Key Factors Influencing Natural Gas Supply

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June 23, 2010

CenterPoint Energy ‐ESC Webinar

Christopher B. McGill

Managing Director, Policy Analysis



A simple

question:

Why is

there

such

optimism

regarding

natural gas markets in our energy

economy today?



U. S. Natural Gas Prices

Forecast

0

5

10

15

20

25

Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011

Henry Hub spot price

Composite wellhead pr ice

dollars per thousand cubic

Source: Short-Term Energy Outlook, J une 2010; Reuters News Service





U.S. Natural Gas Infrastructure Additions

Underground Storage

Working Gas(Bcf) Working Gas(Bcf)Estimated Peak Capacity Design Capacity

April 2008 3,789 4,136

April 2009 3,889 4,313

Source: Estimates of Peak Underground Working Gas Storage Capacity in the

United States-2009 Update, Energy Information Administration, September 2009.



U.S. Natural Gas Pipeline Infrastructure



Additions to U.S. Natural Gas Pipeline Infrastructure

(2007‐2011)

(Bcf/d) ($ Billions) Added Capacity Estimated Cost Miles

2007 14.9 4.3 1,663

2008 44.6 11.4 3,893

2009 (est.) 31.9 11.9 3,643

2010 (est.) 24.6 5.8 2,070

2011 (est.) 37.4 15.7 4,528

Source: Expansion of U.S. Natural Gas Pipeline Network: Additions in 2008 andprojects through 2011, Energy Information Administration, September 2009.



WAVE, “GOODBYE,” TO WHERE WE HAVE BEEN

Source: American Association of Petroleum Geologists.



SAY, “HELLO,” TO WHERE WE ARE GOING

Source: Natural Gas Supply Association.



U.S. NATURAL GAS SUPPLY (2007 ‐ 2009)

Source: Bentek Energy LLC, Energy Market Fundamentals.

51.753.9 54.7

8.88.2 7.0

2.1 1.0 1.2

0

10

20

30

40

50

60

70

2007 2008 2009

B i l l i o n

C u b i c

F e e t p e r D a y

Average Daily U.S. Natural Gas Supply

LNG

Canadian Imports

U.S. Production

62.6 63.1 62.9



U.S. Dry Natural Gas Reserves(1988‐2008)

Data source: Potential Gas Committee (2009)

0

50

100

150

200

250

T r i l l i o n

c u b i c F e e t

Source: Energy Information Administration.



Energy Information Administration

Reserves and Production of Dry Natural Gas

in the

United

States

(TCU)

EIA Dry Gas

Year Reserves Production

1990 169 17.8

1992 165 17.81994 164 18.8

1996

166

18.91998 164 19.02000 177 19.22002 187 18.92004

193 18.6

2006 211 18.52008 245 20.4



Natural Gas Resource Assessment of the

Potential Gas

Committee,

2008

(mean

values)

POTENTIAL GAS AGENCY

COLORADO SCHOOL OF MINES

Traditional Resources 1,673.4 TCFCoalbed Gas Resources 163.0 TCF

Total U.S. Resources 1,836.4 TCF

Proved Reserves (EIA) 237.7 TCF

Future Gas Supply 2,074.1 TCF

* Value as of year-end 2007



Potential Gas Committee

Determination of Future Supply of Natural Gas

in the

United

States

(TCF)

DOE Traditional Coal Future Cumulative Ultimate

Reserves

+

Resources

+

Gas = Supply

+ Production

= Resource

1990 169 855 147 1,172 777 1,9491992 165 854 147 1,166 815 1,9811994 164 881 147 1,192 853 2,045

1996

166

921 146 1,234 893 2,1271998 164 896 141 1,202 933 2,1342000 177 936 155 1,268 973 2,2412002 187 958 169 1,314 1,013 2,3272004 193 950 169 1,312 1,053 2,3642006 211 1,155 166 1,532 1,091 2,6232008 238 1,673 163 2,074 1,132 3,206



PGC Resource Assessments, 1990‐2008

Data source: Potential Gas Committee (2009)

Total Potential Gas Resources (mean values)



Hydraulic Fracturing

Source: Chesapeake Energy.



Shale Basins and the U.S. Pipeline Grid

Source: American Clean Skies Foundation.



