Energy Market Outlook Webinar December, 2017
Today s Webinar Agenda Winter Weather Outlook Short-term temperature outlooks Winter weather forecasts colder winter than a year ago? Short-Term Market Fundamentals: Key Winter Price Drivers Natural gas production setting historic highs impact on price volatility? Storage inventories recover from expanding deficit with rare December injection How will new pipeline capacity impact the market this winter? Natural Gas and Power Price Review Long-Term Demand Drivers: U.S. Exports and Global Natural Gas Demand Growth U.S. natural gas export update How will global natural gas demand align with U.S. LNG facilities coming on-line? 2
Weather
Weather Overview Warm temperatures this weekend and early next week will give way to colder trends for the longer term. Renewed blocking over Alaska is expected to drive Arctic air into the Plains, Midwest and Northeast. The South may struggle to see long lived cold outbreaks, however Texas may get quite cold at times. Data source: NOAA 4
Overall Pattern: Mixed, But Leaning Cold 500 MB PRESSURE ANOMALIES EAST PACIFIC OSCILLATION FORECAST NORTH ATLANTIC OSCILLATION FORECAST The models are showing strong blocking over the northeast Pacific and Alaska (blue circle), which correlates to a negative East Pacific Oscillation (cold risks). However the models are showing a general lack of blocking over the north Atlantic, which correlates to a positive North Atlantic Oscillation (warm risks for the Mid-Atlantic and Southeast). These mixed signals may result in huge temperature differences across the Ohio Valley and East at times. Data source: WSI and EarthSat 5
December Demand Picture DECEMBER 2017 REALIZED TEMPERATURE DEPARTURES PLUS FORECAST DECEMBER 2017 HDD RANKS (NEAR THE 10-YEAR NORMAL) Recent warm changes to the short term weather pattern have pushed expected December Heating Degree Days (HDDs) down to near the 10-year normal (around 830 HDDs). The map on the left assumes normal for the last 5 days of December. If the last 5 days of December come in colder than normal, the December HDD number could come in a bit colder than the 10-year normal and closer to last year s total of 856 HDDs. Data sources: CWG and EarthSat 6
Supply & Demand Fundamentals
Key Supply & Demand Balances Supply: Last year, production was at a 2 ½ year low of ~71 Bcf/day. Production now up ~5 Bcf/day year-over-year. Demand: LNG exports up 1.5 Bcf/day and set to expand with Cove Point (0.7) Bcf/day in Q1. Sabine Pass (LA) loaded 23 ships in November for a total of 81 Bcf of LNG, Cove Point taking feed gas in Dec. Exports to Mexico up ~0.5 Bcf/day and will grow in 2018, but be driven by build out of capacity in Mexico. Gas fired generation continuing to replace coal fired generation in the Southeast. Customer Takeaway: Last December, production was at Jun 2014 levels (~71 Bcf/day) with overall strong weather demand. Production has recovered to new all time highs leaving sustained weather demand to maintain the storage deficit and move NYMEX prices higher over course of this coming winter. 8 Data sources: EIA, Constellation
Storage Deficit Contracting Storage ended October at 3,790 Bcf, the first in two years below 4 Tcf (-4%) lower and -2% below 5-year average. EIA s Short Term Energy Outlook (STEO) estimates end of March storage will finish at 1,752 Bcf, which would be consistent with a typical 10-year normal winter where approximately 2,000 Bcf of gas is withdrawn from storage. The NYMEX prompt month contract rallied in late November to $3.21 on three consecutive weeks of storage withdrawals, but has since pulled back to $2.70 on moderating temps in late December. Customer Takeaway: Smaller injections this season were insufficient to return inventories to 4 Tcf. Three consecutive withdrawals in November moved the market to $3.21 before it pulled back on moderating temperatures in mid December. The pace of withdrawals vs. a year ago will be a key driver of NYMEX 12 mo strip pricing this winter. 9 Data sources: EIA, Constellation
