1. 1 Natural Gas Pricing: What Does the Future Hold? October 24, 2012 By: John A. Harpole Presentation to: Denver Association of Lease and Title Analysts Denver, CO

2. 2 2Source: America’s New Natural Gas, America’s Natural Gas Alliance EVOLUTION IN GAS WELL COMPLETION TECHNOLOGY - THE KEY TO TODAY’S NATURAL GAS REVOLUTION

3. 3

4. 4 100% LF 85% LF Supply Available for Export Base Case Cheyenne Plains 170 expansion Cheyenne Plains 560 expansion REX West 1800 expansion High Case Ruby 1500 expansion MMcf/d Bison 407 expansion Kern River 145 expansion Kern River 266 expansion Winter Peak Month Summer Peak Month Source: George Wayne, Wyoming Gas Fair – Rockies Market Update – 9/15/2011 presentation 4

5. 5 5

6. 6 6

7. 7 Liquids Plays: 2.8 Bcfd Lean Gas Plays: 1.7 Bcfd Quarter 4 - 2011 Versus Quarter 4 - 2010 Eagle Ford PermianMarcellusAnadarkoHaynesvilleFayette- ville Other Wet Other Dry U.S. Liquids Plays Contributed 61% Of Incremental Volumes In Q4 - 11 Source: Bentek Energy

8. 8 US Production Is Up Nearly 7 Bcfd from 2011 Source: BENTEK Supply and Demand Report JanJulAprOct Average Daily Production (Bcfd) Data through February 8, 2012 Q-2Q-1Q-3Q-4 2010 2011 2012 Pre-2010 US Production High Comparison of Dry Production 6.7 Bcfd

9. 9 PetroChina/Encana ITOCHU/MDU Resources CNOOC/Chesapeake BHP/Chesapeake KNOC/Anadarko BG/EXCO Reliance/Pioneer Reliance/Atlas Statoil/Chesapeake Statoil/Talisman $12.1 B BHP Plans to Acquire Petrohawk Foreign Investment in U.S. Shale Source: Dr. Jim Duncan, ConocoPhillips, Decoding the Relevance of Abundant Supply, 2011 COGA Presentation

10. 10 Global Shale Reserves

11. 11 Recoverable Shale Reserves: 6622 Tcf Source: EIA

12. 12 A Cautionary Note Forecasts Count on Real-Business-Cycle (RBC) Theories RBC Theories/Models offer “no closed-form solution due to the interaction of linear and nonlinear elements” 1 Solution clarity? Causality? RBC studies presume perfect information on data input 1 Loglinear approximate solutions to RBC models: An Illustration and some observations, Sau-Him Paul Lau and Philip Hoi-Tak Ng, University of Hong Kong, January 2004

13. 13 Linear Calculations in a Very Non-Linear World

14. 14 The Crystal Ball for Demand

15. 15 4 Significant Demand Factors to Consider LNG Exports Industrial Demand Growth Coal to Gas Electric Generation Fuel Switching CNG/Natural Gas Vehicles

16. 16 No Immediate Relief It is difficult to foresee any demand response within the next three years (before 2015) that can significantly change the current natural gas price environment.

17. 17 NYMEX Henry Hub Natural Gas Price* 1996 - 2015 Actual/Forecast** Source: *Average of last three days of trading as published in the Platts Gas Daily Report ** Future forecasts based on NYMEX Henry Hub indices in Clearport Software as of 9/26/2012 $ per MMBtu

18. 18 LNG Exports

19. 19 Cove Point Lake Charles Sabine Pass Cameron Export Terminals Source: Office of Oil and Gas Global Security and Supply, Office of Fossil Energy, U.S. Department of Energy; U.S. Federal Energy Regulatory Commission U.S. LNG Export Projects Jordan Cove CompanyCapacity (Bcf/d) DOE Filing FERC Filing Sabine Pass Liquefaction 2.2 Corpus Christi Liquefaction 1.8 * Freeport LNG Expansion 2.8 * Lake Charles Exports 2.0 Dominion Cove Point 1.0 Jordan Cove Energy Project 1.2 Cameron LNG 1.7 Gulf Coast LNG Export 2.8 Freeport Corpus Christi Gulf LNG * FERC Pre-Filing Process Slide from U.S. LNG Exports & Unconventional Gas presentation, Charif Souki, Cheniere Energy, Inc.

