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FERC Electricity Course 101.ppt


  • pg 1
									Expect Continuing Intense Pressure on
         Natural Gas Market
    Throughout the Next Decade

          Andrew D. Weissman

           Founder & Chairman
       Energy Ventures Group, L.L.C.
               Austin, Texas
             February 20, 2004

                                          Andy‟s Background

•   Energy industry specialist
•   Prior to forming EVG, advised CEO‟s of major energy
    companies and major financial institutions on high stakes
    strategic issues for more than 25 years
•   Founded Energy Ventures Group, L.L.C. January 1, 2000
     – Boutique investment firm specializing in energy industry
     – Offices in Washington, D.C. and San Diego, California
•   Manages energy sector hedge fund and provides consulting
    services to certain select clients
•   Publishing arm, EnergyBusinessWatch.com, publishes
    Weekly & Quarterly Reports on natural gas market and
    presents seminars and in-house programs on natural gas

                   How to Contact Andy for Questions

Mailing Address:   Andy Weissman
                   Energy Ventures Group, L.L.C.
                   3050 K St.
                   Suite 205
                   Washington, D.C. 20007-5123
E-mail:            aweissman@energyvg.com
Office Phone:      202/944-4141
Cell:              202/744-1956
Fax:               202/944-4145


•   Today‟s presentation covers five key points:
1. U.S. faces massive short fall in natural gas supplies
     In BTU terms, by 2010, equivalent to 1.5X current level of oil
      imports from Saudi Arabia (i.e., 1.8 million barrels/day)
2. Results from combined impact of:
     Rapid growth in power sector demand for natural gas
     Rapid aging of most major fields in U.S. and Canada/inability to
      significantly expand supplies any time this decade
3. Not only or even primarily a short-term problem
     Recent winter price spikes, California crisis in 2000 early warning
      signs of much deeper crisis to come
     Gap between projected U.S. needs and available supplies like to
      grow every year for at least the next 5 to 7 years
     Most important challenge facing energy providers + U.S.
      economy as a whole for most of the next decade

                                           Overview - Continued

4. Except in years in which weather unusually mild, certain to
   result in significantly higher prices for natural gas
    Most existing price forecasts no longer reliable – for either
     electricity and natural gas
    Price volatility – always high – will become even greater
    On average, natural gas prices likely to average at least $ 8.00 –
     10.00/MMBTU – and potentially much higher
    Over time – impact on electricity prices could be even greater
5. Profound implications for U.S. economy
    Could have significant implications for competitiveness of U.S.
     industry + health of U.S. economy for much of the next decade
    Urgent need to take steps to reduce pressures about to develop
     on natural gas market
        No way current projected needs during remainder of decade
         can be met

The Emerging Natural Gas Crisis

                                                           Early Warning Sign

•   Price shocks 3 winters ago signaled emerging crisis

                          2000-2001 Natural Gas Wellhead Prices
                    Jan      Mar   May     Jul       Sep    Nov   Jan
                    00       00    00      00         00    00    01

•   One of 2 major causes of California meltdown of same year
    – But dismissed as anomaly at the time

                                       Subsequent Track Record

•   Prices now far higher than most analysts predicted 3 out of
    past 4 winters
•   The one exception (winter of ‟01/‟02) occurred only because
    of combined effect of:
     – Worst manufacturing recession in 22 years; and
     – Extremely mild winter (i.e., almost a “1 in 100 year” type
•   Prices remained far above expected levels all last year
•   Never dropped much below $ 6.00/MMBTU over Christmas
    holidays even with combination of:
     – Mild weather
     – Sharp drop off in consumption due to shut down of offices and
       factories over holidays
•   Mystery: why are forecasters who have proven wrong
    over and over again still taken seriously?