Bcf/d Bcf/d Production Sets New Highs for November 76 Lower 48 Dry Gas Production (Bcf/day) 77 EIA Weekly Dry Gas Production Y-o-Y 75 76 75 74 74 73 72 73 72 71 71 70 70 69 2015 2016 2017 Weekly Dry Production 2016/'17 Yr Ago Weekly Production The EIA s most recent production figures show supply averaging 76.2 Bcf/day for the week ending Dec. 6 th, as Northeast (PA,OH, WV) production continues to be a key driver, up +3% year-over-year in Nov. In the EIA s most recent STEO, total dry gas production for 2017 is expected to average 73.5 bcf/day and to 78.9 bcf/day in 2018, an increase of 0.4 bcf/day from the previous STEO. TX production has rebounded from summer lows of 16.75 Bcf/day to ~17 Bcf/day currently and expected growth in the Permian basin via associated gas should spur further growth in 2018. Customer Takeaway: Production has recovered from 2017 lows and continuing to set historic highs in Q4. Northeast production is expected to continue growing in 2018 as new pipeline capacity comes online. Data sources: EIA 10
Pressure on Big Oil WTI Crude prompt-month is up +36% since Jun 2017 low and is up +120% from the $26.21 low back on Feb. 11, 2016. Since 2007, shares in an index of U.S. shale oil-and-gas producers have fallen 31%, while the S&P 500 has risen 80% (according to FactSet); have spent $280B more than generated from operations on shale investments. U.S. oil production has grown to about 9.6 million barrels a day to about 5 million a decade ago. Investors are starting to pressure CEO s to stop focusing on the number of barrels being produced and to start focusing more on profits; the industry hasn t been able to generate positive cash flow since 2014 when oil traded over $100 a barrel. Customer Takeaway: Pressure on oil producers to increase profits could lead to a curtailment in future production that could impact associated gas as well dry gas investment decisions. 11 Source; WSJ, EIA 2016 Constellation Energy Resources, LLC. The offerings described herein are those of either Constellation NewEnergy-Gas Division, LLC, Constellation NewEnergy, Inc., Constellation Energy Services - Natural Gas, LLC, Constellation Energy Services, Inc. or Constellation Energy Services of New York, Inc., affiliates of each other and ultimate subsidiaries of Exelon Corporation. Brand names and product names are trademarks or service marks of their respective holders. All rights reserved. Errors and omissions excepted.
Growth Rate in Northeast Production Exceeds Other Regions EIA s Drilling Productivity data shows Appalachian production (PA,OH and WV) has accelerated its growth rate since 2012, helping to drive national production higher. Production grew from 7.8 Bcf/day in 2012 to 22.1 Bcf/day in 2016; up 14 Bcf/day. Average Appalachia production per rig increased by 10.8 MMcf/day since Jan 2012; driven largely by changes in technology and improved efficiencies. For example, in WV the lateral well length increased from 2,500 ft in 2008 to as long as 15,000 ft in Marcellus. Days to complete wells have declined from 30 in 2011 to 7 days in 2016, lowering overhead costs. Customer Takeaway: Northeast production has seen rapid growth since 2012 and while slowed in 2016, new pipeline takeaway capacity (i.e. Rover, Nexus, Leach X-press) will help it likely expand further in 2018. Data sources: EIA 12
Pipeline Construction Update Rover Pipeline Phase 1A & 1B There are three major pipelines that are in various planning stages to bring Permian oil, NGLs and gas to the Gulf to move a constrained growing supply and serve coastal demand (LNG and petrochemical). In the East, Rover Pipeline formally asked FERC to place Phase 1B into service on Dec 14 th. Phase IA is currently online has averaged (0.9-1.2) Bcf/day over past 30 days. Phase 1B will bring capacity up to 1.8 Bcf/day. Rover has stated Phase II (1.6 Bcf/day) is likely to be completed and online by end of Q1 2018. Customer Takeaway: The robust growth of Northeast gas production has driven the need to move gas out of the region to (Midwest, Canada and Southeast) as well as Cove Point LNG. Pipelines proposed to move Permian gas to the Gulf are in the works but most won t be completed until 2019. 13 Data Source: EIA 2016 Constellation Energy Resources, LLC. The offerings described herein are those of either Constellation NewEnergy-Gas Division, LLC, Constellation NewEnergy, Inc., Constellation Energy Services - Natural Gas, LLC, Constellation Energy Services, Inc. or Constellation Energy Services of New York, Inc., affiliates of each other and ultimate subsidiaries of Exelon Corporation. Brand names and product names are trademarks or service marks of their respective holders. All rights reserved. Errors and omissions excepted.