Richard Newell, SAIS,December 14, 2009

0

5

10

15

20

25

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Shale gas and Alaska production offset declines in supply to meet

consumption growth and lower import needs

TCU

Alaska

Non-associated offshore

ProjectionsHistory

Associated with oil

Coalbed methane

Net imports

Non-associated onshore

Shale gas

Source: Annual Energy Outlook 2010



18



NORTH AMERICA LNG IMPORT CAPACITY 2010

Source: Federal Energy Regulatory Commission

Everett, MA 1.035 Bcfd

Cove Point, MD 1.800 Bcfd

Elba Island, GA 1.200 Bcfd

Lake Charles, LA 2.100 Bcfd

Gulf Gateway, LA 0.500 Bcfd

Northeast Gateway, MA 0.800 Bcfd

Freeport, TX 1.500 Bcfd

Sabine, LA 4.000 Bcfd

Hackberry, LA 1.800 Bcfd

` Other North America 2.700 Bcfd

Total 17.435 Bcfd



20

Source: Benter Energy LLC, December 31, 2009.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

J a n 1

1 1

2 1

3 1

1 0

2 0 2

1 2

2 2

1 1

2 1

1 ‐ M a y

‐ 0 9

1 1

2 1

3 1

1 0

2 0

3 0

1 0

2 0

3 0 9

1 9

2 9 8

1 8

2 8 8

1 8

2 8 7

1 7

2 7 7

1 7

2 7

B u f f p e r d a y

Net U.S. Natural Gas Imports from Canada

January 1‐

December 31,

2009

A u g

D e c

M a r



U.S. NATURAL GAS CONSUMPTION BY SECTOR(EIA, AEO 2010‐2035 REFERENCE CASE)

21

0.00

5.00

10.00

15.00

20.00

25.00

30.00

2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034

Q u a d r i l l i o n B

t u

Power Generation

CNG

Pipeline Fuel

Lease and

Plant

Fuel

Industrial

Commercial

Residential



22

0.00

5.00

10.00

15.00

20.00

25.00

30.00

T r i l l i o n

C u b i c F e e t

Dry Gas Production Net Imports

U.S. Natural Gas SupplyEIA,

AEO

2010

‐2035

Reference

Case



Key Theme: Transformative Forces

Shift in Natural Gas Supply

Dare We Say – Price Stability?



Short‐Term Natural Gas Supply/Demand

Balance Influences

‐2010

y Weather – NOAA currently anticipating 1.5% warmer than

30

‐ year

norm,

about

the

same

as

last

year

y

Natural

gas

demand

expected

to

grow

in

industrial

and

power generation sectors 2010 over 2009

y Supply disruptions

due

to

active

Atlantic

hurricane

season

24



Short‐Term Natural Gas Supply/Demand

Balance Influences

(cont.)

y Modest demand increases coupled with strong

domestic production

in

record

storage

levels

by

November 1, 2010

y Strong or weak LNG, Canadian imports

y Degree of

coal

to

gas

switching

in

power

generation

sector

25



Christopher B. McGillManaging Director, Policy Analysis

[email protected]



Kent Armstrong

Webinar

June 23, 2010



2009 was

a year

of

challenges.

y An economic recession with high unemployment, a

constrained financial

market,

oil

prices

at

lows

unseen

since 2005, and natural gas prices bottoming out around $2 /MMBtu, reflected a stark picture

compared to

the

world

in

2008.



Now in 2010, the picture is

changing for

the

better

y The financial markets are opening up and companies are

making

capital

expenditures

again,

providing

jobs

and economic growth, although unemployment still remains high. Oil and gas prices have bounced back,

although not

to

2008

levels



Looking forward through the rest

of 2010

and

beyond

To answer these questions, many sources were consulted for their

expertise

including:

y Cambridge Energy Research Associates (CERA), y An IHS Company, y ICF International, y

Wood Mackenzie,

y Energy Information Administration, y SNL Financial, and

y Platt’s.

To understand

the

current

environment,

multiple

forecasts

were

reviewed and evaluated. Wood Mackenzie’s Near‐Term price

outlook falls in the center of the consensus price forecast (see Chart 1). For this reason we use Wood Mackenzie’s data to discuss market fundamentals throughout the report.



