CRE_NATURAL_GAS__FOSS_.PPT

NATURAL GAS MARKET AND
REGULATORY TRENDS

©UH IELE, 2
No reproduction, distribution or attribution without permission.
What is the natural gas business…
…and how should it be regulated?
• Is it a competitive, upstream-driven
business?
• Is it an economies of scale, monopoly
midstream-downstream business that
affects the public interest?
• How much of direct end use and
conversion is competitive?
• If the goal is to build the “natural gas
factory,” then policy/regulatory
approaches need to facilitate value
chain development – “commercial
frameworks.”
Where does
most profit,
value creation
take place?

©UH IELE, 3
Worldwide Natural Gas System
Dynamics: Framework Issues
E&P
Profit driven; ROR drill decision in
anticipation of higher prices;
monetization
Pipelines Regulated asset optimization
LDCs Regulated asset optimization
End Users
End use in anticipation of lower
prices; proximity to final customer
Power
Fuel competition for generation;
proximity to final customer (LDC)
Benefits of
Competitive
Supply

©UH IELE, 4
The Overall Challenge:
Balancing the Market
LOW Prices HIGH
SUPPLY
DEMAND
Mean reversion is a reality if market-
clearing participants exist

©UH IELE, 5
Achieving Competitive Supply
COMPETITIVE SALES
•Wellhead producers
•Third party wholesalers
Pricing Supply The challenges:
•Entry of new suppliers
•Managing common pools
•Developing liquidity to
establish locational basis
•Protecting market
transparency
•Dealing with third party
wholesalers that are affiliated
with regulated infrastructure
•Access for new supplies

©UH IELE, 6
Regulated Infrastructure as the
Conduit for Supply Competition
RESERVATION (DEMAND)
Fixed cost of investment
•Return on equity
•Taxes
•Long term debt
•A&G, DA, O&M
COMMODITY (USAGE)
Variable cost of operation
•O&M
The challenges:
•Rate-making transitions
•Setting maximum
allowable rates with market
transparency
•Pricing new capacity
•Dealing with access for
new capacity
•Determining contestable
transportation markets
•Dealing with market power
Pricing Transportation

©UH IELE, 7
Does Power Offer Similar
Opportunities…
Unbundle electrons from wires, enable competitive
generation and sales of electrons, enable comparable
transportation service for shippers.
…or new problems and challenges?

©UH IELE, 8
Price Volatility and Risk are the
Trade Offs for Competition
E&P Pipelines LDCs End Users Power
Commodity price risk flows
Capacity price risk flows
Risk accepting entities

©UH IELE, 9
Electric Power Driver
It’s Stormy Out There!
Real Time Pricing
Does choice
matter?
Load Management
& Reliability
Retail Competition?
Competitive Electricity Markets
(Restructuring)
Market Structure
Measurement
Aaagghh!

©UH IELE, 10
Around the world, countries and companies face a
range of issues associated with commercial framework conditions

©UH IELE, 11
The U.S. Case
Pre-Natural Gas Restructuring
PRODUCERS PIPELINES LDCs
Locate
+
Produce
Sell to Pipelines
Aggregate
Storage
Sell to LDCs
Purchase from
Pipelines
Serve End User
FERC PUCs

©UH IELE, 12
The U.S. Case
Post-Natural Gas Restructuring
Marketers
Gatherers &
Aggregators
Service
Companies
End Users
Producers
Storage
Companies
Pipelines LDCs
Production
Storage
Services
Transport Distribution
Aggregation Gathering Marketing
Transport
Services
Capacity
Brokering
LNG
Information
Services
Processing
Risk
Management
FERC PUCs

©UH IELE, 13
U.S. (Canada) Natural Gas Value Chains
Industrial
Electric Generation
(fuel, bulk market
for power)
Residential, Small
Commercial
Physical
Bypass
Interstate
Pipelines
“City Gate”
“LDC”
Transportation (pipe) Sales (commodity)
“Unbundling” is the separation of transportation from sales
(supply) to allow third party marketing with pipelines providing
“open access” and comparable service to all shippers.
Most Competitive Competitive Least Competitive
Commercial
Production1,2
Gathering1,2
Processing1
Intrastate
Pipelines2
1,2 Often vertically
integrated

©UH IELE, 14

©UH IELE, 15
Production Basin
Pipeline Capacity
Producing Basins and Regional
Natural Gas Flows
Source: U.S. EIA

©UH IELE, 16

©UH IELE, 17
Henry Hub, Louisiana

©UH IELE, 18
U.S. Case – How Well Does the
Model Perform?
Market
• Transparency of price
signals
• Price volatility
• Role of pipeline affiliates
• Demand response
• Problems in retail
competition
• Supply security and
capital to drill
Policy/Regulatory
• Encourage market solution
to price information
• No action (but debate)
• FERC Order 637
• Under discussion
• Georgia re-bundling
• Producer incentives and
LNG

