27
NORTH AMERICAN GAS OUTLOOK 24 September 2015
NORTH AMERICAN GAS OUTLOOK
24 September 2015
1
WORKING GAS STORAGE FORECAST(BCF)
Source: Bloomberg New Energy Finance
24 September 2015
3,996
1,930
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2010-14range
2015
2016
2
-0.7
6-0
.80
0.30
0.15
0.11
0.16
0.05
0.28
-0.0
31.
871.
500.
441.
100.
30-0
.28
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
18202224262830323436
Jul 1
5A
ug 1
5S
ep 1
5O
ct 1
5N
ov 1
5D
ec 1
5Ja
n 16
Feb
16M
ar 1
6A
pr 1
6M
ay 1
6Ju
n 16
Jul 1
6A
ug 1
6S
ep 1
6
BNEF vs. EIA EIA BNEF-0
.05
0.14
0.21
0.33
0.34
0.46
0.47
0.39
0.45
0.43
0.48
0.52
0.60
0.68
0.70
-0.100.000.100.200.300.400.500.600.700.80
18
19
20
21
22
23
24
25
26
Jul 1
5A
ug 1
5S
ep 1
5O
ct 1
5N
ov 1
5D
ec 1
5Ja
n 16
Feb
16M
ar 1
6A
pr 1
6M
ay 1
6Ju
n 16
Jul 1
6A
ug 1
6S
ep 1
6
BNEF vs. EIA EIA BNEF
0.59
0.69
0.47
0.70
0.61
-0.3
2-0
.31
-0.1
9-0
.33
-0.2
00.
420.
05-0
.15
-0.3
4-0
.21
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Jul 1
5A
ug 1
5S
ep 1
5O
ct 1
5N
ov 1
5D
ec 1
5Ja
n 16
Feb
16M
ar 1
6A
pr 1
6M
ay 1
6Ju
n 16
Jul 1
6A
ug 1
6S
ep 1
6
BNEF vs. EIA EIA BNEF
0.00
0.00
0.00
-0.5
0-0
.60
-0.5
2-0
.55
-0.6
7-0
.64
-0.2
2-0
.08
-0.0
8-0
.10
0.10
0.49
-0.80
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Jul 1
5A
ug 1
5S
ep 1
5O
ct 1
5N
ov 1
5D
ec 1
5Ja
n 16
Feb
16M
ar 1
6A
pr 1
6M
ay 1
6Ju
n 16
Jul 1
6A
ug 1
6S
ep 1
6BNEF vs. EIA EIA BNEF
-0.3
70.
79-0
.08
0.40
0.43
0.46
0.09
-0.1
70.
29-0
.02
-1.1
8-0
.92
-0.7
3-0
.28
-0.5
9
-1.50
-1.00
-0.50
0.00
0.50
1.00
73
74
75
76
77
Jul 1
5A
ug 1
5S
ep 1
5O
ct 1
5N
ov 1
5D
ec 1
5Ja
n 16
Feb
16M
ar 1
6A
pr 1
6M
ay 1
6Ju
n 16
Jul 1
6A
ug 1
6S
ep 1
6
BNEF vs. EIA EIA BNEF
SUPPLY DEMAND FORECASTS – US VS. THE EIA(BCFD)
Source: Bloomberg New Energy Finance
24 September 2015
1. Several large new industrial projects (mostly ammonia plants) are online over the next 12 months. But a strong dollar poses downside…
2. The EIA expects LNG exports in October? Not going to happen. We foresee a sputtering start to Sabine Pass T1, with baseload operations only in April 2016.
3. We expect production seasonality from Appalachia, especially Northeast Pennsylvania.
1.
2.
3.
Power Industrial Dry production
Net pipeline imports LNG exports
3
Source: Bloomberg New Energy Finance Note: *1 Nov-31 Mar; **National, gas-weighted HDDs
ANALYZING STEO’S RESCOMM FORECAST
● The EIA is calling for a much milder winter than the last two years, in line with NOAA’s forecast of a strong El Nino.
● Offsetting this somewhat is increasing ‘gas-intensity’ –more Bcf are used per HDD.˗ We attribute most of this to the
continued switch off of fuel oil in the Northeast.
