natural gas 101 - an introduction to the natural gas industry
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Natural Gas 101 &Current Industry Issues
Bruce McDowell
American Gas Association
AGA Financial Forum
May 2006
Natural Gas Advantages
Domestic resource Sufficient supply Competitively priced Relatively safe and clean burning
Natural Gas Accounts for Roughly One-Fourth of U.S. Primary Energy Consumption
Coal
Oil
Other
Natural Gas
Source: Dept. of Energy, Energy Information Administration
Producing Wells
Gathering LinesTransmission Lines
Processing Plant
CompressorStations
UndergroundStorage
Large Volume Customer
Regulator/Meter
City Gate(Regulators/Meters)
LNGor Propane/Air Plant
Natural Gas Transportation System
Residential Customers
CommercialCustomers
Distribution Mains (Lines)
Large Volume Customers
Participants Miles of Pipe Regulatory Regime
Producers 6,800 Independents 0 Phased price deregulation21 Majors begun in 1979, completed in 1989
Pipelines 160 259,000 Federal Energy RegulatoryCommission (FERC)
Natural Gas Marketers 250 0 Unregulated
Local Gas Utilities335 840,000 State Utility Commissions
End Users Residential 62 million 0 UnregulatedCommercial 5 millionIndustrial 200 thousand
Electric Utilities 500 0 Interstate - FERCIntrastate - State Commissions
The US Natural Gas Industry The US Natural Gas Industry At A GlanceAt A Glance
Source: Dept. of Energy, Energy Information Administration, AGA
Investor-OwnedMunicipal 860 300,000 Local Governments
Supply, Exploration & Development
How Oil & Gas Are Created
24803
Petroleum System ElementsPetroleum System Elements
120° F120° F
350° F350° FGenerationGeneration
MigrationMigration
Seal RockSeal Rock
Reservoir RockReservoir Rock
OilOil
WaterWater
Gas CapGas Cap
EntrapmentEntrapment
Locating Natural Gas Reserves – New Technology
Vibrator Truck(Energy Source)
Recording Truck
Geophone(Receivers)
American Petroleum Institute, American Petroleum Institute, 19861986
ReturningReturningSound WavesSound Waves
Recoverable Gas Resources in the US, 1968-2004
0
400
800
1200
1600
2000
2400
1968 1980 1990 2000 2004
Potential Resources
Proved Reserves
Cumulative Production
CoalbedMethane
Trillion Cubic Feet
Source: Potential Gas Committee
Well Success Rates
Wildcat well: 10%-20%
Exploratory well: 25%-50%
Developmental well: 70%+
Drilling Rig
24803
Traveling Block
Hook
Swivel
Draw Works
Mud PumpRotary Table
Kelly
Mud Hose
Crown Block
Casing
Drill Pipe
Bit
Completed Well
ChristmasTree
Pipeline to Flow
Process and
Storage
Surface Casing
Intermediate Casing
Production Casing
CompletionFluid
CementPacker
Cement
Cement
Tubing
WellFluids
Oil or Gas Zone
Perforations
Horizontal Drilling Avoids Surface Horizontal Drilling Avoids Surface Hazards
GasGas
OilOilWaterWater
American Petroleum Institute, 1986
Natural Gas Production Is Responsive to Market Price
0
5,000
10,000
15,000
20,000
25,000
30,000
We
lls D
rille
d P
er
Ye
ar
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
Wel
lhea
d P
rice
(19
99 $
)
Gas Wells Drilled
Real Wellhead Price
SOURCE: U.S. Dept. of Energy, Energy Information Administration
Tightening Demand And Supply Curves = Price Volatility
Source: Energy and Environmental Analysis (EEA)
40
45
50
55
Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
Bcf
d
Gas Production Productive Capacity
Lower-48 Dry Gas Production vs.Dry Gas Productive Capacity
Pipeline Transmission System
Pipeline Activities
ConstructionFERC or state approvalObtain right-of-wayConstruction
OperationCompressionMaintenanceUnderground Storage
Pipeline Rates
Rate of return regulated by FERC Traditional contracts with set rates Capacity release market
Types of contracts/services Firm Interruptible Released capacity No-notice
Factors impacting returns Demand - weather Competition from other pipelines Types of contracts
Distribution System
Distribution Operations
Gas supply management Gate station
Pressure reductionOdorant
System construction & operation Metering & customer service
Distribution CompanyGas Supply Management
Co. Ow ned Gas44%
Storage36%
Co. Production1%
Other2%LNG SNG Propane
5%
Transport12%
Co. Owned Gas30%
Transport62%
Storage8%
Other0%
LNG SNG Propane
0%
Annual Profile Peak Day Profile
Source: Energy Information Administration, AGA Survey
Gas Supply Management
Gas Supplier Options Producer Marketer Intrastate pipeline Company-owned production
Gas Contract Options Contract length Contract pricing
Indexed (monthly, weekly) Fixed Spot Hedged (NYMEX)
Distribution Rates
Rates regulated by PSC’s Costs spread over fixed and commodity Purchased gas costs recovery
Rate schedules based on demand Firm Interruptible/special contracts Transportation
Factors impacting returns Weather Competition New construction/marketing Conservation
Customers
Residential
90% of total customers 23% of total consumption Weather sensitive Conservation impact Bad debt
Commercial
9% of total customers 14% of total consumption Somewhat weather sensitive Conservation impact Market opportunities
Industrial
Less than 1% of total customers 38% of total consumption Can help manage sendout Price causing demand destruction Primarily transportation customer
Electric Generation
Less than 1% of total customers 25% of total consumption Demand growing Difficult delivery requirements Primarily transportation customer
Current Gas Industry Issues –
Basically, It Comes Down To Supply
North American supply/demand balance is and will remain tight.