©UH IELE, 19
U.S. Wellhead Natural Gas Prices
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
1
9
4
9
1
9
5
2
1
9
5
5
1
9
5
8
1
9
6
1
1
9
6
4
1
9
6
7
1
9
7
0
1
9
7
3
1
9
7
6
1
9
7
9
1
9
8
2
1
9
8
5
1
9
8
8
1
9
9
1
1
9
9
4
1
9
9
7
2
0
0
0
$/mcf, real
Source: U.S. EIA.
Wellhead price control
NGPA
Open access era
“Gas bubble”

©UH IELE, 20
Natural Gas Spot Price
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
A
p
r
-
9
0
A
p
r
-
9
1
A
p
r
-
9
2
A
p
r
-
9
3
A
p
r
-
9
4
A
p
r
-
9
5
A
p
r
-
9
6
A
p
r
-
9
7
A
p
r
-
9
8
A
p
r
-
9
9
A
p
r
-
0
0
A
p
r
-
0
1
A
p
r
-
0
2
A
p
r
-
0
3
Month
Nominal
Spot
Price
($/Mcf)
Source: NYMEX
Suspected market manipulation
No suspected market manipulation

©UH IELE, 21
Are New Market Fundamentals
Emerging?
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
12-month MA

©UH IELE, 22
U.S. Gas Resource Development
1,200
1,300
1,400
1,500
1,600
1,700
1,800
J
u
l
-
8
7
J
u
l
-
8
8
J
u
l
-
8
9
J
u
l
-
9
0
J
u
l
-
9
1
J
u
l
-
9
2
J
u
l
-
9
3
J
u
l
-
9
4
J
u
l
-
9
5
J
u
l
-
9
6
J
u
l
-
9
7
J
u
l
-
9
8
J
u
l
-
9
9
J
u
l
-
0
0
J
u
l
-
0
1
J
u
l
-
0
2
BCF
200
300
400
500
600
700
800
900
1,000
1,100
1,200
Gas
Rigs
Monthly Dry Gas Production
12 Month MA, Production
Monthly Gas Rigs
Source: U.S. EIA.

©UH IELE, 23
U.S. Wells Drilled
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
1
9
4
9
1
9
5
2
1
9
5
5
1
9
5
8
1
9
6
1
1
9
6
4
1
9
6
7
1
9
7
0
1
9
7
3
1
9
7
6
1
9
7
9
1
9
8
2
1
9
8
5
1
9
8
8
1
9
9
1
1
9
9
4
1
9
9
7
E
2
0
0
0
E
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
Oil
Gas
Dry
Success Rate
Source: U.S. EIA.

©UH IELE, 24
U.S. Well Costs ($/foot)
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
1
9
6
0
1
9
6
2
1
9
6
4
1
9
6
6
1
9
6
8
1
9
7
0
1
9
7
2
1
9
7
4
1
9
7
6
1
9
7
8
1
9
8
0
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
Oil
Gas
Source: U.S. EIA.
Deep water
effect

©UH IELE, 25
U.S. Natural Gas Well Productivity
(Mmcf/well)
0
20
40
60
80
100
120
140
160
180
1
9
6
0
1
9
6
2
1
9
6
4
1
9
6
6
1
9
6
8
1
9
7
0
1
9
7
2
1
9
7
4
1
9
7
6
1
9
7
8
1
9
8
0
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
Source: U.S. EIA.

©UH IELE, 26
17
Capital Spectrum Void
Capital Spectrum Void
PDP PDNP PUD PROB/POSS Exploration Prospects
Engineering Risk Geological/Geophysical Risk
Return
Risk
6%
10%
15%
20%
30% +
Senior Debt
Senior Debt
VPP
VPP
Mezzanine
Mezzanine
Pref. Equity
Equity
Equity
Equity
Post-Enron

©UH IELE, 27
Market Geography with Pipe
De-bottlenecking, 1995-99
Delivered
to
Pipe: JAN 95 JAN 96 JAN 97 JAN 98 JAN-99
Henry Hub $1.43 $2.90 $3.70 $2.25 $2.61
El Paso 1.17 2.00 3.85 2.20 2.50
Blanco 1.11 1.35 3.80 2.10 2.04
Oklahoma 1.23 2.05 4.15 2.15 2.49
Opal 1.02 1.25 3.70 2.05 2.19
Alberta 0.66 1.05 1.90 1.05 2.25
Spot prices, $/mmBtu, beginning of month
Source: World Gas Intelligence

