OREGON PUBLIC UTILITY COMMISSION 2011 NATURAL GAS OUTLOOK WORKSHOP. August 3, :30 AM Main Hearing Room

Transcription

1 OREGON PUBLIC UTILITY COMMISSION 2011 NATURAL GAS OUTLOOK WORKSHOP August 3, :30 AM Main Hearing Room

2 Agenda Overview of expected PNW natural gas prices for Staff Top natural gas issues Staff National PNW The regional picture on natural gas supply, demand, and price Northwest Gas Association Utility presentations Avista, Cascade, Northwest Natural Gas markets - short- and longer-term Estimated gas costs for the PGA 2 OPUC 2011 Natural Gas Outlook Workshop August 3, 2011

3 $/MMBtu $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 Pacific Northwest Spot Natural Gas Price , and Annual , $6.20 Winter , $5.86 Annual , $4.80 Winter , $4.84 Annual , $4.05 Winter , $4.41 $4.00 $3.50 $3.00 $2.50 $2.00 Based on EIA Short Term Energy Outlooks June 9, 2009, June 8, 2010 and June 7, OPUC 2011 Natural Gas Outlook Workshop August 3, 2011

4 $/MMBtu Pacific Northwest Spot Natural Gas Price $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $4.05 $4.41 $4.91 $5.32 $5.10 $3.50 $3.00 $2.50 $2.00 Based on EIA Short Term Energy Outlook June 7, 2011 Annual Winter Current Avista PGA WACOG Current CNG PGA WACOG Current NWN PGA WACOG 4 OPUC 2011 Natural Gas Outlook Workshop August 3, 2011

5 $/MMBtu $7.00 $6.50 Pacific Northwest Projected Natural Gas Three-Year Financial Hedging Prices $6.00 $5.50 $5.00 $4.83 $4.88 $4.91 $5.32 $5.10 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 Based on Trades Made July 8, 2011 Three-Year Annual Hedge Price Current Avista PGA WACOG Current NWN PGA WACOG Three-Year Winter Hedge Price Current CNG PGA WACOG 5 OPUC 2011 Natural Gas Outlook Workshop August 3, 2011

6 Top Natural Gas Issues (some changes from last year) National Unconventional production environmental issues, depletion rate, and safety Demand for electric generation (gas-firing) Carbon costs and markets Price and Supply (low volatility are prices stabilizing?) High storage level; new storage to handle Potential move to single US price Financial reform legislation PNW Future of Canadian exports (price and supply) Future of Rockies supply Shale impacts on PNW (price and supply) Pipelines from the Rockies to West (Ruby 2011; Blue Bridge (reconfigured); Cross Cascades (GTN and NWN)) LNG (import to export terminals?; in light of shale) Energy efficiency and conservation 6 OPUC 2011 Natural Gas Outlook Workshop August 3, 2011

7 Gas-Fired Generation Over the last two decades 77% of the Megawatts constructed were gas-fired; while 10% were wind; coal was only 6.5% Future building of electric generation is poised to continue this trend AEO 2011 projects total US natural gas consumption to increase by 14% in 2035 AEO 2011 projects use of natural gas in electric generation to increase by 18% in 2035 These increases will require additions to long-haul pipelines, storage (particularly generation compatible storage), and gathering/drilling facilities AEO 2011 projects annual natural gas production to be 27 Tcf in 2035, a 30% increase over today; or with maximum shale gas production to 30 Tcf, a 49% increase over today 7 OPUC 2011 Natural Gas Outlook Workshop August 3, 2011

8 Longer-Term Prices Natural gas prices are more stable and not expected to increase greatly over the next 25 years see AEO 2011 projection below $7.50 $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 AEO 2011 (April 26, 2011 Release) Natural Gas Price at PNW Hubs (Avg.) $/MMBtu ($/2009) 2.4% projected annual growth rate Gas Price at PNW Hubs ($ /MMBtu) 8 OPUC 2011 Natural Gas Outlook Workshop August 3, 2011

