Transcript Document

National Fuel Gas Supply Corporation
Empire Pipeline, Inc.
Marcellus Shale: Changing Gas Supply Dynamics
and Pipeline Infrastructure
A Pipeline & Storage Perspective
Jeffrey Schauger
GENERAL MANAGER
INTERSTATE MARKETING
NATIONAL FUEL GAS SUPPLY CORPORATION
Safe Harbor for
Forward Looking Statements
This presentation may contain “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995, including statements regarding future
prospects, plans, performance and capital structure, anticipated capital expenditures and completion of construction projects, as well as statements that are identified by the
use of the words “anticipates,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “predicts,” “projects,” “believes,” “seeks,” “will,” “may,” and similar expressions.
Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed in the forward-looking
statements. The Company’s expectations, beliefs and projections contained herein are expressed in good faith and are believed to have a reasonable basis, but there can be
no assurance that such expectations, beliefs or projections will result or be achieved or accomplished.
In addition to other factors, the following are important factors that could cause actual results to differ materially from results referred to in the forward-looking statements:
changes in economic conditions, including economic disruptions caused by terrorist activities, acts of war or major accidents, and downturns in economic activity including
national or regional recessions; changes in demographic patterns and weather conditions, including the occurrence of severe weather such as hurricanes; changes in the
availability and/or price of natural gas or oil and the effect of such changes on the accounting treatment of derivative financial instruments or the valuation of the Company’s
natural gas and oil reserves; uncertainty of oil and gas reserve estimates; ability to successfully identify, drill for and produce economically viable natural gas and oil
reserves, including shortages, delays or unavailability of equipment and services required in drilling operations; significant changes from expectations in the Company’s
actual production levels for natural gas or oil; changes in the availability and/or price of derivative financial instruments; changes in the price differentials between various
types of oil; inability to obtain new customers or retain existing ones; significant changes in competitive factors affecting the Company; changes in laws and regulations to
which the Company is subject, including changes in tax, environmental, safety and employment laws and regulations; governmental/regulatory actions, initiatives and
proceedings, including those involving acquisitions, financings, rate cases (which address, among other things, allowed rates of return, rate design and retained gas), affiliate
relationships, industry structure, franchise renewal, and environmental/safety requirements; unanticipated impacts of restructuring initiatives in the natural gas and electric
industries; significant changes from expectations in actual capital expenditures and operating expenses and unanticipated project delays or changes in project costs or plans;
the nature and projected profitability of pending and potential projects and other investments, and the ability to obtain necessary governmental approvals and permits;
occurrences affecting the Company’s ability to obtain funds from operations, from borrowings under our credit lines or other credit facilities or from issuances of other shortterm notes or debt or equity securities to finance needed capital expenditures and other investments, including any downgrades in the Company’s credit ratings; ability to