● If this is wrong, using last year’s intensity of 8.16Bcf/HDD, total heating-season ResComm demand would drop by 166Bcf (1.1Bcfd).
● Upside is purely weather-driven.
● Downside may be weather-driven, or come from overly aggressive intensity assumptions.
8 September 2015
EIA STEO ResComm gas demand over heating season* against HDDs**
Bcf of heating-season ResComm consumption per HDD
37.7631.37
36.0141.38 39.43 37.53
742
594
692
771731
679
0
100
200
300
400
500
600
700
800
900
0
5
10
15
20
25
30
35
40
45
2010/11 2011/12 2012/13 2013/14 2014/15 2015/16
BcfdHDD10YHDD
7.69
8.037.86
8.11 8.15
8.40
7.2
7.4
7.6
7.8
8.0
8.2
8.4
8.6
2010/11 2011/12 2012/13 2013/14 2014/15 2015/16
Bcf/HDD
4
OCEANIC NIÑO INDEX (ONI)
● The ONI (Oceanic Niño Index) is the tool NOAA uses to monitor El Niño and La Niña conditions. NOAA considers El Niño conditions to be present when the ONI is at least +0.5. In other words, El Niño conditions exist when the three-month average sea surface temperature in the Niño 3.4 region is at least 0.5°C warmer than average.
● The ONI shows that we are entering strong El Niño conditions.
Niño 3.4 Region anomaly
-3
-2
-1
0
1
2
3
4
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997
We are right on track with the strong El Niño winter of 1997/98
24 September 2015
5
Source: Bloomberg New Energy Finance
US DRY GAS PRODUCTION, YOY GROWTH(BCFD)
● Appalachia continues to lead the way● The Permian and Eagle Ford begin to exhibit year-on-year declines● The Haynesville declines mildly from its H1 2015 “comeback” ● Forecast uncertainty is mostly in “Other” – less about the Big 5 and more about the “Little 50”.
24 September 2015
4.2
5.36.4 6.3
5.6
8.2
5.4
6.2
5.9 6.1
4.33.5
3.1 3.2 3.1 3.02.2
0.8
2.1
1.8
1.8
1.1 0.81.3 1.2
0.7 0.7 0.61.1 1.4
-4
-2
0
2
4
6
8
10
Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16
HaynesvillePermianEagle FordAppalachianOtherTotal
Net year-on-year, 2015 vs. 2014: +3.9Bcfd Net year-on-year, 2016 vs. 2015: +1.2Bcfd
6
Source: Bloomberg New Energy Finance, EIA, LCI Energy Note: “Lesser” plays are defined as total L48 production less Marcellus, Utica, Rockies, Eagle Ford, Permian, Federal Gulf of Mexico, Haynesville, Barnett, Fayetteville and Woodford.
THE “LITTLE 50”
● We (and others) actively observe the largest production areas, monitoring drilling and completion activity, well inventory/deferrals, and midstream infrastructure, when that is a binding constraint.
● We do not monitor every production area, however. And even if we did, production in many is not dictated by rig counts, type curves, or midstream constraints, so forecasting is less straightforward.
● The chart to the right shows two things:˗ Structurally, growth is coming from the large
production areas (the grey line is trending upwards while the green line is trending downwards).
˗ On a month-to-month basis, though, variance in total production is due almost exclusively to variance at smaller plays, which still account for ~17Bcfd of production, in aggregate.
● Hence, forecast uncertainty is dominated by production from the “Little 50” – all those production areas that analysts do not spend much time tracking (and listed in the notes below).
