Natural Gas Market Update

Transcription

1 Natural Gas Market Update 2015 LDC/SCC Conference Fredericksburg, VA Chris Foster October 7, 2015 Restrictions on Use: You may use the prices, indexes, assessments and other related information (collectively, Data ) in this presentation only for your personal use. You may not publish, reproduce, distribute, retransmit, resell, create any derivative work from and/or otherwise provide access to Data or any portion thereof to any person (either within or outside your company including, but not limited to, via or as part of any internal electronic system or Internet site), firm or entity. Disclaimer: Platts, its affiliates and all of their third-party licensors disclaim any and all representations and warranties, express or implied, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use as to the data, or the results obtained by its use or as to the performance thereof. Limitation of Liability: In no event whatsoever shall Platts, its affiliates or their third-party licensors be liable for any indirect, special, incidental, punitive or consequential damages, including but not limited to loss of profits, trading losses, or lost time or goodwill, even if they have been advised of the possibility of such damages, whether in contract, tort, strict liability or otherwise. The Data is provided on an as is basis and your use of the Data is at your own risk. Copyright 2013 by Platts, McGraw Hill Financial, Inc. All rights reserved. No portion of this publication may be photocopied, reproduced, retransmitted, put into a computer system or otherwise redistributed without prior authorization from Platts. Platts is a trademark of McGraw Hill Financial Platts, McGraw Hill Financial. All rights reserved.

2 Today s Agenda US Supply Outlook Impact of Collapse in the Btu Gap Producer Efficiency Gains Financial Stress in the Oil Patch Canadian Imports Northeast Focus Outlook for Northeast Production Pipeline Infrastructure Projects Demand Growth in VA/Southeast VA Pricing Outlook US Demand Outlook Power Burn Industrial Mex Exports LNG Exports Bullish or Bearish: Final Conclusions 2

3 US Supply Outlook

4 $/MMBtu Equivalent Tightening Btu Gap $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 WTI Brent Mont Belvieu - NonTET HH CAPP

5 Tightening Value Gap: Why It Matters for Natural Gas Markets Reduced Supply Growth - Diminishing NGL/crude value uplift with associated gas. - Fewer $ from US banks/international players to fund producer drilling activities. Reduced Demand Growth - US exports (refined products, condensate, NGLs, poly-olefins, LNG/Mexico). - Lessened incentive for fuel oil conversions/gtls/nat. gas vehicles, ships, rail. - Reduced US manufacturing cost advantage and slower industrial growth. - More difficult price environment for Canadian oil sands: supply (production) and demand (nat. gas/power/c5+). Bullish or Bearish: Which one grows faster/further going forward? 5

6 Lower Crude/NGL Prices: Lower Returns 80% 70% 60% 50% 40% 30% 20% 10% 0% IRRs: July 2014 vs. Sep 2015 July'14 Sep' 15 August 2015 Price Assumptions: Gas = 12 month forward average curve for each regional pricing point (range $ $2.93/Mcf) Oil = 12 month forward average WTI +/- differential (range $ $52.57/barrel) NGLs = weighted average $/barrel, 12-mo forward average Mt. Belvieu prices (range $ $22.30/barrel) Source: BENTEK 6

7 WTI ($/bbl) Producers Quickly Respond to $60/bbl # of active rigs $120 $100 Rig Activity v. US Oil Prices $80 $60 $40 $20 $ WTI Active Rigs Source: Bentek, Platts, RigData,data as of August 7,

8 Huge Well Backlog Aiding Growth NE PA Dry Wet Marcellus/Utica Well Inventory (1,425 wells) Well Inventory (1,059 wells) ~2,500 Wells in Inventory Source: : Rig Data May15; OH DNR Feb 15; PA DEP Mar Bcf/d of Trapped Production 8

9 Producers continue to focus on core acreage to grow production # Wells % Core 450 Percentage of Wells Drilled in Core 90% % % 75% 70% % EF Total Core Total % Core Source: Bentek, Rig Data, data as of May 2015 Core Counties Include: De Witt, Dimmit, Gonzales, Karnes, La Salle, McMullen and Webb

10 IP Rates (b/d) Remaining rigs drill faster and produce more # of days to drill IP Rates and Drill Times by Basin (2010 v. 2014) Anadarko Bakken DJ Eagle Ford Permian IP 2014 IP 2010 Drill Time 2014 Drill Time Source: RigData, Bentek 10

11 $ million/well Producers realizing an average of 15% reduction in drilling costs $10.0 $9.0 $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 Average Well Cost by Basin (2014 v. 2015) 15% 19% 9% 16% 14% Williston Permian Marcellus Eagle Ford DJ 2014 Average Q Average *Data sample comprised of 20+ Producers Source: Bentek, producer presentations 11

