Natural Gas 101: The Basics of Natural Gas Production, Transportation, and Markets

Transcription

1 Natural Gas 101: The Basics of Natural Gas Production, Transportation, and Markets David E. Dismukes, Ph.D. Center for Energy Studies Louisiana State University

2 What Is Natural Gas? 2

3 Overview Overview Where Does Oil and Natural Gas Come From? Effectively buried solar energy from prior geological time periods. Sedimentation and changes in sea levels and geology trapped various organic materials that formed the basis for crude oil and natural gas. Source: Energy Information Administration 3

4 Overview Overview History of Natural Gas Natural gas has been known to escape from the surface since ancient Greek, China, and even with Native Americans. In 1821 in Fredonia, New York, William A. Hart drilled at 27 foot well in an effort to get a larger flow of gas from a surface seepage of natural gas. This was the first well intentionally drilled to obtain natural gas. For most of the 1800s, natural gas was used almost exclusively as a fuel for lamps to light city streets. Source: U.S. Department of Energy. The History of Natural Gas. 4

5 Overview History of Natural Gas Around the 1890s, many cities began converting their street lamps to electricity, and therefore gas producers began looking for new markets for their products. In 1855, Robert Bunsen invented a burner that mixed air with natural gas called the Bunsen burner. This showed how gas could be used to provide heat for cooking and warming buildings. Moving large quantities of natural gas for these new purposes required pipelines, though. In 1891, there was a 120 mile long pipeline that carried gas from central Indiana to Chicago. This was one of the first lengthy pipelines built. Source: U.S. Department of Energy. The History of Natural Gas. 5

6 Overview History of Natural Gas Improvements in metals, welding techniques and pipe making during WW2 made pipeline construction more economically attractive. Throughout the 1950s and 1960s, thousands of miles of pipeline were constructed throughout the U.S. Today the U.S. pipeline network, laid end-to-end, would stretch to the moon and back twice. Source: U.S. Department of Energy. The History of Natural Gas. 6

7 Overview Overview Industry Organization Natural Gas Over time, industry became organized into three components: (1) production; (2) transport/processing; and (3) distribution. Natural Gas Wells Gas Processing Plant Main Line Sales Natural Gas Company Retail Consumers Underground Storage Production (Upstream) Processing/Transmission (Mid-stream) Distribution (Downstream) 7

8 Natural Gas Drilling and Production 8

9 Drilling/Production Drilling/Production How is Petroleum Developed? Petroleum is recovered mostly through drilling activities. This can occur at a few thousand feet to over 20,000 feet. Drilling comes after a considerable amount of geological research and analysis that considers the structural geology (at the reservoir scale), sedimentary basin analysis, reservoir characterization (mainly in terms of the porosity and permeability of the target structures. Porosity refers to the void space, or the ability of the formation to hold hydrocarbons. Permeability refers to ability of a material to allow fluids to flow. So how much oil can a structure hold and how does the petroleum flow through the structure. High porosity and permeability, generally, is a good thing. 9

10 Drilling/Production Petroleum Formations/Resource Types Unconventional 10

11 Drilling/Production Conventional Supply Basins Traditional basins include the Gulf of Mexico region, onshore Texas/LA, Midcontinent, Appalachia and the Rockies 11

12 Drilling/Production Upstream: Drill Rig A drilling rig supports a variety of equipment used to physically drill into the earth s surface to considerable depths. The primary component of the drilling rig is the derrick that supports the drill-string and drill bit as it moves into the earth s surface. Source: Energy Information Administration 12

13 Drilling/Production Drilling Schematic Drilling is usually completed to various depths depending upon initial geological research done at the prospective location. Vertical wells can range from very shallow, to very deep and are drilled both on-shore and offshore. Source: Energy Information Administration 13

14 Drilling/Production Wellhead and Downhole Equipment Source: Extractingoil.net Drilling equipment will be removed from the hole and production casing (or piping) will be lowered into the hole to bring crude oil or gas to the surface and protect subsurface sources of water. Casing pipe is cemented to ensure strength and well integrity and will be tied into a system of pipes and valves known as a wellhead. The natural pressure in the well will force the oil to the tanks. If the natural pressure is not strong enough, pumps will inject artificial force (or artificial lift ). 14

