Bruce B. Henning

1
NREL Energy Analysis Seminar February 24,
2005
Natural Gas Yesterday, Today, and Tomorrow
Energy and Environmental Analysis, Inc.
1655 N. Fort Myer Drive Suite 600Arlington,
Virginia 22209

• Bruce B. Henning
• [phone]
• bhenning_at_eea-inc.com

2
Contents

• Gas Supply/Demand Balance
• Gas Demand Outlook
• Gas Supply Outlook
• Is Supply Adequate to Meet Demand?

Uncertainties and Price Volatility
Gas Price Outlook Impact of Weather on Gas
Prices
Regional Gas Prices Key Findings
Note All conclusions and results are based on
EEAs gas market fundamentals analysis.
3
What Determines Gas Prices?
Fundamentals - Gas prices are determined by the
balance of supply and demand in a regional
marketplace. Technical factors - Trading momentum
, speculator activities, etc. Market imperfection
s and manipulation - Has had some impact, but
less than most think.
4
Determinants of Gas Demand
Gas demand is driven by Stock of gas-fired equip
ment More than 200 GWs added between 1998 and 200
5 Weather Electricity demand Economic growth E
conomics of the marginal customers next best
alternative Ability to switch to alternate fuel,
generally oil in the short-term.
Power plant dispatch options. Industrial shut-do
wn decisions when variable costs exceed product
prices.
5
Determinants of Gas Supply
In the near-term, gas supply is determined by
Deliverability (or the total productive
capacity). Storage (deliverability and working ga
s). Opportunity to sell gas into or out of a mark
et including the cost and availability of
transportation and distribution capacity.
In the longer term, gas supply is determined by
Drilling activity. Drilling cost. Amount of gas
recovered per well. Cost of pipeline and distribu
tion. LNG infrastructure.
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Gas Price Response to Demand Shifts
7
The Changing Gas Balance
Divergent trends in gas supply and demand have
led to the tight balance between supply and
demand, higher gas prices, and increased price
volatility. TIGHT BALANCE EXPECTED TO CONTINUE
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Needed for Deliverability Replacement
9
Natural Gas Supply
Relying On New Frontiers
U.S. and Canada Gas Supply

• Production from mature producing areas will
  decline by 0.7 percent per year.
  
• New frontier supplies will account for 44 percent
  and 52 percent of total U.S. and Canada gas
  supply in 2015 and 2025, respectively.

10
Gas Demand Outlook

• Gas consumption in the power sector will grow
  substantially.
  
• Over 200 GWs of new gas-based generating
  capacity has already been installed in the U.S.,
  and is today largely underutilized.
  
• Gas use for power generation using existing and
  under-construction capacity will be used to
  satisfy increasing electric load adding 300 Bcf
  per year in gas consumption.
• As a result, growth in gas use for power
  generation is already built into the system.
  
• Modest growth in residential and commercial gas
  consumption.
  
• Industrial gas consumption will fluctuate around
  current levels.
  
• Well below pre-2000 levels.
• When necessary, price-induced demand reductions
  will balance the market.

The North American gas market may be best
characterized as a demand leads supply market
for the foreseeable future.
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Recent Natural Gas Consumption in the U.S. by
Sector (Bcf)
Source Natural Gas Annual 2003, U.S. Energy
Information Administration
however, gas use in power generation has been
growing due to increased reliance on gas-based
power generation, a trend we expect to continue.
Relatively high gas prices have led to demand
destruction in the industrial sector, a trend
that we do not expect to continue ...
12
Gas-Based Generation
Powering The Future

• Gas-based power generation will grow
  significantly.
  
• Penetration of gas-based generation will slow
  after 2015 as new base load generation capacity
  is added.

Gas Generation as Percent of Total Generation
2004 14 2015 25 2025 24
13
What Drives the Growth inPower Generation Gas
Demand?

• Between 1998 and the end of 2003, over 200
  gigawatts of new gas-based capacity was
  constructed.
  
• In contrast the older steam units, the new
  combined cycle and combustion turbines were build
  without any oil backup capability.
  
