Richard Benedict, Indianapolis Power & Light Company (IPL) - Speaker at the marcus evans Generation Summit 2012, held in San Antonio, TX, delevered his presentation entitled “Hello My Old Friend” – The Resurgence of Natural Gas as the Power Generation Fuel of Choice

1. Hello My Old Friend – the Resurgence of Natural
Gas
G as the Power G
h P Generation F l of Choice
i Fuel f Ch i
Generation Summit
February 8, 2012
Richard Benedict, Director Project
Development

2. Indianapolis Power & Light Company
• IPL supplies electricity
to about 470 000
470,000
customers
• Most of IPL’s energy
comes from the
combustion of coal
• Natural gas is used for
peaking
• In 2010
I 2010, generated
t d
about 2% of its energy
from wind and forecasts
7% in 2012
• An Investor Owned
Utility whose parent is
The IPL Building – lighted for Super Bowl XLVI
the AES Corporation
2

3. AES – The Power of Being Global
• The AES Corporation has
– A widely di
id l diversified
ifi d
Natural Gas Coal 34%
generation mix 37%
– Generating capacity >
40,000
40 000 MW
– In 28 countries on five
continents
– $16.6 billion annual Oil, Diesel 5%
revenues Renewables
– $40.5 Billion in assets 24%
– A global force of more
g
than 29,000 people AES Generation Mix
3

4. Coa
Coal in the Crosshairs
t e C oss a s
aaa
bbb
ccc
ddd
Source: Wood Mackenzie
4

5. 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 for
construction limit nuclear
growth
U.S. Electricity Production in 2009
• Hydro is expensive and limited
(Source: EIA) in location
• Most growth will come from
renewables
rene ables and nat ral gas
natural
5

6. Generation Growth – Past, Present & Future
6

7. 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
• Prices have dropped to below
Pi h d dt b l
$4/MMBtu
Source: (Table) “Glut Hits Natural-Gas Prices”,
Wall Street Journal 1/12/12; (Data) “The Economic
and Employment Contributions of Shale Gas in • Has created 72,000 jobs since
, j
the United States”, IHS CERA and Lukert,
Ecology and Environment, Inc., “Overview of
2009 in Pennsylvania
Shale Gas Development and Environmental according to that state’s Dept
Issues”, 10/2011
of Labor & Industry
7

8. Shale 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 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
addition,
LNG would put additional upward pressure on prices
Source: “The Economic and Employment Contributions of Shale Gas in the United States”, IHS CERA
8

9. Basis Prices Have Been Impacted in Ways Not
Contemplated Just 5 Years Ago
• Prices at Henry Hub
Hub,
TETCO M3
the benchmark for
Rockies $0.80
-$1.81
Chicago
$0.62
the NG market, have
-$0.24
$0.24
-$0.16 fallen substantially
$0.12
TCO • Nearly all basis
$0.28 points now trade
$0.04 closer to Henry Hub
• 2012 futures prices
HSC
are from September
-$0.40
and actual January
-$.05
Henry Hub spot prices even
S TX BASIS
$7.45 lower than these
-$0.49 5-yr Avg (‘04-’08)
$4.41 figures
-$0.09 2012 Futures
in 9/2011
Source: CenterPoint Energy Services
9 9

10. Forward Curve Prices
$7
Avg Nominal Pric at Henry Hub ($/MMBTU)
$6
b
$5
ces
$4.55
Low Trade Volumes -
Higher Uncertainty
$4
A
$3
2012 2013 2014 2015 2016 2017 2018 2019 2020
10

11. What Has Happened?
• Shale gas is one of three unconventional forms of natural gas
(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 this
recently
unconventional natural gas
• Joining together horizontal drilling and hydraulic fracturing
(“fracking”) have allowed unconventional gas to be economically
recovered
11

12. Horizontal Drilling and Hydraulic Fracturing
(Part 1 of 2)
• Because shale gas is in low
permeability rock, it is located at
great 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
y g
Source: Task Force On Ensuring Stable Natural Gas
portion of source rock
Markets, Bipartisan Policy Center and American
Clean Skies Foundation
12

13. 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
rock
– The fluid is a mixture of water,
sand 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
Source: Task Force On Ensuring Stable Natural Gas
used to protect the pipe passing
Markets, Bipartisan Policy Center and American through the aquifer
Clean Skies Foundation
13

14. US Lower 48 Natural Gas Production 2011-35
• CERA forecasts growth
from 65 B f per d i
f Bcf day in
2010 to nearly 90 Bcf per
day in 2035
• The growth will come in
unconventional gas –
especially shale gas
14

15. US Lower 48 Natural Gas Demand 2011-35
• 481 GW of new capacity
between 2010-35,
b t 2010 35
including 64 GW of coal
retirement
• 60% Gas fired (290 GW)
• 32% Wind/Renewable
( 5 GW)
(154 G )
• 3% Nuclear (14 GW)
• 5% Clean Coal (24 GW)
15

16. Shale Gas is Well Distributed Throughout
the US and Near Major Population Centers
16

17. Marcellus Shale
• One of the largest Shale gas plays in
the 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 August
3 600
2011 in Pennsyvania
Source: (Map) National Energy Board of Canada , (Statistics) Lukert, Ecology and Environment, Inc., “Overview of
Shale Gas Development and Environmental Issues”, 10/2011
17

18. But Fracking is Dangerous and Awful!
• Chances are that if you
only know one thi
l k thing
about fracking, it is that
it “caused” this guy’s tap
water to catch on fire
• Often reproduced, this
video is used by
opponents of drilling in
the Marcellus Shale
Source: “Sierra Club Scrapbook” -
http://sierraclub.typepad.com/scrapbook/2012/01/big-new-
p yp p p g
jersey-rally-demands-fracking-ban-in-delaware-river-
• Needless to say the
say,
basin.html facts are a bit more
involved than that
18

19. Methane 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
Source: “The Facts About Fracking”, Wall Street Journal 6/25/2011
19

20. Marcellus Shale Regulating Agencies
• Drilling regulated by individual
states
– Pennsylvania Department of
Environmental Protection (PADEP)
– New York State Department of
Environmental Conservation
E i t lC ti
(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.,
Environment Inc “Overview of Shale Gas Development and Environmental Issues” 10/2011
Issues”,
20

21. Marcellus Shale Water Use (Susquehanna
River B i Example)
Ri Basin E l )
Source: Data from Susquehanna River Basin Commission, quoted by Lukert, Ecology and Environment, Inc.,
“Overview of Shale Gas Development and Environmental Issues” 10/2011
Issues”,
21

22. Natural 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 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 costs
gy
– The decision to utilize natural gas and hydraulic fracturing
needs to be made based upon science and not emotion
22

23. 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