Recent History – Natural Gas November 2012 Michael Vickerman

 Fears of declining NG output triggers price spike above $10/MMBtu  Drilling activity hits all-time high  Industry rushes to develop new shale gas plays (Barnett, Haynesworth, Marcellus)  Demand destruction observed

 Shale gas output begins flowing to market  Total NG output increases by 6%  Prices stabilize in $4 to $6 /MMBtu range  NG industry launches “game-changer” PR campaign  High decline rates observed with shale gas wells (Art Berman)

2011  Shale gas flows boost output by 7%  Industry starts ratcheting back exploration, but well completions continue apace  More NG turning into kWh; coal usage declines  Weekly storage injections surpass historical averages  Prices drop below $4/MMBtu early, then tumble below $3 at year-end

First Half of 2012  Record-setting mild winter reduces heating demand by 30%  Storage inventories swell to record levels - 60% above five-year average  Prices drop to $2/MMBtu – substantially below production costs  NG now cheaper than coal

Second Half of 2012  NG output remains constant  Exploration activity now 25% of 2008 level  Record-setting hot weather increases demand for NG as generator fuel  Storage overhang decreases, now only 6% above 5-year average  Industry bleeding red ink due to continuation of prices below cost of production

Outlook – 2013/2014  Greater recognition in financial circles that shale gas extraction is expensive!  Contractual commitments notwithstanding, industry will conserve capital & cut back spending  Plant closures to continue, expanding NG share of electricity market  Lag effects of reduced exploration, combined with high decline rates, will shave output totals  Prices have nowhere to go but up