Natural Gas: Winter 2012-13 Abundance! and Some Confusion

Natural Gas: Winter 2012-13 Abundance! and Some Confusion NASEO Winter Fuels Outlook Washington, D.C. October 10, 2012 Bruce B. Henning Vice President, Energy Regulatory and Market Analysis BHenning@icfi.com

Disclaimer This presentation presents the views of ICF International. The presentation includes forward-looking statements and projections. ICF has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable, and complete. However, a variety of factors could cause actual market results to differ materially from the projections, anticipated results or other expectations expressed in this presentation. 2012 ICF International. All rights reserved. 2

Historical Natural Gas Prices $16 $14 $12 $10 $8 $6 $4 $2 $0 Monthly Average Gas Prices at Henry Hub (Nom$/MMBtu) Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Source: Platts In the last decade, there were three periods where natural gas prices spiked. Each of these periods had a different driver for the increase in prices. Recently, prices have collapsed. 2012 ICF International. All rights reserved. 3

Gas Supply from Shale and Consumption affected by Warm Weather Reduced Gas Prices in 2012 Average Bcfd 80 70 60 50 40 30 20 10 0 U.S. Gas Supplies (Annual Average Bcfd) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 4500 4000 3500 3000 2500 2000 1500 1000 All Other Production Net Imports 500 Shale Production 0 Distribution of Winter Heating Degree Days, 1931/32 through 2011/12 Normal (1981-2010 Average) Winter 2011/12 2012 ICF International. All rights reserved. 4

Storage Fill Levels Will Likely Reach Record Highs This Fall 4.0 U.S. Natural Gas Storage Working Gas Levels (Tcf) 3.5 3.0 2.5 2.0 1.5 1.0 Source: EIA w/ ICF Forecast Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Range, 2006-2010 Average, 2006-10 2011 2012 Working gas levels exited the winter at a record high level and will likely approach 4 Tcf this October. Unless this coming winter is colder than normal, some of the storage surplus may extend into 2013. 2012 ICF International. All rights reserved. 5

Gas Drilling Response to Price Movements Active Rigs 1,600 1,400 1,200 1,000 800 600 400 200 0 U.S. Gas-Directed Drilling Activity and Gas Prices $14 $13 $12 $11 $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1995 1996 Gas Price ($/MMBtu) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Rigs Drilling for Gas Henry Hub Spot Price In response to each of the three previous price spikes, drilling levels increased. The resulting increase in supply moderated prices. In the most recent period, gas supplies have been increasing even though rig activity is more than 50 percent below peak levels. 2012 ICF International. All rights reserved. 6

Natural Gas Price Expectations have Changed Several Times over the Last Year Extremely warm weather in the first few months of 2012 dramatically affected natural gas prices. The lower prices were reflected in market expectations. As the year progressed, the understanding of the impact of low prices on drilling activity has resulted in an increase in expected prices. 4.50 4.00 3.50 3.00 2.50 NYMEX Futures (Nominal $/MMBtu) Jan-12 Apr-12 Jul-12 Oct-12 2.00 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 7

Weren t we running out of gas? 8

The North American Natural Gas Resource Base Could Support Current Levels of Gas Use for About 150 Years In total, the U.S. and Canada have almost 4,000 Tcf of resource that can be economically recovered using current exploration and production (E&P) technologies. At current levels of consumption, this is enough resource for about 150 years. As technologies improve and new discoveries are made, the total gas resource is likely to grow. Over 50% of the assumed resource is shale gas. U.S. and Canada Natural Gas Resource Base 1 (Tcf of Economically Recoverable Resource, Assuming Current E&P Technologies) Unproved Plus Discovered Undeveloped Total Remaining Resource Proven Reserves Shale Resource 2 Alaska 7.7 153.6 161.3 0.0 West Coast Onshore 2.3 24.6 27.0 0.3 Rockies & Great Basin 66.7 388.3 454.9 37.9 West Texas 27.6 47.7 75.3 17.5 Gulf Coast Onshore 70.1 684.7 754.8 476.9 Mid-continent 37.0 205.0 241.9 133.9 Eastern Interior 3,4 18.6 1053.7 1072.3 986.1 Gulf of Mexico 14.0 238.6 252.5 0.0 U.S. Atlantic Offshore 0.0 32.8 32.8 0.0 U.S. Pacific Offshore 0.8 31.7 32.5 0.0 WCSB 60.4 664.0 724.4 508.8 Arctic Canada 0.4 45.0 45.4 0.0 Eastern Canada Onshore 0.4 15.9 16.3 10.3 Eastern Canada Offshore 0.5 71.8 72.3 0.0 Western British Columbia 0.0 10.9 10.9 0.0 US Total 244.7 2,860.6 3,105.3 1,652.5 Canada Total 61.3 807.6 868.8 519.1 US and Canada Total 306.0 3,668.1 3,974.1 2,171.6 1. ICF updated its gas resource assessment in December 2011; while these regional totals may not fully reflect the current assessment, the U.S./Canada economically recoverable resource is similar. 2. Shale Resource is a subset of Total Remaining Resource 3. Eastern Interior includes Marcellus, Huron, Utica, and Antrim shale. 4. Reference case assumes drilling levels are constant at today s level over time, reflecting restricted access to the full resource development. 2012 ICF International. All rights reserved. 9

North American Gas Supply Curves The existing North American resource base includes about 1,500 Tcf of gas that is economically recoverable at $5 per MMBtu. Shale gas accounts for over half of the gas economically recoverable at $5 per MMBtu. Total cost of developing the new resource includes exploration, development and O&M costs (both fixed and variable cost). Cost of Development at Wellhead (2010$/MMBtu) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 North American Gas Supply Curves 0 500 1000 1500 2000 2500 3000 3500 4000 Dry Gas Resource (Trillions of Cubic Feet) CBM Tight Conventional Shale Total 2012 ICF International. All rights reserved. 10

