Analysis of California Natural Gas Market, Supply Infrastructure, Regulatory Implications, and Future Market Conditions. CIEE Subcontract No.

Transcription

1 Analysis of California Natural Gas Market, Supply Infrastructure, Regulatory Implications, and Future Market Conditions CIEE Subcontract No. MNG Natural Gas Storage Forum: Modeling of Natural Gas Market in California

2 Modeling of Natural Gas Market in California Overview of NARG Model Analysis for Demand Projections Key Results from Fundamental Analysis of California Market Summary Observations B&V - 2

3 North America Regional Gas model (NARG) NARG is a fundamental model that estimates the equilibrium price, consumption and production in each defined North America market by balancing natural gas demand and supply Simulates market behavior by creating a network representation of each economically distinct element of the natural gas industry Models are comprehensive and include gas reserves, processing plants, storage facilities, transportation pipelines and final market demand by sector Microeconomic theory is used to simulate the real world interaction of these elements to determine future prices, production levels, demand loads, pipeline flows, storage withdrawals/injections B&V - 3

4 North America Regional Gas model (NARG) B&V has extensive experience using NARG for fundamental analysis of the North American market Numerous engagements over 5 years analyzing supply, demand, infrastructure and price trends Detailed representation of the North American natural gas grid with inputs that have been validated through various engagements Natural gas infrastructure in North America, with specific focus on California, has been modeled as part of the research study For the purpose of this study, the model analyzed a time period from 2008 to 2020 with monthly resolution B&V - 4

5 Interstate Pipeline Capacity Across CA border Pipeline Location Delivery Capacity 2.09 Bcfd Gas Transmission Northwest El Paso Natural Gas Malin Topock 2.09 Bcfd 2.00 Bcfd 185 MMcfd El Paso Natural Gas Blythe 1.77 Bcfd Energia Costa Azul Bcfd Bcfd 0.80 Bcfd 2.0 Bcfd 1.77 Bcfd Bcfd Transwestern Kern River Transmission TGN (LNG) Tuscarora* Questar Southern Trails N.Needles & Topock Goodsprings Compressor Mexico Border Malin N. Needles Bcfd Bcfd 174 MMcfd 185 MMcfd 80 MMcfd * Natural gas flows through the state of California on the Tuscarora pipeline Source: Energy Velocity; Final Reference Case in Support of the 2005 Natural Gas Assessment CEC, Nov 2005 B&V - 5

6 Storage Facilities in California Existing & Proposed Max Deliverability (MMcf/d) Storage Field Ownership Working Gas Capacity (Bcf) Turns of Service Pipeline Interconnects Status Lodi Gas Storage Lodi Gas Storage LLC PG&E Operating Kirby Hills Storage Lodi Gas Storage Co PG&E Operating Niska Gas Storage - Carlyle/Riverstone PG&E Operating Wild Goose Storage Honor Rancho Storage Field SoCal ,000 4 SoCal Operating La Goleta SoCal SoCal Operating Playa del Rey SoCal SoCal Operating Aliso Canyon SoCal ,860 1 SoCal Operating Los Medanos PG&E PG&E Operating McDonald Island PG&E ,300 1 PG&E Operating Pleasant Creek PG&E PG&E Operating Sacramento Natural Gas Facility Sacramento Natural Gas Storage Co Sacramento Municipal Utility District, PG&E Kirby Hills Area Expansion Lodi Gas Storage Co PG&E Proposed - Expected In Service 2008 Proposed - Expected In Service 2008 Wild Goose Expansion Niska Gas Storage - Carlyle/Riverstone 5.0 TBD TBD PG&E Proposed Gill Ranch Storage 10 Gill Ranch Storage, LLC PG&E Proposed - Expected In Service 2010 B&V - 6

7 Modeling of Natural Gas Market in California Overview of NARG Model Analysis for Demand Projections Key Results from Fundamental Analysis of California Market Summary Observations B&V - 7

8 Analysis for Demand Projections Regression based analysis for residential, commercial and industrial demand Explanatory variables weather, prices, lag of demand, macroeconomic variables Dispatch based electricity demand Fundamental electricity dispatch model with 14 power service territories in California Integrated with NARG model Peak day demand based on historic data B&V - 8

9 Residential and commercial demand is forecast to grow by 0.7% CAGR or 55 Bcf during the study period CA Core Demand Forecast Historical Consumption EIA AEO 2007 Forecast B&V Forecast CEC Forecast 3.50 Bcf/d EIA CAGR ( ) 1.1% B&V CAGR ( ) 0.7% CEC CAGR ( ) 2% B&V - 9

10 Industrial demand is expected to grow at 0.4% CAGR or 30 Bcf over the study period CA Ind Demand Forecast Historical Industrial Consumption AEO 2007 Forecast B&V Forecast CEC Forecast Bcf/d B&V EIA CAGR ( ) 0.4% B&V CAGR ( ) 0.4% CEC CAGR ( ) -0.7%

11 Electric gas demand is expected to grow at a rate of 1.6% CAGR or 235 Bcf from 2008 to 2020 CA Elec Demand Forecast Historical Consumption EIA AEO 2007 Forecast B&V Forecast CEC Forecast Bcf/d EIA CAGR ( ) -1.1% B&V CAGR ( ) -0.5% CEC CAGR ( ) 1.1% B&V - 11

12 Peak Day Send Out vs. Average Day Send Out Total California Bcf/d Source: Energy Velocity, Avg. Send Out Peak Send Out B&V analysis B&V - 12

