Workshop U - Utica Shale Update after a Two … by Midwest Energy Logistics Customer Presentation...

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Workshop U

The Utica Shale Poised to Resume Growth After a

Two-Year Timeout

Tuesday, February 21, 2017 3:15 p.m. to 4:30 p.m.

Biographical Information

Mark Jergens, Founder & CEO Midwest Energy Logistics, LLC

Columbus, OH Phone: 614.477.0313 Fax: 866.898.5810

[email protected] Website: www.midwestenergylogistics.com

Mark is a hydrocarbon expert at a time when Ohio is producing more hydrocarbons than ever before. Over the course of his 25-year professional career, Mark has gained a unique and deep wisdom concerning the buying/selling of natural gas, electric power, and NGLs. This knowledge base is derived from thousands of negotiations for physical supply, transportation agreements, contracts, and complex integrated agreements. Mr. Jergens has represented or worked alongside just about every possible participating segment of the energy transaction chain including: large manufacturers, commercial buyers, producers, pipelines, engineers, attorneys, consultants, and marketers. Mr. Jergens is currently the CEO of Midwest Energy Logistics, a company started in 2005 specializing in providing its customers market intelligence and physical transaction excellence. MEL approaches problem solving from a scientific viewpoint and helps its' clients think through biases and the ever-present resistance to change. Mark is also a co-owner of CVR Liquids, LLC which constructs NGL extraction plants and then markets the resulting hydrocarbons. Prior to founding Midwest Energy Logistics and co-founding CVR Liquids, Mr. Jergens was the Chief Commercial Officer at Somerset Gas Transmission, responsible for long-term business development and selling pipeline transportation. Mark has also worked as Vice President of Supply for Constellation Energy where he directed one of the country’s largest industrial procurement team’s activities. While at Constellation, Mark also had the privilege of working directly with large many energy buyers with significant North American footprints. Mark was also the Co-Founder and former CEO of EnergyGateway (now part of World Energy Exchange) where he worked for the benefit of many prominent Midwest manufacturers. Mark also served as a Vice President with Clinton Energy Management Services where he primarily contributed his expertise to the firm's largest clients. Mark first learned the industry as a logistics expert with one of the pioneering energy marketing companies, Access Energy. Mark has a B.S. in Engineering from The Ohio State University and an Honorary Master’s degree in Risk Management. Mr. Jergens now resides near Columbus, OH with his beautiful and talented wife of 22 years, 18-year old son, and 9-year old daughter. Mark is an honorable member of the Kentucky Colonels; a distinction earned through a history of volunteerism and charitable giving. Mark can be reached via email at [email protected].

Midwest Natural Gas Pipeline New Infrastructure Overview

Presented by Midwest Energy Logistics

Customer Presentation – Feb 2017

Goals of PresentationMaking sense of the infrastructure in the Marcellus/Utica Shale - Activity levels in the hydrocarbon bonanza known as the Marcellus/Utica

Shale picking up again after a two year hiatus. Understanding the fundamental differences between the dry Marcellus

and the wet Utica. Charting the costs of gathering, processing, fractionation, and

transportation inherent in the region. Learn how the least valuable commodity, ethane, drives the decision

making of producers. Natural Gas - learn what's new including updates on Rover, NEXUS,

Atlantic Sunrise, Leach/Mountaineer Xpress, Mariner, Utopia, and Cornerstone pipelines.

Insights on where Utica/Marcellus producers are selling their natural gas and what that tells us about regional basis values.

Measuring how much incremental contract risk pipeline companies are taking on by selling projects to producers instead of utilities.

How to evaluate producer costs of transportation and the long term fixed demand charges that come with these agreements.

Midwest Energy Logistics – Utica/Marcellus Infrastructure - February 2017

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SimplifiedViewofHydrocarbonIndustry3


SimplifiedViewofHydrocarbonIndustry


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Methane

Ethane

Propane

Butane

Pentane

Oil/Condensate

Methane is also the main ingredient in natural gas. It is shipped to consumers via an established pipeline grid. Used as heating fuel, electric generation fuel, and process fuel.

Ethane is used in the production of ethylene for making plastics, anti-freeze and detergents; it's a ripening agent for foods, a refrigerant, a substance in producing welding gas. Ethane is a component in natural gas and is removed by cryogenic liquefaction. Primary US consumption of ethane is in Sarnia, ONT, Gulf of Mexico coastal region, and Sandy Hook, PA (export terminal)

Propane is commonly used as a fuel for engines, oxy-gas torches, portable stoves, and residential central heating. Primary US consumption is in Northeast states.

Butane It is used as a petrol component, as a feedstock for the production of base petrochemicals in steam cracking, as fuel for cigarette lighters and as a propellant in aerosol sprays such as deodorants.