Expert Price Forecasts

Expert Price Forecasts ($/MMBtu)

2010 2011 2015 2020 2025 2030

IHS CERA

4.04 3.93 5.65

6.59 7.92

9.07Wood Mackenzie

4.91 4.87 7.67

8.75 10.15

12.16

ICF International

5.60 5.84 6.41

8.54 9.64

12.06

EIA

5.17 5.65 6.99

8.11 9.49

12.15

PIRA5.65

Deutsche Bank

6.00 6.00

Credit Suisse

5.25 6.50

IHS Global Insight, Executive Summary of the Economy, March 2010



Consensus Price

Forecast

Summary

Table 3: Consensus Price Forecast Summary

Consensus Price

($/MMBtu)

Upper Boundary

($/MMBtu)

Lower Boundary

($/MMBtu)

Near‐Term : 2010‐20112010 2011 2010 2011 2010 2011

5.00 5.07 5.94 6.27 4.03 3.93

Mid‐Term: 2012‐20152012 2015 2012 2015 2012 2015

5.93 6.57 6.42 7.67 5.22 5.65

Long‐Term: 2016‐20302016 2030 2016 2030 2016 2030

7.06 11.36 8.00 12.16 5.86 9.07

To understand the current environment, multiple forecasts were reviewedand evaluated. Wood Mackenzie’s Near‐Term price outlook falls in thecenter of the consensus price forecast. For this reason we use WoodMackenzie’s data to discuss market fundamentals throughout the report.



Historical & Near‐term Prices

Near‐Term Consensus and Wood

Mackenzie Price ForecastHenry Hub Spot Prices ‐ YTD

2010

vs.

2009

Sources: Historical Data: SNL Financial; Wood Mackenzie, March 2010; Consensus

Price Forecast, Upper and Lower Boundary



2009 versus

2010

y Though declining since the middle of February, prices

have been

consistently

higher

in

2010

than

they

were

in 2009. Prices peaked on January 8th, 2010 in excess of $7/MMBtu. Prices remained at or above $5.50/MMBtu

until February

18th,

2010,

at

which

point

warmer

weather and stronger production numbers led to a

decline in spot prices at Henry Hub that has continued

though March.

As

of

March

23,

2010

Henry

Hub

spot

price was $4.03.



Natural Gas Near‐

Term Price Forecast

The upper and lower boundaries are the highest and lowest expert and Investment Bank forecasts for

each period.

According

to

SNL

Financial, the average price for the

first quarter of 2010 was $5.17/MMBtu. We expect prices to

average $4.97, $4.86 and $5.01 per MMBtu for quarters 2‐4 of 2010, respectively.

Prices

are

expected

to

average $5.00/MMBtu in 2010 and

$5.07/MMBtu in 2011. See the

chart for a summary of the

quarterly and annual consensus

price forecasts

for

2010

and

2011.

Sources: SNL Financial, Historical Data; Consensus Price Forecast, Projections

The high upper boundary price in June 2011 is a result of ICF International’s method for modeling storage – it supports high prices in April, May and June and requires a price drop in July



Natural Gas Near‐

Term Supply

The landscape of production is changing. As the chart shows, the role

unconventional gas is playing

throughout North America is growing

and

will

continue

to

do

so

through

2030. Unconventional gas made up

only 19% of North American supplies in 2000; it is expected to make up 46%

and 56% of the supply mix in 2015 and

2030 respectfully. The effect of

unconventional gas,

specifically

shale

gas, is particularly pronounced in the

United States. Shale gas alone, which

made up 14% of domestic production

in 2009, will grow to 25% of production by 2015 and to 40% by 2030.

ICF International, Gas Market Model, January 2010

Wood Mackenzie, Natural Gas Monthly Market Update, March 2010

Baker Hughes US Rotary Rig Count March 19,2010



Natural Gas Mid‐

Term Consensus

Price ForecastThe upper and lower boundaries are the highest and lowest expert forecasts for each period. In the

Mid‐Term

prices

are

expected

to

range from $5.93/MMBtu in 2012 to

$6.57 /MMBtu in 2015. The upper boundary during this period ranges from $6.42 to $7.67/MMBtu and

the lower boundary ranges from

$5.22 to

$5.65/MMBtu.

Historical: SNL Financial; 2010‐ 2015: Consensus price

forecast



Natural Gas

Mid

‐Term

Supply

In the Mid‐Term, the market is not going to be supply constrained and U.S. prices should continue to be de‐linked from the global oil prices.

ProductionIn the Mid‐Term, U.S. producers will be transitioning from the period of declining

production (in all but the shales) to a period of growth. There will be steep

requirements in drilling from 2012‐2015 and the ability of the industry to make

this transition while limiting increases in the cost of producing will be an

important factor

of

Mid

‐Term

prices.

