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NATIONAL WEBCAST – ROB PATRYLAK & GREG HOPPER
2013 ENERGY MARKET OUTLOOK AND INDUSTRY TRENDS ENERGY MARKET PERSPECTIVE – END OF YEAR 2012
This report was prepared for Client by Black & Veatch Corporation (“B&V”) and is largely based on information not within the control of B&V. As such, B&V has not made an analysis, verified, or rendered an independent judgment of the validity of the information provided by others, and, therefore, B&V does not guarantee the accuracy thereof.
In conducting our analysis and in forming an opinion of the projection of future operations summarized in this report, B&V has made certain assumptions with respect to conditions, events, and circumstances that may occur in the future. The methodologies we utilize in performing the analysis and making these projections follow generally accepted industry practices. While we believe that such assumptions and methodologies as summarized in this report are reasonable and appropriate for the purpose for which they are used; depending upon conditions, events, and circumstances that actually occur but are unknown at this time, actual results may materially differ from those projected. Use of this report, or any information contained therein, shall constitute the user’s waiver and release of B&V and Client from and against all claims and liability, including, but not limited to, any liability for special, incidental, indirect or consequential damages, in connection with such use. In addition, use of this report or any information contained therein shall constitute an agreement by the user to defend and indemnify B&V and Client from and against any claims and liability, including, but not limited to, liability for special, incidental, indirect or consequential damages, in connection with such use. To the fullest extent permitted by law, such waiver and release, and indemnification shall apply notwithstanding the negligence, strict liability, fault, or breach of warranty or contract of B&V or Client. The benefit of such releases, waivers or limitations of liability shall extend to B&V and Client’s related companies, and subcontractors, and the directors, officers, partners, employees, and agents of all released or indemnified parties. USE OF THIS REPORT SHALL CONSTITUTE AGREEMENT BY THE USER THAT ITS RIGHTS, IF ANY, IN RELATION TO THIS REPORT SHALL NOT EXCEED, OR BE IN ADDITION TO, THE RIGHTS OF THE CLIENT.
Readers of this report are advised that any projected or forecasted financial, operating, growth, performance, or strategy merely reflects the reasonable judgment of B&V at the time of the preparation of such information and is based on a number of factors and circumstances beyond our control. Accordingly, B&V makes no assurances that the projections or forecasts will be consistent with actual results or performance. To better reflect more current trends and reduce to chance of forecast error, we recommend that periodic updates of the forecasts contained in this report be conducted so more recent historical trends can be recognized and taken into account.
Any use of this report, and the information therein, constitutes agreement that: (i) B&V makes no warranty, express or implied, relating to this report, (ii) the user accepts the sole risk of any such use, and (iii) the user waives any claim for damages of any kind against B&V.
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15 January 2013
AGENDA
About the EMP Power Sector Projections Fuel Market Projections Industry Trends
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The Black & Veatch Energy Market Perspective is prepared every six months to provide B&V clients with a fresh and insightful assessment of the current state of North American energy markets, and a Base Case long term view of how those markets may function.