                                       Seductive Warmth

•   Warmer-than-normal winters masked emerging supply

                                     Collision of Tectonic Plates

• Train wreck about to occur stems from collision of two
  tectonic plates set in motion long ago:
   1.   After several decades of development, production from
        most conventional on-shore fields in U.S., Alberta and
        Near-Shelf region in Gulf has entered into a period of
        rapid – and irreversible -- decline
         • Particularly severe in shallow waters off Gulf Coast and
           western Canada
            – Until recently, most important sources of new supply
   2.   Shift to natural gas as near-exclusive fuel to meet
        incremental electricity needs of U.S. economy
         • Due in part to:
            – Delayed impact of Clean Air Act requirements enacted
              long ago
            – 20-year period required to work off huge generation
              surplus left over after oil price shocks of ‟70‟s

Abrupt Shift in Strategy for Meeting
   Incremental Electricity Needs

                                                          Economic Growth Requires
                                                     Increased Supplies of Electricity

•   Demand for electricity generally increases every year
    –   Even in ‟01, despite most severe manufacturing recession in 22 years,
        decline still = only 0.2%

                                Electricity Consumption Grows Every Year

                    1982        1985   1988   1991      1994   1997   2000   2003
                                     Engine of Economic Growth

•   Since 1980, U.S. electricity consumption has grown by more
    than 75%
•   Even with increases in energy efficiency, requires 0.70 to
    0.75% increase in electricity production to achieve each 1%
    growth in GDP
     – Electricity production accounts for an increasing percentage of
       U.S. energy supply every year
•   Lifeblood of the economy
•   If no longer feasible to expand supplies of electricity, growth
    of U.S. economy likely to be brought to a halt
     – Would require many years to changeover infrastructure
       sufficiently to change dramatically relationship between
       electricity consumption and economic growth
•   Even with increased efficiency, electricity production
    currently projected to increase 30% over next 15 years

                                          Major Turning Point

•   Prior to late ‟90‟s, possible to meet incremental electricity
    needs of U.S. economy primarily thru increased utilization of
    existing coal and nuclear units:

                                    Sharp Increase in Consumption

•   Starting in 1998, consumption of natural gas at existing
    generating units began to rapidly increase:

                     Increased Power Sector Consumption of
                             Natural Gas (1997-2000)
             5,350     Cumulative Increase = 1.141 TCf

             3,950       4,065

                        1997       1998        1999      2000

                                           Need for New Capacity

•   By late 1990‟s, new capacity needed in every region of U.S.
•   Industry in midst of far-reaching change
    – De-regulation of wholesale markets by FERC + statewide
      restructuring in states representing 2/3rd‟s of total U.S. load
    – Explosive growth of Independent Power Producer industry &
      power marketers
        • Darlings of Wall Street with 40:1 P/E ratios
•   Developers strongly favored gas-fired capacity over coal
    – Shorter lead time and much lower (apparent) capital cost
    – Much lower permitting risk/perceived as “environmentally-
      friendly” choice
    – Turnkey construction with few perceived development risks
    – Greater familiarity (since many developers had experience with
      gas-fired co-generation under PURPA, gas marketing or both)
    – Widely believed supplies plentiful and prices would remain low

                                          Natural Gas Supplies
                                          Perceived as Plentiful

•   December 1999 National Petroleum Council (NPC)) Study
    forecast North American production increasing to 33.5 TCf by
    2015 with little or no increase in price
    – Principally from lower 48 States

                                                        Choices Necessary

•   Result = abrupt shift in U.S. energy policy
     –   $ 100 billion investment in new gas-fired plants
     –   Enough generation to meet all of the electricity needs of Great Britain,
         Germany and France

                                  Result = Massive Increase
                            In Dependence Upon Natural Gas

•   U.S. now dependent upon increased utilization of gas-fired
    units to meet virtually all of its incremental electricity needs

                                                                              Primary Driver of
                                                                        Increased Consumption

•   After brief pause, starting in 2004 power sector consumption
    of natural gas will again increase significantly every year:
                     Cumulative Increase in Power Industry Natural
                       Gas Consumption (2004-2015) vs. 2003



