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Free Markets & Natural Gas

Free Markets & Natural Gas. Presentation to: CREA Energy Innovations Summit Denver, CO. October 14, 2011 By: John A. Harpole. Forward Looking Statements/Cautionary Note.

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Free Markets & Natural Gas

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  1. Free Markets&Natural Gas Presentation to: CREA Energy Innovations Summit Denver, CO October 14, 2011 By: John A. Harpole

  2. Forward Looking Statements/Cautionary Note This presentation is incomplete without reference to, and should be viewed solely in conjunction with the oral briefing provided by Mercator Energy. Except for the historical information contained herein, the matters discussed in this presentation are forward-looking statements that are based upon current expectations. Important factors that could cause actual results to differ materially from those in the forward-looking statements include risks inherent in exploratory drilling activities, the timing and extent of changed in commodity prices, unforeseen engineering and mechanical or technological difficulties in drilling wells, availability of drilling rigs and other services, land issues, federal and state regulatory developments and other risks.

  3. 4 Presentation to Senate Business and Commerce Committee & Senate Natural Resources Committee, April 15, 2008.

  4. Lost in Beijing

  5. Free Markets “Consider for a moment that any one person can only know a fraction of what is going on around him. Much of what that person believes will be false rather than true…” - F.A. Hayek in his “The Constitution of Liberty”

  6. Free Markets “It is because every individual knows so little and, in particular, because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it.” - F.A. Hayek in his “The Constitution of Liberty”

  7. Range of Levelized Cost of New Generating Technologies Due To Regional Cost Differences, 2016 Source: Institute for Energy Research, Levelized Cost of New Electricity Generating Technologies, Updated February 1, 2011; Energy Information Administration, Annual Energy Outlook 2011, http://www.eia.doe.gov/oiaf/aeo/electricity_generation.html

  8. Scientific Observation Science is common sense at its best that is rigidly accurate in observation and merciless to fallacy in logic. - Thomas Huxley

  9. Output is Not Correlated with Load Source: Brett Oakleaf, Invenergy LLC

  10. Xcel Defined Wind Event: 7/2/2008 When Wind Blows At Night, Coal Gen Ramps Down Wind Coal Gas 4:00 AM 8:00 AM Source: PSCo Training Manual

  11. Cycling of Coal Plants Has Increased With Greater Wind Generation ERCOT Incidence of Coal Cycling Cycling event is defined as a > 5% change in generation output hour over hour Source: Bentek Energy

  12. Generation Stacks Differ Across The Country Nat Gas 17% MISO Nuclear 4% Nuclear 24% Nat Gas 4% BPA Nat Gas 56% Nuclear 11% ERCOT Nat Gas 47% CAISO Source: Bentek Energy

  13. Average US Cost For Saving CO2: $56/ton MW of Wind Needed To Save 1 Ton CO2 Assumes tax subsidy of $22/MWh, with pre-tax value of $34/MWh Source: Bentek Energy

  14. Colorado as a Laboratory The Renewable Energy Standard Promise: 37 Cleaner Air Cheaper Energy 2004 Campaign Yard Sign

  15. Expensive Laboratory • Bills for Xcel Energy’s 1.4 million electricity customers in Colorado are up 21 percent in the past six years • Over the next six years, rates are expected to increase another 20 percent Source: http://www.denverpost.com/fdcp?1297096466537

  16. 18 Source: Informational Briefing before the Colorado Public Utilities Commission, HB10-1365, Clean Air/Clean Jobs Act Air Quality Implementation, Paul R. Tourangeau, Colorado Department of Public Health & Environment, April 26, 2010

  17. 1% 1 plant 0.4% 1 plant 5% 3 plants 14% 8 plants 0.3% 1 plant 13% 9 plants 3% 4 plants 1% 1 plant 1% 1 plant 8% 8 plants 6% 5 plants 2% 3 plants 1% 1 plant 3% 3 plants 7% 6 plants 3% 3 plants 2% 4 plants 8% 6 plants 5% 3 plants 1% 1 plant 4% 2 plants Population < 1 million 1-5 million 5-10 million 10-15 million > 15 million Population < 1 million 1-5 million 5-10 million 10-15 million > 15 million Shale plays 1% 1 plant 75 Worst Coal Power Plants Percent of Total Pollution Sources: “Dirty Kilowatts – America’s Most Polluting Power Plants”, Environmental Integrity Project (July 2007), EIA-860 December 2008, Analysis/Summary by F.P. LeGrand

  18. EVOLUTION IN GAS WELL COMPLETION TECHNOLOGY - THE KEY TO TODAY’S NATURAL GAS REVOLUTION Source: America’s New Natural Gas, America’s Natural Gas Alliance 20

