“ASSESSING THE ECONOMICS OF NORTH AMERICA

NATURAL GAS MONETIZATION

PATHWAYS”

Presented by:

Ajey Chandra Managing Director Muse, Stancil & Co.

June 16, 2015

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MUSE, STANCIL & CO. Independent energy consulting firm founded in 1984, providing industry

expertise from wellhead to end-user; www.musestancil.com

Energy Sectors Served – Natural Gas Processing

– Refining and Refined Products

– Pipelines

– Crude Oil

Representative Assignments – Market Studies

– Asset Valuation

– Project Development

– Transactional Due Diligence

– New Technology Assessment

– Insurance Claims (Property & Business Interruption)

– Litigation Support

– Royalty Negotiation/Auditing

– Contract Negotiation/ Dispute Resolution

– Natural Gas Liquids

– Petrochemicals

– Biofuels

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GTL TECHNOLOGY UPDATE Available gas “liquefaction” pathways

Why GTL?

Gas-To-Liquids Pathways

Fischer Tropsch

– R&D work ongoing worldwide to increase efficiency in reaction pathway

– Engineering design leading to more cost effective process design

New market entrants

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MARKETING GTL TECHNOLOGY IN TODAY’S PRICE ENVIRONMENT

Is 2015 the Pivotal Year for GTL Technology?

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GAS LIQUEFACTION PATHWAYS Variety of technology pathways exist for conversion of commercial natural gas to

various liquid products – Natural Gas Liquefaction (LNG)

– Natural Gas Conversion

Natural Gas to Methanol (GTM)

GTM integrated with Methanol to Gasoline (MTG) or other products such as dimethylether (DME)

Natural gas to ethylene (OCM)

Comparison of Netback Prices, Basis: 2014 Averages and Henry Hub

LNG to Europe LNG to Asia Methanol GTL

$9.69/MMBTU $15.78/MMBTU $443.35/MT $104.09/BBL

U.S. Dollars Per MMBTU gas processed

Revenue 8.73 14.21 13.64 10.41

Shipping (1.00) (2.80)

Tolling (2.75) (2.75) (9.11) (5.49)

Netback per MMBTU 4.98 8.66 4.53 4.92

Product Sales Price

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GAS LIQUEFACTION PATHWAYS

Comparison of Netback Prices, Basis: 1Q 2015 Averages and Henry Hub

Economics of various liquefaction pathways has changed significantly in the past year; specific project economics can

varying significantly

LNG to Europe LNG to Asia Methanol GTL

$8.28/MMBTU $14.30/MMBTU $351.22/MT $64.35/BBL

U.S. Dollars Per MMBTU gas processed

Revenue 7.46 12.88 10.81 6.44

Shipping (1.00) (2.80)

Tolling (2.75) (2.75) (9.11) (5.49)

Netback per MMBTU 3.71 7.33 1.70 0.95

Product Sales Price

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WHY CONSIDER GTL? “Stranded” Gas

– Geographically isolated gas deposits

– Gas reserves with limited economic market accessibility

– Gas flaring

Diesel Markets

– Strong diesel demand world wide

– Emphasis on increasingly “cleaner” diesel fuel worldwide

– Significant change in the gasoline/diesel price relationship since 2008

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WHY CONSIDER GTL? “Stranded” Gas

– Geographically isolated gas deposits

– Gas reserves with limited economic market accessibility

– Gas flaring

Diesel Markets

– Strong diesel demand world wide

– Emphasis on increasingly “cleaner” diesel fuel worldwide

– Significant change in the gasoline/diesel price relationship since 2008

Small-scale, compact, and mini-GTL enable project development in a wide variety of locations both

