Natural Gas Supply Strategies

Transcription

1 Natural Gas Supply Strategies John R. Bitler, Principal 94 th Annual IDEA Conference & Trade Show June 23, 2003

2 U.S. Natural Gas Industry Perspective 2002 Production 19.0 Tcf Net Imports 3.5 Tcf 2002 Demand 23.2 Tcf Residential 4.9 Tcf Commercial 3.1 Tcf Industrial 9.0 Tcf CHP at Industrial Facilities 1.3 Tcf Other Industrial 7.7 Tcf Electric Generation (Utilities & IPPs) 5.6 Tcf Other 0.6 Tcf Current Proved Reserves of Tcf provide an inventory of 9.7 years of production Source: U.S. EIA

3 U.S. Supply and Demand Forecast EIA 29.5 Tcf market by % U.S. production 23.8 Tcf by % Difference to be supplied by pipeline imports from Canada (+17%) and LNG imports (+350%) Gas consumed for electric power generation and CHP is forecast to increase 35% by 2015 Can U.S. production be increased to meet growing demand? Is the resource base sufficient to support needed production levels at reasonable prices? Source: U.S. EIA 2003 AEO

4 Henry Hub Prices Henry Hub 6.00 $/mmbtu ge Monthly Prices: $ 2.32 $ 5.33 $ 2.91 $ Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Source: Natural Gas Week Source: Natural Gas Week

5 North American Supply s Western Canada Sedimentary Williston Michigan Green River Powder River Denver- Julesberg Illinois Scotian Sable Island Uinta/Piceance Hugoton Appalachian Sacramento San Juan Raton Anadarko/ Arkoma Black Warrior San Joaquin Permian East Texas/ North Louisiana s South Texas Gulf Coast

6 Changing Continental Supply Dynamics Maturation of existing producing basins Running hard to maintain production levels Gulf Coast Onshore and shallow water production flat to declining Deep water production growth WCSB Declining production from shallow wells in the east Growth from deeper more expensive wells with longer lead-times New conservation ethos favoring bitumen reserves

7 Changing Continental Supply Dynamics (cont d) Growth from New Supply s and Sources New basins less prolific and require new pipeline infrastructure Atlantic Canada Regional supply potential for Atlantic Canada and U.S. Northeast Not another Gulf Coast Rocky Mountain Producing s Smaller fields Coal bed CH 4 LNG growing supply source to fill production gaps

8 Production v. Price Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 HH Price ($/MMBtu) Production (Bcf) # wells drilled

9 North American Natural Gas Supply Resources Base (Tcf) Total 1,901 Reserves (Tcf) Total 252 Mid-Continent 117 Other* 648 Reserves 252 Mid-Continent 39.9 Other* 33.4 Gulf Coast 68.3 Rocky Mountains 175 Atlantic Canada 51 Western Canada 365 Gulf Coast 293 Rocky Mountains 50.8 Atlantic Canada 2.4 Western Canada 57.5 Sources: EIA, CAPP, Canadian Potential Gas Committee

10 Gas Sources and Supplies Large Resource Base in North America 1,901 Tcf >70 years of production Converting Resources to Reserves and Production Focus of Current Supply Issues With Primary s Struggling-Meeting Demand will Require: Massive Investment in E & P Continued Application of New Technology Reliance on New Sources of Supply

11 Storage Withdrawal Trends Northeast 400 Average Winter Withdrawal Total Winter Withdrawal (Bcf) /96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 Working Volume Withdrawal Sources: NOAA, EIA

12 A Closer Look at Last Winter $ NYC Gas Prices ($/MMBtu) $12 $8 $ Gas in Eastern Storage (Bcf) $0 11/5/02 12/5/02 1/5/03 2/5/03 3/5/ Year Avg. Winter of '02-'03 NYC Gas Price

13 Henry Hub Prices $/mmbtu (with NYMEX futures) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

14 Transco Zone 6 Gas Prices $/MMBtu /1/97 1/1/98 1/1/99 1/1/00 12/31/00 12/31/01 12/31/02

15 Heavy Load Spark Spreads in NYC (40.00) 9/1/00 1/1/01 5/1/01 9/1/01 1/1/02 5/1/02 9/1/02 1/1/03 Zone J Peak Power Prices NYC Heavy Load Spark Spreads

16 Light Load Spark Spreads in NYC $ / MWh (20.00) (40.00) (60.00) 9/8/00 1/8/01 5/8/01 9/8/01 1/8/02 5/8/02 9/8/02 1/8/03 Zone J Off-Peak Power Prices NYC Light Load Spark Spreads

17 Implications of Changing Supply/Demand Dynamics Continued Price Volatility Increased Frequency of Supply Squeezes due to treadmill effect and storage constraints Lessened Seasonality Industrial Demand Destruction Transition from a Continental to a World Market

18 Henry Hub Gas Prices: Historical & Forecast $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 EIA Forecast Henry Hub Prices NYMEX Most Recent Settle 6/18/03 Historical Trend Line

19 Gas Commodity Forwards Gas Supply Strategies Fixed-price forwards Floating forwards priced at major hubs depending on volume NYMEX Henry Hub futures last day settlement (LDS) price Caps, collars, and other variations Triggers

20 Gas Strategy Caps Caps set cost ceiling Caps are in effect call options; calls are traded on NYMEX Cost of cap is in addition to cost of gas The lower the cap, the higher the cost Pros Risk exposure capped Can take advantage of gas price dips Cons Expensive Marketer s mark-up on top of cap costs

21 Gas Strategy Collars Collars set ceiling and floor Constructed using offsetting positions in calls and puts Calls and puts can be selected such that the resulting collar is costless Costless Collars Pros Risk exposure capped Costless Cons Narrow bandwidth between the ceiling and the floor limits participation in price dips Marketer s mark-up can further narrow the bandwidth

22 Gas Strategy Triggers Triggers set ceiling and floor Provided by marketers at no charge Buyer free to set triggers at any level If triggers not hit, default to NYMEX price Pros Costless Flexible Automatic stop-loss Cons Once set, orders are executed automatically not subject to Buyer s control Forgo participation in price decline in a volatile market with downward pressure

23 Gas Strategies These gas strategies work best when procurement can be implemented during periods of relatively low prices But what about now? Price risk management initiatives of little short-term use in current market environment Buyers need to pay close attention to market trends Prices Production Storage Cycle Ability to use back-up/alternative fuel important Energy sales contracts need fuel cost pass through provisions