Pentanes are some of the primary blowing agents used in the production of polystyrene foam and other foams. Is also used as a solvent or diluent. A mixture of Butane and Pentane is used to mix with Canadian tar sands oil to ease transport.

Petroleum products include transportation fuels, fuel oils for heating and electricity generation, asphalt and road oil, and feedstocks for making the chemicals, plastics, and synthetic materials that are in nearly everything we use today.

TheBigPicture– NaturalGasFlows


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1980-2015 2020

TheBigPicture– NGL/LPGFlows


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Propane - Current Ethane - Current

Marcellus/UticaNGProductionTrajectory


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TheNGL/LPGStory


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Source: Blue Racer

ImportantPrinciplesBehindMostNewNGBuildProjects

Producers first had existing pipelines squeeze out new capacity to NE, or turn around, this $.15-.25 solution didn’t last long (and CHK snatched up most these opportunities) DTI, Dominion East Ohio Gas, REX, TETCO, Tennessee

Then sheer enormity of new volumes forces greenfield builds to move gas to long haul pipelines without direct Utica/Marcellus access ($.50 solutions) Texas Gas, Col Gulf, Trunkline, ANR, PEPL, Williams

Most new projects funded by producer 15 year commitments, whereas in the past 50 years almost all new projects were funded by regulated utilities shipper commitments (“A” credit companies with regulated rate of return)

The few projects to get regulated utility support (NEXUS, Atlantic Coast) have lagged in gaining binding commitments


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MidwestNaturalGasPre‐2015TradeMovements


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Defiance

Lebanon

Leach

Clarington

Leidy

M3/Z6

LNGImports

MidwestNaturalGasPost‐2017TradeMovements


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Defiance

Lebanon

Leach

Clarington

Leidy

M3/Z6

LNGExports

1

1,2

23

4 5

6,9

7,8

MidwestNaturalGasBasisValues


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Defiance

Lebanon

Leach

Clarington

Leidy

M3/Z6

LNGExports

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Toledo Hub2010 +.202016 +.252018 -.05

Lebanon Hub2010 +.202016 +.052018 -.25

Clarington Hub2010 +.302016 -1.252018 -.60 Transco Z5 Hub

2010 +.352016 +.302018 +.15

M2/Z6 Hub2010 +.652016 +.452018 +.35

Leidy Hub2010 +.252016 -.402018 -.25

New Greenfield ProjectsMajor New NG Pipeline Projects 1. Rover Pipeline – 3.25 Bcfd – Q3 20172. Nexus Pipeline – 1.35 Bcfd – Q1 20183. TETCO OPEN – 0.6 Bcfd – Q4 20154. Leach XPress – 1.5 Bcfd – Q2 20185. Mountaineer XPress – 2.7 Bcfd – Q2 20186. Atlantic Coast – 1.5 Bcfd – Q4 20187. Atlantic Sunrise – 1.7 Bcfd – Q2 20188. Penn East – 1.0 Bcfd – Q4 2018 (runs largely parallel to Atlantic Sunrise)

9. Mountain Valley – 2.0 Bcfd – Q4 2018 (runs largely parallel to Atlantic Coast Pipeline)

Total New Build from 2015-2018 = 15.6 Bcfd


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Rover Pipeline Owner: Energy Transfer Partners (owners of Panhandle, Trunkline, Sunoco)

Size: Two 42” steel lines in OH, Single 42” line from Defiance, OH to Vector Pipeline in MI, 711 miles total new build

Capacity: 3.25 Bcfd from Eastern Ohio to Defiance, OH, 1.25 Bcfd from Defiance to Vector Pipeline

Starts Operation: July 2017

Capacity Sold: 98% subscribed

Biggest Shippers: Antero, Traverse Midstream, Southwestern, Eclipse, Range Resources, Gulfport, Rice, and EdgeMarc

Capacity Rates: $0.55 to Defiance, $.80 to Michigan, $.82 to Gulf Coast via Trunkline

Supply Sources: Just about every processing hub in OH, PA, and WV

Major Pipeline Interconnects: ANR (Defiance), Panhandle (Defiance), Trunkline (PEPL), Vector (Dawn Hub)

MEL forecasted basis value: -$0.05 to -$0.20 at Defiance, depends on backhaul costs on ANR/Trunkline


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NEXUS Pipeline Owners: DTE Energy and Spectra (owners

of Texas Eastern)

Size: One 36” steel line in OH, Single 30” line from Defiance to Vector in MI

Capacity: 1.35 Bcfd from the Kensington, OH processing hub to Dawn Hub

Starts Operation: November 2017

Capacity Sold: 60% subscribed (but reps say it’s fully approved and steel pipes arriving daily)