        Total TCf




                    2004   2005   2006   2007   2008   2009   2010   2011   2012   2013   2014   2015
                                         Cumulative Increases Huge

•   Increase likely to be > 3.4 TCf by 2010, > 5.7 TCf by 2015
    –   No other current source of supply to meet incremental electricity needs of

                Projected Increase in Power Sector
                    Natural Gas Consumption
                Year    Increase                          Total
                                         vs. 2003
                2004     0.275   TCf     0.250 TCf       5.486    TCf
                2005     0.462   TCf     0.712 TCf       5.948    TCf
                2006     0.563   TCf     1.275 TCf       6.511    TCf
                2007     0.522   TCf     1.797 TCf       7.033    TCf
                2008     0.460   TCf     2.257 TCf       7.493    TCf
                2009     0.568   TCf     2.825 TCf       8.061    TCf
                2010     0.568   TCf     3.393 TCf       8.629    TCf
                2011     0.353   TCf     3.746 TCf       8.892    TCf
                2012     0.353   TCf     4.099 TCf       9.335    TCf
                2013     0.546   TCf     4.645 TCf       9.881    TCf
                2014     0.546   TCf     5.191 TCf      10.427    TCf
                2015     0.546   TCf     5.737 TCf      10.975    TCf

Irreversible Decline in Supplies
   Available to U.S. Market

                              Disastrous Coincidence in Timing

•   Production from major sources in U.S. and Canada appears
    to have hit a wall in 1999-2000 time frame
     – Major turning point after 20 – 30 years of development of many
     – Not physically possible to reverse
•   Massive ramp-up in drilling in late 2000/first three quarters
    of 2001 further depleted remaining inventory of attractive
•   U.S. supply crisis further exacerbated by:
     1. Sudden, unexpected (and almost certainly continuing) decline in
        imports from Canada
          • Due largely to same underlying causes as in U.S.
     2. Sudden, largely unexpected (and in all likelihood also
        continuing) rapid increase in exports to Mexico
•   Net effect is to significantly exacerbate a deficit that already
    would be severe without these two added burdens
                                    Barriers to Increased Production

•   While higher prices in ‟00 and early ‟01 resulted in massive
    increase in drilling, total U.S. production barely budged
     – Maximum increase achieved = 1.35 BCf/day (i.e., 2.7%)

                     Natural Gas Rigs vs. Production
     1,100                                                     60



       700                                                     50
              7/00       10/00    1/01   4/01   7/01   10/01

                                              Signaled Major Shift

•   With benefit of hindsight, inability to increase production
    despite major increase in development activity should have
    been cause for major concern
•   Early warning sign of crisis to come
     – Correlates with massive $ 10 – 15 billion increase in E&P
     – Every reason to assume E&P companies used resources
     – No reason to believe will be easier to expand production in ‟03 or
     – Fewer attractive targets remain every year

                                                   Sharp Decline In Production

•   When drilling began declining late in ‟01,production
    immediately began to fall
     – Severity and speed of decline quite shocking
                            Natural Gas Rigs vs. Production
     1,100                                                                             60

       600                                                                             45
                    11/99 3/00   7/00 11/00 3/01   7/01 11/01 3/02   7/02 11/02 3/03

                                           Production      Rigs

                             Not Physically Possible to Increase
                        Production by 1.0 BCf/day in 12 Months

•   Results from combined impact of:
     1.   Rapid increase in rate at which production declines from existing
         • 29 – 30 % this year
     2. Sharp fall-off in size of typical new well
     3. Steep drop in half life ((n 2003, typically less than 12 months)
•   Net impact: may need to drill up to 22,000 new
    development wells/year just to replace production lost from
    existing wells
     – Requires deploying almost every available rig in North America
       just to halt decline in production
•   Production virtually certain to continue declining later this
     – Nearly impossible to rebuild supplies at rate of more than 0.5 –
       1.0 BCf/day in any one year