20. 20

21. 21 LNG in the Headlines Boosting the Economy Through Natural Gas Exports –Washington Post Editorial Board, March 14, 2012 “BG Group’s CEO Frank Chapman, suggested that U.S. LNG exports could reach 5.8 BCF/day by 2020” –Sutherland LNGLawBlog.com, February 10, 2012 BG is looking at an LNG export project on the West Coast of Canada at Prince Rupert –Sutherland LNGLawBlog.com, February 10, 2012 “The United States would probably only export a trickle of gas over the next five years, it could be exporting 4 BCF by 2022 and 15 BCF by 2027.” –The New York Times Green Blog, April 18, 2012

22. 22 LNG in the Headlines Cheniere receives FERC approval for Sabine Pass LNG Export Terminal –Edward McAllister and Ayesha Rascoe, Reuters, April 17, 2012 Sempra Energy Unit Signs Commercial Development Agreements with Mitsubishi Corporation, Mitsui & Co., Ltd. to Develop $6 Billion Louisiana Liquefaction Facility –Sempra Energy PRNewswire, April 17, 2012 Energy Transfer Equity LP has filed for federal permission to build an export facility at its import terminal at Lake Charles –The Associated Press, April 17, 2012

23. 23 LNG in the Headlines Royal Dutch Shell plc, Mitsubishi Corporation, China National Petroleum Corporation and Korea Gas Corporation are expected to reach an agreement soon to build a $12.35 billion LNG terminal near Kitimat, British Columbia –Sutherland LNGLawBlog.com, April 12, 2012 Cheniere to Submit Resource Reports Soon for Corpus Christi LNG Export Project –Sutherland LNGLawBlog.com, April 19, 2012 DOE delays LNG export study –Reuters.com, September 17, 2012

24. 24 Kitimat LNG Issued license by NEB October 2011 Export Facility

25. 25 Shipping Routes Source: http://www.kitimatlngfacility.com/Markets/marketing.aspxhttp://www.kitimatlngfacility.com/Markets/marketing.aspx

26. 26 Industrial Demand Growth

27. 27 Chemical Plant Growth Chevron Phillips Chemical Shell Dow Chemical Formosa Westlake ExxonMobil “Chemical Makers Ride Gas Boom” - Wall Street Journal, April 19, 2012

28. 28 The Ammonia Story Current economics –Ammonia worth $590 per ton in world market –Can be produced for $180 per ton at current U.S NYMEX natural gas price strip 14 Ammonia plants closed in the U.S. between 1998 and 2006 thanks in part to high natural gas prices Top 5 world producers would like to build new facilities in the U.S. 1 ammonia plant can consume as much as 100,000 MMBtu per day

29. 29 What it could mean to demand for natural gas: North America imports approximately 12,500,000 tons of nitrogen per year (22% from Canada, 78% from overseas) 37 MMBtu is roughly equal to 1 ton of nitrogen If all overseas imports were eliminated by domestic production, natural gas demand would increase by approximately 1 BCF per day or 3.6 TCF per year The Ammonia Story

30. 30

31. 31 Petrochemical End Use Automobiles About 600 pounds of petrochemical-derived plastics, composites, rubber, coating and textile products are used in the average vehicle accounting for about 15% of the total vehicle weight. Electronics Home electronics and appliance products contain up to 40% or more of plastics derived from petrochemicals. Appliances Source: Bill Bradley, Enterprise

32. 32 Coal to Gas Electric Generation Fuel Switching

33. 33 Impact of Mercury and Air Toxics Standards (MATS) and Cross-State Air Pollution Rule (CSAPR) “We estimate that by 2015 some 54 GW of coal fired capacity will cease operations rather than incur the cost of compliance with CSAPR and MATS, while 74 GW will be upgraded.” “A further 12 GW of coal fired capacity is likely to be retired as these units reach 60 years of age.” Source: Bernstein Research, U.S. Utilities: The EPA Finalizes Its Mercury and Air Toxics Standards; What Will Be the Impact? December 22, 2011

34. 34 Natural Gas vs Coal “The collapse in the price of natural gas since 2008, combined with recent increases in the cost of Appalachian coal, have caused the variable cost of operation of the average power plant burning Appalachian coal to converge with that of the average combined cycle gas turbine generator.” Source: Bernstein Research, U.S. Utilities: The EPA Finalizes Its Mercury and Air Toxics Standards; What Will Be the Impact? December 22, 2011