Gas consumption grows.
“New frontier” gas supplies are necessary and take time.
North American Gas Market
Gas prices remain relatively high.
High levels of gas price volatility continue.
LNG imports become an important player in natural gas pricing.
Lower-48 Dry Gas Production vs.Dry Gas Productive CapacitySource: Energy and Environmental Analysis, Inc.
40
45
50
55
Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
Bcf
d
Gas Production Productive Capacity
Shut-In Federal Offshore Gulf Natural Gas Production(EIA, April 2006)
* Trading on Henry Hub suspended from 9/23 – 10/6
Bcf/d = Billion cubic feet per day, $/Mcf = Dollars per thousand cubic feet
0
2
4
6
8
10
Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06
1.1 0.8 0.6
7.55 7.50 7.51
Apr May Jun0
4
8
12
16
20Henry Hub Price *
(right axis)
Shut In Production (left axis)
Forecast
Bcf/d $/Mcf
Working Gas in Underground Storage Compared With 5-Year Range (EIA)
Gas Consumption Could Grow By More Than 20% By 2020
Gas Consumption (Trillion Cubic Feet, Tcf)
0
5
10
15
20
25
30
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Residential
Commercial
Industrial
Power Generation
Other
Source: Energy Information Administration
66
Ch ar tin g_ a_ Pat h_W or ksh op _I _0 82 70 3
US Lower-48 Undiscovered Gas Resources Subject to Access Restrictions*
PacificOf fshore
Shelf and Slope
19 Tcf
Eastern GulfShelf and Slope
AtlanticOffshore
Shelf and S lope
27 Tcf
OCS Sale181
CanadianScotian Shelf
BaltimoreCanyonTrough
CarolinaTrough–
Salt Basin
BlakeP lateauBasinGas production/discovery
Oil production
Oil and gas production
Major basinsaffected• Green River• Powder River• Paradox/San Juan• Uinta/Piceance• Montana Thrust Belt
Rockies**
29 Tcf
24Tcf
10530-43
Sou rc e: Cam b rid ge Ene rg y R ese a rch Asso cia tes .
No te: 20 7 Tcf ha ve re str ictio ns or ar e off lim its:
* 9 9 Tcf a re o ff lim its for e xp lor atio n an d d ev elo pm en t.
** An a dd ition al 10 8 Tcf o f t he Ro ckie s g as re so ur ces ar e ava ilab le with re str ict ion s.
M ay 20 03
STATUS OF U.S. UNCONVENTIONAL GAS PRODUCTION
Source:• Conventional/Offshore – EIA Annual Reserve Reports.• Unconventional – Advanced Resources International data base.
TotalDomestic
Production
OnshoreConventional
UnconventionalGas
U.S
. Nat
ural
Gas
Pro
duct
ion
(Tcf
)
0.0
5.0
10.0
15.0
20.0
2000 2003
35% of U.S. total
JAF2004074.XLS19.2 19.4
5.5 5.4
AssociatedGas
3.1 2.8
FederalOffshore
4.8 4.4
5.86.8
In the past three years, unconventional gas has helped maintain U.S. production and now accounts for 35% of U.S. natural gas supplies.
