To view a full copy of this report, please visit web.mit/mitei/research/studies/

1. MIT Future of Natural Gas Study

2. MIT Future of Natural Gas Study To view a full copy of this report, please visit www.web.mit.edu/mitei/research/studies/ natural-gas-2011.shtml

3. MIT Future of Natural Gas Study Advisory Committee Members • Thomas F. (Mack) McLarty, Chair – President and CEO, McLarty Associates • Denise Bode – CEO, American Wind Energy Association • Ralph Cavanagh – Senior Attorney and Co- Director for Energy Program, Natural Resources Defense Council • Sunil Deshmukh – Founding Member, Sierra Club India Advisory Council • Joseph Dominguez – Senior Vice President, Exelon Corporation • Ron Edelstein - Gas Technology Institute • R. Neil Elliot – Director, Regulatory and Government Relations, GTI • John Hess – Chairman and CEO, Hess Corporation • Jim Jensen – President, Jensen Associates • Senator (ret.) J. Bennett Johnston - Chairman, Johnston Associates • Vello A. Kuuskraa –President, Advanced Resources International, Inc. • Mike Ming – Oklahoma Secretary of Energy • Theodore Roosevelt IV –Managing Director & Chairman, Barclays Capital Clean Tech Initiative • Octavio Simoes – Vice President of Commercial Development, Sempra Energy • Gregory Staple –CEO, American Clean Skies Foundation • Peter Tertzakian – Chief Energy Economist and Managing Director, ARC Financial Corporation • David Victor – Directory, Laboratory on International Law and Regulation, University of California – San Diego • Armando Zamora – Director, ANH- Agencia Nacional de Hidrocarburos

4. MIT Future of Natural Gas Study Study sponsors • American Clean Skies Foundation • MITEI/donors • Hess Corporation • Agencia Nacional de Hidrocarburos (Colombia) • Gas Technology Institute • Exelon • Energy Futures Coalition

5. MIT Future of Natural Gas Study Remaining Recoverable Natural Gas Resources(Excludes unconventional gas outside North America) Tcf of Gas

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7. MIT Future of Natural Gas Study Global Gas Supply Cost Curve(Excludes unconventional gas outside North America) Breakeven Gas Price* $/MMBtu Tcf of Gas * Cost curves based on 2007 cost bases. North America cost represent wellhead breakeven costs. All curves for regions outside North America represent breakeven costs at export point. Cost curves calculated using 10% real discount rate and ICF Supply Models ** Assumes two 4MMT LNG trains with ~6,000 mile one-way delivery run, Jensen and Associates

8. MIT Future of Natural Gas Study U.S. Gas Supply Cost Curve Breakdown of Mean U.S. Supply Curve by Gas Type Breakeven Gas Price* $/MMBtu Breakeven Gas Price* $/MMBtu Tcf of Gas Tcf of Gas * Cost curves calculated using 2007 cost bases. U.S. costs represent wellhead breakeven costs. Cost curves calculated assuming 10% real discount rate and ICF Supply Models

9. MIT Future of Natural Gas Study Variation in Shale Well Performance and Per-Well Economics IP Rate Probability (Barnett 2009 Well Vintage) Impact of IP Rate Variability on Breakeven Price (BEP)* (2009 Well Vintages) P20 P50 P80 IP Mcf/d IP Mcf/d IP Mcf/d IP Mcf/d IP Mcf/d Barnett 860 5,500 1,610 3,920 2,340 7,730 12,630 2,600 2,000 1,960 790 1,140 3,500 3,090 2,700 BEP $/Mcf BEP $/Mcf BEP $/Mcf BEP $/Mcf BEP $/Mcf $6.34 $4.27 $6.53 $11.46 $4.12 $3.85 $5.53 $13.42 $3.49 $5.12 $17.04 $4.02 $6.31 $2.88 $8.87 Fayetteville Haynesville Marcellus** IP Rate: Mcf/day (30-day avg) Woodford * Breakeven price calculations carried out using 10% real discount rate ** Marcellus IP rates estimated based on industry announcements and available regulatory data Source: MIT, HPDI production database and various industry sources

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11. MIT Future of Natural Gas Study Key Environmental Issues Associated with Shale Gas Development Primary environmental risks associated with shale gas development Contamination of groundwater aquifers with drilling fluids or natural gas On-site surface spills of drilling fluids, fracture fluids and wastewater Contamination as the result of inappropriate off-site wastewater disposal Excessive water withdrawals for use in high-volume fracturing operations Excessive road traffic and degraded air quality Breakdown of Widely-Reported Environmental Incidents Involving Gas Drilling; 2005-2009

