Opening Global Markets to Booming U.S. Shale Gas and NGL Production

Vinson & Elkins and

ICF International Welcome You

June 25, 2014

Opening Global Markets to Booming U.S. Shale Gas and NGL Production ICF International – Vinson & Elkins Houston Energy Breakfast

June 25, 2014

1

Today’s Agenda

Introductions

Market Outlook – Greg Hopper

Regulatory & Contractual Considerations – James Olson

Q&A

2

ICF Leaders and Subject Matter Experts

Kevin Petak VP and Head of Fundamental Analysis

Michael Sloan Principal and NGL Markets Practice Leader

3

NGLs and Midstream Investment – Good Times

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014Pr

ice

Ratio

WTI/Henry Hub Price Ratio

4

Natural Gas, Oil, and NGL Production – ICF Base Case

U.S. and Canadian Natural Gas Production (Average Annual Bcfd)

U.S. and Canadian Liquid Production Average Annual Million Barrels per Day (Bbl/d)

NGL production grows 3.2% per year. Gas production rises 1.8% per year

5

Recent Growth of NGL Production

Most of the growth is in light products: 47% Ethane; 29% Propane

36% Growth – 2009 to 2013

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NGL Production by Basin – ICF Base Case

0

1,000

2,000

3,000

4,000

5,000

6,000

MBPD

Western Canada ShalesOther U.S. UnconventionalMarcellus + UticaE. Texas & OklahomaEagle FordBakkenRockiesConventional

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NGL Fractionation (Bcfd) – ICF Base Case

0.0 0.0 0.0 0

1

2

3

2011 2025 2035

Arctic

0.6 1.0 1.1

0

1

2

3

2011 2025 2035

Canada

0.1 0.1 0.1 0

1

2

3

2011 2025 2035

Western

0.2 0.3 0.4

0

1

2

3

2011 2025 2035

Central 0.1

0.5 0.5

0

1

2

3

2011 2025 2035

Midwest

0.0 0.3 0.4

0

1

2

3

2011 2025 2035

Northeast

1.8 3.4 3.9

012345

2011 2025 2035

Southwest

0.0 0.1 0.1 0

1

2

3

2011 2025 2035

Southeast

0.0 0.0 0.0 0

1

2

3

2011 2025 2035

Offshore

U.S. and Canada fractionation rises to 6 million barrels per day by 2035.

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Propane Supply / Demand Balance

0

500

1,000

1,500

2,000

2,500

3,000

MBP

D

Additional Export Capacity

Planned PDH Capacity

Existing PDH Capacity

Baseline Export Capacity

Baseline Cracker Demand

Consumer Sector Demand

Propane Supply + Butane Exports

ICF Base Case

If all export capacity is built, it will result in an “overbuild” with propane supply falling below market potential.

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NGL Supply/Demand Balance in the Marcellus/Utica Area

Local Propane Demand

Unity Pentanes+

Mariner West Ethane

ATEX Ethane

Mariner East Propane

Mariner East Ethane

ATEX Propane

Bluegrass Y-Mix

Utica/Marcellus TX Pipeline (TGP) Y-

Mix

Mariner East 2 E/P/B Mix

Utopia E/P Mix

Proposed Appalachia Cracker

-

200

400

600

800

1,000

1,200

1,400

1,600

MBP

DICF Base Case

Projects and production in relatively close balance over next 5 years, but some projects are uncertain.

After 2020, more capacity (incremental market growth) will be needed.

Specific timing of development will affect the amount of ethane rejection, but there are limits on the amount of ethane rejection that can occur.

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NA Ethane Supply to Outpace Demand

The impact of falling prices has offset the value of production growth; value to producers has increased by just 4% and at times Mont Belvieu ethane has traded at a negative ‘frac’ spread to natural gas. “

[SERIES NAME]

[SERIES NAME]

0

500

1,000

1,500

2,000

2,500

3,000

3,500

MBP

D

Odebrecht/Braskem Lubeck, WV

SABIC , TX/LA

Indorama Ventures , TX/LA

Sasol Lake Charles, LA

Mexichem/OxyChem Ingleside, TX

Dow Chemical Freeport, TX

Chevron Phillips Chemical Baytown, TX

Aither Chemical Charleston, WV

Formosa Plastics Point Comfort, TX

ExxonMobil Baytown, TX

Dow Chemical Freeport, TX

Westlake Lake Charles, LA

BASF-TOTAL Port Arthur, TX

Sunoco Export Terminal Marcus Hook, PA

Westlake Calvert City, KY

LyondellBasell Laporte, TX

Dow Chemical Plaquemine, LA

LyondellBasell Channelview, TX

Williams Geismar, LA

Nova Chemicals Corp. Corunna, ON

High Recovery Case

ICF Base Case

Low Recovery Case

Cases derived by assuming

different levels of ethane rejection.

