U.S. Natural Gas Markets Developments and Outlook

1
U.S. Natural Gas MarketsDevelopments and Outlook

• Barbara Mariner-Volpe
• February 2001
• Bangladesh Ministry of Energy and Mineral
  Resources
• barbara.marinervolpe_at_eia.doe.gov

2
Scope of Presentation

• Recent market developments
• Volatility
• Market convergence / mergers
• Short-term outlook
• Long-term outlook

3
Components of Reserves Changes for Dry Natural
Gas,1989-1999
4
Gas Reserve Additions Replaced Production For 5
of the Last 6 Years
5
Technically Recoverable U.S. Natural Gas
Resources as of January 1, 1998 (Trillion Cubic
Feet)
6
Gas Discoveries Per Exploratory Gas Well Have
Been Trending Up Since The Mid-1980s
7
Resource Depletion

• Progressive reduction of the overall volume of a
  resource over time as the resource is produced.
• As existing wells, reservoirs and fields are
  depleted, new portions of the resource base must
  be tapped to replace those that can no longer be
  produced at economical levels.

8
Pace of Depletion is Increasing

• Average annual declined of gas wells
  drilled in 1972 (17) v. 1996 (49)
• Advances in Technology - production grows but
  depletion is faster
• Changes in Prices affect drilling and hence
  depletion

9
Depletion - Occurring at more rapid rates

• Gas wells drilled in 1972 declined 17 per year,
  wells drilled 1996 declined 49

1. Advances in Technology 2. Changes in Resource
Base 3. Greater Efficiency
10
Natural Gas Production Exhibits Significant
Decline Rates
Source Advanced Resource International
11
(No Transcript)
12
(No Transcript)
13
(No Transcript)
14
(No Transcript)
15
Does Depletion Preclude Production Increases?

• Answer NO.
• First fields developed are relatively large and
  accessible. Future development requires more
  effort.
• Counterbalance - increasing initial production
  and advances in drilling technology.
• But, higher initial rates are accompanied by more
  rapid declines in later stages.
• Hence, more exploration and development activity
  needed to maintain production levels.

16
Depletion (continued)

• If drilling increases sufficiently, production
  can actually increase despite the finding of
  smaller and potentially less productive fields.

17
Proved Reserves - Defined

• Estimated quantities, which, on a particular
  date, geological and engineering data demonstrate
  with reasonable certainty to be recoverable in
  the future from known reservoirs under existing
  economic and operating conditions.

18
Reserve Growth - Ultimate Recovery Appreciation
(U.R.A.)

• Increase in estimates of ultimate recovery over
  time due to the extension of proved reservoir
  areas, in-field discovery of more reservoirs and
  other factors - that account for the majority of
  gas supplies and current additions to reserves.

19
Historical Record on Ultimate Recovery
Appreciation

• Shows that the estimates of ultimate recovery
  increase over time for most reservoirs, the vast
  majority of fields, all regions, all countries,
  and the world.

20
Ultimate Recovery Appreciation in the U.S.

• Still occurring at low rates in fields found more
  than a century ago.
• From 1977-1995, approximately 86 of the
  additions to U.S. proved gas reserves were due to
  ultimate recovery appreciation rather than the
  discovery of new fields.

21
Factors that lead to U.R.A.

• Lack of adequate geotechnical information at the
  time of discovery
• Effect of post-discovery development and
  production processes
• Technological progress

22
Evolution of Canadian Export Policy

• Purpose - ensure sound development/conservation
  and market practices
• Export Prices
• Prior to 1975 - negotiated
• 1975-1984 - set by Canadian government
• 1984 - negotiated, subject to criteria
• - after-the-fact monitoring

23
Canadian Policy re Export Volumes

• Goal - ensure that exports are surplus to
  reasonably forseeable Canadian requirements
• Early, Mid 1980s - reserves/production ratio
  procedure
• Initially 25 years protection, then 15 years in
  late 1980s
• 1987 - Market based procedure adopted.