15 Drilling/Production Qualitative Differences in Natural Gas Rich/Wet Gas: raw natural gas with relatively high concentration of heavier hydrocarbons. Lean/Dry Gas: Raw natural gas with a low concentration of heavier hydrocarbons. Sour Gas: contains significant quantities of hydrogen sulphide. Sweet Gas: does not contain significant quantities of hydrogen sulphide. Acid Gas: contains hydrogen sulphide and carbon dioxide. Non-associated Gas: found in reservoir in which no crude is present. Associated Gas: found in reservoir in which crude is present. Solution Gas: raw natural gas dissolved in crude under reservoir conditions a type of associated gas. Associated gas not dissolved in crude under reservoir conditions is called gas-cap gas. 15

16 Unconventional Supplies 16

17 Unconventional Unconventional Supply Basins Unlike conventional resources, shale plays (natural gas, liquids, and crudes) are located almost ubiquitously throughout the U.S. and are the primary reason for the decrease in overall and regional natural gas prices. Source: Energy Information Administration, U.S. Department of Energy 17

18 Unconventional Shale, Horizontal Drilling, and Fractionation Shale (unconventional) wells differ from conventional wells since they are drilled horizontally and not vertically. Horizontal segments are then fractured with higher pressure water, chemicals and silica to break up the formation. The fractionation process releases/liberates the hydrocarbons. Some environmental and water use concerns expressed in some areas of the country on this drilling process. Source: Energy Tomorrow. 18

19 U.S. Dry Natural Gas Proved Reserves (Tcf) Unconventional Changes in Reserves and Production Natural gas production and reserves are at levels not seen since the 1970s and both U.S. natural gas production and reserves are now at an all time recorded peak reserve 10 estimates mark the 50 first decline in 14 years U.S. Natural Gas Marketed Production (Tcf) Natural Gas Reserves Natural Gas Production Source: Energy Information Administration, U.S. Department of Energy. 19

20 Annual Change (Tcf) Annual Changes in U.S. Natural Gas Proved Reserves (Shale and Other) Expanded exploration and development of unconventional resources in increases in natural gas proved reserves in recent years. And, while net additions in shale outpaced the overall decrease in natural gas reserves from all other sources, reserve estimates fell in 2012 due to a 34 percent decrease in the average natural gas price Unconventional 50% 40% 30% 20% 10% 0% Shale s Share of Reserves Shale Other Dry Natural Gas Source: Energy Information Administration, U.S. Department of Energy. 20

21 Reserves (Tcf) Unconventional Annual Energy Outlook 2015, Natural Gas Reserves Unconventional resources are not a flash in the pan and are anticipated to continue to increase over the next two decades or more Source: Energy Information Administration, U.S. Department of Energy 21

22 Unconventional Changes in Well Costs and Productivity $18 $16 $14 $12 $10 $8 $6 Encana reports a reduction in well costs of 15-30% through use of multi-pad drilling, improved rig efficiencies, and lower hydraulic fracturing costs. The use of higher water volumes, increased frac stages, and enhanced pay selection have resulted in % increases IP rates Well Cost (million $) $25 $20 $15 $ Well Performance (MMcfe/d) $4 $2 $5 $ $ East Texas Deep Bossier Haynesville East Texas Deep Bossier Haynesville Source: U.S. Natural Gas Resources and Productive Capacity: Mid-2012, Prepared for Cheniere Energy, Advanced Resources International, Inc. August 23,

23 Tcf Unconventional Forecast U.S. Natural Gas Production Shale availability will drive U.S. natural gas supply Shale Gas Production Associated Gas Production Shale gas Tight gas Non-associated offshore Alaska Coalbed methane Non-associated onshore Source: Energy Information Administration, U.S. Department of Energy 23

24 Unconventional Basin Competition Close to 6,000 TCF of shale gas opportunities around the world. Coupled with 9,000 Tcf in conventional suggest a potentially solid resource base for many decades. Canada 388 Tcf U.S. 862 Tcf Mexico 681 Tcf Brazil 226 Tcf Argentina 774 Tcf France 180 Tcf Algeria 231 Tcf Libya 290 Tcf South Africa 485 Tcf Poland 187 Tcf China 1,275 Tcf Australia 396 Tcf Source: MIT Energy Initiative. 24

25 Capacity Capacity Markets Policy Markets (Transportation) & Regulation (Storage) Markets Market Organization 25

26 Markets Capacity Capacity Markets Policy Markets (Transportation) & Regulation (Storage) Markets Natural Gas Markets Similar to other markets, natural gas markets are comprised of buyers and sellers as well as a number of other market participants that facilitate the transfer (trade) of natural gas commodity to end-users (buyers). Buyers Sellers and Middlemen Households Businesses Utilities Producers Industry Marketers 26

