natural gas demand

National Petroleum Council

Natural Gas Demand

National Petroleum CouncilNatural Gas in North America’s Economy

BCF/Year

Natural Gas24%

Natural Gas23%

Natural Gas31%

Canada

U.S.

Mexico

Petroleum38%

Coal23%

Petroleum63%

Coal4%

Nuclear/Other10%

Hydro7%

Nuclear8%

Petroleum34%

Coal12%

Hydro10%

Nuclear7%

Other6%

Total Energy Use by Country

Regional Natural Gas Demand by SectorYear 2002

National Petroleum CouncilDemand Task Group Approach

• Develop a sector-by-sector demand picture

• Analyze existing and future electric power

• Assess industrial process energy and raw materials

• Evaluate the role of energy efficiency in all sectors

• Integrate U.S. & Canadian demand; Mexico modeled as net export/import

National Petroleum CouncilDemand Task Group Participants

Power Generation*

AEPKeith Barnett

Bonneville PowerBurlington ResourcesCERADominionEdison Electric InstituteExelonExxonMobil PowerFlorida Power & LightSeminole ElectricSouthern CompanySouthern Company Gas

Residential/Commercial

KeySpanRon Lukas

NiSourceSempra

IndustrialConsumers*

PGCDena Wiggins

AlcoaBP ChemicalDow ChemicalCERA ExxonMobil ChemicalKeySpanPCS NitrogenPPGPraxairProcter & GambleTemple-Inland

Economy &Demographics

Shell TradingLes Deman

BPBurlington ResourcesConocoPhillipsDominionEl PasoExxonMobilKeySpanSouthern CompanyUnocalWilliams

Task GroupLeaders

KeySpanDavid ManningHal ChappelleDOEMark MaddoxWade Murphy

Demand Task Group: Working Group Team Composition

*Substantial additional participation from regional power workshops and industrial sector workshops

National Petroleum CouncilFindings on Natural Gas Demand

Greater energy efficiency and conservation are vital near-term and long-term mechanisms for moderating price levels and reducing volatility

Power generators and industrial consumers are more dependent on gas-fired equipment and less able to respond to higher gas prices by utilizing alternate sources of energy

Gas consumption will grow, but such growth will be moderated as the most price-sensitive industries become less competitive, causing some industries and associated jobs to relocate outside North America

National Petroleum CouncilRecommendations Related to Natural Gas Demand

Objective: Improve demand flexibility and efficiency

Recommendation #1

Encourage Increased Efficiency and Conservation through Market-Oriented Initiatives and Consumer Education

Recommendation #2

Increase Industrial and Power Generation Capability to Utilize Alternate Fuels

National Petroleum CouncilDemand Development Roadmap

Macroeconomics

Industrial Demand

Power Generation Demand

Residential & Commercial Demand

Demand Outlook

National Petroleum CouncilDemand Outlook

TCF

0

5

10

15

20

25

30

35

1990 1995 2000 2005 2010 2015 2020 2025

Canada

U.S. Power

U.S. Cogeneration

U.S. Industrial

U.S. Residential/Commercial

Other

1%/YEAR GROWTH2%/YEAR GROWTH

National Petroleum CouncilModeling Assumptions

Macroeconomic Assumptions US GDP Growth 2.8% 2002-2005; 3.0% thereafter US Industrial Production 3.0% Canadian GDP Growth 2.4% 2002-2005; 2.6% thereafter Inflation Rate (GDP Deflator) 2.5%

Other Assumptions Weather Historic 30-year NOAA average Oil Price WTI at $20/bbl flat (real) after 2004 Refiner Acquisition Cost 90% of WTI

of Crude (RACC) Residual Fuel Oil Price 84% of RACC by 2004 Distillate 140% of RACC Coal Price $1.25/MMbtu and declining in real

terms at 1.5%/year to $1/MMbtu by2025


Percent Change in Real GDP

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

1970 1980 1990 2000

% Growth in Real GDP

10 Yr Rolling Avg Real GDP Growth



70 Year Average 3.74% PA

Source: FRB

Recent GDP History

National Petroleum CouncilIndustrial Production by Industry

80

100

120

140

160

180

200

220

240

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Inde

x (1

992=

100)

