North American Natural Gas:
Where do we go from here?
BP North American Gas and Power
April 2012
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Current driving factors
• Mother nature is having a large impact on US energy markets
− Much above normal temps are a big departure from last year
• The economy continues to weigh on demand
− Weather adjusted load growth has been sluggish at best
• Competing fuel prices
− Prompt month gas hovering around $2.07/MMBtu; PRB at $8.15/ton
• Supply, supply, supply…exports?
• EPA policies on hold??
− Stay issued for Cross States Air Pollution Rule (CSAPR)
− Mercury and Air Toxics Standards (MATS) issued in December
− Is this the next court battle to be fought?
− Carbon standards for new plants proposed for new builds
• Wind generation & tax credits?
North American energy prices
Source: Various, April 9, 2012
$28
$26
$24
$22
$20
$/MMBtu
$18
$16
$14
$12
$10
$8
$6
$4
$2
$14
n-
Ja
HO #2 NYH
Coal NYMEX (unadj)
13
n-
Ja
12
n-
Ja
11
n-
Ja
10
n-
Ja
09
n-
HH/NYMEX 6-mths ago
FO NYH #6 1%
Ja
08
n-
Ja
07
n-
Ja
06
n-
Ja
05
n-
Ja
04
n-
Ja
03
n-
Ja
02
n-
Ja
01
n-
Ja
00
n-
Ja
HH/NYMEX
WTI
Where is the weather??
Nov 2010 – Mar 2011
Nov 2011 - Mar 2012
Source: EarthSat
U.S. storage inventories: Large year on
year surplus
Source: EIA
4,400
3,600
3,200
2,800
2,400
2,000
1,600
1,200
7 Year Min/Max
Previous Year
Current Year
7 Year Average
800
400
US inventories are 887 Bcf above year ago levels, and 892 Bcf
above the five year average
28-Sep
14-Sep
31-Aug
17-Aug
3-Aug
20-Jul
6-Jul
22-Jun
8-Jun
25-May
11-May
27-Apr
13-Apr
30-Mar
16-Mar
2-Mar
17-Feb
3-Feb
20-Jan
6-Jan
23-Dec
9-Dec
25-Nov
11-Nov
28-Oct
14-Oct
0
30-Sep
Total U.S Storage Inventories (Bcf)
4,000
Housing Starts
2,000
1,500
1,000
500
0
$340
$320
$300
$280
$260
$240
$220
Ja
n
Ap -08
rJu 08
O l-08
ct
Ja -08
n
Ap -09
rJu 09
O l-09
ct
Ja -09
n
Ap -10
rJu 10
O l-10
ct
Ja -10
n
Ap -11
rJu 11
O l-11
ct
Ja -11
n12
11
10
-8%
-10%
Depressed home values contributing to depressed housing market
Average Home Price
Source: Federal Reserve Board, Bureau of Labor Statistics, Census Bureau, & Congressional Budget Office
Ja
Jn
M a-n06
May -0
Se ay-066
Spe- -06
Ja p0-60
Jn 6
M a-n0-7
May 0 7
Se ay-0- 7
Spe 07
Ja p0-70
Jna- 7
MM n0-80
aay 8
SeS y-0-08
pe- 8
JaJ p0-80
na- 8
MM n0-90
aay 9
SeS y-0-099
pe-p
JaJ 0-909
na-n
MM 1-01 0
aayy
SeS -1-100
pe-p
JaJa 1-010
n-n
MMa 1-11 1
ayy
SeSe -1-111
p-pJaJa 1111
n-n-1
12 2
2,500
1Q
1Q
09
08
07
06
05
04
03
02
01
4%
2%
0%
1Q
1Q
1Q
1Q
1Q
1Q
1Q
1Q
1Q
Real GDP, Quarterly % Change
8%
6%
Thousands of Dollars
Ja
M n-0
a
Sey-0 6
6
Jap- 06
n
M -0
a
Sey-0 7
7
Jap- 07
n
M -0
a
Sey-0 8
8
Jap- 08
n
M -0
a
Sey-0 9
9
Jap- 0
n
M -19
a
Sey-1 0
0
Jap- 1