27 Markets Capacity Capacity Markets Policy Markets (Transportation) & Regulation (Storage) Markets Definition: Natural Gas Commodity Natural gas commodity originates (physically) from the supply side of the business and is the ultimate product delivered to end users. Natural gas is traded (and referred to) as a commodity because it homogeneous and fungible in nature (non-differentiable on qualitative basis). Is a highly traded and valuable commodity that can be volatile since prices are set by traders in the market and in its simplest form, represents the price for as available commodity. Trades are influenced by the physical deliverability that can be constrained. Physical constraints, coupled with the relatively inelastic nature of demand, can lead to volatile prices. 27

28 Markets Capacity Capacity Markets Policy Markets (Transportation) & Regulation (Storage) Markets Definition: Natural Gas Capacity Capacity in the natural gas business refers to the ability to reserve or hold the ability to move (or call upon) natural gas supplies at any point in time. Capacity is commonly thought of in terms of terms of transportation (pipe capacity) or storage (cavern capacity), but can also reference the capacity of natural gas supplies (commodity) in the form of reserves. Capacity is not free! You have to pay for the right to call up a resource and hold it in reserve (physical insurance). While capacity is not free, unused capacity can be resold to the market to offset overall costs. 28

29 Capacity Capacity Markets Policy Markets (Transportation) & Regulation (Storage) Natural Gas Transportation & Storage 29

30 What is Natural Gas Transmission/Transportation? Capacity Markets (Transportation) Capacity Capacity Markets Policy Markets (Transportation) & Regulation (Storage) Natural gas transmission service is needed to move natural gas from producing areas to consuming areas. The long-distance pipeline is needed to move natural gas from Point A to Point B. Natural gas transmission operators receive natural gas from a source by a shipper, then move that gas to a delivery point defined by the shipper. The gas transmission company is paid for moving the gas from receiving the gas at Point A and moving that gas to the delivery point at Point B. Natural gas transmission service can be provided on either a firm or an interruptible basis. 30

31 Natural Gas Pipeline and Storage Facilities Capacity Markets (Transportation) Capacity Capacity Markets Policy Markets (Transportation) & Regulation (Storage) Natural gas infrastructure originates in the producing areas and terminates in (near) consuming areas. The definition of producing areas, and their importance, is changing rapidly with unconventional development. 31

32 Capacity Markets: Types & Costs of Transportation Services Capacity Markets (Transportation) Capacity Capacity Markets Policy Markets (Transportation) & Regulation (Storage) Direct correlation between the firmness of a service and its price. As quality increases, price increases. Interruptible Degrees of Firm Firm $ $$ $$$$ Interruptible rates will tend to be more volumetric in nature. Firm service rates will tend to have demand (capacity) and smaller volumetric components. 32

33 Capacity Markets (Storage) Capacity Policy Markets & Regulation (Storage) Capacity Markets: The Role of Storage in the Value Chain Natural Gas Wells Gas Processing Plant Main line sales Natural Gas Company Consumers Underground Storage Production Transmission Distribution Source: Energy Information Administration, U.S. Department of Energy. 33

34 Capacity Markets (Storage) Capacity Policy Markets & Regulation (Storage) Capacity Markets: Storage Purpose Natural gas storage serves two primary functions: to meet seasonal demands for gas (base-load storage); and to meet short-term peaks in demand (peaking storage). Peaks in natural gas demand can range from a few hours to a few days, typically during unusually cold winter weather. To ensure that adequate natural gas supplies are available to meet seasonal customer requirements, underground natural gas storage facilities are filled during low utilization periods in what is commonly called the injection season, typically between April through October of any given year. Natural gas that is placed into storage is ultimately moved to markets to supplement domestic production and imports during what is referred to as the withdrawal season between the fall/winter peak usage months of November to March. 34

35 Capacity Markets (Storage) Capacity Policy Markets & Regulation (Storage) Capacity Markets: Storage Characteristics Characteristic Description Storage Capacity Usually thought of in terms of base, working and total. (Measured in billion cubic feet or Bcf ) Deliverability Where and how storage is integrated with the transportation system. Cycles Number of times a facility can be completely filled and emptied (or turned ). All of these characteristics are important in defining different types and purposes for underground natural gas storage. 35