24 September 2015
L48 gas production – total vs. “lesser” plays (Bcfd)“Lesser” plays Total
76
77
78
79
80
81
14
15
16
17
18
19
Oct 14 Jan 15 Apr 15 Jul 15
"Lesser" plays L48
Short-term production variance stems from the “Little 50”
7
2.642.72
2.882.99 2.99 2.96
2.82 2.82 2.85 2.88 2.90 2.89
2.48 2.39 2.38
2.29
2.13
1.94 2.03 2.02 2.00 1.99 1.94
1.86
2.81
3.05
3.37
3.69
3.86 3.97
3.61 3.62 3.69
3.78 3.85
3.92
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Oct 15 Nov 15 Dec 15 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16
Source: Bloomberg
NYMEX HENRY HUB FUTURES, NEXT 12 MONTHS($/MMBTU)
Probability distributions
-1σ
+1σ
Strike
24 September 2015
8
Northeast/Mid-Atlantic (1,662)
Southeast
Gulf Coast
Midwest
Michigan/Ontario
New England/Quebec
+2,559
OUT OF APPALACHIA 18BCFD OF TAKEAWAY ONLINE OVER 2015-2018
924 September 2015
APP BASIN TAKEAWAY CAPACITY AND PRODUCTION FORECAST(BCFD)
● We think 20 major pipeline projects with combined incremental takeaway capacity of 17Bcfd will be built from Sept 2015-Nov 2018.
● Growth in takeaway capacity outpaces production growth – basis should narrow substantially by 2017/18.
10
15
20
25
30
35
40
45
50
Jan '14 Jul '14 Jan '15 Jul '15 Jan '16 Jul '16 Jan '17 Jul '17 Jan '18 Jul '18 Jan '19 Jul '19Source: Bloomberg
10
Source: Bloomberg New Energy Finance
APPALACHIAN BASIN GAS “EXPORTS”(BCFD)
● Appalachia is already exporting 6Bcfd to the Gulf Coast (USGC), Midwest, Southeast and Canada.
● This will rise as new pipelines and continued reversals push more gas in all directions.
24 September 2015
-2
-1
0
1
2
3
4
5
6
7
Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15
Canada TGPSoutheast TranscoMidwest REXMidwest TETCOUSGC TGTUSGC TETCOUSGC TGP
11
TRANSCO Z6 DYNAMICS
24 September 2015
● Lower NY Bay Lateral used to be 547MDth/d to Long Beach. It operated at those levels (ie, full) during winter.
● Rockaway Lateral is new build to a new point (Rockaway), for 647MDth/d.
● Lower NY Bay Lateral expanded by 100MDth/d. Gas sourced from Station 195.
● Net-net, the Rockaway Lateral will NOT add 647MDth/d of capacity into NY, but only 100MDth/d.
● Not only that, but National Grid was already buying gas at Station 195 last winter (50-60MDth/d a day).
Lower NY Bay Lateral
12
WHAT CAUSES ALGONQUIN PRICES TO SPIKE?PIPELINE MAP
M&NE (inc Canaport):222 (767)
TGP:1,141 (1,239)
AGT (Southeast):1,337 (1,465)
AGT (Oxford):1,041 (1,209)
AGT to IGT:270 (410)
PNGTS:57 (146)
LNG (ex Canaport):79 (463)
● No indigenous supply or storage● Strong winter peak Underpiped LNG imports & gas-to-oil switching in the power sector
Pipeline/point name:2014/15 heating season average flow (2014/15 heating season peak daily flow)
24 September 2015
1324 September 2015
WHAT CAUSES ALGONQUIN PRICES TO SPIKE?LOGIC MAP
Cold temperatures
High demand
Constraints on pipeline
networkHigh prices
(spikes)
Gas-to-fuel oil switching
LNG imports
0
500
1000
1500
2000
2500
0
10
20
30
40
50
60
70
80
90
Apr Jun Aug Oct Dec Feb
Mean daily temp (°F, lh axis)
System demand (MMcfd, rh axis)
600
700
800
900
1,000
1,100
1,200
1,300
Apr Jun Aug Oct Dec Feb
Oxford compressor flow
Oxford compressor capacity
0
5
10
15
20
25
30
35
Apr Jun Aug Oct Dec Feb
Prices
0
200
400
600
800
1000
1200
0
20
40
60
80
100
120
140
Apr Jun Aug Oct Dec Feb
Oil generation (GWh/d, lh axis)
LNG sendout (MMcfd, rh axis)
1424 September 2015
ALGONQUIN S/D DYNAMICS, 2014/15 HEATING SEASONLOGIC MAP IN ACTION
0
500
1000
1500
2000
2500
0
20
40
60
80
100
Nov Dec Jan Feb Mar
Mean daily temp (°F, lh axis) System demand (MMcfd, rh axis)
750
850
950
1,050
1,150
1,250
Nov Dec Jan Feb Mar
Oxford compressor flow Oxford compressor capacity
05
101520253035
Nov Dec Jan Feb Mar
Prices
0
500
1000
1500
0
50
100
150
Nov Dec Jan Feb Mar
Oil generation (GWh/d, lh axis) LNG sendout (MMcfd, rh axis)
“The price spike that shouldn’t have been” – an LNG vessel – British Merchant – arrived outside Canaport on 22 February but was forced to wait until 26 February to unload due to poor weather. (It had loaded up at Point Fortin on 15 February.) The resultingdrop in LNG sendout caused a severe price spike and a corresponding uptick in oil generation.