24
Components of Canadas Market-Based Export
Procedure

• Protection of Core Markets (residential,
  commercial and small industrial)
• Public Hearings complaints, export impact
  assessment, public interest determination
• Monitoring long-term, short-term market outlook
  and assessment

25
Gas Price Surge in 2000
26
Why Have Natural Gas Prices Surged in 2000?

• Supply Tightness
• Storage Stocks - lower than average
• Consumption increases
• Oil Price Increases
• Market Perceptions

27
Natural Gas Storage

• Critical supply component during heating season
• Natural gas demand is highly seasonal
• Natural gas works on a real time delivery
  system at the consumers site
• There is no storage of natural gas at customer
  site

28
As of Jan. 12, 2001, Storage Stocks are Down
About 30 Percent from the 5 Year Average
29
Outlook for Winter 2000/2001

• Prices significantly higher than last winter
• Current storage levels are low and may be very
  tight if gas demand surges beyond expected levels
• Record drilling levels will start to ease supply
  tightness but timing is an issue
• With normal weather, consumption will be higher
  than last winter
• Barring extreme weather, pipeline capacity will
  be adequate to satisfy firm load requirements

30
Rigs Drilling Gas Wells Are At All-Time Highs
Drilling Rigs 1/2/98 - 1/19/01
31
Short Term Forecast
32
Current Natural Gas Spot Prices Well Above the
Recent Price Range
33
Residential Prices Do Not Reflect the Volatility
Seen in Upstream Prices
34
Volatility
35
Transportation Constraints Can Result in Dramatic
Price Differentials
Daily Spot Prices, Jan 1999-June 2000
36
Price Volatility Increases As Beginning Heating
Season Storage Levels Declined
Price Volatility
Stocks Relative to Heating Season Demand
37
What Are The Main Drivers OfShort-term Price
Volatility?
Affects Supply Affects Demand
Weather Economic/business conditions Stock
levels Pipeline capacity Operational
difficulties Lack of timely, reliable
information

38
Natural Gas is Second Only to Electricity in
Energy Futures Price Volatility
39
Energy Prices Are More Volatile Than Other
Commodities
COB Electricity
Natural Gas
Crude Oil
Wheat
T Bonds
40
High Prices and Volatility Do Not Necessarily
Happen at the Same Time
41
The Futures Market is Used Largely for Short-term
Price Stability
42
U.S. Gas Market Increasingly Interacts With Other
Markets

• Example Fuel oil / gas market interaction in
  2000
• California gas / electricity market
• Development of Btu market

43
Winter 1999/2000 Fuel Oil and Gas Market
Developments

• New England heating oil prices increased 0.78
  per gallon (to 1.97) between 1/17 and 2/7
• Factors that led to the surge
• increases in crude oil prices
• cold weather
• low fuel oil stocks
• refinery outages
• transportation problems
• natural gas interruptible load switching to
  distillate

44
Heating Oil Prices Spiked
45
Natural Gas Prices Also Spiked
46
Natural Gas Customers Switching to Distillate
Impact Heating Oil Prices
Heating Oil
Natural Gas Market
Switching
-- Economic --
Vol -- Interruptible -- Vol
Other Liquids
(Not to Scale)
47
Distillate Stocks Were Low Especially on the
East Coast
Source EIA
48
Distillate Stocks Are Important Part of East
Coast Winter Supply
Source EIA
49
Typical Price Surge Dynamics 1989
50
Typical Price Surge Dynamics 2000
51
California Electricity Market - Market Stresses
in 2000

• Load growth without complementary generation
  expansion (supply constraints), hydro down
• Strong demand
• Generation cost increases (including natural gas,
  emission credits). Cap on spot electricity
  prices.
• Results
• Other states are concerned it could happen to
  them
• May slowdown retail restructuring programs

52
Development of a Btu Market

• Some market participants are insensitive to the
  choice of commodity gas, electricity, petroleum
• domestic as well as international markets
• Customer wants power and has the option to
  self-generate, using gas, or purchase the
  electricity. Economics drive customer selection.