36 Capacity Markets (Storage) Capacity Policy Markets & Regulation (Storage) Capacity Markets: Storage Basics Why do we store natural gas? (1) Reliability: insurance on supply interruptions (outages/curtailments). (2) Risk management: insurance on rapid and large price changes (volatility). (3) Profitability: opportunities for storage service sales related to market changes. Greater price uncertainty and volatility often leads to more significant storage needs. 36

37 Tcf Center for Energy Studies Capacity Markets (Storage) Capacity Policy Markets & Regulation (Storage) Capacity Markets: Storage Cycles Fundamental purpose of storage is to provide natural gas during peak demand periods (i.e., reliability) Storage is needed to meet those peak usage periods when natural gas demand exceeds natural gas supply. 0.0 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Demand Supply Source: Energy Information Administration, U.S. Department of Energy. 37

38 Capacity Markets (Storage) Capacity Policy Markets & Regulation (Storage) Capacity Markets: Storage Facility Types Depleted Reservoirs Most common - - has slower injection/withdrawal rates. Conversion of a natural gas field from production to storage duty takes advantage of existing wells, gathering systems, and pipeline connections. Some reservoir storage along the GOM. Aquifers Usually used only in areas where there are no nearby depleted reservoirs. Single withdraw period (winter) & used to meet peak load requirements as well. Least desirable and most expensive type of natural gas storage facility. Salt Caverns Very high withdrawal and injection rates. Most salt caverns/domes in U.S. along GOM. More expensive, but faster and more flexible. The safest form of natural gas storage if originally designed for that purpose. 38

39 Policy & Regulation Policy & Regulation 39

40 Policy & Regulation Policy & Regulation Important Market/Regulatory Distinctions (Gas & Power) Wholesale Market Retail Market Not end-users: are entities that buy or sell for others to make a profit (or lower costs). End-users: Purchase energy for use. Engaged in interstate commerce: federally regulated Intrastate transactions: state regulated Examples: Marketers Utilities Municipals/Cooperatives Examples: Residential Commercial Industrial 40

41 Policy & Regulation Power Markets: Wholesale v. Retail The competitive wholesale market is upstream of the transmission and distribution system and is where various market participants generate and trade electricity. Wholesale Competitive Market Marketer Retail Regulated Market Producer Utility Utility Market Residential Commercial Industrial Utility Producer Marketer 41

42 Policy & Regulation Regulation: Wholesale versus Retail FERC regulates wholesale (national) markets and state commissions regulate retail (intrastate) markets. Wholesale Federal Energy Regulatory Commission Marketer Retail State Regulated Regulators Utility Market Producer Utility Utility Utility Utility Producer Marketer 42

43 Wholesale (Interstate) Regulation 43

44 Wholesale Regulation Wholesale Regulation & Competition Natural gas transmission systems can be either interstate or intrastate systems. Interstate systems are regulated by the Federal Energy Regulatory Commission ( FERC ) as a natural monopoly whereas intrastate systems are typically regulated by state utility commissions. (Natural Gas Act of 1938, Federal Power Act of 1935). At one time, natural gas transportation systems were integrated where pipelines owned (contracted for) the commodity and made those bundled sales to local distribution companies. Sales were bundled meaning that transportation and commodity were charged on one integrated rate. The trend towards less regulation and more competition in the late 1970s and early 1980s began the process of unbundling these systems: separating the commodity from the transportation component. Began the process of turning the interstate pipeline system into a common carrier-based system. While the FERC has a number of traditional ratemaking (rate setting functions) it has increasingly moved away from very stringent methods of economic regulation and focus more on market oversight and stimulating competition. 44

45 Wholesale Regulation Wholesale Competition : Transportation & Order 636 Order 636 (1992) major regulatory change - creates a common-carrier framework for transportation. Prohibits pipeline companies from engaging directly in commodity sales and to provide transportation and storage service on equal and non-discriminatory terms. Requires pipeline to provide no-notice transportation service, access to storage facilities, increased flexibility in receipt and delivery points, and capacity release programs. No-notice transportation services allow LDCs and utilities to receive natural gas from pipelines on demand to meet peak service needs for its customers, without incurring any penalties. These services were provided based on LDC and utility concerns that the restructuring of the industry may decrease the reliability needed to meet their own customers' needs. 45