National Petroleum Council Study
 Balancing Natural Gas Policy –
Fueling the Demands of a Growing

                                              Landmark Event

•   New National Petroleum Council Study prepared for
    Secretary of Energy Spencer Abraham = landmark event
    – Summary of Findings and Recommendations and Draft of
      Integrated Report available at www.npc.org
•   Most comprehensive assessment of North American supply
    and demand undertaken in many years
•   Primary conclusions:
    – Findings of Council‟s earlier, December 1999 Study are
      no longer valid
    – Major fields in U.S. and Canada aging far more rapidly
      than expected just four years ago
    – No longer realistic to expect any significant increase in
      supply from “traditional” North American sources (i.e.,
      sources south of the Arctic Circle)

                                                        Huge Void

•   New NPC Study finds conclusively that traditional sources of
    supply cannot meet this demand
    – Estimate of production for lower 48 States alone reduced by a
      stagger 16 BCf/day (i.e., just under 6.0 TCf/year)

                                  Production Has Hit Plateau

•   At best, increases in Rockies and from Deepwater projects in
    Gulf of Mexico will offset declines in other basins

                                          Multiple Causes

•   Results from combined impact of:
    – Reduced reserves + rapidly increasing decline rate +
      smaller wells

                             Creates Insurmountable Hurdle

•   Creates need to drill larger number of wells each year just to
    replace production lost from existing wells

                                             Treadmill Effect

•   Decline rate now well over 50% in most regions:

                        No Source Available to Replace Shelf

•   Decline in production in Near Shelf Region in Gulf
    particularly severe
    – Accounted for almost 1/4th of U.S. production in ‟90‟s
    – Estimated to have lost 4.0 BCf/day in last 48 months

                                       Creates Massive Hole in
                                  Expected U.S. Energy Supply

•   Estimated total production from “traditional” North American
    sources of supply reduced by over 50 TCf between now and
•   Creates >21 TCf gap between projected needs and available
    supplies and between now and 2010
    – No easy way to reduce gap

                        No Contingency for Further Declines

•   Even this estimate could prove far too optimistic

                                              Flat Supply Curve

•   Expected increase in production in response to higher prices
    surprisingly modest

                                Far Longer Lead Times and More Distant
                                                     Sources of Supply

  •    To obtain significant new supplies, necessary to successfully
       complete large number of large-scale, highly capital
       intensive multi-year projects targeting far more distant
       sources of supply
                       Required Capital                                            Likely Increase
Source                                         Required Lead Time
                        Expenditures                                                  in Supply
Mackenzie Delta       $4 -5 billion           At least 4-5 years             1-2 BCf/day -- all of which
in Canada (near                                                              currently is expected to be
Arctic Circle)                                                               dedicated to Tar Sand’s Project

Prudhoe Bay           $20 billion             A decade or more               4.5 BCf/day

Ultra-deepwater       $500 million or more    Minimum 5-7 years if           0.5 BCf/day
platforms in the      per platform            technology can be
                                              developed; even then,
Gulf (i.e., 15,000-                           could yield mostly oil, with
20,000 foot depth)                            only limited natural gas

LNG                   $3-7 billion for each   Likely to be at least 2009     2-4 BCf/day by 2010
                      0.5 BCf/day of          before imports of LNG into
                      additional supply       the U.S. can be increased

                        Alaskan Gas At Least a Decade Away

•   2013 -2014 = Earliest Potential In-Service Date
    – Requires federal legislative support not yet enacted + no major
      permitting impediments

                                            Near-Term Contribution
                                               of LNG Also Limited

•   Likely to take until at least 2009 to 2012 before imports of
    LNG will make a major contribution
     – Most production likely to come on line before 2008 or 2009
       already committed to other markets
     – Even then, will offset only a portion of increased demands of
       U.S. power sector

