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.
Mitchell DeRubis, Senior Energy Analyst NATURAL GAS MIDSTREAM FUNDAMENTALS
Where it s needed, when it s needed Production Demand
From Wellhead Producing Basin Gathering Processing Source: EIA Benposium 2017
To Burner-Tip Storage Industrial Res/Comm LDC Power Power Industrial Storage Benposium 2017
Transportation & Pricing Demand Supply Surplus $ $ $ $ $ Hub $$$ $ $ $ $ $ $ $ $ Prices reflect Supply/Demand Balance $$$$$ Shortage Shortage $$$$ Benposium 2017
Firm Reserved Reservation rate (fixed) + variable costs Interruptible Variable costs only Benposium 2017
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
How Does This Apply to Pipeline Economics? P ATC MC MR = D Q
Benposium 2017
Benposium 2017
STORAGE 1. Natural Gas 2. NGLs 3. Crude Oil Depleted Salt Aquifer Caverns Field Salt Dome Benposium 2017
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 $2.40 500 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 1,000 500 - Depleted Field Salt Dome (500) (1,000) Bcf $- $2.20 0 01-Jan-10 01-Jan-11 01-Jan-12 Historic 01-Jan-13 Surplus/Deficit 01-Jan-14 Henry 01-Jan-15 Hub Cash 01-Jan-16 01-Jan-17 (1,500) $2.00 1.5 Tcf Benposium 2017
Storage Modeling Three Approaches Bcf 200 150 100 50 0-50 -100-150 -200-250 -300-350 1. Weather Inj/With vs. Avg Temp EIA = α + β1 Temp + β2 Temp^2 EIA = α + β1 HDD + β2 CDD 90 80 70 60 50 40 30 20 10 0 Degrees F Inj/With Avg. Temp
Storage Modeling Three Approaches 2. Supply/Demand Implied EIA = Total Supply Total Demand Total Supply Total Demand Total Supply = 496 +41 +3 = 540 Bcf Total Demand = 29 + 15 + 446 = 490 Bcf
Storage Modeling Three Approaches 3. Storage Sample / Flow Based 60 Midwest Sample vs. EIA 40 20 0 EIA = α + β1 Sample Bcf -20-40 -60-80 -100 Midwest Sample Midwest Non-Sample
Bob Yu, Senior Energy Analyst NATURAL GAS DOWNSTREAM FUNDAMENTALS
Upstream Midstream Downstream Power Burn Producing Wells Gathering Lines Pipeline Residential Processing Plant Local Distribution Company (LDC) Commercial Industrial Storage
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
Sources of Natural Gas Demand Residential Commercial Industrial Power Burn 20
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
Sources of Natural Gas Demand Residential Commercial Industrial Power Burn 22
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
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 1,000 500 - Chemicals Primary Metals Other Sectors Source: EIA 24
Sources of Natural Gas Demand Residential Commercial Industrial Power Burn 25
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 1,000,000 500,000-2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000-2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Other Renewables Nuclear Hydro Coal Gas Source: EIA 26
Power Burn Leads Demand Growth 80 70 60 50 Bcf/d 40 30 20 10 - Commercial Residential Industrial Power Burn Source: EIA 27
Weather is the Primary Driver of Demand Bcf/d 100 90 80 70 60 50 40 30 20 10 - Historic Demand Vs. Normal Weather 30 25 20 15 10 5 - Degree Days ResComm Industrial Power Burn Heating Degree Days Cooling Degree Days Source: Platts Bentek CellModel 28
Weather is the Primary Driver of Demand Heating Demand Vs. HDDs Cooling Demand Vs. CDDs 70 4,000 35 1,800 Bcf/d 68 66 64 62 60 58 56 54 52 3,500 3,000 2,500 2,000 1,500 1,000 500 - Degree Days Bcf/d 30 25 20 15 10 5-1,600 1,400 1,200 1,000 800 600 400 200 - Degree Days ResComm and Indutrial Demand Total HDDs Power Burn Demand Total CDDs Source: Platts Bentek CellModel, CustomWeather 29
US Power Burn Nominations Vs Temperature 30 US Power Plant Nominations Vs. Population-Weighted Temperature 25 20 Bcf/d 15 10 5 15 25 35 45 55 65 75 85 95 Degrees Fahrenheit Sample (2014 - Present) Source: Platts Bentek Power Burn Report 30
US Power Burn Nominations Vs Temperature 30 US Power Plant Nominations Vs. Population-Weighted Temperature 25 20 Bcf/d 15 10 5 15 25 35 45 55 65 75 85 95 Degrees Fahrenheit 2014 2015 2016 2017 YTD Source: Platts Bentek Power Burn Report 31
Commodity Prices Dictate Market Share Gas Equivalent Quantity (Bcf/d) 30 25 20 15 10 5 - Cumulative Price by Volume Chart Gas Equivalent Price Southeast Northeast Midwest Texas Southwest Rockies Source: EIA 923 32
US Power Burn Nominations Vs Temperature 30 US Power Plant Nominations Vs. Population-Weighted Temperature 25 20 Bcf/d 15 10 5 2014 2015 2016 2017 YTD $0.00 - $2.50 $2.50 - $3.50 Above $3.50 15 25 35 45 55 65 75 85 95 Degrees Fahrenheit Source: Platts Bentek Power Burn Report 33