STATUS OF U.S. UNCONVENTIONAL GAS PRODUCTION
GasShales
CoalbedMethane
Tight GasSands
U.S
. Nat
ural
Gas
Pro
duct
ion
(Tcf
)
Source: Advanced Resources International data base.
0.0
1.0
2.0
3.0
4.0
5.0
2000 20034.0
4.6
1.4 1.6
0.40.6
All three of these unconventional gas resources - - tight gas sands, coalbed methane and gas shales – have experienced increased production.
LNG Imports Could Quadruple By 2009 LNG Imports Could Quadruple By 2009
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Year
Tri
llio
n C
ub
ic F
ee
t
LNG L-48 ImportsLNG Import Capacity
23
25
A
3 4
46
17
8
2815
30
29
4748
56
14
54
55
B
37
36
1
19
49
3112
57
US Jurisdiction
FERC US Coast Guard
5150
* US pipeline approved; LNG terminal pending in Bahamas** These projects have been approved by the Mexican and Canadian authorities
52
21
10204116
42
7C
2D
1811
32
3313
5,269
6,27
40
3435
2239
E
CONSTRUCTEDA. Everettt, MA : 1.035 Bcfd (Tractebel - DOMAC)B. Cove Point, MD : 1.0 Bcfd (Dominion - Cove Point
LNG)C. Elba Island, GA : 0.68 Bcfd (El Paso - Southern
LNG)D. Lake Charles, LA : 1.2 Bcfd (Southern Union -
Trunkline LNG)E. Gulf of Mexico: 0.5 Bcfd (Gulf Gateway Energy
Bridge - Excelerate Energy)
APPROVED BY FERC1. Lake Charles, LA: 0.6 Bcfd (Southern Union -
Trunkline LNG) 2. Hackberry, LA : 1.5 Bcfd (Sempra Energy)3. Bahamas : 0.84 Bcfd (AES Ocean Express)*4. Bahamas : 0.83 Bcfd (Calypso Tractebel)*5. Freeport, TX : 1.5 Bcfd (Cheniere/Freeport LNG
Dev.)6. Sabine, LA : 2.6 Bcfd (Cheniere LNG)7. Elba Island, GA: 0.54 Bcfd (El Paso - Southern
LNG)8. Corpus Christi, TX: 2.6 Bcfd (Cheniere LNG)9. Corpus Christi, TX : 1.0 Bcfd (Vista Del Sol – ExxonMobil)10. Fall River, MA : 0.8 Bcfd (Weaver's Cove
Energy/Hess LNG)11. Sabine, TX : 1.0 Bcfd (Golden Pass -
ExxonMobil)12. Corpus Christi, TX: 1.0 Bcfd (Ingleside Energy -
Occidental Energy Ventures)
APPROVED BY MARAD/COAST GUARD13. Port Pelican: 1.6 Bcfd (Chevron Texaco)14. Louisiana Offshore : 1.0 Bcfd (Gulf Landing -
Shell)
PROPOSED TO FERC15. Long Beach, CA : 0.7 Bcfd
(Mitsubishi/ConocoPhillips - Sound Energy Solutions)
16. Logan Township, NJ : 1.2 Bcfd (Crown Landing LNG - BP)
17. Bahamas : 0.5 Bcfd, (Seafarer - El Paso/FPL )18. Port Arthur, TX: 1.5 Bcfd (Sempra)19. Cove Point, MD : 0.8 Bcfd (Dominion)20. LI Sound, NY: 1.0 Bcfd (Broadwater Energy -
TransCanada/Shell)21. Pascagoula, MS: 1.0 Bcfd (Gulf LNG Energy
LLC)22. Bradwood, OR: 1.0 Bcfd (Northern Star LNG -
Northern Star Natural Gas LLC)23. Pascagoula, MS: 1.3 Bcfd (Casotte Landing -
ChevronTexaco)24. Cameron, LA: 3.3 Bcfd (Creole Trail LNG -
Cheniere LNG)25. Port Lavaca, TX: 1.0 Bcfd (Calhoun LNG - Gulf
Coast LNG Partners)26. Freeport, TX: 2.5 Bcfd (Cheniere/Freeport LNG
Dev. - Expansion)27. Sabine, LA: 1.4 Bcfd (Cheniere LNG - Expansion)
PROPOSED TO MARAD/COAST GUARD28. California Offshore: 1.5 Bcfd (Cabrillo Port - BHP
Billiton)29. So. California Offshore : 0.5 Bcfd (Crystal
Energy)30. Louisiana Offshore : 1.0 Bcfd (Main Pass
McMoRan Exp.)31. Gulf of Mexico: 1.0 Bcfd (Compass Port -
