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Energy

North American 2007 Outlook for Demand and Supply Brazilian Petroleum Institute IBP Logistics Seminar Houston, TX June 13, 2007. Black & Veatch delivers consulting, engineering and construction services to critical infrastructure industries. Energy. Water. Information. Government.

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  1. North American 2007 Outlook for Demand and Supply Brazilian Petroleum InstituteIBP Logistics Seminar Houston, TXJune 13, 2007

  2. Black & Veatch delivers consulting, engineering and construction services to critical infrastructure industries Energy Water Information Government

  3. Black & Veatch – Enterprise Management Solutions / Lukens Energy Group services Strategy Process Application Services

  4. Today’s discussion • Review of Winter 2006-07 • Prices • Storage Status • Demand and Supply Outlook • Demand • Production • LNG • Pipeline Infrastructure • Summary/Conclusions

  5. Prices across the US remained volatile in winter 2006-07 although lower than high levels experienced in winter 2005-06

  6. High price volatility is expected to continue in both natural gas and crude oil markets

  7. Storage inventory correspondingly stayed close to 5-yr highs until late winter drawdown in Feb 07 EIA Weekly Storage Level and 5-yr range

  8. NYMEX seasonal spreads imply market concerns for tightening supplies Abnormally high seasonal spreadfor current gas year

  9. Today’s discussion • Review of Winter 2006-07 • Prices • Storage Status • Demand and Supply Outlook • Demand • Production • LNG • Pipeline Infrastructure • Summary/Conclusions

  10. Weather normalized residential and commercial natural gas demand growth is expected to grow 1.4% annually between 2007 and 2011 Forecast History Source: EIA

  11. Gas demand for power generation is projected to grow 2.4% annually between 2007 and 2011 – key factors include price levels and emission considerations History Forecast

  12. Industrial natural gas demand is expected to grow 1.3 % annually between 2007 and 2011 as prices drop and economic growth continues History Forecast

  13. Total US natural gas demand is projected to increase by 1.7% annually, with cumulative growth of 7% between 2007 and 2011 Source: EIA AEO 2007

  14. Winter and summer demand peaks are forecasted to grow Source: B&V / LEG Analysis

  15. Peak month residential demand is growing relative to average monthly demand

  16. Supply outlook – new sources, uncertain costs • Key sources influencing the North American supply picture : • Canada • GOM production • Rockies • Shale plays – Barnett, Fayetteville • LNG • Frontier gas – Alaska, Mackenzie Valley

  17. Canadian production is expected to decline and the decline is compounded by delay in the Mackenzie Valley project MVP delayed until 2014

  18. Alaska pipeline project is delayed and timing is uncertain, build-out is +/- 10 years Source: Platts Pipeline Conference, September 21, 2006

  19. Aggregated production projections for the Lower 48 states indicate an increase between 2007 and 2012, flattening thereafter

  20. GOM Offshore – Deepwater increases offset shallow water declines Historical Forecasted Source: Lippman Consulting, LEG Analysis

  21. Unconventional reserves include of CBM, Gas Shale, and Tight Gas Sands

  22. Unconventional gas plays lead recent domestic resource discoveries

  23. US Rockies non-conventional production is providing valuable relief to supply constraints

  24. Rockies production growth has largely come from key basins in the northern Rockies • Rockies production is expected to grow at about 2.5% per annum in the next ten years • Jonah, Pinedale and Piceance will lead the growth with an average rate of 4.5% per year • Jonah and Pinedale production increased from 600 Mmcf/d to 1.5 Bcf/d from 2002 to 2006, at an annual growth rate of 25% • Piceance production increased from 439 Mmcf/d to 1 Bcf/d in 2006, at an annual rate of 22%

  25. Rockies gas producers are targeting eastern markets Zone 3 – Lebanon to Clarington In Service: Jun-09 Capacity: 2.0 bcf/d FT rate: $1.094 Fuel: 2.22%

  26. Gulf Coast Onshore – Benefiting from Barnett Shale Historical Forecasted Source: Lippman Consulting, LEG Analysis

  27. Insights into the shale resource: Barnett Shale • Dry Production in 2006: 1,421 MMcf/d • Current Rig Count: 44 Rigs • Wells First Delivered in 2006: 864 • Drilling and fracturing technology has driven the Barnett Shale resource development Source: Lippmann Consulting

  28. Barnett Shale – peak production not expected for another 10 years

  29. Mid-Continent production also expected to grow on the strength of non-conventional shale gas plays

  30. Mid-Continent production is projected to increase due to Fayetteville Shale prospects • Fayetteville Shale is a Mississippian-age shale accumulation located in Arkoma Basin across several counties of Arkansas. • Southwest Energy, the dominant player in the play, has drilled and completed 172 wells as of Dec. 31, 2006, of which 92 are horizontal wells. • Assuming average well ultimate recovery of 1.4 Bcf and 80-acre spacing, Southwest Energy estimated an ultimate recovery of over 11Tcf • Fayetteville shale production forecast is based on Lippman Consulting projections and an assumed growth rate