9 Financial Reform (Dodd-Frank) Title VII of the Wall Street Reform and Consumer Protection Act ( Dodd-Frank ) mandates comprehensive changes to the $600 trillion U.S. over-the-counter ( OTC ) derivatives market for swaps LDCs and electric utilities use swaps for hedging gas and other fuel costs as well as related market risks, and thus are subject to the mandates of Title VII of Dodd-Frank The commodity, weather, energy, and emissions swaps most often employed by energy utilities are subject to the jurisdiction of the Commodity Futures Trading Commission (CFTC), eliminating the current exclusions and exemptions from the Commodity Exchange Act (CEA) on which these companies have relied for a decade to transact in the OTC derivatives markets (swaps) 9 OPUC 2011 Natural Gas Outlook Workshop August 3, 2011

10 Financial Reform (Dodd-Frank) II Title VII requires anyone considered a swap dealer or major swap participant to register and follow strict requirements for recordkeeping, reporting, business practices, capital, margin, and position limits; and any person or entity that enters into a swap, must either clear that swap and transact on a CFTC-regulated exchange or other regulated entity, or to find an exception from the clearing and/or exchange-trading requirements Title VII allows the CFTC to grant exemptions from the requirements to parties who use swaps for commercial hedging purposes (such as energy utilities), the so called end user exemption; the CFTC has not yet finalized these rules so no exemptions have been granted thus far (See proposed rule for comment: Federal Register /Vol. 75, No. 246 /Thursday, December 23, 2010 / Proposed Rules 80747; End-User Exception to Mandatory Clearing of Swaps) 10 OPUC 2011 Natural Gas Outlook Workshop August 3, 2011

11 Million Dth Recent Gas Demand PNW Gas Deliveries (source: US EIA, StatCan) 1,000 Generation Industrial Commercial Residential

12 Capability (MWa) Market & Policy Drives Generation Builds Pacific Northwest Generating Additions & Retirements (Capability) Wind Solar Petroleum Natural gas Hydro Geothermal Coal Biomass February, 2011

13 MWa 2008 Energy By Source 2008 Generating Capability v Dispatch by Source % Capability Dispatch % % % 109% 0 Hydro NatGas Coal Nuclear Wind (32%) Energy Source Source: NPCC

14 Demand Forecast

15 Base Case Forecast by Sector 350,000, ,000, ,000, ,000, ,000, ,000,000 Power Generation - High Residential 50,000,000 Commercial (Sales) Industrial (Transport & Interruptible) Power Generation

16 Million Dth Three Year Forecast Comparison %

17 Million Dth Decline in Projected Industrial Use 400 Industrial Demand %

18 Demand Composition: 1996 Generation 3% Industrial 51% Residential 26% Commercial 20%

19 Demand Composition

20 Bcf/day 2007 WCSB Production Forecast High Forecast Low Forecast Average

21 Bcf/day WCSB Production Forecast TCPL Low TCPL Reference TCPL High NEB Reference TransCanada, NEB

22 BC Production Propping Up WCSB Bcfd BC Alberta WCSB Data Source: Navigant

23 Bcf/Day Rockies Production Forecasts High Forecast Low Forecast Average of all Source: Commercially Available Proprietary Forecasts

24 Million Dth/day 2008 Peak Capacity I-5 Corridor I-5 Total Firm Peak Day Supply/Demand Balance 6 Low Base High Peak LNG Underground Storage Pipeline Year (Nov-Oct)

25 Million Dth/day Current Peak Capacity I-5 Corridor I-5 Total Firm Peak Day Supply/Demand Balance 6 Low Base High Pipeline Underground Storage Peak LNG Year (Nov-Oct)

26 Capacity Projects Pipelines Southern Crossing Expansion Palomar Sunstone Blue Bridge (reconfigured) Ruby Pacific Connector Pacific Trail Oregon LNG LNG Terminals Kitimat LNG (export) Bradwood Landing Oregon LNG Jordan Cove LNG Storage Facilities Mist 26 Jackson Prairie Kitimat LNG Oregon LNG Jordan Cove LNG Bradwood Landing LNG