35. 35 Increase in Utility Consumption of Natural Gas Annual (TCF) and Daily (BCF) Average U.S. Gas Consumption in 2010: 22.1 TCF60.50 BCF/D Increase due to Natural Gas Coal Plant Retirements: 0.3 TCF 0.82 BCF/D Increase due to EPA Regulation of SO2 and Mercury: 1.7 TCF 4.65 BCF/D Reduction Due to New Coal Plants: (0.8 TCF) (2.19 BCF/D) U.S. Expected Gas Consumption in 2015E: 23.3 TCF63.01 BCF/D Source: Bernstein Research, U.S. Utilities: The EPA Finalizes Its Mercury and Air Toxics Standards; What Will Be the Impact? December 22, 2011 Annual AverageDaily Average

36. 36 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.htmlhttp://www.eia.doe.gov/oiaf/aeo/electricity_generation.html Plant Type Range for Total System Levelized Costs (2009 ¢/megawatt hour) MinimumAverageMaximum Conventional Coal8.559.4811.08 Advanced Coal10.0710.9412.21 Natural Gas-fired - Conventional Combined Cycle6.006.617.41 - Advanced Combined Cycle5.696.317.05 Advanced Nuclear10.9711.3912.14 Wind8.199.7011.50 Wind - Offshore18.6724.3234.94 Solar PV15.8721.0732.39 Solar Thermal19.1731.1864.16

37. 37 CNG/Natural Gas Vehicles

38. 38 How many NGVs to get to 1 BCF per day of Demand? “The U.S. currently has about 110,000 NGVs on the road (less than 0.1% of total U.S. vehicles), mostly owned by fleets.” “To get to 1 BCF per day would mean a roughly ten-fold increase in the number of U.S. NGVs.” It will take the right incentives and plenty of time. Source: Raymond James & Associates, Inc., Weekly Energy Report 6-13-11

39. 39 Natural Gas to Power Pickups Tuesday, March 6, 2012 Chevrolet, GMC introduce bi-fuel pickups for 2013 model year Source: Platts Gas Daily publication, Rodney White

40. 40 Demand Increase By 2015? Low CaseHigh Case LNG0 BCF/day2.0 BCF/day Industrial Demand Growth1.0 BCF/day2.0 BCF/day Coal to Gas2.0 BCF/day2.5 BCF/day CNG/Natural Gas Vehicles0.3 BCF/day0.5 BCF/day Total3.3 BCF/day7.0 BCF/day

41. 41 Oil Production Drives Investment Decisions for Gas Source: Advanced Resource Intl presentation to Cheniere Board, March 2011; Cheniere Research Liquids production from shale plays > 3 million b/d by 2020 Associated natural gas > 7 Bcf/d of “costless” supply Bcf/d MMB/d 0 1 2 3 4 5 6 7 8 20102011E2012E2013E2014E2015E2020E 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Includes Eagle Ford, W. Barnett, Bakken Shales; Granite Wash, Piceance & Uinta Tight Sands Liquids Gas Annual Production from Unconventional Reservoirs Slide from U.S. LNG Exports & Unconventional Gas presentation, Charif Souki, Cheniere Energy, Inc.

42. 42 Conclusions A significant demand response won’t occur for at least 3- 5 years Infrastructure investment in the 4 areas of potential new demand (LNG export facilities, industrial (steel/chemical/ammonia/nitrogen), new gas fired electric generation, NGV) could take 5-8 years to be meaningful Marginal cost of gas is moving lower Natural gas liquids will be the driving force in drilling BTU value disparity between natural gas and crude oil will continue for many years Demand will increase but too slowly Don’t forget the “tuition” slide

43. 43 Citations for Report All of the information utilized for this report is a compilation of information pulled from the following data sources: Bentek Energy Charif Souki, Cheniere Energy Inc.; Cheniere Research Office of Oil and Gas Global Security and Supply Office of Fossil Energy U.S. Department of Energy U.S. Federal Energy Regulatory Commission Institute for Energy Research (IER) Energy Information Administration (EIA) Bernstein Research EnCana Raymond James and Associates, Inc. Western Energy Alliance Bill Bradley, Enterprise Sutherland LNG Blog www.Kitimatlngfacility.com

44. 44 John A. Harpole President Mercator Energy LLC 26 W. Dry Creek Circle, Suite 410 Littleton, CO 80120 harp@mercatorenergy.com (303) 825-1100 (work) (303) 478-3233 (cell) Contact Information