Metal Durables

Total Ind

Rubber & Plastics

SCG

ChemicalRefining

Food Other

Pr MetalsPaper

National Petroleum CouncilEnergy Efficiency

2003 2010 2020 202520150

5

10

15

20

25

30

35

TCF

U.S. Demand Projection

Projected Demand without Efficiency Gains 5 TCF


Industrial Demand

National Petroleum CouncilU.S. Regional Industrial Energy Use (2002)

SouthAtlantic

MiddleAtlantic

New England

East NorthCentral

West NorthCentral

West SouthCentral

Mountain 1

Mountain 2

Pacific 2

Pacific 1

East SouthCentral

1,500

1,000

500

Trillion Btu

Gas Oil Coal Electric

Source: EEA, Inc.

National Petroleum CouncilIndustrial Energy Demand (2002)

4.3

9.8

0.8

5.13.4

0.9

9.2 26.4

1.4

0.7

19.7

2.5

3.7

4.1

3.9

11.9

2.4

0.4

0.1

0

5

10

15

20

25

30

35

40

Power Gen Industrial Transportation Residential Commercial

Qua

d

Gas Petroleum Coal Purchased Electricity Other

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Agricu

lture

Mini

ng

Constr

uctio

nFoo

dPap

er

Chemica

ls

Petrole

um R

efinin

g

Stone,C

lay,G

lass

Primary

Meta

ls

Rubbe

r

Meta

l Dur

ables

Other M

anuf

actur

ing

Tri

llio

n B

tu

Gas Oil Coal Electric Other

U.S. Total Energy Consumption

Total Energy By Industrial Sector

0 500 1000 1500 2000 2500 3000 3500

Other

Boilers

Process Heat

Feedstock

Trillion Btu

Natural Gas Consumption By Industrial Sector

Natural Gas Consumption By Industrial End-Use

0

500

1000

1500

2000

2500

Foo

d

Pap

er

Pet

role

umR

efin

ing

Che

mic

als

Sto

ne-C

lay-

Gla

ss

Iron

/Ste

el

Prim

ary

Alu

min

um

Oth

er P

rimar

yM

etal

Oth

erM

anuf

actu

ring

Non

-M

anuf

actu

ring

Source: EEA, Inc.

National Petroleum CouncilIndustrial Demand Approach

• Industrial demand for natural gas particularly driven by a discrete group of industries

– Chemicals, refining, food, paper, primary metals, stone/clay/glass– Model focused on these industries

• Analysis focused on primary industrial uses of natural gas– Feedstock– Boiler Fuel– Process Heating– Other (space heating, cogeneration, on-site electricity generation)

• Demand forecasted from– requirements for each end-use– intensity (gas use per unit of output), reflective of technology mix & fuel

switching

• Capacity idled in modeling for at least two years is assumed to be shut down permanently

National Petroleum CouncilInsights on Most Gas-Intensive Industries

• Chemicals– Feedstock, steam and process heat – Demand growth driven by cogeneration, hydrogen needs– Ammonia, methanol, ethane-based ethylene experiencing shutdowns

• Petroleum Refining– Steam generation and process heat– Demand growth driven by hydrogen, cogeneration, heavier crude feedstocks– No new refineries expected, but industry expected to maintain full capacity

• Paper– Steam generation and lime calcining– Demand growth driven by cogeneration and and process reconfigurations– Increased mill production driven by demand for paper and paperboard

• Primary metals– Process heating– Lower demand and increased competition from imports– Consolidation and plant closures

National Petroleum CouncilIndustrial Demand Workshop Observations

• Outreach efforts indicate relatively gloomy picture of expected industrial growth

– reflective of current economic downturn– concerns for long-term viability of some industries

• Gas price not the primary driver in many industries– keys: labor, raw materials, proximity to market, exchange rates, financing

arrangements/loan guarantees

– for consumer products (e.g., toilet paper, wallboard), higher gas prices mean higher consumer prices