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Recent U.S. Propane Exports

Total U.S Export Capacity is now 6.6 billion gallons annually.

2014 expansions are expected to add another 2.5 billion gallons.

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Operational and Planned LPG Export Capacity

Enterprise Debottlenecking

Enterprise Expansion

Targa Refrigerated Terminal Phase I

Targa Refrigerated Terminal Phase II

Sunoco Marcus Hook Terminal

Oxy Corpus Christi Terminal


Sunoco Nederland Terminal

Pembina (Canada) Terminal


Williams/Boardwalk Terminal

Phillips66 Freeport Terminal

Sage Midstream Longview Terminal

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NGL Flows to 2035 – ICF Base Case

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North America Midstream Capital Expenditures

Source: ICF Midstream Infrastructure Study for INGAA

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Natural Gas Liquids Capital Expenditures

Source: ICF Midstream Infrastructure Study for INGAA

Thank you. Greg W. Hopper [email protected] 713.445.2024

mailto:[email protected]

©2014 Vinson & Elkins LLP Confidential & Proprietary

Opening Global Markets to Booming U.S. Shale Gas and NGL Production

June 25, 2014

V&E – ICF International Houston Energy Breakfast


Infrastructure to Get Natural Gas and NGLs to Domestic and International Markets: Regulatory &

Contractual Considerations

• Gas Gathering/Processing

• Gas & NGL Transport

• LNG & NGL Terminals

Overview

2


Introduction

3

• Shale production has revolutionized oil and gas industry in US

• Natural gas and NGL markets are flooded – Transportation Constraints – Need for Exports


Gas Gathering – Regulatory Issues

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• Exempt from FERC jurisdiction

• Modified Primary Function Test – Physical Factors: (1) length and diameter, (2) central

point in the field, (3) geographic configuration, (4) compression and processing, (5) location of wells along the line, and (6) operating pressure

– Non-Physical Factors


Gas Gathering – Contractual Issues

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• Dedications

• Obligation to Construct

• Standard of Service

• Price

• Term


Processing/Fractionation

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• Not Regulated

• Contracts – Dedications – Standard of Service – Allocations – Price – Term


Natural Gas Transport - Regulatory

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• Jurisdiction – Intrastate

• Hinshaw • NGPA Section 311

– Interstate • Construction – NGA Section 7 • Rates – NGA Sections 4 & 5


Natural Gas Transport – Contractual Issues

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• Volume & Anchor Shipper/Foundation Shipper Status – Priority – Rate Certainty/MFN

• Firm/Interruptible

• Price

• Receipt/Delivery Points

• Term


NGL Transport – Regulatory Issues

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• Jurisdiction – FERC has jurisdiction under ICA for interstate movements – Fixed and persisting intent of the shipper

• Common Carriage

• Open Seasons & Declaratory Orders


NGL Transport – Contractual Issues

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• Deficiency Payments/Volume Commitment

• Quality of Service – Firm Service – Historical Prorationing

• Rate

• Origin & Destination Points

• Term


LNG & NGL Export Terminals – Regulatory and Contractual Issues


LNG & NGL Export Terminals – Regulatory Issues

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• LNG Terminals require FERC or MARAD authorization – No tariff, no open access requirements – Environmental review

• NGL Export Terminals generally not jurisdictional under ICA – Storage and terminalling generally not jurisdictional – Except if integrated or necessary to transportation, such as

breakout tanks

• Export of LNG requires approval from DOE Office of Fossil Energy


LNG and NGL Export Terminals – Basic Commercial Structure

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• LNG export terminals: – FOB Sales of LNG: Sabine Pass – Tolling – liquefaction services

• Receipt of natural gas at inlet • Liquefaction and limited storage • Loading on vessels