Natural Gas for Winter 2012-13 ICF September Base Case Projection 11

Residential and Commercial Gas Consumption 40 Assuming normal weather, residential and commercial gas 35 consumption in the coming winter (2012-13) 30 will average 36.6 Bcfd. Last winter (2011-12), 25 residential and commercial gas consumption was only 20 30.3 Bcfd due to very warm weather. 15 During the 2010-11 winter, which was slightly 10 colder than normal, residential and 5 commercial gas consumption was 37.6 Bcfd. 0 Bcfd Winter 2010/11 Winter 2011/12 Winter 2012/13 Weather assumed to be consistent with past 30 year averages. January 2012 through August 2012 uses actual weather; all forecast months from September 2012 forward are assumed to be consistent with the 30-year averages. 12

Gas Consumption for Electricity Generation Even with a return to normal weather (assumed), gas consumption for power generation this coming winter (2012-13) will be 4.2 Bcfd lower than the previous winter. Gas prices in winter 2012-13 compared to winter 2011-12 will reduce the amount of economic fuel switching from coal to gas. Bcfd 25 20 15 10 5 0 Winter 2010/11 Winter 2011/12 Winter 2012/13 Weather assumed to be consistent with past 30 year averages. January 2012 through August 2012 uses actual weather; all forecast months from September 2012 forward are assumed to be consistent with the 30-year averages. 13

Industrial Gas Consumption 25 A modest economic recovery and a return to normal weather will increase gas consumption in the industrial sector slightly in the winter of 2012-13. 20.5 Bcfd in 2012-13 19.6 Bcfd in 2011-12 19.0 Bcfd in 2010-11 Bcfd 20 15 10 5 0 Winter 2010/11 Winter 2011/12 Winter 2012/13 Weather assumed to be consistent with past 30 year averages. January 2012 through August 2012 uses actual weather; all forecast months from September 2012 forward are assumed to be consistent with the 30-year averages. 14

Gas Supply and Demand are Likely to Remain in Balance During the Winter Heating Season Gas consumption is likely to grow compared to last winter. Large growth in heating load will be somewhat offset by declines in power generation requirements. Economic fuel switching from coal to gas will be lower than last winter. Production is likely to continue to grow very slightly, despite lower gas prices. Growth continues to be spurred by shale gas production. U.S. Natural Gas Supply/Demand Balance Average Billion Cubic Feet per Day Injection Season Withdrawal Season 2010 2011 2012 2013 2009/10 2010/11 2011/12 2012/13 Gas Demand R/C/I Gas Use 27.6 29.3 29.8 31.5 54.1 56.5 49.9 57.1 Power Gas Use 21.7 22.5 27.5 22.5 17.8 20.8 22.2 18.0 Other Gas Use 5.6 5.9 6.1 5.9 5.6 6.0 6.2 6.2 Net Injections 10.9 11.1 6.9 9.2 0.0 0.0 0.0 0.0 Demand Total 65.8 68.8 70.3 69.0 77.5 83.3 78.3 81.3 Gas Supply US Production 59.7 64.6 65.4 66.1 56.4 62.2 65.5 65.6 Net Imports 7.2 5.3 5.7 3.9 7.1 6.6 4.1 5.0 Net Withdrawals 0.0 0.0 0.0 0.0 15.1 15.8 9.7 12.0 Supply Total 66.9 69.9 71.1 70.0 78.7 84.6 79.3 82.7 Balancing Item (S-D) 1.0 1.1 0.9 1.0 1.2 1.3 1.0 1.4 2012 ICF International. All rights reserved. 15

Gas Prices are Likely to Recover but Remain Relatively Low over the Next 18 Months Near-term gas prices are projected to average between $4 and $5 per MMBtu. On average, our projection of future prices is still above the recent future strip. We also project greater seasonal variability. Consumer gas bills in the 2012-13 winter will reflect the commodity that are likely to be lower than commodity prices from 2007 through 2010. 7 6 5 4 3 2 1 0 Projected Natural Gas Prices Versus NYMEX Nominal Dollars per MMBtu Historical Henry Hub Price ICF Forecast Henry Hub Price NYMEX Futures, October 1, 2012 NYMEX Futures, July 30, 2012 NYMEX Futures, April 30, 2012 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 2011 ICF International. All rights reserved. 16

Natural Gas in New England The New England market is supplied with natural gas from four sources. Pipeline deliveries from the south through New York; Pipeline deliveries from Canada, directly and through New York; Pipeline deliveries from eastern Canada, primarily offshore, and; LNG deliveries, primarily through Canaport and Everett. Gas consumption for power generation increased in New England, but pipeline capacity has not. Gas LDCs contract for firm capacity on the pipelines while many generators rely on interruptible transportation service from the pipelines. 2012 ICF International. All rights reserved. 17

Natural Gas in New England If there is normal or colder than normal weather, gas delivery capacity will be tight into New England. Gas Local Distribution Companies with firm transportation contracts into the region should receive their gas supply for their customers and be somewhat insulated from movements in spot market prices. Pipelines may not be able to serve all of the electric generation load requesting interruptible service. 2012 ICF International. All rights reserved. 20

Conclusion Nationally, gas supply is abundant. That said, gas prices will likely continue to firm. Even with the recent rebound and continued firming, gas prices for the coming winter will remain well below the prices paid during much of the previous decade. But gas prices will continue to fluctuate from year to year. In New England, congestion on pipelines and inadequate gas supplies connected to specific pipelines could pose operational challenges for electric generation and the pipelines that serve that load. 2012 ICF International. All rights reserved. 21