27 OPUC 2011 Natural Gas Outlook Avista Corporation Kevin Christie August 3, 2011

28 $/Dth $/Dth Natural Gas Prices $8.00 Prompt Winter Forward Prices AECO 2009 vs 2010 vs 2011 $7.50 $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $7.00 AECO Gas Daily Prices 2009 vs vs $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $ Jan 1-Feb 1-Mar 1-Apr 1-May 1-Jun 1-Jul 1-Aug 1-Sep 1-Oct 1-Nov 1-Dec

29 Mar '09 Apr May May Jun Jul Jul Aug Sep Sep Oct Nov Nov Dec Jan '10 Jan Feb Mar Apr Apr May Jun Jun Jul Aug Aug Sep Oct Oct Nov Dec Jan '11 Jan Feb Mar Mar Apr May May Jun Jul Rigs Oil Rigs Surpass Natural Gas Rigs Oil Gas Total Source: SmithBits

30 Bcf/d Production Is Up, But So Is Demand US Demand Change Relative to Last Year 64 EIA - Total US Dry Gas Production

31 New Drill Cost Curves Indicate A Higher Longer Term Henry Hub Price Requirement

32 $/Dth The Best Indicator Of Future Behavior Is Past Behavior? Historic AECO Cash Prices 1999 through Current Declining rig counts $14.00 $12.00 $10.00 Western Energy Crisis Winter Weather Event Hurricane s Katrina and Rita????? Fracking legislation Faster economic recovery Power generation Carbon legislation LNG exports $8.00 Debt Ceiling the end of $6.00 subsidies $4.00 Production levels continue to $2.00 remain higher than expected Slower economic recovery $0.00 Moderation in weather

33 Natural Gas Procurement Plan Goal To provide reliable supply at stable and competitive prices in an expected volatile market Premise - Avista cannot accurately predict future natural gas prices, but market conditions and experience help shape our overall approach Components: The Plan utilizes a mix of index, fixed price, and storage transactions Transaction Dates: Hedge windows are developed to distribute the transactions throughout the Plan Supply Basins: Plan to primarily utilize AECO for hedging Delivery Periods: Hedges are completed in annual, seasonal and monthly timeframes. Long-term hedges may be executed Procurement Plan Mix Oregon 32% 11% 19% Storage Withdrawals Long-term - Previous One-year or less 18% 20% Discretionary Index/Spot

34 2011 Gas Supply and Pricing Outlook Cascade Natural Gas Corporation Mark Sellers-Vaughn Manager, Supply Resource Planning August 3, 2011

35 Market Fundamentals and Assessment Recovery from the Great Recession continues to be sluggish Shale, Shale, Shale!!! Spectra and NOVA continue to add infrastructure to bring on more Horn River and Montney gas. Baker Hughes rig count showed drilling rigs targeting natural gas slightly increased for the week ending July1. Total natural gas specific rigs is at 874 NOAA is predicting 12 to 18 named storms. 6 to 10 could be hurricanes. 3 to 6 could be major hurricanes. Weather anticipated to remain mild in the Pacific Northwest next heating season. Will there be a "hurricane premium" or will shale temper supply fears? EIA expects this year's annual average natural gas Henry Hub spot price to be $4.25 and $4.58 in NEB expects natural gas prices to range between $4 to $5 (US) Traders seem to be flocking to physical and away from financial products on fear of reforms. Less than 5% of Cascade s base load portfolio and less than 4% of our expected load is tied to financial swaps. Some of the new rules mandated by 2010's Dodd-Frank financial oversight law have taken effect. Some are still being debated. Others were to take effect automatically on July 16. Confusion reigns. Ruby looks to be a go at Malin--there may be backhaul opportunity to help serve Central Oregon and beyond 35

