1. 2016 Wyoming Energy Summit May 19, 2016 Gavin Roberts, Ph.D. Candidate, Research Asst. University of Wyoming Department of Economics and Finance Drill-bit Hydrocarbons: Recent History & Thoughts about the Future

2. And it never failed that during the dry years the people forgot about the rich years, and during the wet years they lost all memory of the dry years. It was always that way. - John Steinbeck, East of Eden

3. AGENDA  Recent history of natural gas (and liquids) supply and demand  Some considerations for the future  What we can and can’t predict  How can stakeholders in Wyoming cope?

4. DISASTER AROUND THE CORNER  “Why the U.S. Is Running Out of Gas”  Time Magazine, July 2003  “The U.S. is finally beginning to run out of domestic oil and easily recoverable natural gas.”  Spiking heating and electricity bills.  A petrochemical industry in decline.  “The inflated [oil] price of $30.” (About $40 today)

5. DISASTER AROUND THE CORNER  Politicians and Markets respond  Subsidization of new supply  Conservation measures  Build out in infrastructure to access new resources  LNG Import Terminals  Rockies Express Pipeline (REX)  Things were looking up for WY producers!

6. THE GREAT GAS FLOOD - BEGINNINGS  In the early-1990’s McMurry Oil Company broke the code in the Jonah Field and Pinedale Anticline.  The Rockies region was seen as being one of the cures to inevitable future shortages  In 1997 Nick Steinsberger, a petroleum engineer at Mitchell Energy applies a slick-water frac to a horizontal well in the Barnett Shale  The technique invented by Steinsberger worked in other shale plays across North America, with massive reserves of natural gas and liquids

7. THE GREAT GAS FLOOD - PRODUCTION

8. THE GREAT GAS FLOOD - STORAGE

9. THE GREAT GAS FLOOD - PRICES

10. THE GREAT GAS FLOOD - DIFFERENTIALS

12. THE GREAT GAS FLOOD - WYOMING

13. WHEN LIFE GIVES YOU LEMONS…  The flood of natural gas and associated low prices has led to a huge demand response  Natural gas electricity generation:  816 GWh in 2006  1,355 GWh in 2015  A more than 60% increase  Primarily at the expense of coal (fuel switching)  8 GWh capacity additions planned for 2016

14. …MAKE LEMONADE…

15. …AND SHIP IT OVERSEAS  The flood of natural gas and associated low prices has led to a huge demand response  LNG Exports:  First shipment occurred on February 24 from Cheniere Energy’s Sabine Pass facility in Louisiana with more than 1.5 Tcf/year permitted capacity  Approximately 3.5 Tcf/year of capacity is ready or will be by 2020  Almost all is on Gulf Coast  Much more capacity is proposed  Proposed capacity on Gulf and West Coasts could benefit WY producers  The Energy Policy and Modernization Act will speed permitting (April 2016)

16. …AND SHIP IT OVERSEAS

17. THE GREAT LIQUIDS FLOOD  The flood of gas and low prices have also led to a huge supply response  While natural gas prices fell, NGL prices and crude oil prices remained elevated  At first, this led to movement to “wet gas” plays  As drilling technology evolved, huge resources of tight oil were released  And the dominoes fell…

18. THE GREAT LIQUIDS FLOOD - NGL

19. THE GREAT LIQUIDS FLOODS - OIL

20. THE GREAT LIQUIDS FLOOD - PRICES

21. GIVEN LIMES…MAKE LIMEADE

22. GIVEN LIMES…MAKE MARGARITAS  The flood of liquids has led to a huge demand and policy response  The U.S. petrochemical industry, which was in decline just a few years ago is thriving, and major new projects continue to be constructed  NGL exports are increasing, and more capacity is under construction  The abundance of crude oil in the U.S. led to the end of the ban on crude oil exports

23. AN AGE OF ABUNDANCE?  Prices seem extremely low relative to the commodity price run up of the mid-2000’s  However, these low prices seem less extreme relative to prices in the early 2000’s  Supplies of drill-bit hydrocarbons have increased quickly  But, demand is trying to catch up  Will it overshoot?  Sunk costs…

24. AN AGE OF EQUILIBRIUM  Increasing natural gas and oil supplies in the U.S. been met with increases in infrastructure to bring supplies to market  New infrastructure (LNG terminals), and policies (oil exports), are leading to an increasingly global market for U.S. drill-bit hydrocarbons  This will tend to dampen the effects of market disruptions in other regions

25. THE UNPREDICTABLE  Prices are set on the margin in competitive markets  This margin is affected by uncertain events:  OPEC collusion or price war  War in the Middle East  Revolution in Venezuela  Demand in China  Shale production in other parts of the world  Carbon policy  Weather

26. THE PREDICTABLE  More competitive markets tend to bring prices closer to marginal costs  Shale and tight oil producers in the U.S. might be the new marginal producers  Therefore, knowing the distribution of breakeven prices of wells in the U.S. is the best place to start

27. COWBOYS CAN COPE  What does all this mean for Wyoming?  While new technology has unlocked unconventional resources in WY, the major shale plays have had higher rates of return, some of which are close to Wyoming’s traditional large markets  Marcellus  Utica  Woodford & Fayetteville

28. COWBOYS CAN COPE  On the other hand, Wyoming continues to be a key supply source for markets in the Northwest, and on the West Coast  Policies incentivizing reduced carbon emissions are likely to increase natural gas demand west of WY, which could increase prices received by WY producers  LNG export terminals on the West Coast, if approved and finished, would also likely require WY supply  Getting creative with wind and natural gas resources  Complementarity of natural gas and wind

29. RIDE WEST  Westward flowing pipelines currently have enough takeaway capacity for a majority of WY production.  Northwest, Kern River, Ruby (not shown)

30. CONCLUDING REMARKS  Long-term forecasts in natural gas and oil markets almost always turn out to be wrong  Within the last ten years many market watchers had predicted damaging shortages  The shale gas revolution proved these predictions wrong  Now many predict long-term surpluses of natural gas, oil, and NGLs  My advice: Be prepared for the unpredictable!

31. And it never failed that during the dry years the people forgot about the rich years, and during the wet years they lost all memory of the rich years. It was always that way. - John Steinbeck, East of Eden THANK YOU: QUESTIONS?