onshore and offshore

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6,650

6,700

6,750

6,800

6,850

6,900

6,950

7,000

2010 2011 2012 2013 2014 2015

WORLDWIDE GAS RESERVES

Large-scale GTL already in service in Qatar

LNG projects dominate Asia & Oceania

Africa 9%

Asia & Oceania

8%

North America

6%

Central & South

America 4%

Europe 2%

Middle East 40%

Eurasia 31%

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WORLDWIDE GAS RESERVES

Large-scale GTL already in service in Qatar

LNG projects dominate Asia & Oceania

BUT…many opportunities exist to deploy smaller-scale GTL worldwide

6,650

6,700

6,750

6,800

6,850

6,900

6,950

7,000

2010 2011 2012 2013 2014 2015

Africa 9%

Asia & Oceania

8%

North America

6%

Central & South

America 4%

Europe 2%

Middle East 40%

Eurasia 31%

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GTL PRODUCTS EXCEED STRINGENT QUALITY REQUIREMENTS

GTL

Diesel ULSD

CARB

Diesel Jet

Sulfur, ppm max

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GTL PRODUCTS EXCEED STRINGENT QUALITY REQUIREMENTS

GTL

Diesel ULSD

CARB

Diesel Jet

Sulfur, ppm max

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DEMAND GROWTH FOR HIGHEST QUALITY PRODUCT

Air quality concerns have driven global diesel requirements toward very low sulfur, low aromatic product specifications

The U.S. demand for diesel is growing and U.S. refiners are also exporting huge volumes of higher quality diesel fuels

These trends are expected to continue

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U.S. Diesel Product Quality

Greater than 500 ppm (2,000 ppm) 15 ppm to 500 ppm 15 ppmSource: Energy Information Administration

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U. S. Distillate Demand

Domestic ExportsSource: Energy Information Administration

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NUMEROUS COMPANIES DEVELOPING MINI-GTL TECHNOLOGY

Methion

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NEW ENTRANTS IN THE MARKET FOR MINI-GTL

Company Technology Notes

INFRA FT 100 BPD plant (2015)

Greyrock FT 1000 BPD plant (2015)

Emerging Fuel Tech. (EFT) FT 1 BPD pilot plant

Gas2 FT 3 BPD pilot

Marcellus GTL MTG 2000 BPD (2016)

TIGAS MTG Demo plant in Houston

Primus GE MTG 6.5 BPD plant in operation

TU Freiberg MTG 15 BPD plant

Siluria OCM 1 TPD ethylene pilot plant being constructed

Proton Ventures Small scale Ammonia

0.2 MMcfd feed rate (3 TPD Ammonia)

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Proven chemistry

Years of bench-scale testing, industry has “fine tuned” catalyst and commercialized catalyst manufacturing

Scale-up of most of the process components already proven – Production of syngas (front end)

– Hydrocracking of wax and distillation of products (back end)

GTL-FT diesel product has been tested in many commercial applications – Commercial Aircraft

– Trucking Industry

– Military, B52 Bomber

Commercial plants have operated in South Africa for many years

POSITIVE ATTRIBUTES

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Capital cost for fixed-bed reactor processing configuration historically dictated larger projects to capture economies of scale; largest world-scale project completed to date far exceeded budget estimate

Margin risk associated with uncorrelated feedstock and product price volatility

Catalyst selectivity for wax production versus direct conversion to diesel or gasoline

Scale-up of high efficiency, fluidized bed reactors not proven thus complicating process technology guarantees and project finance

– Physical design, wax separation from catalyst particles

– Heat balance, highly exothermic reaction requires active control of heat balance to avoid “hot spots”

CHALLENGES

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WILL NORTH AMERICAN ETHANE PROVIDE A SUITABLE FEEDSTOCK?

Several of the GTL players (Greyrock, Siluria) can use ethane as a feedstock

Ethane will be cost disadvantaged until petchem consumption jumps dramatically

Excess ethane is being exported from North America

– More ethane export capacity being built

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Refinery and Gas Plant Ethane Production

Refineries Gas Plant

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Number of companies developing modular process design

Minimize “custom” aspects of project design

Provide for shop fabrication to improve quality control and compress projection execution timeline

With modular approach, smaller projects become economically feasible

In addition, developer are seeking brownfield sites or have partnered with integrated producers to integrate smaller-scale commercial units into existing facilities

CHALLENGE – CAPITAL COST

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AGE OLD QUESTIONS – What will oil and gas prices be next week? Next month? Next year? In 5 years? In 10 years?

