This presentation by Lucian Pugliaresi, President, Energy Policy Research Foundation (EPRINC), was made during the launch of the report on the "Mexican Competition Assessment in the Gas Sector" held on 23 July 2019 in Mexico. More information on the report and the highlights brochure in English and Spanish can be found out at http://www.oecd.org/daf/competition/oecd-competition-assessment-mexico-2019.htm.

1. Competition in the U.S.
Natural Gas Industry
Lucian Pugliaresi
President, Energy Policy Research Foundation (EPRINC)
Washington, DC
eprinc.org
OECD COMPETITION ASSESSMENT REVIEWS
MEXICO 2019
Secretaría de Economía
Mexico City
July 23, 2019

2. Themes
Dynamics of competition in the production of U.S.
natural gas
• Expansion of US natural gas production
• How US regulatory program promotes competition
• Competition in the distribution and pricing of natural
gas
• Some comments on Propane, LPG and Small Scale LNG
Competition is important in all phases:
Exploration, Extraction, Production,
Transportation, Storage, Distribution and
Marketing

3. North American Petroleum Resource Base is Vast
&
Benefits from a Highly Competitive System

4. Marcellus
Permian +
Eagle Ford

5. Main U.S. Shale Basins and Plays
Power of Source Rock + Private Property
Source: EIA
Resource Base
Does Not Stop
At the US Border

7. US Has Extensive Oil & Gas Resources on Both Private Land
(with private mineral rights) and Public Lands
Source: US Department of Interior

8. US Natural Gas Production, 2004 – 2018
(billions of cubic feet/day
Source: EIA, Note over 5 bcf/day exported to Mexico via pipelines

9. Source: RBN
DISTRIBUTION OF US NATURAL GAS PRODUCTION
 60% of exports shipped
to Mexico in 2018

10. But US Shale is More than a Supply Shock:
Its Investment Cycle in Unique
Average lead times between final investment decision and first production for
different oil resource types
The investment cycle for US shale is shorter from that of conventional fields with time between
FID and first production is a fraction of that for conventional fields (few months) and much
lower capital intensity (few millions dollars)
Source: IEA – with permission Bassam Fattouh, OIES

11. Source: Rystad Energy, Presentation by Rajeeve Madhavan (Lambert Energy Advisors) at Annual JOGMEC petroleum
seminar, February 28, 2019, Tokyo, Japan.
Unconventionals are low risk
(Not Lumpy!)

12. New Mexico Collects Some Economic Rent
Katharine MacGregor, deputy assistant secretary of land and minerals
management at the U.S. Department of Interior presents
a check to the State of New Mexico for $486 million from a recent Federal
lease sale, Dec. 11, 2018.)
Some in US are calling for rapid
curtailment of US
Oil and Gas production
But how should we deal with the
“Economic Rent”
New Mexico legislators oppose
fracking gas shale development,
should they give back the rent?
Federal Revenues in 2017 from oil
& gas leases exceed $6 BILLION
Source: Carlsbad Current Argus
Competition in Upstream Development Yields Revenue to Government

13. Competitive Features of the US Gas Market

14. Simplified U.S. Natural Gas Distribution System

15. Overview of Competitive Operation of US Gas Market
- Deregulated and unbundled gas prices
o Government deregulates price & regulators reform market to separate
commodity sales function from transportation & other logistics services
o Number of buyers and sellers increases
- 3rd party access to transport facilities and terminals
o Regulators mandate all potential infrastructure users have access
o Open to buyers and sellers
- Bilateral trading predominates
o Multiple parties contract w/ each other on their own terms & over TPA
facilities
o Producers can trade directly w/ distributors and large end users
o Number of parties and transactions expands
- Transparency in pricing & volumes traded
o Pricing reporting entities (PRE) publish pricing info where prices and
volumes are reported
o Published daily, weekly, monthly to ensure accuracy
o Reliable price info supports bilateral trade & reduces transaction costs

16. - Standardization of trading rules & contracts
o Instituted by regulators or an industry organization
o Ensures common use of terms or standard trading and transfer practices
o Facilitates trade by reducing transaction costs and makes trade more efficient
- Over the counter brokered trading
o Traders such as merchants, financial institutions and brokers enter market to trade
gas and provide additional market liquidity
- Price indexation
o Liquidity at hub increases to the point that PRE-reported prices at the hub become
indicator of market balance
o Reported prices become reliable index that parties will cite for future pricing in long-
term contracts
- Non-physical trading permitted
o Offer pure financial hedging instruments based on the hub index
o Enter market to take price risk and offer custom OTC hedging services linked to index
- Futures exchange
o A commodity exchange such as NYMEX creates standardized tradable futures
contract
o Offers trading platform under exchange rules
- Liquid force price curve
o Parties trade large numbers of futures contracts for deliveries months out
o Provides future discovery and means of managing prices risk on future commitments
Features of US Competitive Gas Market, Con’d

