Natural Gas Assessment

1. Natural Gas Assessment Natural Gas Demand by James Fore Natural Gas Office California Energy Commission March 26, 2007

2. THE DEMAND MODELING PROCESS • Demand Structure • Demand Sectors • Elastic and Inelastic Demand Sectors • Development of Elastic Demand • Demand parameters • Demand functions • Assumptions • Data Sources • Inelastic Demand Sources

3. Demand Structure • Four levels of disaggregation in the North America Gas market: • Super-regions • Regions • Sub-regions • Activity nodes

4. Demand Structure North America Gas Market Three regions: United States Canada Mexico

5. DEMAND STRUCTURE SUB-REGIONS

6. Demand Structure(cont’d) • Each super-region is divided into regions and sub-regions: • United States contains 54 demand sub-regions; • Canada contains 8 demand sub-regions; • Mexico contains 15 demand sub-regions.

7. Demand Structure (cont’d) • Natural gas demand in each of the sub regions can be divided into eight activity nodes or demand sectors • The level of demand sector disaggregation in each of the sub-regions is based upon gas activities the sub-region:

8. Demand Structure (cont’d) • The eight activities nodes used to model gas demand in North America are: • Residential • Commercial • Industrial non-chemical • Industrial chemical • Power generation • Alberta oil sand • California enhanced oil recovery • LNG exports

9. Model Structure Demand Sub-Region

10. The Demand Modeling Process The demand activities nodes are represented by: • Elastic demand • Inelastic demand

11. The Demand Modeling Process Activities nodes that are represented by elastic demand functions • Residential • Commercial • Industrial • Chemical Manufacturing • All other Industrial Processes

12. The Demand Modeling Process Residential Natural Gas Parameters Residential natural gas demand is a function of: • Income (Gross domestic product) • Population • Heating degree days • Price of natural gas

13. The Demand Modeling Process Commercial Natural Gas Demand Parameters Commercial natural gas demand is a function of: • Income (Gross domestic product) • Population • Heating degree days • Price of natural gas

14. The Demand Modeling Process The Parameters in the Industrial Demand Functions Industrial chemical and non-chemical natural gas demand is a function of: • Industrial production • Cross price elasticity is measured using the oil price forecast from EIA Annual Energy Outlook 2007 • Price of natural gas

15. Demand Modeling Process Inelastic Demand Nodes • Power Generation - California Energy Commission, Energy Information Administration and • Alberta Oil Sands– National Energy Board Canada’s Energy Future Scenarios for Supply and Demand to 2025 • Process Heat for Enhanced Oil Recovery – California Energy Commission • All Aggregated Demand Nodes

16. Data Sources Data Sources include: • California Energy Commission; • Energy Information Administration (US Department of Energy) • National Oceanic and Atmospheric Administration • US Census Bureau • National Resources Canada • Statistics Canada • US States and Canadian Provinces;

17. Questions and Comments

18. Imported Low Sulfur Light Crude Oil Source: Annual Energy Outlook 2007, Reference Case

19. Residential Demand Function The demand function for residential natural gas demand is Qt,i RES = αi · Ytβ1 · Pt,iB2 · POPt,iβ3 · HDDt,iβ4 · Q1-γ t-1,I,RES

20. Commercial Demand Function The demand function for commercial natural gas demand is Qt,i COM = αi · Ytβ1 · Pt,iB2 · POPt,iβ3 · HHDt,iβ4 · Q1-γ t-1,I,COM

21. Industrial (Chemical) Demand Function The demand function for industrial natural gas demand (chemical) is Qt,i CHEM = αi · IPtβ1 · Pt,iB2 · POILtβ3 · Q1-γ t-1,I,CHEM

22. Industrial (Non-Chemical) Demand Function The demand function for industrial natural gas demand (non-chemical) is Qt,i IND = αi · IPtβ1 · Pt,iB2 · POILtβ3 · Q1-γ t-1,I,IND

23. The Demand Modeling Process Accounting for Reaction Time: The Lag Parameter • Each elastic demand function includes a lag parameter • The lag parameter measures the influence of the previous period’s demand on the quantity of natural gas consumed in the current period • A large lag parameter implies that there is a greater degree of sluggishness to react to current conditions

24. Demand Assumptions

25. Demand Assumptions

26. United States Population Growth Source: U. S. Census Bureau, Population, Interim State Population Projection, 2005 Released Date April 21, 2005

27. Canada Population Growth

29. The Demand Modeling Process Natural Gas Demand for Electricity Generation Power Generation demand is modeled as an inelastic input. • There is insufficient data to create an accurate econometric model • The power market has undergone a structural shift over the past several years, with gas-fired stations playing a greater role as a baseload resource • The gas model generates prices for use as an input to the electricity model. The electricity model is then used to create a fuel use forecast for the gas model

30. The Demand Modeling Process Industrial Natural Gas Demand • Broken into demand for chemical manufacturing and all other industrial processes • Chemical and non-chemical industrial demands are functions of: • Industrial production • Cross price elasticity variable • Price of natural gas