The Gas Price Roller Coaster: The Ride Continues

1
The Gas Price Roller Coaster The Ride Continues

• Bruce B. Henning
• Energy and Environmental Analysis, Inc.
• bhenning_at_eea-inc.com
• A.G.A. Energy Industry Outlook Meeting
• November 13, 2003

2
North American Gas Market OverviewGas Consumption

• Given the vast amount of new gas-fired power
  generating capacity recently placed in service
  and additional capacity under construction, gas
  demand will continue to grow.
• U.S. gas consumption has trended up during recent
  history. Consumption will continue to grow,
  rising to 25 Tcf by 2005, with over 50 percent of
  the growth occurring as a result of gas-use in
  power generation.
• Canadian gas consumption has also trended up and
  will continue to grow.
• Projected demand growth is dependent on economic
  growth.

North American natural gas market best
characterized as a demand leads supply market
for the foreseeable future.
3
Gas Supply Long run vs. Short run

• Long run
• Number of wells needed to meet demand.
• All in cost of wells.
• Short-run
• Maximum production capacity (deliverability).
• A decision to reduce production (shut-in)
  because of market price.

4
Gas Market Fundamentals Gas Quantity And Price
Equilibrium
5
Gas Price Response to Demand Shifts
6
Producer Activity

• Producer drilling responds to
• Current gas prices.
• Current oil prices.
• Expectation of future prices?
• Producers view
• Wall Streets view

7
(No Transcript)
8
(No Transcript)
9
(No Transcript)
10
Impact Of Weather
All U.S. markets have the potential for
weather-induced price spikes.
11
Impact Of Weather
Price volatility will be higher where there are
transportation constraints that can cause basis
blowout.
12
If You Want a Return to Low Gas Prices, Its
Not a Pretty Picture But... Its Not as Bad as
We Thought as recently as June
13
(No Transcript)
14
(No Transcript)
15
Why Havent Producers Responded Quicker?

• Are elephants extinct?
• Or do they only live in restricted areas?
• Price volatility creates a wait and see
  attitude.
• Misunderstanding of the power generation market.
• Capital markets restricted investment.

16
Longer Term Outlook
17
North American Gas Supply

• Gas supply from new frontiers will account for 7
  Tcf, or one-third of total supply in 2010, versus
  only 3 Tcf, or 13 percent of todays supply.
  Production from mature areas will decline by
  about 19 percent during this period.

18
Natural Gas Prices

• Gas prices will average 4 to 5 per MMBtu.
• Growing gas demand will encourage development of
  new frontier gas supplies at 4 gas prices.
• However, price volatility will remain high, so
  prices well above 5 and below 4 are possible
  for some periods of time.
• Upside potential is greater.

19
Conclusions

• The gas price roller coaster has added
  uncertainty into the market. Producers have not
  been confident in the market direction.
• Much of the drilling in the high price period was
  low risk drilling
• The gas market will remain fundamentally tight
  for the next decade
• power generation demand combined with high
  decline rate production can tighten the market
  even in warm weather years

20
Conclusions (continued)

• Gas supplies will need to be developed in more
  difficult resource
• Tighter gas, deeper water, and frontier gas
• Producer activity must shift to higher
  risk-higher reward resource - Soon!
• Some recent statements indicate that this
  recognition is growing

21
The Gas Price Roller Coaster The Ride Continues

• Bruce B. Henning
• Energy and Environmental Analysis, Inc.
• bhenning_at_eea-inc.com
• A.G.A. Energy Industry Outlook Meeting
• November 13, 2003