NG Market Notes, October 2012
 

NG Market Notes, October 2012

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In the October 2012 issue of NG Market Notes, Navigant Director Gordon Pickering discusses the recent phenomenon of coal-to-gas fuel switching with respect to electric generation. ...

In the October 2012 issue of NG Market Notes, Navigant Director Gordon Pickering discusses the recent phenomenon of coal-to-gas fuel switching with respect to electric generation.

As a result of relative fuel costs and emission regulation impacts, natural gas has recently displaced a significant amount of coal-fired generation. Furthermore, a permanent replacement of significant generation capacity is expected in the long-term as coal-fired power plants retire. When the switching phenomenon begins to wind down, new or expanded markets, such as LNG exports and industrial gas use, will be important in sustaining the development of the country's abundant natural gas resources.

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NG Market Notes, October 2012 NG Market Notes, October 2012 Document Transcript

  • A publication by Navigant’s Energy Practice » October 2012Contents Lessons from the Natural Gas Market1 Lessons from the Natural Gas Market Coal-to-Gas Switching – A Phenomenon – Coal-to-Gas Switching – A Phenomenon It seems as though the industry trade press and public news sources these days are8 Natural Gas Market Charts all reporting on “coal-to-gas fuel switching”. So, what is the current fuel switching11 Legislative and Regulatory Highlights buzz really all about?14 About Navigant Coal-to-gas switching occurs for two primary reasons, both related to lower natural gas prices relative to coal. First, in the near term, natural gas fleets can increase their utiliza- tion by ramping up idle capacity in order to displace more expensive coal-fired genera- tion. Second, in the longer term, natural gas generation can replace retiring coal-fired generation capacity. In both cases, the drivers are environmental regulations and the relative costs of the two fuels. Navigant’s analysis indicates that short-term coal-to-gas switching has resulted in an average of about 6 Bcfd1 of extra natural gas consump- tion during the first half of 2012 versus the first half of 2011. This represented about 8.4 percent of the total U.S. gas market during the first half of 2012. Navigant believes that natural gas prices will rise moderately in the future, causing the short-term displace- ment of coal by gas to diminish slightly. However, with about 48 GW2 of coal capacity expected to retire between 2011 and 2017, long-term average displacement of coal-fired with gas-fired generation, due to the retirements, is expected to be about 4 to 5 Bcfd. It is also important to note that expected retirements will not be evenly distributed around the country, but mainly expected in the Mid-West, Mid-Atlantic, and the Southeast regions. Coal plant retirements will impact the West, but to a much lesser degree primarily because the region is less dependent upon coal generation than oth- ers across the country. Coal-fired plants make up 21 percent of total capacity in the Western Energy Coordinating Council (WECC) NERC3 region versus the Reliability First Corporation (RFC) NERC region in the Great Lakes area where 46 percent of the electric capacity is provided by coal-fired power plants. Thus, when speaking of coal-to-gas switching for the purposes of this article, one or both of the following are generally being referred to: »» Displacement of coal-fired generation by natural gas-fired generation due to short-term fuel price competition. Historically, natural gas has been more expensive than coal and as a result, coal plants have been dispatched to meet electrical demand before natural gas plants. Over the last few years, the situation has been that world- wide coal demand has pushed coal prices up, while the development of shale gas in North America has pushed domestic natural gas prices down. As a result, coal prices have become higher than gas prices in several markets. 1. Estimated from the average monthly increase between 2011 and 2012 in natural gas generation during the months of January to June (25 TWh*8MMBtu/MWh/30 days). 2. 48 GW is taken from Navigant’s Coal Retirement & Retrofit Model, and includes announced retirements and estimated unannounced retirements driven by MATS, as well as actual retirements during 2011 and YTD 2012. Other recent retirement estimates include 49 GW by EIA and 50 GW by ICF International, both published in June 2012. 3. North American Electricity Reliability Corporation, FERC’s designated Electricity Reliability Organization for the U.S.