successfully identify and finance acquisitions or other investments and ability to operate and integrate existing and any subsequently acquired business or properties;
impairments under the SEC’s full cost ceiling test for natural gas and oil reserves; changes in the market price of timber and the impact such changes might have on the types
and quantity of timber harvested by the Company; significant changes in tax rates or policies or in rates of inflation or interest; significant changes in the Company’s
relationship with its employees or contractors and the potential adverse effects if labor disputes, grievances or shortages were to occur; changes in accounting principles or
the application of such principles to the Company; the cost and effects of legal and administrative claims against the Company or activist shareholder campaigns to effect
changes at the Company; changes in actuarial assumptions and the return on assets with respect to the Company’s retirement plan and post-retirement benefit plans;
increasing health care costs and the resulting effect on health insurance premiums and on the obligation to provide post-retirement benefits; or increasing costs of insurance,
changes in coverage and the ability to obtain insurance.
For a discussion of these risks and other factors that could cause actual results to differ materially from results referred to in the forward-looking statements, see “Risk
Factors” in the Company’s Form 10-K for the fiscal year ended September 30, 2009 and and the Company’s Form 10-Q for the quarter ended December 31, 2009. The Company
disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
National Fuel Gas Company
Principal Businesses
National Fuel Gas Company
E&P
Seneca
Resources
Corporation
Midstream
National Fuel
Gas Midstream
Corporation
P&S
National Fuel
Gas Supply
Corporation
&
Empire Pipeline
Utility
Energy Mktg
National Fuel
Gas Distribution
Corporation
National Fuel
Resources,
Inc.
Timber
Highland Forest
Resources, Inc.
and NE Division
of Seneca
Resources Corp.
PL&S: ~3,000 Miles of
Pipeline, 60,000+ hp
LDC: ~725,000
Customers Served
throughout Western NY
and Northwestern PA
Own/Operate 27 Fields;
Co-Own/Operate 4 Fields
Storage Capacity ~70 bcf
Niagara
TCPL Interconnects:
Niagara, Chippawa
CANADA
Empire Pipeline
Chippawa
Empire Connector
Corning Interconnects:
Empire, Millennium
Lake
Lake
Erie
Erie
Independence
Corning
Millennium
NY
Tuscarora
Storage
PA
Ellisburg
Ellisburg Interconnects:
TGP, DTI
Leidy
Leidy Interconnects:
Transco, TETCO, DTI
National Fuel Gas Company
PA
Bristoria Interconnect:
TETCO – M2
OH
National Fuel’s Pipeline & Storage System
Lake
Lake Ontario
Ontario
NFGSC System Storages
NFGSC System Pipelines
Empire State Pipeline
Interconnects
FACT: North American Shale has
dramatically altered the domestic
gas Supply picture.
Shale Gas Plays in
the United States
FACT: North American Shale has
dramatically altered the domestic
gas Supply picture.
 Relatively low Unconventional costs vs Conventional
 The Key- Technological advances
 Shale production has grown from 3% of the U.S. Gas Supply in
2005 to 20% in early 2010
 In 2009 US Local Natural gas production highest since 1973.
 PA production has doubled since the pre-shale days
Marcellus - “The Beast in the East”
 Recoverable area > 95,000 sq mi
 Depth 5,000 ft +, Thickness 50 ft –
250 ft
 Potentially the largest field in the
U.S. - recoverable reserves
estimated in the 100’s of TCFs
 Low breakeven costs – maybe
lowest of major U.S. shale plays
 Marcellus Shale play is vast – and
it’s still early
Marcellus Shale Production Forecast
