Summer 2010: Energy Market Update and Short-Term OutlookCalifornia Independent Petroleum Association Annual Meeting June 3-6, Hyatt Regency Lake TahoeIncline Village, Nevada
This presentation was prepared by Navigant Consulting, Inc. exclusively for the benefit and use of the California Independent Petroleum Association and its members. No part of it may be circulated, quoted, or reproduced for distribution outside these organization(s) without prior written approval from Navigant Consulting. This presentation is incomplete without reference to, and should be viewed solely in conjunction with the oral presentation provided by Navigant Consulting.
06/01/2010
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Page 3
Table of Contents
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» 1 » Price
2 » Supply/Production
3 » NCI 2010 NG Reference Case Price Forecast
4 » Demand
5 » Take-Aways
6 » Questions
Price Trends
$0
$2
$4
$6
$8
$10
$12
$14
$16
Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10
$/M
MB
tu
Chicago Opal New York
AECO-C SoCal Gas Henry HubSources: NCI/Gas Daily
• Natural gas prices have been trending down across North America since price peaks in 2008 when Henry Hub hit $13.11 per MMBtu in June 2008, at Henry Hub, LA.
• Physical gas monthly index prices were generally below $4.00 across the continent for April 2010 deliveries. In May physical gas prices were up slightly by $0.10 to $0.20 per MMBtu.
• Price declines on abundant gas supply and to a lesser degree as a result of the recession that has moderated demand.
• In supply driven market, demand needs to increase significantly or production to decrease sharply to re-balance market.
Monthly Gas Price Index
Page 5
Price Trends
Spot Prices Have Declined Across the U.S. since 2008
Further Declines in 2010
Spot (Daily) Natural Gas Prices
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
7.50
8.00
1/1/2010 2/1/2010 3/1/2010 4/1/2010
Henry Hub SoCal Gas PG&E Citygate
CA Spot (Daily) Natural Gas Prices
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Source: NCI/Platts
$0
$2
$4
$6
$8
$10
$12
$14
$16
May-06 Nov-06 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10
$/M
MB
tu
Chicago Opal New York
AECO-C SoCal Gas Henry HubSources: NCI/Gas Daily
Oil and Gas Prices Comparison
• It is only money!
• Natural gas prices are low – oil prices are high.
• In 2010 (Jan 1- Apr 18) the average daily price of WTI crude oil was US$12.67 per MMBtu ($79.66 per barrel) on an energy equivalent basis.
• Over the same period, the spot price of natural gas at Henry Hub was US$4.94 per MMBtu, 38% of the price of oil.
• At Transco Z6 N.Y., the average price of spot gas was $6.24 per MMBtu Jan 1 – Apr 18), 49% of the price of oil.
• The message is that gas is a bargain for buyers, but for producers - DRILL FOR OIL.
Oil Prices are High – Gas Prices are Low
$0
$4
$8
$12
$16
$20
$24
May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10
$/M
MB
tu
WTI Crude Oil Henry Hub Natural Gas
Sources: NCI/Platts
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Price Trends - Forwards
• NYMEX closed at $4.16 per MMBtu for June, down $0.19 from May.
• 1 year strip closed at $4.77 per MMBtu compared to $5.06 last month.
• SoCal Gas City Gate continues to show $0.35 discount to PG&E City Gate at around $3.90 per MMBtuwhile PG&E City Gate trades in $4.25 per MMBtu range.
• S. CA enjoys advantage of Rockies supply via Kern River Pipeline and Costa Azul LNG vs NorCal
• US market now does not see $6.00 gas prices before 2012.
• 3rd and 4th Quarter 2010 prices off on supply surpluses with the steep contango lessened from May prices.
$4
$5
$6
$7
Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11
$/M
MB
tu
Sources: NCI/NYMEX
Apr
May
Jun
NYMEX Cls June 1 Yr. Strip down $0.29/MMBtu
Page 8
Price Trends – Summer Hurricane Season
• Although an above normal Gulf of Mexico hurricane season (June 1-October 31) is forecast by Colorado State University, reduced Gulf gas production and increased onshore shale production should mitigate the hurricane season effects.
• Hurricanes are good for gas – not for Macondo cleanup/relief well
• For the first time ever in 2009, U.S. gas shale production overtook Gulf offshore gas production volumes (8.7 Bcfd to 7.3 Bcfd).