  • October 2012»» Retirement of coal-fired capacity and replacement with natural gas- Coal and Natural Gas Prices FIGURE 1: COAL AND NATURAL GAS PRICES fired capacity. In these instances $10.00 older, less efficient coal plants are $9.00 retired and where necessary for $8.00 reliability, replaced with natural $7.00 $/MMBtu gas-fired power plants. $6.00 $5.00Coal-to-Gas Switching Based on $4.00Fuel Costs $3.00The first driver behind coal-to-gas $2.00switching is the relative cost of natu- $1.00ral gas versus coal. Figure 1 indicates $-the historical prices of these two 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012commodities. The comparison showshistorical natural gas prices at Henry Weighted average coal price Natural Gas at Henry HubHub, Louisiana (the primary refer- Source: Navigant/Ventyxence hub for U.S. national naturalgas prices and the delivery point for FIGURE 2: U.S. COAL-FIRED POWER PLANTSthe NYMEX futures contract) versusweighted average U.S. coal prices.Historically, there has been a widegap between the prices of the twofuels, with natural gas being signifi-cantly higher priced on an energyequivalent basis. The gap narrowedconsiderably beginning in 2009, andin 2012 the cost of the two fuels hasessentially converged. Coal priceshave been trending higher in recentyears as world demand for coal hasgrown and the cost of mining coal inthe eastern U.S. has increased. At thesame time, the transforming force ofunconventional shale gas has contin-ued to push natural gas prices downdue to continuing supply growth Source: Navigant/Ventyxand drilling efficiency improvements projected to remain stable and the plants, indicating the vast majority oflowering the costs of production. absolute price will remain low for coal-fired generation is located east ofShale gas was always known to exist the foreseeable future as price vola- the Mississippi River, near or conve-in many areas, but as Navigant first tility will be significantly diminished niently served by supplies of Centralreported in 20084, it was largely un- in the new North American gas mar- Appalachian coal. Figures 3 and 4developed until just a few years ago. ket environment. highlight the price differences be-The cost and effectiveness of hori- tween coal and gas at the key associ-zontal drilling and hydraulic frac- Figure 2 shows the general location of ated price points for the Appalachianturing have improved to the point many of the nation’s coal-fired power Basin and the Powder River Basin.where the long-term price of gas is4. ‘North American Natural Gas Supply Assessment’, prepared by Navigant for the American Clean Skies Foundation, July 4, 2008, available at http://www.navigant.com/~/media/Site/Insights/Energy/NCI_ Natural_Gas_Resource_Report.ashx 2
  • October 2012 price charts. Of course, there will be While coal and natural gas prices converged on a national a wide variation in the efficiencies level in 2012, regional differences in fuel prices, combined and delivered fuel costs for both coal with the regional distribution of coal plants, are resulting in and natural gas power plants, so not all coal generation will be displaced more pronounced impacts of coal-to-gas competition in some at the same time. Additionally, the regions of the country. vast majority of coal plants purchase coal under long-term contracts, andIn most of the eastern region of the The outlook for coal generation in the thus not all plants are immediatelyU.S., natural gas is now cheaper than Mid-West and Mid-Atlantic is impact- exposed to the full impact of pricecoal. Figure 3 shows historical prices ed by the fact that they are among the fluctuations.for the Dominion natural gas hub oldest and least efficient in the coun-in Pennsylvania and Central Appa- try. The average heat rate, defined as While coal has generally maintainedlachian coal in West Virginia, Penn- the heat input required to generate its price advantage relative to natu-sylvania and Ohio, along with the one kWh of electricity, is greater than ral gas in the western U.S., the overallNYMEX futures for both these com- 11,000 Btu for coal-fired plants in this coal-to-gas switching phenomenonmodities over the next three years.5 area. A new, efficient combined-cycle has not been affected due to regionalAs can be seen, the price advantage gas power plant only requires around factors. The most prolific coal basin infor natural gas is expected to remain 7,000 Btu to generate one kWh of the U.S., producing about 40 percentin place through the end of 2014 – electricity. Adjusting for these heat of U.S. coal, is Wyoming’s Powderand perhaps longer — based on the rate differentials contributes to the River Basin. The historical relation-NYMEX prices during the first two price advantage in favor of natural ship between Powder River Basinweeks of August 2012. gas generation, and is included in the coal and Colorado Interstate Gas FIGURE 3: APPALACHIAN COAL AND GAS PRICES Northeast Coal vs Gas Prices Central App Coal Dominion Gas $16.00 $14.00 NYMEX Settlement Price NYMEX Futures Price $12.00 $10.00 $/MMBtu $8.00 $6.00 $4.00 $2.00 $0.00 2007-07 2007-10 2008-01 2008-04 2008-07 2008-10 2009-01 2009-04 2009-07 2009-10 2010-01 2010-04 2010-07 2010-10 2011-01 2011-04 2011-07 2011-10 2012-01 2012-04 2012-07 2012-10 2013-01 2013-04 2013-07 2013-10 2014-01 2014-04 2014-07 2014-10 Source: Navigant/Platts5. Coal prices have been adjusted to reflect transport costs and the higher heat rate of coal-fired versus gas-fired power plants. 3 View slide
