The Energy ConsortiumRecent Developments and the Outlook for

Natural Gas in the Northeast

John R. BitlerOctober 20, 2010

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Northeast OverviewTraditional Sources of Supply

• Gulf Coast• Western Canada (WCSB)• Sable Island (Atlantic Canada)• LNG (Everett, MA)• Appalachian (conventional and CBM)

Current Northeast Demand• Average 7.0 Bcf/d

◦ Industrial 0.6 Bcf/d◦ Commercial 1.6 Bcf/d◦ Residential 2.2 Bcf/d◦ Electric Generation 2.5 Bcf/d

Sources: EIA, Northeast Gas Association

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Traditional Supply IssuesNortheast at the “end of the pipe”Majority of gas supplies traveling long distances on pipelines from the Gulf Coast or Western Canada

• High transportation costs• Declining production and reserves in maturing

conventional fields◦ WCSB◦ Conventional onshore and offshore fields in the Gulf

Coast experiencing rapid depletion• Deliveries subject to interruptions and pipeline

bottlenecks◦ Hurricanes◦ Peak demand basis blowouts

Atlantic Canada – Sable Island Disappointing

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New England Gas Supply Sources

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Declining Sable Island Production

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WCSB Conventional Production and Reserves

Proved Reserves 56 TcfRemaining Conventional Resources 90 Tcf

Total Recoverable Conventional Resources 146 TcfSource: CAPP

Source: NEB

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Gulf Coast Proved Reserves and Production – 2003 v. 2008

12/31/2003 12/31/2008 ChangeOnshore 20.9 18.0 -14%Offshore 23.0 14.0 -39%Total 43.9 32.0 -27%

2003 2008 ChangeOnshore 3.3 2.8 -15%Offshore 4.5 2.4 -47%Total 7.8 5.2 -33%

Proved Reserves (Tcf)

Annual Production (Tcf)

Source: EIA

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The Good News U.S. proved reserves increased 29% from 2003 to 2008

• 189.0 Tcf as of 12/31/2003• 244.7 Tcf as of 12/31/2008

More than half of the increase was due to increases in unconventional gas reserves (CBM and shale gas)

• CBM and Shale Gas Proved Reserves were 21.7 Tcfat the end of 2003 and increased to 53.6 Tcf by the end of 2008

• Shale gas reserves increased by more than 900% over this period

• Shale gas increased from about 1% of total U.S. production in 2003 to 20% by 2009

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Fundamental Shift in North American Supply/Demand

Source: TransCanada, September 28, 2010 NECA Conference on Natural Gas and Fuel Issues

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U.S. Shale Gas Resources

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Recent Developments Expand Regional SupplyLiquefied Natural Gas

• From New Brunswick (Canaport) via Maritimes & Northeast pipeline (0.8 Bcf/d)

• From two offshore terminals: Northeast Gateway (0.4 to 0.8 Bcf/d) and Neptune (0.4 Bcf/d)

Rocky Mountain • Rockies Express pipeline: 1.5 Bcf/ into eastern Ohio• Transported to the Northeast via several pipelines

Marcellus Shale• Current production is 0.5 Bcf/d• Expected to grow to 3 Bcf/d by 2015

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LNG Supplies for the NortheastExpanded LNG receiving capacity

• Distrigas (Everett) – continued supply to core LDC markets and electric generation (New Mystic)

• Canaport – supplement declining Sable Island production

• Offshore terminals – supplies that will dampen winter peak demand basis blowouts

Excess global LNG capacity through at least 2015• 2009 global LNG trade 8.6 Tcf• U.S. LNG imports 0.45 Tcf• Since 2008 global LNG capacity increased by 3.1 Tcf• Capacity will increase by another 38% through 2013

with the completion of liquefaction trains under construction

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Sendout From New England LNG Terminals

Source: FERC Market Oversight Updated October 7, 2010

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Expanded Northeast Supplies Bring new conventional wisdom regarding gas prices and availability for end-users

• Old conventional wisdom ◦ Expensive gas ◦ Frequent winter basis blowouts◦ Peak demand delivery restrictions

• New conventional wisdom◦ Moderate prices◦ Less volatility◦ Increased availability

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Key QuestionsWhat’s the new conventional wisdom and why the radical shift?