46 Wholesale Regulation Wholesale Competition: Order 636 & Capacity Release Order 636 initiated a broad platform for trading a wide range of transportation and storage services that are differentiated on price and quality (firmness) no longer plain vanilla transportation. Electronic Bulletin Board ( EBB ): post critical information about pipeline operations, services, terms and conditions, market opportunities, and other information. Goal: increase market transparency and reduce informational and transactions costs. Capacity release: allow the resale of unwanted pipeline capacity between pipeline customers. A customer requiring pipeline transportation can refer to these bulletin boards, and find out if there is any available capacity on the pipeline, or if there is any released capacity available for purchase or lease from one who has already purchased capacity but does not need it. 46

47 Retail (Intrastate) Regulation 47

48 Regulatory Retail Regulation Process State Utility Regulation (Retail) Regulation conducted by state Public Utilities Commissions or Public Service Commissions that have quasi-legislative and quasi-judicial functions. Commissioners are appointed or elected. Rates typically set on a fair rate of return hence the reference rate of return regulation. Rate of return regulation is a bit of misnomer since service rates are what are fixed (through a tariff) and actual rates of return (profit/earnings) vary. 48

49 Monopoly Rates Determination - Overview Retail Regulation Overall, the regulatory process is said to be governed by what is often referred to as the regulatory compact between regulators and regulated firms stating: Utilities are given a monopoly service territory and are allowed to utilized a set of regulated rates that provide them with an opportunity to recover their prudently-incurred expenses and a return on and off their prudently-incurred investments in return for providing safe, economic, and reliable service. This regulatory compact is the result of over 100 years of regulation. It is not necessarily defined in a specific code or statute, but the result of long-standing practices and precedents. Rates are set in a fashion that is supposed to be consistent with this regulatory compact. 49

50 Monopoly Other State Regulatory Functions Retail Regulation Utility regulation is not limited to just setting rates alone. State PSCs are very active in the utility supply planning process. Will review, evaluate and approve fuel procurement plans of utilities to ensure that they are diversifying their supplies, storage and transportation alternatives adequately. PSCs will also be active in integrated resource planning. This usually involves the analysis current mains extensions plans, other long run capital management/budgeting plans, load forecasts and potential growth requirements, energy efficiency requirements. PSCs will also be active in the review and monitoring of a utility s distribution integrity management ( DIMP ) plans to ensure that the utility is maintaining a safe and reliable systems. Evaluate and measure existing system, identify and quantify known threats to the system, develop plans to mitigate those risks (communication with contractors, asset replacement), evaluate the success of prior plans and strategies, feed those back into upcoming plans. 50

51 Retail Markets and End-Uses 51

52 Retail Markets Natural Gas Usage Natural gas is important for all consumers Residential Commercial Natural Gas Industrial - Furnace/Heat - Boiler/Steam - Feedstock - Power Generation Power Generation 52

53 Natural Gas Consumption (Tcf) Center for Energy Studies Retail Markets Historic Natural Gas Sales Trends Natural gas sales are not typically volatile over time (unlike prices). Residential/commercial very slow growing, power generation & vehicles represent the growth part of the market NGV Consumption (Bcf) Residential Commercial Industrial Electric Power NGV - Source: Energy Information Administration, U.S. Department of Energy. 53

54 Retail Markets Increase in Natural Gas Usage by Major Sector (2000 and 2013) While the overall gas market has grown little, the composition of use and growth has changed considerably. Total Natural Gas Delivered to End Users Percent Change by Sector Tcf 11 percent increase 23.9 Tcf 70% 60% 50% 20 40% % 20% 10% % -10% -20% Residential Commercial Industrial Electric Power Source: Energy Information Administration, Department of Energy 54

55 Retail Markets Historic Natural Gas Sales Shares, 2015 Significant share of natural gas sales are associated with those from residential and small commercial customers which can exhibit fluctuating loads within the year based on seasonality/weather. (low load factors). Note: power generation demand for natural gas is driven by many of the same underlying factors since generators are dispatched to meet similar loads. Electric Power 39% Residential 18% Commercial 13% NGV 0% Industrial 30% 55

56 Retail Markets Natural Gas Demand Determinants Natural gas demand is influenced by many of the same factors that drive the demand for other goods and services. There are some important differences, however, since natural gas demand is seasonal and highly influenced by the weather. Natural gas demand determinants include: Weather (Heating Degree Days or HDDs ) Overall Economic Conditions Natural Gas Prices Electricity Prices Other Factors