12 Half-cycle Natural Gas Break-Evens Montney $2.07 $4.22 Duvernay Green River $3.68 $4.35 Piceance Utica Dry $2.99 $ %/ 69% MarcellusDry Arkoma-Wood 154% $3.65 $3.35 Barnett Fayetteville $4.66 $3.07 Haynesville Dry Gas Play 63% August 2015 Price Assumptions: Gas = 12 month forward average curve for each regional pricing point (range $ $2.93/Mcf) Oil = 12 month forward average WTI +/- differential (range $ $52.57/barrel) NGLs = weighted average $/barrel, 12-mo forward average Mt. Belvieu prices (range $ $22.30/barrel) Source: BENTEK

13 USD bn Low Interest Rates Create Supply Bubble? $70 U.S. and Canada Quarterly Free Cash Flow Burn $60 $50 $40 $30 $ $10 $0 ($10) ($20) ($30) (0) Q (3) Q (0) Q (4) Q (9) Q (7) Q (4) Q (7) Q (23) Q (12) (11) (12) Q Q (10) (8) (9) (4) (4) Cash Flow from Ops. Capital Expenditures Unlevered Free Cash Flow Q Q Q Q Q Q (25) Q (12) Q (18) Q (23) Q (12) Q Source: Capital IQ Note: Companies with market capitalization greater than $100MM 13

14 US Dry Gas Production Summer-to-Date 15: 72.3 Bcf/d Summer-to-Date 14: 69.2 Bcf/d Peak 73.5 Bcf/d Production Stalls 2015: 72.4 Bcf/d 2016: 73.3 Bcf/d 2017: 76.3 Bcf/d Forecast 2016

15 Canadian Imports (Bcf/d) US Summer-to-Date 2014: 4.80 Bcf/d 2015: 5.35 Bcf/d Northeast West Midcon Summer '14 Summer ' Canadian Production Summer '14 Summer '15 Source: Bentek Supply Demand History 15

16 Northeast Focus

17 Northeast Production Driving US Production Growth Bcf/d Bcf/d 80 Production 30% Northeast Net flows 25% 20% % (5) % 5% 0 0% Rest of US Northeast % of Northeast 17

18 Bcf/d Northeast Stagnates Too 10 9 Transco Leidy Line Maintenance NE PA Dry Production Peaks Last Winter at 9 Bcf/d Northeast producers choke more than 1 Bcf/d of gas due to low prices Another winter ramp in store?? App OH NE PA Dry 18

19 Northeast Capacity Additions Project Name Est. ISD Capacity Status REX Zone 3 East-to-West 7/1/2015 1,200 Operating TETCO Uniontown to Gas City Expansion 8/1/ Operating TETCO OPEN Ohio Pipeline Energy Network Project 9/15/ Partial Service TCO East Side Expansion Project 9/1/ Under Construction Transco Virginia Southside Expansion 9/1/ Operating ANR Sulphur Springs Expansion (Formerly Glen Karn) 11/1/ Under Construction NFG Northern Access 2015 Expansion 11/1/ Under Construction NFG Tuscarora Lateral 11/1/ Under Construction TGP Niagara Expansion 11/1/ Under Construction TGP Broad Run Flexibility Project 11/1/ Under Construction NFG Line N West Side Expansion and Modernization 11/1/ Under Construction Transco Leidy Southeast Expansion 12/1/ Under Construction Total 4,547 19

20 Other Projects Targeting Southeast Transco Atlantic Sunrise: 1,700 Source: Bentek Northeast Observer 20

21 Southeast Demand (Bcf/d) NC SC VA Source: Bentek Pipeline Flow Data 21

22 Virginia Region Pipeline Network Dominion Columbia Cove Point Columbia Gulf East Tennessee Transco Source: Bentek Geoflo 22

23 VA Deliveries by Pipeline (Bcf/d) Columbia Gas: 38% Transco: 28% Dominion: 26% Cove Point: 6% East Tenn: 2% Columbia Gas Transco Dominion Cove Point East Tennessee Bentek Pipeline Flow Data 23

24 VA Demand Sector (Bcf/d) 2.5 LDC/Ind/Rescom: 56% Power: 44% LDCs/ResCom/Ind Power Bentek Pipeline Flow Data 24

25 Virginia Power Plants: Existing and Proposed Benposium

26 Production Area Basis $1.00 $0.50 $0.00 ($0.50) ($1.00) ($1.50) ($2.00) TCO Appalachia Dominion South ($2.50) 26

27 Production Area Basis DTI Receipts 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Dom Receipts grow 2.5 Bcf/d since Jan DTI Production DTI Interconnect TCO Receipts Flat Since Jan ,000 TCO Receipts 5,000 4,000 3,000 2,000 1,000 0 Source: Bentek Northeast Observer TCO Production TCO Interconnect 27

28 Transco: Bad Deal for Consumers? $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 ($0.50) ($1.00) ($1.50) ($2.00) ($2.50) Transco Z5 Transco Zn6 NY Transco Zn6 xny 28

29 Bcf/d NE PA Dry Production Constrained Until NE PA Dry Production vs Pipeline Capacity NE PA and Central Dry Pipeline Takeaway Pipeline Takeaway High Case

