US Gas and LNG Markets - Continuing Challenges are Forecasted

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US GAS AND LNG MARKETS CONTINUING CHALLENGES ARE FORECASTED

INTRODUCTION Even though drilling targeting natural gas has declined to a multi-year low, US gas production continues to increase as E&P companies grow oil production and with it, oil-associated gas.

As noted by the Energy Information Agency (EIA), a new daily gas production record of 92.8 BCF per day was reached on August 19, 2019, up from about 72 BCF/day in January 2018.

This substantial increase occurred even as the price of natural gas continued to slide, falling from approximately $3.20 in early 2018 to less than $2.30 at the end of August 2019. Since that time, prices have rebounded somewhat with the normal seasonality of the markets, trading in the $2.50 - $2.70 range in September, though they remain well below the same period in most previous years. Further, according to EIA forecasts1, little improvement is expected for the remaining months of 2019 and early 2020 as storage volumes are within normal ranges and production continues to keep pace with demand.

1) https://www.eia.gov/outlooks/aeo/data/browser/#/?id=13-AEO2019&cases=ref2019&sourcekey=0

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US Gas and LNG Markets - Continuing Challenges are Forecast

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A CHANGING DEMAND MIX FOR US NATURAL GAS Though there are numerous factors that impact supply and demand for natural gas in any particular market, given the continuing increases in oil associated natural gas production in the US, the variables that will most affect prices will clearly be on the demand side for the foreseeable future. In this market, demand is driven by five components - residential & commercial demand (primarily for heating), industrial demand (manufacturing processes including combined cycle power generation and petrochem feedstocks), power generation, pipeline exports and LNG exports.

Residential & commercial demand is generally weather driven. Comparing Jan–June 2018 to the same period in 2019, residential & commercial demand increased 3.3%, primarily due to colder temperatures in the Northeast US. However, variances in seasonal demand from year-to-year generally even out and any changes from “normal” demand are usually absorbed by underground gas storage. Additionally, any increased demand driven by economic growth or new building construction is expected to be offset by mandated improvements in energy efficiency. As such, the EIA expects little growth in natural gas use in this sector, forecasting only a 0.2% increase through 2050.

Industrial demand generally follows economic growth patterns - an expanding economy will consume more natural gas for manufacturing and processing fuels & feedstocks. Overall though, current forecasts indicate growth through 2050 is expected to be slightly below 1% per year, with total demand from the industrial sector

expected to grow to 37 bcfd in 2050, an increase of about 9 bcfd over 2019.

The other three primary components of demand - power generation, pipeline exports (primarily to Mexico) and LNG exports - have become the predominate drivers of current and future demand growth and will have the greatest impact on prices and new infrastructure investment over the next several decades.

With increasing supplies of solar and wind renewable power flooding the US market and the continuing retirement of coal-fired generation, more gas-fired generation will be required to provide baseload generation and ensure grid stability. In total, gas burned for power generation will account for about 39% of the overall power mix in the US in 2050, up from 34% in 2019, resulting in an 3.6% increase in natural gas demand for power generation - from 28.5 bcfd in 2018 to 33.3 bcfd in 2050.

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US Gas and LNG Markets - Continuing Challenges are Forecast

Pipeline exports are expected to grow as well. Though some natural gas is exported to Canada via pipelines in New York and Michigan, those volumes are more than offset by Canadian imports in the western US. Mexico has become an increasingly important market for gas exports - helping to alleviate a backlog of supply in the southern US, particularly in West Texas. With the recent liberalization of the Mexican gas markets, US natural gas is increasingly suppling power generation and industrial demand in that country. Though exports to Mexico have grown rapidly in the last couple of years - from 2.0 bcfd in 2014 to 4.6 bcfd in 2018 - current forecasts expect demand for US gas to moderate as more Mexican domestic supplies are brought on-line and construction of new power plants slows. Overall, the EIA forecasts pipeline exports into Mexico will top out at 7.0 bcfd by 2050.

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LNG exports are expected to have the greatest impact on the future supply & demand balance as several new liquification and export facilities are completed and brought online over the next 10 years. In fact, the EIA projects that LNG exports will grow from 2.8 bcfd in 2018 to over 13.7 bcfd in 2030. However, after 2030, current EIA forecasts note that US-produced LNG is expected lose its price advantage compared to other global suppliers (as US domestic gas prices increase on tightening supply) and anticipates little or no growth in LNG exports from 2031 to 2050.

In all, total US domestic demand (net of exports) for natural gas is expected to grow from 29.34 TCF/year to 35.0 TCF/year in 2050. Factoring in exports, US domestic natural gas production will need to increase from 29.5 TCF/year to 43.4 TCF/year (or almost 119 BCFD) in order to maintain market equilibrium.

