natural gas market dynamics and risk management
TRANSCRIPT
![Page 1: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/1.jpg)
Smart Energy Strategies:Natural Gas Market
Dynamics and Risk Management
March 1, 2019
Ken Graeber, President & CEOEncore Energy Services, Inc.
![Page 2: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/2.jpg)
2
![Page 3: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/3.jpg)
3
Basic Terminology
Supply & Demand Dynamics
Risk Management
Strategy
![Page 4: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/4.jpg)
4
To set the stage…a few terminology basics:
Units of Measure• 1 Mcf = 1,000 cu. ft.
• 1 Bcf = 1 Billion cu. ft.
• 1 Therm = 100,000 btu. 1 Dth = 10 Therms or 1 million btu (MMbtu).
• 1 MMbtu = one million btu and is approximately 1 Mcf.
• The U.S. Annual Demand is now about 81 Bcf/day or 30 Tcf/yr with a daily range of
about 60 to 150 Bcf/day.
• What do hospitals typically use?
25,000 to 150,000 MMbtu annually (0.025 to 0.15 Bcf)
Equates to $100,000 to $600,000 per year.
![Page 5: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/5.jpg)
5
Typical Hospital Usage Examples:
• 50 - 70 beds ≈ 25,000 to 40,000 MMBtu/yr.
• 100 – 250 beds ≈ 45,000 to 130,000 MMBtu/yr.
• The average U.S. Annual Demand of 81 Bcf/day is equivalent to about 600,000 hospitals
@ 50,000 MMbtu/yr. each.
NYMEX: New York Mercantile Exchange. National benchmark
for price.
Basis: Regional price. Your cost of gas.
![Page 6: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/6.jpg)
6
![Page 7: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/7.jpg)
7
Sources of Demand:
• Residential/Commercial
• Industrial
• Power Production
• Exports to Mexico
• Liquefied Natural Gas (LNG) Exports
• Storage
Drivers of Demand:
• WEATHER (Winter AND Summer)
• Economic Growth / Contraction
• Competing Fuels
• Regulation
• Global markets (exports)
![Page 8: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/8.jpg)
8
U.S. Gas Demand by Sector 2018
Takeaways: • Blue slice…Demand from power sector is playing a greater role in
power production and overall gas demand. Fuel for power production back in 2000: Coal = 50%, Gas = 15%
Today: Coal and gas are each used for about 1/3 of power production.
• There are several days during the summer when power production
using gas is over 40 Bcf/day. (i.e. half of production)Source: EIA
![Page 9: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/9.jpg)
9
% Share of U.S. Power Generation Summary – by source
Takeaway: Natural gas has surpassed coal. Non-hydro renewables (wind/solar)
are now up to 10% of electricity produced.
Source: EIA
![Page 10: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/10.jpg)
10Source: EIA
![Page 11: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/11.jpg)
11Data thru Jan19
U.S. demand record
of 150+ Bcf set on
Jan 30, 2019.
Source: EIA
![Page 12: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/12.jpg)
12Data thru Jan19Source: EIA
![Page 13: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/13.jpg)
13Data thru Jan19Source: EIA
![Page 14: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/14.jpg)
14
Recent Major Demand Shifts:
• Exports (LNG worldwide & pipelines to Mexico)
• Power Production
EPA Regs & Coal Plant Retirements
Coal to gas conversions
• Fertilizer & Chemical Sector
Feedstock gas – new plants and
also former plants back online
Ammonia (NH3 plants for fertilizer)
Methanol
Ethylene
Source: EIA
![Page 15: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/15.jpg)
15
• Pipelines to Mexico – Now 5 Bcf/day. Will continue to grow. Main barrier right now are pipeline projects on Mexico side of the border. 60% of Mexico’s power is fueled by natural gas.
• Liquified Natural Gas (LNG) – Now about 4.5 Bcf/day. Started Feb16.