n
M -10
a
Sey-1 1
1
Jap- 1
n- 1
12
Thousands of units
US economy remains resilient
US GDP
Services and manufacturing industries stabilize
60
10-year average
50
-2%
-4%
-6%
40
30
Non-Manufacturing Index
Manufacturing Index
Real rate of unemployment: those who have completely dropped out of
Unemployment
continues
the labor
force to improve
18%
10%
16%
14%
8%
12%
10%
6%
8%
4%6%
4%
2%
2%
0%0%
Industrial gas demand: Modest growth
Source: EIA, Apr. 12
22
21
22
EIA is projecting 4.9% industrial gas demand growth for 2011;
0.8% growth in 2012 (relative to 2011)
21
20 20
Bcfd
Bcfd
19 19
18 18
17 17
16 16
15 15
14 14
Jan Feb
Feb Mar
Mar Apr
Apr May
May Jun
Jun
Jan
2007
2008
2008
2009
Jul
Jul
2009
2010
Aug Sep
Aug
Sep Oct
Oct Nov
Nov Dec
Dec
2010
2011
2011
2012
• Gas demand in industrial sector has surpassed pre-recession levels, driven by petchems sector
-30%
-30%
Residential
Coal
Coal
D
e
Jac-08
ec n
F an-08eb 09
M eb-09ar 09
- A -0
ar M09pr- 9
- 0
pr 09ay- 9
-J
ay 09un 09
un-0J9ul 09
A
Ju -09ug 09
lS ug-09ep 09
ep-0O9ct 09
-N -0
ct D09ov- 9
-0 e 09
ov 9 c
-J ec 09an 09
F an-09eb 10
M eb-10ar 10
- A -1
ar M10pr- 0
- 1
pr 10ay- 0
-J
ay 10un 10
un-1J0ul 10
A1u -1
Ju 0g 0
lS ug-10ep 10
O ep-10ct 10
N
- -1
ct D10ov- 0
ov 10ec 10
- ec 10 10
-1
0
-20%
-20%
p
Gas
Gas
p
Change in total electricity consumption
Change in total electricity consumption
Commercial
p
Industrial
p
12
12
12
11
11
11
10
10
10
09
09
5.0
Se
ay
M
Ja
n
Se
ay
M
Ja
n
Se
ay
M
Ja
n
Se
ay
-10%
-10%
09
0.0
M
08
2.0
Ja
n
p
08
08
1.0
Se
ay
M
Ja
n
Billion kw-hours per day
Electricity demand: Signs of growth in
industrial sector
Source: EIA, Apr. 12
6.0
Forecast
4.0
3.0
30%
30%
20%
20%
EIA is projecting
0.8% electricity demand decrease for
10%
2011; 0.4%
decrease in 2012
0%
10%
0%
Year on Year Change in Power Generation:
Coal to Gas Displacement
Source: EIA STEO, Apr. 12
40%
Coal
Forecast
Gas
30%
20%
10%
0%
-10%
-20%
2009 vs 2008
2010 vs 2009
2011 vs 2010
2012 vs 2011
ov
N
Ju
l
Se
p
N
ov
Ja
n
M
ar
M
ay
Ju
l
Se
p
M
ar
M
ay
n
Ja
ov
N
Ju
l
Se
p
N
ov
Ja
n
M
ar
M
ay
Ju
l
Se
p
M
ar
M
ay
Ja
n
-30%
Weather and natural gas are weighing on
coal
Coal Share of Power Gen
60.0%
55.0%
50.0%
45.0%
40.0%
35.0%
2000 to 2010 Range
Coal Inventories
150
100
• Stockpiles could approach the highs of 2009 (driven by
weather and gas prices)
50
2000 to 2010 Range
2011
2012
ec
D
ov
N
ct
O
Se
p
Au
g
l
Ju
n
Ju
M
ay
Ap
r
M
ar
Fe
b
-
D
ec
N
ov
ct
O
Se
p
demand recovery continue to depress US steam coal
demand
200
n
2012
• Low natural gas prices, mild weather, and slow electricity
250
Ja
2011
• Production continues to be flat to down year on year
300
MMST
Au
g
l
Ju
n
Ju
ay
M
Ap
r
ar
M
Fe
b
Source: EIA
Ja
n
30.0%