©UH IELE, 28
U.S. Gas Price Convergence
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
Aug-95
Feb-96
Aug-96
Feb-97
Aug-97
Feb-98
Aug-98
Feb-99
Aug-99
Feb-00
Aug-00
Feb-01
Aug-01
Source: Natural Gas Week
$/mcf across all active U.S. and
Canada market centers, hubs
and major city gates
Henry Hub

©UH IELE, 29
Demand Destruction is Real
1000
1200
1400
1600
1800
2000
2200
2400
2600
2800
199801
199804
199807
199810
199901
199904
199907
199910
200001
200004
200007
200010
200101
200104
200107
200110
200201
200203
200207
200210
100
200
300
400
500
600
700
800
900
Consumption
Wellhead Price
Total Consumption, bcf Avg. Wellhead, cents/mcf
Source: U.S. EIA

©UH IELE, 30
Gas Demand by Segment
24%
22% 21%
13% 14% 14%
41%
46%
33%
19%
22% 23%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1980/19.9 tcf 1999/21.4 tcf 2001/22.6 tcf
Residential Commercial Industrial Electric Power
Source: U.S. EIA

©UH IELE, 31
U.S. Natural Gas Prices (Real)
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01
Residential
Commercial
Industrial
Electric
Wellhead
$/mcf
Source: U.S. EIA

©UH IELE, 32
U.S. Value Chain Issues
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
Wellhead to
Citygate
Citygate to
Residential
Citygate to
Commercial
Wellhead to
Industrial
Wellhead to
Electric
Source: U.S. EIA
Price differentials, $/mcf
1984-2000: Open Access
Implementation

©UH IELE, 33

©UH IELE, 34
Electricity Demand
2,000
2,200
2,400
2,600
2,800
3,000
3,200
3,400
90 91 92 93 94 95 96 97 98 99 00 01
0
200
400
600
800
1000
1200
Utilities
Non-utility Providers
Billion kwh Net Generation Utilities Billion kwh Net Generation NUGs
Source: BP
Nonutility generation = 30% of total industry

©UH IELE, 35
Natural Gas Consumption for
Power Generation
20%
25%
30%
35%
40%
45%
50%
55%
60%
90 91 92 93 94 95 96 97 98 99 00 01
Non-utility
Providers
0%
2%
4%
6%
8%
10%
12%
Utilities
Non-utility Providers
Utilities
Natural Gas Generation as %
Total Net Generation
Source: BP

©UH IELE, 36
Does the U.S. Need More LNG?
• Most of the natural gas
used in the U.S. comes
from domestic production.
• Many fields are several
decades old and are
declining rapidly.
• New natural gas reserves
are being discovered, but
with advanced recovery
technologies these fields
are quickly depleted.
U.S. Gas Supply
Canada,
14%
LNG, 1%
Domestic
Production,
85%
74% from gas wells
26% from oil wells
LNG is about 6% of worldwide natural
gas consumption. It is about 94% of
natural gas consumption in Japan.

©UH IELE, 37
• U.S. EIA estimates a shortfall
in natural gas supply of about
8 tcf by 2025.
• Canada may not be able to
sustain increasing volumes of
exports to the U.S.
• LNG imports expected to
reach 2.1 tcf a year by 2025,
or about 6% of our total
consumption. LNG is currently
less than 1% of total U.S.
consumption.

©UH IELE, 38
Japan
239
140
10
166
3728
LNG
LNG
66
Trinidad and Tobago
98
2
Australia
Algeria
64
12
Oman & Others
Nigeria
38
23
Qatar
Total 2001 U.S.
consumption =
22.7 tcf
Pipe exports to
Mexico = LNG
imports
U.S. Natural Gas Imports, Exports in 2001, bcf
Source: U.S. DOE-OFE

©UH IELE, 39
Is LNG A Safe Fuel?
• Worldwide LNG facilities:
– 17 LNG export (liquefaction) terminals
– 40 import (regasification) terminals
– 136 LNG ships altogether handling approximately 120
million metric tons of LNG every year
– Over 240 peakshaving and LNG storage facilities, some
operating since the mid-60s
• The U.S. has the largest number of LNG
facilities in the world.
– U.S. gas utilities use LNG extensively for “peak-
shaving” with facilities located near population centers.

©UH IELE, 40
Source: EIA
U.S. Liquefied Natural Gas Facilities
Source: EIA
U.S. Liquefied Natural Gas Facilities
113 active LNG facilities in the U.S.
Is LNG A Safe Fuel?

