Natural Gas Outlook

1
Natural Gas Outlook

• The Tennessee Regulatory Authority
• Natural Gas Symposium
• August 19, 2003
• Roy Kass
• Energy Information Administration (EIA)
• Roy.Kass_at_eia.doe.gov

www.eia.doe.gov
2
Outline

• Natural Gas Market Overview
• Short-term Outlook
• - Supply
• - Consumption
• - Prices

3
Natural Gas Spot Prices Are Volatile
Henry Hub Daily
18.85 on 2/25/03
10.50
Midpoint Price
8.50
6.50
Dollars per MMBtu
4.50
2.50
0.50
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Dec-97
Aug-98
Dec-98
Aug-99
Dec-99
Aug-00
Dec-00
Aug-01
Dec-01
Aug-02
Dec-02
Source Natural Gas Intelligence, Natural Gas
Index
4
Average Annual Wellhead Prices Have Been Close To
The Record High Price Set In 1983
5
Constant 2003 Dollars
4
3
Dollars per Thousand Cubic Feet
2
Projection
Nominal Dollars
1
0
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Sources History EIA Projections Short-Term
Energy Outlook, August 2003
5
This Winter Was Colder Than Last WinterAnd
Colder than Normal in Some Regions(Cumulative
Heating Degree Days, Heating Season 2002-2003)
Source Derived from Heating Degree Day
Monitoring, National Climatic Center.
6
Factors Contributing to High Gas Prices

• Winter 2002/2003
• High crude prices
• Cold weather in major gas markets
• Weak production
• Decrease in net imports in 2002
• Relatively heavy stock drawdown

• Summer 2003
• Storage inventory less than historical level
• Concern about supply adequacy next winter
• Lags in bringing new production to market
• Limited demand response to date

7
Working Gas in Underground Storage Compared with
5-Year Range

• Source EIA, Weekly Natural Gas Storage Report,
  August 14, 2003

8
EIA Has Changed Definitionof Consuming Sectors
9
Impact of New DefinitionsTotal United States,
2001

• Industrial Deliveries reduced by 1.3 Tcf
• Electric Consumption increased by 2.6 Tcf
• Net increase of 1.3 Tcf for the year

10
Short-Term Outlook for Natural Gas

• Demand is expected to be essentially flat in 2003
  and 2004 (under assumptions of normal weather)
• Supply picture is mixed
• Increasing completion rates are necessary to
  offset decline from producing wells
• Year-over-year production is expected to increase
  in 03 with rising numbers of gas rigs drilling
• Net imports are expected to increase in 2003 and
  2004 with notable increases in LNG imports
• Storage refill is questionable (but recent signs
  are positive)
• Extremes in market or weather conditions would
  change this outlook.

11
U.S. Natural Gas Production Growth is Modest in
2003 and 2004
Sources EIA, Short-Term Energy Outlook, August
2003
12
Imports and Exports Increase in 03 and 04, Net
Imports will Increase Slightly
Projections
5,000
LNG
LNG
LNG
590
4,500
490
230
4,000
3,500
3,000
2,500
BCF
2,000
1,500
1,000
500
0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Imports
Exports
Notes Includes LNG. Net Imports equal imports
minus exports. Sources EIA, Short-Term Energy
Outlook, August 2003
13
Gas Storage Projections For 2003, Compared to
Historical Levels
3,053 Bcf assuming 5-Yr Maximum Refill Rate
Band is Maximum and Minimum Values 1998-2002
Projections
2,853 Bcf assuming 5-Yr. Avg. Refill Rate
2,188 Bcf in Underground Storage as of August
8, 2003
Note The gray shaded area represents the range
of working gas in storage levels during the years
1998 to 2002. Source EIA Weekly Natural Gas
Storage Survey and EIA estimates. Max refill rate
is the max monthly rate observed between 1998 and
2002. EIA estimate is based on EIAs STEO
forecast August, 2003.
14
Total Natural Gas Demand Is Expected to Remain
Flat For the Next Two Years
12
90
10
80
History
Projection
8
70
6
60
4
50
Billion Cubic Feet per Day
Percent Change
2
40
0
30
-2
20
-4
10
-6
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004

• Percent Change (Left Axis)

• Total (Right Axis)

Sources History EIA Projections Short-Term
Energy Outlook, August 2003.
15
Natural Gas in Storage on Nov. 1 Will Be Within
the Range of the Past Five Years
Estimate 2,853 Bcf

• End Fill Season

Average Refill Rate 1998-2002
Working Gas in Storage (billion cubic feet)
Level as of August 8, 2003 2,188 Bcf
Storage Stocks as of October 31

• Beginning Fill Season

Source EIA data and estimate assuming average
refill rate for August 9 Oct. 31.
16
Natural Gas Spot Prices Are Expected to Average
about 5 for remainder of 2003 (Base Case and
95 Confidence Interval)
Average Spot Price about 5.40 /Mcf in
2003 about 4.46 /Mcf in 2004
The confidence intervals show /- 2 standard
errors based on the properties of the model. The
ranges do not include the effects of major supply
disruptions.
Sources History Natural Gas Week Projections
EIAs Short-Term Energy Outlook, August 2003.
17
Mechanisms to Manage Price Risk

• Trading in Futures Contracts
• Longer-Term Contracts
• Fixed-Price Contracts
• Storage for Physicals Hedging
• Ability to Use an Alternate Fuel
• Residential Customers Can Choose Budget
  Payment Plans

18

• Summary
• The natural gas market will remain relatively
  tight
• over the near term. However, prices this winter
  will be slightly lower than last winters
  prices.
• The gas market is vulnerable to upward price
  pressures from developments like severe weather
  or disruptions in supplies.