy needs

Source: http://www.gapminder.org/data/

Source: 2012 BP statistical review