Biggest Shippers: Chesapeake, Consol, Noble, DTE, Enbridge, Col of Ohio

Capacity Rates: $.80 to Michigan, $.50 to Ohio

Supply Sources: Momentum M3 processing hub in Kensington OH, and the TETCO OPEN Line

Major Pipeline Interconnects: MICHCON, ANR, Panhandle, Trunkline (PEPL), 12-13 smaller Ohio interconnects

MEL forecasted basis value: -$0.10 to -$0.25 at Toledo area


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TETCO OPEN Pipeline Owner: Spectra (owners of Texas Eastern)

Size: One 30” steel line in OH, 76 miles

Capacity: 0.55 Bcfd from the Kensington, OH processing hub to Clarington Hub

Started Operation: November 2015


Biggest Shippers: Chesapeake, Consol, Total, Rice

Capacity Rates: $.20 to Clarington, $.65 to points south on TETCO

Supply Sources: Momentum M3 processing hub in Kensington OH

Major Pipeline Interconnects: TETCO, REX, Tennessee, DTI

MEL forecasted basis value: -$0.55 to -$0.60 at Clarington area


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Leach XPress Pipeline Owner: TransCanada (formerly CPG)

Size: One 36” steel line (with some 30” line), 160 miles

Capacity: 1.5 Bcfd from Majorsville Processing hub to Leach, KY

Starts Operation: June 2018


Biggest Shippers: Range, Noble, Kaiser, Ascent (AEP)

Capacity Rates: $.40

Supply Sources: Majorsville Processing hub

Major Pipeline Interconnects: TCO, Columbia Gulf

MEL forecasted basis value: -$0.25 to -$0.35 at Leach


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Mountaineer XPress Pipeline


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Owner: TransCanada (formerly CPG)

Size: One 36” steel line, 165 miles

Capacity: 2.7 Bcfd from Majorsville Processing hub to TCO mainline on WV



Biggest Shippers: Range, Noble, Kaiser, Ascent (AEP)

Capacity Rates: $.40

Supply Sources: Majorsville Processing hub

Major Pipeline Interconnects: TCO

MEL forecasted basis value: -$0.25 to -$0.35 at interconnect

Atlantic Coast Pipeline Owners: Dominion, Duke, Piedmont, Southern

Size: One 42” steel line (with some 36” in NC) from Harrison County, WV to North Carolina, 556 miles

Capacity: 1.5 Bcfd from the Kensington, OH processing hub to Dawn Hub



Biggest Shippers: Dominion, Duke, Piedmont, PSCNC, VNG

Capacity Rates: $.50 to VA, $.75 to NC (MEL estimate)

Supply Sources: Berne, OH and Natrium, WV processing hubs (owned by Blue Racer)

Major Pipeline Interconnects: VEPCO power plants, Duke Progress, Duke Carolinas, Piedmont, PSCNC, VNG

MEL forecasted basis value: +$0.25 at VA/NC area


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Atlantic Sunrise Pipeline

Owner: Williams (owners of Transco)

Size: One 42” steel line for 125 miles and one 30” line for 57 miles

Capacity: 1.7 Bcfd from the Leidy line in PA to Transco Station 85 in Alabama



Biggest Shippers: Anadarko, Cabot, Chief, Seneca, Southwestern Energy

Capacity Rates: $.38 (tariff)

Supply Sources: Leidy Line

Major Pipeline Interconnects: Transco

MEL forecasted basis value: +$0.25 at VA/NC area


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Incremental Capacity into the US NE Region Slow to Grow


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MEL Quote: “The US East Coast and West Coast are where great energy projects go to die.”

The US Northeast is the premium market to sell NG, and has severe deliverability issues, but NIMBY, environmental lobby, and government combine to make new projects scarce

KeyDifferencesBetweentheDryMarcellusandWetUticaDry Marcellus Gas generally meeting 1100 Btu tariff

threshold (or waiver gas) can be gathered directly into interstate lines

TGP alone added hundreds of separate taps from 2010-2015 ($3.0 Million/tap)

Ethane just gets sold as natural gas, raising Btu factor of stream

Breakeven costs can be isolated to methane production

Wet Utica Hydrocarbon mix heavy with NGLs/LPGs Production must first be gathered to

processing hubs Output from processing hub consists of tail

gas (methane and ethane) and the bundle of NGLs/LPGs called Ygrade or Ymix

Mega interconnects at processing hubs take tail gas, while separate pipes move Ymix to Fractionation plant

Ethane most difficult component to transport due to dew point challenges and is least valuable/wanted NGL

Ethane rejected (kept in nat gas stream) to the furthest extent possible.

Breakeven cost calculation much more complicated, total hydrocarbon output and values needs to be evaluated


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HowMuchDoesitCosttoGather,Process,Fractionate,Transport?