  • October 2012 FIGURE 4: WESTERN COAL AND GASPrices Western Region Coal vs Gas PRICES Powder River Basin Coal Colorado Interstate Gas $16.00 $14.00 NYMEX Settlement Price NYMEX Futures Price $12.00 $10.00 $/MMBtu $8.00 $6.00 $4.00 $2.00 $0.00 2007-07 2007-10 2008-01 2008-04 2008-07 2008-10 2009-01 2009-04 2009-07 2009-10 2010-01 2010-04 2010-07 2010-10 2011-01 2011-04 2011-07 2011-10 2012-01 2012-04 2012-07 2012-10 2013-01 2013-04 2013-07 2013-10 2014-01 2014-04 2014-07 2014-10 Source: Navigant/Platts(CIG) is shown in Figure 4. Natu- FIGURE 5:Average U.S. Monthly Electricity Production by FuelFUEL TYPE AVERAGE U.S. MONTHLY ELECTRICITY PRODUCTION BY Typeral gas has been less expensive thancoal in the western states by a smaller (Average Over Jan-Jun) (AVERAGE OVER JAN-JUN)margin and for a shorter time than 160,000in the eastern U.S., and is currently 140,000not lower cost than Powder River 120,000coal. Despite the high volume and Thousand MWh 100,000low price of Powder River Basin coal,it has not impeded significant coal- 80,000to-gas switching in the U.S. for two 60,000main reasons. First, because only 10 40,000percent of the coal-fired power plant 20,000fleet is located in the western U.S., 0near the Powder River Basin. Second, 2010 2011 2012because the Powder River Basin coalis sub-bituminous coal, which is “less Coal Natural Gas Source: Navigant/EIA Navigant/EIAdesirable” than Appalachian “metal-lurgical” coal due to its lower heat tion dropped an average of 28.5 TWh/ trated in Figure 5. The displacementcontent. Thus, the eastern U.S. is ef- month6 or 20 percent during the first of coal-fired generation with gas-firedfectively the key competitive battle- half of 2012 compared to the first half generation has amounted to an aver-ground area for coal and gas competi- of 2011, while natural gas generation age of about 6 Bcfd, with the majoritytion and lately for switching. increased by 25 TWh/month7 or 34 of the switching occurring in the RFCThe low cost of natural gas in the east- percent. The changing mix for electric and SERC Reliability Corporation8ern U.S. relative to the cost of coal is generation between coal and natural NERC regions.the main reason U.S. coal-fired genera- gas over the last three years is illus-6. EIA data for MWh of generation by fuel type.7. EIA data for MWh of generation by fuel type.8. The SERC Reliability Corporation is the successor to the Southeast Electric Reliability Council. 4 View slide
  • October 2012It is important to note that many of the coal FIGURE 6: DISPLACEMENT OF COAL CAPACITYplants currently reducing output due to low nat-ural gas prices are the same coal plants sched-uled for retirement. So, in one sense, coal-to-gas”switching” will continue on a more permanentlevel, due to the replacement or the retirementof coal-fired capacity, even though short-termswitching based solely on fuel prices shoulddecrease. Following this pattern, as natural gasprices trend moderately upwards towards whatNavigant believes is the fuel’s natural long-termsustainable price range of $4-$6 per MMBtu,and depending upon fluctuating coal prices, therecent discount of natural gas prices to coal pric-es may disappear. Only time will tell. What wedo know is that the 48 GW of coal plant retire-ments expected between 2011 and 2017, notedearlier, are apt to put downward pressure oncoal prices. Nevertheless, the recent prolifera-tion of shale gas production should ensure that Source: EIAcoal and natural gas prices remain in close prox-imity to one another. capacity in the U.S. The most significant of these rules areAs can be seen in Figure 6, the Marcellus shale deposit lies the Mercury and Air Toxics Standards (MATS) and theunder the heart of U.S. coal country and will drastically Cross State Air Pollution Rule (CSAPR). MATS, formerlychange natural gas flow patterns and prices in a region known as the Maximum Achievable Control Technology,that has traditionally imported the majority of its natural set emission limits on mercury and other toxic pollutantsgas. It has been estimated that the Marcellus shale has to- from power plants. As the rule does not allow for tradingtal recoverable reserves exceeding 400 Tcf, and estimates of credits between plants, owners cannot over comply atcontinue to rise as development of the shale continues. one site and leave another without controls. Coal plantsSome of today’s estimates are close to double the estimate have until April 2015 to comply with MATS, with individ-in Navigant’s 2008 North American Natural Gas Assess- ual states able to grant an additional year if needed. Thement completed for the American Clean Skies Founda- timeline can be extended to a fifth year in exceptional cir-tion, where Navigant first identified the rapidly expand- cumstances where a unit is required for reliability.ing development of natural gas from shale gas resources.9 CSAPR was designed to meet the requirements of theFurthermore, the Marcellus overlaps a portion of the Utica Clean Air Act and the Regional Haze Rule. The Clean Airshale, which is still in the early stages of exploration and Act requires EPA to control NOx and SO2, as well as par-could contain even more natural gas than Marcellus. So, ticulate matter. The Regional Haze Rule was designed tothe ability of natural gas to compete