David Givens presentation to Devon Energy October 2015

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Market review for Devon EnergyOklahoma City, Oklahoma

David Givens26 October 2015

Copyright © 2015 Argus Media Ltd. All rights reserved.

illuminating the markets

• Coal’s slide is inevitable as air rules mount

• Buyers have an array of supply options

• Midwest markets already affected

• Exports to Mexico jump far ahead of LNG

• Argus working to provide constructive solutions

Many new forces drive gas market in 2015-16


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Argus Media: global, market-focused, independent



Events

Coal, gas are switching places in generation




• Q1 2016 gas ◦ Not competitive for generation in Gulf Coast, midwest◦ On the bubble in West, midcontinent

• Additional coal to gas switching may be limited now◦ Coal prices falling◦ Locational dispatch directives

• EIA:◦ Coal's share of generation unchanged at 35pc in 2016◦ Gas’ share could fall 1 percentage point to 31pc◦ Most coal plants scheduled to retire in 2016 cut deliveries

Gas may not advance in generation next year



• Coal-fired generation in PJM fell by 7.4pc in August

• MISO August coal burn decreased by 14pc

• Natural gas generated 9pc more electricity in September in Texas

• Southwest coal-fired generation down 13pc in September

Yearly gas gains in generation are impressive


Events

Gas expected to benefit from multiple air rules




• Expected Federal Register publication 23 October

• Some states used Freedom of Information Act to get documents on the plan’s publication process

• EIA: plan could result in retirement of another

90GW of coal-fired generation from 2014 to 2040, double EPA estimate

Clean power plan release was imminent



• EPA sent new ozone standard to White House◦ 65-70 ppb, down from 75ppb◦ Possible December release

• SO2, NOX budgets for 13 states under cross-state rule invalidatedo Rule sent back to EPA but still in effect

• Clean Power Plan for existing units ◦ Could lower SO2, NOX and particulates by 25pc by 2030

Coal seems pancaked with regulations



• Mercury and Air Toxics Rule back at the D.C. Circuit

• EPA expects to respond in spring

• Court must decide vacate or remand ◦ Vacate: 165 power plants that received one-year

compliance extensions avoid installing pollution controls

◦ Remand: keep the regulations intact

States succeed in stalling mercury rule


Events

Utilities are in the driver’s seat




• Local distribution companies buying gas reserves◦ Black Hills in plains, Rockies◦ NextEra’s FP&L gets Woodford supply from PetroQuest◦ Wexpro supplies Questar in Utah, Wyoming◦ Louisiana: Entergy, AEP, Cleco may examine all options ◦ AGL negotiating with regulators in Virginia

• Capitalization versus long-term hedging• Financed through the rate base; regulator-

approved• LDCs on Atlantic coast choose infrastructure

Overcoming reluctance for long-term reliance on gas



• Renewables targeted at 50pc in 2030 for power

• Forecast for decline in gas use for power

• End-use growth only up 1pc annually

• Unusual policy focus: Expecting big gains from CHP, biogas for transport

California is the outlier



• Drought in California suggested another power panic

• Stout summer basis at citygates again

• Utilities outside of California cannot ignore low gas prices

• Gas use not growing in state, but may not fall

• Several occasions California gas demand at 6 Bcf/d in summer as renewables generate 17pc of power

Western grid dodges the bullet


Events

LNG exports remain on the horizon



Five US facilities under construction• Peak capacity of 71mn t/yr (9.8 Bcf/d)• Contracted capacity 57.2mn t/yr• Qatari output is 77mn t/yr


Cove Point

Sabine Pass

CameronFreeportCorpus Christi



• Sabine Pass • 20mn-25mn t/yr• Commissioning cargo Q4 2015• Trains 1-4 Mar 2016-Aug 2017

• Cove Point • 4.6mn-5.75mn t/yr• One train late 2017

• Cameron • 12mn-14.95mn t/yr

• Freeport • 13.2mn-15.4mn t/yr

• Corpus Christi • 7.7mn-10mn t/yr

Most US capacity expected on line after 2018

Mar-16

May-16

Jul-16Sep

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-17

Apr-17Jun-17

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Nov-17Jan

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Aug-18Oct-

18Dec-

18Feb

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May-19

Jul-19

0

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Cumulative peak capacity (mn t/yr)Cumulative baseload capacity (mn t/yr)



• 46.5 Bcf/d, or 363mn t/yr, to FTA nations

• 42 Bcf/d, or 328mn t/yr, to non-FTA nations

• Both more than current global LNG market

US project totals would dominate LNG trade

FTA Non-FTA 2015 market0

50

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mn

t/yr



• Proposals total 344mn t/yr, about as much as the US

• Most in western Canadao Use Canadian shale gaso Target Asiao Likely oil-linked

contractso More expensive than US

but cheaper shipping

Canadian proposals also extensive• Four projects in eastern

Canada totaling 38mn t/yro Target Europeo Could use cheap US

Marcellus gaso Will need US non-FTA

licenseo Could also use western

and eastern Canadian gas



• Chevron sees 70mn t/yr of unsanctioned capacity needed by 2025

• Global demand expected to reach 440mn t/yr by 2025

• Expects 70mn t/yr of US capacity to be built and 80mn t/yr outside of US

• US could account for most of 70mn t/y of unsanctioned capacity

US likely to meet most of future demand

70

80

70

Needed production by 2025 (mn t/yr)