ABOUT THE BLACK & VEATCH ENERGY MARKET PERSPECTIVE
The B&V Energy Market Perspective is available as a National Service or as one or more Regional Services: Western, Texas (ERCOT), Northeast, Midwest and Southeast
EMP North American Market Coverage
4
15 January 2013
The EMP features analytical neutrality and does not advocate certain technologies or agendas
• Subscription-based service
• Uses proprietary Integrated Market Modeling process
• 25-year projections (2013 – 2038)
• Covers 5 regions of North America
ABOUT THE ENERGY MARKET PERSPECTIVE (EMP)
5
15 January 2013
Clients use EMP to plan for and manage risks of North American shift to natural gas generation
• Insights on industry trends and market opportunities
• Fundamental capacity, energy, emission and power fuel price forecasts for North American Energy Markets
• Easily assessable data
EMP DELIVERABLES
6
15 January 2013
Integrates primary research, leading data sources and client consulting experience
• Generation expansion plans
• Transmission infrastructure
• Unit retirements
• Supply and pipeline expansion plan
• Finding and development costs
• Regulation
• RPS requirements and response
• Power demand and conservation
• Fuel demand and pricing
• LNG imports / exports
• Future construction costs
KEY ISSUES AND ASSUMPTIONS THAT INFLUENCE THE BASELINE PERSPECTIVE
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15 January 2013
POWER SECTOR PROJECTIONS
ROB PATRYLAK MANAGING DIRECTOR, PLANNING AND ENERGY MARKETS BLACK & VEATCH MANAGEMENT CONSULTING
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COMPLIANCE PLANNING & DEADLINES 15 January 2013
BLACK & VEATCH BASELINE GHG FORECAST– CHANGES FROM MID-YEAR EMP
15 January 2013
10
NATURAL GAS PRICE FORECAST
15 January 2013
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036
$/M
MBt
u (Re
al 20
12$)
2012-2014 Demand Recovery &
Rationalized Production
2015-2020 Prices rise to bring a return
to profitability for Non-core dry gas producers
2020-2025 Emission costs and abandoned Alaska Pipeline push B&V projection upward
2026-2037 Price trajectory tracks continued growth
in power generation demand
Henry Hub Natural Gas PricesHistorical EIA AEO 2012B&V Projection (Year-End 2012) B&V Projection (Mid-Year 2012)
11
Black & Veatch forecasts additional 63 GW of coal-fueled generator retirements by 2037
• Black & Veatch expects a wave of retirement of smaller, older coal-fired assets by 2020
• Forecasted retirements driven primarily by EPA hazardous air pollutant requirements and projected natural gas prices
• Forecast does not include retirements from potential future GHG emission regulations
COAL UNIT RETIREMENTS FORECAST REMAINS UNCHANGED AT 61.7GW BY 2020
15 January 2013
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Source: Black & Veatch
Emporia Energy Center - Kansas
Coal retirements and decline in regional reserve margins will drive continued capacity growth
• Power sector demand for gas expected to grow 2% annually
• More than 390,000 MW of new capacity is expected before 2037 – a nearly 20% increase from previous forecast
• Technology advances in combined cycle with advances in combustion turbine technology
NATURAL GAS-FUELED GENERATION WILL CONTINUE TO GROW
15 January 2013
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Source: Black & Veatch
Refueling Nuclear Reactor
In the near-term, budget deficit and waste disposal concerns limit federal loan guarantee programs
• Expect deferrals and cancellations of new units to continue
• Utilities will work to get the most of existing units with up-rates
• Uncertainty regarding Fukushima “lessons learned” will diminish
• Over the next 25 years, B&V forecasts a decline in nuclear resources
ECONOMY, GAS PRICES SLOW NUCLEAR DEVELOPMENT
15 January 2013
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Source: Black & Veatch
Lopburi 55 MW Solar Farm - Thailand
Renewable capacity additions are driven by state Renewable Portfolio Standards requirements
• ~115,000 MW of new capacity additions anticipated by 2037
• Wind will make up majority of new capacity additions
• Solar capacity expected to grow as a result of technology advances
RENEWABLE ENERGY GROWTH WILL CONTINUE
15 January 2013
15
Source: Black & Veatch
THE CHANGING U.S. GENERATION CAPACITY MIX
15 January 2013
16 Gas capacity will increase by nearly 20% during the next 25 years
Data Label Legend: Technology, Capacity (MW), Share of Total (%) Source: Black & Veatch EMP
COAL TO GAS: THE CHANGING U.S. ENERGY GENERATION MIX
15 January 2013
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Natural gas’s “market share” increases from 25% of electricity consumption to 52%, while coal decreases from 37% to 20%, and renewables increases from 6% to 10%
Data Label Legend: Technology, Energy (GWh), Share of Total (%)Source: Black & Veatch EMP
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FUEL MARKETS PROJECTIONS
GREG HOPPER MANAGING DIRECTOR, NATURAL GAS & POWER FUELS PRACTICE BLACK & VEATCH MANAGEMENT CONSULTING
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BRIGHT OUTLOOK AHEAD FOR THE NATURAL GAS INDUSTRY
15 January 2013
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Optimistic 92%
Neutral 5% Pessimistic 3%
OUTLOOK ON INDUSTRY GROWTH IN NORTH AMERICA BETWEEN NOW AND 2020
Source: Black & Veatch Natural Gas Survey Q. What is your general outlook on the future growth of the North American natural gas industry?
