NATURAL GAS MARKETS, STRUCTURES, AND MECHANISMS

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1 NATURAL GAS MARKETS, STRUCTURES, AND MECHANISMS Mitchell DeRubis, Senior Energy Analyst Bob Yu, Senior Energy Analyst 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 thirdparty 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 thirdparty 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 2016 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.

2 Mitchell DeRubis, Senior Energy Analyst NATURAL GAS MIDSTREAM FUNDAMENTALS

3 Where it s needed, when it s needed Production Demand

4 From Wellhead Producing Basin Gathering Processing Source: EIA Benposium 2017

5 To Burner-Tip Storage Industrial Res/Comm LDC Power Power Industrial Storage Benposium 2017

6 Transportation & Pricing Demand Supply Surplus $ $ $ $ $ Hub $$$ $ $ $ $ $ $ $ $ Prices reflect Supply/Demand Balance $$$$$ Shortage Shortage $$$$ Benposium 2017

7 Firm Reserved Reservation rate (fixed) + variable costs Interruptible Variable costs only Benposium 2017

8 Quick Microeconomics Refresher P P = MR PROFIT MC ATC AVC FC LOSS AFC Q P = Price, Q = Quantity, MR = Marginal Revenue, MC = Marginal Cost, ATC = Average Total Cost, AVC = Average Variable Cost Benposium 2017

9 How Does This Apply to Pipeline Economics? P ATC MC MR = D Q

10 Benposium 2017

11 Benposium 2017

12 STORAGE 1. Natural Gas 2. NGLs 3. Crude Oil Depleted Salt Aquifer Caverns Field Salt Dome Benposium 2017

13 STORAGE 416 Bcf $/MMBtu $7.00 $6.00 $5.00 $4.00 $/MMBtu Bcf $3.00 $2.00 $1.00 $3.60 4,500 4,000 $3.40 3,500 $3.20 3,000 $3.00 2,500 $2.80 2,000 1,500 $2.60 1,000 $ Henry US Inventories Hub Futures Henry Hub Vs. Rolling 5-Year Storage Surplus/Deficit 1.2 Tcf 461 Bcf 1,500 1 Tcf Intrinsic Value Aquifer 1, Depleted Field Salt Dome (500) (1,000) Bcf $- $ Jan Jan Jan-12 Historic 01-Jan-13 Surplus/Deficit 01-Jan-14 Henry 01-Jan-15 Hub Cash 01-Jan Jan-17 (1,500) $ Tcf Benposium 2017

14 Storage Modeling Three Approaches Bcf Weather Inj/With vs. Avg Temp EIA = α + β1 Temp + β2 Temp^2 EIA = α + β1 HDD + β2 CDD Degrees F Inj/With Avg. Temp

15 Storage Modeling Three Approaches 2. Supply/Demand Implied EIA = Total Supply Total Demand Total Supply Total Demand Total Supply = = 540 Bcf Total Demand = = 490 Bcf

16 Storage Modeling Three Approaches 3. Storage Sample / Flow Based 60 Midwest Sample vs. EIA EIA = α + β1 Sample Bcf Midwest Sample Midwest Non-Sample

17 Bob Yu, Senior Energy Analyst NATURAL GAS DOWNSTREAM FUNDAMENTALS

18 Upstream Midstream Downstream Power Burn Producing Wells Gathering Lines Pipeline Residential Processing Plant Local Distribution Company (LDC) Commercial Industrial Storage

19 Agenda Introduction to natural gas demand sources Drivers of natural gas demand how do we quantify the effects? Long term trends affecting demand growth 19

20 Sources of Natural Gas Demand Residential Commercial Industrial Power Burn 20

21 Space Heating Drives ResComm Demand Residential End Use Commercial End Use 3% 25% 36% 32% 42% 8% 36% Space Heating Water Heating Cooking Other 18% Source: EIA 21

