# Presentation: 781564

## Natural Gas Outlook

**The Tennessee Regulatory Authority**
**Natural Gas Symposium**
**August 19, 2003**
**Roy Kass**
**Energy Information Administration (EIA)**
***Roy.Kass@eia.doe.gov***

**www.eia.doe.gov**

## Outline

**Natural Gas Market Overview**
**Short-term Outlook**
**         ****- Supply**
**         ****- Consumption**
**         ****- Prices**

## Natural Gas Spot Prices Are Volatile

**Natural Gas Spot Prices Are Volatile**

- Source:  *Natural Gas Intelligence*, Natural Gas Index

**$18.85 on 2/25/03**

**0.50**

**2.50**

**4.50**

**6.50**

**8.50**

**10.50**

**Dec-97**

**Apr-98**

**Aug-98**

**Dec-98**

**Apr-99**

**Aug-99**

**Dec-99**

**Apr-00**

**Aug-00**

**Dec-00**

**Apr-01**

**Aug-01**

**Dec-01**

**Apr-02**

**Aug-02**

**Dec-02**

**Apr-03**

**Dollars per MMBtu**

**Henry Hub Daily **

**Midpoint Price **

## Average Annual Wellhead Prices Have Been Close To The Record High Price Set In 1983

**$1**

**$2**

**$3**

**$4**

**$5**

**Constant 2003 Dollars**

**Nominal Dollars**

**Projection**

**$0**

**1975**

**1977**

**1979**

**1981**

**1983**

**1985**

**1987**

**1989**

**1991**

**1993**

**1995**

**1997**

**1999**

**2001**

**2003**

**Dollars per Thousand Cubic Feet**

- Sources: History:  EIA;  Projections: *Short-Term Energy Outlook*, August 2003

**Average Annual Wellhead Prices Have Been Close To The Record High Price Set In 1983**

## This Winter Was Colder Than Last WinterAnd Colder than Normal in Some Regions(Cumulative Heating Degree Days, Heating Season 2002-2003)

- Source: Derived from Heating Degree Day Monitoring, National Climatic Center.

## Factors Contributing to High Gas Prices 

**Winter 2002/2003**
**High crude prices**
**Cold weather in major gas markets**
**Weak production **
**Decrease in net imports in 2002**
**Relatively heavy stock drawdown**

** ****Summer 2003**
**Storage inventory less than historical level**
**Concern about supply adequacy next winter**
**Lags in bringing new production to market**
**Limited demand response to date**

**Notes:**
Natural Gas Prices were high during the winter 2002/2003 for a number of reason
 	- High crude prices   -- although there is not a one-to-one correspondence between oil and gas prices  --- there is, at least, an indirect relationship.    Petroleum products and natural gas compete some dual-fuel demand that is principally in the electric generation and industrial sectors.
         - WEATHER – Although the U.S. as a whole was not significantly colder than previous winters , nor was it colder than normal, overall   -- It was colder than previous winters (and colder than normal) in some key weather-sensitive areas --- the Northeast and the Middle Atlantic states.   One this that was striking is that winter weather (in those areas)  hit early and continued throughout the winter.   (Past winters often have episodes of very cold weather and then there is some relief – when more injections into storage, for instance, can be made).  
        - Production was down in 2002, in part, because of hurricane damage in the Gulf that impacted production operations.
       - Although imports from Canada were up in 2002 (v. 2001), exports were up more ---- so, on balance total net imports  (imports minus exports) were down.    
       - Stock drawdown last winter was very heavy.   When one compares this last winter to a reference period of the last five years (1998-2002), stock withdrawals were at record levels --- by over 400 billion cubic feet(bcf).     

Prices continue to be high in the summer 2003
 	- Although we are approximately 2 months into the refill season – stock levels (as of 6/6/03) are about 25% lower than the average over the last five years.     And although the gap between current levels and historical levels (5 year) has narrowed, particularly over the past month, there is concern about supply adequacy going into this winter.
	- Although drilling is up – there are inherent lags in the exploration, development and production processes such that it takes a number of months to bring the production on line  (exploration – 18 months, development 6-7 months)
         - We have seen some switching and some demand destruction (fertilizer, chemical industries)   --- but overall consumption remains strong. 

## Working Gas in Underground Storage Compared with 5-Year Range

**Source: EIA, ***Weekly Natural Gas Storage Report***, August 14, 2003**

## EIA Has Changed Definitionof Consuming Sectors

| Concept | Old Paradigm | New Paradigm |
| --- | --- | --- |
| Industrial | Reported by gas companies as deliveries to industrial or nonutility generators | Reported by gas companies as deliveries to industrial |
| Electric Utility/
Electric Power | Reported receipts by regulated utilities | Reported receipts by regulated utilities and NUGS in power business |

## Impact of New Definitions:Total United States, 2001

**Industrial Deliveries reduced by 1.3 Tcf**
**Electric Consumption increased by 2.6 Tcf**
**Net increase of 1.3 Tcf for the year**

## Short-Term Outlook for Natural Gas

- Demand is expected to be essentially flat in 2003 and 2004 (under assumptions of normal weather)
- Supply picture is mixed
- Increasing completion rates are necessary to offset decline from producing wells
- Year-over-year production is expected to increase in ’03 with rising numbers of gas rigs drilling
- Net imports are expected to increase in 2003 and 2004 with notable increases in LNG imports
- Storage refill is questionable (but recent signs are positive)
- Extremes in market or weather conditions would change this outlook.