• After the recent economic slump, electricity
  demand growth is expected to return to about 1.9
  per year.
  
• In the near term, coal generation is expected to
  increase, but not as quickly as the increase in
  electricity demand.
  
• Increases at existing coal plants are limited by
  environmental regulations.
  
• Future regulations (on mercury or carbon
  emissions) could further limit coal generation.
  
• Significant additions of new coal capacity are
  not expected for 10 years.
  
• Nuclear and Renewables output will at a rapid
  rate, but the contribution remains relatively
  small. There is no significant change in
  hydroelectric capacity.

Existing gas-based capacity will meet most of the
incremental growth in electricity demand through
the end of the decade.
14
Gas Capacity Additions
Over 200 GW of new combined cycle and combustion
turbines have been added since January 1998.
The pace of additions slows over the remainder of
the decade, as the existing capacity can meet
most of the incremental demand growth.
Additions decelerate further in the coming decade
as coal becomes more competitive.
15
Cost of Power from Gas Versus Coal

• As gas prices pass 4, building new coal plants
  starts to look economically attractive compared
  to new gas units.
  
• But even at gas prices above 5.50, existing gas
  units are a threat to capital recovery of a new
  coal unit
  
• As a result, we do not expect to see many new
  coal units built over the next seven years.

New coal plants can compete on on a cost basis
with new gas units, but face tough competition
from existing units and have environmental and
siting risk
16
Gas-Based Generation
Powering The Future

• Gas-based power generation will grow
  significantly.
  
• Penetration of gas-based generation will slow
  after 2010 as clean coal technologies become
  economically viable.

Gas Generation as Percent of Total Generation
2003 17 2010 22 2020 27
17
Industrial Gas Demand

• Growing power generation gas demand placing
  pressure on gas prices.
  
• Over the past five years, industrial consumption
  has declined relieving some pressure.
  
• Will this continue?

The North American gas market may be best
characterized as a demand leads supply market
for the foreseeable future.
18
Industrial Sector Gas Use (Bcf)
19
North American Gas Market
North American Natural Gas Market in a New Era

• North American gas supply/demand balance will
  remain tight.
  
• Gas consumption will grow.
• Increased reliance on gas-based power generation
  is a near certainty.
  
• New frontier gas supplies are necessary.
• New supplies will be more remote and more costly
  than supplies developed to date, but cheaper than
  todays prices.

Long term contracts will be needed to support
frontier gas supply development.
In the long term, Henry Hub price will average
4 to 5 per MMBtu. Gas price volatility will cont
inue. Weather and other variables, including pipe
line constraints, will yield high levels of price
volatility, given the tight balance between
supply and demand. Volatility can be managed with
long term contracts, pricing tools, and hedging
programs.
20
The Fundamental QuestionCan Gas Supply Support a
Growing Market?

• Yes!
• Sufficient gas resource is available in North
  America and around the world.
  
• These resources can be developed and delivered to
  the North American market at prices that will
  allow the gas demand to continue to grow.
  
• However, the construction of new facilities is
  needed to access and deliver new frontier gas
  supplies.
  
• Pipelines, storage, and LNG infrastructure.
• Long-term contracts are likely to be necessary to
  support new infrastructure development.
  

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New Frontier Gas Supplies
Abundant at prices lower than todays levels
Cost Of New Frontier Gas Supplies

• Cost of new frontier supplies will set the trend
  for future natural gas prices.
  
• Prices will be higher than delivered to market
  costs due to development delays and risk
  premiums.
  
• Even so, prices can be lower than current price
  levels when these sources are developed.

