Cheniere Energy, Inc.

The outlook for U.S. natural gas supply has changed dramatically over the past five years as a result of innovations in drilling technologies that have enabled large supplies of unconventional gas, and in particular shale gas, to be developed at low costs.

At the start of the decade, fears of impending shortages were prevalent in the U.S. natural gas industry. Natural gas reserves and production had been flat during the 1990s, large conventional gas fields in the Gulf Coast region were in decline, and many analysts were skeptical of the industry’s ability to add new production and meet future growth in domestic demand.

Benefitting from science and technology investments in the 1980s and 1990s, the U.S. natural gas industry began making strides in extracting natural gas from low-permeability, or “tight”, reservoirs such as coalbed methane, sandstone and shales. Production gains rapidly accelerated after 2005, following the widespread adoption of horizontal drilling practices in the Barnett Shale in north-central Texas, and subsequently in other emerging shale plays.

From 2005 – 2007, natural gas prices at the Henry Hub averaged approximately $8.00 per MMBtu, a price which supported an increase in active drilling and continual improvements in industry practices to produce gas from unconventional reserves. Long-run breakeven price estimates to produce shale gas have fallen significantly over time as the industry has perfected drilling and completion methods while discovering prolific new fields, enabling the expansion of a predictable, low-cost source of gas for the U.S for future decades.

Instead of declining as many predicted, U.S. natural gas production increased from 53 Bcf/d in 2000 to approximately 59 Bcf/d in 2010, as gains in unconventional production more than countered declines in conventional onshore and offshore reservoirs. Production from shale plays surged over the decade, rising from 1 Bcfd in 2000 to over 12 Bcfd in 2010.

As the natural gas industry’s understanding of the unconventional resource base has grown, drilling costs have steadily declined while the productivity of new wells has steadily increased. Meanwhile, productive geologic formations continue to be discovered. Many of today’s most prolific shale plays, including the Marcellus Shale in the Northeast, the Haynesville Shale in northern Louisiana and East Texas, and the Eagle Ford Shale in South Texas, were virtually unexplored by the industry only a few years ago.

The U.S. natural gas resource should continue to expand in the coming years as unproved unconventional basins are defined and developed. Examples of these emerging basins include multiple shale plays in the Rockies (Mancos, Baxter, Niobara, etc.), the Granite Wash tight sands in the Mid-Continent, and the Utica and others emerging shale plays in the East.

The robust potential for future United States natural gas supply has been reflected in other recent industry evaluations:

The Potential Gas Committee estimates the U.S. has future available gas supply of 2,074 Tcf, the highest resource evaluation in the group’s 44-year history and over 90 years of U.S. demand at 2009 consumption levels.

The recent MIT report, Future of Natural Gas, found that the U.S. has 2,100 Tcf of recoverable reserves, including 650 Tcf of recoverable shales of which 400 Tcf could be economically developed below $6 wellhead prices. The MIT Report estimates U.S. gas production will rise by 40% between 2005 and 2050.

Advanced Resources International, in a report commissioned for Cheniere’s application with the Department of Energy for LNG export authorization, estimates that the U.S. has 2,585 Tcf of technically recoverable gas reserves, or 113 years of U.S. demand at 2009 levels. Unconventional gas represents 53% (1,373 Tcf) of this total, including 700 Tcf of recoverable shale, 567 Tcf from tight sands, and 106 Tcf from CBM.