North American electricity demand growth
projections have steadily declined
• Comparison of average annual
growth rates for NERC-wide
summer peak demand
• Impacts of slower economic
growth, demand-side efficiency
• Comparison of demand
growth and annual growth
rates by assessment area
• PJM accounts for approx. 25%
of the 10-year growth in the
US
Source: NERC
EPA Mandates: Coal retirements could
significantly impact the gas and power markets
GW: Brattle
Group’s
projected
retirements in
Gigawatts
(0.5 Bcfd)
Brattle Group
estimates 40 to 55 GW
of retirements, and up
to 5.8 Bcfd of
incremental demand
(0.1 Bcfd)
(1.5 Bcfd)
(0.4 Bcfd)
(2.3 Bcfd)
(0.3 Bcfd)
(0.1 Bcfd)
(0.7 Bcfd)
Lower costs and liquids uplift continue to
drive shale growth
Post tax Break Even (US$/Mcfe)
8.00
7.00
6.00
5.00
2012 Forward Strip: $2.52/MMBtu
4.00
3.00
2.00
2011 Forward Strip: $4.17/MMBtu
1.00
0.00
t
ll
r
t
r ee rd
e ah rd ls ll e
o
e
n rd os il le
e ier l e al s ga dy i m rre ey
ey s t as et hia sh v e
nd al
a
i
al
ny ur
l
o
a
BM c tte d e o
r
tl a ned J on e F Co ttev nt n hwe the arn lac W a Ri rok odfo r C ean s u Co an y dfo anc esv S h oss Sh Co n oo Co nt Pi e Val l ba o D
i
o M
r
l
u
A
t
o
i
c
m
B pa ite rn he o
A al
e
n
y n n ay p B si er rior atta
Fr e P c e ag rde aye M ou No
o C W Ri v Pi W a rara e C W o
a
p
n
n
r
tto ew P
r
E
H
o
e
e
S
e
A
s
h
a
s
F
H
c
a
a
b
o
a
r
e
v
r
o
h
e
d
u
N
o
s
n
L
C
l
a
e e r nd io es rk
C
m
G
uv D B k W
a
ll u el
La
N rs da
es
D
k o owd av l mo
c
tic
r
c e arc
M
o
a
a
s
r
U
A P e
A
H An
a M
Bl
M
M
Source: WoodMackenzie
US gas rig activity by county:
Focus on key areas
1,000
Total US Gas Rig Activity
900
800
Rockies
All other gas rigs
700
Appalachia/Marcellus
500
400
300
200
Marcellus
DJ/ Niobrara
600
TX GC/Eagleford
San Juan
Anadarko/ Granite
Wash
LA Land/Haynesville
Permian
100
Anadarko/GW
Haynesville
Ja
n0
M 8
ar
-0
M 8
ay
-0
Ju 8
l-0
Se 8
p0
N 8
ov
-0
Ja 8
n0
M 9
ar
-0
M 9
ay
-0
Ju 9
l-0
Se 9
p0
N 9
ov
-0
Ja 9
nM 10
ar
M 10
ay
-1
Ju 0
l-1
Se 0
p1
N 0
ov
-1
Ja 0
nM 11
ar
M 11
ay
-1
Ju 1
l-1
Se 1
p1
N 1
ov
-1
Ja 1
n1
M 2
ar
-1
2
-
Eagle Ford/
S TX Gulf Coast
Source: Smith Bits, Baker Hughes
US oil rig activity by county:
Steady increase
Williston/ Bakken
Total US & Canadian Oil Rig Activity
2,000
DJ/ Niobrara
1,800
Rockies
1,600
1,400
Canada: 108
1,200
Anadarko
1,000
800
US: 1,329
600
400
200
Permian
US: 323
0
Ja
n0
Ap 8
r- 0
Ju 8
l-0
O 8
ct
-0
Ja 8
n0
Ap 9
r- 0
Ju 9
l-0
O 9
ct
-0
Ja 9
n1
Ap 0
r- 1
Ju 0
l-1
O 0
ct
-1
Ja 0
n1
Ap 1
r- 1
Ju 1
l-1
O 1
ct
-1
Ja 1
n1
Ap 2
r- 1
2
San Joaquin/
Monterey
Canada: 98
Eagle Ford/S TX
Gulf Coast
Source: Smith Bits, Baker Hughes
US Shale Gas Production Outlook