13 California peak send out appears to be growing faster than average day send out Ratio of Peak Day Send Out to Avg. Day Send Out Source: Energy Velocity, B&V analysis B&V - 13

14 Peak Day Demand History and Forecast Bcf/d B&V Source: Energy Velocity, B&V analysis Average Demand Peak Day Demand

15 Modeling of Natural Gas Market in California Overview of NARG Model Analysis for Demand Projections Key Results from Fundamental Analysis of California Market Summary Observations B&V - 15

16 Henry Hub Price Projections $14.00 $12.00 $10.00 Historical Base Case NYMEX 08/06/07 CEC 2007 EIA AEO 2007 $/MMBtu $8.00 $6.00 $4.00 $2.00 $ B&V - 16

17 SoCal Price Projections $14.00 $12.00 $10.00 Historical Base Case CEC 2007 $/MMBtu $8.00 $6.00 $4.00 $2.00 $ B&V - 17

18 PG&E Price Projections $14.00 $12.00 Historical Base Case $10.00 $/MMBtu $8.00 $6.00 $4.00 $2.00 $ B&V - 18

19 California consumption is expected to grow with a CAGR of 1.1% over the study period Bcf/d Core Power Gen Industrial B&V - 19

20 LNG and Rockies production contribute to the increase in supply among the sources serving California Bcf/d WCSB Rockies San Juan Permian California LNG B&V - 20

21 Pipeline utilization is expected to remain high for pipelines from the WCSB and the Rockies 120% 100% Pipeline Utilization (%) 80% 60% 40% 20% 0% Kern River GTN Transwestern So. Trails El Paso N. El Paso S. B&V - 21

22 Sensitivity Analysis to Determine the Impact of Uncertainties Fundamental supply/demand drivers impacting natural gas prices in California WCSB Production R & C Demand Gas Demand for Power Generation Rockies Production San Juan & Permian Production LNG Imports B&V - 22

23 Impact of Fundamental Drivers on PG&E prices in 2020 LNG P-10 P-90 Western Power Gen Demand WCSB Rockies San Juan-Permian Western Core Demand -$2.00 -$1.50 -$1.00 -$0.50 $0.00 $0.50 $1.00 $1.50 $2.00 $/MMBtu B&V - 23

24 Range of PG&E Prices $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 B&V - 24 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 $/MMBtu Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Feb-20 Aug-20 Mean Price Mean Price + 1 Std Dev Mean Price - 1 Std Dev P10 P90

25 Impact of Fundamental Drivers on SoCal prices in 2020 LNG P-10 P-90 San Juan-Permian Rockies Western Power Gen Demand WCSB Western Core Demand -$2.00 -$1.50 -$1.00 -$0.50 $0.00 $0.50 $1.00 $1.50 $2.00 $/MMBtu B&V - 25

26 Range of SoCal Prices $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 B&V - 26 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 $/MMBtu Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Feb-20 Aug-20 Mean Price Mean Price + 1 Std Dev Mean Price - 1 Std Dev P10 P90

27 The uncertainty in equilibrium prices at SoCal & PG&E increases the expected price volatility over time Historically, the FOM price volatility estimates using a mean-reversion process at PG&E and SoCal are 88% The uncertainty in fundamental price drivers is estimated to increase the volatility by 4-5% Increase in FOM (spot price) volatility will also lead to increase volatility in the futures market Given that price volatility is a key factor in influencing arbitrage storage value (primary valuation methodology utilized for independent storage facilities), increases in volatility could encourage storage development and trading activities. Increased storage infrastructure not only provides arbitrage opportunity but also provides short term deliverability to mitigate supply disruptions or demand spikes B&V - 27

28 Annualized Volatilities for PG&E and SoCal 120% 100% PG&E Winter Volatility PG&E Summer Volatility Socal Winter Volatility Socal Summer Volatility Annualized Volatility (%) 80% 60% 40% 20% 0% Cash Prompt Prompt +1 Prompt +2 Prompt +3 Prompt +4 Prompt +5 Prompt +6 Prompt +7 Prompt +8 Prompt +9 Prompt +10 Prompt +11 B&V - 28

29 Modeling of Natural Gas Market in California Overview of NARG Model Analysis for Demand Projections Key Results from Fundamental Analysis of California Market Summary Observations B&V - 29

30 Summary Observations B&V s modeling of California s natural gas market included fundamental analysis, statistical analysis and real options based valuation of storage Demand projections: The average annual demand for natural gas in the State of California is projected to grow from 6.2 Bcf/d in 2008 to 7.1 Bcf/d by 2020 under baseline projections Peak day demand is expected to grow faster than average demand in both northern and southern California Prices are expected to increase during the study period: SoCal price is expected to increase from $5.50/MMBtu in 2008 to $7.50/MMBtu by 2020 PG&E City-gate price is also expected to increase from $5.80/MMBtu in 2008 to $7.80/MMBtu in 2020 B&V - 30

31 Summary Observations Natural gas supply to the state is projected to grow from approximately 5.7 Bcf/day to 6.4 Bcf/day by 2020 Under the normal weather average month demand assumption incorporated in the current base case, existing storage assets in California are well utilized The price in Southern California is expected to range between $6.20/MMBtu and $7.07/MMBtu in 2020 due to the uncertainty in actual supply/demand factors Northern California prices is expected to range between $6.80/MMBtu and $8.20/MMBtu in 2020 due to the uncertainty in actual supply/demand factors Volatility is expected to increase by 5% over the analysis period; market conditions will remain supportive for future development of independent storage facilities with market based rates B&V - 31