Transcript Spring Market Assessment 2002

Spring Market Update
2002
Chris Smith & Les Deman
May 2002
If I Only Had One Slide
2001 Storage Levels Relative to Historical (Total US)
Source: EIA
3,500
3,000
May 24, 2002 at 1,796 Bcf
2,500
Bcf
2,000
1,500
1,000
500
0
J
F
M
A
94-01 Historical Max-Min
M
J
Series2
J
2000
A
2001
S
O
2002
N
D
Is It Deja Vu All Over Again?
 The 1999-2001 Cycle








Gas inventories reached an all-time peak in March 1999
NYMEX gas prices troughed in February 1999 at $1.63
NYMEX oil prices troughed in February 1999 at $11.68/B
The US rig count troughed in April 1999 at 488
WTI hit $37.20 in September 2000
Henry Hub gas approached $10 in December 2000
Gas inventories plunged to 627 Bcf in March 2001
The US rig count peaked at 1293 in July 2001
 Spring 2002

Gas inventories surpassed the 1999 peak
 Gas and oil prices are strong
 The rig count dropped to 738 in early April
 Economic growth seems to be ramping upwards
 Will the next 18 months repeat the 1999-01 experience?
US Gas Demand Better in 02, 03 Maybe
 No Winter = No Demand
WINTER RESIDENTIAL-COMMERCIAL DEMAND

42
40
38
Bcfd
1st quarter 2002 was 9% warmer
than normal
 If rest of 2002 is normal GWHDDs 1.4%, but up 1.3% in 2003
 Residential/Commercial flat in 2002,
but up 4.2% in 2003
 Power generation down 4% in Q-I,
but gas took share from oil
36
34
32
30
1999-00
2000-01
2001-02
2002-03
 Generation Comes First in Q-II & III
US POWER GENERATION GROWTH
2001-2003
E
R
H
T
A
L
O
A
S
O
C
2003
+
IL
O
N
U
C
LE
A
R
Y
D
H
RISKS: EL NINO BEGINNING IN
SECOND HALF OF 2002
2002
R
2001
G
100
80
60
40
20
0
-20
-40
-60
-80
O
Cheap baseload units get chosen
first--hydro, coal, nucs
 Generation growth goes to hydro &
gas in 2002
 In 2003 growth goes to coal, oil and
gas
Bil Kwh

Source: EIA, NOAA and Coral estimates
Industry Comes Last
 Industry=f(Price, HDDs, GWIP)
BASE INDUSTRIAL GAS USE
(Yr over Yr Change)
01 II
-Q
01 III
-Q
-IV
02
Q
-I
02
Q
-I
02 I
Q
02 III
Q
-IV
03
-Q
-I
03
Q
-I
03 I
Q
-I
03 II
Q
-IV
-I
US economic growth accelerated in QI, but Q-II signs are more subdued
 Gas-intensive mfg. remains well below
the mid 2000 peak
 Efficient new gas units & a return of
hydro & coal might limit gas upside
 Higher gas prices through rest of 2002
impacts 2003 demand growth
01
Q

01
Q
 How Fast a Rebound?
4
3
2
1
0
-1
-2
-3
-4
-5
US GAS CONSUMPTION - 12 MO. AVE.
63
62
61
Bcfd
The key variables were mostly
negative in 2001
 Weather was a drag in 01Q-IV & 02QI, but key industries are raising
production
 Gas prices were attractive in Jan-Feb,
but a negative factor in Mar-Apr
Bcfd

60
59
58
57
RISKS: HIGHER INTEREST RATES
PLUS HIGHER OIL AND GAS PRICES
PUT A BREAK ON THE RECOVERY
56
Jan- May- Sep- Jan- May- Sep- Jan- May- Sep- Jan- May- Sep00
00
00
01
01
01
02
02
02
03
03
03
Source: EIA and Coral estimates
Gotta Drill To Find Gas
 Gotta Have Money to Drill

GAS RIG COUNT vs GAS PRICE* 1991-2002
1200
Gas Rig Count
About 85% of all US wells
are drilled by independents
 Spending is highly
correlated with prices
 Low price = less drilling
 A Lot of Wells to Keep Even
1000
800
600
200
0
$0