Total Amount Estimate Capital Expended Delivered
To U.S. And Delivery Through 2020 Canadian
Markets Cost Per Unit To Develop In 2020 Of
Gas1 Supply2 New Frontier Source (TCF) (/MMBtu)
(Billion U.S.) Deepwater Gulf Of Mexico3 3.5 2.5
0 300 Rocky Mountain Gas 3.9 2.80 133 LNG Import
s 5.5 3.50 88 Alaska 2.7 3.80 50 Eastern Canada
Offshore 0.5 3.50 20 MacKenzie Delta 0.4 3.60 14
Total Of New Frontiers 16.5 605
1) Cost of deliveries into closest major market
area in constant 2003 dollars. 2) Total cost of
development, including all EP expenditures and
all development expenditures to bring the gas
supply to market. 3) Almost two-thirds of the
capital expenditure applies to oil well
development.
22
Alaska Gas and LNG ImportsPlaying a Major Role
LNG Imports, Bcfd
Alaska Capacity Expansions
Gulf Coast
MMcfd
Added
November 2014 / November 2017
East Coast
Alaska
West Coast
4000/2000
Alberta
British
Columbia
New England
New England
LNG Imports and Alaska gas will provide over
one-quarter of North American gas supply by 2020.
There would be little growth in supply without
these new sources of supply.
Everett
Everett
Mid-Atlantic
Mid-Atlantic
Cove Point
Cove Point
Florida/Bahamas
750
Elba Is.
Elba Is.
Louisiana (2)
Louisiana (3)
Katy (2)
Katy (2)
Lake Charles
Lake Charles
Florida/
Florida/
Bahamas
Bahamas
Texas Offshore (3)
Texas Offshore (3)
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Challenges For Supply Growth

• Large Capital Requirements
• Liquidity Crunch
• Investor Recognition of Opportunities
• Price Volatility Creates Uncertainty

Access Restrictions Cumbersome Approvals Process
Environmental and Siting Issues
These challenges are a Call to Arms for
industry and the government.
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U.S. Natural Gas Investment
Requirements For 2003-2020 Will Be
Approximately 1 Trillion Dollars
Real 2003 dollars. LNG capital requirements
include liquefaction plants, ships and
regasification facilities. EP includes
investments for both oil and gas production.
25
Uncertainties Price Volatility
Price uncertainty due to weather and other factors
26
Regional Natural Gas Prices
For A Few Select Locations
Regional gas prices will change along with Henry
Hub gas price. Prices are subject to greater
volatility in areas where there are
transportation constraints.
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The Fundamental QuestionCan Gas Supply Support a
Growing Market?

• Yes!
• Sufficient gas resource is available in North
  America and around the world.
  
• These resources can be developed and delivered to
  the North American market at prices that will
  allow the gas demand to continue to grow.
  
• However, the construction of new facilities is
  needed to access and deliver new frontier gas
  supplies.
  
• Pipelines, storage, and LNG infrastructure.
• Long-term contracts are likely to be necessary to
  support new infrastructure development.
  

Building these facilities is a challenge that
industry and the government must rise up to.
28
The Stakes are High

• Consumer energy costs.
• The NPC report found that access to U.S.
  resources (excluding designated wilderness areas
  and national parks) can save consumers over 300
  billion in natural gas costs over the next 20
  years.
• A two year delay in the construction of pipeline
  projects and LNG terminal development will
  increase consumer gas costs by more than 200
  Billion (constant 2003) by 2020.
• Competitiveness of major North American industry
  and robust economic growth.
  
• Gas supply will be sufficient to satisfy growing
  gas demand and
  
• prices will fall from todays levels if economic
  investments in supply are allowed to proceed.
  The economic incentive is there.
  

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Fundamental ConclusionsCan Gas Supply Support a
Growing Market?

• Yes!
• Sufficient gas resource is available in North
  America and around the world.
  
• These resources can be developed and delivered to
  the North American market at prices that will
  allow the gas demand to continue to grow.
  
• However, the construction of new facilities is
  needed to access and deliver new frontier gas
  supplies.
  
• Pipelines, storage, and LNG infrastructure.
• Long-term contracts are likely to be necessary to
  support new infrastructure development.

30
Questions or Comments? February 24, 2005
Natural Gas Yesterday, Today, and Tomorrow
Energy and Environmental Analysis, Inc.
1655 N. Fort Myer Drive Suite 600Arlington,
Virginia 22209

• Bruce B. Henning
• [phone]
• bhenning_at_eea-inc.com