                                                         Bottom Line

•   U.S. faces unprecedented energy supply shortfall
•   Already has caused serious harm to the economy
     – Severe, unanticipated price spikes 2 out of past 3 winters
     – One of two major precipitating causes of California crisis in 2000
     – May have helped to precipitate recession in 2001 (worst
       manufacturing recession in 22 years)
•   No precedent for being able to sustain growth of U.S.
    economy without being able to expand supplies of electricity
•   Yet, no urgent effort is being made at national level to:
     – Dramatically improve efficiency of energy utilization beyond
       current levels
     – Increase our ability to supply electricity from alternative sources
       (e.g., coal and renewable energy)
•   Could have severe repercussions for economy – quite
    possibly starting this year

                       Rapidly Diminishing Potential to Further
                               Reduce Industrial Consumption

•   In the past, inherent volatility of natural gas prices has been
    tempered by ability of manufactures to switch to fuel oil or
    temporarily cut-back production
     – As recently as 3-4 years ago, accounted for 35 –40% of total
       U.S. consumption of natural gas
     – Major factor that helped to reduce severity of price spikes, even
       as recently as run-up in last 6 months of 2001
•   Over the past 2 – 2 ½ years, however, virtually all of the
    non-draconian (and some fairly extreme) measures to
    reduce industrial consumption already have been
•   Most industrial boilers capable of burning fuel oil have been
    doing so for at least a year – and often much longer
     – Little, if any, fuel switching potential left

                       Rapidly Diminishing Potential (Contd.)

•   In addition:
     – Aluminum smelters and a number of other heavy manufacturers
       shut their facilities more than 2 years ago and never have
       reopened since
     – Maximum amounts of natural gas liquids being retained in the
       gas stream
     – A significant portion of fertilizer industry has been shut down or
       is operating at well below maximum capacity
     – Methanol and ethylene production (other highly intensive uses)
       also have been cut back back severely
•   Little, if any, “low-hanging fruit” remains
•   Even a relatively modest incremental reduction in
    consumption (i.e., 0.50 – 1.00 BCf/day) could require a
    steep increase in price
     – Not sufficient to offset even 1 year‟s expected growth in power
       sector demand for natural gas

                                Electric Generation Now Largest Use

•    Power generation now largest category of use
      – Price elasticity near zero

                       Use of Natural Gas at Generating Units
                                   vs. Industrial



                                   Power Generation*            Industrial
                1996     1997     1998   1999      2000        2001       2002E
                                            *Generating units include combined
                                             cycle electric units + industrial CHP units

Steep Increase in
Electricity Prices

                              Huge Impact on Electricity Prices

• Over time, impact on wholesale price of electricity
  could be even more severe than direct impact
• Only about 1/3rd of natural gas used to generate
• But – electricity market is far larger
• Over time, more and more megawatt hours will be
  priced against natural gas as:
     – Power supply buy-back agreements and other transitional
       arrangements entered into in late ‟90‟s continue to expire
     – Gas-fired generating units = marginal source of supply more and
       more hours of the year in every region of the country each year
     – More and more coal and nuclear capacity entitled to price
       against natural gas
•   Total increase in wholesale price of power could easily be
    $75 to 100 billion per year, if not more
                                       Rapid Acceleration in Megawatt Hours
                                                  Priced Against Natural Gas

                                   Megawatt Hours Priced
             100%                   Against Natural Gas

% of Total MWhrs


                   25%                                    Megawatt Hours
                                                        Produced from Gas-
                                                            Fired Units
                         2000   2003     2006    2009      2012     2015     2018

                                                                 Key Driver

•   Increasingly over time, natural gas prices likely to become
    key driver of electricity prices – and vice versa
     –   Potential for a vicious circle of unprecedented scope

•   By 2010, gas-fired capacity expected to be marginal source
    of supply during 2/3rd of the year or more in every region of
    the country except MAPP
     –   More than 1/3rd of the year in MAPP

