Hello My Old Friend – the Resurgence of Natural G h P G i F l f Ch iGas as the Power Generation Fuel of Choice

Generation SummitFebruary 8, 2012

Richard Benedict, Director ProjectRichard Benedict, Director Project Development

Indianapolis Power & Light Company

• IPL supplies electricity to about 470 000to about 470,000 customers

• Most of IPL’s energy comes from the combustion of coal

• Natural gas is used for peakingI 2010 t d• In 2010, generated about 2% of its energy from wind and forecasts 7% in 20127% in 2012

• An Investor Owned Utility whose parent is the AES Corporation The IPL Building – lighted for Super Bowl XLVI

2

AES – The Power of Being Global

• The AES Corporation hasA id l di ifi d– A widely diversified generation mix

– Generating capacity > 40 000 MW

Natural Gas 37%

Coal 34%

40,000 MW– In 28 countries on five

continents– $16.6 billion annual Oil, Diesel 5%$16.6 billion annual

revenues– $40.5 Billion in assets– A global force of more

Renewables24%

gthan 29,000 people AES Generation Mix

3

Coal in the CrosshairsCoa t e C oss a s

aaa

bbb

ccc

ddd

4

Source: Wood Mackenzie

If Not Coal, What?• Coal will shrink given the

current EPA “train wreck” policy and little new coal is likely to be built

• 481 GW of new capacity will be needed from 2010 to 2035 (including 64 GW of coal retirement) according to CERA

• Long lead times forLong lead times for construction limit nuclear growth

• Hydro is expensive and limitedU.S. Electricity Production in 2009(Source: EIA)

• Hydro is expensive and limited in location

• Most growth will come from rene ables and nat ral gas

5

renewables and natural gas

Generation Growth – Past, Present & Future

6

The Shale Gas Revolution

• Shale production in 2000:– 1 Bcf per day p y– 2% of Lower 48 production

• Shale production in 2010:– 15 Bcf per day– 27% of Lower 48 production

P i h d d t b l

Source: (Table) “Glut Hits Natural-Gas Prices”, Wall Street Journal 1/12/12; (Data) “The Economic and Employment Contributions of Shale Gas in

• Prices have dropped to below $4/MMBtu

• Has created 72,000 jobs since and Employment Contributions of Shale Gas in the United States”, IHS CERA and Lukert, Ecology and Environment, Inc., “Overview of Shale Gas Development and Environmental Issues”, 10/2011

, j2009 in Pennsylvania according to that state’s Dept of Labor & Industry

7

Shale Gas Right Time and PlaceShale Gas – Right Time and Place• IHS CERA estimates that today, shale gas is 34% of Lower 48

production– “Since 2009, gas producers have succeeded in meeting the demands

of two colder-than-normal winters and two hotter-than-than normal summers while building storage inventories to record levels”

• If not for shale gas, the current 67 Bcf per day US demand would be met with large quantities of LNG imports– LNG = Liquefied Natural GasLNG Liquefied Natural Gas– US consumers would be paying European or even Asian

prices for natural gas ($10 - $12/MMBtu rather than $4/MMBtu)– In addition increased demand from North America for global– In addition, increased demand from North America for global

LNG would put additional upward pressure on prices

8

Source: “The Economic and Employment Contributions of Shale Gas in the United States”, IHS CERA

Basis Prices Have Been Impacted in Ways Not Contemplated Just 5 Years AgoContemplated Just 5 Years Ago

• Prices at Henry Hub

-$0.16

Chicago-$1.81

-$0.24

Rockies $0.80

$0.62

TETCO M3• Prices at Henry Hub,

the benchmark for the NG market, have fallen substantially

$0.12$0.24

$0.28

$0.04

TCO • Nearly all basis points now trade closer to Henry Hub

-$0.40

-$.05

HSC• 2012 futures prices

are from September and actual January spot prices even

5-yr Avg (‘04-’08)

2012 Futuresin 9/2011

BASIS

-$0.49

-$0.09

S TX$7.45

$4.41

Henry Hub spot prices even lower than these figures

9 9

Source: CenterPoint Energy Services

Forward Curve Prices$7

$6

b ($

/MM

BTU

)

$5

ces

at H

enry

Hub

$4.55

$4

Avg

Nom

inal

Pric

Low Trade Volumes -Higher Uncertainty

$32012 2013 2014 2015 2016 2017 2018 2019 2020

A

10

What Has Happened?