• Regulatory limitations exist to energy-intensive retrofits

• Bulk paper industry seeks continuation of PURPA or similar enabler to CHP

National Petroleum CouncilFuel Substitution Capability

Natural Gas andOil-Based Industrial

Consumption

26%*

5-10%

1995 Today*EIA/Dept. of Commerce MECS Survey

• Public information presents optimistic view on fuel switching capability

• Fuel switching inhibited by local siting restrictions and State/Federal air standards, multiple examples cited by range of industries

National Petroleum CouncilIndustrial Demand Workshop Observations

• Energy-intensive commodity industries not growing– international competition from areas with “stranded gas” and/or emerging markets

and/or other factors– temporary/permanent displacements of capacity planned/possible due to relative

price differentials– gas-intensive ammonia and methanol capacity will decrease step-wise with time– primary metals (steel, aluminum) will not grow except in ‘planned economy’ such

as Quebec– no new refineries or petrochemicals facilities seen– no new chlor-alkali facilities seen

• Outreach efforts consistently reflected– concerns over recent natural gas prices– belief that continued higher prices are detrimental to industrial sector– less demand responsiveness than in past due to environmental (emissions)

restrictions and gas-favored process investments– fundamentally different downstream market for products (less liquid, less

transparent than electric power, for example)– effect of non-domestic factors on natural gas demand (world markets, emerging

economies, proximity to stranded gas, etc)

National Petroleum CouncilModeling Framework for Non-Chemicals Gas Use

Industrial Production Growth and Intensity Assumptions

Base Intensity Trends (Steamrequirement/unit of output)1

Base Gas Use in Boilers

Boiler Fuel Switchingand Efficiency Effects

Natural Gas Consumptionin Boilers

Base Intensity Trends(Gas use/unit of output)

Base Gas Use in Processesand Other Categories

Gas Price Elasticity 2

Natural Gas Consumptionin Process Heat/Other Uses

1 steam unit efficiencies assumed to improve 0.3%/year2 gas price elasticity factors from Industrial Sector Technology Use Model, EEA, Inc.

Boiler Gas UseProcess Heat &Other Gas Uses

National Petroleum CouncilModeling Framework for Chemicals

Product Demand Growth(ammonia, methanol, ethylene)

Production Costing Model(domestic cost of production)

Import Share(based onimported product prices)

Natural Gas Consumptionfor Feedstock/Raw Material

Gross Domestic Product

Production Index

Base Intensity Trends (Gasuse/unit of production)

Baseline Gas Use toProduce Other Chemicals

Gas Price Elasticity

Natural Gas Consumptionto Produce Other Chemicals

Non-refinery producedhydrogen growth rates

Natural Gas Consumptionfor non-Refinery Hydrogen

Feedstock/Raw Material Hydrogen (non-Refinery) Other Chemicals

National Petroleum CouncilModel Inputs and Outputs

Table 1. Annual Growth Rates

1992-1998 2001-2025

Ind Prod Gas Use Ind Prod Gas Use

Gas Intensive Industries 2.4% 2.9% 1.1% -0.6%

Food 1.8% 3.8% 1.1% -0.4%

Paper 0.4% 3.5% 0.0% -1.3%

Refining 1.2% 6.7% 1.0% -1.2%

Chemical1 0.6% 1.3% 0.8% -0.1%

Stone, Clay and Glass 3.8% 2.8% 2.8% 0.8%

Primary Metals 3.5% 1.8% -0.2%3 -2.7%

Other Industries 5.2% 1.9% 2.6% 0.1%

Total2 2.3% 2.7% 1.1% -0.4%

1Industrial production growth rate for 1992 to 1998 is for the Organic Chemicals industry. Industrial production growth rate for 2001 to 2030 uses the model results’ average of the growth rates of gas feedstocks and non-gas-intensive chemical industry production.

2Industrial production growth rate for both periods are unweighted averages of the seven industries.

