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Document Sample
Federal Energy
Regulatory Commission
The Future of Natural Gas
Supplies and Prices
Steve Harvey
Deputy Director of Market Oversight and
Assessment
The Future of Natural Gas
Prices and Supply
• A transition – not necessarily a crisis
• Transition to what?
• Key issues
• Managing the change
My opinions – NOT the Commission’s
Natural Gas Prices Over Time
U.S. Average Monthly Natural Gas Wellhead Prices
9
8
7
6
Real Dollars (2002)
5
$/Mcf
4
3
2
1
Nominal Dollars
0
Jan-76 Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02
Source: EIA and CPI conversion factors, Robert Sahr, Oregon State University
The Emerging Natural Gas Market
• Cyclical prices
• Increased volatility
• Investment efficiencies
• Adequacy of market “infrastructure
Supply Responds: Lagged Drilling
Responds Systematically
6-Month Delayed Monthly Drilling Rigs versus
Average Monthly Wellhead Natural Gas Prices
(July 1992-Dec 2002)
1200
Average Monthly Gas Rig Count
1000
800 Price for 1/01
Rig Count for 7/01
600
400
200
0
$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00
Source: EIA, Baker Hughes Nominal $/Mcf
Drilling Lags Create Cycles
Weekly Rig Counts versus Spot Prices
1,200 $12.00
Henry Hub Natural Gas Price
1,000 $10.00
Natural Gas Rig Count
Operating Natural
Gas Rigs
800 $8.00
($/MMBtu)
600 $6.00
400 $4.00
200 $2.00
Average Weekly Henry
Hub Spot Price
0 $0.00
Jan-98
Jul-98
Dec-98
Jul-99
Dec-99
Jun-00
Dec-00
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Transition Characteristic:
Price Volatility
• No more “balancing the system” on
production
• Other sources of flexibility – like fuel
switching – eroded with environmental
regulation and less flexible new generation
investment
• Storage and demand response to price now
the last major factors in balancing the
system
Loss of Production Swing Puts
Pressure on Storage
L o w e r -4 8 D r y G a s P r o d u c tio n v s .
D r y G a s P r o d u c tiv e C a p a c ity
60
55
B c fd
50
45
40
J a n -9 5 J a n -9 6 J a n -9 7 J a n -9 8 J a n -9 9 J a n -0 0 J a n -0 1 J a n -0 2
G a s P ro d u ctio n P ro d u c tive C a p a city
Fuel Switching is Reduced – Some
Evidence it is Still Around
Spot NOx Allowance Price
9000
Allowance Cost ($/ton)
6000
3000
0
Aug-02 Nov-02 Feb-03 May-03 Aug-03
Storage Use Increasing as Other
Sources of Flexibility Fade
Storage Use Since 1990
3.5
3.0
2.5
Working Gas (Tcf)
2.0
1.5
1.0
0.5
90
91
92
93
94
95
96
97
98
99
00
01
02
03
19
19
19
19
19
19
19
19
19
19
20
20
20
20
Year
Is Market “Infrastructure” Adequate
to Manage Change?
• Progress being made in price discovery
– Commission’s Policy Statement – increase
participation – biggest concern
– Process changes increase dependability
– Use of exchanges creates potentially more reliable
information
• Spot markets are being tested – and appear to be
performing
– Staff study found no evidence of 2/03 manipulation
– Markets driven by fundementals and each other
– Fewer traders and transactions than desired
Focus on the Future
• Development of strategic infrastructure
– Investment generalizations not helpful – details matter
– Storage and some transmission to increase flexibility
– Longer-term “basis” markets critical
• Use of risk management tools
– Move buying out of most volatile market (spot) and
into longer-term markets
– Wise use of financial options
– Capacity investments as risk management
• Technological advancement – prices in the
$5.00/MMBtu range can fuel technological
development