30 Northeast Wet Region (SW PA, WV, and Utica) Constrained Until 2017 Bcf/d 30 Wet Marcellus/ Utica Production vs Pipeline Takeaway S PA OH WV SW PA Pipeline Takeaway Pipeline Takeaway High Case

31 US Demand Outlook

32 Bcf/d Power Burn Testing 2012 Levels Power Burn Season to date: Versus 2014: +4.3 Bcf/d Versus 2012: -0.4 Bcf/d Apr 1-May 1-Jun 1-Jul 1-Aug 1-Sep 1-Oct 5 yr range forecast 32

33 Future Northeast Power Burn Driven by Changes in Generation Fleet MW 40,000 35,000 30,000 25,000 Gas New Builds 20,000 15,000 10,000 5, Non-NE New Gas Plants NE New Gas Plants Source: Bentek s NA Power Plant Databank 33

34 Increased Efficiencies and Renewables Offsetting Growth in Power Burn Source: Bentek Supply Demand History 34

35 US Industrial Demand (Bcf/d) US Summer-to-Date 2014: Bcf/d 2015: Bcf/d Northeast Southeast Texas Midcon West Summer '14 Summer '15 Source: Bentek Supply Demand History 35

36 Exports to Mexico a Bright Spot for Demand Texas West Summer '14 Summer '15 US Summer-to-Date 2014: 2.16 Bcf/d 2015: 2.83 Bcf/d 36

37 Bcf/d Bentek LNG Exports Forecast Base US LNG Capacity Sabine Pass T12 Sabine Pass T2 Sabine Pass T3 Sabine Pass T4 Sabine Pass T5 Freeport LNG T1 Freeport LNG T2 Freeport LNG T3 Cameron LNG T1 Cameron LNG T2 Cameron LNG T3 Cove Point T1 Corpus Christi T1 Corpus Christi T2 47 Bcf/d of proposed capacity BENTEK expects 10.1 Bcf/d to get built LNG Exports could reach 6 Bcf/d in 2020 East Coast Export Terminals: Cove Point 1 Bcf/d Gulf Coast Liquefaction Capacity: Sabine Pass T Bcf/d Freeport LNG T Bcf/d Cameron T Bcf/d Corpus Christi T Bcf/d Benposium 2015 Source: Bentek 37

38 Global LNG Prices Also Signal Lack Of Demand $MMBtu $25 $20 $15 F U K U S H I M A $10 $5 $0 Henry Hub JKM NBP 38

39 Bcf Storage Outlook US Natural Gas Inventories Five Year Range US Inventory History US Inventory Forecast Source: Bentek CellCAST 39

40 The Btu Gap: Where Does It Go From Here? Markets eliminate inefficiencies/move to the mean. Economic growth moves to more normal levels. Environmental issues continue to plague coal and nuclear making natural gas the clear fuel of choice. US best place to invest in incremental supplies and is the marginal cost supplier. Prices move to variable cost spreads Natural gas moves to variable transport differentials LNG/crude/LPG prices reflect variable shipping rates Conclusion: Btu Gap moves to reflect variable spreads 40

41 Conclusion: Bearish Short Term/Bullish Long Term US Demand Growth Accelerating. Gains Critical Mass in 2017 Power Burn demand will increase due to economics/environmental concerns, but conservation, efficiencies and renewables offset. Industrial renaissance tempered, but material. Mexican exports on the rise. LNG exports expectations reduced, but still significant. Increased Production is Needed to Meet Growing Demand Higher prices needed to allow producers to earn a return. Higher prices needed for banks to loan money. Producer efficiency gains will continue, but movement away from core areas and higher service company costs will offset these gains to some degree. Northeast will continue to fuel production growth and pipeline expansions. Northeast basis strengthens as capacity constraints alleviated. Weaker basis values move southward. Benposium

42 Thank You! BENTEK is an energy market analytics company focused on the natural gas, oil, and liquids markets and related energy sectors. Chris Foster Contract Chris at 212/ or contact any Bentek Analyst at 303/ DISCLAIMER. THIS REPORT IS FURNISHED ON AN AS IS BASIS. BENTEK DOES NOT WARRANT THE ACCURACY OR CORRECTNESS OF THE REPORT OR THE INFORMATION CONTAINED THEREIN. BENTEK MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE USE OF ANY INFORMATION CONTAINED IN THIS REPORT IN CONNECTION WITH TRADING OF COMMODITIES, EQUITIES, FUTURES, OPTIONS OR ANY OTHER USE. BENTEK MAKES NO EXPRESS OR IMPLIED WARRANTIES AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANT- ABILITY OR FITNESS FOR A PARTICULAR PURPOSE. RELEASE AND LIMITATION OF LIABILITY: IN NO EVENT SHALL BENTEK BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFIT) ARISING OUT OF OR RELATED TO THE ACCURACY OR CORRECTNESS OF THIS REPORT OR THE INFORMATION CONTAINED THEREIN,WHETHER BASED ON WARRANTY, CONTRACT, TORT OR ANY OTHER LEGAL THEORY.