# Presentation: 237426

## “A FERC Perspective on Natural Gas Issues”

**Commissioner, Federal Energy Regulatory Commission**
**IPAA 2004 Mid-Year Meeting**
**June 14, 2004**

**“****A FERC Perspective on Natural Gas Issues”**

## Rig Count Responds to Higher Prices 

**Rig Count Responds to Higher Prices**

- Sources: OMOI analysis, Baker Hughes, *Platts Gas Daily, *some underlying data from Banc of America Securities

**Rig Count versus Gas Price**

**U.S. Gas Drilling and Gas prices, 6-Month Lag**

- The rig count levels off at around 1,000 rigs with a muted response to higher prices.
- Although utilization is at 75% to 80%, additional drilling will be limited by the quality of prospects.
- Much of the drilling is lower risk- development versus exploration.

**Exploration as a Percentage of Total Drilling Capital**

**Notes:**
Presenter = Tom Pinkston

## Supply Is Not Rebounding; The Nature of Proven Reserves May Be Changing

- Reserves added per well have declined since 2000.
- 3-D seismic contributed to growth in proved reserves per well during the 1990s. Similar growth rates may be difficult to repeat in the near-term.
- Proven Undeveloped Reserves (PUDs) have increased.
- Converting PUDs to proved developed producing reserves (PDPs) requires capital and typically one to two years.
- Represent a backlog of prospects but also entail higher risk.  Reportedly, 75% of El Paso’s revisions involved PUDs.

- Sources: OMOI analysis, EIA, some underlying data from Banc of America Securities

**Drop in Proved Reserves Added**

**Domestic PUD and Replacement Percentages**

## Higher Prices Have Improved Financial Returns but Sustainable Domestic Investment is Limited

- Returns are lower for independents with neither downstream nor international operations and for majors too big to grow domestically and unable to compete internationally with the super majors.  May lead to more consolidation.
- Only the super majors, on average, earn attractive returns given risk.  The majors and independents have difficulty recovering their cost of capital.
- The domestic industry is struggling with balancing financial returns and production growth.

- Sources: OMOI analysis, percentage return on capital data from CERA (1993-2002) and Bloomberg, L.P. (2003)

**Percentage Return on Capital**

- Each bar represents one year from 1993–2004

- 1993–2003 Average

## Traditional vs. NEPA Pre-Filing Process

- Announce
- Open
- Season

- Announce
- Open
- Season

- Develop
- Study
- Corridor

- Develop
- Study
- Corridor

- Conduct
- Scoping

- Conduct
- Scoping

- 0  1   2   3   4   5   6   7    8   9   10   11   12   13   14   15   16   17   18   19   20   21   22   23   24   25   26   27   28

-  Review Draft
- Resource Reports
- & Prepare DEIS

- Issue
- Draft
- EIS

- Issue
- Draft
- EIS

- File
- At
- FERC

- Issue
- Order

- Issue
- Order

- File
- At
- FERC

- Prepare Resource
- Reports

- Prepare Resource
- Reports

- Issue
- Final
- EIS

- Issue
- Final
- EIS

- (months)

**Traditional - Applicant**

**Traditional - FERC**

**NEPA Pre-Filing - Applicant**

**NEPA Pre-Filing - FERC**

**Notes:**
There have been 23 projects filed under the NEPA Pre-filing process.  In FY03 there were 8 pre-filings, or PFs and in FY04, so far, there have been 12 PFs.

This total includes the Kern River Expansion which was actually the “granddaddy” of the NEPA Pre-filing program.  Kern River, basically a looping of its entire system and a doubling of its capacity to deliver gas to Nevada and California, took 11.5 months to process when its certificate application was filed. 

Also, out west, the Cheyenne Plains project, a 380 mile new “greenfield” pipeline that was a NEPA pre-filing participant, took 10 months to process once its application was filed at the Commission.

Currently, the Entrega pipeline project, a new pipeline to take gas from SW Colorado to connections in SE Wyoming is in the Pre-filing process.

## Kern River Expansion Project

**716 miles of pipeline looping through CA, NV, UT, WY**
**3 New Compressors**
**$1.2 Billion **
**885.6 MMcf/day of additional capacity**
**Doubles Kern River’s capacity from 845.5 MMcf/day to 1.7 Bcf/day**

- Map is Non-Public Internet

## Cheyenne Plains Pipeline Project

**  **** ****     **

- Map is Non-Public Internet

## How Much Natural Gas Is Out There?

-  LNG supply growing
-  Multiple LNG supply proposals announced
-  Long term LNG supply outlook robust

**Global LNG Supply**

- Source: Cedigaz, NPC

**Existing**
**Under Construction**
**Proposed**

**Global LNG Supply Facilities**

**Notes:**
LOOKING BRIEFLY AT THE WORLD SUPPLY OF NATURAL GAS....
IN 2002, WORLD GAS RESERVES WERE ESTIMATED TO BE ABOUT 6.3 TCF.

