Bridging the Methane Gap August 2006 Resolving the Growing Gap between Natural Gas Supply and...

Bridging the Methane Gap

August 2006

Resolving the Growing Gap between

Natural Gas Supply and Demand, 2006–30

Copyright © 2006 Global Insight, Inc. 2

Bridging the Methane Gap: Study Definition

N atural gas demand in the United Statescontinues to expand. While there are

several alternative development patterns for new gas supplies, there are also numerous sign posts pointing to limited or even declining Lower 48 capacity. The consequences of this capacity shift will be a higher, more volatile long-term gas price plateau.



Who should participate?

Timetable

Why is the study important and timely?Why is the study important and timely?

Global Insight qualifications

Study content


Major Strategic Questions Addressed in Study

• How long can the high level of drilling in conventional and non-conventional reserves offset the declines in gas production?

• How will industrial users respond? Will demand continue to increase, remain relatively flat with

improvements in efficiency, or decline rapidly because of high and volatile prices?

• How will the power generation sector respond and make best use of gas at these high prices?

• What are the potential implications of climate change and other environmental constraints and mandates?


Henry Hub Gas Price vs. U.S. Gas Rig Count

0

200

400

600

800

1000

1200

1400

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Rig

Co

un

t (U

nits

)

0

2

4

6

8

10

12

14

16

He

nry

Hu

b W

ee

kly

Sp

ot

Pri

ce

U.S. Gas Rigs

Henry Hub Prices

… Even though rig counts are up in response to price changes

… Even though rig counts are up in response to price changes


Gas Production Has Not Responded to Price

Henry Hub

Dry Production

0

2

4

6

8

10

12

14

16

Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05

40

42

44

46

48

50

52

54

56

Despite record drilling activity, U.S. gas production has declined …

Despite record drilling activity, U.S. gas production has declined …

Production has declined since 2001 & prices

are higher than ever

$/m

mB

TU

BC

F/d

ay


35

40

45

50

55

60

1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

Pro

du

ctio

n (

BC

FD

)

-15%

-10%

-5%

0%

5%

10%

… which can be attributed to accelerating declines in existing wells

and declining productivity of new wells.

… which can be attributed to accelerating declines in existing wells

and declining productivity of new wells.

In recent years, declines have been accelerating…

Production Will Continue to Fall

Year-on-year declines

Production


Implications of Accelerated Declines

40

45

50

55

60

65

70

1973 1978 1983 1988 1993 1998 2003 2008

(BC

F/d

ay

)

Total Consumption

Domestic Dry Production

Accelerated Decline2010 Production

Demand Destruction to Balance Accelerated Decline

Base Case 15 BCF/day

Accelerated Decline23 BCF/day

Import Requirements

Up to 8 BCF/day of supply needed

from new sources as soon as 2010.




Timetable

Why is the study important and timely?


Study contentStudy content


A Scenario-based Approach

• Critical uncertainties that will determine how the US gas outlook will unfold include: Global oil prices Pace of LNG development Alaskan gas pipeline

• Alternative views of future supplies and prices are a core element of the study

• Study will include base case and two alternative scenarios

Opening restricted drilling areas Conventional and Non-conventional

gas


Filling the Gap from Technically Challenging Sources

Current LNG Terminals

LNG: Under Construction

Resource Areas

Existing Pipelines

Proposed Pipelines

Resource Areas

Current LNG Terminals

LNG: Under Construction

Resource Areas

Existing Pipelines

Proposed Pipelines

Resource Areas

®


Proposed Scenarios

Scenario World Oil Price(Real $2005)

Lower 48 Gas Production

Environmental Constraints

Base $60/BBL, declining to $45/BBL by 2020

Successful shift to non-conventional

Current environmental regulations

Supply Constrained

$60/BBL flat Accelerating decline rates

Current environmental regulations

Global Climate Change (Supply Constrained)

To be determined To be determined Global Climate Change mandates

Details of scenarios will be defined in first workshop


Outline of Study Analysis and Deliverables

North American Gas Base Case Forecast

Constrained Supply and Global Climate Change Scenarios

Economic GrowthEnvironmental PremisesRegional and Sectoral DemandGas Supplies:

ConventionalNon-Conventional

Regional Prices

Lower 48 Conv. Gas Productive CapacityMoving Up the Supply Cost Curve:

Deep offshoreFrontier and ArcticLNGNon-conventional Gas

Scenarios for Future Supply and Price

Gas Demand Destruction by Industry and Sector

By Sector By Industry

ResidentialCommercialPower SectorIndustrial

Short-term Long-term

Historical gas/oil switchingMulti-fuel power plantsMulti-feed petrochemical plantsEnvironmental limits

Industrial/Generation migrationAlternative technologyPower emphasis: Coal/NuclearEconomic impactsPetrochem.

