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Spring Market Update 2002

Spring Market Update 2002. Chris Smith & Les Deman May 2002. If I Only Had One Slide. May 24, 2002 at 1,796 Bcf. 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

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Spring Market Update 2002

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  1. 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?

  4. 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

  5. Industry Comes Last • Industry=f(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

  6. 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

  7. 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: E&P INVESTMENT LAGS AS PRODUCERS CLEAN-UP BALANCESHEETS Source: EIA and Coral estimates

  8. 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

  9. Supply 2005: Through a Looking Glass • It’s 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 S&D? • 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

  10. 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

  11. 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

  12. 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? • Coal’s 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

  13. Gas & Electricity ValuesYesterday, Tomorrow (& Last Year) You were here You are here

  14. 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.

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