head-on with coal for limit emissions that degrade visibility in national parksthe long term appears certain. and wilderness areas. Under CSAPR, a pollution limit orWhile fuel cost is the main driver of the first type of coal- budget was set for each state that contributed significant-to-gas switching, it is only one part of the reason why the ly to a downwind state’s pollution problems. The agencyretirement of old coal-fired generation units is occurring. also adopted a cap-and-trade approach that would allowThe Environmental Protection Agency (EPA) has issued intrastate and limited interstate trading of emissions al-several rules that will significantly impact the operation lowances, but also set hard limits on how much each stateof the coal-fired power plant fleet, which currently con- could emit.stitutes more than 30 percent of the electrical generation9. Navigant estimated the Marcellus recoverable resource in 2008 at 262 Tcf; higher ranges are reflected in recent estimates by consulting companies IHS (267 Tcf to 534 Tcf) and ICF (460 Tcf to 698 Tcf). See ‘New Figures on Shale Gas Optimistic’, Pittsburgh Tribune-Review, March 20, 2012, (http://triblive.com/x/pittsburghtrib/news/regional/s_787326.html). 5
  • October 2012On Aug. 21, 2012 the U.S. Court of FIGURE 7: ACTUAL AND ANNOUNCED COAL-FIRED RETIREMENTS Total Actual and Announced Coal-Fired RetirementsAppeals for the District of ColumbiaCircuit vacated CSAPR, finding that 14 40EPA went beyond the scope of its au- 12 35thority. In the meantime, the CleanAir Interstate Rule (CAIR) remains in 30 Cumulative GW 10 Annual GWeffect until a successor program can 25 8be developed. The fact that the court 20left CAIR in place while the EPA 6comes up with a replacement for the 15 4rejected CSAPR standards is a good 10indication that some standards will 2 5continuously be in effect. 0 0Retirements are expected to occur 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020mainly over the next few years – to Annual Retirements Cumulative Retirements from 2011meet MATS – and mainly in the RFC Source: Source: Navigant analysis Navigant analysisand SERC NERC regions. Actualand announced retirements by year FIGURE 8: PROJECTED COAL RETIREMENTS FROM 2011 BY NERC REGION (GW)are shown in Figure 7. The dispar-ity of retirements across the countryis shown in Navigant’s estimate oftotal retirements, including both ac-tual and announced retirements andestimated unannounced retirements,illustrated in Figure 8.Using our Coal Retirement and Ret-rofit Model, Navigant projects a totalof 48 GW of coal-fired power plantretirements from 2011 through 2017.This figure contains about 16 GW ofretirements beyond those that havebeen announced as well as almost 2GW of announced retirements in thePacific Northwest and one GW of Source: Navigant / Coal Retirement & Retrofit Model, 2012announced retirements in Texas thatare scheduled to occur beyond the lower utilization (42 to 63 percent) gional Haze Rule will affect thesenext five years. The main drivers of than the nation’s coal fleet as a whole. states. There are currently approxi-retirements are the relative prices of In today’s new environment, with mately 4 GW of announced retire-coal and gas as power generation fu- natural gas competitive with coal as a ments in the West, but this numberels, and the potential capital costs to power generation fuel, the economics could grow based on the recently re-retrofit power plants to meet plant- don’t support pouring retrofit money leased implementation plans to meetspecific environmental requirements into such plants when they can be the Regional Haze Rule. Recently, thesuch as those of MATS. As indicat- replaced with more efficient natural EPA has reviewed State Implementa-ed in Table 1, most of the units that gas-fired generation. tion Plans or issued Federal Imple-have announced retirement are older mentation Plans for coal plants in Even though CSAPR would not have(greater than 50 years in service), Arizona, Nevada, Utah, New Mexico, impacted the western states, the Re-smaller (by 46 percent) and have Colorado, Wyoming and Montana. 6
  • October 2012The plans could impact an additional As a result of both the realignment of This sizable volume of new naturalone GW of operating capacity that is coal and natural gas fuel prices, and gas demand will help support thenot currently announced for retire- the costs of emissions allowances or country’s expanding dry natural gasment. Retirements of 5 GW through- mitigation, there has recently been a production base that has, over theout the West would account for less significant amount of substitution of past few years, grown by about thisthan 3 percent10 of total region-wide natural gas-fired for coal-fired elec- same volume annually and which, atgeneration capacity, or up to 0.5 Bcfd tric generation. Short-term economic this point, is about 65 Bcfd. Coal-to-of natural gas demand. The impact of switching has likely amounted to gas switching will continue to be ancoal retirements on the west, in con- more than 6 Bcfd of incremental natu- important market phenomenon overtrast to other areas of the country, will ral gas consumption this year ver- the medium term, as coal-fired powerlikely be minimal. sus last. While such fuel substitution plant retirements wind down. Mean- would likely diminish as natural gas while, new markets for natural gas,In most instances, power