## U.S. Natural Gas Production Growth is Modest in 2003 and 2004

- Sources: EIA, *Short-Term Energy Outlook*, August 2003

## Imports and Exports Increase in ’03 and ’04, Net Imports will Increase Slightly

- Notes: Includes LNG. Net Imports equal imports minus  exports.
- Sources: EIA, *Short-Term Energy Outlook*, August 2003

**Projections**

**LNG**

**590**

**LNG**

**490**

**LNG**

**230**

- 0

- 500

- 1,000

- 1,500

- 2,000

- 2,500

- 3,000

- 3,500

- 4,000

- 4,500

- 5,000

- 1993

- 1994

- 1995

- 1996

- 1997

- 1998

- 1999

- 2000

- 2001

- 2002

- 2003

- 2004

- BCF

- Imports

- Exports

**Imports and Exports Increase in ’03 and ’04, Net Imports will Increase Slightly**

## Gas Storage Projections For 2003, Compared to Historical Levels

- Note: The gray shaded area represents the range of working gas in storage levels during the years 1998 to 2002.  Source: EIA Weekly Natural Gas Storage Survey and EIA estimates. Max refill rate is the max monthly rate observed between 1998 and 2002.   EIA estimate is based on EIA’s STEO forecast August, 2003.

**Band is Maximum **
**and Minimum Values**
**1998-2002**

**~ 2,853 Bcf**
**assuming 5-Yr. Avg. Refill Rate**

**2,188 Bcf in **
**Underground Storage**
** ****as of August 8, 2003**

**~ 3,053 Bcf assuming **
**5-Yr Maximum**
**Refill Rate**

**Projections**

## Total Natural Gas Demand Is Expected to Remain Flat For the Next Two Years

**Total Natural Gas Demand Is Expected to Remain Flat For the Next Two Years**

- Sources: History:  EIA;  Projections: *Short-Term Energy Outlook*, August 2003.

**-6%**

**-4%**

**-2%**

**0%**

**2%**

**4%**

**6%**

**8%**

**10%**

**12%**

**1991**

**1992**

**1993**

**1994**

**1995**

**1996**

**1997**

**1998**

**1999**

**2000**

**2001**

**2002**

**2003**

**2004**

**Percent Change**

**0**

**10**

**20**

**30**

**40**

**50**

**60**

**70**

**80**

**90**

**Billion Cubic Feet per Day**

** ****Percent Change (Left Axis)**

** ****Total (Right Axis)**

**History**

**Projection**

## Natural Gas in Storage on Nov. 1 Will Be Within the Range of the Past Five Years

**Working Gas in Storage**
**(billion cubic feet)**

**Level as of**
**August 8, 2003**
**2,188 Bcf**

**Average **
**Refill Rate**
**1998-2002**

**Estimate:**
**2,853 Bcf**

- Storage Stocks as of October 31

- Source: EIA data and estimate assuming average refill rate for August 9 – Oct. 31.

**Beginning Fill Season**

**End Fill Season**

**Notes:**
 Natural gas volumes at the start of the heating season have varied between 2,732 and 3,191 Bcf in the past 10 years, with an average of roughly 3,000 Bcf.  
 Natural gas in storage hit record lows this past spring, so a large quantity of gas will be needed to achieve volumes generally deemed adequate. 
 The need to replenish stocks this year will introduce significant incremental demand during the summer months, which will compete with cooling loads and other uses for limited supplies. 
At the 5-year average refill rate the level of working gas in storage at the beginning of the heating season (November 1) would be 2,617 Bcf, which is 16 percent below the 2002 level and 14 percent below the 5-year average level.
 For 7 of the past 8 weeks, however, net additions to storage have exceeded the 5-year average.

The 2,617 Bcf estimate of Nov 1, 2003 working gas in storage was developed from the June 13 stock by adding an estimate of refill volumes for the remainder of the refill season.  As of June 13, storage stocks were 1,324 Billion cubic feet.  Refill volumes for this estimate are based on average daily rates for the months June-October in the years 1998-2002.   

## Natural Gas Spot Prices Are Expected to Average about $5 for remainder of 2003 (Base Case and 95% Confidence Interval*)

**Natural Gas Spot Prices Are Expected to Average about $5 for remainder of 2003**** ****(Base Case and 95% Confidence Interval*)**

- Sources: History: *Natural Gas Week*;  Projections: EIA’s *Short-Term Energy Outlook*, August 2003.

**The confidence intervals show  +/- 2 standard errors based on the properties of the model.  The ranges do not include the effects of major supply disruptions.*

**Average Spot Price:**
**about $5.40 /Mcf in 2003**
**about $4.46 /Mcf in 2004**

## Mechanisms to Manage Price Risk

** ****Trading in Futures Contracts**
** ****Longer-Term Contracts**
** ****Fixed-Price Contracts**
** ****Storage for Physicals Hedging **
** ****Ability to Use an Alternate Fuel**
** ****Residential Customers Can Choose Budget                           Payment Plans**

## Summary

**The natural gas market will remain relatively tight **
**	****over the near term. However, prices this winter ****	****will be slightly lower than last winter’s prices.**
** **
**The gas market is vulnerable to upward price ****	****pressures from developments like severe ****	****weather or disruptions in supplies.**

**Summary**