  31. Woodford Shale, East OK also provides Mid-Continent production with upside potential • Woodford shale is the geological equivalent of Barnett Shale and Fayetteville Shale in East Oklahoma on the west part of the Arkoma basin. • Major players in Woodford shale include Newfield Exploration and Devon Energy. Newfield plans to drill 233 to 322 new wells by 2009. • Newfield Exploration estimates the ultimate recoverable reserves ranges from 2 – 5 Tcf • Woodford Shale production forecast is based on Lippman Consulting projections

  32. Producer commitments to new pipeline capacity is a valuable sign of confidence in supply certainty • Status: Conducting a binding Open Season, to be completed Jan-07 • Texas Panhandle to Alabama • Expected Capacity: 1.4 Bcf/d to CGT, 1.0 Bcf to Transco St 85 • Expected in-service date – Feb 2009 • Proposed Recourse Rate: • Zone 1: Daily Demand $0.31 • Zone 2: Daily Demand: $0.24

  33. Additional Pipeline Capacity: Boardwalk/Gulf South – Gulf Crossing Project • 355 Miles Interstate Pipeline from Sherman, TX to Perryville Hub • Expected Capacity: 1.65 Bcf/d • CapEx: 1.1 Billion • Expected in service date: 4th Quarter, 2008

  34. Mid-continent supplies and pipelines are good news for southeast consumers (AND MARKETERS!) OK KM MidCont Exp 1.4 Bcf/d KM MidCont Exp 1.1 Bcf/d BW Gulf Crossing 1.65 Bcf/d ETP Sherman Lateral l 1.1 Bcf/d Duke Carthage to Perryville 1.2 Bcf/d Carthage KM MidCont Exp 1.0 Bcf/d N. Texas Perryville ETP N. TX to Carthage 1.0 Bcf/d BW E.TX-MS Exp 1.3 Bcf/d BW Gulf Crossing + SE Exp 1.5 Bcf/d Transco Zone 4 ETP N. TX to Harden 0.95 Bcf/d Duke- Centerpoint SE Supply Header 1.0 Bcf/d Enbridge 0.7 Bcf/d HSC Mobile Bay

  35. Expectation for LNG imports – the devil is in the details… • Several LNG regasification terminals are permitted and under construction in the US • The actual volume of LNG imports will be determined by several factors: • Delivered cost of LNG • Supply sources for LNG • Competition for LNG • Quality specifications for LNG in the US

  36. LNG import expectations continue to moderate Source: EIA, LEG Analysis

  37. World liquefaction capacity is expected to more than double through 2010 Expected Worldwide Liquefaction Capacity Source: LNG OneWorld

  38. LNG is the lynchpin of a global market for natural gas Source: BP Statistical Review 2006

  39. UK National Balancing Point (NBP) prices compared to Henry Hub; North America will compete for LNG supplies with Europe and Asia

  40. North America & Europe expected to become more import-dependent;Asia (Japan, S. Korea, India, & China) expected to remain import-dependent

  41. Will GOM LNG terminals receive higher volumes in the summer? Source: Lippman, LEG Analysis

  42. While more attractive and restrictive markets maintain high terminal utilization? Source: Lippman, LEG Analysis

  43. Based on Europe’s ability to store LNG Valuation implications for storage facilities located near LNG import terminals Impact physical need? Dependent on import facility, import schedules, and pipeline takeaway capacity. Impact market dynamics? Uneven imports put pressure on market volatility. Potential for future LNG imports to exhibit seasonality, with larger volumes in the summer Source: LEG Analysis

  44. Natural gas storage must provide the critical flexibility and security to optimize LNG sales and satisfy demand Source: Energy Velocity

  45. Expansion of Previously Built Storage New Storage Field Proposed Storage Field New storage will be justified as LNG imports and markets grow 100% of current Gulf Coast LNG regas capacity Golden Triangle Storage

  46. Today’s discussion • Review of Winter 2006-07 • Prices • Storage Status • Demand and Supply Outlook • Demand • Production • LNG • Pipeline Infrastructure • Summary/Conclusions

  47. Summary & Conclusions • Natural gas market expected to continue being tight in the near term – largely weather dependent • High price volatility will continue in the near term due to combined tight supply-demand balance, and the risk of supply or demand (weather) shocks • New gas supplies from shale and Rockies production are key to meeting long-term demand • New production areas have triggered new pipeline capacity projects to provide access to markets • LNG still has much uncertainty around it, as does an Alaskan pipeline project • Storage is more critical than ever to managing demand cycles. Storage value has been increased by supply reliability considerations coupled with: • Resurgence in liquidity • Expanding number of energy market participants – traders/marketers • LNG Imports off-peak

  48. Thank you. Greg W. Hopper Vice President 713.590.2280 hoppergw@bv.com

  49. Louisiana production growing on the strength of results in ELA offshore blocks; others regions maintaining replacement rates

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