3Primary aluminum -1.0%; iron & steel 0.0%; other primary metals 0.5%.

National Petroleum CouncilOutlook for Industrial Demand for Natural Gas

• Low-growth/no-growth for gas-intensive industries

• Competitiveness of individual plants & industries threatened

• Modeling focused on industrial production levels, import/export prices, boiler switching

• Ammonia, methanol, and primary metals will likely experience demand destruction

• Significant stress on North American olefins, particularly ethane-base ethylene

• Forecasts made in context of overall GDP growth (3%/year, the 30-year average)

-

500

1,000

1,500

2,000

2,500

3,000

3,500

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

BC

F/Y

ear

Chemicals

Primary Metals

Food

Refining

Other

Stone Clay & Glass

Paper

History Outlook

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

History Outlook

Boilers

Process Heat

Cogeneration/Other

Feedstock

By End Use (U.S.)By Industry (U.S.)


Power Generation Demand

National Petroleum CouncilGDP Effects

• Electricity demand growth is strongly correlated to GDP growth

• Electricity demand grew faster than GDP in 1950’s and 1960’s

• Rate of growth declined to a ratio less than 1.0 in mid-1970’s

– Declining energy intensive manufacturing industry

– High oil / energy prices– Increased efficiency– Saturation of electric appliances

• Ratio factor approximately 0.72

• Gas fueling more hours of power generation will couple gas demand to power and to its GDP relationship

– Combined cycles influenced more by GDP driven demand

– Combustion Turbines tied more to weather induced demand

1,500

2,000

2,500

3,000

3,500

4,000

3,000 5,000 7,000 9,000 11,000

GDP, $Billions

Lo

ad

, T

wh

's

Demand for Electricity Driven by GDP; Future Gas Demand Driven by Power

National Petroleum CouncilGas Fired Capacity Has Significantly Increased

-

200

400

600

800

1,000

1,200

1,400

1995 2000 2005 2010 2015 2020 2025

Electric Power Generation Capacity, GW

Renewables

Gas

Oil/Distillate

Coal

HydroelectricNuclear

Dual-Fuel

National Petroleum CouncilNatural Gas-Fired Capacity Additions by Region

Figure D-7EPA Nonattainment Areas for Multi-Pollutants

Figure D-7EPA Nonattainment Areas for Multi-Pollutants

Gas-Fired Electric Power Generation Capacity (GW) and

National Petroleum CouncilGas Demand Will Grow But Coal Still Plays Major Role

0

1,000

2,000

3,000

4,000

5,000

6,000

1995 2000 2005 2010 2015 2020 2025

Electricity Generated by Fuel Type, TWH/Year

Renewables

Gas

Oil/Distillate

Coal

Hydroelectric

Nuclear

National Petroleum CouncilModeling Assumptions for New Generation Capacity

• Model called for new capacity when reserve margins hit threshold

• No coal built on West Coast or in EPA non-attainment areas

• Additional coal built beyond reserve margin test if economics support

• New coal limited in Florida

• Total new coal limited to 14 GW per year

• Renewable generation capacity is able to economically compete

• Differing alternate fuel capability between cases

• Post-run processing to ensure emissions limits not exceeded

National Petroleum CouncilNew Generation Capacity Technology Assumptions

Technology Description Lead Time (Years)

Capital Costs ($2002/kW)

2010 Heat Rate (Btu/kWh)

Max. Cap. (%)

Conventional Pulverized Coal w / Scrubber

7 1,200 9,300 85

Integrated Coal Gasif ication Combined Cycle Greenfield

6 1,400 9,000 90

Integrated Coal Gasif ication Combined Cycle Brow nfield

5 1,400 9,000 90

Super Critical Pulverized Coal w / All Environmental

7 1,250 8,600 85

Gas Combined Cycle 3 600 7,000 92

Low sulfur Diesel Combined Cycle

3.5 600 7,200 90

Distillate Combined Cycle 4 670 7,400 88

E-Class Residual Oil Combined Cycle W/ environmental

4 800 8,100 70

Gas Combustion Turbine 1.5 350 10,000 15*

Low sulfur Diesel Combustion Turbine

2.5 400 10,600 15*

Advanced Nuclear 10 1,500 10,500 92Renew able – Wind 3 1,100 N/A 30

Generation Technologies Model Input Parameters

* 30% maximum capacity factor in West for low hydro years and backup for renew ables.

