US Manufacturing and LNG Exports Economic Contributions to the US Economy and Impacts on US Natural Gas Prices CREA Energy Innovations Summit October 28, 2013 Ken Ditzel

U.S. LNG Context and Key Questions 1 U.S. natural gas supply boom due to shale Gas prices are averaging $3.5 – $4/MMBtu at the Henry Hub Japan LNG import price of $14 – $16/MMBtu ~35 Bcf/d of LNG export terminal applications submitted to the DOE Key markets (e.g., Japan, China, India, EU) are non-Free Trade Agreement (non- FTA) countries/regions representing 80% of current LNG demand These markets cannot access U.S. LNG unless deemed in the “public interest” Context Key Questions 1.What determines the public interest? 2.How will the economy be impacted by exports? 3.What strategies should gas consumers take given the recent trend of non-FTA export approvals?

Where do things currently stand on the non-FTA LNG export discussion? 2 The DOE has issued two studies –EIA (January 2012): found price impacts ranging from approximate 5-20% above 2030 reference case prices at export levels of 6-12 Bcf/d –NERA (December 2012): found a net overall economic benefit to the US economy CRA and API also have released studies: –CRA (February 2013 and July 2013): more employment and value-added are created from manufacturing than from LNG exports at a commensurate levels of gas demand –API (May 2013): gas prices will remain low because the supply resource is robust and LNG exports generally are not competitive. The “public interest” has yet to be formally defined, so the debate principally has focused on the US “economic interest” versus other interest elements (e.g., energy/national security, promotion of free trade, environmental impacts) DOE currently is not considering additional analyses on public interest impact, but they may consider additional analyses towards the end of the year (translation: they will consider EIA’s AEO 2014 Early Release)

What is the U.S. resource capability? 3 The abundance of low-cost resources is not clear. The majority of resource estimates land in the 2,000 – 2,750 Tcf range, which is plentiful, but it is not as optimistic as the API report (~40 more years at current demand levels). Finding Total U.S Resource Estimates

How do the various supply curves compare? 4 Compared to MIT’s and EIA reference cases, the API report forecasts about ,000 Tcf (15 – 33 years) more gas resources available from $4 – $6/MMBtu. North American Supply Curve Comparison – Base Case Finding

5 Won’t proposed international projects squeeze out U.S. projects? Disaggregation of the API Report’s Planned Liquefaction Projects Not necessarily. Two-thirds or ~26 Bcf/d of planned projects in the API report no longer are applicable or are “low probability” projects. Finding API Report Planned International Capacity: 39.2 Bcfd

This leaves room for the United States to compete for much of the anticipated 30+ Bcf/d capacity required in the API report’s High Demand scenario Demand Existing Capacity + API Int’l Project List Disaggregation of API Int’l Project List 2013 Liquefaction Plants Operating and Under Construction Additional Supply Needed by Bcf/d Operational Capacity Under Construction Operational Capacity API Report Planned LNG Projects High Potential Australian & SE Asia Horizon U.C. Capacity De-rate Shelved Projects Break- down of Planned Projects The U.S. Could Supply Much of this Gap 2035 API High Demand Future LNG Supply & Demand Balance (Bcf/d)

Won’t exports be curtailed if Henry Hub prices rise? 7 Breakeven Cost of Delivered LNG to Asia Note: this is a snapshot of existing and proposed projects. The sensitivities shown are for changes in the Henry Hub price only. The curves do not reflect the changing supply/demand dynamics in other countries. We project that the U.S. could be a part of the LNG supply mix even if Henry Hub prices rise to price levels of $7 – $10/MMBtu. Finding 2035 API Low Demand

What happens if 20 Bcf/d is layered on top of the CRA base case? Source: CRA US Gas Model Price Forecasting Results of Demand Scenarios Gas prices would rise back to mid-2000 levels, where gas price levels of $8/MMBtu to $10/MMBtu were common. Finding 8

How will new power generation decisions be impacted at $8-10/MMBtu? 9 Wholesale Levelized Cost of Electricity of New Generation X The electric sector will rely mostly on NGCC as the technology of choice going forward as it has a significant cost advantage over alternatives, especially with EPA heavily regulating coal via MATS and carbon standards. Finding Illustrative

How might U.S. manufacturing be affected at $8-$10/MMBtu? Ammonia/Fertilizer Manufacturing Case Study Source: CRA Analysis; The Fertilizer Institute Historical Trend of Manufacturing vs Gas Prices 10 There were significant declines in manufacturing jobs during the mid-2000s; an ammonia case study confirms that these prices levels would reduce gross margins significantly. Finding

Comparative Economic Impacts, 5 Bcf/d Is the U.S. economy better off with natural gas used in manufacturing than natural gas exported as LNG? Industry has publicly announced plans for $90 billion in gas-intensive manufacturing investments since 2010, which is equivalent to 5 Bcf/d of incremental natural gas consumption through This consumption is equivalent to about two large LNG terminals (~$20 billion in investment) Gas-intensive manufacturing, relative to LNG exports, annually contributes: –At least twice as much GDP –More than eight times the permanent jobs –More than four times the construction jobs There is a $52 billion trade benefit from manufacturing vs. LNG exports Finding 11

Conclusion: Trade-offs are required to accommodate future demand, and unconstrained LNG exports would likely prevail at the expense of broader economic growth, particularly in the manufacturing sector. Demand destruction will be inevitable, particularly from the manufacturing and electricity generation sectors if LNG exports are left unconstrained. The unintended consequences of high LNG exports could be lower benefits to GDP, employment, and trade balance due to reductions in a manufacturing renaissance, a low-cost electricity economy, and NGV deployment. These findings were missed by the December 2012 NERA study because of fundamental flaws: 1.The authors overestimated the costs of delivering US LNG exports to Asian markets and the price elasticity of demand of Asian importers such as Japan and Korea. 2.The authors did not separately represent each of the gas-intensive components of the manufacturing sector, instead using an averaging approach that muted the impacts of higher gas prices. The API report relies on optimistic resource assumptions to support its conclusion that the U.S. has more than enough resources to support LNG exports and domestic demand. The DOE’s public interest determination and its process for selecting who is next on the non-FTA export approval list should be made transparent to ensure a ‘prudent export logic’ Conclusions from CRA Studies 12