perspectives on world natural gas markets
TRANSCRIPT
A Member of the Galway GroupLP
Galway Energy Advisors
www.galwaygroup.com
Advisors and Investment Bankers to the Energy Industry
November 6th, 2012
Perspectives on World Natural Gas Markets
Robert D. Stibolt
USAEE 2012
© 2012 by Galway Energy Advisors. All Rights Reserved.
Agenda
World Natural Gas Markets Today
Trading Market Price Perspectives
Fundamental Considerations
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© 2012 by Galway Energy Advisors. All Rights Reserved.
Agenda
World Natural Gas Markets Today
Trading Market Price Perspectives
Fundamental Considerations
3
© 2012 by Galway Energy Advisors. All Rights Reserved.
We’re economists – we’re supposed to know something!
Can we develop reasonable natural gas price forecasts, but at the same time acknowledge the reality of price uncertainty?
How will the race between technology and resource depletion playout in the future?
Will technology emerge that we are not even aware of today (similar to the experience with hydraulic fracturing that we did not foresee)?
What can experts tell us about how rapidly technology will advance in the future, or even what that technology will be?
What will regional differences in markets look like as we go into the future (Asia/Europe/North America)?
An approach to more useful price and quantity forecasts
Start with trading market views
Augment with fundamental market analysis, though need to explicitly address uncertainty
Assessing the realistic range of uncertainty is useful in its own right4
© 2012 by Galway Energy Advisors. All Rights Reserved.
There are five ways to assess prices and basis differentials in energy markets
3. Historical Statistical Extrapolation
2. Internal Judgment
4. Market Observations
1. Expert Surveys5. Fundamental Models
© 2012 by Galway Energy Advisors. All Rights Reserved.
Our view: operate on the lower left boundary with a methodology that links liquid and illiquid points
3. Historical Statistical Extrapolation
2. Internal Judgment
4. Market Observations
1. Expert Surveys5. Fundamental Models
Gold
Oil
Gas
Electricity
Aluminum
p*
q*
Price
Quantity
Demand
Supply
Market Clearing
Price
© 2012 by Galway Energy Advisors. All Rights Reserved.
Agenda
World Natural Gas Markets Today
Trading Market Price Perspectives
Fundamental Considerations
7
© 2012 by Galway Energy Advisors. All Rights Reserved.
NBP Natural Gas Prices w/Probability Ranges
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0
2
4
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18
20
10/1/2012 10/1/2013 10/1/2014 10/1/2015 10/1/2016
$/MMBT
U
Maturity Date
NBP Forward Curve and Options‐Derived Ranges(October 26th, 2012)
Forwards
Low Case (5% Envelope)
High Case (95% Envelope)
© 2012 by Galway Energy Advisors. All Rights Reserved.
NBP Volatility Curve – Traded Options vs. Modeled
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0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
0.000 2.000 4.000 6.000 8.000 10.000
Ann
ualized
%
Tenor
Indicative Volatility CurveNBP
Traded
Smoothed
© 2012 by Galway Energy Advisors. All Rights Reserved.
Brent Crude Oil Prices w/Probability Ranges
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0
20
40
60
80
100
120
140
160
180
200
11/1/2012 11/1/2013 11/1/2014 11/1/2015 11/1/2016
$/BB
L
Maturity Date
Brent Forward Curve and Options‐Derived Ranges(October 26th, 2012)
Forwards
Low Case (5% Envelope)
High Case (95% Envelope)
© 2012 by Galway Energy Advisors. All Rights Reserved.
Henry Hub Natural Gas Prices w/Probability Ranges
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0
1
2
3
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5
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8
9
9/1/2012 9/1/2013 9/1/2014 9/1/2015 9/1/2016
$/MMBT
U
Maturity Date
NYMEX NG Forward Curve and Options‐Derived Ranges(September 10th, 2012)
Forwards
Low Case (5% Envelope)
High Case (95% Envelope)
0
1
2
3
4
5
6
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9
10
10/1/2012 10/1/2013 10/1/2014 10/1/2015 10/1/2016
$/MMBT
U
Maturity Date
NYMEX NG Forward Curve and Options‐Derived Ranges(October 26th, 2012)
Forwards
Low Case (5% Envelope)
High Case (95% Envelope)
© 2012 by Galway Energy Advisors. All Rights Reserved.
Correlation of historical returns varies widely and is unstable in most (but not all) cases
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‐100%
‐80%
‐60%
‐40%
‐20%
0%
20%
40%
60%
80%
100%
Correlation of Rolling 12‐Month ReturnsNBP/Brent
‐100%
‐80%
‐60%
‐40%
‐20%
0%
20%
40%
60%
80%
100%
Correlation of Rolling 12‐Month ReturnsNBP/HH
‐100%
‐80%
‐60%
‐40%
‐20%
0%
20%
40%
60%
80%
100%
Correlation of Rolling 12‐Month ReturnsHH/NGX
© 2012 by Galway Energy Advisors. All Rights Reserved.
Summary Observations on Trading Markets
Price uncertainty as reflected by the trading markets is significantly greater than standard industry forecasts admit
Ranges observed in price histories are consistent with the traded range of uncertainty and refute the usefulness of purely deterministic price forecasts
Understanding market structure at a deeper level remains an essential
Correlation of historical returns is unstable and questionable as a predictive tool
Understanding of linkages among liquid trading points and linkages of liquid to illiquid trading points is needed to get a complete picture
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© 2012 by Galway Energy Advisors. All Rights Reserved.