Cove Point LNG Set to Start Up, Joining Sabine Pass Dominion Energy reported its Cove Point s LNG train in MD is 97% complete and the first cargo is expected to ship in late December; volumes should reach 0.7 Bcf/day in Q1 bring total export capacity to 3.7 Bcf/day. U.S. liquification capacity, currently at 3 Bcf/day (Sabine Pass) is forecasted to expand to 9.6 Bcf/day by Q4 2019, placing the U.S. as the third largest LNG exporter, behind Qatar and Australia. BP (AEO 2017) forecasts U.S. LNG export capacity will increase to 19 Bcf/day by 2035, assuming that after initial projects are absorbed, a second wave of projects in the U.S. will occur post 2020. The second wave of projects will be driven by global LNG prices; largely be driven by demand in Asia and Europe. Customer Takeaway: The U.S. is poised to become the third largest exporter of LNG by 2019 but additional growth will be dependent upon strength in global demand, particularly in Asia and Europe. Source: EIA, BP (Annual Energy Outlook 2017) 14 2016 Constellation Energy Resources, LLC. The offerings described herein are those of either Constellation NewEnergy-Gas Division, LLC, Constellation NewEnergy, Inc., Constellation Energy Services - Natural Gas, LLC, Constellation Energy Services, Inc. or Constellation Energy Services of New York, Inc., affiliates of each other and ultimate subsidiaries of Exelon Corporation. Brand names and product names are trademarks or service marks of their respective holders. All rights reserved. Errors and omissions excepted.
The Growing Global LNG Market LNG Demand Asian countries are increasing their demand for LNG at a greater rate than oil or coal, due to its cleaner attributes. China s LNG imports tripled between 2010 and 2016 reaching 3.5 Bcf/day (17% of total supply in 2016) and is poised to surpass South Korea, in 2018, as the world s second largest LNG importer behind Japan. China began importing LNG in 2006, and its 16 LNG receiving terminals now in operation will be joined by an additional three import terminals, set to commence operations within the next 12 months. One-third of China s future gas demand will be supplied via LNG and pipelines. Customer Takeaway: High growth regions of the world such as Asia will drive future natural LNG demand and will be a major factor in the growth of that sector in the US for years to come. Source: FERC, EIA, BP 15 2016 Constellation Energy Resources, LLC. The offerings described herein are those of either Constellation NewEnergy-Gas Division, LLC, Constellation NewEnergy, Inc., Constellation Energy Services - Natural Gas, LLC, Constellation Energy Services, Inc. or Constellation Energy Services of New York, Inc., affiliates of each other and ultimate subsidiaries of Exelon Corporation. Brand names and product names are trademarks or service marks of their respective holders. All rights reserved. Errors and omissions excepted.
Natural Gas and Power Pricing Trends
NYMEX Shrugs Off the Cold for Now Production: 71.2 Bcf/day at 3-year low Production: 76.7 Bcf/day Historic High Storage: 36 Bcf or - 1.0% < 5-year average Customer Takeaway: Despite bouncing around early in the winter period with both bullish and bearish weather fundamentals driving the market, NYMEX gas prices have been rangebound with resistance at $3.20 resulting from record high gas production and support around $2.70 as a result of a storage deficit to the 5-year average. Source: CQG 17
NYMEX Forward Strip Bucking the Trend $4.25 NYMEX 12-Month Rolling Strip Nov-Oct Trend $4.00 $3.75 Current Price $2.80 $3.50 $3.25 $3.00 $2.75 $2.50 $2.25 $2.00 N D J F M A M J J A S O 2014/2015 2015/2016 2016/2017 2017/2018 Customer Takeaway: Unlike the past three years heading into winter, where we saw some degree of a break-out in one direction or the other, the current 12-month gas strip continues to consolidate around the $3.00 pivot point as a result of strong production limiting the upside and a storage deficit providing price support. Data sources: Constellation 18
NYMEX Forward Curve vs. Year Ago Customer Takeaway: Forward prices for 2018 and 2019 were backwardated (downward sloping) ahead of winter based the deficit to the 5-year average and uncertainty around heating season demand. Source: NYMEX 19
Year-Over-Year Change in Forward Power Prices New England Texas SoCal Mid-Atlantic Northern Illinois Michigan Note: These energy-only power prices are an indicative, non-transactable snapshot of the wholesale market as of COB 12/8/17. Customer Takeaway: Mixed weather patterns across the U.S., proposed regulatory changes, pending generation retirements, and operational challenges have had varying impacts on forward power prices ahead of winter. Source: Constellation 20