(Based on Conservative 50 Tcf Recoverable Reserve Estimate)
7,000
3,000
6,000
2,500
MMcf/d
2,000
4,000
1,500
3,000
1,000
2,000
500
1,000
0
0
2009 2012 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045
Production Forecast
Source: Black & Veatch Analysis
Wells First Delivered
# Wells First Delivered
5,000
Other Telling Indicators….
 What large players are saying:
 “…We continue to ramp up our activities in the Marcellus…”
 “…accelerate sharply our development of the Marcellus.. “
 “…able to utilize new drilling techniques that allows (us) to affordably reach
gas supplies in the Marcellus…that previously had been too expensive to
tap.’
 Producers taking on firm capacity positions to ensure production flows:
Range, EQT, Chesapeake, Statoil, Cabot, East Resources, Fortuna
 Majors and investors jumping into the Marcellus fray
 Pittsburgh area exploding – tightening labor market
 TGP 300 Line
Eastern Mainline Export Points and Other Major
Pipelines
EAST
HEREFORD
IROQUOIS
NAPIERVILLE
PHILLISBURG
DRACUT
NIAGARA
CHIPPAWA
ST. CLAIR
DAWN
ELLISBURG
LEIDY
DOVER
RAMAPO
BROOKFIELD
Pre-Marcellus Gas Supply Sources in North America
Pre-Marcellus Gas Supply Sources in North America
Pre-Marcellus Gas Supply Sources to the Northeast
ONTARIO
Traditionally gas supply
sources have come from
Canada, the Rockies, and the
Gulf Coast Region.
NIAGARA
New York
LEIDY
Pennsylvania
Post Marcellus Gas Supply Sources in North America
Displacement
Rockies
Midcontinent
Southeast/
Gulf
Appalachia
Post-Marcellus Gas Supply Sources to the Northeast
ONTARIO
Marcellus Shale has
resulted in the traditional
gas supply being
displaced.
NIAGARA
New York
LEIDY
Pennsylvania
Trends…
NFGSC System
Increased Producer Activity
NFGSC Interconnect Requests
180
161
160
140
104
120
100
79
80
60
40
20
0
2003
2004
2005
2006
2007
2008
2009
55% increase in IC requests from 2009-2010
2010
NFGSC System
Volumes Associated with IC Requests
Cumulative Exp Daily Vol (MCFD)
Interconnect Request Volumes
1,400,000
1,214,750
1,200,000
1,000,000
800,000
600,000
400,000
56,600
200,000
0
Producer Requested Flow Date
Basis Differential Shift
Domininon SP to Niagara Basis (Average Monthly Prices)
$1.00
$0.80
$0.60
$0.40
Summer 06
Avg. 0.119
Summer 08
Avg. 0.122
Estimates Derived from
Forward Basis Numbers
Summer 07
Avg. 0.092
$0.20
$0.00
-0.083
-0.145 -0.130
-$0.20
Summer 09
Avg. (0.07)
Winter 09/10
Avg. (0.136)
-0.277
Summer 10
Avg. (0.198)
Summer 11
Winter 10/11
Sept-10
Apr-06
Jun-06
Aug-06
Oct-06
Dec-06
Feb-07
Apr-07
Jun-07
Aug-07
Oct-07
Dec-07
Feb-08
Apr-08
Jun-08
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
-$0.60
Summer 12
Winter 07/08
Avg. (0.145)
Winter 08/09
Avg. (0.115)
Winter 11/12
-$0.40
Winter 06 /07
Avg. (0.028)
Canadian Imports
U.S. Natural Gas Imports from Canadian Pipelines
39
37.83
38
Mmcf
37
35.86
36
35
34
32.71
33
32
31
30
1999
Source: EIA
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Effects of Shales on LNG Imports
120,000
US LNG Imports
98,344
100,000
Mcf
80,000
60,000
44,252
40,000
20,000
31,019
36,271
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Bentek/EIA
Observations…
 “Pipeline Geology”
 Displacement
 Significant gas supply being added to large long-haul pipes: TGP,
TETCO, TCO, DTI, NFG
 Shift in flows due not only to Marcellus but effects of REX, LNG,
and other shale plays
 The Interstate Pipeline System Downstream of Storage
(Ellisburg/Leidy and Oakford) is at Capacity
 Key Market Segment: Power Gen Markets in NYC, Mid-Atlantic,
and Ontario. Rate of growth?
 Overall market will grow – rate depends on economy, but
unlikely to match increase in gas supply in market area.
…And Effects of Marcellus in the Northeast