National Petroleum CouncilOther Modeling Assumptions Related to Electric Power

• Load growth remains coupled to GDP growth– Growth ratio changes from 0.72 to 0.62 in Reactive Path– Growth ratio changes from 0.72 to 0.55 in Balanced Future

• Hydropower capacity unchanged; annual generation multi-year average

• Nuclear plants have success in 1 relicensing effort– Capacity increases by 2% in Reactive Path– Capacity increases by 10% in Balanced Future– Capacity factors remain above 90% in future

• Mercury regulations cause 20 GW of coal fired capacity shut-down in Reactive Path

• Older oil/gas steam units continue retiring through 2010

• Transmission capacity between regions increases by 50% over study period

• No attempt to model market rules, market designs, transmission congestion, or locational marginal prices

National Petroleum CouncilSensitivities Related to Electric Power

• Directly coupled sensitivities

– High and Low GDP growth

– High and Low ratio of electric load growth to GDP Growth

– Fuel Flexibility

– Carbon reduction

• Indirectly coupled sensitivities

– Weather sensitivities

– Higher oil price

National Petroleum CouncilSensitivities Related to Electric Power

Natural Gas Demand for Power

0

2

4

6

8

10

12

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025

Low Elasticity High Elasticity Low GDP High GDP Fuel Flex RP BF

TCF


WECC

ERCOT/SPP

SERC/FPCC

ECAR/MAIN/MAPP

NPCC/MAAC

Other*

Nuclear

Hydro Coal

Oil/Gas

GasGeneration Capacity

140 GW220 GW

160 GW

180 GW

210 GW

920 TWH 500 TWH

900 TWH570 TWH

590 TWH

Gas Oil Other*NuclearHydroCoal

Electricity Generation by FuelTWH

*includes renewables

200

100

Natural Gas and Power Markets Are Connected

U.S. Electricity Generation and Generation Capacity (Year 2002)

National Petroleum CouncilGeneration Capacity Additions – Power Market Impacts

0

10

20

30

40

50

60

1966 1972 1978 1984 1990 1996 2002

Coal NUC NG OtherSource: EIA, Platt's, AEP

GW Installed Capacity

National Petroleum CouncilEfficiency of Gas Use Has an Impact

• More efficient gas fired units use less natural gas

– ERCOT Region– Example: AEP and Centerpoint

decommission less-efficient steam units, ~6,000 MW mothballed

+ 50% Capacity factor+ Average Heat Rate of

12 MMBtu/MWh+ Combined Cycle heat rate of

7 MMBtu/MWh+ Annual gas savings ~130 Bcf

• Other considerations keep older steam units in dispatch

– Voltage support in congested area– Regional system reliability– Alternate fuel capability– Regulatory compacts at state level

8.8

9.0

9.2

9.4

9.6

9.8

10.0

10.2

10.4

1990

1992

1994

1996

1998

2000

2002

MM

Btu

/MW

h

Annual Heat Rate Total Gas Fired Generation

Source: EIA STEO Data


Residential & Commercial Demand

National Petroleum CouncilResidential & Commercial Demand

0

20

40

60

80

1990 1992 1994 1996 1998 2000 2002

0

2

4

6

1990 1992 1994 1996 1998 2000 2002

0

2

4

6

8

1990 1992 1994 1996 1998 2000 2002

0

2

4

6

1990 1992 1994 1996 1998 2000 2002

Residential Commercial

Customers(Millions)

Demand(TCF)

Source: EIA

National Petroleum CouncilResidential & Commercial Demand Approach

• Key Demand Drivers– demographics– weather (short-run)– price response (long-run)

• Econometric and Capital Stock Models– Regionally-disaggregated econometric model– Demographic trends driven by GDP

