page 1 gas markets ron mosnik director, gas supply wisconsin public service corporation energy...

Gas Markets

Ron MosnikDirector, Gas SupplyWisconsin Public Service CorporationEnergy Utilities BasicsOctober 5, 2012

Gas Markets Agenda

Brief history of natural gas regulation Gas transportation market Shale (Natural gas market game changer) Natural gas pricing Price and volatility

Wisconsin Public Service Corporation Profile

1,363 Employees

319,000 Gas Customers 12.8 Bcf Gas Storage 38 Bcf System Sales $178 Mil (Annual Gas Cost)

441,000 Electric Customers 2,175 Mw Gen Capacity

Data as of December 31, 2011

Regulation of WPSC Gas Utility

Federal Regulation (FERC) – Federal Energy Regulatory Commission Transportation, Storage & Sales of natural gas

in interstate commerce

State Regulation (PSCW) – Public Service Commission of Wisconsin Tariff (Distribution Rates, Extension Rules,

Service Rules, etc.) Gas Cost Rates (Transportation & Storage, Gas

Purchases, Hedging, etc.) Pipeline Safety (Federal & State rules)

Natural Gas Industry (Current State)

• Natural Gas Commodity is De-regulated

• Transportation of Natural Gas is highly Regulated Interstate transport Gas Storage in interstate commerce

Why?Provide the market “open access” to gas

transportation assetsMitigate abuse of limited gas transportation assets

Natural Gas Industry (Prior to 1938)

• Local gas production (Coal Gasification)• Expanding exploration for crude oil

and natural gas• Steel welding perfected

High pressure steel pipelines

• Federal Trade Commission (FTC) Looked after the growing industry Made recommendations to regulate

the natural gas industry

Natural Gas Act of 1938 (NGA)

Federal Power Commission (FPC) was given authority to regulate… Transportation of natural gas in

interstate commerce Sales of natural gas in interstate

commerce for resale Exempted:

Local distribution of natural gasProduction and gathering of natural gas

Natural Gas Act Required…

• Certificates of public convenience and necessity [NGA §7(C)]

• Abandonment authority [NGA §7(b)]• Just and reasonable rates

[NGA §4 and § 5]• Nondiscrimination [NGA §4(b)]• Reporting [NGA §10]

Local Distribution

Company

InterstatePipeline

Bundled Sales and Gas Transportation Service

Producer

Gas and Transportation

Service (Bundled)

Natural Gas Policy Act of 1978 (NGPA)

Natural gas supply shortage in mid-1970s

Legislation that established… Federal Energy Regulatory Commission

(FERC) - Abolished FPC Extensive price regulation at wellhead Curtailment priorities First timeline for natural gas deregulation

Federal Energy Regulatory Commission (FERC)

• Five commissioners Appointed by the President

(With advice and consent of Senate) Serve staggered five year terms Equal vote on regulatory matters

• No more than three may belong to same political party

• Chair is designated by President to serve as FERC’s administrative head

Present FERC Commissioners

Chairman Jon Wellinghoff (D)

Commissioner Philip Moeller (R)

Commissioner John Norris (D)

Commissioner Cheryl LaFleur (D)

Commissioner Tony Clark (R)

NGPA of 1978 (Objectives)

• Reform of wellhead price controls (increase supply on interstate pipelines)

• Foster a more competitive environment (in market areas & along the interstate pipeline systems)

• Restructure distribution and sales(to provide “open access” on pipes to serve market areas)

First step toward present regulatory system

NGPA of 1978 (Outcomes)

• Production boom of late 1970s, early 1980s• FERC successfully stimulated supply

to meet demand• Exploration and production segments

flourished

However - Unforeseen jurisdictional and bureaucratic problems arose Had to purchase a bundled package “Open access” to marketplace did not

materialize

FERC Order 436 (1985)

• Pipelines must transport gas on an open-access, nondiscriminatory basis

• Pipeline capacity to be allocated (first-come, first-served basis)

• LDC’s have ability to: Convert bundled service to

transportation-only contracts Reduce demand volume for gas

purchase contracts• “Shipper Must Have Title” Rule

Orders 500 & 528 (Take-or-Pay)

Painful consequences when FERC permitted LDC’s to acquire gas directly from suppliers under Order 436

Orders 500 & 528 resolved problems Allow pipelines to buy out or buy down

supply contracts Apportion costs between themselves and

their customers (Take-or-pay provisions)

Local Distribution Company

InterstatePipeline

Open Access Transportation and Bundled City Gate Service

Gas Commodity Sales

Transportation

Producer

P/L Gas and Transportation

Service (Bundled)

Natural Gas Wellhead Decontrol Act of 1989 (NGWDA)

Congress decided price regulation was unnecessary and anticompetitive

• NGWDA amended the NGPA of 1978 to phase out all price regulation of natural gas (commodity)

• Natural gas (commodity) market completely deregulated as of January 1, 1993

FERC Order 636 (1993) – “Final” Restructuring (Pipeline Services)

Interstate Natural Gas Pipelines must… Unbundle transportation from sales of

gasPipelines can only transport

gas for others (Shippers)

Provide all shippers access to certain information on electronic bulletin boards

Allow shippers to release capacity on permanent or temporary basis

FERC Order 636 (cont.)