Updated: November 28, 2017 Weekly Forward Power Price Update Customer Takeaway: After a brief period of price support in November, particularly on the front-end of the curve, forward power calendar strips have retreated 3-4% the past couple of weeks and are holding at previous levels above all-times lows last seen in October ahead of winter. Prices as of COB 12/12/2017 21
Key Supply & Demand Drivers for 2018 Key Drivers (Winter 2017/2018) and 12-Month Term: Supply: Does supply continue to set new highs to keep up with export demand? End of March storage levels? If storage finishes at deficit to 5-year average Bullish, if surplus Bearish. Growth rates in Marcellus/Utica and Permian shale plays remain key. Demand: Pipeline infrastructure projects key driver to move Northeast gas to Markets: Growth in associated gas in Permian will largely be driven oil drilling will investors start to extract dividends in exchange for lower production? Weather: Weather will drive (Residential and Commercial) heating demand and impact end of March storage levels. Current Impact: Neutral LNG exports: Cove Point adding 0.7 Bcf/day in Q1 2018. Cameron and Freeport come online in 2018. Exports to Mexico continue to expand, currently 4.5 Bcf/day. Growth in gas fired power generation load, particularly in the Southeast as older coal units are retired. Long term ISO load growth has slowed since 2009 as energy efficiency programs have reduced demand. Growth in renewables (wind and solar) has continued to weigh on power prices and can displace gas fired generation. Summary: Where storage finishes March either at deficit or surplus to 5-year average will be key to NYMEX. In the longer term; does the LNG, Mexican exports and growth in gas fired generation demand outpace continued growth in production, particularly the Northeast? 22
Appendix
NOAA and Model Forecasts (Updated) OFFICIAL NOAA FORECAST MODEL FORECASTS Data source: NOAA and IRI 24
Gas Infrastructure Projects YTD 17: 1.5 Bcf/d Under Construction*: 3.2 Bcf * Under construction with completion expected in 2018 The most significant project completed in 2017 remains Rover Phase IA due to its size (1.2 Bcf) and the supply it will provide to the Midwest. TETCO s Adair and Access South have brought additional supply to Gulf Coast. 2018 will likely see the completion of several Northeast projects (Rover, Nexus, Rayne) while in 2019, there are several new oil and gas pipelines in the Permian that will move oil and gas to the Gulf Coast. Customer Takeaway: The rapid growth in Northeast shale has led to supply exceeding demand; the projects coming online in 2018 will help move gas to new markets and likely lift constrained gas pricing points. 25 Data Source: EIA
Disclaimer The information contained herein has been obtained from sources which Constellation NewEnergy, Inc., Constellation NewEnergy-Gas Division, LLC, Constellation Energy Services - Natural Gas, LLC, Constellation Energy Services, Inc. and/or Constellation Energy Services of New York, Inc. (collectively, Constellation ) believes to be reliable. Constellation does not represent or warrant as to its accuracy or completeness. All representations and estimates included herein constitute Constellation s judgment as of the date of the presentation and may be subject to change without notice. This material has been prepared solely for informational purposes relating to our business as a physical energy provider. We are not providing advice regarding the value or advisability of trading in commodity interests as defined in the Commodity Exchange Act, 7 U.S.C. 1-25, et seq., as amended (the CEA ), including futures contracts, swaps or any other activity which would cause us or any of our affiliates to be considered a commodity trading advisor under the CEA. Constellation does not make and expressly disclaims, any express or implied guaranty, representation or warranty regarding any opinions or statements set forth herein. Constellation shall not be responsible for any reliance upon any information, opinions, or statements contained herein or for any omission or error of fact. All prices referenced herein are indicative and informational and do not connote the prices at which Constellation may be willing to transact, and the possible performance results of any product discussed herein are not necessarily indicative of future results. This material shall not be reproduced (in whole or in part) to any other person without the prior written approval of Constellation. 2017 Constellation Energy Resources, LLC. The offerings described herein are those of either Constellation NewEnergy-Gas Division, LLC or Constellation NewEnergy, Inc., affiliates of each other and ultimate subsidiaries of Exelon Corporation. Brand names and product names are trademarks or service marks of their respective holders. All rights reserved. Errors and omissions excepted. 26