• Similarly, unlike the affects on spill stocks - recently announced ‘Macondo response’ with GOM drilling moratorium should have minimal affect on total U.S. dry gas production given onshore supply abundance.
• Some minimal affects on GOM production for 2011.
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0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
US Shale (MMBtud)
Gulf Offshore Gas (MMBtud)
U.S. Shale Gas vs. Gulf OCS Production Profile
Price Trends – Regional Basis Changing
• As indicated last year, the changing U.S. supply picture is having effects on regional prices.
• On a east / west basis, gas shale has caused prices in the Northeast market to decline from historic levels by lowering ‘basis’ from previous years .
• Winter strip (Nov-Mar) prices in Transco Z6 NY decreased by $1.23 per MMBtu from $7.79 in winter 2008-09 to $6.56, this past winter.
• Winter prices (Nov-Mar) at SocalCitygate and PG&E increased over the same periods by $0.90 per MMBtu and by $0.04 per MMBtu, respectively.
• With Ruby Pipeline scheduled to be on next year to Malin, some readjustment in prices in the West is expected again.
Page 10
Haynesville
Fayettevil
leWoodford
Barnett
Antrim
Bakken
Marcellus
Generalized Gas Flows in North America
Source: AAPG/USGS
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Table of Contents
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»
1 » Price
2 » Supply/Production
3 » Demand
4 » NCI 2010 NG Reference Case Price Forecast
5 » Take-Aways
6 » Questions
U.S. Production
• With the exception of the period during Hurricane Ike in September 2008, U.S. gas production has been increasing since April 2007 (gas production highest levels currently since the 1970’s).
• In April 2007 U.S. dry gas production was 51.64 Bcfd; in April 2009 58.33 Bcfd and in April 2010 58.72 Bcfd – an increase of almost 14% in three years according to the EIA.
• Mainly on gas shale production increases.
U.S. Dry Gas Production
40
45
50
55
60
65
May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10
Bcf/
day
Sources: NCI / EIA
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Gas Production - Shale
• Remembering NCI’s North American Gas Supply Assessment in July 2008 for ACSF – recoverable resources were estimated to last 88 - 118 years, at then current production rates.
• As indicated, shale production continues to increase – to an NCI estimate of over 10 Bcfd average production in 2010.
• Over last year one new play Eagleford (TX) has been significant supported by high liquids content (over 1000 bblsd).
• Haynesville (LA, TX) and Marcellus (Appalachia) continue to attract much activity – with successes of production.
• Barnett (TX) continues strong with signs of flattening production of 4-5 Bcfd. Barnett represents 6% of U.S. Lower 48 production; 20% of total gas production in Texas.
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575 551 528 511 489 422 407 432 420 406 407 404 402 392 390 392 385 390 382 389
95 118 220 372 607 839 1,0581,411
2,0602,680
3,1203,680
4,3064,843
5,3985,964
6,5277,024 7,199 7,165
88
77
77
72
74
77
81
97
134
282
525957
1,447
51 50 52 5349
5664
78
86
95
104
100
107
116
132
148
162
168
178
193
10 9 7 77
75
5
5
7
6
6
6
6
7
7
8
8
7
8
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1998 1999 2000 2001 2002 2003 2004 2005 2006 1st Qtr. 2007
2nd Qtr. 2007
3rd Qtr. 2007
4th Qtr. 2007
1st Qtr. 2008
2nd Qtr. 2008
3rd Qtr. 2008
4th Qtr. 2008
1st Qtr. 2009
2nd Qtr. 2009
3rd Qtr. 2009
MM
cf/
d @
14.7
3
Lower 48 States ShaleRegional Gas Production
Eastern U.S. Mid-Continent Gulf Coast Onshore
Rocky Mountain San Juan Basin
Source: Lippman Consulting
California Gas and Oil Production
Downward Gas Production Downward Oil Production
700
750
800
850
900
950
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
MM
cf
pe
r d
ay
CALIFORNIA GAS PRODUCTION
Sources: EIA / DOGGR
15,000
16,000
17,000
18,000
19,000
20,000
21,000
22,000
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09
Mb
bl p
er
mo
nth
CALIFORNIA OIL PRODUCTION
Offshore Onshore Sources: EIA/CA
Page 14
California Gas Production?