Sabine Pass, LA operational now and expanding
Cove Point, MD added late last year and more recently Corpus Christi, TX
Many others planned – projections of around 10+ Bcf/day by 2020/21
Gas Export Demand:
![Page 16: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/16.jpg)
16
• LNG cont’d
Total = 10.5 Bcf/day
End of 2021End of 2019
![Page 17: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/17.jpg)
17As of late 2018
![Page 18: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/18.jpg)
18
![Page 19: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/19.jpg)
19LNG Liquefaction Plant
![Page 20: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/20.jpg)
20LNG Ships
![Page 21: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/21.jpg)
21Panama Canal Expansion – Opened late Jun16
![Page 22: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/22.jpg)
22
Weather
IN THE END….WEATHER IS THE MAJOR DEMAND DRIVER
• Heating demand in the winter.
• Cooling demand (power generation) in the summer.
• Residential/Commercial varies widely with the weather (10 Bcf/day in the summer to as much as 75 Bcf/day in the depth of winter).
• Affect on Market: Sometimes short term and sometimes longer term.
![Page 23: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/23.jpg)
23
Example: January 30, 2019 – set record U.S. demand of 150 Bcf!
![Page 24: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/24.jpg)
24
![Page 25: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/25.jpg)
25Source: EIA
Note: Approx. 10% production increase YOY from 2017 to 2018 to approx. 31 Tcf
![Page 26: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/26.jpg)
26Source: EIA (excludes Alaska)
1%13%16%
23%
35%
9%
3%Approx. 55% of total is shale
![Page 27: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/27.jpg)
27Source: EIA
![Page 28: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/28.jpg)
28
Shale! High prices in 2005-2008 spurred innovation
Marcellus leads the way at 20+ BcfSource: EIA
![Page 29: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/29.jpg)
29
Current Storage Supply as of February 21st report for week ending February 15th:
• Current Stocks = 1,705 Bcf
• “Full” is about 4,000+ Bcf
One Year Ago = 1,882 Bcf (-4.1%)
5-Year Ave. = 2,067 Bcf (-17.5%)
• Level heading into winter 2018/19 = 3,247 Bcf. Lowest since 2005.
• Past levels going into winter:
• 2015/16 = 4,009 Bcf
• 2016/17 = 4,047 Bcf
• 2017/18 = 3,800 Bcf
Source: EIA
![Page 30: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/30.jpg)
30
Oil Propane • Propane is a heavier hydrocarbon
found in the natural gas stream.
• Plentiful supply of natural gas.
• The U.S. now exports nearly 1
million barrels per day (nearly half
of all U.S. production).
• Heating oil is about 25% of a barrel of
crude.
![Page 31: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/31.jpg)
31
Propane Exports: Importance of Asia
![Page 32: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/32.jpg)
32
Current Market Recap:
• Supply: Outpacing demand (production was up 10% YOY in 2018).
• Production: Up due to the shale revolution and increased drilling efficiency. Shale gas has gone
from 2 Bcf/day to 60+ Bcf/day over the past 15 years.
• Exports: U.S. is now a net exporter of natural gas. Canadian imports are less than combined LNG and Mexican exports.
LNG (liquefied natural gas):
Exporting started in early 2016. Now about 4.5 Bcf/day.
Exports are projected to go to 10+ Bcf/day in the next 3-4 years.
Mexico: Up to 5 Bcf/day (more than double 5 yrs ago).
• Storage: Storage was unusually low heading into winter. Lowest since 2005.
• Weather: Winter came in hard early. Cold Oct, November, and first part of December.
Back half December and front half of January warm.
Colder than norm since mid January.
All in all, just slightly colder than normal for the winter.
• Volatility: NYMEX went from $3 and peaked at $4.84 in mid-Nov and now back down to sub-$3.
![Page 33: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/33.jpg)
33
![Page 34: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/34.jpg)
34
What NOT to worry about:
o Storage
o Hurricanes
o NYMEX
What to worry about:
o Changes in Govt. regulation
o Weather
o Regional Basis
o That unknown “game changer”
![Page 35: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/35.jpg)
35
![Page 36: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/36.jpg)
36
![Page 37: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/37.jpg)
37
![Page 38: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/38.jpg)
38Demand
Price
Natural Gas – Price / Demand Characteristics
Elastic
Demand
Inelastic
Demand
![Page 39: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/39.jpg)
39
Afraid to take a position in the market?