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39 Cascade Natural Gas Corp. GAS SUPPLY AND PRICING OUTLOOK MEETING CUSTOMERS NEEDS - Ensure All Core Customers Natural Gas Needs are Met - Through Disciplined Market Analysis, Long-term Contracts, and Prudent Storage Management Actively Promote Customer Conservation Mitigate Price Volatility for Customers - Through Multi-Year Hedging and a Diversified Portfolio Less than 5% of Cascade s base load portfolio and less than 4% of our expected load is tied to financial swaps. Current target is that 40% of the base load portfolio and less than 35% of the expected load is tied to FIXED PRICED physical supplies EMPLOYING EFFECTIVE SUPPLY-SIDE STRATEGIES - Maintain a Rolling Multi-Year Physical Supply Portfolio Firm, Diversified Supply Contracts Prices are Hedged with a small layer of multi-year Financial Swaps for up to 3 years and primarily through Fixed-price Physical contracts. Our portfolio also includes a mixture of structured products designed to take advantage of both upside and downside price opportunities Utilize Market Area Storage: Jackson Prairie and Plymouth LNG Effectively Manage Wholesale Prices - Through Cost-Effective FOM and Day Gas Purchases By Participating in USA and Canadian Pipeline Rate Filings and Forums 39

40 Typical Winter Day Supply Stack Plymouth (Storage) FOM/Day Gas (As Needed) Annual (365 days) Jackson Prairie (Storage) Peaking (As Needed) Citygate (As Needed) Seasonal (Winter) Pipeline Imbalance Total Core Load in this example is 200,000 dths, with a system degree day of

41 November 2011 through October 2012 Gas Supply Outlook and Strategies Peak events unlikely to occur based on most recent weather predictions Cascade has sufficient firm supplies flowing on our firm transportation to meet load requirements Firm peaking and citygate delivery contracts in place Storage accounts will be full by September 30, 2011 Recall released firm capacity, whenever required Pricing will continue to be moderate Continual assessment of portfolio and market to seek out opportunities to minimize portfolio costs 41

42 2011 Gas Supply and Pricing Outlook Questions?

43 2011 Natural Gas Outlook Workshop Planning for Volatility August 3, 2011 Randy Friedman Director, Gas Supply Northwest Natural Gas

44 Station 2 15% NW Natural Average Winter Day WCSB 29% Flowing Supplies Sumas AECo 2% Underground Storage 27% Avg. Day Winter Supply Volumes (Therms) British Columbia (Stn 2) 580,000 Alberta 1,150,000 Rockies 1,100,000 Jackson Prairie 100,000 NWN Malin Stanfield Rocky Mountain Basin Opal Mist Storage 1,070,000 Portland LNG 0 27% Newport LNG 0 Plymouth LNG 0 San Juan Basin Total 4,000,000 Assumes that storage is 100% full on Nov 1. Topock Permian Basin 44

45 Managing Price Volatility Unhedged 25% Storage 15% Financial Hedges and Gas Reserves 58% Mist Prod. 2% Financial Hedges = Swaps and Options 45

46 WACOG vs. Spot Price Volatility $/Dth Alberta Gas Price Comparison WACOG Rockies Nov- 98 Nov- 99 Nov- 00 Nov- 01 Nov- 02 Nov- 03 Nov- 04 Nov- 05 Nov- 06 Nov- 07 Nov- 08 Nov- 09 Nov

47 Shale Dominates Current Planning US Shale Gas Supply Areas BC Shale/Tight Gas Supply Areas Marcellus Shale Haynesville Gas shale deposits appear in basins from the east to the west coast across the United States. Although recovery percentages are low, total volumes are high. (Map from epmag.com, courtesy of Schlumberger) Source: Northwest Gas Association, July 7,

48 The Fracking Controversy 48

49 The Fracking Controversy Proper Well Construction Layers of Separation Safe Disposal of Drilling Fluids 49

50 Planning for Uncertainty A Black Swan Event is a Surprise to the Observer A Black Swan Event has a major Impact After the fact, the event is rationalized by hindsight These Outliers may be rare but play massive roles 50

51 Examples of Black Swan Events 51

52 Recent Black Swan Events 52

53 The Latest Black Swan Event? 53

54 Black Swan Implications Plans need more robustness Options have more value than you might think Opportunities abound to those not blinded by the bell curve Thanksgiving Day is only a Black Swan Event for the Turkey 54