• The USGS does not currently show any shale gas reserves or production in California, in the San Joaquin or Santa Maria basins –however based on activity in other shale basins shale potential could exist.
• The EIA includes the San Joaquin basin in its map of major shale basins that if successful could serve to support, possibly turn around declining in-state gas production.
Page 15
California Production by Operator 2009
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Number of Production % of Total
Rank Operator Active Wells MMcf/d Production
1 Occidental of Elk Hills, Inc. 2,688 302 44%
2 Venoco Incorporated 574 94 14%
3 Aera Energy LLC 9,025 49 7%
4 Rosetta Resources Oper. LP 163 44 6%
5 Vintage Prod. California LLC 1,798 34 5%
6 Chevron U.S.A. Incorporated 3,256 21 3%
7 Plains Exploration & Prod. Co. 1,524 16 2%
8 Southern Calif. Gas Company 16 14 2%
9 Seneca Resources Corporation 475 13 2%
10 Thums Long Beach Company 818 12 2%
11 Crimson Resource Mgt. Corp. 485 10 1%
12 Aba Energy Corporation 41 8 1%
13 Towne Exploration Company 38 4 1%
14 Petrogulf Corporation 7 4 1%
15 Lario Oil & Gas Company 22 4 1%
16 Breitburn Energy Co. LLC (1) 441 4 1%
17 Royale Energy Incorporated 38 4 1%
18 Central Resources Incorporated 81 3 0%
19 Signal Hill Petroleum Inc. 171 3 0%
20 Orchard Petroleum Incorporated 33 3 0%
Others 5,121 47 7%
Totals 26,815 693
(1) Includes Breitburn Energy Company LLC and Breitburn Operating LP
State of California
Gas Production by Operator for 2009All Volumes in MMcf/d at State P.B.
U.S. Production Adjusted by EIA
New Methodology Reduces 2009 U.S. Gas
Production by 0.6% on Average• EIA recently revised its
methodology for reporting gas production on April 29, 2010.
• With fan fare the new methodology revised production from January 2009 through February 2010, and reduced production for 2009 by 0.84 Bcfd or 0.6%.
• New methodology had 3 main changes:
• Updates to be monthly using most recent information.
• Estimates of production of non-sampled companies to use estimates that are 6-18 months old rather than 2-7 years old.
• Calibration of estimates to be monthly rather than annually.
-1.4%
-1.2%
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
60.00
60.50
61.00
61.50
62.00
62.50
63.00
63.50
64.00
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10
% C
han
ge
Bcfd
Previous Methodology Revised Methodology % Change
Sources: NCI/EIA 914
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U.S. Production - Adjusted
• The general trend of the EIA 914 revisions is for increased differences in the near months.
• Largest absolute differences occurred in the highest producing states Texas, Louisiana and Gulf of Mexico.
• Texas and Louisiana are also the states with the largest gas shale plays that often exhibit ramping production rates.
-1.00
-0.80
-0.60
-0.40
-0.20
0.00
0.20
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10
Bcfd
Lower 48 States Federal Offshore GOM Louisiana
New Mexico Texas Wyoming
Oklahoma Other (Exc AK) Sources: NCI/EIA 914
Largest Producing States Most Affected
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U.S. Production Adjusted
• After adjusting for the EIA-914 U.S. dry gas production still continues to increase.
• Market had anticipated a larger revision and while a reduction in 2009, U.S. dry gas production actually grew in January and February of 2010 by 1 Bcfd in January and by 800 MMcfd.
• One lingering item remains with the 914 relating to smaller but still a large ‘balancing item’ in the 914 data. The balancing remains at about 46 Bcf per month down from 58 Bcf per month but still leaves questions as to EIA data.
48
50
52
54
56
58
60
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Bcf/
day
2008 2009 2010Sources: NCI / EIA
Gas Production is still increasing after 914!
Page 19
U.S. Gas Rig Count
• U.S. gas directed rig count (vertical and horizontal) is up again to over 900 wells (average weekly) drilled year-to-date, versus 800 wells drilled in 2009. About 50% are shale directed.
• This is down substantially from peak gas wells drilled in 2008 of 1,491 wells drilled.