Pricing Dynamics

New West to East pipeline infrastructure will increase the Western Basis
and put downward pressure on Eastern Market Prices

Overall flattening of basis and decreased price volatility.
Flows

Displacement of traditional gas supply, and reverse flow south to north

Focus on Unconventional plays

Reduced reliance on LNG

Shifting plans related to Alaskan gas supply
Infrastructure

NE Markets have competitive advantage as transportation and fuel costs
decrease from transporting gas a shorter distance

Long haul pipelines will likely see lower utilization and decreased
revenue on pipelines from the Gulf to the Northeast
Infrastructure, Infrastructure,
Infrastructure.
Effects of Marcellus Shale in the Northeast
Changing the Pipeline Infrastructure in the Northeast
40
16,000
35
14,000
30
12,000
25
10,000
20
8,000
15
6,000
10
4,000
5
2,000
0
0
2010
New Pojects
2011
2012
2013
2014
Total Expansion Capacity (MMcf/d)
 34 Potential New Projects Planned through 2014
 Total Increased Potential Capacity of 13,693 MMcf/d
Source: Bentek
MMcf/d Capacity
Projects
Northeast Expansion Projects
2010 Pipeline Expansion
Projects Map
Source: Bentek
National Fuel Gas
PL&S Infrastructure Expansion Plans
 Y-M53 to Leidy
 Lamont Compressor Station
 Line N Expansion
 Northern Access Expansion
 Tioga County Extension
PIPELINE & STORAGE
EXPANSION INITIATIVES
Y-M53 DIRECT
INTERCONNECTS
Y-M53 Direct Interconnects
Initial Capacity
100,000 Dth/d
In-Service Date
November 2010
Producer Commitments of 20,000 - others Pending
31
PIPELINE & STORAGE
EXPANSION INITIATIVES
LAMONT
COMPRESSOR
STATION
PHASE 1I &
& II2
Lamont Compressor Station Phase I & II
Planned Capacity
Planned Compression (2 units)
Anticipated In-Service Date
Estimated CAPEX Investment
32
40,000 Dth/d (I)
50,000 Dth/d (II)
1,150 HP (I)
1,700 HP(II)
July 2010 (I)
June 2011 (II)
~$6 MM
~$7 MM
PIPELINE & STORAGE
EXPANSION INITIATIVES
Line “N” Expansion Phase I & II
Planned Capacity
LINE “N”
EXPANSION
PHASE I & II
33
160,000 Dth/d (I)
150,000 Dth/d (II)
Planned Compression
4,700 HP (I)
13,000 HP (II)
Anticipated In-Service Date
Sept 2011 (I)
Nov 2012 (II)
Estimated CAPEX Investment
$23 MM (I)
$30 MM (II)
NATIONAL FUEL PIPELINE & STORAGE
EXPANSION INITIATIVES
NORTHERN ACCESS
EXPANSION
Northern Access Expansion
Planned Capacity
320,000 Dth/d
Planned Compression- Ellisburg
12,000 HP
Planned Compression- East Aurora
2,300 HP
Anticipated In-Service Date
Fall 2012
Estimated CAPEX Investment
$60 MM
Full Producer Commitment
34
PIPELINE & STORAGE
EXPANSION INITIATIVES
TIOGA
COUNTY
EXTENSION
PHASE I & II
Tioga County Extension Phase I & II
Planned Capacity
350,000 Dth/d (I)
260,000 Dth/d (II)
Anticipated In-Service Date
September 2011 (I)
2012/2013 (II)
Estimated CAPEX Investment
35
$47 MM (I)
$125 MM (II)
PIPELINE & STORAGE
EXPANSION INITIATIVES
LAMONT
COMPRESSOR
STATION
PHASE I & II
NORTHERN ACCESS
EXPANSION
Y-M53 DIRECT
INTERCONNECTS
WEST TO EAST
LINE “N”
EXPANSION
PHASE I & II
APPALACHIAN
LATERAL
36
TIOGA
COUNTY
EXTENSION
PHASE I & II
Infrastructure and Transporter-related
Challenges
 GQ
 Creditworthiness
 Timelines
 Shifting Pipeline Grid Dynamics & Valuation
 Producer risk tolerances
 IC requests
On the Horizon….
 New supply areas will continue crowd out traditional ones
 “Non-firm” production eventually at risk
 All bets off with regard to traditional flows, basis, and commodity
pricing - price and gas supply-driven changes
 Certain oversupplied producing areas/pipes could see price
bloodletting
 Canadian markets will soon gain access to Marcellus supply
 Large need for midstream/gathering infrastructure
 Utilities: encouraged by proliferation of Marcellus gas supply but
will adjust portfolios with caution
Thank You
Please visit us at
www.nationalfuelgas.com