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Shale Gas: What Is It, How

Will It Impact Supply, Prices Block Island


and Customers,, and The
Regulatory Issues It Raises:

Presented by:

Melissa Whitten
La Capra Associates, Inc.

Presented to:

National Association of State Utility


Presentation to NASUCA
Mid-Year Meeting
Consumer
Advocates
By: M. Whitten June 28, 2011
2011 Mid-Year Meeting
San Antonio, Texas June 28, 2011

Wh t is
What
i Shale
Sh l Gas:
G
P
Pervasive
i

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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Technology Breakthrough: Higher Recoverable


Reco erable Reser
Reserve
e Estimates
What is a TCF?
1 trillion cubic feet
or
1 billion Mcf
or
~ 1 billion mmBtu
and
Enough natural gas to:
Heat 15 million homes
for 1 year
Generate 100 billion
kilowatt-hours of electricity
Fuel 12 million natural gasfueled vehicles for one year
Presentation to NASUCA Mid-Year Meeting
By: M. Whitten June 28, 2011

R
Recoverable
bl Reserves
R
equivalent
i l t tto 10 to
t 100 yrs consumption
ti

http://www.eia.gov/neic/speeches/howard12102010.pdf

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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The Rise of Shale Gas: EIA doubles forecast of pproduction byy 2035
from 6 Tcf to 12 Tcf, accounts for almost half of total production
EIA2011 AEO EarlyRelease ReferenceCase

EIAAEO2010ReferenceCase:Naturalgasproduction
bysource,1990 2035(trillioncubicfeet,similartofig.73,p.72)
bysource,1990

Natural Gas Production 19902035,trillion


NaturalGasProduction
1990 2035 trillion cubic
cubicfeet,
feet Fig.1
Fig 1

30

30

Projection

History

Projections
25

25

Net Imports

Alaska

20

20

Shale Gas
ShaleGas
CoalbedMethane

15

2035 45%12.0 Tcf Shale Gas

15
Coal BedMethane

NonAssocOffshore

NonAssoc Offshore

AssocOnshore

10

Alaska

10

NetImports

Tight Gas
TightGas

NonAssocConventional

Associated Gas
NonAssoc Convential

2034

2032

2030

2028

2026

2024

2022

2020

2018

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

2034

2032

2030

2028

2026

2024

2022

2020

2018

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1994

1992

1990

1996

2010 AEO reference case

1990

2011 AEO reference case


Presentation to NASUCA Mid-Year Meeting
By: M. Whitten June 28, 2011

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Shale Gas Price: EIA Forecast Henry Hub

$5.85

$ $4.52
4.52

2011 AEO is 23% lower than 2010 AEO

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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Whyy Does Supply


pp y Increase Despite
p Low Market Price ?
1. Competitive Full Cycle Cost of Production

Kern River Gas Transmission Company Customer Meeting, October 19, 2010

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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Why Does Supply Increase Despite Low Market Price ?


2. Presence of Rich Gas (Liquids) in Shale Formations

Kern River Gas Transmission Company Customer Meeting, October 19, 2010

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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8

NGL from Shale Offers Multi-Product Revenue Stream

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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9

Western Canadian Conventional Production / Imports Declining

2011

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

10
10

Before Marcellus: Rockies Express (REX) excess


e cess Rockies Prod
Production
ction
Tennessee

Columbia Gas
Columbia Gulf
Dominion
TETCO

Transco
REX--NEX

Source: IOGA Annual Meeting, May 2008, www.rexpipeline.com

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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REX Competitive
C
titi Rate
R t E
Economics
i bbased
d on $10 gas iin 2008

REX(NEX)

(1): volumes ramp up over 3 to 5 year period w/max capacity 1.8 Bcfd
Source: IOGA Annual Meeting, May 2008, www.rexpipeline.com

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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Wh are the
What
h Ri
Risks
k to the
h FForecast ?
Risk=Opportunity+Challenge
Opportunities:
Readilyavailablesupplyforpreviouslyconstrainedmarkets
enhancesdiversity&reliabilitytomeetpeakandloadgrowth
possiblelowerpricevolatility longterm
environmentaladvantageofgasvs
environmental advantage of gas vs coaloroil
coal or oil

Challenges:
Scope
Scale
Timing
Environment

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

13

Challenges in detail:

Scope

Scale

Investment $, MLPs, JVs, VPPs maintain access to capital markets


Coordinate gathering, processing liquids extraction; Downstream bottlenecks

Ti i
Timing

Too expensive for demand


demand pull
pull
producer push required for 1st phase
No one party has capacity to vertically integrate back to the wellhead
Smaller independent producers have taken the lead

