Spring%20Market%20Update%20%202002

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Spring Market Update 2002

• Chris Smith Les Deman
• May 2002

2
If I Only Had One Slide
May 24, 2002 at 1,796 Bcf
3
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?

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US Gas Demand Better in 02, 03 Maybe

• No Winter No Demand
• 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
• Generation Comes First in Q-II III
• 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

RISKS EL NINO BEGINNING IN SECOND HALF OF 2002
Source EIA, NOAA and Coral estimates
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Industry Comes Last

• Industryf(Price, HDDs, GWIP)
• The key variables were mostly negative in 2001
• Weather was a drag in 01Q-IV 02Q-I, but key
  industries are raising production
• Gas prices were attractive in Jan-Feb, but a
  negative factor in Mar-Apr
• How Fast a Rebound?
• US economic growth accelerated in Q-I, 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

RISKS HIGHER INTEREST RATES PLUS HIGHER OIL AND
GAS PRICES PUT A BREAK ON THE RECOVERY
Source EIA and Coral estimates
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Gotta Drill To Find Gas

• Gotta Have Money to Drill
• 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
• 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

RISKS THE PRICE NEEDED TO RAISE PRODUCTION
DEPRESSES DEMAND
Source EIA and Baker-Hughes Excludes revisions
and adjustments
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If Not in 2002, When?

• 2002 Supply - A Downer
• 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
• Gas Imports Help Some
• 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

RISKS EP INVESTMENT LAGS AS PRODUCERS CLEAN-UP
BALANCESHEETS
Source EIA and Coral estimates
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A US Trial Balance 2002-2003

• So Far, So Good. But....
• US demand growth should exceed supply in 2002
  03
• High 2002 storage should mitigate availability
  concerns
• The balance gets more dicey in 2003
• Going From Feast To Famine
• 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?

RISKS ANTICIPATORY MARKET REACTION LOWERS DEMAND
RAISES SUPPLY
Source EIA, AGA and Coral estimates
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Supply 2005 Through a Looking Glass

• Its A Tall Order
• 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
• Can Imports Balance SD?
• 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

RISKS TRADITIONAL NA GAS SUPPLY BASINS HAVE
PEAKED
Source EIA (12-2001) and Coral estimates
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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
• Higher supply encourages more gas-for-oil fuel
  switching
• The Financial Issues
• 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.

RISKS BOOM-BUST CYCLES LIMIT INVESTMENTS IN
BOTH THE SUPPLY AND DEMAND SECTORS
Source Coral estimates
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New Generation, No Place to Go

• Build and they Will Come
• 72 Gw slated from 2000 to 2005, 37 in CA
• Peak demand growing at 3-4 Gw per year
• Need aluminum and silicon valley to return to
  2000 growth rate
• The Good, Bad .
• Many plants facing limited operation at variable
  cost
• Merge, sell or mothball?
• Consumers in some western states see flat-to-
  lower bills. Not in CA.

WSCC RESERVE MARGIN FORECAST -
30
25
20
COMFORT RANGE
15
10
5
CA
OTHER
0
2000
2001
2002
2003
2004
2005
Source RDI and Coral estimates
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Gas Gets Generation Growth, But

• Limited, Low Cost Sources
• Hydro can do 200 in wet year, but no upside
• Nuclear, operating near capacity now. Tomorrow?
• Coals cheap, but minimal new capacity slated
• Load growth goes to gas
• Declining Heat Rates Dampen Gas Growth
• Gas generation growth exceeds 5/yr.
• 66 of new plants are cc- gas
• Heat rates could easily decline by 10 in 2005

Source EIA and Coral estimates
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Gas Electricity ValuesYesterday, Tomorrow (
Last Year)
You are here
You were here
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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.