# Presentation: 057609

## Status of Natural Gas and LNG Markets and Pricing

- Herb Emmrich
- October 2004

## Southern California Employment

- Economic growth is the main driver for the Commercial and Industrial demand forecasts.
- From 2004 to 2025, employment is forecasted to grow 1.2% per year in SoCalGas’ area, and 1.6% per year in San Diego County.
- Growth trend slows slightly as Baby Boomers start   retiring about 10 years from now.
- Long-term growth should stay stronger than the US     average, with continuing foreign immigration of relatively younger workers into Southern California.

## Slide 3

**Notes:**
Employment Growth
The SoCalGas 12-county area includes 12 counties served by SoCalGas –from Fresno and San Luis Obispo in the north, to Imperial on the Mexican border.
San Diego County jobs grow faster mainly due to faster population growth (and jobs serving the local population). 
Currently (2004) coming out of a nationwide cyclical slowdown.  San Diego has a higher concentration of high-tech jobs than the SCG area – was hitter harder in the  downturn of 2000 and 2001.  But San Diego is also recovering faster, including strong local growth in biotechnology.

## Slide 4

**Notes:**
Forecasts are from the utilities themselves.

## Slide 5

**Notes:**
Total retail sales (Residential, commercial, industrial)
Forecasts are from the utilities themselves.

## Slide 6

**Notes:**
Rates are inflation-adjusted to constant 2003 dollars.
The inflation adjustment was made using the forecasted “Greater Los Angeles area all urban CPI”, used by SoCalGas and SDG&E in the 2004 Cal Gas Report. 

## SoCalGas Electric Generation Demand

- Specific EG forecast required by the CPUC--but is surrounded by much uncertainty, given volatility of EG demand and sensitivity to changes in assumptions.
- Forecast is based on the CEC’s long-term forecast in their Electricity Outlook report–which has two big assumptions that reduce EG gas demand:
-         1) Very aggressive electric DSM from 2004 to 2013;
-         2) Renewable energy sources’ share of California       power generation rises to 20% by 2013.
- Long term EG demand slowly rising with additional gas-fired generation capacity at LADWP, Edison and City of Burbank.
- Additional electric transmission capacity intoSouthern California should offset some long-termincrease in EG demand.

**Notes:**
For this Cal Gas Report, to develop EG forecasts -- SEU, PG&E and the CEC agreed to use common assumptions from the CEC’s Electricity Outlook.

## Slide 8

**Notes:**
Electric Generation (EG)
Unusually high demand in years 1999 through 2003, as Southern California gas-fired EG made up for dry hydro years in the Northwest.
SoCalGas area EG gas demand decreasing in short term (2005) with expected return to normal hydro conditions.

Extra details
(Per EG forecaster Jeff Huang): Some drop expected in 2009-2010 (down 15% from 186,000 Mdth in 2008 to 158,000 by 2010).  New gas-fired EG units expected to start up--but will bypass utilities, getting gas from sources such as Kern-Mojave pipeline.  This new EG will displace some less efficient EG plants currently served by SoCalGas.
In comparing the EG forecast in the CGR to the last BCAP filing for the year 2006, the EG total was 107 BCF lower.  This can be almost totally explained by the lower electric sales in the CGR verses the BCAP for the SCE, SDG&E and LADWP service areas.  If we assume gas is on the margin and assume an 8,000 heat rate, the lower electric demand explains 97 BCF of the 107 BCF change.     

## New LNG Supply to Balance Market

- The race for siting of new US LNG terminals is in its final stages. Out of more than 40 proposed projects, five have been abandoned, but ten projects have been approved.
- Four existing LNG terminals are importing 3% of total US consumption, compared to just a trickle a few years ago. Expansion of existing LNG terminals and construction of new LNG terminals is expected to provide up to 10% of US consumption by 2010.
- World LNG supply is dominated by long-term contracts, and the US is no exception--due to regulations, high capital and infrastructure costs.
- New LNG supply is expected to ease the tight natural gas market, balance growing demand and gas natural prices will settle toward long-term fundamentals.