12. For optimum long-term development, need to improve understanding of shale gas science and technology Government-funded fundamental research Industry/govt collaboration on applied research Should also cover environmental research Determine and mandate best practice for gas well design and construction Create transparency around gas development Mandatory disclosure of frac fluid components Integrated water usage and disposal plans Continue to support research on methane hydrates MIT Future of Natural Gas study Recommendations

13. MIT Future of Natural Gas Study 13 System Studies of Gas Futures • Emissions Prediction & Policy Analysis Model • Strength: explore market interactions • Limitation: some industry details beneath the level of market aggregation • Influences on U.S. Gas Futures • Size of resource base, and cost • Greenhouse gas mitigation • Evolution of international gas markets • Development of technology over time

14. U.S. Gas Use, Production, Imports & ExportsNo New Climate Policy MIT Future of Natural Gas Study 14

15. Carbon dioxide emissions pricing scenario - 50% reduction to 2050 in industrialized countries - 20 year time delay in large emerging economies - no constraint elsewhere

16. U.S. Gas Use, Production, Imports & ExportsPrice-Based Policy (50% by 2050, No Offsets) MIT Future of Natural Gas Study 16 7.5 $/Mcf 13.3 $/Mcf

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20. MIT Future of Natural Gas Study 20 International Market Evolution 5.7 $/Mcf 11.4 $/Mcf 7.5 $/Mcf 13.3 $/Mcf Global Market Regional Markets

21. MIT Future of Natural Gas Study 21 Global Gas Market & Geopolitics Recoverable Shale (2009 use) Global Gas Market in 2030 • More liquid, integrated global markets • In U.S. economic interest • Reduce security concerns • Recommendations • Support market integration, supply diversity • Aid transfer of shale technology

22. MIT Future of Natural Gas Study Years Payback for CNG Light Duty Vehicles ($1.50 gallon of gasoline equivalent spread) “The U.S. natural gas supply situation has enhanced the substitution possibilities for natural gas in the electricity, industry, buildings, and transportation sectors.”

23. MIT Future of Natural Gas Study Industrial Gas Demand Conv. Boilers 22% CHP/Cogen 14% Process heating 42% 4.5 Tcf Manufacturing 85% 6.3 Tcf Industry 35% 7.4Tcf 23

24. MIT Future of Natural Gas Study Industrial Boiler Replacement Costs Net Present Value Costs (millions $) Competition with Coal Boilers After Compliance with MACT Standards

25. MIT Future of Natural Gas Study Replacing existing coal boilers and process heaters with new efficient gas boilers could lower costs for meeting EPA MACT standards

26. MIT Future of Natural Gas Study Buildings: Full Fuel Cycle Energy/CO2 Energy Consumption CO2 Emissions 2.7X Source: Electricity + 194% Ton CO2 per 100 MWh of Useful Energy Site: Gas +10% Fuel Energy per 100 MWh of Useful Energy + = Source Energy Site Energy 26 26

27. MIT Future of Natural Gas study For buildings, a move to full fuel cycle efficiency (site vs. source) metrics will improve how consumers, builders, policy makers choose among energy options (especially natural gas and electricity). Efficiency metrics need to be tailored to regional variations in climate and the electricity supply mix.

28. MIT Future of Natural Gas Study Gas-Oil Price Differential If the current trend of large oil-gas price ratios continues, it could have significant implications for the use of natural gas in transportation.

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30. MIT Future of Natural Gas Study Years Payback for CNG Light Duty Vehicles ($1.50 gallon of gasoline equivalent spread) • Payback times for US light duty vehicles are attractive when— • used in high mileage operations • have sufficiently low incremental costs 12,000 miles per year 35,000 miles per year $ 3,0000 $10,0000

31. MIT Future of Natural Gas Study LNG Long Haul Truck Limitations • Low temp onboard fuel storage • Fueling infrastructure with competitive pricing • High incremental cost and lower resale value • Mitigation in hub-to-hub

32. MIT Future of Natural Gas Study Conversion of Natural Gas to Liquid Fuels Reformer Natural Gas Catalyst Synthesis Gas Methanol Diesel DME Mixed Alcohols Gasoline Ethanol

33. MIT Future of Natural Gas study Methanol/Gasoline Cost Comparison

34. MIT Future of Natural Gas study The potential for gas to reduce oil dependence could be increased by its conversion…into liquid fuels…methanol is the only one that has been produced from natural gas for a long period at large industrial scale. The US government should implement an open fuel standard, requiring tri-flex-fuel capability for light-duty vehicles.