22 Sources of Natural Gas Demand Residential Commercial Industrial Power Burn 22

23 The Many Sectors of Manufacturing 0% 0% 1% 0% 1% 1% 2% 1% 7% 10% 1% 1% 5% 3% 10% 2% 1% Industrial Sector 0% 0% 39% 16% Chemicals Petroleum and Coal Products Food Primary Metals Beverage and Tobacco Products Textile Mills Textile Product Mills Apparel Leather and Allied Products Wood Products Paper Printing and Related Support Plastics and Rubber Products Nonmetallic Mineral Products Fabricated Metal Products Source: EIA 23

24 Primary Use of Natural Gas is Still Heating US Natural Gas Consumption for Manufacturing (2010) 3,000 2,500 2,000 9% of gas consumed is considered feedgas Feedgas Heating/Other Bcf 1,500 1, Chemicals Primary Metals Other Sectors Source: EIA 24

25 Sources of Natural Gas Demand Residential Commercial Industrial Power Burn 25

26 Electricity Load and Fuel Switching Drive Power Burn Demand Annual Retail Sales of Electricity 4,500,000 Annual Power Generation By Fuel Type Million KWh 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 Million KWh 1,000, , ,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, , Other Renewables Nuclear Hydro Coal Gas Source: EIA 26

27 Power Burn Leads Demand Growth Bcf/d Commercial Residential Industrial Power Burn Source: EIA 27

28 Weather is the Primary Driver of Demand Bcf/d Historic Demand Vs. Normal Weather Degree Days ResComm Industrial Power Burn Heating Degree Days Cooling Degree Days Source: Platts Bentek CellModel 28

29 Weather is the Primary Driver of Demand Heating Demand Vs. HDDs Cooling Demand Vs. CDDs 70 4, ,800 Bcf/d ,500 3,000 2,500 2,000 1,500 1, Degree Days Bcf/d ,600 1,400 1,200 1, Degree Days ResComm and Indutrial Demand Total HDDs Power Burn Demand Total CDDs Source: Platts Bentek CellModel, CustomWeather 29

30 US Power Burn Nominations Vs Temperature 30 US Power Plant Nominations Vs. Population-Weighted Temperature Bcf/d Degrees Fahrenheit Sample ( Present) Source: Platts Bentek Power Burn Report 30

31 US Power Burn Nominations Vs Temperature 30 US Power Plant Nominations Vs. Population-Weighted Temperature Bcf/d Degrees Fahrenheit YTD Source: Platts Bentek Power Burn Report 31

32 Commodity Prices Dictate Market Share Gas Equivalent Quantity (Bcf/d) Cumulative Price by Volume Chart Gas Equivalent Price Southeast Northeast Midwest Texas Southwest Rockies Source: EIA

33 US Power Burn Nominations Vs Temperature 30 US Power Plant Nominations Vs. Population-Weighted Temperature Bcf/d YTD $ $2.50 $ $3.50 Above $ Degrees Fahrenheit Source: Platts Bentek Power Burn Report 33

34 Other Factors Influence Power Burn as Well CAISO Hydro Generation BPA Hydro Generation GWh 60 GWh Year Range Year Average 5 Year Range Year Average Source: Platts Bentek Power Burn Report 34

35 Other Factors Influence Power Burn as Well 8 West Power Burn Demand Bcf/d Year Range Year Average 0 1-Jan 1-Feb 1-Mar 1-Apr 1-May 1-Jun 1-Jul 1-Aug 1-Sep 1-Oct 1-Nov 1-Dec Source: Platts Bentek Power Burn Report 35

36 A Holistic View of Power Markets Variable O&M Costs $ $ $ $ $ $ $80.00 $60.00 $40.00 $20.00 $- ERCOT Supply Curve - 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90, ,000 Cumulative Summer Capacity Biomass Coal Natural Gas Wind Solar Hydro Nuclear Oil Other Source: S&P Market Intelligence 36

37 A Holistic View of Power Markets Variable O&M Costs $ $ $ $ $ $ $80.00 $60.00 $40.00 $20.00 $- ERCOT Supply Curve - 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90, ,000 Cumulative Summer Capacity Biomass Coal Natural Gas Wind Solar Hydro Nuclear Oil Other Cheaper Gas Prices Source: S&P Market Intelligence 37