ONLY 4% OF THESE RESERVES WERE LOCATED IN NORTH AMERICA.  AND ONLY 183 TCF, OR 3%, OF THE WORLD’S RESERVES WERE LOCATED IN THE US.

ACCORDING TO EIA, THE US PRODUCED 21.3% OF THE WORLD’S GAS PRODUCTION IN 2001 AND CONSUMED 25% OF THE WORLD’S GAS PRODUCTION.

TO MEET OUR INCREASED DEMANDS WE WILL HAVE TO RELY MORE ON IMPORTS, NOT ONLY FROM CANADA, BUT ALSO THOSE IMPORTS WHICH CAN ONLY BE DELIVERED IN THE FORM OF LNG.

## Existing and Proposed 

_**Existing Terminals with Approved Expansions**_
**A. Everett, MA :  **1.035 Bcfd  (Tractebel – DOMAC)
**B. Cove Point, MD :  **1.0 Bcfd  (Dominion – Cove Point LNG)
**C. Elba Island, GA :  **1.2 Bcfd  (El Paso – Southern LNG)
**D. Lake Charles, LA :  **1.2 Bcfd  (Southern Union – Trunkline LNG)
_**Approved Terminals**_
**1. Hackberry, LA : **1.5 Bcfd,  (Sempra Energy)
**2. Port Pelican:** 1.6 Bcfd,  (Chevron Texaco)
**3. Bahamas : ** 0.84 Bcfd,  (AES Ocean Express)*
**4. Gulf of Mexico:** 0.5 Bcfd,  (El Paso Energy Bridge GOM, LLC)
**5. Bahamas : ** 0.83 Bcfd,   (Calypso Tractebel)*
_**Proposed Terminals and Expansions – FERC**_
**6. Freeport, TX : ** 1.5 Bcfd,   (Cheniere / Freeport LNG Dev.)
**7. Fall River, MA :** 0.8 Bcfd,  (Weaver's Cove Energy/Hess LNG)
**8. Long Beach, CA :** 0.7 Bcfd,  (SES/Mitsubishi)
**9. Corpus Christi, TX : ** 2.6 Bcfd,  (Cheniere LNG Partners)
**10. Sabine, LA :  **2.6 Bcfd (Cheniere LNG)
**11. Corpus Christi, TX :  **1.0 Bcfd (Vista Del Sol/ExxonMobil)
**12. Sabine, TX :  **1.0 Bcfd (Golden Pass/ExxonMobil)
**13. Logan Township, NJ :  **1.2 Bcfd (Crown Landing LNG – BP)
**14. Lake Charles, LA:**  0.6 Bcfd (Southern Union – Trunkline LNG)
**15. Bahamas : ** 0.5 Bcfd,  (Seafarer - El Paso/FPL )
**16. Corpus Christi, TX**:  1.0 Bcfd (Occidental Energy Ventures)
**17.** **Providence, RI :  **0.5 Bcfd (Keyspan & BG LNG)
**18.**** Port Arthur, TX:**  1.5 Bcfd (Sempra)
_**Proposed Terminals – Coast Guard**_
**19. California Offshore**: 1.5 Bcfd, (Cabrillo Port – BHP Billiton)
**20. ****Louisiana Offshore : ** 1.0 Bcfd (Gulf Landing – Shell)
**21. So. California Offshore :** 0.5 Bcfd,  (Crystal Energy)
**22. Louisiana Offshore : ** 1.0 Bcfd (McMoRan Exp.)
**23. Gulf of Mexico:**  n/a (Compass Port - ConocoPhillips)
_**Planned Terminals and Expansions**_
**24. Brownsville, TX :**  n/a,  (Cheniere LNG Partners)
**25. Mobile Bay, AL:  **1.0 Bcfd,  (ExxonMobil)
**26. Somerset, MA : ** 0.65 Bcfd (Somerset LNG)
**27. Belmar, NJ Offshore ** **: ** n/a (El Paso Global)
**28. Altamira, Tamulipas : ** 1.12 Bcfd,  (Shell)
**29. ****Baja California, MX :**  1.0 Bcfd,  (Sempra & Shell)
**30. Baja California - Offshore :**  1.4 Bcfd,  (Chevron Texaco)
**31. California - Offshore :**  0.5 Bcfd,  (Chevron Texaco)
**32. St. John, NB :**  0.5 Bcfd,  (Canaport – Irving Oil)
**33. Point Tupper, NS**  1.0 Bcf/d  (Bear Head LNG - Access Northeast Energy)
**34. Pleasant Point, ME :**  0.5 Bcf/d (Quoddy Bay, LLC)
**35. St. Lawrence, QC :  **n/a (TCPL and/or Gaz Met)
**36. Lázaro Cárdenas, MX :  **0.5 Bcfd (Tractebel/Repsol)
**37. ****Gulf of Mexico :**  1.0 Bcfd (ExxonMobil)
**38. Mobile Bay, AL:**  1.0 Bcfd (Cheniere LNG Partners)
**39. Cherry Point, WA:**  0.5 Bcfd (Cherry Point Energy LLC)
**40. Cove Point, MD :  **0.8 Bcfd  (Dominion)
**41. Puerto Libertad, MX:  **1.3 Bcfd (Sonora Pacific LNG)
**42. Offshore Boston, MA:**  0.8 Bcfd (Northeast Gateway – Excelerate Energy)
- **US pipeline approved; LNG terminal pending in Bahamas*