Technical learning curve


Pipeline transmission permit & construction (~ $20 mil/mile)

Environment

State level responsibility for regulation


New sources of revenue, jobs vs local cost of living & infrastructure
Presentation to NASUCA Mid-Year Meeting
By: M. Whitten June 28, 2011

28.
14

Shale Gas Price: EIA Forecast Including Production Side Cases

10

10

$ 4.52

2
2008
2009
2
2010
2
2011
2
2012
2
2013
2
2014
2
2015
2
2016
2
2017
2
2018
2
2019
2
2020
2
2021
2
2022
2
2023
2
2024
2
2025
2
2026
2
2027
2
2028
2
2029
2
2030
2
2031
2
2032
2
2033
2
2034
2
2035
2

200
09$permmB
Btu

EIA2011AnnualEnergyOutlook USAverage
N t l G P i D li
NaturalGasPriceDeliveredtoElectricGeneration
d t El t i G
ti

HighRecoverableReserves

LowRecoverableReserves

HighRecRsv+HighEURperwell

LowRecRsv+LowEURperwell

REFERENCE

HenryHub REF

RecoverableReserves includesTotalUnprovedTechnicallyRecoverableShaleGasResources
Presentation to NASUCA Mid-Year Meeting
Shalegasproductiongrowstoaccountforalmost50%oftotalproductionby2035
By: M. Whitten June 28, 2011
PriceRangesbetween$5and$9permmBtuby2035 inRealTerms

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Technology Reserves & Pipeline Flows: Northeast Supply Hub Forms


Technology,

Historic dominant
source of gas supply
Conventional wells
TX, LA

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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Case Study: Market Impact on Tennessee Gas Pipeline

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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Problem: How to move incremental 2.8 Bcf/d from the middle of long-haul
g
design
g system
y
?
Solution: Strategic Incrementally priced expansions & back hauls

Source: NECA Fuels Conference, September 2010

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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Back Haul agreements to maintain value off capacity, but physical limit:

Source: NECA Fuels Conference, September 2010

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

19

Net Imports : TGP Canadian Receipts at Iroquois/Transcanada:


Chapman Testimony Exhibit No. TGP-149

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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RESULT: Underutilized Design Capacity = Cost under recovery

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

21
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T
Tennessee
Gas
G Pipeline
Pi li (TGP) General
G
l Rate
R t Case
C
FERCDocketNo.RP111566:filed11/30/2010(Previous:1994/1996)
Strategy:
Alignrateswith
Align rates with current
currentconditions
conditions
Rollinmarketareaexpansions
Correctcostunderrecovery
Negativesalvageandaccelerateddepreciation
ReasonableROItomaintainaccesstocapitalmarkets(FitchRatingBBB)
Costofserviceexcludesrevenuefromdiscountednegotiatedrateservice
BackhaulratesEFVdesign

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

22

RESULT: TGP Proposed Revenue Requirement increases 24%

$billions

Existing Proposed
RP95112 RP111566 %change

RateBase
Rate
Base
CostofService(*)
TotalRevenueRequirement:

1.5
0.7
0.8

2.6
1.06
1.05

MaximumRateBillingDeterminantsMMDth/day
Maximum
Rate Billing Determinants MMDth/day
Reservation 4.2 3.9
Usage:
4.7
Including Discounted Capacity:
IncludingDiscountedCapacity:
7.9 7.2

78%
51%
24%
5.9%
8.9%
8.9%

(*)w/oincreaseddeprec&negsalvagecosts=$0.956bilorapprox35%increase

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

23
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TGP Also Proposed Higher Cost of Equity:


CapitalStructure

Existing

Proposed

RP95112

%ofTotal

Debt(+)

notpartof
settlement

48%

3.3%

Equity(*)

12.71%

52%

6.6%

100%

9.9%

g
g
WgtdAverage:

wgtdavg RP111566

%ofTotal

wgtdavg

7.81%

45%

3.55%

13.50%

55%

7.36%

100%

10.91%

(*)RP95112costofequityperwitnessC.Oblitas,capitalstructurenotpartofsettlement
(+)notpartofRP95112settlement,estimatedfrompretaxrateofreturn15.3%

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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RESULT R
RESULT:
Rate
t Sh
Shock,
k C
Complex
l S
Settlement
ttl
tN
Negotiations
ti ti
Short Haul Zone 4 to 6
Marcellus to Boston citygate

SFV

EFV

Proposed increase + SFV:

$12.44 vs $5.89 / Dth-mth

Rate impact : > 100%


Depends upon load factor
Variable rates lower

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

25
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R C t ti Risk
Re-Contracting
Ri k Not
N tU
Unique
i
to
t TGP

