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Update on the Natural Gas Situation:
Terry H. MorlanNorthwest Power Planning Council
Power Committee BriefingJuly 16, 2003
Recent Natural Gas Prices: Henry Hub
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8.00
9.00
10.00
No
min
al $
/MM
Btu
Excess Capacity Has Been Eliminated
Capacity Utilization Above 90% is Associated With Volatile Prices
Volatile Short-Term Prices React to Supply and Demand Changes
Weather (and weather forecasts)Cold spells in winterAnd more recently, hot spells in summer
Storage levels compared to normal for time of year
Electric generation for air conditioning now competes with storage refill
Storm threats in Gulf that may affect supply
Deviations from Normal
-200
-150
-100
-50
0
50
100
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250Heating
Cooling
Unusual Heating and Cooling Needs Affect Prices
For Example: Cold Weather Leads to High Natural Gas Prices
-200
-150
-100
-50
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50
100
150
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250
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03
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9.00
10.00Heating Deviations
Prices
Gas Storage is Used to Meet Heavier Winter Demand
-600
-400
-200
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200
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1000
1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11
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Fe
et
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1600
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Cu
bic
Fe
et
Net Withdrawal
Weather Sensitive Demand
1999 2000 2001 2002
+ = Storage Withdrawal
1998
Gas Price is Sensitive to Storage Position Relative to Normal
Natural Gas Prices vs. Storage Deviations from Previous 5-Year Average
-800
-600
-400
-200
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Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02
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10Storage Variance
Price
Storage Levels Deteriorated During 2000, But Recovered in 2001
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3500
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52
1997-2001Range
2000
2001
Storage Levels Deteriorated Rapidly in December 2002, and Continued
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1500
2000
2500
3000
3500
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52
2002
2003
1997-2001Range
Heavy Withdrawals in Winter 2002-03
Natural Gas Demand and Supply Respond to Price
DemandFuel switchingPlant closures (fertilizer and chemicals especially)Invest in fuel switching capacity, alternative technologiesLonger-term plants may move offshore
SupplyShort term, changes in storage injections or withdrawalsLong term, changes in drilling activityLonger term, invest in alternative supplies, e.g. LNG capacity
Drilling and Well Completions Respond to Price Changes
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500
1000
1500
2000
2500Price
Gas Rigs
Wells
Council Forecast Compared to EIA and Futures Prices
$-
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
2002 2003 2004 2005 2006 2007 2008 2009
$/ M
MB
tu (
No
min
al)
Council Draft
EIA ST
NYMEX
EIA LT
Council Revised
Futures Prices are Sensitive to Current Prices and Conditions
History of Closing Prices for July 2003 NG Futures ($/MMBtu)
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6/2
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8/2
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/29
/20
00
12
/29
/20
00
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8/2
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1
4/2
9/2
00
1
6/2
9/2
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1
8/2
9/2
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1
10
/29
/20
01
12
/29
/20
01
2/2
8/2
00
2
4/2
9/2
00
2
6/2
9/2
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2
8/2
9/2
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2
10
/29
/20
02
12
/29
/20
02
2/2
8/2
00
3
4/2
9/2
00
3
Futures for July 2003
Cash Price
Long-Term ConcernsDeclining natural gas production in major producing areasObserved decline in average size of new wellsWell productivity declines more rapidlyNew sources of supply will be deeper, more expensiveReplacement supplies such as LNG or Alaskan gas pipeline will take time to developGrowth in gas-fired electricity generation (increase summer demands versus normal winter peaks)
On the Other Hand ……Drilling technology improving, costs fallingGas well productivity is stableProduction has been replaced in 7 of last ten yearsGas discovered per well drilled does not show a long-term declining trendIncreased gas-fired generation should increase overall capacity utilization rates, decrease costs
Drilling Success Improving Over TimePercentage of Dry Wells
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
Gas Well Productivity StabilizedAverage Gas Well Productivity
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
160,000,000
180,000,000
Cu
bic
Fe
et
Pe
r W
ell
Proved Reserves Have Increased Adequately to Replace Production
Change in Proven Natural Gas Reserves
-25000
-20000
-15000
-10000
-5000
0
5000
10000
15000
Bcf
Gas Discoveries Per Well Drilled Does Not Show the Downward Trend
Gas Discoveries Per Well Drilled
0.000
0.200
0.400
0.600
0.800
1.000
1.200
1.400
1.600
Bc
f P
er
We
ll
Transitional DifficultiesDeveloping more multiple fuel capabilityGrowth of summer demand for electricity generationDevelopment of a more diverse and flexible supply baseConflicting environmental policiesFinancial stress in energy businesses