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A.T. Kearney Study Sees Scenario Where Natural Gas Prices Are in the $6 - $7.00 Per Thousand Cubic Feet (mcf) Range by 2020

A.T. Kearney Study Sees Scenario Where Natural Gas Prices Are in the $6-$7 Per Thousand Cubic Feet (mcf) Range by 2020

10 December 2012 (Chicago)—Today global management consulting firm A.T. Kearney released a report, "With Fortunes to be Made or Lost, Will Natural Gas find its Footing?" that addresses long-term pricing in the natural gas market. The report analyzes key actions needed by the natural gas industry to reduce the volatility of gas prices and reach a balanced market that provides investment incentives for producers, midstream players, marketers, and users of natural gas. The report also provides insight into five different natural gas 2020 scenarios that could impact the balance of natural gas supply and demand.

Herve Wilczynski, A.T. Kearney partner and co-author of the study said, "The North American natural gas market is structurally out of balance and cannot stay this way. Speculative investment combined with diverging incentives and investment horizons have plagued the industry for years. There is some hope for the future: the increased role of global players and more prevalent use of long term contracts should bring some stability to pricing."

Patrick Haischer, A.T. Kearney partner and study co-author commented, "We believe the price of natural gas in the free markets scenario will find equilibrium by 2020 in the $6-$7 range. Any lower than that price and production from dry-gas wells would not increase sufficiently to meet demand; any higher and demand from power plants will decline."

Understanding future natural gas pricing is critical for businesses as gas producers and gas users (primarily chemical companies, power generators, and gas exporters) must make major infrastructure investments. The industry is not structured for short-term win-win scenarios. Understanding what is going to happen requires understanding the players, their economics and incentives. The economic model that is the basis for the report analyzed the key participants in the natural gas supply and demand market and the dysfunction caused by each player too often focusing on only their interests. Below is a summary of the natural gas players and their individual outlooks:

Independent producers are fond of short-term plays and have an investment time horizon of just a few years. They can bring on capacity quickly and inexpensively, but if gas prices stay below $4 per million BTU, many players with predominantly dry gas portfolios will continue to struggle and possibly go out of business.

Super majors and global producers take a longer view on their investments and can afford to delay investment in certain parts of the world if local conditions are not favorable.

Midstream players have a longer view on investments and they take advantage of geographic and capacity-based market differentials to invest in pipelines, gas processing and fractionation.

Gas exporters are eyeing liquefaction facilities on the coasts that could competitively export LNG and take advantage of high prices abroad if the price spread between the US and overseas markets stays above $5. Liquefaction facilities can cost up to $10 billion per trillion cubic foot and take a minimum of five years to permit and build.

Chemical companies are looking at natural gas liquids (NGLs) as feedstock. Current natural gas prices make polyethylene cheaper to produce in the United States than anywhere in the world except the Middle East. Gas cracker and related downstream investments of $1 to $2.5 billion apiece are being evaluated, but the industry needs confidence in competitive ethane prices for the next 10 years.

Power generators need low-cost gas to generate electricity competitively. If power generators knew for sure gas prices would stay below $6, they could begin replacing existing coal plants with gas plants more aggressively.

The advocates of new uses are evaluating opportunities to use compressed natural gas (CNG) to fuel cars and trucks if gas prices are low compared to oil. These CNG infrastructure plans require huge investments over long timeframes.

Andy Walberer, A.T. Kearney partner and study co-author made the following observation: "The encouraging news is that some of the natural gas market suppliers are already pairing up. Chemical companies are signing long-term ethane supply agreements with shale NGL producers and midstream companies. LNG companies are doing the same with the suppliers and their customers."

To read the full text of the report, "With Fortunes to be Made or Lost, Will Natural Gas find its Footing" please go to www.atkearney.com.

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