35. MIT Future of Natural Gas study • Public and public-private funding for natural gas research is down substantially even as gas takes a more prominent role. • Consideration should be given to restoring a public-private RD&D research model – • Industry-led portfolios • Multi-year funding RD&D Spending

36. MIT Future of Natural Gas study Improving Economics of Resource Development * Analysis/simulation of gas shale reservoirs * Methane hydrates Reducing environmental footprint of NG Production, Delivery and Use * Water * NGCC with CCS * Fugitive emissions NG Research Needs/Opportunities

37. MIT Future of Natural Gas study Expanding current use and creating alternate applications of natural gas * Power generation: integrated understanding of power/NG systems with large deployment of intermittent sources, DG, smart grids; better modeling capability (e.g. hybrid top-down and bottom-up);… * Mobility: end-to-end analysis of multiple pathways to liquid fuels, integrated with vehicle and infrastructure engineering data;… NG Research Needs/Opportunities

38. MIT Future of Natural Gas study Improving Conversion Processes * Process improvements: novel membranes for separations, more selective catalysts-by-design for synthesis, reduced process heat through integration,… * New process technologies: low-T separation, new less energy-intensive materials,… * DOE “Industries of the Future” program NG Research Needs/Opportunities

39. MIT Future of Natural Gas study Improving Safety and Operation of NG Infrastructure * Improved data quality * Minimize environmental footprint Improving the Efficiency of NG Use * Micro-CHP/low HPR,… NG Research Needs/Opportunities

40. MIT Future of Natural Gas Study RD&D Spending GRI Funding Steady over 15 years Gas produced after tax credit Federal Funding Time limited tax credit Gas produced under tax credit

41. MIT Future of Natural Gas Study backup

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43. MIT Future of Natural Gas Study WA Scale and Location of Fully-Dispatched NGCC Potential and Coal Generation (MWh, 2008) ME MT ND MN OR NH MA NY ID SD MI WY WI CT RI PA IA IL OH NJ MD NV WV DE IN VA CA KY MO NC TN AZ AR SC OK AL NM GA MS LA Scale: 100,000,000 MWh TX FL MWh coal generation, heat rate <10,000 MWh coal generation for pre-1987 plants with >10,000 heat rate Existing NGCC capacity operating at 85% capacity factor minus 2008 actual MWh generation (FDNP) 43

44. MIT Future of Natural Gas Study Coal to Gas Fuel Substitution Benefits Vary by Region 44

45. MIT Future of Natural Gas Study • Nationwide, coal generation displacement with surplus NGCC would: • reduce CO2 emissions from power • generation by 20% • reduce CO2 emissions nationwide • by 8% • reduce mercury emissions by 33% • reduce NOx emissions by 32% • cost roughly $16 per ton/CO2 • The displacement of coal generation with NGCC generation should be pursued as the only practical option for near term, large scale CO2 emissions reductions

46. MIT Future of Natural Gas Study Large Scale Penetration of Intermittent Wind in Short Term for ERCOT Gas Peakers NGCC Coal Wind • The principal impacts of increased deployment of intermittent renewable energy sources in the short term are – • the displacement of NGCC generation • increased utilization of operating reserves • more frequent cycling of mid-range or even base load plants. 46

47. MIT Future of Natural Gas Study Large Scale Penetration of Intermittent Wind in Long Term Policy and regulatory measures should be developed to facilitate adequate levels of investment in gas generation capacity needed for large scale penetration of intermittent renewables. The development or expansion of electric system models is needed to inform the design of policies that would mandate large amounts of solar or wind generation (important for both short and long-term impacts).

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49. MIT Future of Natural Gas Study Natural Gas System/Infrastructure DOE and EPA should co-lead a new effort to review and update methane emission factors associated with gas systems, focusing on actual fugitive emissions measurements and cost effective mitigation. Effort should also include oil and coal. CO2e Emissions from Gas Systems, 2008 reflecting EPA’s 2011 revisions (teragrams)

50. MIT Future of Natural Gas study Natural Gas System/Infrastructure A detailed analysis of the growing interdependencies between the gas and electric infrastructures should be conducted.