• Current production in the US doubled in last 2 years and surpassed 20 Bcfd
• Production from existing shales (excl Eagle Ford) expected to double in next 20 years
• Key risks include: Environmental impact (footprint, water), Operating challenges (costs, people)
Bcfd
Current Shale Gas Production
Source: EIA, Feb 2012
Shale Gas Production Outlook
Source: MIT Study, June 2010
Long-term US natural gas balances:
What a difference a year makes
70
70
60
60
27 Bcfd
22 Bcfd
50
L48 Offshore
Onshore conventional
CBM
L48 Offshore
Onshore conventional
CBM
Shale
Net Pipeline Imports
Alaska
Shale
Net Pipeline Imports
Alaska
Total Consumption
20
20
20
19
20
18
20
17
20
16
20
15
20
14
20
09
20
20
19
20
18
20
17
20
16
20
20
20
20
20
20
20
20
20
15
0
14
0
13
10
12
10
11
20
10
20
09
30
08
30
20
12
40
20
11
Bcfd
40
20
10
50
Bcfd
EIA 2012 Outlook
LNG
20
13
EIA 2011 Outlook
Total Consumption
Source: EIA AEO 2011/2012
Profound changes in US gas supply
outlook
US Dry Gas Production
US LNG Import Forecast
65
16
63
14
61
12
59
10
55
8
Bcfd
57
53
6
51
4
49
2
47
0
45
-2
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
Bcfd
AEO 2005
Source: US EIA
AEO 2007
AEO 2010
AEO 2011
AEO 2012
05 0 06 0 07 0 08 0 09 0 10 0 11 0 12 0 13 0 14 0 15 0 16 0 17 0 18 0 19 0 20
0
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
Source: US EIA AEO
Multiple LNG export projects are
currently under consideration
Source: FERC
Long-Term Henry Hub spot price
outlooks
Source: Various, April 9, 2012
10.00
Historical
9.00
Forecast
8.00
$/MMBtu
7.00
6.00
5.00
4.00
3.00
2.00
1.00
Range of spot price outlooks
Historical Henry Hub prices
NYMEX forward curve
NYMEX year ago
0.00
05 0 06 0 07 0 08 0 09 0 10 0 11 0 12 0 13 0 14 0 15 0 16 0 17 0 18 0 19 0 20
0
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
View of gas demand, competing fuels, supply costs, production and LNG trends will
influence long-term outlook of gas prices – many moving parts!
Key insights
• North American market works: price works to balance supply
and demand
• Short-term balances influenced by mother nature, economic
trends
• Growth potential in industrial / power gen sectors influenced by
gas price environment and policy direction; will impact
generation fleet
• Unconventional gas/oil production expected to make up larger
share of total supply… but not without risk
• Significant investment in new infrastructure required to move
new energy supply – evolving flow dynamics
• Long-term price assumptions: many moving parts!
Contact Information
• Paul Burgener
• Director Structured Products Americas
• BP Corporation North America Inc.
• [email protected]
• Office: 312-594-7505
• Mobile: 630-300-4914
• AIM: BurgenerCL
• Yahoo IM: burgenerpaul