**Existing and Proposed **
**North American**
**LNG Terminals**

**June 2004**

- A

- C

- 1

- 3

- 5

- 2

- 4

- 32

- 7

- 27

- 15

- 6

- 24

- 28

- 9

- 19

- 8

- 26

- 22

- 21

- 33

- 35

- 34

- 36

- 20

- 29

- 30

- 11

- 37

- 10

- 12

- 17

- 13

- B

- 31

- 25

- 14

- 39

- 40

- 16

- 38

- 23

- 18

- D

- 41

- US Jurisdiction
-     FERC
-        US Coast Guard

- 42

**Notes:**
WE HAVE FOUR TERMINALS IN THE LOWER 48 THAT, WHEN ALL APPROVED IMPROVEMENTS HAVE BEEN PUT IN PLACE, WILL HAVE ABOUT 4.4 BCFD OF DELIVERABILITY.

THE COMMISSION RECENTLY APPROVED THE IMPORT VIA PIPELINE OF REGASIFIED LNG FROM THE BAHAMAS.  IN ADDITION, THE COAST GUARD RECENTLY APPROVED THE PORT PELICAN OFFSHORE LNG PROJECT WHICH ADD 1.0BCFD.  WHEN COMBINED, FERC AND THE COAST GUARD HAVE APPROVED ABOUT 5.3 BCFD OF DELIVERABILITY WHICH IS TO BE CONSTRUCTED.

PROJECTS PROPOSED AND CURRENTLY UNDER ANALYSIS AT FERC, TOTAL ABOUT 15.5 BCFD OF DELIVERABILITY.

THERE ARE ALSO FOUR PENDING PROJECTS SUBJECT TO THE DEEP WATER PORT ACT THAT ARE UNDER THE COAST GUARD’S JURISDICTION THAT WOULD ADD ANOTHER 4 BCFD OF DELIVERABILITY.

AND THEN THERE ARE THE PLANNED TERMINALS, INCLUDING BOTH MEXICO AND CANADA.  I’M NOT GOING TO PRETEND THAT THIS CONSTITUTES THE UNIVERSE OF EVERY RUMORED PROJECT, BUT IT’S STILL A PRETTY LONG LIST.  THE DELIVERABILITY OF THESE PROJECTS TOTALS 13.6 BCFD.

ALL TOLD, IF YOU ADD EVERY CATEGORY TOGETHER, IT TOTALS DAILY DELIVERABILITY OF ALMOST 43 BCF!  WELL, WE KNOW THIS WON’T HAPPEN, GIVEN MARKET CONDITIONS, SITING DIFFICULTIES AND FINANCING LIMITATIONS.

NEVERTHELESS, DUE TO THE DECLINES IN OTHER SUPPLY SOURCES, SOME OF THE DELIVERABILITY THAT WILL BE PROVIDED BY THE APPROVED, PROPOSED AND/OR PLANNED FACILITIES WILL HAVE TO BE BUILT TO MEET OUR GAS DEMANDS

## US Natural Gas Balance

**Notes:**
LOOKING AT THE FUTURE GAS BALANCE ....

THE U.S. CAN NOT MEET PROJECTED DEMAND IN THE COMING YEARS WITHOUT LNG UNLESS WE SHED MORE INDUSTRIAL LOAD.  THIS IS NOT A DEMAND REDUCTION PROGRAM WE WANT TO FOLLOW.

FURTHER, ARCTIC GAS WILL NOT SOLVE THE ENTIRE PROBLEM.

IN THE SHORT-TERM, WE NEED THE CAPACITY MADE AVAILABLE FROM THE EXISTING LNG FACILITIES.  BUT IN THE MID TO LONG-TERM, WE WILL REQUIRE ADDITIONAL LNG CAPACITY TO MEET OUR NEEDS AND TO PROVIDE THE STABILITY TO CALM PRICE VOLATILITY AND ASSURE INDUSTRIAL CUSTOMERS.

WHILE LNG HAS MADE A MARGINAL CONTRIBUTION TO THE U.S. GAS SUPPLY OVER THE LAST 30 YEARS, IT IS POISED TO MAKE A MAJOR CONTRIBUTION IN THE FUTURE.