©UH IELE, 41
LNG Facilities in the U.S.
Source: CMS
Baseload LNG regasification terminals
The four marine LNG import terminals in the
U.S. represent base load LNG facilities.
Source: CMS

©UH IELE, 42
LNG Facilities in the U.S.
U.S. LNG STORAGE FACILITIES CAPACITY
2%
18%
80%
Marine Export Terminal,
2.3 bcf
Marine Import Terminal,
18.8 bcf
LNG Peak Shaving and
Satellite Storage, 86 bcf
Source: EIA

©UH IELE, 43
Proposed LNG Import Facilities,
U.S. West Coast
Mare Island
Bechtal/
– Shell abandoned project.
Lazaro Cardenas
Tractebel
– Conducting feasibility study.
Tijuana
Marathon led
group
– Filed permit
application
with CRE and
selected EPC
contractor.
Ensenada
Sempra/CMS
– Filed permit application with CRE.
Baja California
ChevronTexaco
– Filed permit application
with CRE.
Source: CMS Energy

©UH IELE, 44
Proposed LNG Import Facilities,
U.S. Gulf & East Coasts
Bahamas
AES
– Resolving pipeline design
and construction issues.
Tractebel
Tractebel buys Enron interest.
Port Pelican
ChevronTexaco
– Filed with the DOT
under Deepwater Port
Act.
Altamira
El Paso/Shell
– RFP issued by CFE.
Hackberry
Sempra
– Received preliminary
approval from FERC.
Energy Bridge
El Paso
– Applied with USCG for
deepwater mooring buoy.
Freeport
Cheniere
– Announced three
Gulf Coast sites.
0103-001
Source: CMS Energy; note that plans include expansion of LNG facilities in Puerto Rico (not shown).

©UH IELE, 45
U.S. LNG Regulators
DOE regulates natural gas imports/exports
and helps to coordinate across federal
agencies that have regulatory and
policy authority for LNG
FERC is responsible for permitting new
onshore LNG regasification terminals
and ensuring safety at these facilities
DOT regulates offshore terminals and LNG
tanker operations
Coast Guard is responsible for assuring
the safety of all marine operations at
all LNG terminals and on tankers in
U.S. coastal waters
EPA and state environmental agencies
establish air and water standards with
which the LNG industry must comply
Others include:
Fish and Wildlife Service
Army Corps of Engineers for
coastal facilities and wetlands
MMS for offshore activities
National Oceanic and
Atmospheric Administration
State, county and local
(municipal) agencies play
roles to ensure safe and
environmentally sound
construction and operation of
LNG industry facilities. Local
police and fire departments.
LNG facilities are subject to U.S. Homeland Security

©UH IELE, 46
EXPLORATION &
PRODUCTION
LIQUEFACTION SHIPPING
REGASIFICATION
& STORAGE
$0.5-$1.0/MMBtu $0.8-$1.20/MMBtu $0.4-$1.0/MMBtu $0.3-$0.5/MMBtu
LNG Value Chain
Sources: BG, ALNG, CMS
How Much Does LNG Cost?

©UH IELE, 47
LNG costs are
declining.
Natural gas can be
economically produced
and delivered to the
U.S. as LNG in a price
range of about $2.50 -
$3.50/MMBtu
depending largely on
shipping cost.
LNG COSTS ARE DECLINING
Does not include feedstock prices
2.5
1.8
0.5
0.1
0.1
0
0.5
1
1.5
2
2.5
1980's Liquefaction Shipping Regasification
and Storage
2000's
$/MMBTU
Sources: El Paso
How Much Does LNG Cost?

©UH IELE, 48
Prices Are Converging
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
LNG (cif Japan) US Henry Hub Oil (Brent)
$/mmbtu Oil indexed LNG v. Henry Hub
Source: BP Gas and Power

©UH IELE, 49
How LNG Competes
1998 1999 2000 2001
Canada $1.91 $2.18 $3.90 $4.36
LNG
Imports*
2.31 – 2.84 2.15 – 2.69 2.73 – 3.93 3.29 – 5.00
Domestic/
Henry Hub**
2.08 2.27 4.32 3.98
Natural Gas Prices, $/mmBtu (U.S. DOE – OFE)
* Includes both landed and tailgate prices; lower price is generally
landed price.
** Mean, daily spot prices.

©UH IELE, 50
Global Gas Market Evolution
Orange arrows are cargos shipped to U.S. for Henry Hub
premiums. Green arrows are price dampening effects to
other markets.

©UH IELE, 51
IELE LNG Research
Consortium
Sponsors:
• BP Energy Company-Global LNG
• BG LNG Services
• ChevronTexaco Global LNG
• ConocoPhillips Worldwide LNG
• Dominion Energy (Cove Point)
• El Paso Global LNG
• ExxonMobil Gas & Power
Marketing Company
• Shell Gas & Power
• Tractebel LNG North
America/Distrigas of
Massachusetts
Technical Advisors:
• U.S. Department of Energy-Office
of Fossil Energy
• Ministry of Energy and Industry,
Trinidad & Tobago
• ABS
• CH-IV
• Lloyd’s Registry
• PTL

CRE_NATURAL_GAS__FOSS_.PPT

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