Natural Gas: Balancing Supply, Demand and the Environment May 24, 2005

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Natural Gas Balancing Supply, Demand and the
Environment May 24, 2005
Framing the Natural Gas Issues
Energy and Environmental Analysis, Inc. 1655 N.
Fort Myer Drive Suite 600Arlington, Virginia
22209

• Bruce B. Henning
• [phone]
• bhenning_at_eea-inc.com

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Contents

• Background
• The changing balance
• Imperative to address high gas price
• Natural gas utilities and pipelines
• Energy efficiency community
• National Environmental Trust and other
  environmental groups
• Portfolio of options

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The Changing Gas Balance
Rising Prices Winter 2002-03
Price Spike Winter 2000-01
Hurricane Ivan
Relative Price Stability
Source Platts Gas Daily
Source Energy and Environmental Analysis, Inc.
Divergent trends in gas supply and demand have
led to a tight balance between supply and demand,
higher gas prices, and increased price
volatility. TIGHT BALANCE EXPECTED TO CONTINUE
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Gas Market FundamentalsGas Quantity And Price
Equilibrium
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Gas Price Response to Demand Shifts
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Gas Demand Outlook

• Gas consumption in the power sector will grow
  substantially.
• Over 200 GWs of new gas-based generating
  capacity in the U.S. will be used to satisfy
  increasing electric load.
• Modest growth in R/C 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.

Delta 2004-2025 7.0 Tcf 1.1 Tcf 0.7
Tcf 1.3 Tcf 0.2 Tcf
Delta 2004-2015 5.7 Tcf 0.3 Tcf 0.4 Tcf 0.7
Tcf 0.2 Tcf
The North American gas market may be best
characterized as a demand leads supply market
for the foreseeable future.
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Projected Annual Average Henry Hub Gas Price
Continued price pressure likely to persist for
next few years.
Henry Hub gas prices will average between 5 and
7 per MMBtu - 1990 levels will not return.
Long-term prices in parity with oil prices.
Long-term oil price of
about 35 per barrel (real) assumed.
Sources Historical data from Platts Gas Daily,
Projection by Energy and Environmental Analysis,
Inc.
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Convergence of Interests

• A diverse group of interests find it important to
  work to find mechanisms to address the
  fundamentals that are driving gas prices.
• Consumer groups in all sectors.
• Natural gas utilities and pipelines.
• Energy efficiency research and advocacy groups.
• Environmental groups that view gas as an
  important element of programs to improve air
  quality and address climate change.

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Natural Gas A Clean Air Future

• High NG prices are negatively affecting clean air
  outcomes now and will do so in the future.
• Economic dispatch policies led to a 400,000 ton
  increase in SO2 emissions last year from
  utilities.
• More than 100 new traditional coal-fired power
  plants are under development.
• Given current prices, coal not NG - is
  expected to fill the void that will be created
  with impending nuclear unit retirement.
• Future carbon reductions are far more difficult
  without increased reliance on NG for base-load
  electricity generation.

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CO2 Electricity Production

• Fossil plants - largest US source 2.6 billion
  tpy, 40 of US 10 of world total.
• 1990-2001 24 increase economy as a whole
  posted a 16 increase.
• DOE projects 41 additional increase by 2025.
• Projected carbon growth does not include CO2
  Jump associated with nuclear unit retirements by
  2025.
• State-of-the art NGCC turbine produces 60 less
  CO2 per unit of electricity produced.
• CONCLUSION NG needs to remain as a fuel option
  in a carbon-constrained future.

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COAL'S KNOCKOUT BLOW TO KYOTO
According to EIA and industry estimates, by 2012,
expected cuts in greenhouse-gas emissions under
the Kyoto treaty will be swamped by emissions
from a surge of new coal-fired plants built in
China, India, and the United States
Prepared by National Environmental Trust
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Natural Gas Supply
Relying On New Frontiers
U.S. Canada Gas Supply

• Production from mature producing areas will
  decline by about 1 per year.
• New frontier supplies will account for 44 and
  53 of total U.S. and Canada gas supply in 2015
  and 2025, respectively, versus only 20 today.