•   Even during off-peak hours, by 2010, gas-fired capacity
    expected to be marginal source of supply:
     –   More than 2/3rd of the year in New England, Florida, Texas and much of
         the West
     –   More than 1/3rd of the year in New York, the Southeast, SPP and much of
         western Canada

•   Cost implications of a shift from $4.00 –5.00/MMBTU gas to
    $8.00 – 10.00/MMBTU under this scenario are staggering

                                    Staggering Cost Impact

•   Huge impact on costs:
                   All-In Levelized Cost ($ 2010)

           Alternative         Levelized Cost       Difference

    New Coal                  $ 45.82/MWhr              --
    Gas CC @ $ 4.50/MMBTU     $ 56.99/MWhr          + 24.3%

    Gas CC @ $ 8.00/MMBTU     $ 96.08/MWhr          + 109.6%

    Gas CC @ $ 10.00/MMBTU    $ 118.42/MWhr         + 158.4 %

                                        Huge Life Cycle Impact

•   Potential multi-billion impact from a single plant:
                   Life Cycle Costs – 500 MW Plant
                          ($ 2010 Levelized)

           Alternative           Annual Increase          20 Years
    New Coal                             --                  --
    Gas CC @ $ 4.50/MMBTU       $ 41.6 million/yr    $ 0.832 billion

    Gas CC @ $ 8.00/MMBTU       $ 187.1 million/yr   $ 3.740 billion

    Gas CC @ $ 10.00/MMBTU $ 270.3 million/yr        $ 5.406 billion

Why Isn’t Urgency of Emerging
  Crisis Better Understood?

                                         How Freight Train From Hell
                                                      Can Be Missed

• Focus of most analyzes of natural gas market = short-
  term supply/demand balance
    – Except for new NPC Study, few careful studies look beyond 12
    – Even then, tendency is to focus on long term options, not critical
      time horizon of next 5-7 years
•   Freakishly mild weather masked emerging crisis
    –   Winters of ‟98/‟99 and ‟99/‟00
    – Winter of ‟01/‟02
    – As we‟ll see, this summer and this fall
•   But – as we‟ve also seen – warning signs have been clear:
    – Severe price spikes 2 of past 3 winters
    – California crisis
    – Far higher-than-expected prices ever since spring of „02

                                             The Three Myths

•   Analysis of the natural gas market has also been seriously
    distorted, however, by three pervasive myths regarding the
    Myth # 1 – The near universally held belief that the larger
      than expected injections into underground storage that
      occurred this summer were due to large-scale industrial
      demand destruction since the end of last winter
    Myth # 2 – The closely-related belief that prices above $
      5.50/MMBTU are not sustainable, since (it is believed)
      large amounts of industrial demand will quickly disappear
      from the market at prices above this level
    Myth # 3 – The belief the 3,000 BCf of natural gas in
      underground storage is sufficient to prevent price spikes
      during the winter months
• Remainder of presentation will explain why all 3 false

                                  Demand Destruction Myth

•   Summer ‟03 injections far exceeded ‟02 levels:

                 Increase in Injections
     Month          '02           '03       Increase
     April        141   BCf     166   BCf     25   BCf
     May          309   BCf     404   BCf     95   BCf
     June         340   BCf     468   BCf    128   BCf
     July         231   BCf     361   BCf    130   BCf
     August       234   BCf     315   BCf     81   BCf
        Total   1,255   BCf   1,714   BCf    459   BCf

•   Equates to an average increase of 3.0 BCf/day

                                              Thought to Disprove
                                                Existence of Crisis

•   Based upon the size of these injections, many analysts have
    concluded that, since the end of last winter:
    – Massive industrial fuel switching and demand destruction have
    – Estimated to be as much as 3.5 to 4.0 BCf/day
•   Thought to demonstrate that:
    – After price run-ups early this summer, market quickly restored
      to sustainable long-term equilibrium
    – Prices above $ 5.50/MMBTU not sustainable for more than brief
•   Cornerstone of how many analysts view market
•   Suggests there is no long term “problem,” since “market”
    will quickly bring prices back down to acceptable levels