+ regional population growth+ residential housing stock+ commercial floor space+ penetration of gas-based technologies

– GDP elasticity based on historic GDP growth+ 1984-1998 in U.S.+ 1988-1998 in Canada

– Price elasticity compared historic gas price responses– Weather the major variable in short-run

• Contrasting Scenarios Evaluated– Increased rate of efficiency gains assumed in Balanced Future

National Petroleum CouncilDemand Projections

U.S. Residential Gas Consumption, BCF

4500

5000

5500

6000

6500

20252005 2010 20152000 2020

3000

3500

4000

4500

5000

20252005 2010 20152000 2020

U.S. Commercial Gas Consumption, BCF

Balanced Future

Reactive Path

Balanced Future

Reactive Path

National Petroleum CouncilEnergy Efficiency in Residential/Commercial Use

• Reactive Path– current efficiency trends

– current price-responsiveness

• Balanced Future – greater efficiency gains in

residential appliances, commercial equipment, and building standards

– efficient market signals

0

200

400

600

800

1,000

1,200

1,400

1,600

2010 2020 2025

BC

F/Y

ea

r

REACTIVE PATH

BALANCED FUTURE

National Petroleum CouncilResidential & Commercial Demand Projection

Projected U.S. Residential & Commercial Natural Gas Demand (Reactive Path)

2000

2005

2010

2015

2000

2025

2000

2005

2010

2015

2000

2025

2000

2005

2010

2015

2000

2025

2000

2005

2010

2015

2000

2025

2000

2005

2010

2015

2000

2025

4,000

2,000

2000

2005

2010

2015

2000

2025

BCF/Year

4,000

4,000

1,500

1,500

3,000


Demand Summary

National Petroleum CouncilSelected Sensitivity Analyses

High Resource Base P10

Fuel Flexibility

High Supply Technology

Low Economic Growth

Increased Access

High LNG Imports

Less Access

High Electricity Elasticity

High Economic Growth

WTI $28 Oil Price

No Alaska Pipeline

Low LNG Imports

Static Supply Technology

Low Resource P90

Change in PriceVs. Reactive Path

Change in S/D Volumes (BCF/Year)Vs. Reactive Path

-2.00-4.00 2.00 4.000.00 -4,000 4,0000 2,000-2,000

Values shown are averages for the 2011 to 2025 period

National Petroleum CouncilSelected Demand Sensitivity Analyses

National Petroleum CouncilRegional Demand Outlook

National Petroleum CouncilSector Demand Outlook

TCF

0

5

10

15

20

25

30

35

1990 1995 2000 2005 2010 2015 2020 2025

Canada

U.S. Power

U.S. Cogeneration

U.S. Industrial

U.S. Residential/Commercial

Other

1%/YEAR GROWTH2%/YEAR GROWTH

National Petroleum CouncilDemand Recommendations

Recommendation: Encourage Increased Efficiency and Conservation through Market-Oriented Initiatives and Consumer Education

• Educate consumers

• Improve conservation programs

• Review & upgrade efficiency standards

• Provide market signals to consumers to facilitate efficient gas use

• Improve efficiency of gas consumption by resolving the North American wholesale power market structure

• Remove regulatory and rate-structure incentives to inefficient fuel use

• Provide industrial cogeneration facilities with access to markets

• Remove barriers to energy efficiency from New Source Review

National Petroleum CouncilDemand Recommendations

Recommendation: Increase Industrial and Power Generation Capability to Utilize Alternate Fuels

• Provide certainty of air regulations to create a clear investment setting for industrial consumers & power generators, while maintaining our commitment to improvements in air quality

– Provide certainty of Clean Air Act provisions– Propose reasonable, flexible mercury regulations– Reduce barriers to alternate fuels by New Source Review

processes

• Expedite hydroelectric and nuclear power plant relicensing

• Take action at the state level to allow fuel flexibility– Ensure alternate fuel considerations in Integrated

Resource Plan– Allow regulatory rate recovery of switching costs– Support fuel backup