**Notes:**
LNG imports has grown from 1% in 2002 to almost 3% of US consumption in 2004. Imports are arriving at four existing terminals that were built in the late 70’s. Three of these terminals are currently under various stage of permitting, approval, and construction for expansion. They are:
Cove Point (Maryland) - Expansion
 Elba Island (Georgia) - Expansion
Everett (Massachusetts) 
Lake Charles (Louisiana) – Expansion

There are currently more than 40 LNG North American proposed projects: 5 projects have been blocked and 10 projects have been approved by the authorities in Canada, Mexico and the United States. Half of the approved projects will be in the Gulf of Mexico, two in Canada, two in the Bahamas and one in the West Coast. According the CERA, EIA and INGAA, the average flow would be 6.85 Bcf/d of US consumption or 10% of US consumption by 2010. 
Why the race to bring LNG to the US?
High gas prices
LNG supply chain cost has been declining for 30% in recent years
Increasing cost to find, develop and produce North American gas 
US market was on short-term or spot purchase, but US buyers have begun to show an interest in securing long-term supplies. US must competes with world demand and it’s dominated by long-term contracts.

What are the benefits of LNG to the consumers?
The new supply is expected to ease the tight natural gas market and balance growing demand (mostly from gas-fired electric generation.) 
Eventually, natural gas prices will becomes less volatile and settle to long-term fundamentals.

## Average California Supply taken for 2004

- _Total       =  5.9 Bcf/d_
- Bypass	   = 1.2 Bcf/d
- PG&E       = 2.3 Bcf/d
- SoCalGas = 2.4 Bcf/d
-    SDG&E     = 0.3 Bcf/d
-    LADWP     = 0.1 Bcf/d
- By 2008, 0.8 Bcf/d of new capacity is expected from West Coast LNG.

**Notes:**
Pipeline bypass occurs when customers are served directly by an interstate or intrastate pipeline without utilizing existing local distribution company facilities. In California these customers are served mostly by Kern-Mojave or Southern Trails-Questar pipelines.
SoCalGas supply taken is actually 2.35 Bcf/d, but 0.3 Bcf/d of this supply is wholesale load serving SDG&E.  Another 0.05 Bcf/d is wholesale to Long Beach and Southwest Gas.
Most of supply coming into SoCalGas system (including supply going on to SDG&E) comes from TW & EP through Topock and Needles delivery points (CA-AZ border).

The recent CPUC decision on the Natural Gas Market OIR established new policies that enable utilities to:
Turn back some pipeline capacity on expiring interstate pipelines.
Establishes Otay Mesa, CA. as a new natural gas receipt point for LNG from Mexico into Southern California
Encourages new supply from the Rocky mountain and LNG terminals.

(Extra details)
Current actual =6.25 Bcf/d (2004 is a mildly dry hydro year; less hydromore EG)
TW goes into North Needles
EP North goes into Topock (or South Needles)
EP South goes into Ehrenberg. Some gas in Enhrenberg goes directly into North Baja into Mexico, then becomes Baja Norte, and takes the southern part of TGN (Transportaciones de Gas Natural) into Rosarito (EG plant).

## Weighted Average Cost of Gas (WACOG)

- Forecast developed in February 2004, when oil was $28/barrel.  The forecasted average 2004 WACOG is under $5.00/Dth.
- Currently, natural gas prices are volatile and driven upward by historic oil prices and hurricane shut ins, and downward by high storage. 2004 actual WACOG has been as high as $6.10/Dth when oil shot up to $48/Barrel in June, but has settled down to $4.81/Dth even though oil is around $50/Barrel because of full storage.
- Fundamentals suggest sustained natural gas prices under $3 is no longer possible.
- Significant LNG is scheduled to arrive in the US from 2008 to 2013, expected to help lower gas prices about 3% per year.

