The Global oil outlook (and why it matters to Appalachian gas) Bob Tippee, Editor, Oil & Gas Journal Appalachian pipeliners association January 15, 2019

On these subjects in OGJ… Forecast & Review (January 7) Conglin Xu, Senior Editor-Economics Laura Bell, Statistics Editor Worldwide Pipeline Construction (February 4) Christopher Smith, Managing Editor-Technology Midyear Forecast (July 6) Forecast & Review Webcast, January 25, 2019

The plan Global oil markets in 2019 US oil, gas markets in 2019 (with pipeline notes) Pipeline construction outlook Long-term oil and gas market changes (why policy matters) Why gas producers should pay attention to oil (and vice versa)

global oil demand (MMb/d) 2019 2018 OECD 48.1 47.8 Non-OECD 52.5 51.4 Total 100.6 99.2 Quarterly growth Growth in oil demand is slowing. Growth dominated by China, other non-OECD (developing countries). Source: OGJ Forecast & Review, Jan. 7, 2019

global oil supply (MMb/d) 2019F 2018E OPEC crude 31.5* 32.5 OPEC NGL 7.0 Non-OPEC 61.9 60.4 Total 100.4 99.9 *OGJ estimate. Other from IEA. Quarterly growth OPEC is yielding to non-OPEC supply: North American unconventionals, Brazil Source: OGJ Forecast & Review, Jan. 7, 2019

Will opec+ keep market balanced? (MMbd) 2019 Vs. 2018 Demand 100.6 +1.4 Non-OPEC supply 61.9 +1.5 OPEC NGL 7.0 NC Need for OPEC crude 31.7 -0.1 OPEC crude 31.5 -1.0 Stock change -0.2 -0.9 Key uncertainties: Demand growth (and, therefore, global economy) OPEC restraint after agreement expires in June Source: IEA Oil Market Report, December 2018 with OGJ projection for OPEC crude

Oil supply management * The oil market seems to crave coordinated supply management December 2018 agreement: Cut 1.2 MMb/d from October levels, 800 Mb/d OPEC, 400 Mb/d non-OPEC OPEC production; world supply Inventories * THE LEADERS (MMB/D) Saudi Arabia Russia Orig. quota 10.54 11.597 Oct. 2017 10.05 11.303 Oct. 2018 10.65 11.79 Agreed in December: Needed cut + Cut 0.230 Source: OGJ F&R *OPEC+ cuts started Jan. 2017 Vienna, Dec. 2016: Cuts of 1.2 MMb/d by 12 OPEC members, 600 Mb/d by 10 nonmembers, effective Jan. 2017. Production surged late 2018 to compensate for losses from Venezuela, others, expected from Iranian sanctions scheduled for November but waived for 6 months.

The oil market’s uncertain variables Middle Eastern unrest US disengagement Saudi turbulence (Yemen quagmire, Jamal Khashoggi murder, economic and cultural reform, Aramco IPO) Blockade of Qatar and weakening of GCC Iranian expansionism (Yemen, Syria, Iraq, Lebanon) and sanctions Maneuvers for influence by Russia, China, Turkey Eastern Mediterranean gas discoveries Global economic growth IMO 2020

The IMO 2020 rule International Maritime Organization regulation effective Jan. 1, 2020 Lowers sulfur limit in marine bunker fuel to 0.5 wt % from 3.5 wt % Lower limits already apply in four emission control areas (ECAs) What happens to ~3.4 million b/d of high-sulfur fuel oil? What happens to sweet-sour price spreads? Source: Ken Cowell et al., Muse, Stancil & Co., in OGJ, July 2, 2018

Us oil demand Gasoline is no longer the growth market 2019 2018 Amount MMb/d Change % Motor gasoline 9.370 +0.6 9.311 -0.2 Jet fuel 1.780 +3.5 1.720 +2.3 Distillate 4.200 +1.7 4.130 +5.0 Residual 0.320 0.318 -7.0 LPG + ethane 3.150 +5.4 2.990 +13.1 Other products 2.060 +0.5 2.050 +0.9 TOTAL 20.880 +1.8 20.519 +2.8 Source: OGJ Forecast & Review, Jan. 7, 2019