• Incorporate fuel-switching considerations in power market structures


Natural Gas Markets

National Petroleum CouncilNorth American Market Overview

• North American natural gas market is largest and most liquid in the world

• Key characteristics of a healthy, well functioning market:

– Price transparency

– Overall market liquidity

• Recent change: several large marketing firms have recently exited the

physical and financial trading business

– Creditworthiness reinforced

– On-line trading operations have declined


NYMEX Open Interest - Natural Gas Contracts

0

100000

200000

300000

400000

500000

600000

700000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

# o

f C

on

tra

cts

Open Interest: The number of open or outstanding contracts for which an entity is obligated to the Exchange

because tha entity has not yet made an offsetting sale or purchase, an actual

contract delivery,

Market Activity: Financial Market Liquidity

• Current levels of Nymex trading below peak but above 1990 - 2000 range

• Fewer parties offering over-the-counter instruments (price swaps, basis swaps, etc); Creditworthiness of remaining parties improved

• Overall liquidity sufficient to transact business at multiple hubs and access financial markets


Natural Gas Price and Volatility

$-

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

Feb-9

5

Aug-95

Feb-9

6

Aug-96

Feb-9

7

Aug-97

Feb-9

8

Aug-98

Feb-9

9

Aug-99

Feb-0

0

Aug-00

Feb-0

1

Aug-01

Feb-0

2

Aug-02

$/MMBtu

-200

-150

-100

-50

0

50

100

150

200

Percentage

Henry Hub Price LevelVolatility Winter Period - Nov thru MarVolatility Summer / Shoulder Period

Record cold Nov.-Dec. 2000. Low storage & supply issues

El Niño Winter 1997-1998

Winter price spike on consequtive high HDD in the Northeast.

An

nu

aliz

ed 3

0-d

ay R

olli

ng

Vo

lati

lity

Hen

ry H

ub

Gas

Dai

ly G

as P

rice

El Niño 2002-2003

Henry Hub Cash Price

30 Day RollingVolatility

Natural Gas Price and Volatility (Daily Cash Prices)

Daily Volatility for Prior 30 Trading Days


WTI Crude Daily Cash Price

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

Sep

-94

Mar

-95

Sep

-95

Mar

-96

Sep

-96

Mar

-97

Sep

-97

Mar

-98

Sep

-98

Mar

-99

Sep

-99

Mar

-00

Sep

-00

Mar

-01

Sep

-01

Mar

-02

Sep

-02

$/BBL

ERCOT Daily Peak Electricity Volatility

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

May

-96

Sep

-96

Jan-

97

May

-97

Sep

-97

Jan-

98

May

-98

Sep

-98

Jan-

99

May

-99

Sep

-99

Jan-

00

May

-00

Sep

-00

Jan-

01

May

-01

Sep

-01

Jan-

02

May

-02

Sep

-02

Daily Peak Price $/MWH

Energy Price Volatility ComparisonDaily Cash Prices - (Yearly period)

0%

50%

100%

150%

200%

250%

300%

350%

400%

1994 1995 1996 1997 1998 1999 2000 2001 2002

WTI Crude Yearly Volatility

Henry Hub Gas Yearly Gas Volatility

ERCOT Electricity Yearly Volatility

Volatility: Comparison to Other Commodities

• Gas is much less volatile than electricity; more volatile than crude

• Fundamentals drive each commodity volatility

National Petroleum CouncilConclusions on Markets and Volatility

• Price volatility is a natural and healthy phenomena of a dynamic market

• Required to give consumers and suppliers appropriate signals and cause rational actions

• High volatility tends to increase uncertainty and decrease investor confidence thereby raising the minimum hurdle rate

• Consumers and suppliers have broad range of physical and financial tools to mitigate price effects – Come at a cost; may not provides consumers with lowest price or

suppliers with highest price

• Government policies should:– Promote free market solutions– Support transparency in market transactions– Provide safeguards against non-competitive behavior and market

manipulation– Foster timely and accurate supply, demand, and storage information

natural gas demand

Documents