Other Factors Influence Power Burn as Well CAISO Hydro Generation BPA Hydro Generation 120 400 100 350 300 80 250 GWh 60 GWh 200 40 150 100 20 50 - - 5 Year Range 2017 5 Year Average 5 Year Range 2017 5 Year Average Source: Platts Bentek Power Burn Report 34
Other Factors Influence Power Burn as Well 8 West Power Burn Demand 7 6 5 Bcf/d 4 3 2 1 5 Year Range 2017 5 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
A Holistic View of Power Markets Variable O&M Costs $200.00 $180.00 $160.00 $140.00 $120.00 $100.00 $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 90,000 100,000 Cumulative Summer Capacity Biomass Coal Natural Gas Wind Solar Hydro Nuclear Oil Other Source: S&P Market Intelligence 36
A Holistic View of Power Markets Variable O&M Costs $200.00 $180.00 $160.00 $140.00 $120.00 $100.00 $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 90,000 100,000 Cumulative Summer Capacity Biomass Coal Natural Gas Wind Solar Hydro Nuclear Oil Other Cheaper Gas Prices Source: S&P Market Intelligence 37
A Holistic View of Power Markets Variable O&M Costs $200.00 $180.00 $160.00 $140.00 $120.00 $100.00 $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 90,000 100,000 Cumulative Summer Capacity Biomass Coal Natural Gas Wind Solar Hydro Nuclear Oil Other Source: S&P Market Intelligence 38
A Holistic View of Power Markets Variable O&M Costs $200.00 $180.00 $160.00 $140.00 $120.00 $100.00 $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 90,000 100,000 Cumulative Summer Capacity Biomass Coal Natural Gas Wind Solar Hydro Nuclear Oil Other Nuke Outages Source: S&P Market Intelligence 39
A Holistic View of Power Markets Variable O&M Costs $200.00 $180.00 $160.00 $140.00 $120.00 $100.00 $80.00 $60.00 $40.00 $20.00 $- 2016 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 90,000 100,000 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
Longer Term Trends and Risks to Natural Gas Demand Growth 41
Gas and Renewables Set to Grow; Coal to Decline 700 US Generating Fuels Capacities 600 500 GW 400 300 200 100 - Coal Natural Gas Renewable and Hydroelectric Nuclear Other Source: Platts Bentek NA Power Plant Databank 42
Gas and Renewables Set to Grow; Coal to Decline 120 Natural Gas, Coal, and Renewable Generation Capacity Changes 100 80 60 GW 40 20 - (20) (40) 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 New Gas Generation Capacity New Renewable Generation Capacity Coal Retirements Source: Platts Bentek NA Powerplant Databank 43
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 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 71% 70% 69% 68% 67% 66% 65% 64% 63% 62% Fossil Fuel Generation Market Share Renewable Market Share Fossil Fuel Market Share Source: EIA 923 44
New Generation Capacity Additions by Year 80 New Generation Capacity Additions by Year (Operating Power Plants) 70 60 50 GW 40 30 20 10 - Gas Coal Oil Nuclear Renewables Other Source: Platts Bentek NA Powerplant Databank 45
Older Existing Coal Generation At Risk of Retiring Source: Platts Bentek NA Powerplant Databank 46
Older Existing Coal Generation At Risk of Retiring Source: Platts Bentek NA Powerplant Databank 47
Older Existing Coal Generation At Risk of Retiring Source: Platts Bentek NA Powerplant Databank 48
Older Existing Coal Generation At Risk of Retiring 300 Cumulative Distribution of Operating Coal Capacity by Age 250 200 GW 150 100 50 150 GW of existing coal generators greater than 40 years old - 5 15 25 35 45 55 65 75 85 Years Source: Platts Bentek NA Powerplant Databank 49
Offsetting Trends in Residential Demand 0.12 Annual Household Natural Gas Consumption 0.10 0.08 MMcf/year 0.06 0.04 0.02 - Source: EIA 50
Offsetting Trends in Residential Demand 450 US Population Continues to Grow 400 350 300 Millions 250 200 150 100 50-1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 Historic Population Population Projection Source: US Census Bureau 51
Exports Continuing to Grow 7 US Natural Gas Exports 6 5 Bcf/d 4 3 2 1-2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Pipeline Exports to Mexico LNG Feedgas Source: Platts Bentek CellModel 52
Exports Will Drive Demand Growth Going Forward 100 US Natural Gas Demand History and Outlook 18% Bcf/d 90 80 70 60 50 40 30 20 10 16% 14% 12% 10% 8% 6% 4% 2% Percent of Total Demand - 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 ResComm Industrial PowerBurn Exports Exports Percent 0% Source: Platts Bentek CellCAST 53
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
Thank you! Platts Analytics Mitchell DeRubis mderubis@spglobal.com Bob Yu byu@spglobal.com 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.