53
Mergers / Acquisitions
54
Types of Corporate Combinations

• Merger
• Acquisition
• Divestiture
• Joint Venture
• Alliance

55
Drivers

• Deregulation / Re-Regulation
• Technology
• Shrinking Margins
• Customer Demands
• Fears

56
Goals

• Penetrate New Markets
• Offer New Services
• Take Advantages of Synergies
• Reduce Taxes
• Establish Brand Name
• Gain Access
• Timing
• Avoid Costs / Cutting Costs

57
Cutting Costs

• Economies of Scale
• Divestiture
• Reduce Overhead
• Outsourcing
• Joint Ventures
• Strategic Alliances

58
Strategies

• Expand into Non-Regulated Businesses
• Focus Marketing Efforts
• Advertise
• Develop One-Stop Energy Service
• Establish Brand Identification

59
Strategies - Cont.

• Combinations
• Defensive
• Expansive
• Territory
• Local / Regional
• National
• International

60
Top 20 Natural Gas Marketers Growth in Volume
Outpaces Growth in Share
61
U.S. Market Outlook
62
Outlook for NEXT Winter 2001/2002

• Average wellhead prices expected to be lower than
  current levels.
  
• Production in 2001 will increase 5.4 from 2000
  level. (Additional 2.5 growth in 2002)
• Increased imports from Canada
• Winter consumption close to 2000/2001 level
• (Annual growth 2.9 in 2001 and 2.7 in 2002)

63
U.S. Consumers Will Pay 45 percent more and
Total Heating Bills will be about 75 percent
higher than Last Winter
64
Natural Gas Spot Prices Base Case and 95
Confidence Interval
65
Annual Changes in Natural Gas Demand by Sector
Sources History EIA Projections Short-Term
Energy Outlook, January 2001.
66
Working Gas in Storage(Difference from Previous
5-Year Average)
Sources History EIA Projections Short-Term
Energy Outlook, February 2001.
67
Low Natural Gas Stocks Expected at the End of the
Current Heating Season
68
The Commodity Portion of Delivered Residential
Prices Is a Fraction Of The Total
69
U.S. Gas Drilling Activity Levels
Assumes rigs stay constant at about 880 in
forecast
70
Natural Gas Market Outlook For 2020

• Market growth (32 Tcf in 2015, 34 Tcf in 2020)
• After the 2000/2001 surge, prices will drop, then
  increase slowly to about 3.10 (99 dollars/mcf)
  in 2020
• Imports increase to about 5 Tcf in 2020
• Rising prices and lower drilling costs increase
  reserve additions and production
• Technology improvements limit cost increases

71
World Oil Prices in Three Cases,1970 - 2020 (1999
dollars per barrel)
36.04
17.10
Reference case
(nominal dollars)
High Oil Price
Reference
Low Oil Price
History
Projections
72
World Oil Consumption in the Reference Case by
Region (million barrels per day)
73
World Oil Production in the Reference Case by
Region (million barrels per day)
74
Lower 48 Natural Gas Prices,1970 - 2020 (1999
dollars per thousand cubic feet)
5.03
1.55
Reference case
(nominal dollars)
High Growth Price
Reference
Low Growth Price
History
Projections
75
U.S. Natural Gas Consumption, Production, and
Imports, 1970 - 2020 (trillion cubic feet)
Consumption
Net Imports
Production
History
Projections
76
U.S. Natural Gas Consumption by Sector,
1990-2020 (trillion cubic feet)
History
Projections
Electricity Generation
Industrial
Residential
Commercial
CNG Vehicles
77
U.S. Natural Gas Production by Source,
1990-2020 (trillion cubic feet)
History
Projections
L48 NA Onshore Conventional
L48 NA Onshore Unconventional
L48 NA Offshore
L48 Associated/ Dissolved
Alaska
78
In Summary The Gas Industry is Dynamic and
Faces Opportunities and Challenges...

• Prices will moderate in 2001
• Continued volatility of prices
• Significant market growth in the long-term
• Domestic production and imports will increase
  significantly in the future
• Natural gas is an abundant resource