# Presentation: 737904

## Bruce B. Henning
(703) 528-1900
bhenning@eea-inc.com

**Bruce B. Henning**
**(703) 528-1900**
**bhenning@eea-inc.com**

**Natural Gas: ****Yesterday, Today, and Tomorrow**

**Energy and ****Environmental ****Analysis, Inc.**
**1655 N. Fort Myer Drive ****Suite 600****Arlington, Virginia  22209**

** ****NREL Energy Analysis Seminar**** ** February 24, 2005

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

- Gas Demand Outlook
- Gas Supply Outlook
- Is Supply Adequate to Meet Demand?

*Note:  All conclusions and results are based on **EEA’s gas market fundamentals analysis.*

- Contents

- Uncertainties and Price Volatility
- Gas Price Outlook Impact of Weather on Gas Prices
- Regional Gas Prices
- Key Findings

- Energy and Environmental Analysis, Inc.

## 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 imperfections and manipulation - Has had some impact, but less than most think.

- Energy and Environmental Analysis, Inc.

## Determinants of Gas Demand

- Gas demand is driven by:
- Stock of gas-fired equipment
- More than 200 GWs added between 1998 and 2005
- Weather
- Electricity demand
- Economic growth
- Economics of the marginal customer’s next best alternative:
- Ability to switch to alternate fuel, generally oil in the short-term.
- Power plant dispatch options.
- Industrial “shut-down” decisions when variable costs exceed product prices.

- Energy and Environmental Analysis, Inc.

## Determinants of Gas Supply

- In the near-term, gas supply is determined by:
- Deliverability (or the total productive capacity).
- Storage (deliverability and working gas).
- Opportunity to sell gas into or out of a market 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 distribution.
- LNG infrastructure.

- Energy and Environmental Analysis, Inc.

## Gas Price Response to Demand Shifts

- Energy and Environmental Analysis, Inc.

## The Changing Gas Balance

***TIGHT BALANCE EXPECTED TO CONTINUE***

- Energy and Environmental Analysis, Inc.

## Needed for

**Needed for**
**Deliverability**
**Replacement**

- Energy and Environmental Analysis, Inc.

## 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.

- New frontier supplies will account for 44 percent and 52 percent of total U.S. and Canada gas supply in 2015 and 2025, respectively.

*Relying On New Frontiers*

- Natural Gas Supply

**U.S. and Canada Gas Supply**

- Energy and Environmental Analysis, Inc.

## Gas consumption in the power sector will grow substantially.
Over 200 GW’s 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.

- Over 200 GW’s 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.*

- Gas Demand Outlook

- Energy and Environmental Analysis, Inc.

## Recent Natural Gas Consumption in the U.S. by Sector (Bcf)

*Relatively high gas prices have led to demand destruction in the industrial sector, a trend that we do not expect to continue ...*

*... **however, gas use in power generation has been growing due to increased reliance on gas-based power generation, a trend we expect to continue.*

*Source:  Natural Gas Annual 2003, U.S. Energy Information Administration*

- Energy and Environmental Analysis, Inc.

## 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-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%***

- Gas-Based Generation

*Powering The Future*

- Energy and Environmental Analysis, Inc.

## What Drives the Growth inPower 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.*

- Energy and Environmental Analysis, Inc.

## 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.

- Energy and Environmental Analysis, Inc.

## 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*

- Energy and Environmental Analysis, Inc.

## Gas-based power generation will grow significantly.

Penetration of gas-based generation will slow after 2010 as clean coal technologies become economically viable.

- 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%***

- Gas-Based Generation

*Powering The Future*

- Energy and Environmental Analysis, Inc.

## 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? 

- 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.*

- Industrial Gas Demand

- Energy and Environmental Analysis, Inc.

## Industrial Sector Gas Use (Bcf)

- Energy and Environmental Analysis, Inc.

## 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 today’s prices.

- 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 today’s prices.

- North American Gas Market

*North American Natural Gas Market in a New Era*

- 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 continue.
- Weather and other variables, including pipeline 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.

- Energy and Environmental Analysis, Inc.

## The Fundamental QuestionCan 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.**

- Energy and Environmental Analysis, Inc.

## 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.

- 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.

*“**Abundant at prices lower than today’s levels”*

- New Frontier Gas Supplies

- 	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 Mexico****3****	****3.5****	****2.50****	****300**
**Rocky Mountain Gas****	****3.9****	****2.80****	****133**
**LNG Imports****	****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**

**Cost Of New Frontier Gas Supplies**

- 1) Cost of deliveries into closest major market area in constant 2003 dollars.  2) Total cost of development, including all E&P 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.

- Energy and Environmental Analysis, Inc.

## Alaska Gas and LNG ImportsPlaying a Major Role

- West Coast

- Gulf Coast

- East Coast

- Alaska Gas and LNG Imports*Playing a Major Role*

- Alaska Capacity Expansions

*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.*

**MMcfd**

** ****Added**

**November 2014 / November 2017**

**4000/2000**

***Alberta***

***Alaska***

***British***

***Columbia***

- LNG Imports, Bcfd

**Everett**

**Everett**

**Cove Point**

**Cove Point**

**Elba Is.**

**Elba Is.**

**Florida/**

**Florida/**

**Bahamas**

**Bahamas**

**Lake Charles**

**Lake Charles**

**Katy (2)**

**Katy (2)**

**Texas Offshore (3)**

**Texas Offshore (3)**

**Mid-Atlantic**

**Mid-Atlantic**

**New England**

**New England**

**Louisiana (2)**

**Louisiana (3)**

**Florida/Bahamas**

**  ****750**

- Energy and Environmental Analysis, Inc.

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

- Liquidity Crunch
- Investor Recognition of Opportunities
- Price Volatility Creates Uncertainty

***These challenges are a “Call to Arms” for industry and the government.***

- Challenges For Supply Growth

- Access Restrictions
- Cumbersome Approvals Process
- Environmental and Siting Issues

- Energy and Environmental Analysis, Inc.

## 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. E&P includes investments for both oil and gas production.

- Energy and Environmental Analysis, Inc.

## Uncertainties & Price Volatility 

- Price uncertainty due to weather and other factors

- Uncertainties & Price Volatility*** ***

- Energy and Environmental Analysis, Inc.

## Regional Natural Gas Prices

***Regional gas prices will change along with Henry Hub gas price.  Prices are subject to greater volatility in areas where there are transportation constraints.***

*For A Few Select Locations*

- Energy and Environmental Analysis, Inc.

## The Fundamental QuestionCan 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.***

- Energy and Environmental Analysis, Inc.

## 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 today’s levels if economic investments in supply are allowed to proceed.  The economic incentive is there.***

- Energy and Environmental Analysis, Inc.

## Fundamental ConclusionsCan 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. **

- Energy and Environmental Analysis, Inc.

## Bruce B. Henning
(703) 528-1900
bhenning@eea-inc.com

**Bruce B. Henning**
**(703) 528-1900**
**bhenning@eea-inc.com**

**Natural Gas: ****Yesterday, Today, and Tomorrow**

**Energy and ****Environmental ****Analysis, Inc.**
**1655 N. Fort Myer Drive ****Suite 600****Arlington, Virginia  22209**

***Questions or Comments?****** ***February 24, 2005