Petroleum Markets
“The meek shall inherit the Earth, but not the mineral rights.”
- J. Paul Getty
Agenda
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Resource assessments
 Crude Oil
 Natural Gas
•
Natural Gas Value Chain
•
Key Market Issues
 Shifting demand – power generation
 Shifting supply – reversal of producing/consuming regions
 Firm vs. Interruptible Rates
•
Regulatory Framework & Emerging Issues
 Federal Regulation
 Inter-fuel competition
 Full-Fuel Cycle Analysis
Resource Assessment
Oil vs. Gas
Oil Supply Outlook
High Oil Prices – Getting Higher
U.S. Gas Prices vs Global Oil Prices
We have a supply of natural gas
that can last America nearly one
hundred years, and my
Administration will take every
possible action to safely develop this
energy. Experts believe this will
support more than 600,000 jobs by
the end of the decade.
President Obama
State of the Union Address
25 January 2012
Golden Age of Gas
“Some believe there is
enough methane in the
form of hydrates—
methane locked in ice—
to supply energy for
hundreds, maybe
thousands, of years,”
according to researchers
at the U.S. Department
of Energy’s Oak Ridge
National Laboratory.
Global Gas Production
US shale production alone exceeds all other nations’ gas
production except Russia.
Proved natural gas reserves and shale resource estimates,
selected countries (2009)
World Energy Outlook (WEO) 2012
•
North America is at the forefront of a sweeping transformation in oil and gas
production that will affect all regions of the world, yet the potential also
exists for a similarly transformative shift in global energy efficiency
•
The WEO finds that the extraordinary growth in oil and natural gas output
in the United States will mean a sea-change in global energy flows. In the
New Policies Scenario, the WEO’s central scenario, the United States
becomes a net exporter of natural gas by 2020 and is almost self-sufficient in
energy, in net terms, by 2035.
•
North America emerges as a net oil exporter, accelerating the switch in
direction of international oil trade, with almost 90% of Middle Eastern oil
exports being drawn to Asia by 2035.
Natural Gas Value Chain
Upstream
Midstream
Downstream
Value Chain: Natural Gas Delivery System
Value Chain: Upstream
•
In 1821, William Hart dug the first
well specifically to produce natural
gas in the United States in the Village
of Fredonia on the banks of
Canadaway Creek in Chautauqua
County, New York. It was 27 feet
deep, excavated with shovels by hand,
and its gas pipeline was hollowed-out
logs sealed with tar and rags.
•
In recent years, natural gas
production has been dominated by
independents rather than integrated
majors like ExxonMobil.
•
There are over 19,000 U.S. natural
gas producers.
Acadian Museum: Erath LA by Richard Byrd
Henry Hub (the main U.S. natural gas hub) – Erath, Louisiana
The Henry Hub is a pipeline interchange near Erath, LA, where a number of interstate and intrastate pipelines connect via
the Sabine Pipe Line header system. Henry Hub is the standard delivery point for the NYMEX natural gas futures contract.
Value Chain:
Midstream
The natural gas pipeline transportation
system, the “interstate highway”, consists
of 306,000 miles of high-strength steel
pipe 14 to 48 inches in diameter
Midstream infrastructure includes
transmission pipelines, storage fields and
liquefied natural gas (LNG) terminals.
Pipelines are regulated under FERC and
are considered open-access carriers (i.e.,
pipelines do not own the gas shipped)
Shipper service classes include firm,
interruptible, and capacity release
contracts
Pipeline expansion and construction
driven by firm customer base only (not
reserve margin or excess design capacity)
Piped gas moves 30 miles per hour from
producing regions to end users
Value Chain:
Downstream
City Gate–the location at which the
interstate and intrastate pipelines
sell/deliver natural gas to local
distribution companies, which
deliver gas to most residential and
commercial consumers
LDCs are regulated by state
commissions with rate-making
procedures similar to electric
utilities
Cost recovery for LDC contracts
with consumers via delivery “pass
through” charges
City Gate: Where Midstream Becomes Downstream
Key Market Issues
Shifting demand – power generation
Shifting supply – reversal of producing/consuming regions
Firm vs. Interruptible Rates
Shifting Demand
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Power plant retirements
 Nuclear : Vermont Yankee, Indian
Point, San Ofre
 Coal: On June 2, 2014, the EPA
proposed the Clean Power Plan to cut
carbon emissions from existing power
plants.