plant own- prices return to a more equilibrium- such as LNG exports and possibly in-ers consider their alternatives before type level of $4 to $6 per MMBtu, eco- dustrial demand, will help sustain theannouncing final retirement plans. nomics still indicate switching from ongoing development of the coun-The lack of a state-level rule (like coal to gas in the longer-term, but in try’s abundant, clean and inexpensiveCSAPR) in the West to address the the context of the replacement of coal- shale gas assets.Regional Haze Rule has resulted in fired generation capacity by naturalspecific equipment being proscribed — Gordon Pickering gas-fired generation capacity. Dueon a plant-by-plant level. It has been to the competitive natural gas prices About the Author » Gordon Pickering is a Director inspeculated that the repeal of CSAPR Navigant’s Energy Practice. He received research expected to result from the new en-in the East may drive a similar, plant- assistance from the following Energy Practice vironment of shale gas abundance,by-plant approach in those states, Consultants: Gary Belter, Li Wang, Edward O’Toole along with the capital expenditures and Jeff Van Hornewith all reductions to be achieved at for upgrading coal plants likely to bea plant level and without emissions The opinions expressed in this article are those of the necessary as a result of environmen-trading to mitigate retirements, unlike authors and do not necessarily represent the views of tal policies, significant amounts ofCSAPR. This could cause far more re- Navigant Consulting, Inc. existing coal-fired generation capacitytirements than currently estimated by is expected to retire over the next fiveNavigant under the CSAPR Rule. years, creating a long-term bump in natural gas consumption estimated at about 4 Bcfd.10. Estimated using total operating generation capacity per Ventyx Energy Velocity. 7
  • October 2012Natural Gas Market Charts MONTHLY GAS INDEX PRICE DAILY GAS PRICE $10 $22 $20 $18 $8 $16 $14 $6 $12 $/MMBtu $/MMBtu $10 $4 $8 $6 $2 $4 $2 $0 $0 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Chicago Opal New York Chicago Opal New York Sources: Navigant/Gas Daily Sources: Navigant/Gas Daily AECO-C SoCal Gas Henry Hub AECO-C SoCal Gas Henry Hub Monthly index gas prices fell back below $3.00 last month, with The daily spot prices ended the month up 11% from August with Henry Hub decreasing 13% to $2.63/MMBtu for September from Henry Hub at $3.02/MMBtu. $3.01 for August. NYMEX FUTURES SETTLEMENT PRICES AT CLOSE MONTHLY PRICES: OIL AND NATURAL GAS GULF COAST $4 $24 Oct $18 Aug$/MMBtu $/MMBtu $3 $12 Sept $6 $2 $0 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 WTI (Cushing, OK), Crude Oil Sources: Navigant/NYMEX Henry Hub - Natural Gas Sources: Navigant / Platts The average 12-month strip price increased to $3.58/Mmbtu from Most recent comparison shows an increasingly large monthly price spread, $3.16. with Henry Hub natural gas price at $2.63 versus WTI crude oil price at $14.96, an equivalent energy ratio more than five and a half times. 8
  • October 2012Natural Gas Market Charts U.S. DRY GAS PRODUCTION U.S. WELLHEAD SHALE GAS PRODUCTION 68 28 66 24 64 20 62 16 Bcf/day Bcf/day 60 12 58 8 56 54 4 52 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Marcellus Eagleford Woodford Sources: Navigant 2009 2010 2011 2012 Fayetteville Haynesville Barnett Shale / LCI Sources: Navigant / EIA Other U.S. dry gas production is mostly flat, at 65 Bcfd. Total U.S. shale gas production increased to 27.5 Bcfd. U.S. POPULATION-WEIGHTED CDD U.S. WEEKLY NATURAL GAS RIG COUNT 450 1,800 400 1,600 350 1,400 300 1,200 250 1,000 RigsCDD 200 800 150 100 600 50 Degree days for the current month are projected 400 from weekly degree days to date. 0 200 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2008 2009 2010 2011 2012 NOAA Normal Actual Sources: Navigant / NWS CPC Sources:Navigant/ Baker Hughes The cooling season continues with above average temperatures U.S. natural gas rig count continues its 2012 decline, ending Sep- and cooling degree days 23% above normal for both September tember at 435 versus 923 a year ago. and the season. 9
  • October 2012Natural Gas Market Charts U.S. GAS STORAGE CANADA GAS STORAGE 4,500 750 4,000 650 3,500 550 3,000 450 2,500Bcf Bcf 350 2,000 250 1,500 1,000 150 500 50 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Range (2002-2011) 2008 2009 2010 2011 2012 Range (2006-2011) 2008 2009 2010 2011 2012 Sources: Navigant / EIA Sources: Navigant / Enerdata U.S. storage levels are now just at the top of the 10-year range for Canadian storage inventories are still about 23% above the 5-year September. norm for this time of year, at 692 Bcf vs 564 Bcf. U.S. MONTHLY NATURAL GAS DEMAND NAVIGANT PRICE PREVIEW 100 2013 Price Forecast Source (Nominal $/MMBtu) 90 EIA $3.34 80 FBR Capital $3.50 Bernstein Res. $3.75 Bcf/d 70 Survey Average $3.53 Navigant $3.48 60 Sources: Navigant Survey/Navigant 50 40 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2008 2009 2010 2011 2012 Sources: Navigant / EIA Demand is showing a normal seasonal dropoff, but still exceeds the Price forecasts average near $3.50 for 2013. average level of the prior four years at this time by about 11%. 10