                                   Industrial Demand Destruction
                                                  Not the Cause

• Injections can be explained almost entirely based upon
  decline in amount of natural gas used to generate
   – Attributable primarily to milder weather in key cities

    Decrease in Use for Electric Generation
     Month              '02           '03          Increase
   April             437   BCf     366   BCf       -71   BCf
   May               457   BCf     417   BCf       -40   BCf
   June              585   BCf     452   BCf      -133   BCf
   July              779   BCf     646   BCf      -133   BCf
   August            745   BCf     695   BCf       -50   BCf
            Total   3,003 BCf    2,576 BCf        -427 BCf
• Through the end of August, aggregate decrease > ½ of
  a TCf (i.e., 520 BCf)
                                                                  Massive June Decline

•   Power industry consumption of natural gas declined
    massively in June of ’03 vs. June of ’02:
                        Region             Change vs. '02 (BCf)
                New England                                 1.9
                Middle Atlantic                           -24.3
                East North Central                        -18.1
                West North Central                         -5.5
                South Atlantic                            -20.3
                East South Central                        -19.5
                West South Central                        -26.5
                Mountain                                   -2.3
                Pacific                                   -19.8
                Pacific - Non-contiguous                    0.2
                                   Total                -134.3
•   Explains 92% of increase in injections
     –   Average of 31.25 BCf/ week
•   ¾ is due to differences in weather
•   ¼ is due to increased dispatch of oil burning plants

                                                   Steep Weather-Driven Declines

           Consumption of Natural Gas by Region June 2002 and June 2003

             Middle         East North          West North         South           East South      Regions
             Atlantic        Central             Central          Atlantic          Central         Jun-02
            (NJ, NY, PA)                         (IA,KS,MN,MS,   (DE,DC,FL,GA,MD   (AL,KY,MS,TN)
                           (IL, IN, MI,OH,WI)                                                       Jun-03
                                                 NE,ND,SD)       ,NC,SC,VA,WV)

                                                           Repeated in July

•   Decline continued in July:
                          Region         Change vs. '02 (BCf)
                New England                                4.6
                Middle Atlantic                          -26.7
                East North Central                       -41.1
                West North Central                        -5.8
                South Atlantic                           -20.8
                East South Central                       -24.6
                West South Central                       -29.0
                Mountain                                   7.8
                Pacific                                    3.3
                Pacific - Non-contiguous                  -0.3
                                  Total                -132.6
•   Explains all of the increase in injections
•   ¾ is due to differences in weather
•   ¼ is due to increased dispatch of oil burning plants

                                                       Equally Dramatic Differences

            Consumption of Natural Gas by Region July 2002 and July 2003




               Middle         East North          West North       South Atlantic     East South      Regions
               Atlantic        Central             Central          (DE,DC,FL,GA,MD     Central         Jul-02
              (NJ, NY, PA)   (IL, IN, MI,OH,WI)                     ,NC,SC,VA,WV)
                                                   (IA,KS,MN,MS,                      (AL,KY,MS,TN)     Jul-03

                                      Major Factor First Seven Months

•   Total decline in power sector consumption for the first 7 months
    of ’03 vs. ’02 = 327 BCf:
                                Region            Change vs. '02 (BCf)
                      New England                                 -12.3
                      Middle Atlantic                             -99.9
                      East North Central                          -85.5
                      West North Central                          -15.3
                      South Atlantic                              -43.7
                      East South Central                          -94.1
                      West South Central                          -85.4
                      Mountain                                      0.4
                      Pacific                                     -26.0
                      Pacific - Non-contiguous                      1.1
                                          Total                 -460.8

•   Due to combined impact of :
     –   Efficiency effect
     –   Milder temperatures in June
     –   Heavier use of oil-fired units
•   Will be completely overtaken by load growth in future years