Dry Marcellus (Producer costs per MMBtu) Prod Cost = $2.00 Net Royalties = $0.15 Gathering = $0.35 Transportation = $0.45 Basis Adjustment = $.10 Total B/E NYMEX = $2.75

Basis is defined as the difference between the sales point and the Henry Hub. The Midwest region Basis is generally negative and ranges from -.15 to -1.50

Wet Utica (Producer costs per MMBtu) Prod Cost = $2.20 Net Royalties = $0.15 Gathering = $0.35 Processing = $0.45 Transportation = $0.25 Basis Adjustment = $.75 Total B/E NYMEX = $4.15

Producers shifting costs from Basis value of gas to higher transportation costs in order to escape bottlenecks

But equation must also include cost of NGL/LPG Fractionation (.07-.09 per gal) and transport (.10-.30 per gal) versus value of resulting purity NGLs/Condensate/Oil

Not possible or relevant to calculate stand alone nat gas BEMidwest Energy Logistics – Utica/Marcellus Infrastructure - February 2017

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HowtoIdentifyAddedValueWhenEvaluatingPipelineProjects

Straightforward analysis IRR

Cash flows

MLP dividends

Basis spreads

Supply/Demand balance

Added Value (1+1=3) Bifurcation opportunities

Connections to other pipelines owned by developer

Opportunity to re-file tariff rates

Increased Risk Producer creditworthiness

Producer re-contracting fickleness

Utility contracting turnback schedule

High cost reservoir storage decontracting (replaced by LNG exports)


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HowPositiveBifurcationWorks

In this example, let’s say that 1.0 Bcfd is flowing from A to B on a 36” pipeline

The pipeline collects $.40 in transport fees

Total Revenue is thus $146,000,000


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Point A, Supply Source 1 Bcfd

Point B, Demand Center 1 Bcfd Point B, Demand Center 1 Bcfd

Point A, Supply Source 1 Bcfd

Point D, Supply Source 1 Bcfd

Point C, Demand Source 1 Bcfd

Now the pipe is moving1.0 Bcfd from A to C and another 1.0 Bcfd from D to B

The pipeline collects $.25 in transport fees

Total Revenue is thus $182,500,000

The Major Utica/Marcellus Processing Players

Big 5 Processors:

1. MarkWest (now MPLX)

2. Blue Racer (Caiman/Dom)

3. M3 Momentum (with CHK)

4. Williams (purchase from Caiman)

5. Pennant Midstream (NiSource/Hilcorp


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Marcellus/UticaProcessingHubs


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Source:MarkWest(nowMLPX) Source:M3Momentum

NGLProcessing&Transportation


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Source: Blue Racer

NGLProcessing&Transportation


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Source: Antero Resources

Mariner East II Owner: Sunoco Logistics (part of Energy

Transfer Equity MLP)

Size: One 20” steel lines and one 16” line from Ohio to Philadelphia area (Marcus Hook Marine Terminal), 350 miles

Capacity: 24” will move 275,000 b/d initially then expand to 450,000 b/d. The 16” line will move 250,000 b/d. ME 1 is 70,000 b/d.

Starts Operation: July 2017


Products: Propane, Butane, Ethane

Capacity Rates: $0.14 per gal, $5.88 per barrel (42 gallons in 1 barrel)(MEL est.)

Supply Sources: Houston, Hopedale, Scio, and Natrium processing hubs


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Utopia Pipeline Owner: Kinder Morgan

Size: One 12” steel line from Cadiz Processing Hub in Ohio to existing KM pipe in Fulton County, Ohio, 215 miles

Capacity: 50,000 b/d initially then expand to 75,000 b/d. Products moving to Sarnia, ONT

Starts Operation: April 2018


Products: Ethane and Propane

Capacity Rates: $0.12 per gal, $5.04 per barrel (42 gallons in 1 barrel) (MEL est.)

Supply Sources: Cadiz and Hopedale processing hubs


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Cornerstone Pipeline Owners: MLPX MLP and (soon to be part of

Energy Transfer MLP)

Size: One 16” steel line from Harrison County Ohio to Canton, OH, 50 miles

Capacity: 180,000 b/d

Starts Operation: September 2016


Products: condensate, natural gasoline, diluent and butane

Capacity Rates: $0.06 per gal, $2.52 per barrel (42 gallons in 1 barrel)(MEL est.)

Supply Sources: Cadiz, Scio, and Hopedale processing hubs

Connects to: Canton refinery, Lima refinery, Toledo refineries through other pipelines


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Thank You

Mark Jergens

Midwest Energy Logistics, LLC

(614) 477-0313

[email protected]


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Workshop U - Utica Shale Update after a Two … by Midwest Energy Logistics Customer Presentation...

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