RISKS: THE PRICE NEEDED TO RAISE
PRODUCTION DEPRESSES DEMAND
$2
$4
$6
$8
GAS DISCOVERIES vs RIG COUNT 1990-2000
Gas Discoveries - Tcf
Dry gas production reached
53 Bcfd in 2001 (19.3 Tcf)
 Max gas discoveries* past
10 yrs was 19.1 Tcf (2000)
 Well half-life is down to 24
months, from 40 in 1990
 Need about 800 gas rigs to
get 20 Tcf
*Wellhead Price 6
mos earlier
400
20
15
10
5
0
300
400
500
600
Gas Rig Count
Source: EIA and Baker-Hughes
*Excludes revisions and adjustments
700
800
If Not in 2002, When?
 2002 Supply - A Downer
ESTIMATED QUARTERLY PRODUCTION CHANGES
(Yr-Over-Yr)
US gas production peaked in mid
2001
 Declines likely through most of 2002
 Gas rigs hit 1070 in 7/01, but supply
growth trailed off quickly in Q-III & IV
 Gas rigs are down 1/3, but may have
turned a corner
Bcfd

2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
01
 Gas Imports Help Some
I
I
I
II
II
II
II
II
II
Q- 1Q- -Q-I Q-IV 2Q- 2Q- Q- I Q- IV 3-Q- 3Q- Q- I Q- IV
2
3
0
1
2
0
0
0
0
0
0
0
0
03
01

ESTIMATED GAS IMPORT CHANGES
(Yr-Over-Yr)
2.0
PIPELINE
1.5
LNG
1.0
Bcfd
Canadian and LNG imports are trailing
last year
 LNG import growth is lagging, but may
rebound with gas prices $3.50+
 Unless WCSB declines, pipe imports
should trend higher because of high
Canadian gas storage
0.5
0.0
-0.5
-1.0
-1.5
-Q
01 -III
-Q
-IV
02
Q
-I
02
Q
02 II
Q
02 III
Q
-IV
03
-Q
03 I
Q
-I
03 I
Q
03 III
Q
-IV
Q
-II
01
01
Q
-I
-2.0
01
RISKS: E&P INVESTMENT LAGS AS
PRODUCERS CLEAN-UP BALANCESHEETS
Source: EIA and Coral estimates
A US Trial Balance: 2002-2003
 So Far, So Good. But....
US SUPPLY-DEMAND BALANCES

65.0
APPARENT DEMAND
63.0
62.0
61.0
60.0
2001
 Going From Feast To Famine
2003
3500
2001
3000
2002
Bcf
2500
2003
2000
1500
2000
1000
500
1996
Source: EIA, AGA and Coral estimates
O
ct
N
ov
D
ec
ep
S
l
ug
A
Ju
Ju
n
M
ay
pr
A
M
ar
Fe
b
0
Ja
n
RISKS: ANTICIPATORY MARKET
REACTION LOWERS DEMAND &
RAISES SUPPLY
2002
END OF MONTH STORAGE 1995-2003

Record storage levels likely
until fall 2002
 2003 could see record lows
over much of the year--below
1996 & 2000-01
 Has the market reacted too
early or is it too late?
TOTAL SUPPLY
64.0
Bcfd
US demand growth should
exceed supply in 2002 & 03
 High 2002 storage should
mitigate availability concerns
 The balance gets more dicey
in 2003
Supply 2005: Through a Looking Glass
 It’s A Tall Order
US ANNUAL SUPPLY GROWTH 2000-05

14
12
10
8
6
4
2
0
-2
Mexico
Canada
Source: EIA (12-2001) and Coral estimates
2005
W
es
t
es
Ro
ck
i
LNG
2000
RISKS: TRADITIONAL NA GAS
SUPPLY BASINS HAVE PEAKED
SW
M
id
Co
n
S
NET IMPORTS
Bcfd
Imports need to grow at least
0.5 Bcfd per yr.
 Will Canadian exports grow
from East & West basins?
 LNG import capacity grows to
3.5 Bcfd by 2005, but worldwide
supply lags
O
C
G
ul
f
 Can Imports Balance S&D?
O
ns
ho
re
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
-0.05
NE
Forecasts call for production to
grow nearly 1.0 Bcfd per year
 All regions expected to increase
except southwest
 Gas rigs may need to average
1000+ between 2002-05
Bcfd