15
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
0 20 40 60Daily mean temperature (°F)
Entire winter Early winter Late winter
Chance of "price spike"
LOGISTIC MODEL OF ALGONQUIN “PRICE SPIKE”DETERMINING FREQUENCY
● We run three regressions, one for the entire winter, and then two others for early winter (Nov-Jan) and late winter (Feb-Mar).
● We then lay these curves on actual and simulated winter temperatures to arrive at an unbiased guess as to how many spikes should occur.
30%
35%
40%
45%
50%
55%
60%
65%
70%
20 25 30 35 40Daily mean temperature (°F)
Entire winter Early winter Late winter
Chance of "price spike"
24 September 2015
1624 September 2015
SPIKE TO WHERE?DETERMINING LEVELS
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
0
10
20
30
40
50
60
70
80
90
Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13 Aug 13 Nov 13 Feb 14 May 14 Aug 14 Nov 14 Feb 15
Algonquin citygate price ($/MMBtu) Fuel oil price ($/MMBtu) Oil generation (GWh/d)
● 2013/14 winter spikes needed to spike higher than 2014/15, as fuel oil was more expensive (crude oil prices started their drop in summer 2014).
● Currently, fuel oil prices are around $11.50-12.00/MMBtu. Since many plant co-fire gas and fuel oil, they will have similar heat-rates, allowing for a direct price comparison between the fuels.
Algonquin price vs. fuel oil price vs. oil generation
1724 September 2015
ALGONQUIN BASIS OUTLOOK
2.77
3.72
4.06
4.34
3.49
2.37
3.63
4.87
4.63
4.48
2.90
5.90
8.08
8.03
4.92
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
Nov Dec Jan Feb Mar
1997/9810Y avgFair value
1824 September 2015
NEW ENGLAND PIPELINE ADDITIONS
● Pipelines are proposed from all directions – via Canada, New York, and Connecticut – to reach demand in central New England.
● The proposed pipelines will increase capacity by 70% (+3.0Bcfd) by winter 2018, including a 1.3Bcfd project (Northeast Energy Direct, NED) spearheaded by Kinder Morgan.
ProjectName
Pipeline In-ServiceDate
Volume(MMcfd)
CTExpansion
TGP Nov 2016 72.1
AIM AGT Nov 2016 342
AtlanticBridge
AGT Nov 2017 132.7
SONOand C2C
IGT andPNGTS
Nov 2017 300
NED TGP Nov 2018 1,300
AccessNortheast
AGT Nov 2018 900
LONGER-TERM OUTLOOK
24 September 2015
20
CHANGE IN PRODUCTION, 2014-2020
24 September 2015
MidCon+4.5
Perm+1.4
Eagle Ford+0.8
ROX+1.6 App
+17.1
H’ville+4.3
F’ville
-0.4
Canada+1.3
All other-6.6
Barnett+0.1
Production growth remains dominated by Appalachia, but the MidContinent supplies a lot of gas to USGC facilities
21
CHANGE IN DEMAND, 2014-2020
24 September 2015
MC+1.0
SW+0.6
USGC+10.3
Mexports+3.2
FL+1.1
ROX+0.5
Northeast/Mid-
Atlantic+2.7
Midwest+0.7
CA-0.5
Southeast+1.0
PacNW+1.2
New England-0.1
Canada+3.0
The USGC dominates demand, although power sector growth in the Northeast, Mid-Atlantic and Southeast, and exports to Mexico, are considerable.
