North American Natural Gas Markets Presentation to ICoTA

1
North American Natural Gas MarketsPresentation
to ICoTA

• October 22nd, 2009
• J. Cameron Bailey CFA
• President and Chief Executive Officer

2
What Happened?

• Canadian Well Completions
• 2007 19,144
• 2008 20,729
• 9,000 down 56
• 2010 ?

3
Canadian Energy Financing - Activity

• Year to Date 2009
• 5.8 billion of New Equity
• 83 transaction
• Energy accounts for 26 of all equity deals
  completed in 2009
• Year to Date 2008
• 2.3 billion in 2008
• 64 transactions
• Cash Flows Activity

4
Natural Gas Price Forecasting When?

• Supply
• Old Supply Decline Rates?
• New Supply
• Drilling Activity Key Driver
• Drilling Efficiencies
• Production Additions
• Demand
• Base Demand
• Weather

5
Historical Decline Rates
US Production Declining by 30 - 35 per annum
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Truth No. 1 - Production Declines!

• 2009 US Production 57.0 bcf/d
• Decline 25 14.2 bcf/d
• Decline 30 17.1 bcf/d
• Decline 35 19.9 bcf/d

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US Natural Gas Production Well Completions
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US Production Observations

• 2007 Production 51.8
  bcf/d
• January 2007 Average 49.6 bcf/d
• 2007 Exit Rate 53.7 bcf/d
• Production Additions 4.1 bcf/d
• Decline 30 14.8 bcf/d
• 2007 Production Added 18.9 bcf/d
• Gas Wells Completed 35,605
• Production Adds per Well 530 mcf/d

• 2008 Production 54.9
  bcf/d
• January 2008 Average 53.5 bcf/d
• 2008 Exit Rate 56.6 bcf/d
• Production Additions 3.1 bcf/d
• Decline 30 16.4 bcf/d
• 2008 Production Added 19.6 bcf/d
• Gas Wells Completed 36,432
• Production Added per Well 537 mcf/d

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Truth No 2. - Drilling Replaces Production
Declines
2008 2008 2008
Total Conventional Gas Wells Horizontal Gas Wells

Number of Rigs 1,491 1,012 479
Days per Well 15 12 35
Wells per Year per Rig 24 31 10
Wells Drilled per Year 36,432 31,430 4,997
Average First Year Production Rate (mcf/d) 537 275 2,200
Incremental Production (bcf/d) 19.6 8.6 11.0
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US Natural Gas Directed Rig Count Future Supply?
Source Baker Hughes
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700 Rigs Operating Supply

Current Current Current
Total Conventional Gas Horizontal Shale Gas

Number of Rigs 700 402 298
Days per Well 16 12 35
Wells per Year per Rig 22 31 10
Wells Drilled per Year 15,604 12,500 3,104
Average First Year Production Rate (mcf/d) 658 275 2,200
Incremental Production (bcf/d) 10.3 3.4 6.8

Supply Declines (bcf/d) 6.2
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The Growing US Supply Deficit
US Average Demand
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US Natural Gas Production Declining?
US Production
Source Bentek
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US Production - Declining When?
Source Bentek
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Natural Gas - Investment Cycle

• Concept
• Land Acquisition
• Permits
• Rig Count Baker Hughes Rig Count
• Completions
• Pipeline Construction Tie-in
• Production Daily Estimates

Six Month Delay?
17
Delayed Production Response Natural Gas
Drilling Activity in Texas
New well permits are down 73 but there still
remained a large inventory of wells to complete
Well completions have dropped off which will be
followed by production declines
Source Railroad Commission of Texas
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Texas - Natural Gas Production - Declining
Source Railroad Commission of Texas
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Canadian Gas Drilling Rig Count Future Supply?
Lowest levels witnessed in 10 years
Source Baker Hughes
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Canadian Gas Production - Declining
Canadian gas production is declining leaving less
for exports to the US
Source NEB
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Canadian Gas Export to the United States
Source Bentek
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Production Forecast - Assumptions
2008 Actual 2009/10 Forecast
of Horizontal Wells 39 45
Conventional IP Rate mcf/d 360 360
Horizontal IP Rate mcf/d 3,300 3,500
Conventional First year Decline Rate 43 43
Horizontal First year Decline Rate 60 60
Conventional Drilling Times 12 days 12 days
Horizontal Drilling Times 35 days 35 days
Time On-Stream after Drilling 6 months 6 months
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Production Forecast 2008 to 2009
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Production Decline Analysis 700 Rigs
Forecast
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Natural Gas Demand
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Total US Natural Gas Demand Recession?
More affected by weather than recession
Source Bentek 2009
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Recession and Demand? Industrial Demand
Industrial demand is off 1.3 bcf/d Y/Y but has
recovered
Source Bentek 2009
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Recession and Demand? Power Demand
Power Demand continues to be strong.
Source Bentek 2009
29
The Growing US Supply Deficit
US Average Demand
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Seasonal Affect on Demand Forecasting?
31
Natural Gas Inventories Awash in Gas ?
The difference between surplus and critically
low inventories is 500 bcf 8 days of consumption
Source EIA
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Forecast Gas Storage Levels 700 Rigs
Operating Average Gas Demand
3.8 TCF Storage
Not enough gas production to fill storage in 2010
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Forecast Gas Storage Levels 700 Rigs
Operating Mild Winter Low Gas Demand - 2006
3.8 TCF Storage
34
Forecast Gas Storage Levels 700 Rigs
Operating Cold Winter 2008 Perfect Storm
3.8 TCF Storage
Not enough gas production to fill storage in 2010
35
Change in Natural Gas Inventory Supply/Demand
Balance
Source EIA
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US Wellhead Prices vs US Natural Gas Rig Count
Source EIA
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Production Decline Analysis Response from
Drilling 60 Rigs per month Return to Work
38
Natural Gas Myths

• New technology applied to Shales and Tight Sand
  plays have changed the game?
• Fewer wells more productivity replacing
  declines?
• Recession has destroyed Demand?
• Demand is running at historical highs
• Drilling efficiencies have improved?
• Few rigs can drill more wells only the best
  crews and equipment are currently working

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Drilling Rig Efficiency Improving?
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Conclusions

• The low pace of drilling activity cannot be
  sustained
• Price response will anticipate supply shortages
• Price response will create cash flow
  increase capital budgets Drilling Activity
• Weather is the biggest factor to when supply
  shortages will emerge.