What If the Forecasts are Wrong?
 The Physical Issues
Smaller gas supply squeezes
industrials
 Price sensitive sectors close
first--ammonia, methanol, etc.
 Foreign sources gain share-metal products, chemicals, etc
0
-2
-4
Bcfd

POTENTIAL DEFICITS 2005
-6
-8

Higher supply encourages
more gas-for-oil fuel switching
 The Financial Issues
-10
-12
Flat Production
Flat Productuin +
High Generation
KEY OIL-GAS PRICE RELATIONSHIPS (HUB GAS*)

$7.00
USGC Propane
NYC Distillate
NYC 0.3% No 6
$6.00
$5.00
$/MMBtu
If supply lags, gas prices move
up to clean oil products on a
sustained basis--No. 2, LPGs,
etc. Hub prices might range
from $3.50-$6.00/MMBtu
 Higher supply pits gas against
No.6. Hub prices in the $2.75$4.25/MMBtu range.
Higher Generation
$4.00
$3.00
$2.00
$1.00
RISKS: BOOM-BUST CYCLES LIMIT
INVESTMENTS IN BOTH THE SUPPLY
AND DEMAND SECTORS
$-
$20 WTI
ASSUMES $0.50 HUB-NYC BASIS
Source: Coral estimates
$25 WTI
$30 WTI
New Generation, No Place to Go
WSCC GENERATION ADDITIONS - GW
 Build and they Will Come

72 Gw slated from 2000 to
2005, 37% in CA
 Peak demand growing at 34 Gw per year
 Need aluminum and silicon
valley to return to 2000
growth rate
25
Many plants facing limited
operation at variable cost
 Merge, sell or mothball?
 Consumers in some
western states see flat-tolower bills. Not in CA.
OTHER
2001
2002
20
15
10
5
0
 The Good, Bad & ….

CA
2003
2004
2005
WSCC RESERVE MARGIN FORECAST - %
30
25
20
COMFORT RANGE
15
10
5
CA
0
2000
2001
OTHER
2002
Source: RDI and Coral estimates
2003
2004
2005
Gas Gets Generation Growth, But…
WECC LOAD ESTIMATES - Bil KWh
 Limited, Low Cost Sources

Hydro can do 200+ in wet
year, but no upside
 Nuclear, operating near
capacity now. Tomorrow?
 Coal’s cheap, but minimal
new capacity slated
 Load growth goes to gas
800
700
600
500
400
300
200
100
0
GAS
COAL
NUCLEAR
HYDRO
*Other includes
purchases & imports
2000
 Declining Heat Rates
Dampen Gas Growth
2001
2005
ESTIMATED GAS USE FOR GENERATION - WECC
4.6

4.4
4.2
Bcfd
Gas generation growth
exceeds 5%/yr.
 66% of new plants are ccgas
 Heat rates could easily
decline by 10% in 2005
OTHER*
4.0
3.8
3.6
3.4
2000
Source: EIA and Coral estimates
2001
2005
Gas & Electricity Values
Yesterday, Tomorrow (& Last Year)
20.00
$/MMBtu
$/MWH
200.00
SP 15 On Peak
17.50
SP 15 On Peak - (Last Yr)
175.00
SoCal Border
15.00
SoCal Brdr - (Last Yr)
150.00
12.50
125.00
10.00
100.00
7.50
75.00
5.00
50.00
2.50
25.00
You were here
You are here
0.00
Jan-95
Jul-95
Jan-96
Jul-96
Jan-97
Jul-97
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Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
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Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
0.00
Tying It All Together
 Despite a 1st quarter GDP surge, a U-shaped US economic recovery
in 2002 seems likely as capital investment expenditures lag
 Gas increases marketshare from oil (lost in 2000-01) and in power
generation, but mild winter moderated demand growth
 A large inventory overhang hinders gas markets, but farsighted
players provide upward momentum
 Accelerating economic growth (US and R-O-W) moves energy
demand up sharply in 2003
 US gas demand could see record growth in 2003
 Quicker market reaction sends early signals to producers and
consumers, reducing the likelihood of price spikes
RISKS: ESCALATING OIL AND GAS PRICES LOWER ECONOMIC GROWTH AND
DEPRESS GAS & OIL DEMAND BY LATE 2002-EARLY 2003. PRICES FALL AND
THE NEXT CYCLE BEGINS.