**Notes:**
Gas prices very volatile.  So far just in 2004, WACOG has ranged from mid-$4’s to $6.10 per Dth –all within a few months.
Sustained natural gas prices under $3 is no longer possible.  Fundamentals suggest the new floor price is about $3.50 due to higher upstream cost at North American producing regions, world-wide LNG demand, capital intensive projects (LNG, MacKenzie Delta or Alaskan pipelines) and power generators can absorb higher prices due to more efficient gas-fired combine cycle generation.
The natural gas market will remain tight until LNG is arrived in significant amount. One bright spot is Canadian production; it is in much better shape than the US and we expect Canadian imports to rise.
The 3% annual price reduction is the sum of 1% price reduction from west Coast LNG and 2% price reduction from Gulf Coast LNG. About 0.8 Bcf/d of West Coast LNG will directly reduce West Coast prices by 1%, and about 5.0 Bcf/d of Gulf Coast LNG will indirectly reduce West Coast prices by 2%.

(Extra details)
SCG WACOG down partly due to high gas storage levels in CA—200 Bcf at end of July (vs 170 Bcf July 2003).  Not too far from the record pre-heating season storage inventory of 229 Bcf.

## Slide 12

**Notes:**
Chart shows WACOG in real inflation-adjusted 2003 constant dollars.
We expect WACOG is to track closer to the mid-range forecast line (it’s currently very close) -- staying above mid-$4’s/Dth until 2007.
Beyond 2013, long-term sustained real prices are projected to be about $4/dth (if LNG terminals, MacKenzie Delta and Alaskan pipelines are built.)

(Extra details)
Current gas supply is stagnant: growth in Rockies is not enough to offset decline in maturing Gulf of Mexico.
Canada’s MacKenzie Delta pipeline is scheduled to arrive in 2009 (into upper Midwestern US), helping to lower prices—together with LNG.
Alaskan gas pipeline is scheduled to arrive by 2020, but will not significantly lower gas prices due to its high construction cost.
The EIA estimated the “trigger cost” for these two pipeline projects to be in the same range as LNG supply chain cost, so it’s unlikely that they would undercut LNG imports.

## Slide 13

**Notes:**
Rates are inflation-adjusted to constant 2003 dollars.
The inflation adjustment was made using the forecasted “Greater Los Angeles area all urban CPI”, used by SoCalGas and SDG&E in the 2004 Cal Gas Report. 

## SoCalGas Demand Forecast Summary

- Total average annual demand growth from 2004 to 2025 is 0.5% (0.6% if EG excluded).
- Largest sectors are Residential (currently 30% share of  total, and growing) and EG (currently 24% share and declining).
- Total core, and noncore Commerical/Industrial long-term loads show slow, stable growth.

## Slide 15

**Notes:**
Chart: SoCalGas Demand Forecast Summary
Recorded data is actual, not weather-adjusted.
Volatility especially in EG:  unusually high demand in years 1999 through 2003, as Southern California gas-fired EG made up for dry hydro years in the Northwest and power shortages in Northern California (much local EG power—largely from LADWP-- was wheeled northward in those years).
2004 is also a somewhat dry hydro year (75% of normal), thus slightly higher than normal EG.
2005 to 2025 forecast based on normal hydro conditions.

(Extra details)
2006-2008 rampup is wholesale EG – SDG&E EG up with startups of Palomar and Otay Mesa plants.

## Slide 16

**Notes:**
SDG&E Demand Summary
From 2004 to 2025, core and noncore demand are expected to grow just under 1.3% per year. 
SDG&E accounts for nearly all of SoCalGas’ wholesale EG load, with more to come.  The expected ramp-up in 2006-2008 is due to two new San Diego County power plants: Palomar expected to come online in mid-2006, Otay Mesa in early 2008.
After 2008, little growth is expected in SDG&E’s EG demand.  

## Slide 17

**Notes:**

Residential Customers
Residential includes 96% of all existing SoCalGas customers, and 99% of new customers being added.
In both utilities, the residential market is about 2/3 single-family, 1/3 multi-family customers.
SoCalGas expects 2004-2025 net average annual growth of about 75,000 to 80,000 (growth rates around 1.3% to 1.4%).  [Year to date through August, 2004 is running 1.33% higher than 2003.]
With somewhat faster population growth than SoCalGas, SDG&E expects 1.6% annual growth in residential customers – about 15,000 per year.