22
Source: Bloomberg New Energy Finance
GAS BREAKEVENS – IN-BASIN PRICING (IE, NO BASIS) ($/MMBTU)
0.49
1.47
1.82
1.94
2.06
2.27
2.45
2.62
2.70
2.73
2.76
2.77
2.81
2.98
3.04
3.05
3.08
3.09
3.16
3.16
3.23
3.24
3.27
3.43
3.47
3.66
3.68
3.84
4.05
4.10
4.13
4.14
4.18
4.25
4.31
4.33
4.91
5.69
6.99
12.2
9
0
1
2
3
4
5
6
7
8
Utic
a co
ndy
Utic
a w
et
Jona
h
NE
Mar
cellu
s co
re
SW
Mar
cellu
s su
per-
rich
Utic
a dr
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SC
OO
P C
ore
Con
dy
Hay
nesv
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core
cho
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Faye
ttevi
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SW
Mar
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Mar
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Can
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Pin
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Pic
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Cen
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liqui
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Gre
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Nat
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But
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Hay
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core
unr
estri
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Nor
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Hoa
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Gla
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Gre
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Sie
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(Hor
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& L
iard
Bas
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Wat
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Hz
high
-GO
R
Faye
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ier 2
SW
Mar
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Bar
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high
-EU
R
Cot
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Val
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liqui
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Bar
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core
Ver
mill
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Alm
ond
PR
B C
BM
Gra
nite
Was
h
Can
a ga
ssy
Kay
bob
Duv
erna
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ssy
Ark
oma
Woo
dfor
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SC
OO
P C
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Gas
Hay
nesv
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Tier
2
Haw
kvill
e (E
agle
For
d)
Cle
vela
nd
Wat
tenb
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Vt
Mis
s Li
me
Tier
2
24 September 2015
The cost of gas supply is as low as it has been for the past two decades – we think D&C has come down fairly permanently
23
Source: Bloomberg New Energy Finance
OIL BREAKEVENS($/BBL WTI)
38.7
1
40.1
4
40.3
1
40.6
4
43.4
3
44.1
6
44.5
4
46.9
6
47.8
8
48.4
4
48.7
7
48.9
2
49.0
0
50.7
7
50.8
5
50.9
9
54.3
2
54.5
4
55.3
9
55.3
9
55.9
7
57.9
4
58.8
7
59.1
4
60.1
4
62.2
1
62.2
9
64.2
8
65.4
1
66.0
2
66.1
2
66.9
5
68.4
7
70.4
4
72.6
6
76.7
0
78.6
9
82.2
3
0
10
20
30
40
50
60
70
80
90
100
SC
OO
P C
ore
Oil
Per
mia
n M
idla
nd C
entra
l Wol
fcam
p H
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Eag
le F
ord
Eas
t vol
oil
Per
mia
n D
el B
asin
Hz
(Bon
e Sp
ring)
Sou
th M
ontn
ey o
ily
San
Jua
n (M
anco
s Sh
ale)
Per
mia
n D
el B
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Hz
(Wol
fcam
p)
Wat
tenb
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Hz
oil
Bak
ken
(Nes
son
East
)
Eag
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Eas
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Eag
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Wes
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Tusc
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sa M
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Per
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Wol
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Per
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Pem
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Duv
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Per
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Per
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Sha
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Tier
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Per
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(Ava
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Mar
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Eag
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24 September 2015
24
2.00
2.50
3.00
3.50
4.00
4.50
5.00
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Price (monthly)Price (ann avg)
Source: Bloomberg New Energy Finance
24 September 2015
BNEF LONG-RANGE HENRY HUB GAS PRICE FORECAST (REAL 2015$/MMBTU)
2016/H1 2017: Glut eases as ex-Northeast supply drops/demand rises slightly
2019-23:Demand continues to grow, but at a less jarring pace –relative calm
2024+:More Canadian LNG exports, permanent declines in the Haynesville and the Marcellus plateauing push prices to a higher steady-state
H2 2017/H1 2019: Rapidly growing demand forces producers back into Haynesville, MidConand Canada
25
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24 September 2015
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