LOOKING CLOSER AT LNG In the 1990’s, most forecasts indicated that the US would require significant new quantities of imported oil and gas, and as such, several LNG import facilities were constructed along the Gulf Coast and in the Northeastern US to supply natural gas to the US markets. However, with the advent of long-lateral horizontal drilling techniques and massive hydraulic fracturing, vast new supplies of both oil and gas were opened for development in the tight sand and shales deposits across the US, leading to the country becoming a net exporter of both oil and gas in the last couple of years.

Simultaneously, the expanding global “green” movement is increasing demand for natural gas to replace, in part, coal for power generation. Coal to gas switching is not only forecast to grow in the US, but also in the European

markets where coal is being rapidly retired and in the Asian markets, where the pace of construction of new coal-fired generation is slowing, despite increasing demand for power to support rapid economic growth. As

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US Gas and LNG Markets - Continuing Challenges are Forecast

such US import facilities that were designed to accept LNG from overseas shippers have been idled and several have been “turned-around” as LNG liquification and export terminals. In total, more than a dozen new US LNG export facilities have been proposed, with 8 either complete or under construction, enough current capacity to supply more than 25% of the total global demand for LNG. With the recent commissioning of Freeport LNG’s Train 1 in August of this year, six LNG liquification/export facilities are currently operating in the US, with two others under construction. These include: • Sabine Pass (Louisiana) - began operation in early 2016 and currently has 5 trains running with a total baseload capacity of 2.95 BCF/day. The facility is also planning an additional 6th train, though a final investment decision has not been made.

• Cove Point (Maryland) - began operations in early 2018 and has a capacity of 0.69 BCF/day.

• Elba Island (Georgia) - launched commercial operations in October with a single relatively small train running producing .20 BCFD of LNG. Nine additional trains of similar size are in various stages of commissioning and/or under construction and will be phased into production over the next several months to a year. When complete, the entire facility will produce about 1.5 BCFD of LNG. • Corpus Christi (Texas) - currently has two trains in production, producing about 1.2 BFCD of LNG. A third train is under construction, bringing the facilities capacity to 1.8 BCFD by mid-year 2021.

• Cameron LNG (Louisiana) - train 1 began production in July 2019, and two additional trains are under construction. Once in full production around mid-

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year 2020, the facility will produce about 1.8 BCFD of LNG. • Freeport LNG (Texas) - train 1 began operation in August 2019 and two additional trains are under construction. With a total capacity of 2.0 BCFD, the plant will reach full production around mid-year 2020. A fourth train has been approved and is awaiting FID. • Golden Pass (Texas) - a buildout/turnaround of an existing LNG import facility along the Sabine River in Texas. With 3 trains under construction, the facility will have a total capacity of 2.0 BCFD when fully operational in 2025 • Calcasieu Pass (Louisiana) - recently reached a positive final investment decision and is slated to begin producing LNG sometime in 2023. With 10 trains, the plant is expected to produce 1.3 BCFD of LNG. In addition, there are six other facilities currently permitted and planned for the Gulf Coast region, though some of these may not ultimately move forward if they’re unable to secure long-term purchase commitments in an increasingly competitive LNG market. Though a couple are nearing final investment decisions, most are battling for market share with new plants proposed or under construction in Qatar, Russia and other countries positioned along the Asia Pac Rim that are better positioned geographically to serve the fast-growing markets in the region. These alternative suppliers have led the EIA to project that US LNG may no longer be price competitive after 2030, as US natural gas prices are expected to increase on rising domestic demand (primarily for industrial use and power generation) and slowing production growth.

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US Gas and LNG Markets - Continuing Challenges are Forecast

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MAINTAINING PROFITABILITY IN A CHANGING MARKET The US natural gas markets are the most complex in the world, with hundreds of thousands of pipeline miles, evolving areas of production, local or regional supply/takeaway imbalances and a changing demand pattern. And, with the market in an almost persistent oversupply situation, natural gas prices are near record low levels and trading margins continue to shrink.

However, pockets and short periods of volatility do occur in areas where infrastructure constraints have resulted in an oversupply (such as the Permian Basin or Marcellus region) or during times of peak demand (such as Artic fronts moving through densely populated markets). Unfortunately, these events are difficult to plan for and generally increase risks for traders and producers in the affected areas.

Profitably managing business for producers, traders and industrial consumers is more difficult than ever, and requires a broad market view that encompasses not only market prices but also the wide range of variables that impact natural gas supply, demand, and transmission.

In this market, participants need more coordination between operations and commercial activities and better market insights to anticipate market changes and make informed decisions in order to lock-in margin or ameliorate risks. As the number of data sources, both external and internal, continue to grow, a systematic approach to identifying actionable information within the tsunami of data is required…simply relying on a singular view of the market, like provided by the information contained with your ETRM solution, is akin to looking only at your rearview mirror while driving…you only know where you’ve been and will be guessing at where you are going in the future.

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