MethanolIron & Steel

AmmoniaAluminumOther Industry


Outline of Study Analysis and Deliverables

Region/Sector Summaries Supply Summaries

Apply results of industry analysis to each region and sector

Estimate regional and sectoral long- and short-term demand responses through comparison to the base case

Recheck price scenario consistency

Apply results of supply and GCC scenarios to each basin

Estimate supply response through comparison to base case

Recheck price scenario consistency


Deliverables

• Kick-off meeting for all study participants• Interim multi-media conference call

presenting preliminary scenario results• Final report documenting

analysis and results• CD-ROM containing study

data• Optional on-site presentation

of study results• Optional customization of

results to specific market geography and sector/industrial composition



Who should participate?Who should participate?

Timetable



Study content


Who Should Participate?

Segment Analysis and Benefits Provided

ProducersFuture price scenarios; changing seasonal demand patterns; changing logistics patterns; competitive position of alternative suppliers

Pipelines and LNG Carriers

Future throughputs; changing seasonal demand patterns; regional demand shifts

Storage OperatorsChanging seasonal demand patterns; regional demand shifts; new seasonal price patterns

Local Distribution Cos. and Power Sector

Customer risks; changing seasonal demand patterns; region-specific demand shifts; customizable to LDC, EU market area.

Power SectorFuture fuel prices; gas supply constraints; generation capacity planning; environmental mandates

Industrial Gas Consumers

Future price scenarios; evaluation of competitive impacts versus other domestic players and imports; future seasonal supply curtailment risks

State GovernmentsAssessment of regional winners and losers; vital information for formulating industrial development and retention policies and outlook for tax revenues

Federal GovernmentHelp assess potential economic and security impact of offshore migration of critical industries, e.g. petrochemicals

Financial InstitutionsFuture price scenarios; which industries (and by inference companies) will be subject to competitive threats linked to high gas prices; opportunities for new gas-based derivatives

Gas

Su

pp

ly S

egm

ents

Gas

Su

pp

ly S

egm

ents

Oth

er S

egm

ents

Oth

er S

egm

ents




TimetableTimetable



Study content


Study Timetable* Timetable for Methane Multi-Client Study

Customized Assessments

Task VII. Final Report & Conclusions

Task VI. Scenario Summaries

Task V. Power Sector Options & Response

Task IV. Industry Options & Response

Interim Teleconference

Task III. GCC with Supply Constraints

Task II. Constrained Supply & Price

Task I. North American Base Case

Kick-Off Meeting

0 1 2 3 4 5 6

Months




Timetable


Global Insight qualificationsGlobal Insight qualifications

Study content


Global Insight - Experienced Leadership

Global Insight, the most consistently accurate economic forecasting firm in the world, serves more than 3,300 clients in industry, finance, and governments around the world.

Our broad range of consulting capabilities covers market analysis, business planning, investment strategy, risk assessment, infrastructure analysis, policy evaluation, and economic development and impact.

Company revenues exceed $90 million, and we have over 600 employees in 30 offices covering North and South America, Europe, Africa, the Middle East, and Asia.

Simply put, Global Insight provides the most comprehensive coverage of countries, regions, and industries available from any source.


Global Insight Energy Group

T he Leaders of the Project Team each have over 30 years experience in North American and global energy market analysis. Each has been

invo lved in developing Global Insight ’s energy modeling, data, and analys is too ls as well as preparing numerous prev ious studies in natura l gas market development. These experienced team leaders wi ll be joined by other experts and analysts f rom wi thin the Global Ins ight economics and energy analys is staf f.

G lobal Insight’s Global Energy Group is recognized for its integrated economic/market analysis, pric ing analysis, comprehensive industry

sector forecasts, and objective treatment of regulatory and competit ive issues. Wi th 44 staf f div ided between Lexington, London, and Paris , the Energy Group’s c lients consist of most of the world’s large power, gas , and o i l companies , as well as many governmenta l agenc ies .


James Osten Mary Novak Kevin Lindemer Bill SevernsPrincipal Managing Director Exec. Mng. Director Senior Consultant

More than 25 years in energy analysis with Global Insight

Responsible for Global Insight N. American Gas Analysis

Expertise in LNG, risk management, fundamental analysis

Director of numerous studies in global energy markets

Economics degrees from Univ. of Wisconsin & Boston College

More than 20 years in energy analysis with Global Insight

Specialist in regulatory issues, policy analysis and economic impact studies

Expertise in all aspects of N. American and European energy economics

Economics degrees from Catholic Univ. of Amer. And Univ. of Maryland

More than 30 years of in energy analysis and project management with Global Insight, CERA, & Irving Oil

Expertise in international oil and gas markets including LNG, refined products, and petrochemicals

Experienced in developing markets and related investment strategies

MS in Economics

More than 25 years in petroleum engineering, project management positions, and corporate strategy positions.

An expert on North American and international gas supply: exploration; field development; and production optimization

Engineering degrees from Univ. of Mo. and Colorado School of Mines; MBA from MIT

Project Team

Other Key Project Contributors

Margaret Rhodes, Senior Economist, US Energy Frantz Price, Managing Director, Industry Practices

Tom Runiewicz, Principal, Steel Service John Dean, Senior Associate, North American Coal

Ron Whitfield, Consultant, Petrochemicals Phil Hopkins, Sr. Economist, US Regional Economics

Gil Rodgers, Senior Director, Energy Practice

TEL: (781) 301-9142EMAIL: [email protected]

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