38 A Holistic View of Power Markets Variable O&M Costs $ $ $ $ $ $ $80.00 $60.00 $40.00 $20.00 $- ERCOT Supply Curve - 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90, ,000 Cumulative Summer Capacity Biomass Coal Natural Gas Wind Solar Hydro Nuclear Oil Other Source: S&P Market Intelligence 38

39 A Holistic View of Power Markets Variable O&M Costs $ $ $ $ $ $ $80.00 $60.00 $40.00 $20.00 $- ERCOT Supply Curve - 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90, ,000 Cumulative Summer Capacity Biomass Coal Natural Gas Wind Solar Hydro Nuclear Oil Other Nuke Outages Source: S&P Market Intelligence 39

40 A Holistic View of Power Markets Variable O&M Costs $ $ $ $ $ $ $80.00 $60.00 $40.00 $20.00 $ Minimum Summer Load: 25,107 MW ERCOT Supply Curve - 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90, ,000 Cumulative Summer Capacity 2016 Peak Summer Load: 71,093 MW Biomass Coal Natural Gas Wind Solar Hydro Nuclear Oil Other Source: S&P Market Intelligence 40

41 Longer Term Trends and Risks to Natural Gas Demand Growth 41

42 Gas and Renewables Set to Grow; Coal to Decline 700 US Generating Fuels Capacities GW Coal Natural Gas Renewable and Hydroelectric Nuclear Other Source: Platts Bentek NA Power Plant Databank 42

43 Gas and Renewables Set to Grow; Coal to Decline 120 Natural Gas, Coal, and Renewable Generation Capacity Changes GW (20) (40) New Gas Generation Capacity New Renewable Generation Capacity Coal Retirements Source: Platts Bentek NA Powerplant Databank 43

44 Emerging Renewable Generation a Threat to Fossil Fuel Renewable Generation Market Share 7% 6% 5% 4% 3% 2% 1% 0% Fossil Fuel Vs. Renewable Generation Market Share % 70% 69% 68% 67% 66% 65% 64% 63% 62% Fossil Fuel Generation Market Share Renewable Market Share Fossil Fuel Market Share Source: EIA

45 New Generation Capacity Additions by Year 80 New Generation Capacity Additions by Year (Operating Power Plants) GW Gas Coal Oil Nuclear Renewables Other Source: Platts Bentek NA Powerplant Databank 45

46 Older Existing Coal Generation At Risk of Retiring Source: Platts Bentek NA Powerplant Databank 46

47 Older Existing Coal Generation At Risk of Retiring Source: Platts Bentek NA Powerplant Databank 47

48 Older Existing Coal Generation At Risk of Retiring Source: Platts Bentek NA Powerplant Databank 48

49 Older Existing Coal Generation At Risk of Retiring 300 Cumulative Distribution of Operating Coal Capacity by Age GW GW of existing coal generators greater than 40 years old Years Source: Platts Bentek NA Powerplant Databank 49

50 Offsetting Trends in Residential Demand 0.12 Annual Household Natural Gas Consumption MMcf/year Source: EIA 50

51 Offsetting Trends in Residential Demand 450 US Population Continues to Grow Millions Historic Population Population Projection Source: US Census Bureau 51

52 Exports Continuing to Grow 7 US Natural Gas Exports 6 5 Bcf/d Pipeline Exports to Mexico LNG Feedgas Source: Platts Bentek CellModel 52

53 Exports Will Drive Demand Growth Going Forward 100 US Natural Gas Demand History and Outlook 18% Bcf/d % 14% 12% 10% 8% 6% 4% 2% Percent of Total Demand ResComm Industrial PowerBurn Exports Exports Percent 0% Source: Platts Bentek CellCAST 53

54 Takeaways Weather is the primary driver of natural gas demand. Residential and commercial buildings use natural gas primarily for space and water heating. In the summer months, warm temperatures increase electricity demand which boosts power burn. Power burn demand has been responsible for a large portion of the demand growth over the past decade. Cheaper gas prices and environmental regulations have allowed gas generation to compete with coal generation. While there will likely be continued domestic demand growth, exports will lead the demand charge. 54

55 Thank you! Platts Analytics Mitchell DeRubis Bob Yu 1800 Larimer Street in Denver, CO 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.