summer 2010: energy market update and short-term outlook · market update and short-term outlook...

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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Table of Contents

» 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

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

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

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

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.

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.

Haynesville

Fayettevil

leWoodford

Barnett

Antrim

Bakken

Marcellus

Generalized Gas Flows in North America

Source: AAPG/USGS

Table of Contents

Page 11

»

1 » Price


3 » Demand


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

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.

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

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.

California Production by Operator 2009

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

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

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!

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

• 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

• 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


Bcf/

day

2008 2009 2010Sources: NCI / EIA

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

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

Table of Contents

Page 25

»

1 » Price


3 » Demand


5 » Take-Aways

6 » Questions

45

55

65

75

85

95


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

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

• 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

Table of Contents

Page 29

»

1 » Price


3 » Demand


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)

»

Table of Contents

Page 31

1 » Price


3 » Demand


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.

»

Page 33

Table of Contents

Page 33

1 » Price


3 » Demand


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

Thank-you.

Ray Welch / Associate Director [email protected]

415.399.2176

Gordon Pickering / [email protected]

http://www.navigantconsulting.com/

mailto:[email protected]

mailto:[email protected]

summer 2010: energy market update and short-term outlook · market update and short-term outlook...

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