Low Gas Prices + Lagging Demand Growth + Potential Export Limits + Increasing Regulation
CRUDE PRICE OUTLOOK CONTINUES TO SUPPORT A ROBUST GAS MARKET
15 January 2013
20
$0
$20
$40
$60
$80
$100
$120
$140
$160
2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035
$/bb
l (20
12$)
B&V End Of Year 2012 WTI Price Forecast B&V End Of Year 2012 Brent Price Forecast
EIA AEO 2012 Reference Oil Price*
*EIA AEO 2012 Reference Case is for Low Sulfur Light Oil
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Source: JT Boyd, Black & Veatch Analysis
DELIVERED COAL PRICES REMAIN FLAT DUE TO FALLING DEMAND AND LIMITED EXPORT OPPORTUNITIES
15 January 2013
U.S. SHALE CONTINUE TO OUTPERFORM PREVIOUS EXPECTATIONS
15 January 2013
Source: Black & Veatch Energy Market Perspective Analysis
0
10
20
30
40
50
60
70
80
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036
Bcf/d
North American Shale Gas ProductionMarcellus. Utica Haynesville Barnett Eagle Ford Montney, Horn River Other
Fayetteville, Woodford
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CONCERNS OVER HYDRAULIC FRACTURING MAY IMPEDE SHALE GAS DEVELOPMENT
15 January 2013
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37%
28%
11%
10%
7%
5%
2%
Legislative/legal …
Environmental …
Increased …
Pipeline safety …
Other
Biggest Impediment to Future Industry Growth
Environmental Concerns Impede Share Gas Development
Not At All Impede
(1) Significantly Impede
(5)
3.38
Source: Black & Veatch Natural Gas Survey Q: Of the following regulatory issues, which one causes the greatest concern in relation to impediments of future growth in the natural gas industry?
ELECTRIC SECTOR DEMAND STILL THE GROWTH ENGINE FOR THE NATURAL GAS INDUSTRY
15 January 2013
Source: Black & Veatch Energy Market Perspective Analysis
0
20
40
60
80
100
120
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036
Bcf/
d
United States Natural Gas DemandResidential Commercial Industrial Electric Transportation LNG Exports
Electric Residential Commercial Industrial2.95% 0.91% 0.98% 0.32%
Projected 2012-2037 Compound Annual Growth Rate
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NATURAL GAS DEMAND GROWTH EXPECTED IN OTHER EMERGING MARKETS
15 January 2013
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Source: Black & Veatch Natural Gas Survey Q. In which of the following emerging markets do you expect material gas consumption increases by 2020? (Multiple responses accepted) Significant differences, compared to total respondents, noted at the 95% confidence level.
Source: U.S. Department of Commerce; Black & Veatch Energy Market Perspective Analysis
61%
56%
54%
45%
12%
2%
LNG exports
Transportation/Natural gas vehicles
Petrochemicals
Manufacturing
Electricity/Power generation*
Other
Consumption Increases in Emerging Markets by 2020
YEAR-TO-DATE THROUGHPUT BY INDUSTRY (SEPT 30, 2012)
15 January 2013
NATURAL GAS PRICE FORECAST
15 January 2013
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036
$/M
MBt
u (Re
al 20
12$)
2012-2014 Demand Recovery &
Rationalized Production
2015-2020 Prices rise to bring a return
to profitability for Non-core dry gas producers
2020-2025 Emission costs and abandoned Alaska Pipeline push B&V projection upward
2026-2037 Price trajectory tracks continued growth
in power generation demand
Henry Hub Natural Gas PricesHistorical EIA AEO 2012B&V Projection (Year-End 2012) B&V Projection (Mid-Year 2012)
27
ACCORDING TO THE B&V NATURAL GAS SURVEY, THE INDUSTRY EXPECTS GAS PRICES TO RISE
15 January 2013
28
TOP 5 DRIVERS OF NATURAL GAS PRICE INCREASES
Increasing use of natural gas for power generation
Increased overall demand
More stringent environmental regulations on producers
LNG Exports
INCREASED E&P COSTS
Respondents were asked to identify the top three drivers for significant, long-term increases in North American natural gas prices.