The

ability

of

the

industry

to

add

new

rig

capacity if necessary should help to keep inflationary pressures in check. Wood Mackenzie is expecting total U.S. production to grow at a CAGR of about

1% from 2011‐2015. In this time period, growth will return to the Rockies, Gulf Coast, Mid‐Continent and Fort Worth and the Northeast. Shale production

from these

areas

continues

to

account

for

the

majority

of

growth.

Wood

Mackenzie estimates have shale production growing to ~15 Bcfd by 2015, accounting for 25% of total production.

Wood Mackenzie, North American Natural Gas Long‐Term View, December 2009



Mid‐Term Supply Projections and

Production Projections



Long‐Term Forecast

The Long‐Term (2016‐2030) consensus forecast is an average of:

Wood Mackenzie, North American

Natural Gas

Long

‐Term

View,

December 2009

Cambridge Energy Research

Associates, IHS CERA Monthly Briefing, March 2010

ICF International, Gas Market

Model, January

2010

Energy Information

Administration, Annual Energy Outlook, December 2009

In the Long‐Term, nominal prices are expected to range from

$7.06/MMBtu in 2016

to

$11.36/MMBtu in 2030. The upper boundary during the period ranges from $8.00 to $12.16/MMBtu and

the lower boundary ranges from

$5.86 to $9.07/MMBtu.



Long‐Term Supply Projections and

Production Projections



Production Estimates for Selected

Shale Plays



Capacity Additions

y At any given time, the price of natural gas in different

locations can

vary

significantly

compared

to

prices

at

Henry Hub (Henry Hub gas prices are the standard against which basis is calculated). Basis is the difference between

the price for a particular market and the Henry Hub gas price.

Increases

in

the

production

from

the

shale

plays

have had the largest impact on basis in recent years, with

pipeline capacity curtailments or additions affecting the

ability

of

producers

to

move

gas

to

more

constrained

areas

also contributing to basis. Over the last year, there has been

a basis collapse, meaning the differences between Henry Hub and other places has shrunk considerably or

disappeared totally.

Cambridge Energy

Research

Associates,

Demystifying

Natural

Gas

Basis,

March

2007



Pipeline Capacity Changes (2007‐2015) and (2015‐2030)

Pipeline Capacity (MMcfd)

Change from 2007‐2015 Change from 2015‐2030

Supply Area

Rockies 3,961 2,200

Mid‐Continent 17,909 1,200

New England 3,934 0

Alaska N/A 2,200

Capacity 25,804 5,600

Total Additional Capacity 31,404



Historical Basis

The following

nine

charts

show

the

historical

basis

from

January

2001

through March 2010 by taking the spot price at that location monthly and comparing it to Henry Hub for the same time period, as well as the

12‐month rolling average basis amounts. When the blue line is under

$0.00, the

particular

location

was

trading

at

a discount

to

Henry

Hub.

The largest dip in the blue line in nearly all the charts is in July 2005

when Hurricanes Katrina and Rita hit and natural gas supply was interrupted in the Gulf Coast area. The other large dip that was seen

by many locations occurred in July 2008 when Hurricane Ike hit and

disrupted supply,

although

not

to

quite

the

same

level

as

Katrina

and

Rita.

Basis



Basis

B i



Basis

Basis



Basis



l



ConclusionCenterPoint Energy Resource Corp expects gas prices to average in

the range

of

$4.03/MMBtu to

$5.94/MMBtu in

2010

and

between

$3.93/MMBtu and $6.27/MMBtu in 2011.

The unknown levels of shale gas provide a large upside for U.S.

domestic supply

and

gives

the

U.S.

a reason

to

be

optimistic

about

natural gas and its role in the future of our country as an energy source. The current quantity of gas coming into the market does not balance the current demand, however, and until supply and

demand

are

more

in

balance,

natural

gas

prices

will

remain

low.

We expect prices to range between $5.00/MMBtu in 2010 to

$11.36/MMBtu in 2030.

The U.S. should hopefully see some resolutions to the ongoing

pieces of

legislation

over

the

Near

‐Term,

which

will

aid

companies

in planning how they will conduct business in the Mid‐ and Long‐

Term time periods.

Documents

Key Factors Influencing Natural Gas Supply