USNon-USUp for grabs



• Projects at existing terminals

• Portfolio companies with deep pockets

• Projects with off-take contracts

• Projects progressing at FERC and MARAD

• Consensus estimate: 8 Bcf/d of exports by 2020

LNG export terminals with best chances


Events

Exports to Mexico grow, market access may not




• DOE approves many export permits

• Very few of the same companies have open access permits authorized by CRE

• Sales are to:◦ Private pipelines◦ PEMEX◦ Industrials◦ CFE

• Small market exists for trucked LNG

US has six major points of export to Mexico



• Maximum quantities authorized by CRE each month in mn cfd

• Some cross-regional flows

• Intent is to incentivize efficiencies, minimize costs

• Based on modeling; new projects will get factored in

• Reynosa, Ciudad Pemex are VPM pricing locations

Energy regulator CRE authorizes system capacities



• CRE daily hydrocarbons report at http://www.cre.gob.mx/articulo.aspx?id=394

• VPM means Venta de Primera Mano, or “first hand sales” by PEMEX and subsidiaries

• US prices change with demand:◦ TGP south Texas in second week October at 9¢/mmBtu

discount to Henry Hub, widening 2¢/mmBtu from prior week

◦ Exports to Mexico dropped by 5.8pc from previous week

Some transparency already exists

http://www.cre.gob.mx/articulo.aspx?id=394




Key takeaway: VPM is discounted to Henry Hub

2 Jun 15 26 Jun 15 20 Jul 15 13 Aug 15 6 Sep 15 30 Sep 152.4

2.5

2.6

2.7

2.8

2.9

3.0Mexico first hand sales vs Henry Hub cash

Henry Hub cash Reynosa Ciudad Pemex

$/m

mBt

u



• Former PEMEX gas pipeline assets being transferred to CENAGAS

• Focus now is on the legalities of the transfer

• CENAGAS will be responsible for managing excess pipeline capacity

• Integration: create EBB using Scada data from diverse sources

Now being discussed at CENAGAS



• CRE is approving open access pipeline tariffs◦ Commodity, capacity charges in pesos/gj◦ Specificity in total amount invested◦ Sophisticated environmental impact statements

• Midstream, downstream sales by PEMEX will belimited to favor the development of efficient and competitive markets

• Will it be similar to FERC order 436 experience?

“Asymmetric regulation” promised


Events

The Argus advantage in changing times




• Dailies rarely exceeded $3/mmBtu east of Rockies

• Underpiped southeast found cheap supply

• New York City had hottest summer in 140 years

• Atlanta was 16pc warmer than normal, Dallas 9pc

• Pipeline expansions and new projects proceed

Hot summer in diverse regions kept prices up



• TGP Broad Run Flexibility project on line November◦ Antero takes full 590mn cf/d

• Tetco Ohio Pipeline Energy Network on line mid-September o Takeaway of 550mn cf/d from Ohio to Gulf Coast

More backhauls of Marcellus gas expected


• Deliveries into Midwestern, NGPL, ANR

• REX Zone 3 daily indexes in a tight range, 3c at most

• Including Lebanon hub in SW Ohio, basis to Chicago has been 8c from REX Zone 3

• Will flood of Marcellus gas tighten that basis?

Argus REX indexes anticipate future market flows



New supply sources affect major market center

2016 2017 2018 2019 2020 2021 20220.00

0.05

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0.25 Chicago citygates winter basis

July October

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• Nipsco index has highest average value of 3 individual Chicago area LDCs

• Nispco averaging about 1c more than Nicor, Peoples

• Joliet hub and NGPL into Vector usually higher than citygates, but not always

• Future seasonal results will show arbitrage possibilities

Chicago-area indexes provide options



• Rapidly providing new indexes◦ REX◦ Gulf Coast storage hubs◦ Chicago area

• Deep understanding of natural gas market reflected in news and analysis

• No onerous licensing terms

Argus Natural Gas Americas responds to market


• Increasing number of utilities and LDCs are including Argus in RFPs

• Producers are transacting on Argus indexes for spot and term supply contracts

• Pipeline companies have amended tariffs to include Argus as an index for capacity release payments

Argus natural gas indexes have taken root




• Gas gets coal market share on price, regulation

• Exports: Mexico now, LNG later

• Supply choices abound: backhauls, pipelines, reserves

• Chicago basis markets already affected

• Argus is a useful tool for midcontinent gas pricing

Domestic, international forces at work in gas


Events

Questions?


Copyright notice Copyright © 2015 Argus Media Ltd. All rights reserved. All intellectual property rights in this presentation and the information herein are the exclusive property of Argus and and/or its licensors and may only be used under licence from Argus. Without limiting the foregoing, by reading this presentation you agree that you will not copy or reproduce any part of its contents (including, but not limited to, single prices or any other individual items of data) in any form or for any purpose whatsoever without the prior written consent of Argus. Trademark notice ARGUS, ARGUS MEDIA, the ARGUS logo, DEWITT, FMB, FUNDALYTICS, METAL-PAGES, JIM JORDAN & ASSOCIATES, JJ&A, ARGUS publication titles and ARGUS index names are trademarks of Argus Media Limited.

Disclaimer All data and other information presented (the “Data”) are provided on an “as is” basis. Argus makes no warranties, express or implied, as to the accuracy, adequacy, timeliness, or completeness of the Data or fitness for any particular purpose. Argus shall not be liable for any loss or damage arising from any party’s reliance on the Data and disclaims any and all liability related to or arising out of use of the Data to the full extent permissible by law.

David GivensHead of Gas and Power Services, Argus Media

Email:Office:Web:

[email protected], DCwww.argusmedia.com

Economy & Finance

David Givens presentation to Devon Energy October 2015