Narrowly Dodged a

Bullet this Summer

                              Putting Current Prices in Context

•   Mild summer weather in the eastern half of the U.S. +
    efficiency effect from new combined cycle units reduced
    power sector consumption of natural gas by at least 100 -
    150 BCf compared to a typical summer
    – 300 - 400 BCf or more compared to last year
•   Note also that:
    – Efficiency effect at an absolute peak, due to massive addition of
      combined cycle units past 2 years
    – Almost every industrial boiler that can switch to fuel oil has done
    – Significant “demand destruction” has occurred in every one of
      the largest categories of industrial use

                                            Alternative Scenario

•   If power sector demand had been higher:
    – LDC‟s still would have needed to buy just as much natural gas
      for injection into storage;
    – Residential and commercial consumption would have been just
      as high;
    – Little industrial consumption would have remained available to
•   Yet, it still would have been necessary to drive out of the
    market 150 BCf of the consumption that actually occurred if
    the weather had been normal
    – 300 – 400 BCf compared to last summer (when the weather was
      particularly hot)
•   Equates to an additional reduction of 2.75 – 4.00 BCf per
    day over the past 8 weeks
    – 20 – 30% of remaining, greatly reduced industrial demand
•   Easily could have resulted in prices of $ 6.75 – 8.00/MMBTU
    this summer
                 Potential Devastating Impact on Manufacturing Sector

Components of Industrial Manufacturing Demand for Natural Gas
          Non-Ferrous      8%



           Food/Tobacco                     Refining
                9%                            14%
                                              source: Prudential Financial 11/25/02
                                            Last Winter Close to Norm

•    Temperatures for season-as-a-whole < 1% colder than
     historical norm:

    Heating Degree Days – ‘02/’03 Winter Heating Season

    Month        Actual          Norm             Difference   % Difference
November       589   HDD's    580   HDD's     +   9    HDD's   +   1.6%
December       841   HDD's    874   HDD's     -   33   HDD's   -   3.8%
January        992   HDD's    980   HDD's     -   12   HDD's   -   1.2%
February       856   HDD's    785   HDD's     +   71   HDD's   +   9.0%
March          616   HDD's    640   HDD's     -   24   HDD's   -   3.8%
      Total   3,894 HDD's    3,859 HDD's      + 35 HDD's       + 0.9%

                                                                                         Record Withdrawal Last Winter

•    Still at risk this winter

                 3.000                                                                                                                      2.850*
                                                      Average of
                 2.750                             previous 8 winters
                                                      (1.910 TCf)                                                              2.549

                                                                                         1.982 2.01
                         1.808                     1.839
                                                                1.765 1.81                                        1.763










* If temperatures identical to last significantly colder-than-normal winter (‟00/‟01)
Required Actions

                                            Critical Next Steps

• To avoid potentially catastrophic impacts on U.S.
  economy, imperative that we begin focusing immediately
  on steps that can achieve major reductions in our natural
  gas dependence in no more than 2 –4 years
• Focus should be on three critical areas:
   1. Efforts to dramatically reduce amount of energy (both
      electricity and natural gas) that is wasted each year in
      commercial office building and retail malls
        - By far the area with the most “low hanging fruit”;
   2. Urgent, high priority effort to increase availability factor and
      expand capacity of nation‟s existing coal-fired plants; and
   3. All-out high priority effort to expand constrained
      transmission pathways that limit ability to move power from
      regions with surplus coal-fired capacity to regions otherwise
      required to burn increased quantities of natural gas

                             Critical Next Steps (contd.)

• No other measures offer potential to achieve
  comparable reductions in demand for natural gas
  within a 2 – 4 year timeframe
   - Absent these measures, U.S. demand for natural gas likely
     to increase by at least 1.5 TCf during this period
   - No other measures offer potential to have as great an
     impact this quickly
• Failure to implement these measures could have a
  devastating impact on the U.S. economy
• But – do we have the will to act? Especially with the
  sense of urgency required?


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