  • October 2012Legislative and Regulatory Highlights Gulf Region KOGAS Contracts to Sell Sabine Pass LNG to French Company TotalNational On September 13, the French energy company Total an- nounced that its gas trading affiliate Total Gas & PowerIndustry Stakeholder Group Proposes Calculation Limited entered into a 20-year supply contract with Ko-Methodology to CFTC for “Notional Amount” With rea Gas Corporation for the purchase of 0.7 million met-Respect to Swap Definitions ric tons per year of liquefied natural gas from the SabineOn September 20, an energy industry coalition (composed Pass liquefaction terminal in Louisiana. KOGAS hadof American Petroleum Institute, Commodity Markets obtained rights to 3.5 mtpa of LNG from Cheniere EnergyCouncil, Edison Electric Institute, Electric Power Supply Partners’ Sabine Pass project earlier in the year.Association, Independent Petroleum Association of Amer-ica and Natural Gas Supply Association) sent to the Com- FERC Staff Completes Environmental Assessment formodity Futures Trading Commission a proposed method- Cheniere’s Creole Trail Pipeline Projectology for calculating the “notional amount” with respect FERC Docket CP12-351-000to certain types of commodity swaps. The coalition noted On September 18, FERC staff issued its environmental as-its special concern with how notional amounts impact sessment finding that the Creole Trail Expansion Projectcompanies through application of the de minimis excep- proposed by Cheniere Creole Trail Pipeline Company LPtion to the swap dealer definition. Since the CFTC relies does not constitute a major federal action significantly af-on “industry standards” for calculating notional amounts, fecting the quality of the human environment. The proj-the purpose of the coalition’s letter was to give notice of ect will allow for the bi-directional flow of natural gas tohow its members will perform calculations, unless they and from the Sabine Pass Liquefied Natural Gas Terminalreceive contrary guidance from the CFTC. According to in Cameron Parish, Louisiana at volumes up to 1.53 Bcfd.the letter, notional value should be “the absolute valuethat results from multiplying the quantity term of a swap Central Regionby its nominal, i.e. named or facial, price”, e.g. for a basisswap, the price differential between two locations. Chesapeake to Divest Permian Assets for $6.9 Billion On September 12, Chesapeake Energy Corp. announcedWestern Congresspersons Request Expeditious that it had entered into multiple agreements to sell mostTreatment of LNG Export Applications of its Permian properties and midstream assets for $6.9On September 24, 16 congressional representatives from billion, allowing it to fully repay $4 billion in term loanswestern states sent a joint letter to Secretary of Energy during Q4 of 2012. The Permian assets will yield net pro-Chu requesting prompt completion of the second of two ceeds of $3.3 billion, and are being sold to subsidiariesLNG export studies by the Department of Energy, as well of Chevron Corp and Royal Dutch Shell, and to Hous-as expeditious review of the many pending LNG export ton-based Ener-Vest, Ltd. Chesapeake will retain aboutapplications before the DOE. The letter noted that the 470,000 acres in the Permian’s Midland Basin. Anotherwell-substantiated abundance of U.S. natural gas could $3 billion in proceeds will result from the sale of Chesa-help reduce historical boom-bust cycles if it could be de- peake’s midstream assets, with $2.7 billion coming fromveloped to supply additional markets. Additional ben- the sale to Global Infrastructure Partners of gatheringefits cited were job creation, trade deficit reduction, and and processing systems in the Eagle Ford, Utica, Haynes-stimulation of domestic manufacturing and industrial ville and Niobrara shale plays. Finally, another $600 mil-sectors. Three Democrats and 13 Republicans represent- lion in proceeds will result from the sale of noncore lease-ing Arizona, California, Colorado, Kansas, Nebraska, hold assets in the Utica Shale, where Chesapeake willNevada, New Mexico, Utah and Wyoming signed the let- retain about 1.3 million net acres of leasehold.ter, which followed a similar letter by 10 Democrat and34 Republican Representatives from the Gulf region onAugust 7. 11
  • October 2012New Processing Plant Planned for Oklahoma’s Cana Northeast/AppalachiaWoodford Shale Inergy Midstream Announces Execution of BindingCaballo Enery announced on September 18 that it will Precedent Agreements for Commonwealthbuild a new cryogenic processing plant for liquids rich Pipeline Capacitynatural gas in the Mississippi Lime and Cana WoodfordShale plays. The 60 MMcfd plant will increase Caballo’s On September 20, Inergy Midstream LP announced thatprocessing capacity in the region to 100 MMcfd. The site subsidiaries of UGI Corporation and WGL Holdingsnear Carmen, OK will allow for construction of a second have executed binding precedent agreements for firmprocessing plant at the same location. Caballo’s mid- transportation capacity on the Commonwealth Pipeline.stream system delivers processed gas to ONEOK Gas The pipeline will provide a route for natural gas from theTransmission and the Panhandle Eastern Pipeline, with Marcellus and Utica shale plays to reach the Mid-Atlan-NGLs going to ONEOK NGL Pipeline. The Carmen pro- tic region, extending from Inergy’s MARC I Pipeline tocessing plant is expected to be operational during Q1 2013. interconnections in southeastern Pennsylvania with Ni- Source, Texas Eastern, Transco and Eastern Shore inter-FERC Issues CPCN for