ConocoPhillips)32. Gulf of Mexico: 2.8 Bcfd (Pearl Crossing -
ExxonMobil)33. Gulf of Mexico: 1.5 Bcfd (Beacon Port Clean
Energy Terminal - ConocoPhillips)34. Offshore Boston, MA: 0.4 Bcfd (Neptune LNG -
Tractebel)35. Offshore Boston, MA: 0.8 Bcfd (Northeast
Gateway- Excelerate Energy)
POTENTIAL SITES IDENTIFIED BY PROJECT SPONSORS
36. Coos Bay, OR: 0.13 Bcfd (Energy Projects Development)
37. California - Offshore: 0.75 Bcfd (Chevron Texaco)
38. Pleasant Point, ME : 0.5 Bcfd (Quoddy Bay, LLC)
39. St. Helens, OR: 0.7 Bcfd (Port Westward LNG LLC)
40. Galveston, TX: 1.2 Bcfd (Pelican Island - BP)41. Philadelphia, PA: 0.6 Bcfd (Freedom Energy
Center - PGW)42. Astoria, OR: 1.0 Bcfd (Skipanon LNG - Calpine)43. Robbinston, ME: 0.5 Bcfd (Downeast LNG -
Kestrel Energy/Dean Girdis)44. Boston, MA: 0.8 Bcfd (AES Battery Rock LLC -
AES Corp.)45. Calais, ME: ? Bcfd (BP Consulting LLC)
CANADIAN APPROVED AND POTENTIAL TERMINALS
46. St. John, NB : 1.0 Bcfd (Canaport - Irving Oil)**47. Point Tupper, NS 1.0 Bcf/d (Bear Head LNG -
Anadarko)**48. Quebec City, QC : 0.5 Bcfd (Project Rabaska -
Enbridge/Gaz Met/Gaz de France)49. Rivière-du- Loup, QC: 0.5 Bcfd (Cacouna
Energy - TransCanada/PetroCanada)50. Kitimat, BC: 0.61 Bcfd (Galveston LNG)51. Prince Rupert, BC: 0.30 Bcfd (WestPac
Terminals)52. Goldboro, NS 1.0 Bcfd (Keltic Petrochemicals)
MEXICAN APPROVED AND POTENTIAL TERMINALS53. Altamira, Tamulipas : 0.7 Bcfd
(Shell/Total/Mitsui)**54. Baja California, MX : 1.0 Bcfd (Sempra)** 55. Baja California - Offshore : 1.4 Bcfd (Chevron
Texaco)**56. Lázaro Cárdenas, MX : 0.5 Bcfd
(Tractebel/Repsol)57. Puerto Libertad, MX: 1.3 Bcfd (Sonora Pacific
LNG)58. Offshore Gulf, MX: 1.0 Bcfd (Dorado -
Tidelands)59. Manzanillo, MX: 0.5 Bcfd60. Topolobampo, MX: 0.5 Bcfd
Existing, Proposed and PotentialNorth American LNG Terminals
Office of Energy Projects
58
As of November 30, 2005
53
59
60
38
24
44
4345
ALASKAN GAS IS READY AND WAITING
NGL Extraction Plant
Designed Over 5000 miles
of pipeline• 52”, 2000 to 2500 psig
• 24 - 28 Compressors Stations
• Over 1200 Stream Crossings
• Over 1500 Road Crossings
World-class Gas Treating Plant for CO2 removal
Source: BP
Alaska Natural Gas Pipeline
Proposed 4.5 Bcf/d pipeline Agreement between state & oil companies must be
approved by Alaska legislature. Adds 35-40 Tcf of reserves immediately to start Costs:
Construction - $20 billion Financing - $20 billion O&M - $20 billion
Potential Incremental Gas Supply
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Eastern GOM LNGExpansions
New LNGTerminals
Alaskan GasPipeline
Bcf
/d
SOURCES OF CURRENT U.S. NATURAL GAS SUPPLY
ALASKA
2.7
LOWER-48
19.0
Source: Energy Information Administration
ALASKA
2.22005: 21.8 Quads
LNG
0.6
Lower-48
18.0
Canada
3.2
Nontraditional Sources Of Natural Gas Will Satisfy Growing Demand
ALASKA
2.7
LOWER-48
19.0
LNG
6.8
CANADA
2.3
Source: Energy Information Administration
2020: 24.5 QuadsALASKA
2.2
LNG
3.7
CANADA
1.6
LOWER-48
19.2
Questions?
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