600
800
1,000
1,200
1,400
1,600
2003 2004 2005 2006 2007 2008 2009 2010
Rig
s
Sources: NCI/Baker Hughes
U.S. Gas Rig Count Is Up Again YTD
Page 20
• As NCI has indicated before, the gas rig count is not necessarily relevant.
• Horizontal rig count is what matters.
• All shale gas wells are drilled horizontally.
• And for last the year (after a slight decline in May and June 2009), the horizontal rig count has been again increasing to an average of 600 horizontal wells drilling in May.
• Vertical well drilling has declined to around 200 rigs working.
Latest Numbers Show Horizontal
Drilling Surprisingly Flat & Holding
U.S. Gas Rig Count
0
200
400
600
Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
Rig
s
Horizontal Vertical
Sources: NCI / Smith Bits
Page 21
• Even as gas prices are low at Henry Hub, LNG import volumes ticked up in April to near 2 Bcfd – highest level in 3 years.
• Recent weekly LNG deliveries in May however were closer to 1 Bcfd.
• North American storage seems to be the enticement to foreign LNG as UK prices that are tied to oil prices and currently are at a premium to Henry Hub price.
• LNG imports to US to be challenged this summer on low HH prices although winter NYMEX prices show seasonal value.
• Note should be taken of announcement last week from Qatar Petroleum (world’s biggest producer of LNG) that they are reducing LNG deliveries to US over next few years on low North American gas prices.
U.S. LNG Imports
Supply - LNG
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Bcf/
day
2008 2009 2010Sources: NCI / EIA
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Storage
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Bcf
Range (1999-2009) 2007 2008 2009 2010
Jan OctSepAugJulJunMayAprMar DecNovFeb
Sources: NCI / EIA
• Another supply source – storage.
• In mid May, storage levels exceeded 2 Tcf in storage and far above the ten year norm of 1,750 Bcf in storage.
• This despite a winter that was colder – 0.2% below normal for the winter November 2009-March 2010 period.
• April weather was much above normal on a population weighted basis (+17%), but as a low shoulder season demand month the affects of April’s weather on prices were moderate.
• The weather for May on a cooling degree basis was also substantially above normal, but like April –effects on demand were moderate.
U.S. Storage Levels Top Ten Year
Averages for Time of Year
Page 23
Canadian Storage
• Gas supply storage levels are extremely high in Canada – 47 Bcfor 17% above seasonal range (high).
50
150
250
350
450
550
650
Bcf
Range (2005-2009) 2006 2007 2008 2010
Sources: NCI / Enerdata
Jan OctSepAugJulJunMayAprMar DecNovFeb
Canadian Storage Highest in 5 Years
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Page 25Page 25
Table of Contents
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»
1 » Price
2 » Supply/Production
3 » Demand
4 » NCI 2010 NG Reference Case Price Forecast
5 » Take-Aways
6 » Questions
45
55
65
75
85
95
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Bcf/
d
2007 2008 2009 2010Sources: NCI / EIA
• Gas demand is higher over the first four months of 2010 (Jan-Apr), since 2003.
• Gas demand for the first four months of 2010 averaged 77 Bcfdcompared to 74 Bcfd in 2009.
• Gas demand grew 3.8% year over year in a period of relatively warm weather (1.1% warmer than normal).
• Demand in the recovering power generation sector is key.
• Electric generation gas demand in Jan-Feb’10 is highest since 2001, up 8.7% compared to recession affected Jan-Feb’09.
• Industrial sector gas consumption beginning to grow on emerging industrial production output strength (up 7.5% 1st Q10).
Total U.S. Gas Demand is Up 3.8% YTD
Compared to 1 Year Ago
Gas Demand
Page 26
Gas Demand
-
10
20
30
40 1/
1/20
01
7/1/
2001
1/1/
2002
7/1/
2002
1/1/
2003
7/1/
2003
1/1/
2004
7/1/
2004
1/1/
2005
7/1/
2005
1/1/
2006
7/1/
2006
1/1/
2007
7/1/
2007
1/1/
2008
7/1/
2008
1/1/
2009
7/1/
2009
1/1/
2010
Bcf/d
Electric Power Gas Demand
Electric Power
Sources: NCI / EIA
Electric Demand in Jan-Feb 2010 is Highest Since 2001
Page 27
• Low gas prices continue to support coal-to-gas substitution as they have for major portions of the last year and one half.