Alliance Pipeline’s Tioga state pipelines. The Commonwealth Pipeline is expectedLateral Project to have an initial capacity of 800 MMcfd coming intoFERC Docket CP12-50-000 service in 2015; project sponsors are working on furtherOn September 20, FERC issued a Certificate of Public precedent agreements to further support the project.Convenience and Necessity authorizing the construc- New York’s Department of Environmentaltion and operation of Alliance Pipeline L.P.’s Tioga Lat- Conservation Rejects Calls for Independent Healtheral Project in North Dakota. The project will connect Study of Hydrofrackingnatural gas production in the Bakken shale formation ineastern Montana and western North Dakota to Alliance’s On September 20, New York’s Department of Environ-pipeline system currently extending from the U.S.-Ca mental Conservation announced that it was rejectingnada border in North Dakota to Chicago. In issuing the calls for the state to commission an outside health studyCertificate, FERC found that the project did not rely on that would determine the future of hydraulic fractur-any subsidization by existing customers, that the project ing in the state’s shale gas plays. The DEC reiterated thewould have no adverse impacts on existing pipelines or Governor’s instructions to “let the science determine thecustomers, and that the project would allow for transport outcome” and stated that government is the most cred-of liquids rich gas to markets rather than the continuation ible entity to make the determination. In that vein, DECof flaring or venting due to the lack of infrastructure. requested the New York State Health Commissioner, in consultation with the most qualified outside experts, toQuicksilver Resources and SWEP Execute Joint review DEC’s health impact analysis of hydrofracking,Development Agreement for Sand Wash Basin after which DEC will make its decision on hydrofrackingOn September 24, Quicksilver Resources announced the in the state.execution of a Joint Development Agreement with Royal Potential Joint Venture to Develop Pipeline to DeliverDutch Shell subsidiary SWEPI LP with respect to their Natural Gas from Utica Shaleoil and gas interests in Colorado’s Sand Wash Basin. Thecompanies will establish an 850,000 acre Area of Mutual On September 4, DTE Energy, Enbridge Inc. and SpectraInterest. SWEPI will be the operator of the majority of Energy Corp. announced the execution of a Memoran-the lands subject to the agreement, which is expected to dum of Understanding to jointly develop the NEXUS Gasclose in late 2012. Transmission system to deliver natural gas from the Utica Shale in Ohio to gas markets in the U.S. Midwest, includ- ing Ohio and Michigan, and Ontario, Canada. The proj- ect would have a capacity of up to one Bcfd, and would use existing pipeline corridors to serve Michigan and the existing Vector Pipeline to reach Ontario. The Vector 12
  • October 2012Pipeline is a joint venture of DTE and Enbridge, but theMOU provides for Spectra to become a 20 percent owner.Expected interconnects for the project include MichCon,Consumers Energy, Enbridge’s Tecumseh Gas Storageand Union Gas’ Dawn Hub. The partners plan an open British Columbiaseason in Q4 of 2012, with a potential in-service date of British Columbia and Republic of Korea Sign MOUlate 2015. on Cooperation and Collaboration in Joint EnergySunoco Logistics Partners Announces Successful Sector InitiativesOpen Season for Mariner East Project to Transport On August 28, British Columbia’s Ministry of Energy andMarcellus NGLs Mines signed a five-year, non-binding Memorandum ofOn September 26, Sunoco Logistics Partners LP an- Understanding with the Republic of Korea’s Ministry ofnounced a successful open season for its Mariner East Knowledge Economy to establish a collaborative frame-Project, which will provide transportation of natural gas work for the development of joint energy sector initia-liquids from the Marcellus shale play to planned new tives. The MOU provides for cooperation in the promo-NGL infrastructure at Sunoco’s Marcus Hook, Pennsyl- tion of trade, investment and R&D in the energy sector, asvania refinery site. Sunoco expects initial capacity to be well as the creation of an annual “Korea-Canada Natural70,000 barrels per day of NGLs, in service by early 2015. Gas Forum” for participation by the Korean and B.C. gov-Range Resources announced on the same day that it had ernments, as well as companies and research institutions.signed a 15-year agreement to become the anchor shipper British Columbia Announces $120 Million in Royaltyon Mariner East. Credits for Infrastructure ProjectsPennsylvania PUC Approves New Natural Gas Local On September 20, British Columbia’s Ministry of Ener-Distribution Company Using Marcellus Gas Supply gy and Mines announced the latest results of the prov-On September 26, the Pennsylvania Public Utilities Com- ince’s Infrastructure Royalty Credit Program, providingmission approved an application by Leatherstocking Gas for $120 million in royalty reductions to facilitate 21 newCo. to provide natural gas utility service to customers in infrastructure projects in northeast B.C. The royalty cred-northern Susquehanna County currently unserved by its can be recovered for up to 50 percent of an approvednatural gas. According to its application, Leatherstocking projects’ cost. The Ministry expects the projects to gener-plans to obtain its gas supplies from local Marcellus Shale ate $260 million in capital spending in B.C., creating oversources. The PUC noted the likely savings that will result 1,650 jobs as well as supporting B.C.’s emerging LNGfrom the switch from high cost heating sources such as export industry.fuel oil and propane to lower cost natural gas. Leather-stocking is a partnership of Corning Natural Gas Corp,an existing New York natural gas distribution company,and Mirabito Holdings, an existing New York energy ser-vices company. 13