  19. NEW SHALE PLAYS IN NORTH AMERICA Horn River Montney Deep Basin Colorado Group Bakken Cody Utica Gammon Mowry Antrim Baxter/Mancos Niobrara Marcellus/Ohio/Huron Mancos New Albany Mulky Lewis Pierre Woodford Fayetteville Barnett/Woodford Floyd-Neal Haynesville Barnett Eagle Ford Source: America’s Natural Gas Alliance website

  20. Eastern U.S. Gas Shale Basins *As of end of 2008 U.S. Proved Natural Gas Reserves as of 2005: 192.5 Tcf Source: Gas Shales Drive the Unconventional Gas Revolution, Vello A. Kuuskraa, Advanced Resources International, Inc., 3/5/2010

  21. Forecasts for Shale Gas Resource? • 2008 - 347 TCF - Energy Information Administration (EIA) • 2008 - 840 TCF - Navigant for Clean Skies Foundation • 2009 - 616 TCF - Potential Gas Committee (PGC) • 2011 - 827 TCF - Energy Information Administration (EIA) “In 2010, U.S. shale gas production reached 4.87 Tcf, up from 0.39 Tcf in 2000, and total domestic natural gas production was 21.2 Tcf.”* Source: Various resource estimates *Docket No. 10-161 LNG, In the Matter of: Freeport LNG Expansion, L.P., FLNG Liquefaction, LLC; Motion for Leave to Answer and Answer of Freeport LNG Expansion, L.P. and FLNG Liquefaction, LLC to Motion for Leave to Intervene and Protest of the American Public Gas Association

  22. Concerns About Fracing Are Misplaced Water Aquifer Several Thousand Feet of Impermeable Rock Cement Casing Fracture Stimulation Upper Well Close-up Source: BENTEK

  23. Foreign Investment in U.S. Shale $12.1 B BHP Plans to Acquire Petrohawk PetroChina/Encana Reliance/Atlas ITOCHU/MDU Resources Statoil/Chesapeake CNOOC/Chesapeake BG/EXCO BHP/Chesapeake Statoil/Talisman Reliance/Pioneer CNOOC/Chesapeake BG/EXCO Source: Dr. Jim Duncan, ConocoPhillips, Decoding the Relevance of Abundant Supply, 2011 COGA Presentation KNOC/Anadarko

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  25. Conclusions • Coal: The free market and the regulatory environment have spoken…coal fired electric generation will never again see the dominant market share that it has enjoyed over the last century. • Wind and Solar: In tough economic times, there will be much more ratepayer scrutiny on the real economics and subsidies of both forms of renewable energy. • Emission savings due to wind generation vary by territory based on fuel mix of offset. The greater the market share of natural gas, the lower the savings potential.

  26. Conclusions (cont’d) Cost of offsetting carbon through wind generation is far above values implied by recent legislative efforts for most of US suggesting that subsidizing wind generation is not a cost-effective means of reducing CO2 Emission savings rates from wind will decline as the market share of natural gas increases. Therefore, policies to promote wind are in conflict with efforts by the EPA to tighten limits on air pollution. Source: BENTEK, The Wind Energy Paradox, 2011 MITEI Symposium

  27. Conclusions (cont’d) • Natural Gas: An overabundance of supply will create new demand in U.S. and overseas export markets. • Analysts in the U.S. gas market have historically utilized linear model forecasts to predict the long term price for natural gas. The fundamental assumptions behind those static linear projections have been incomplete in the past and are subject to the same deficiencies in the future. • The ever changing “human element” behind natural gas supply and demand does not fit a smooth, predictable linear curve.

  28. Citations for Report All of the information utilized for this report is a compilation of information pulled from the following data sources: Bentek Energy Institute for Energy Research (IER) Energy Information Administration (EIA) Bernstein Research Dr. Jim Duncan, ConocoPhillips Electric Power Research Institute (EPRI) EnCana Steve Mufson, Washington Post, 01/02/2011 America’s Natural Gas Alliance James Dominick, Xcel Energy Robert Bryce American Wind Energy Association Western Energy Alliance John Eagleton, Kinder Morgan Bill Bradley, Enterprise Paul R. Tourangeau Brett Oakleaf, Invenergy LLC Tad True Stephen Moore, Wall Street Journal George H. Wayne, El Paso Pipeline Group

  29. Contact Information John A. HarpolePresident Mercator Energy LLC 26 W. Dry Creek Circle, Suite 410 Littleton, CO 80120 harp@mercatorenergy.com (303) 825-1100 (work) (303) 478-3233 (cell)

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