57 Retail Markets Example of Short Run Send-out (Winter) This example shows the variability of sales during the various different hours of the day in prime winter (heating) months. A utility s supply challenge is to make sure that there enough available natural gas and transportation to move that gas to its customers. 57

58 $/MMBtu Retail Markets Natural gas price trends Natural gas price reductions (and reductions in volatility) are the direct result of unconventional oil and gas development. $20 $18 Average : $6.24 (standard deviation: $2.41) $16 $14 $12 $10 $8 $6 $4 $2 Average : $2.79 (standard deviation: $1.28) Average post 2008: $3.57 (standard deviation: $0.95) $0 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Source: Energy Information Administration, U.S. Department of Energy. 58

59 Industrial Production Index Industrial production index and natural gas price Retail Markets Low natural gas prices are helping to secure continued industrial production increases. Note that we have just recently reached pre-recession production levels. 120 $ $14 $12 $10 $8 $6 $4 $2 Natural Gas Price ($/MMBtu) 0 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 $0 Industrial Production Index Natural Gas Price Source: Federal Reserve Bank; and Energy Information Administration, U.S. Department of Energy. 59

60 Petroleum and Coal Products (Billion $) Retail Markets Louisiana exports (chemicals and refined product) Louisiana exports of petroleum and coal products have increased 374 percent since 2009, while chemical exports have moved up and down. $30 $25 $20 $15 $10 $5 $ Petroleum and Coal Products Chemicals $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 Chemicals (Billion $) Source: International Trade Administration 60

61 Industrial Electric Sales, 1990=100 Retail Markets Industrial electric sales comparisons Louisiana s industrial electric sales fell 21 percent between 1996 and Since then, they have jumped 35 percent Louisiana Southeast Average Texas U.S. Note: Southeast states include Alabama, Arkansas, Florida, Mississippi and Georgia. Source: Energy Information Administration, U.S. Department of Energy. 61

62 Industrial Natural Gas Sales, 1990=100 Retail Markets Industrial natural gas sales comparisons Louisiana s industrial natural gas sales fell 27 percent between 1996 and Since then, they have increased 25 percent Louisiana Southeast Average Texas U.S. Note: Southeast states include Alabama, Arkansas, Florida, Mississippi and Georgia. Source: Energy Information Administration, U.S. Department of Energy. 62

63 Billion $ Retail Markets Louisiana total capital expenditures by sector The continued low natural gas price outlook has facilitated considerable development of over to $95 billion: $25 billion already completed, $70 billion remaining, but heavily concentrated in LNG export facilities. $25 $20 $15 $10 $5 $ LNG Export Methanol/Ammonia Cracker/Polymer Other Source: David E. Dismukes (2013). Unconventional Resources and Louisiana s Manufacturing Development Renaissance. Baton Rouge, LA: Louisiana State University, Center for Energy Studies and author s updates. 63

64 (Million MWh) Retail Markets Estimated electricity use from new industrial projects Louisiana s industrial renaissance will require large amounts of power generation. Electricity use from new projects alone could increase by an estimated 24 million MWh. This represents an increase of 26 percent from Louisiana s 2014 retail sales % % 20% 15% 10% 5% (Percent Increase over 2014 Sales) % Other Cracker/Polymer Methanol/Ammonia LNG Export Percent Increase 64

65 MW) Retail Markets Estimated electricity demand from new industrial projects The cumulative load from new industrial projects could reach about 3,900 MW by ,500 4,000 3,500 3,000 2,500 2,000 1,500 1,

66 (Bcf) Retail Markets Estimated natural gas use from new industrial projects The estimated increase in natural gas use is 1.1 Tcf by This represents a sizeable increase over Louisiana s 2014 consumption. 1,400 1,200 1, Other Cracker/Polymer Methanol/Ammonia LNG Export Percent Increase 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% (Percent Increase over 2014 Sales) 66

67 Passing Clouds or Storms Ahead? 67

68 Industrial investment dynamics Storm Clouds? All of the industrial development to date has arisen in order to (1) serve global, not North American, markets and (2) leverage affordably-priced unconventional natural gas supplies. Methanol Olefins Ammonia LNG Exports GTL Exports US GOM industry competes with other places in the world that rely more heavily on crude oil-based feedstocks Provide a substitute fuel source (natural gas) to crude oil trades at a value pegged to crude oil prices. The economics of both sets of infrastructure are very dependent upon the differentials between crude oil and natural gas prices not their absolute level, but their differential. 68

