# Presentation: 737910

## Natural Gas Transmission Infrastructure: How Much is Necessary, at What Cost, and Who Pays For It

**National Energy Modeling System/Annual Energy Outlook Conference**
- Arlington, Virginia
- March 12, 2002
- Kevin Petak
- Energy and Environmental Analysis, Inc.
- 1655 North Fort Myer Drive, Suite 600
- Arlington, VA 22209
- (703) 528-1900
- kpetak@eea-inc.com

## Contents

- Natural Gas Market in Review
- Forecast Assumptions
- Natural Gas Demand and Supply Outlook
- Transmission Infrastructure Requirements
- Industry Challenges

- Energy and Environmental Analysis, Inc.

- March 12, 2002

## Natural Gas Market in Review

- New power plants are continuing to be built and gas-fired generation is coming “on-line.”
- Approximately 120 GW of new gas-fired capacity will be completed over the next three years, on top of 70 GW already completed during the past three years.
- Significant “boom-bust cycle” in natural gas prices caused by a confluence of factors, including the economy, weather, and oil prices.
- Slump in manufacturing activity and natural gas price “spike” in 2000-01 hurt industrial gas use.

- Energy and Environmental Analysis, Inc.

- March 12, 2002

## Natural Gas Market in Review

- Bush Administration “National Energy Strategy” and the terrorist attack of September 11, 2001 have refocused attention on development of domestic energy infrastructure.
- Equity prices and bond ratings for a number of energy companies experienced substantial pressure in the wake of the filing for “Chapter 11” bankruptcy protection by Enron.
- Capital to develop energy projects will be more expensive, at least in the short-run.

- Energy and Environmental Analysis, Inc.

- March 12, 2002

## Forecast Assumptions

- U.S. economic activity increases during the first half of this year.
- GDP grows at an average rate of 2.5 percent per year during projection.
- Oil prices nearly constant at $22 per barrel (in real terms) throughout the projection.
- U.S. electricity demand grows along with the economy, averaging approximately 2 percent per year growth.

- Energy and Environmental Analysis, Inc.

- March 12, 2002

## U.S. Natural Gas Demand

- U.S. gas demand will grow to over 30 Tcf by 2020.
- Most growth will occur in power generation, primarily a result of new gas-fired generating capacity added from 2000-05.
- Residential/commercial gas use will increase (albeit at a modest rate of just over 1 percent per year) as housing stock and commercial floor space grows.
- Industrial gas use will increase modestly over time.

*Source:  EEA Gas Market Compass*

- Energy and Environmental Analysis, Inc.

- March 12, 2002

## U.S. Natural Gas Demand (continued)

-   By 2020, power generation gas use rises to over 25 percent of gas demand and industrial gas use falls to under one-third of total gas use.

*Source:  EEA Gas Market Compass*

- Energy and Environmental Analysis, Inc.

- March 12, 2002

## U.S. Natural Gas Demand (continued)

- Growth in gas demand will be regionally widespread.  However, regions dominated by growth in gas-fired power generation (e.g., the South Atlantic) will account for a slightly greater percent of gas use by 2020.

*Source:  EEA Gas Market Compass*

- Energy and Environmental Analysis, Inc.

- March 12, 2002

## North American Gas Supply

- Gas supply from new frontiers will account for 18 Tcf, or nearly half of total supply in 2020, versus only 3 Tcf, or 14 percent of today’s supply.  Production from mature areas will decline by over 10 percent by 2020.

- Gas supply will be adequate to satisfy gas demand throughout the next 20 years, but significant development of “new frontiers” will be required.

*Source:  EEA Gas Market Compass*

- Energy and Environmental Analysis, Inc.

- March 12, 2002

## Transmission Infrastructure Requirements

- Widespread growth in gas demand coupled with development of “new frontier” gas supplies creates a significant need for new transmission infrastructure.
- New transmission assets (along with regional shifts in gas supply) may alter/reduce the use of existing transmission infrastructure.
- Capital cost recovery for transmission assets could become an issue as value is shifted from existing to new assets.

- Energy and Environmental Analysis, Inc.

- March 12, 2002

## Interregional Flow Changes- Change from 2000 to 2020; values in Bcf/yr -

- Energy and Environmental Analysis, Inc.

- March 12, 2002

## Notable Pipeline Expansion- 2000 through 2020 -

- 4 Bcfd to Northeast U.S.
- 2 Bcfd to Florida
- 2 Bcfd to South Atlantic
- 7 Bcfd from Western Canada to U.S.
- 5 Bcfd out of the Rockies
- 6 Bcfd from Alaska to Canada
- 7 Bcfd to connect deepwater Gulf Coast gas

- Energy and Environmental Analysis, Inc.

- March 12, 2002

## Transmission Infrastructure Requirements

- Over 3,800 miles per year for a total of nearly 77,000 miles of new pipeline will be required over the next 20 years.
- Equates to approximately 1/4 of the transmission pipe currently in place in North America.
- Almost 11,000 miles of pipe will be required to deliver Alaskan gas to Canada and the Lower-48 U.S.

*Source:  EEA Infrastructure Analysis*

- Energy and Environmental Analysis, Inc.

- March 12, 2002

## Transmission Infrastructure Requirements

- Over $4 Billion (US) per year for a total of over $83 Billion will be required over the next 20 years.
- Total includes $250 Million per year for development of gas storage infrastructure.
- The Alaskan pipeline project will account for nearly 1/4 of the total capital expenditures.

*Source:  EEA Infrastructure Analysis*

- Energy and Environmental Analysis, Inc.

- March 12, 2002

## New Storage Capacity- Bcf of Working Gas Capacity Added from 2000 through 2020 -

- Energy and Environmental Analysis, Inc.

- March 12, 2002

## Industry Challenges

- Transmission companies must secure capital to construct the pipe and storage infrastructure necessary to satisfy gas demand.
- Total financing of over $80 billion required during next 20 years.
- Enron bankruptcy raises cost of capital, at least in the near term.
- Gas providers must continue to develop mature basins and new frontiers to satisfy market growth at prices that remain competitive with other alternatives. New sources of gas supply include:
- Alaska
- LNG
- Maritimes
- Deepwater Gulf of Mexico
- Rocky Mountains
- Western Canada Coalbed Methane

- Energy and Environmental Analysis, Inc.

- March 12, 2002

## Industry Challenges

- Industry must help customers manage price volatility.
- Customers must be willing to contract for new pipeline and storage capacity.
- Pipelines must be allowed to develop innovative services that meet the service and economic needs of customers, particularly new power generation customers.
- Power providers and power marketers must be willing to contract for new pipeline and storage assets.
- Maintaining transmission system reliability and flexibility will be a concern.
- Increasing load for power generation may require that the system is operated differently in some locations.

- Energy and Environmental Analysis, Inc.

- March 12, 2002

## Industry Challenges

- Environmental policy should not overly burden gas technologies and be based on efficient, fuel-neutral emission regulations measured on an output basis.
- Energy independence and system security is becoming a greater priority after September 11, 2001.
- Producers, regulators, and politicians must work together to secure access to gas resource.
- Pipelines, regulators, and politicians must work together to secure right of way for new transmission and storage assets.
- Protecting the environment (while developing sufficient assets) should be a top priority for all industry participants.

- Energy and Environmental Analysis, Inc.

- March 12, 2002