Commercial viability of small-scale units requires venture capital support; technical advances in reactor design are enabling such projects

Project finance will require positive economic margin outlook in the medium to long term

Opportunities enabled by new reactor design technologies include: – Offshore or floating installations

– Focus on “portable” nature of the process

– Remote locations where liquid takeaway infrastructure is available or can be installed at lower cost than can gas infrastructure

– In many locations worldwide where gas flaring is being severely limited

CHALLENGE – MARGIN RISK

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All GTL catalysts are proprietary although most GTL companies have one or two catalyst manufactures who are licensed to produce

Most recent leap forward is catalyst for direct conversion of natural gas to diesel, thus eliminating the wax step

– Will likely result in reduced capital cost for less complex “back end” of the process

– May also have implications for reactor design and ultimate reactor scale up, yet to be determined

INFRA – Announced investment decision on 100 BPD plant in June, 2014

– Pilot Plant to be launched in 2015

– Will test additional catalysts and plant configurations

Greyrock – Direct-to-DieselTM Catalyst

– Modular construction of a 1,000 BPD plant

– Capacity can be increased by adding additional modules

– “Drop in” fuel which has been tested in heavy duty engines

CHALLENGE – CATALYST DEVELOPMENT

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Primus Green Energy – 6.5 BPD pilot plant was commissioned in 2013

– Currently in third continuous run

– Producing 93 octane gasoline

TIGAS – Conversion to gasoline in a single synthesis loop with no need for methanol storage

Proton Ventures – Gas2Ammmonia process

Siluria – Conversion of methane and ethane into gasoline and ethylene

NON-FT PROCESSES - GAS TO CHEMICALS AND GASOLINE

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Process developers have been mindful of the need for measured scale-up with respect to fluidized-bed reactors

Some demonstration scale units have been built and operated to prove aspects of reactor engineering design

To address the issue of clean wax separation from catalyst particles, new catalysts are being developed to eliminate the wax production and directly produce diesel; development work continues and the industry awaits commercially-available data on these new catalysts

Other developers have focused on innovative changes in fixed bed reactor design developing modular, micro channel reactors

Pilot plant and demonstration-scale plants employing micro-channel reactor technology have operated and larger scale commercial projects are being developed

– Velocycs

– Compact GTL

CHALLENGE – REACTOR SCALE-UP

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NEW TECHNOLOGY Siluria

– Does not go through syngas intermediates

2 CH4 + O2 → C2H4 + 2 H2O + Heat

2 CH4 + O2 → C2H4 + 2 H2O + Heat

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MODULARIZATION AND ASSEMBLY Several companies are marketing a totally modular solution

– 1.5 MMSCFD feed gas

– Water requirement of 600 gallons/hr

– Electric Power < 0.5 megawatt

– Produces 100 BPD of hydrocarbon liquids

Produces Diesel and Lubricants

Includes all major Equipment needed – Dual SMR’s

– Onsite storage

– Membrane H2:CO ratio unit

– Dual FT recators

– Distillation and hydrotreater

– Integrated Control

– Total site footprint of 90 feet by 70 feet

Turnkey package with OSBL connections and built for ISO container shipping

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CONCLUSIONS A wide variety of options exist for GTL projects

Large increase in gas supply in North America has increased the attractiveness of these projects

While LNG and large scale GTL projects continue, the newer technology is aimed at mini GTL plants that can be built with smaller gas reserves

The smaller units provides good economics by being modular and skid mounted, so they can be constructed in areas that provide market opportunities

New technologies are in various stages of commercialization, and there are several very promising start-ups competing for investment funds