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LNG EXPORTS VARY BY LOCATION AND ARE ASSUMPTION-DEPENDANT
2.0%
2.2%2.1%
2.2%
1.5%
1.7%
2.0%
1.6% 1.6%
1.2%
2.1%
2.4%
2.2%2.4%
1.1%
0.8%
2.1%
1.3%
0.9%
0.6%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Henry Hub Agua Dulce Hub
Houston Ship
Channel
Katy Waha Dominion, South Point
Transco Zone 4
Transco Zone 6, Non-NY
Chicago City-Gates
PG&E City-Gate
Mar
ket P
rice
Impa
ct (%
of B
ase
Case
Pri
ce)
Projected Price Impact of Incremental 1.2 Bcf/d of LNG Exports Starting 2018
2018-2027 2028-2042
29
27%
40%
13%
11%
8%
At will
With moderate regulation
With specific price impact limitations
With comprehensive regulation
No. U.S. gas is for North American …
Base: Total Respondents (n=310) Q5. Should US producers be permitted to export natural gas into the international LNG market?
U.S. EXPORTING INTO INTERNATIONAL LNG MARKET
15 January 2013
30
U.S. Exporting into International LNG Market
Most believe U.S. producers should be permitted to export to international markets with moderate to no regulation
67% at will or moderate regulation
67%
90%
83%
43%
77%
Total Producer/Marketing LDC North America
Q5. Should US producers be permitted to export natural gas into the international LNG market? Significant differences, compared to total respondents, noted at the 95% confidence level.
U.S. EXPORTING INTO INTERNATIONAL LNG MARKET AT WILL OR WITH MODERATE REGULATION BY DIFFERENT GROUPS
15 January 2013
31
(n=310) (n=39) (n=100) (n=133)
Total Value Chain Function Primary Region Served
• Stakeholder firms and firms that serve the global market are more likely to believe that U.S. producers should be able to export at will or with just moderate regulation.
• LDC firms are significantly less likely to believe that U.S. producers should be able to export at will or with just moderate regulation.
Gathering/Storage/ Transportation
(n=80)
Source: Black & Veatch Energy Market Perspective Analysis
2012-2022 Flows Increase
2012-2022 Flows Decrease
2012-2022 Flows Stable Natural Gas Pipelines
32
NORTH AMERICAN GAS INFRASTRUCTURE SHALE GAS REDEFINES PIPELINE FLOWS AND VALUES
15 January 2013
• Continued price recovery • Rationalized production in the near team
• Long term supply growth that moderates prices • Ongoing derivative gas-oil linkage
• Long term and near term migration from coal-fired generation to gas continues • Regulatory activity around gas-power interdependency increases
• New demand sources to emerge • Policy influences will be prominent
LOOKING FORWARD – ISSUES TO WATCH 15 January 2013
INDUSTRY TRENDS
ROB PATRYLAK MANAGING DIRECTOR, PLANNING AND ENERGY MARKETS BLACK & VEATCH MANAGEMENT CONSULTING
34
Well positioned to help our clients address the significant energy industry concerns
• Integrated planning efforts across fuel and power
• SPP evolution to Day 2 Market & LMPs
• Generation capacity decisions and fuel procurement in ERCOT and SPP (and other)
• Midwest and Southeast Coal retirement decisions and generation replacement solutions
• North American or regional base case
• Corporate scenario development
2013 TRENDS – WHERE CLIENTS LEVERAGE OUR HELP
15 January 2013
35 35
Well positioned to help our clients address the significant energy industry concerns
• Active transaction market – Independent Market Report, Independent Engineering Report, Asset Valuation, Risk Assessment, Financial Advisory
• IRP, fuel procurement and stakeholder participation
• Transmission planning (economic and traditional) – helping clients assess and develop transmission projects for reliability, or to facilitate renewable energy delivery
• Transmission investment strategy – identifying transmission investments that open markets, or mitigate price risk, or improve competitive position of strategic generation assets
2013 TRENDS – WHERE CLIENTS LEVERAGE OUR HELP
15 January 2013
36 36
CONTACT:
GREG HOPPER Managing Director Natural Gas & Power Fuels OFFICE: 713-590-2280 [email protected]
ROB PATRYLAK Managing Director Planning and Energy Markets Office: 678-932-9131 [email protected]
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www.bv.com