US oil supply Unless oil prices crash, growth constraint is physical until Permian pipelines open in 2H 2019 2019 2018 Amount MMb/d Change % Crude & cond. 12.070 +10.7 10.900 +16.6 NGPL 5.000 +14.2 4.380 +15.8 TOTAL FIELD 17.070 +11.7 15.280 +16.3 Renewables, oxygenates 1.220 -0.8 1.230 +3.4 Proc. gain, etc. 1.120 -0.9 1.130 +1.7 TOTAL SUPPLY 19.41 +10.0 17.64 +14.0 Source: OGJ Forecast & Review, Jan. 7, 2019

Permian basin Crude pipeline projects Phillips 66, Enbridge; Gray Oak, 385,000 b/d to Corpus, Freeport, Houston, 2019 EPIC Crude; 700-mile, 550,000 b/d, 2019, to Corpus Magellan; 600-mile, 24-in. OD, 350,000 b/d, to Nederland/East Houston, 2020 PAA; Cactus II, 515-mile, 24-in. OD, Wink-to-McCamey-Ingleside/Corpus, 585,000 b/d, 2019 JupiterMLP; 650-mile, to Brownsville, 2020 ExxonMobil, PAA, Lotus, Midland-to-Houston/Beaumont

Us OIL IMPORTS AND EXPORTS Net-exporter status is in view 2019 2018 Amount MMb/d Change % Crude imports 7.700 -1.9 7.850 -1.5 Product imports 2.250 -0.9 2.270 +4.4 TOT. IMPORTS 9.950 -1.7 10.120 -0.2 Crude exports 2.800 +33.3 2.100 +81.3 Product exports 5.890 +6.1 5.550 +6.4 TOT. EXP’TS 8.690 +13.6 7.650 +20.0 NET IMPORTS 1.26 2.47 Source: OGJ Forecast & Review, Jan. 7, 2019

US refining High refinery utilization reflects margins widened by US crude price discount to Brent 2019 2018 Amount MMb/d Change % Crude runs 17.03 +0.7 16.92 +2.0 Total inputs 17.20 -0.3 17.26 +2.1 Refining cap. 18.62 +0.1 18.60 +0.2 Cap. utilization 92% 93%

US gas production and trade Exports will grow with LNG project starts 2019 2018 Amount tcf Change % Production 35.697 +9.1 32.715 +12.0 Pipeline imports 2.612 -8.4 2.851 -3.8 LNG imports 0.073 +5.3 0.069 -11.1 Pipeline exports 3.066 +15.1 2.665 +8.3 LNG exports 2.044 +89.8 1.077 +52.1 Net exports 2.425 0.822 Source: OGJ Forecast & Review, Jan. 7, 2019

US LNG export projects, 2016-21

US gas: More gas, more liquids Source: US Energy Information Administration, 2018 Annual Energy Outlook

Debottlenecking Permian Gas NAmerico Partners; Pecos Trail, 468-mile 1.85 bcfd to Corpus, 2020 Kinder Morgan, DCP, Targa; Gulf Coast Express, 430-mile, Waha to Agua Dulce, 1.92 bcfd, October 2019 Sempra, Boardwalk; Permian-Katy, 470-mile, 2 bcfd, phased in starting December 2019 Tellurian; Permian Global Access, Waha to Gillis, La., 625-mile, 2 bcfd, 2022 Targa, NextEra, MPLX; Whistler, Waha to Agua Dulce, 450-mile, 2 bcfd, 2020 Kinder Morgan, ExxonMobil; Permian Highway, Waha-to-Katy, 430-mile, 2 bcfd, 2020

Debottlenecking Permian ngl EPIC Y Grade; 650-mile, DLK Black River to Corpus Christi 220,000 b/d, 2019 Enterprise; Shin Oak, 571-mile, Hobbs to Mont Belvieu 250,000 b/d, 2019 Permico Energia; Companero, 510-mile, to Corpus Christi, 300,000 b/d, 2020 Energy Transfer; Lone Star Express extension, 352-mile, Wink to Fort Worth interconnect, Q4 2020 Targa; Grand Prix, Permian and Oklahoma to Mont Belvieu

Appalachian gas pipeline delays Northern Access (97 miles, Pennsylvania-NY) approved early 2017, blocked by NY court PennEast (115 miles, Pennsylvania-NJ) approved Jan. 2018, NJ judge OKs eminent domain Mountain Valley (303 miles, WV-Virginia) approved Oct. 2017, 70% complete, Virginia AG filed suit, year-end 2019 in-service Atlantic Coast (600 miles, WV-NC) approved Oct. 2017, work halted after Virginia court stays F&WS permit