69 $ per BOE Storm Clouds? Natural gas and crude oil prices Natural gas/crude oil price spreads well in excess of $60 Bbl and as high as $80/Bbl. These differentials have collapsed by about half. $160 $140 $120 $100 $80 $60 $40 $20 $0 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Natural Gas Price Crude Oil Price Differential $100 $80 $60 $40 $20 $0 -$20 -$40 Differential ($ per BOE) Source: Energy Information Administration, U.S. Department of Energy. 69

70 Example: Changes in competitiveness of US-sourced LNG Storm Clouds? Economics of LNG development are important, but there are additional factors that can influence development such as geopolitical and supply stability concerns that could sustain continued projects. Europe: Low High Asia: Low High Caribbean: Low High Feedgas 40-60% ($/MMBtu) $3.00 $5.00 $3.00 $5.00 $3.00 $5.00 Note: *uses a BOE conversion of 5.8 Mcf/BOE. Source: Various sources Liquefaction 12%-20% ($/MMBtu) $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 Shipping & Fuel 20%-40% ($/MMBtu) $1.40 $1.65 $2.90 $3.45 $0.75 $1.00 Henry Hub (Jun 2016): $2.59 WTI (Jun 2016): Regas 5%-8% ($/MMBtu) $0.50 $0.50 $0.50 $0.50 $0.50 $0.50 Brent (Jun 2016): Delivered Cost ($/MMBtu) $6.15 $8.40 $7.65 $10.20 $5.50 $7.75 Equivalent Oil Price* ($/BOE) $35.65 $48.72 $44.37 $59.16 $31.90 $44.95 $48.76 $

71 $ per BOE Storm Clouds? Natural Gas and Crude Oil Futures The natural gas/crude oil price spread is expected to remain well below prior highs of $80-$90/BOE. $60 40 $50 $40 $30 $20 $ Differential ($ per BOE) $0 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Sep-21 Natural Gas Price Crude Oil Price Differential 0 Source: NYMEX, posted

72 Other Dark Clouds 72

73 Currency Units per U.S. $ Other Dark Clouds? Dollar Valuations (Federal Reserve Broad Index) The dollar is up relative to the currencies: 20 percent appreciation over last four years, close to half of which has arisen since January 2015 alone Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Note: The Broad Index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners. Base year is Source: Federal Reserve Bank of St. Louis; and Energy Information Administration, U.S. Department of Energy. 73

74 Industrial Production Index Other Dark Clouds? U.S. Industrial Production Index Industrial production stabilizing at noticeably lower levels after decreasing since matching its post recession peak in August (2015) Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Source: U.S. Department of Commerce. 74

75 Capacity Utilization (%) Other Dark Clouds? Estimated Louisiana CHP utilization Cogeneration utilization at existing facilities are estimated to be falling relative to their late 2013 peaks. 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Total Petroleum and Coal Products Chemical Manufacturing Source: Energy Information Administration, U.S. Department of Energy. 75

76 Annual Percent Change, GDP Changes in Chinese GDP, 2016 Forecast 16 Other Dark Clouds? Chinese economic growth officially reported at 6.9 percent, while some analysts believe close to 6.0 percent Projections Source: International Monetary Fund. 76

77 Chinese manufacturing PMI Other Dark Clouds? HSBC Chinese manufacturing activity continues to be weak. 77

78 Million metric tons Other Dark Clouds? Example: Agricultural Chemicals (Ammonia) The degree to which the market potentially becomes over-supplied will be function of project cancellations (if any) and continued growth assumptions Revised Growth? Current Capacity New Capacity Demand 78

79 Conclusions 79

80 Monopoly Conclusions Conclusions Conclusions Natural gas industry a very unique American energy industry that is rich and diverse in its players and reflected by three major sectors: production; transmission/storage; and distribution. Natural gas supplies are abundant and could supply up to a century s worth of domestic supplies to U.S. consumers at affordable and relatively less volatile prices. Natural gas end-uses are increasing given the commodity s: (a) affordability; (b) availability; and (c) environmental attributes. The industry is regulated by a number of agencies at the federal and state level. State PSCs are very important players associated with industry regulation and oversight. 80

81 Questions, Comments and Discussion 81