  • October 2012Fuels Practice About NavigantGordon Pickering, Director Navigant Consulting, Inc. (NYSE: NCI) is a specialized, global expert services916.631.3249 firm dedicated to assisting clients in creating and protecting value in the facegpickering@navigant.com of critical business risks and opportunities. Through senior level engagement3100 Zinfandel Drive with clients, Navigant professionals combine technical expertise in DisputesSuite 600 and Investigations, Economics, Financial Advisory, and Management Consult-Sacramento, CA 95670 ing, with business pragmatism in the highly regulated Construction, Energy,Rick Smead, Director Financial Services, and Healthcare industries to support clients in addressing713.646.5029 their most critical business needs.rsmead@navigant.com2 Houston Center, 909 Fannin Out of its Sacramento and Houston offices, Navigant’s Fuels experts focus onSuite 1900 the North American market offering fuels services to utilities and public enti-Houston, TX 77010 ties, financial services companies, independent power producers, natural gas producers, pipelines, LNG developers, and large industrial end-users. AmongBob Gibb, Associate Director512.493.5407 other tasks performed for clients, the Fuels Practice has performed due dili-bob.gibb@navigant.com gence analyses and market analyses/price forecast studies, provided contract98 San Jacinto Boulevard support (transportation, supply, and storage), developed fuel plans, and pro-Suite 900 vided litigation and regulatory support.Austin, TX 78701Rebecca Honeyfield, Associate Director Featured Brochures: Fuels Services619.546.6492rhoneyfield@navigant.com3100 Zinfandel Drive avigant. com Click on each brochureSuite 600 www.nSacramento, CA 95670 to read more about ERED GY Navigant’s Fuels Services ENER V T DELI I NSIGH SERV ICES (LNG) RAL GAS D NATU LIQUEFIE vide clie nts L GAS & erts pro NATURA G) exp op- l gas (LN ncing, d natura tions, fina to liquefie t transac itions us l gas and ss strategies, projec quely pos ’s natura ctive uni busine l perspe Navigant energy r globa ght into rketing . Ou ertise in: with insi and ma tional exp s, trading interna eration estic and e both dom provid planning tegy and nning » Stra and pla t analysis » Marke NGE ry adviso » Reg ulatory otiation CHALLE EXPOR T ercial neg e » Comm diligenc ION: LNG ENT ndent due NGE DOMIN SM » Indepe CHALLE T IMPAC T ASSES EnErgy EXPOR E: LNG N NG E CHENIER SESSMENT SOLUTIO ’s applica tion CHALLE N NATUR AL IMPAC T AS t of Do minion export au- Natural Gas Market In suppor AMERICA SMENT N long term ntries, NORTH PLY AS SES SOLUTIO a detaile d as- to DOE for LNG -Free Tra de cou assess- M GAS SUP and Scenario Analysis odeling provided . to non a report the U.S thority Navigant lysis of provided act of N and ana , Navigant rket imp SOLUTIO nt exports ma Point, d the first sessme act of LNG nt U.S. gas ’s Cove release natu- rket imp partme ing the minion Navigant erican gas ma rgy’s De from Do assess- In 2008, rth Am ere Ene applica tion exports vigant’s y of No poten- for Cheni export ility. Na rket, major stud izing the (DOE) ort nd fac l gas ma recogn . At a na exp Maryla . natura supply pment of Energy s, Louisia the U.S gas sha le ral gas develo ine Pas ted the ment of rcellus shale gas al wisdom for its Sab conduc y- the Ma market tial for con vention t. Navigant industr including ture d in the en the s a de- projec tary was cap vided time wh l gas wa its proprie n basin, orts pro . natura ed lysis with built upo ture rep t U.S ant defi ana model Model astruc and the was tha e, Navig market etition and infr reports resourc por ted a fifty leading e Comp was a clie nt. Both n Navi- clining and sup s Pipelin analysis to the ed upo tus quo n-pre- the Ga expert were bas erican the sta r the the ) and its ant’s rep ort analysis se ove North Am , t increa tes. Tod ay, (GPCM of Navig li- leading n GPCM percen e estima ponent t. The app gant’s built upo min- resourc mble key com projec model t of Do vailing tes rese t of the is at market estima in suppor eniere in suppor vailing breaking ort by Ch export re filed tion in the pre ground for exp and we applica ’s initial, natura l cation and only LNG export Navigant 8, with e the first E ap- ion’s LNG from 200 ac- this tim ed DO 2011. luation being widely e receiv ntri es. tember eva tion t to hav de cou Sep ndance le produc projec -Free Tra gas abu Gas sha im- to non dged. for LNG proval knowle enough . n robust exports has bee by LNG laced n- be rep a substa ports to played erica’s experts rth Am Na vigant No inning in beg tion. tial role sforma l gas tran naturawww.navigant.com ©2012 Navigant Consulting, Inc. All rights reserved. Navigant Consulting is not a certified public accounting firm and does not provide audit, attest, or public accounting services. See www.navigant.com/licensing for a complete listing of private investigator licenses. 14