17. The Road to a Competitive Natural Gas Market was Long and Difficult
Old System
- Under NGPA, pipelines purchased natural gas from producers, transported it to its customers (mostly
local distribution companies), and sold the bundled product for a regulated price
- Early 1980s, customers began switching from natural gas to other forms of energy, resulting in special
marketing programs.
o Approved by FERC, allowed industrial consumers to switch fuels directly from producers but found
discriminatory against other consumers
o Led to FERC order 436
Deregulation and Pro-Competition Initiatives
FERC order No. 436 (1985)
- Pipeline transportation service available to all customers on first come first served basis
- Transport minimums and maximums set, but pipelines could create competitive rates within those
boundaries
- Transport function now essential function of pipelines instead of bundled merchant service offering
- Made unbundling services possible
Natural Gas Wellhead Decontrol Act of 1989
- Complete deregulation of ‘first sales’
- Since January 1, 1998 all NGPA price regulations at the wellhead were eliminated; market determined
price of natural gas at wellhead

18. The Road to a Competitive Natural Gas Market
was Long and Difficult (con’d)
FERC Order No. 636 (1992)
- Pipelines must separate transportation and sales services
o Pipeline customers have a choice in selecting their gas sales,
transportation, and storage services from any provider
- Could no longer engage in merchant gas sales or sell any product as bundled
service
- Prevents monopolies and advantages over other potential pipeline users
- Order 636 required pipelines to separate the offering and pricing of
gas sales from the transportation of natural gas, with this unbundling
taking place at a point near the gas production area.

19. Some Regulations Promote Competition
CFTC
- CFTC responsible for reviewing commodity futures exchanges such as NYMEX to
evaluate which aspects of these exchanges are properly or improperly functioning
- Futures contract: legal agreement to buy or sell a standardized asset on a specific date
or during a specific month that is facilitated through a futures exchange
- Commission provides a standard for each contract
Role of NYMEX
- Market participants can trade contracts that equal multiple times the annual global
refined product volumes actually sold
- Natural gas futures prices are based on delivery at the Henry Hub in Louisiana
- Natural gas futures are:
o 3rd-largest physical commodity futures contract in the world by volume
o global price benchmark for trading natural gas; promotes gas on gas competition
CFTC: Commodities Futures Trading Commission (USG)
NYMEX: New York Mercantile Exchange (trading platform)

20. Source: EIA 2019 STEO
Benefits of Competition
Natural Gas Prices Expected to Remain Low
Natural Gas Prices to
remain low $2-$4/MCF

21. LPG (Propane, Butane), NGLs (Natural Gas Liquids)
and
Small Scale LNG are Unregulated
(although must adhere to Environmental Regulations and General
Competitive Requirements under Federal Trade Commission and Anti
Trust laws)

22. Structure of US Propane Market

23. Retail Price of Fuels on an Energy Equivalent Basis
October 2018
Note: US propane prices reflect high cost of retail operations, plus BTU differences, USLD = 140K BTU/gal, Propane = 91K BTU/gal
Source: US DOE

25. Small Scale LNG Emerging in North America
Note: Chart shows LNG supply and distribution footprint across North America (including Mexico and
Canada), both supply sources and trucking terminals. Total access exceeds 750,000 gallons per day.
Data from a single major operator

26. Comparing Large Scale vs. Small Scale LNG Facilities

27. Back up Slides

28. About EPRINC
• Founded 1944
• Not-for-profit organization
• Studies intersection of petroleum
economics and public policy
• Provides independent and technical
analyses for
distribution to the public
• Supports USG projects,
e.g. Quadrennial Energy Review,
DoD strategic outlook
• EPRINC Embassy Series
• IEEJ-EPRINC Project on “Future of
ASIAN LNG -- Entering 3rd Year
• Opened Mexico Office on March 1,
2019
• www.eprinc.org
28

29. Source: OPIS
The Power of the Utica/Marcellus NatGas Remains
Its Not All About the Permian
Utica/Marcellus
LOWER 48 Production Approaching
90 Bcf/d

30. 30
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31. 31
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33. Source: Vello Kuuskra, ARI (presentation at EPRINC natural gas workshop, April 19, 2018.

35. Rapid Growth and Global Reach for LNG