## SoCalGas Residential Demand

- Annual demand growth averaging 0.9% from 2004 to 2025, due to strong new customer growth..
- Use per-customer is declining about 0.5% per year mainly due to DSM.  Overall residential demand depends on customer growth, driven by new housing.
- New housing and residential hookups are ultimately driven by Southern California’s population growth.
- Long-term area population and housing will grow at faster rates than the overall US, largely due to continuing strong foreign immigration into Southern California.

## Slide 19

**Notes:**
SCG Residential Demand
Recorded data is actual, not weather-adjusted.  (For instance; 1999 was a cold year—higher demand, 2003 was slightly warmer than normal—lower demand.)
In the forecast period, residential demand grows 0.9% per year.
In 2004-2025, there’s an annual average 0.5% decline in use per customer, mainly due to DSM programs and new technology efficiencies that meet tougher building and appliance standards (older furnaces, water heaters, dryers gradually get replaced with new, more efficient ones).

(Extra details)
Use per customer is use per active meter.  The gradual conversion of (high-use) master meters to (lower use) individual meters also contributes to the trend in lower use per meter (average of 19 units per mast  meter).
Lower use per customer in more relatively small and efficient new multi-family homes in (expensive land) coastal areas is expected to offset large new single-family homes in (cheaper land) inland areas. 

## Slide 20

**Notes:**
SDG&E Residential Demand Summary
From 2004 to 2020, residential demand is expected to grow by about 1.3% per year. 
Customer growth accounts for 1.6%, while use-per-customer declines by an average of –0.3%/year.

(Extra details)
Multiply by 100 to get MDth consistent with SoCalGas chart (e.g.,44,000 MDth)
Usage drop in 2001 – response to big rise in commodity gas prices. (SCG prices and demand were less affected; with relatively more gas supply on long-term fixed price contracts, SCG rates didn’t rise as much as SDG&E’s.)

## SoCalGas Commercial/Industrial Demand

- Forecast driven mainly by economic conditions  (employment); also driven by gas prices and DSM.
- _Core C&I_: about 210,000 active customers, with about 12% of SoCalGas’ total gas demand
- _Noncore C&I_: fewer than 1,200 active large customers (includes oil refineries).  Currently about 15% of SoCalGas’ total demand.  Demand decreasing in short-term due to refinery fuel-switching and noncore-to-core migration.

## Slide 22

**Notes:**
SCG C&I Demand

Core C&I:
Average annual demand growth of 0.7% per year from 2004 to 2025 – as economic growth is tempered by use of more efficient gas equipment.
Noncore C&I:
Includes oil refineries (where actual year-to-year as demand can be volatile).
Mid-2005 municipalization of City of Vernon will re-define demand in Vernon from noncore C&I to Wholesale (about 3,000 Mdth).
From 2006 to 2025, slow 0.2% annual growth.
SoCalGas’ split to C and I is based on government NAICS codes: “Industrial” is defined as manufacturing and mining businesses; “Commercial” is all other firms.
     Big drop in 2001 as SoCalGas rate restructuring shifted some customers from noncore C&I into EG (that’s partly why EG demand peaked in 2001).
        Overall increase in 2002 as refinery expansion in Wilmington increased refinery gas use. 
        General downtrend in recent years: non-refinery noncore C&I demand declined in 2001, 2002 and 2003 – high gas prices, slow economy (some customers shut down).
        Declines from 2003 to 2005 for two reasons:
1)   In 2003, mandated change in gasoline additives from MBTE to ethanol – to accommodate the change, refineries must remove some volatile gasoline components [pentanes—types of C5H12 hydrocarbons].  These byproducts are instead burned for operational use, displacing some refinery natural gas demand; 
2)   Mid-2005 municipalization of City of Vernon (see above).

## Slide 23

**Notes:**
SDG&E C/I Summary
Shifting to/from sectors explains large variances in historical period Overall forecast growth expected to be 1.3%, about the expected growth in employment for the area (+0.8 from customer growth, +0.5% growth in use per customer).

Extra details 
Multiply by 100 for MDth (like SoCalGas chart) – e.g., 30,000 MDth
The noncore drop in 2001: some noncore to core migration; and some large customers also temporarily stopped operations due to high spikes in electric prices.