You already have…you are short to the market!
![Page 40: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/40.jpg)
40Time
$3.00Current Market
Price
Short Position
Reward
8
Risk
![Page 41: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/41.jpg)
Long Position
Time
$3.00Fixed Price
Price
Risk
Reward
![Page 42: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/42.jpg)
42
Market direction?
![Page 43: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/43.jpg)
43
Floor & Ceiling
Price
Time
• Price signal – production ramps up
• Gas switch to coal
• Demand decreases
• Price signal – production shuts in
• Coal switch to gas
• Demand increase
$4.00
$2.50
![Page 44: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/44.jpg)
44
5-Year Forward NYMEX Curve
![Page 45: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/45.jpg)
45
Risk Analysis
![Page 46: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/46.jpg)
46
Risk Analysis
![Page 47: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/47.jpg)
Moderate to maximum level of index
Moderate level of call options
Minimize level of fixed
Maximize level of call options
Moderate levels of fixed and index
Maximize level of fixed
Moderate level of call options
Minimize level of index
Price
$4.00
$3.00
High
Intermediate
Low
Time
Strategy
47
![Page 48: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/48.jpg)
48
Post 9/11
Oil Price
Rise
Shale Production
Polar Vortex
Winter
2013-2014
Hurricane
Katrina &
RitaHurricanes
(again)
![Page 50: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/50.jpg)
50
![Page 51: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/51.jpg)
Misc other slides
51
![Page 52: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/52.jpg)
52
![Page 53: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/53.jpg)
53
Omaha Weather Summary
Nov Dec Jan Feb Mar Total Delta
Normal 785 1,209 1,286 1,033 791 5,104
Winter 2010/11 745 1,243 1,438 1,084 791 5,301 3.86%
Winter 2011/12 696 1,073 1,048 967 296 4,080 -20.06%
Winter 2012/13 654 1,103 1,213 991 946 4,907 -3.86%
Winter 2013/14 819 1,318 1,358 1,203 879 5,577 9.27%
Winter 2014/15 923 1,030 1,148 1,232 652 4,985 -2.33%
Winter 2015/16 587 947 1,255 886 537 4,212 -17.48%
Winter 2016/17 523 1,173 1,147 756 663 4,262 -16.50%
Winter 2017/18 723 1,159 1,287 1,141 756 5,066 -0.74%
Winter 2018/19 930 1,087 1,246 3,263
![Page 54: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/54.jpg)
54
• U.S. has capacity of about 4,700 Bcf of storage nationwide
Depleted reservoirs - previous gas and oil wells – 80%*
Aquifer – 10%*
Salt dome – 10%*
* = by volume
• Number of facilities nationwide (2013 stats)
Depleted reservoirs - 332
Aquifer – 47
Salt dome – 40
• Owners:
Interstate pipelines
Local distribution companies
Independent storage operators
Source: EIA
![Page 55: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/55.jpg)
55
![Page 56: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/56.jpg)
56
Hurricanes in 2017For the first time since 2005, four hurricanes made landfall in the U.S.
The 2005 season had five U.S. landfalling hurricanes: Cindy (Cat1), Dennis Cat4),Katrina (Cat5), Rita (Cat5) and Wilma (C5).
![Page 57: Natural Gas Market Dynamics and Risk Management](https://reader031.vdocuments.net/reader031/viewer/2022012420/61750393e9468414281d6d51/html5/thumbnails/57.jpg)
57
Old Days:
• Gulf was crucial to overall US Production.
• Gulf Hurricanes were very disruptive and caused great market volatility!
• 25+% of gas came from the Gulf.
Current:
• Gulf production is minimal (less than 4%).
• Hurricanes don’t really reduce overall production much (and reduced demand on Gulf coast might be more the production affected).
• Should cause little to no market movement in reality.
Future?
• Gulf disturbances could be net bearish as they affect exiting LNG cargo ships.
• Gas could be stranded in U.S. to a degree.