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U.S. and Canada Gas Supply
Abundant But Potentially Costly
With todays technologies, about 500 Tcf of
supply remains to be developed at gas prices
around 4 per MMBtu.
Curves more elastic at 3, yielding a support
level on gas prices.
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Alaska Gas and (Not Or) LNG ImportsPlaying a
Major Role
U.S. Canada LNG Imports, Bcfd
LNG Imports Total 2.2 Bcfd by 2005, 16.3 Bcfd
by 2015, and 24.7 Bcfd by 2025
Alaska Gas Pipeline
4,000 MMcfd
Added
November 2014
Alaska
4000
Alberta
British
Columbia
LNG Imports and Alaska gas will provide about 30
of the U.S. and Canadas gas supply by 2025.
There would be little growth in supply without
these new sources of supply.
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World LNG Supply

• Oil and gas producers throughout the world have
  proposed building as many 50 new liquefaction
  projects in the next five years.
• About 6 Tcf per year or 16.5 Bcfd of liquefied
  gas is pointed toward U.S. markets at delivered
  prices under 4.50 per MMBtu.

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The Fundamental QuestionCan 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.
• But not without the construction of new
  facilities to access and deliver new frontier gas
  supplies.
• Pipelines, storage, and LNG infrastructure.

But what if the facilities are not built or
delayed.
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Obstacles For Supply Growth

• Uncertainty About Future Gas Demand
• Access Restrictions
• Cumbersome Approvals Process
• Environmental and Siting Issues
• Contracting Issues

• Large Capital Requirements
• Recent Liquidity Crunch
• Wall Street Recognition of Opportunities
• Price Volatility Creates Uncertainty

There is much uncertainty about future gas
supply development.
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LNG Imports - A Wildcard

• LNG imports will likely become the most important
  determinant of market conditions in the next 10
  years.
• Many different scenarios are possible
• NIMBY Wins - Existing terminals are expanded,
  but no new terminals are completed.
• Base Case - Approximately 16 Bcfd of imports by
  2015.
• Turbocharged LNG - 10 Bcfd of LNG added to the
  Base Case by 2015.

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Gas Demand and Prices with Different Levels of LNG

• Different levels of LNG import yield very
  different worlds over time.
• Excessively high growth of LNG imports in the
  Gulf Coast may push gas prices at Henry Hub down
  toward 3 and push domestic supplies out of the
  market.
• Gulf Coast infrastructure will be a constraining
  factor and localized price depression is likely
  in high import scenarios.
• Little growth in LNG imports would constrain the
  market, keeping demand near todays level and
  yielding 10 gas at Henry Hub.
• Expect healthy market growth in both the Base and
  Turbocharged cases.

U.S. and Canada Gas Consumption
Henry Hub Gas Prices
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Role for Energy Efficiency

• Supply solutions take years to come to market.
• If modest increases in gas demand produced large
  price increases, then small decreases should
  produce large price reductions.
• Efficiency energy and renewable energy can
  produce savings in both the near-term and
  longer-term.

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Using EEA Natural Gas Model

• EEA utilized as independent natural gas analysts.
• Model used was also used for NPC Natural Gas
  studies, AGF 2020 study and INGAA Infrastructure
  studies.
• Fully integrated natural gas market model
  incorporating supply, transmission, storage and
  consumption at 106 nodes.
• Using July 2003 projection as base case.
• ACEEE modified consumption and renewable
  penetration only model handles other issues.
  (e.g.,fuel switching, demand destruction,
  addition resource choices)

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Gas Consumption Reductions from Energy Efficiency
Source ACEEE 2005
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Impact of Energy Efficiency onHenry Hub Natural
Gas Pricing
Source EEA 2004 and ACEEE 2005
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Benefits and Costs from Reductions in Energy
Expenditures 2004-2008
Total Benefits 142,800 Million Total
Investment and Program Costs 22,441 Million
Benefits
Costs
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American Gas Foundation Natural Gas Outlook to
2020 Actual and Projected Natural Gas Prices
(Henry Hub)

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American Gas Foundation Natural Gas Outlook to
2020 Study Implications

• Under no scenario will natural gas markets return
  to the 80s-90s era of supply surplus and low,
  stable prices
• Policy makers and industry decision makers need
  to act immediately
• Failure to take action will lead to more
  instabilityand cost U.S. consumers billions of
  dollars in additional energy costs

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Key Findings

• Gas supply/demand balance will remain tight.
• Gas consumption is posed to grow, mostly as a
  result of growth in gas-based power generation.
• New frontier gas supplies are necessary.
• Supply development is likely to face many
  obstacles and will take time.
• LNG imports will be an important determinant of
  gas prices.

• Energy efficiency and renewables can moderate gas
  prices if the technologies can be deployed.
• Historically consumers have under-invested in
  efficiency.
• A portfolio of frontier gas supply development
  and energy efficiency/renewable deployment
  provides the most effective relief from high gas
  prices.
• In virtually all analyses of carbon constrained
  scenarios, natural gas demand is significantly
  above baseline levels.
• Often 3 to 5 Tcf per year or more.