• NGL export terminals: – Traditional: terminal buys product and sells FOB – New terminals: tolling – terminalling services

• Receipt of liquids, often in batches • Limited storage as necessary for terminalling • Loading onto vessels (and possibly rail/trucks/pipelines)


LNG and NGL Export Terminals – Key Provisions of Tolling Agreements

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• CPs – Permits and authorizations

• LNG: Export authorization for non-FTA countries – FID – Pipeline – Commercial Start

• Commercial Start – Window notice mechanism but commercial start is not absolute – No delay damages for late start – Termination right for missing long stop date, sometimes with and

sometimes without damages

Timing


LNG and NGL Export Terminals – Key Provisions of Tolling Agreements cont.

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• Term/extensions – Initial term 10-20 years – Extensions may be limited and subject to full capacity

being booked for all customers

• Termination – Extended failure to provide service – Extended Force Majeure

• Rights to expansion capacity



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• Customer’s Obligation: Send or Pay • Fee during services unavailability:

– Caused by Operator – Caused by Other Customers – Caused by Customer – Resulting from Force Majeure

• Affecting the terminal • Affecting Customer’s ability to use the terminal

• Adjustment for capital cost over/under • Fee Mitigation

– Banked volume – Make-up volume

• Change in Law – New regulatory costs and taxes – Threshold or deductible – Possible sharing of costs – How to design incremental rate

• Credit support

Toll / Fee



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• Receipts and deliveries: – May have bidirectional ability, import and export. – Priorities?

• Inventory management: – May need to load vessel when Customer inventory has not reached cargo

size – Limits may be imposed on how far negative inventory Operator will allow –

must not interfere with subsequent loadings – Settling inventory positions

• Operator liability for shortfall/service unavailability – May be limited to excuse of fee – Direct damages? – Threshold

• Terminal manual • Non-discrimination • Off-spec input, output


LNG Export Terminals – Particular Issues

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• Gas pipeline interface – Gulf Coast: header pipeline connecting to existing pipeline

network – Other locations: mainline capacity may be lacking – Pipeline imbalances when Operator calls for changes in supply – Control of feed gas

• Loss of non-FTA export authorization – Due to Operator – Due to Other Customers – Due to Customer

• Ship-loading schedule


LNG Export Terminals – Particular Issues cont.

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• Cross-customer concerns in LNG Export Terminals – Failure to deliver feed gas – Failure to lift (tank tops) – Contamination of feed gas – Contamination of LNG inventory – Borrowing/lending of inventory

• Inter-customer agreements – May not be feasible to achieve – Customer base subject to change over time


NGL Export Terminals – Particular Issues

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• Storage rights: – Usually limited to what is necessary for receipt and loading. – Maximum storage volume and duration allowance.

• Scheduling: – NGLs terminals may hold different products and vessels may be able to

lift different products to different tanks – Object is to maximize throughput, such as by giving loading priority to

customer with highest inventory position – Single customer terminals are far simpler

• Receipts and deliveries: – May receive and delivery by multiple modes (pipeline, truck, vessel, rail)

• Demurrage – Arrival window – Laytime – Rates


James represents clients in: administrative litigation before the Federal Energy Regulatory Commission (FERC) involving the rates charged and services provided by natural gas pipelines and storage facilities; negotiating agreements for service on such facilities and other midstream facilities such as gas gathering and processing facilities and liquids pipelines; negotiating agreements for the purchase and sale of natural gas and liquids; obtaining necessary approvals and/or waivers from FERC and compliance with FERC regulations.

Partner 713.758.4656 [email protected]

James E. Olson

Speaker Biography

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Gary is a member of V&E's worldwide Energy Transactions and Projects practice group. His practice principally consists of representing owners/developers in major energy transactions and project development/joint ventures. This includes sales and transportation of hydrocarbons and hydrocarbon products, with particular experience in natural gas, LNG, LPG, and other liquids; and pipeline and processing plant development. He also has substantial experience in the regulation of energy and in contracts applicable to regulated energy transactions, including natural gas pipeline and LNG facility certificate, rate, and contractual matters; and oil pipeline rates and terms of service.

Partner 713.758.3435 [email protected]

Gary M. Kotara

Speaker Biography

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Opening Global Markets to Booming U.S. Shale Gas and NGL Production

Business

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