Agenda
World Natural Gas Markets Today
Trading Market Price Perspectives
Fundamental Considerations
14
© 2012 by Galway Energy Advisors. All Rights Reserved.
Several North American LNG export projects have been proposed (Primarily Focused on Future Shale Gas)
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Sabine Pass LNGCheniere18 MTPA
KitimatEncana, Apache, EOG Resources
11 MTPA
CameronSempra Energy
12 MTPA
Cove PointDominion Cove
Point LNG5 MTPA
Freeport LNGFreeport LNG
12 MTPA
Progress LNGPetronas & Progress
8 MTPA
Shell CanadaPetroChina/Shell/K
ogas/Mitsubishi8 MTPA
LNG Export Project Name
Sponsor(s)Est. Size
Proposed Export Project
Jordan CoveVeresen6 MTPA
Lake CharlesSouthern Union,
BG LNG15 MTPA
Oregon LNGLNG Development Co.
9.6 MTPA
BC LNG ExportDouglas Channel
Energy Partnership1.8 MTPA
BG LNG
Corpus ChristiCheniere
13.5 MTPA
North Slope Gas?
Lavaca Bay LNGExcelerate3 MTPA
Elba IslandSouthern LNG
4 MTPA
© 2012 by Galway Energy Advisors. All Rights Reserved.
North American export/import capacity additions has implications for linkage to broader world gas markets
Significant narrowing of the NBP/HH spread requires an increase in demand (or decrease of supply) sufficient to re-establish localized consumption of essentially all US shale gas production
Several scenarios (or aspects of scenarios) to consider:
High North American demand growth and full-cycle marginal cost of new natural gas too high to sustain ex ante profitability of North American LNG export projects
Full-cycle marginal cost of new natural gas decreasing with improving technology, resource base exceeding current estimates,North American LNG export projects built and remain online down to marginal operating cost
Significant shale gas development in other parts of the world (e.g. Argentina, China, Poland) and world gas prices – NBP, HH, and Asian delivery points are decoupled from crude and converging to a lower price level
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© 2012 by Galway Energy Advisors. All Rights Reserved.
Recent Work Presented by Dale Nesbitt in Washington Regarding North American Demand
Gas burn for power generation accelerates substantially
Coal retirements drive it
New builds are gas-fired CC and CT
There are 23 quadrillion Btu of coal burned in the US today --equivalent to 18 TCF/yr. of natural gas at the estimated heat rate differential
If 25% of the coal fleet switched over, we would see about 5 TCF/yr. of additional gas consumption for power generation -- almost a doubling of that sector
At the margin, this would keep more domestic gas production at home, and possibly diminish impetus for LNG exports from the US
All other things being equal, Henry Hub gas price rises in this scenario
But not clear if the demand effect is big enough or happens soon enough to lead to export project cancellations
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© 2012 by Galway Energy Advisors. All Rights Reserved.
What about the supply side?
Possible that the long-run supply curve in North America will turn out to be lower and flatter than initially thought
If supply is large enough demand growth may not matter much
Once export projects are built, they will operate down to marginal operating cost and gas exports could continue even as the NBP/HHspread narrows
Significant shale gas potential has been identified outside of North America
Greater impediments to development and a longer cycle outside ofNorth America, but the economics are compelling – and more so as the technology advances
Impact would be lower natural gas prices worldwide, not just in North America – a scenario in which the NBP/HH spread narrows aside from considerations of increasing North American demand
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© 2012 by Galway Energy Advisors. All Rights Reserved.
Probabilistic assessment of supply using methods the USGS has used for oil would be informative
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World Petroleum Assessment 2012
Source: USGS
© 2012 by Galway Energy Advisors. All Rights Reserved.
Resource-Cost analysis w/technological uncertainty
Monte Carlo Simulation (Geology, Exploration, Development, Production, & Transport)
Source: USGS
© 2012 by Galway Energy Advisors. All Rights Reserved.
Arctic Resource–Cost Curves for Oil: Confirms that uncertainty on the supply side is significant
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Source: USGS
© 2012 by Galway Energy Advisors. All Rights Reserved.
YTF Sub-Saharan Conventional Gas (USGS)
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© 2012 by Galway Energy Advisors. All Rights Reserved.
Summary Conclusions
Uncertainty is and will remain high
Trading market views and more comprehensive fundamental market analysis appear to agree that this is the reality
High uncertainty remains around drivers of supply and demand
Supply: shale gas resources exist on every continent and reasonable to expect that long run full-cycle marginal cost will be about the same across the producing basins of the world
Demand: increased demand for natural gas as coal and nuclear power generation is retired and replaced by gas-fired generation
Advancing technology will affect both supply and demand
Some seemingly reasonable trends to watch
World natural gas prices set by traded gas indexes rather than linked to oil, continuing the decoupling of gas and oil prices
Narrowing of NBP/HH/Asian natural gas price spreads
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© 2012 by Galway Energy Advisors. All Rights Reserved.
Acknowledgements
Dr. Mazen SkafStrategic Decisions Group
Dr. Dale NesbittDeloitte MarketPoint
Dr. Don GautierUSGS
Dr. Ben SchlesingerBenjamin Schlesinger and Associates
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