OGJ pipeline construction: 2019 only* Global - 14,387 miles (Flat from 2018 but maintaining a return to 2013 levels) US – 6,334 miles, +79% (of which, 1,315 miles NGL) Land pipeline construction costs: 2018, $9.95 million/mile 2017, $5.94 million/mile *Projects planned to be completed in 2019. Source: OGJ World Pipeline Construction, Feb. 4, 2019

OGJ pipeline construction: 2019 and beyond* Global – 31,917 miles, -5% (Continuing general decline since 2009) US, Canada – 10,396 miles, -4.7% Natural gas, 4,865 miles Crude, 4,115 miles Products, 1,416 miles *Projects under way at start of or set to begin in 2019 and be completed after 2019. Also includes some large projects not yet under construction but expected to advance. Source: Worldwide Pipeline Construction, OGJ, Feb. 4, 2019

Global crude Liberty (Phillips 66, Bridger) – Bakken-to- Corpus, 1,300 miles, 2020 Basra-Aqaba – Export Iraqi crude – 1,043 miles, 2020 Uganda-Indian Ocean – roughly 930 miles, 2020 Keystone XL?

Global natural gas projects SCP/TANAP/TAP (Shah Deniz II) – Caspian to Europe TAP = 800 km, incl. 115 offshore, 2020 Xinjiang to Guangdong-Zhejiang (Sinopec) – Gasified coal to market – 5563 miles, 2020 Power of Siberia (CNPC, Gazprom) – Russian gas to China – 2,465 miles, 2019 Trans Alaska Gas Pipeline?

The long term: IEA’s World Energy Outlook 2018 New Policies Scenario Current and planned policies, including Paris 2015 country commitments Sustainable Development Scenario “a pathway to meeting various climate, air quality and universal access goals in an integrated way. “ Energy-related, global emissions of CO2 peak in 2020 then decline in trajectory needed to meet goals of Paris Climate Agreement.

Long-Term Energy in IEA/WEO 2018 2017-40: Oil -29% Gas +11% 2017-40: Oil +10% Gas +43% Sustainable Development Scenario New Policies Scenario Source: International Energy Agency World Energy Outlook 2018

Long-term oil demand in iea/weo 2018 New Policies Scenario Sustainable Development Scenario Source: International Energy Agency World Energy Outlook 2018

Long-Term oil production in IEA/WEo 2018 Policy is important! 2017: 92.8 MMb/d 103.4 MMb/d Change vs. 2017: New Policies +11.4% Sustainable Development -26.7% 68 MMb/d Source: International Energy Agency World Energy Outlook 2018

Oil-demand growth leader: petrochemicals Net petrochem change: 4.81 MMbd Source: International Energy Agency World Energy Outlook 2018

Long-term gas outlook: ‘new policies’* Source: International Energy Agency World Energy Outlook 2018

Long-term gas sensitive to policy (but demand grows in both cases) Source: International Energy Agency World Energy Outlook 2018

Lng requirements under ‘new policies’ LNG will overtake pipeline share of gas trade in this period US LNG growing rapidly under uniquely flexible contracts Economically, gas will act increasingly like oil (but never totally) Source: International Energy Agency World Energy Outlook 2018

IEA models: chemical feedstock demand Chemical feedstock share of oil demand grows in both scenarios Feedstock demand: RTS vs. CTS* Oil demand for feedstock: RTS vs. CTS* *RTS=Reference Technology Scenario, aligned with New Policy Scenario in WEO 2017 *CTS=Clean Technology Scenario, aligned with Sustainable Development Scenario in WEO2017 Source: IEA ,”The Future of Petrochemicals,” October 2018.

IEA: Chemicals can use more Ethane *RTS = reference technology scenario. Source: IEA, “The Future of Petrochemicals, October 2018

What it means Oil market remains dependent on supply management Middle Eastern instability hampers but hasn’t impaired supply management Shale makes US a net gas exporter, nearly a net oil exporter, a growing exporter of NGL NGL dominates US pipeline construction outlook Long-term oil demand very sensitive to climate-related regulation Long-term growth in oil demand dominated by petrochemicals Gas-production growth means more NGLs, which will compete with oil in petrochemical market

Contact Information Bob Tippee, Editor, Oil & Gas Journal 1455 W. Loop S., Suite 400 Houston, TX 77027 bobt@ogjonline.com Ogj online: www.ogj.com Oil & Gas Community: www.ogj.com/oilandgascommunity