• Shale gas is one of three unconventional forms of natural gas (along with tight sands and coal bed methane)(along with tight sands and coal bed methane)

• Unconventional gas is in a low permeability rock formation– In other words, the gas is trapped and doesn’t want to flow even , g pp

if you drill a well into it– Geologists have known about these reserves for decades– Up until recently there was no economical way to recover thisUp until recently, there was no economical way to recover this

unconventional natural gas

• Joining together horizontal drilling and hydraulic fracturing (“fracking”) have allowed unconventional gas to be economically recovered

11

Horizontal Drilling and Hydraulic Fracturing (Part 1 of 2)(Part 1 of 2)

• Because shale gas is in low permeability rock, it is located at great depthsgreat depths – The gas in permeable rock has

already migrated upwards

• Horizontal drilling involves drilling down and then turning sideways– A vertical well sunk thousands

of feet below the ground– The vertical pipe is then moved

horizontally to access a larger Source: Task Force On Ensuring Stable Natural Gas Markets, Bipartisan Policy Center and American Clean Skies Foundation

y gportion of source rock

12

Horizontal Drilling and Hydraulic Fracturing (Part 2 of 2)

• Hydraulic fracturing is the injection of fluid under high pressure to create new fractures in the source

(Part 2 of 2)

create new fractures in the source rock– The fluid is a mixture of water,

sand and chemicalssand and chemicals– The sand prevents the cracks

from closing

• Fracturing is done well below aquifers used for drinking water and steel casing and cement is used to protect the pipe passing through the aquifer

Source: Task Force On Ensuring Stable Natural Gas Markets, Bipartisan Policy Center and American Clean Skies Foundation

13

US Lower 48 Natural Gas Production 2011-35

• CERA forecasts growth f 65 B f d ifrom 65 Bcf per day in 2010 to nearly 90 Bcf per day in 2035

• The growth will come in unconventional gas –especially shale gas

14

US Lower 48 Natural Gas Demand 2011-35

• 481 GW of new capacity b t 2010 35between 2010-35, including 64 GW of coal retirement

• 60% Gas fired (290 GW)• 32% Wind/Renewable

(154 GW)( 5 G )• 3% Nuclear (14 GW)• 5% Clean Coal (24 GW)

15

Shale Gas is Well Distributed Throughout the US and Near Major Population Centersthe US and Near Major Population Centers

16

Marcellus Shale

• One of the largest Shale gas plays in the United Statesthe United States

• Located primarily in New York, Pennsylvania and West Virginia

• 5,000 to 8,000 feet below ground and 25 to 1,800 feet thick

• Estimates as high as 500 tcf of gas in place (trillion cubic feet)

• Over 3 600 wells drilled as of AugustOver 3,600 wells drilled as of August 2011 in Pennsyvania

Source: (Map) National Energy Board of Canada , (Statistics) Lukert, Ecology and Environment, Inc., “Overview of

17

Shale Gas Development and Environmental Issues”, 10/2011

But Fracking is Dangerous and Awful!

• Chances are that if you l k thionly know one thing

about fracking, it is that it “caused” this guy’s tap water to catch on firewater to catch on fire

• Often reproduced, this video is used by opponents of drilling in the Marcellus Shale

• Needless to say theSource: “Sierra Club Scrapbook” -http://sierraclub.typepad.com/scrapbook/2012/01/big-new- • Needless to say, the

facts are a bit more involved than that

p yp p p gjersey-rally-demands-fracking-ban-in-delaware-river-basin.html

18

Methane and the Marcellus Shale FormationMethane and the Marcellus Shale Formation• Methane has long migrated into drinking water in the Marcellus Shale

region of Pennsylvania and New York g y– Methane is naturally occurring in the region– One study (critical of fracking) acknowledges that methane was

detected in 85% of wells studied regardless of whether drilling occurred nearby or not

• Fracking occurs thousands of feet below where individual or muncipal wells are located

• Steel and cement casings surround the drill hole for unconventional gas as it penetrates aquifers

• Leaky well casings are a legitimate area for state and local regulation –but the risks are not unique to fracking, which has provided no unusual evidence of contamination

19

Source: “The Facts About Fracking”, Wall Street Journal 6/25/2011

Marcellus Shale Regulating Agencies

• Drilling regulated by individual statesstates

– Pennsylvania Department of Environmental Protection (PADEP)

– New York State Department of E i t l C tiEnvironmental Conservation (NYSDEC)

• Water Usage– Susquehanna River Basin Commission

(SRBC)– Delaware River Basin Commission

(DRBC)( )

Source: (Picture) Wikipedia, Marcellus Shale Gas Drilling Tower 1 crop.jpg, (Statistics) Lukert, Ecology and Environment Inc “Overview of Shale Gas Development and Environmental Issues” 10/2011

20

Environment, Inc., “Overview of Shale Gas Development and Environmental Issues”, 10/2011

Marcellus Shale Water Use (Susquehanna Ri B i E l )River Basin Example)

Source: Data from Susquehanna River Basin Commission, quoted by Lukert, Ecology and Environment, Inc., “Overview of Shale Gas Development and Environmental Issues” 10/2011

21

“Overview of Shale Gas Development and Environmental Issues”, 10/2011

Natural Gas and Public PolicyNatural Gas and Public Policy

• The natural-gas industry must take great drilling care

• Responsible regulation is also appropriate

• Natural gas as a fuel for electric generation has many environmental benefitsenvironmental benefits

• The task for the rest of us in whether we are serious about domestic energy production– Without shale gas, what will power the incremental 290 GW

of new electrical capacity needed by 2035?– All forms of energy have risks and environmental costsgy– The decision to utilize natural gas and hydraulic fracturing

needs to be made based upon science and not emotion

22

Hello My Old Friend – the Resurgence of Natural Gas as the Power Generation Fuel of Choice

Richard Benedict

(317) 261-5009

richard.benedict@aes.com