• NCI forecasts gas prices to be below coal prices for much of 2010.
• Coal-to-gas substitution is a result of firmer U.S. coal prices and low gas prices.
• Coal transport (rail) and fuel charges are up with high oil prices.
• Coal prices are supported by international coal demand strength – especially to China.
• GHG climate change legislation this year (Kerry-Lieberman, EPA mandates) does not appear likely.
• Eventual US legislation is very likely.
SE Gas Prices Generally Below Appalachian
Coal Prices since 1st Q 2008
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
May
-08
Jun
-08
Jul-
08
Au
g-0
8
Sep
-08
Oct
-08
No
v-0
8
Dec
-08
Jan
-09
Feb
-09
Mar
-09
Ap
r-09
May
-09
Jun
-09
Jul-
09
Au
g-0
9
Sep
-09
Oct
-09
No
v-0
9
Dec
-09
Jan
-10
Feb
-10
Mar
-10
Ap
r-10
$/M
MB
tu
Central Appalachian Northern Appalachia Dominion South Point
Sources: Platts, EIA, NCI Calculations
Coal to Gas Displacement
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Table of Contents
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»
1 » Price
2 » Supply/Production
3 » Demand
4 » NCI 2010 NG Reference Case Price Forecast
5 » Take-Aways
6 » Questions
NCI Spring 2010 Gas Reference Case Forecast
• Released on May 21, 2010.
• Forecasts are released twice per year –Spring and Fall.
• Includes gas, coal and oil price forecasts.
• Part of NCI’s Energy Practice integrated market models including power (PROMODTM), carbon and GHG, Renewable Portfolio Standards (RPS) and capacity models.
• Gas forecast uses GPCMTM , a network modeling and market analysis system with NCI provided inputs - including industry leading shale gas supply.
• Forecast prices across North America at 94 market points and includes basis and pipeline flows.
• Forecast used by a variety of clients across industry and government for scenario and strategic decision making.
$0.00
$4.00
$8.00
$12.00
$16.00
$20.00
$24.00
2010 2015 2020 2025 2030 2035
per M
MBt
u
Nominal
Real2009$
Monthly Henry Hub Gas Price Forecast (2010 – 2035)*
0
5,000
10,000
15,000
20,000
25,000
30,000M
Mcfd
Shale Forecast - Major Plays Spring 2010Eagleford
Woodford Arkoma
Fayetteville
Barnett
Marcellus
Haynesville
Fall09 Total (no Eagleford)
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»
Page 31
Table of Contents
Page 31
1 » Price
2 » Supply/Production
3 » Demand
4 » NCI 2010 NG Reference Case Price Forecast
5 » Take-Aways
6 » Questions
Summer Short-Term Outlook Take-Aways
• U.S. domestic natural gas supply will continue to grow on gas shale increases (BP oil disaster is to be a boon to domestic gas production at the expense of offshore).
• Gas demand to grow moderately on recovering economy especially in electric generation sector and returning industrial sector demand as wild-card.
• Short-term gas demand to be supported by fuel switching – coal-to-gas on price competition and as gas as the preferred ‘clean fuel’ alternative.
• Costs of gas production to remain low, as technical challenges of horizontal drilling and fracture and play level knowledge become even more widespread causing production efficiencies and technology advances to continue.
• Storage at record levels make summer 2010 weather less a threat to high prices – even active hurricane season in Gulf is not likely to be a major market factor in 2010.
• LNG as marginal supply source continue to be challenged in current market.
• Price volatility expected to be less on surplus supply availability.
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»
Page 33
Table of Contents
Page 33
1 » Price
2 » Supply/Production
3 » Demand
4 » NCI 2010 NG Reference Case Price Forecast
5 » Take-Aways
6 » Questions
Questions - Comments
For more information on gas market dynamics and trends see or subscribe to NCI’s NG Market
Notes – June 2010 edition or at www.navigantconsulting.com, Knowledge Center, Hot Topics
Page 34
Thank-you.
Ray Welch / Associate Director [email protected]
415.399.2176
Gordon Pickering / [email protected]