Interstate Natural Gas Pipelines must… (cont.) Allow shippers to have flexible receipt and

delivery points Provide “no notice” service to protect certain

shippers in the event of a sudden need for gas (balancing)

FERC adopted Straight Fixed Variable rate designDemand charge (fixed costs)Commodity charge (variable costs)

InterstatePipeline

Open Access Gas Transportation

Gas Commodity Sales

Transportation

Producer

Delivery Point

or Broker

U.S. Gas Transportation System

Upper Midwest Gas Transportation Market

Natural Gas Market Game Changer

Shale Production Outlook

History Forecast

WesternCanada

Appalachia

Gulf Coast/Midcontinent

Courtesy TransCanada

Bcf/

d

History of NYMEX Gas Prices

$/D

th

North American Gas Supply


MexicoGulf of Mexico

Onshore Gulf

Big Four Shales

Permian/Anadarko

Rockies/San Juan

Eastern U.S.

WCSBConventional

Shale

LNG/Other

History Forecast

Bcf/

d

North American Gas Demand

History Forecast

Pipe/Plant Fuel

Residential

Commercial

Industrial

Electric Generation

LNG Exports


Bcf/

d

Natural Gas Pricing

Natural gas is a traded commodity(New York Mercantile Exchange - NYMEX)

Law of supply and demand

What Drives Natural Gas Prices?

Natural Gas Pricing (Supply and Demand)

Drivers for lower prices: Increased shale production (Supply) Adequate storage inventories (Supply) Greater energy efficiency (Demand) Economic down-turn (Demand) Weather (Demand)

Warm winterCool summer

Natural Gas Pricing (Supply and Demand)

Drivers for higher prices: Production losses from hurricane

damage (Supply) ??? Low winter storage inventories (Supply) Increased gas usage for fuel

switching/emissions control (Demand) Economic recovery (Demand) Weather (Demand)

Cold winterHot summer

Natural Gas Pricing

Other factors influencing price Value of the dollar (global commodity)

(currently - U.S. price insulated) Speculators trading in market (i.e.,

Natural Gas Fund, derivatives, etc.)

(Oversupplied market – non issue)

Historical NYMEX Gas Futures Prices

Delivery Months: January 2001 through August 2012

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$/M

MB

tu

Historical NYMEX Gas Futures Prices

Delivery Months: January 2001 through August 2012

Supply/Demand in Balance

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$/M

MB

tu

Supply/Demand in Balance

Market Oversupplied

Natural Gas Pricing

Natural gas is a traded commodity(New York Mercantile Exchange - NYMEX)

Law of supply and demand

Purchase location (Location Basis)Timing of delivery (Futures Basis)

What Drives Natural Gas Prices?

Natural Gas Pricing (Purchase Location)

Purchase Location(Location basis) Influenced by:

Supply at purchase locations

Transportation capacity at purchase locations (Receipt Points)

Demand at Delivery Points along pipeline

Natural Gas Pricing (Purchase Location)

Example - Location Basis (Trade date: Sept. 10, 2012 Delivery)

Location Price ($/Dth) Basis ($/Dth)

NYMEX $2.81 -

ANR Ok $2.54 ($0.27)

ANR La. $2.59 ($0.22)

Chicago $2.76 ($0.05)

Natural Gas Pricing (Timing of Purchase)

Timing of Delivery(Futures basis) Influenced by:

Point in time the gas is to be delivered Gas storage costs (factor)

NYMEX Future Strip Prices

N D J F M A M J J A S O$3.00

$3.20

$3.40

$3.60

$3.80

$4.00

$4.20

$4.40

$4.60

$4.80

NYMEX Gas Prices ($/Dth)Trade Date 9/11/2012

Nov 12 - Oct 13 Nov 13 - Oct 14 Nov 14 - Oct 15 Nov 15 - Oct 16 Nov 16 - Oct 17

$/D

th

Alison Millerick

Update with data as of September 30, 2010.

Natural Gas Pricing Mechanisms

Pricing Mechanisms (Physical Supplies) First of month index

Price fixed for the month

Daily price Price fixed for the day

Fixed pricePrice fixed for a future delivery period

Natural Gas Market (Price and Volatility)

Any event or trend that indicates a change in gas supply or gas demand can also trigger a change in price

Natural Gas Price (Market)

NYMEX First of Month Natural Gas PricesDelivery Months: January 2001 through August 2012

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$/M

MB

tu

Cold Winters

Hurricanes

Energy Complex Price Run-up

Natural Gas Market (Price and Volatility)

The price volatility of a commodity is a function of the relative rate at which the price of a commodity moves up or down

Volatility Metric

(Std Dev of the % change in gas prices month to month)

Natural Gas Price Annualized Volatility

NYMEX First of Month Natural Gas PricesDelivery Months: January 2001 through August 2012

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$/M

MB

tu

67% Volatility

48% Volatility

Gas Markets

page 1 gas markets ron mosnik director, gas supply wisconsin public service corporation energy...

Documents

natural gas slide

natural gas act

gas customers

gas purchases

natural gas industry

natural gas deregulation

storage sales of natural

natural gas policy act