How will the Northeast benefit from more diversified supplies?

Is the Marcellus Shale a game changer with regard to Northeast gas supplies?

How will new supply sources and regional pipeline expansions impact prices and availability?

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What’s the new conventional wisdom and why the radical shift?

A dramatic increase in the development and production of gas from unconventional resources, especially shale gas Changes in fracturing and horizontal drilling technology allow for less expensive and more rapid developmentMaturation of conventional producing fields will be more than offset by unconventional gas productionMassive increase in worldwide liquefaction capability, LNG tankers, and U.S. regasification capabilityCritical reliance on LNG no longer required to ensure commodity balance

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Is cheap natural gas a transient phenomenon or here to stay?

Natural gas will remain volatile but moderately priced over the long run, i.e., $5.00 - $8.00 into-the-pipe

“Basis” to New England will reflect increased commoditization of gas supplies across North America, in particular, growth of Marcellus shale

Basis blowouts due to periodic deliverability constraints will be less frequent and short-lived

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NYMEX Henry Hub Futures

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World LNG Estimated October 2010 Landed Prices

Source: FERC Market Oversight Updated October 7, 2010

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Natural Gas Daily Spot Price

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Is Marcellus Shale a game changer, one that will indefinitely flood the market in the greater Northeast?

Proximity to market center, sense of momentum, horizontal multi-frac technology a definite game changerIncreased gas-on-gas competition will hold prices downWill contribute to a redistribution of gas flows on the pipeline infrastructure serving the Northeast

Disparate views re production forecasts, ramp-up

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Location of Marcellus Shale

Source: Spectra Energy Northeast Project Update.Sean Maher. NECA Fuels Conference. 9/22/2009.

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Marcellus Shale Resources

1 Potential Gas Committee, June 18, 20092 U.S. Energy Information Administration3 Marcellus Proved Reserves < 1 Tcf

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Marcellus ResourceU.S. Resources1

2,060 Tcf

U.S. Proved Reserves2

244 Tcf

Marcellus Shale Resource3

256 Tcf

Annual U.S. Consumption

23 Tcf

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Marcellus Shale Production Forecasts

Sources: “An Emerging Giant: Prospects and Economic Impacts of Developing the Marcellus Shale Natural Gas Play.” T. Considine, R. Watson, R. Entler, J. Sparks, The Pennsylvania State University, College of Earth & Mineral Sciences, Department of Energy and Mineral Engineering. July 24, 2009.

Integrated Resource Plan for Connecticut. The Brattle Group. January 1, 2010. (Wood Mackenzie)

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Penn State

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What will be the benefit from diversified supplies?

Greater intra-regional delivery flexibility than ever before

• New sources of supply at new delivery points will improve gas flows and benefit end-users

Decline of Sable Island offset by Canaport LNG via M&N

LNG into Algonquin / M&N injecting diversity benefits across system especially for serving peak demands

Tennessee well-positioned for increased market share with improved flows from M&N and from the Marcellus fields

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Natural Gas Infrastructure Additions

Source: Northeast Gas Association

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A Few Clouds for a Sunny OutlookMarcellus Production

• Possible hydraulic fracturing restrictions• High water consumption• Long-term economics look good but it is early in the

life of this gas resource play◦ Short well production history

LNG capacity glut could disappear after 2015• Current low prices delaying new liquefaction facilities• Return to global economic growth will increase the

demand for LNG suppliesUltimately U.S. carbon emissions regulations are likely to result in a significant shift from coal to gas-fired electricity generation