U.S. Natural Gas Market Dynamics University of Houston Global Energy Management Institute The Future of the Gulf Coast Petrochemical Industry Michael Speltz April 29, 2005 ChevronTexaco 2002
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Discussion Overview Gas Drilling & Gas Price Gas & Oil Price Relationship Power Generation Demand and Coal Price Industrial Demand Henry Hub Price Projections Projected LNG Imports & Potential Impact on Gas Liquids 3
U.S. Gas Production Essentially Flat Despite Sharply Higher Drilling Activity U.S. Dry Gas Production & Gas Oriented Rig Count 54 53 52 12 Month Avg Gas Prod'n Month Avg Gas Rigs 1150 1050 950 Production, BCFD 51 50 49 48 47 Production Rigs 850 750 650 550 Gas Rig Count 46 450 45 350 44 250 Dec-86 Feb-88 Apr-89 Jun-90 Aug-91 Oct-92 Dec-93 Feb-95 Apr-96 Jun-97 Aug-98 Oct-99 Dec-00 Feb-02 Apr-03 Jun-04 Source: EIA, Baker Hughes, CVX 4
Drilling Activity is Responsive to Gas Price 1,150 Gas Rig Count vs 12 Month Strip 1,050 950 Gas Rig Count 850 750 650 550 450 350 1.5 2.5 3.5 4.5 5.5 6.5 7.5 12 Month NYMEX Strip, $/MMBTU Jan'96 - Feb'05 Price data lagged by 5 months. Source: NYMEX, Baker Hughes, CVX 5
Oil & Gas Price Relationship has Changed 11 Henry Hub & USGC Oil Prices Henry Hub 9 USGC LS Diesel USGC 1%S Resid 7 5 3 1 6 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 $/MMBTU Source: Platts, CVX
Henry Hub Price has Strengthened Significantly Relative to Crude Oil 7 6 HH / WTI Ratio Henry Hub Price Henry Hub Price and Ratio to WTI 110% 100% 90% $/MMBTU 5 4 3 2 80% 70% 60% 50% 40% HH / WTI, % 1 1991 1993 1995 1997 1999 2001 2003 30% Source: Platts, CVX 7
Projected Power Gen Capacity Additions Dominated by Gas 40 Net Capacity Additions 30 20 10 GW 0-10 -20-30 Coal Steam Oil & Gas Steam Gas Combined Cycle Diesel Combust Turbine Renewables 2004-2010 2011-2015 2016-2020 Source: EIA AEO 2005, CVX 8
Gas Projected to Remain Fastest Growing Source of Power Generation U.S. Total Power Generation by Primary Energy 6,000 5,000 Natural Gas Renewable / Other Coal Nuclear Oil 4,000 BKWh 3,000 2,000 1,000-2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: EIA AEO 2005, CVX 9
In the East, Gas Can Compete with Inefficient Coal at ~$4/MMBTU 5.0 4.5 4.0 Adjusted Central Appalachain Coal Costs 40% Heat Rate Adjustment Nox & SOx Emissions Transportation FOB Coal Price 3.5 $/MMBTU 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Coal Cost Basis: $25/ton Old Contracts No Controls $40/ton New Contracts No Controls $60/ton Spot Price With Controls Source: PIRA, CVX 10
Industrial Gas Demand - Vulnerable to Additional Losses? Mfg Employees & Industrial Dmnd vs. Gas Price 1.10 Henry Hub 10 Mfg EE & Dmnd Index, 1998=1.0 1.05 1.00 0.95 0.90 0.85 Mfg Employment Index Indus Gas Dmnd Index 0.80 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 9 8 7 6 5 4 3 2 Henry Hub, $/MMBTU 1 Source: EIA,BLS, Platts, CVX 11
Gas Price Expected to Remain Above Longterm Average Henry Hub Price Projections 8.0 7.5 7.0 6.5 6.0 NPC 2003 Reactive Path EIA AEO 2005 Wood Mackenzie PIRA $2004 / MMBTU 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 Average WTI, $/Bbl HH / WTI Ratio NPC 2003 20.25 150+% EIA 2005 30.66 80% Wood Mack 26.50 90% PIRA 40.00 90% 1990 1995 2000 2005 2010 2015 2020 12
World Gas Prices are Already Becoming More Closely Linked $9 World Gas Prices (US$/MMBtu) $8 $7 U.S. Henry Hub Japan LNG regassified U.K. NBP $6 $5 $4 $3 $2 $1 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Source: Platts, Heron, NOC, CVX 13
LNG Imports Projected to Increase Significantly 22 20 18 16 14 EIA 2003 EIA 2005 CERA Wood Mackenzie Historical & Projected LNG Imports BCFD 12 10 8 6 4 2 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 14
Greater Role for LNG may Shift Gas Liquids Supply Mole % Indigenous Gas at Wellhead South TX GOM Shelf Onshore LA LNG Offshore TX Trinidad Qatar Nigeria Methane 88.9 94.0 86.8 95.1 96.2 90.1 90.7 Ethane 5.9 2.9 6.2 1.2 3.4 6.5 8.5 Propane 2.1 1.1 2.5 0.3 0.3 2.4 0.8 Butane & Heavier 1.6 1.1 2.0 0.4 0.1 1.0 0.1 N2 & CO2 1.6 0.9 2.5 2.9 0.0 0.1 0.0 Source: Industry Data, CVX 15
Gas Liquids Recovery Influenced by the Liquids Gas Price Spread C2 & C3 Production and C2 - Gas Spreads 2.0 C3 Prodn 4.5 1.8 C2 Prodn C2 Mt Belview - Henry Hub 4.0 1.6 3.5 1.4 3.0 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 MMBD Mt Belvieu C2 - Henry Hub, right axis 2.5 2.0 1.5 $/MMBTU 1.0 0.5 0.0 (0.5) Source: EIA,Platts, CVX 16
Summary New Sources of Gas Supply Required to Meet Projected Demand Alignment Needed in Energy, Environmental, Regulatory & Foreign Policies Energy Policy Should Encourage Greater Fuel Diversity for Power Generation Gas Prices Expected to Remain Above Long-term Historical Average World Gas Prices Becoming More Closely Linked Greater Role for LNG may Shift Gas Liquids Supply 17
Thank You! Questions? 18