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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REX-NEX extended map: Competition for Premium Northeast Markets

Algonquin
Iroquois
q
Gas
Tennessee
TETCO

Transco
REX--NEX

Source: IOGA Annual Meeting, May 2008, www.rexpipeline.com

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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T
Texas
Eastern
E t Transmission
T
i i (TETCO):
(TETCO) NY
NY-NJ
NJ Expansion
E
i

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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S t / Algonquin
Spectra
Al
i IIncremental
t lM
Market
k t (AIM) project
j t:

Algonquin already seeing the impact of Marcellus


today without downstream market expansion
Proposing new OFO policy as a result
Presentation to NASUCA Mid-Year Meeting
By: M. Whitten June 28, 2011

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D i i TTransmission:
Dominion
i i
Appalachian
A l hi Gateway
G t
Project
P j t
- Interconnects with
TETCO at Oakford , PA

- Major short-haul receipt


point for NE LDCs

- In Service: Sep 2012


FERC CP10-448

http://www.dom.com/business/gas-transmission/appalachian-gateway/index.jsp

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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R ki P
Rockies
Production
d ti Growth
G th Impacts
I
t M
More than
th REX
REX-East
E t

RUBY PIPELINE
Kern River Gas Transmission Company Customer Meeting, October 19, 2010

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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R ki Production
Rockies
P d ti Growth:
G th Redirects
R di t Western
W t
Market
M k t Flows
Fl
May reduce gas flow from Opal on Kern / Questar,
More liquidity at SoCal border from other pipelines
Provides incentive for backhauls on Kern?

Opal

Kern River Gas Transmission Company Customer Meeting, October 19, 2010

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

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B kk Shale
Bakken
Sh l Region:
R i
Both
B th Oil & G
Gas Shale
Sh l Pl
Play
Substantial Infrastructure Issue:
Oil shale production considered
economic when Crude Oil > $60 per bbl
Today Insufficient pipeline take-away
capacity
Shipping excess production by:
Rail
Truck
Impact on roads becoming a huge
issue for local governments

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

33
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NEXT LEVEL OF SHALE IMPACT


IMPACT: LNG EXPORTS ??
2011 DOE Approval to export
/ Proposed
oposed to FERC
C ((2012):
0 )
Sabine, LA: (Cheniere)
import: 2.6 Bcf/d
export: 803 bcf per year
(prelim agrmt w/ Chesapeake)

Freeport, TX: (Macquarie)


import: 1
1.4
4 Bcf/d
export: 511 bcf per year
Under consideration:
Cove Point, MD (Dominion)
Lake Charles(Southern / BG)
Jordan Cove (Oregon)
Presentation to NASUCA Mid-Year Meeting
By: M. Whitten June 28, 2011

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NEXT LEVEL OF SHALE IMPACT: Target Market Price Differential

~ $12 - $13 /mmBtu

~ $4 - $5 per mmBtu

Presentation to NASUCA Mid-Year Meeting


By: M. Whitten June 28, 2011

35
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NEXT LEVEL OF SHALE IMPACT


IMPACT: US GOM Competitive?
C
titi ?
LNG
LNG Export
Export Potential:
Potential
$billions w/ a B to
add liquefaction trains
2014 / 2016 estimate
for first export of
domestic production
(not re-export)
8 announced
3 in Canada, 5 in US
totaling 5.4 Bcf/d
given world market
conditions Platts
estimates 1 to 2 Bcf/d
Presentation to NASUCA Mid-Year Meeting
By: M. Whitten June 28, 2011

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STATUS OF SHALE GAS DATA:


DATA

or Public
P bli ?

BesidesTrade&BroadsheetPress
Besidesadvocacygroups(bothsides)&corporatewebsites
PA DEP Well Production Data
PADEPWellProductionData
http://www.dep.state.pa.us/dep/deputate/minres/oilgas/new_forms/marcellus/marcellus.htm

FracFocus.org
FracTracker.org
PennState(GeologyandAgriculture)
EPADraftHydraulicFracturingStudyPlan
http://water.epa.gov/type/groundwater/uic/class2/hydraulicfracturing/upload/HFStudyPlanDraft_SAB_020711.pdf
Presentation to NASUCA Mid-Year Meeting
By: M. Whitten June 28, 2011

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QUESTIONS ?

Thanks!
Contact Information:

Melissa Whitten
La Capra Associates
One Washington Mall
Mall, 9th Floor
Boston, MA 02108
Tel: 617-778-5515
acochis@lacapra.com
mwhitten@lacapra com
mwhitten@lacapra.com
Presentation to NASUCA Mid-Year Meeting
By: M. Whitten June 28, 2011

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