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Fukushima nuclear disaster in Japan
increased global demand for natural
gas.
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Boiler MACT
Power Sector Gas Consumption Change 2011-2030
Shifting Geography of Supply
Shale Basins and U.S. Pipelines
Declining Imports
Price Dynamics
Insufficient infrastructure at any
point along value chain can contribute
to price volatility, a shrinking market,
and even stranded gas supplies and
reduced economic activity.
“Basis” is the price differential for
natural gas between the NYMEX
futures contract price at the Henry
Hub and the price at other locations.
Natural gas basis reflects the
transportation costs, as well as
regional supply and demand factors.
Infrastructure Constraints
Source: Platt’s Daily January 22, 2014
Constraints on gas supply into New England due to: 1) decline of Atlantic Canada supplies and LNG Imports, 2)
increased demand, and 3) no new infrastructure to bring supplies to New England
Economics of Infrastructure Bottlenecks
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Interruptible Service–a pipeline service contract that allows curtailment or
cessation of service at the pipeline’s discretion under certain circumstances
specified in the service contract.
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Firm Service–a serviced offered to customers under contract with no
interruptions, regardless of service class, except in the case of force majeure.
•
Incremental (vs. rolled-in) Rates)–FERC rate-making policy requiring
pipeline expansions to be priced at the higher of actual cost-based rates or
current system rates.
Regulatory Framework &
Emerging Issues
History of federal regulation
Inter-fuel competition
Full-Fuel Cycle Analysis
Federal Gas Regulation
Date
1935-1976
Law/Regulatory Instrument
Federal Power Commission
1938
Natural Gas Act of 1938
1954
Phillips Petroleum Co. v. Wisconsin
1978
Natural Gas Policy Act (NGPA) of 1978
1985
FERC Order 436 – 1985
1989
Natural Gas Wellhead Decontrol Act of 1989
1992
FERC Order 636
Inter-fuel Competition: Gas Price Advantage
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Long-term elastic supply curve means supply will meet new demand for many years at a cost of
about $4 per Mcf, according to IHS CERA.
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Henry Hub price of natural gas to remain in the $4-5 per MMBtu range (constant 2012 $) on an
annual average through 2035.
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Delivered prices for home heating oil are expected to be more than twice as high as rates for
residential natural gas service, encouraging the ongoing process of replacing fuel oil with natural
gas for home heating.
•
On a Btu-equivalent basis, residential and commercial electricity rates are expected to be on
average 3.5 times more expensive than natural gas rates on a national average.
•
Natural gas prices will not have to increase materially to elicit additional supplies, owing to the
extensive resource base that is available at a full-cycle breakeven price of about $4 per Mcf;
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Natural gas prices will remain significantly lower than had been expected prior to the Shale Gale;
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Retail natural gas prices are expected to remain lower over the long-term, on a Btu-equivalent
basis, than refined oil products or electricity.
The Durst Experience
When did you first experiment with co-gen power?
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Jody Durst: Our first experience with distributed generation was with our installation of
fuel cells at 4 Times Square in 1999.
And what was the hurdle to using it in an office building?
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Jody Durst: There were cost challenges, but the biggest hurdle was getting acceptance from
Con Edison.
What was Con Edison’s fear?
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Douglas Durst: Con Edison makes its money now by transporting electricity so if you’re
generating it on site they don’t get paid. And they didn’t like to think about a world where
all building owners generate their own power over the course of Manhattan’s 400 million
square feet of office space.
Have they since warmed up to the idea?
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Jody Durst: No, not really. We experienced the same sort of hurdles from them with
subsequent co-gen installations.
Source: Jotham Sederstrom, “The Power Generator, The Commercial Observer, March 13, 2012
Full-Fuel Cycle Regulations
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Extant natural gas regulation was developed in a time of perceived scarcity and is poorly designed for today’s and
tomorrow’s gas markets.
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Full fuel-cycle analysis more accurately assesses impact of natural gas of vis-à-vis emissions and costs of energy.
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Many states have implemented revenue decoupling adjustments to assure gas LDCs that they can recover their
fixed costs even if energy efficiency efforts reduce natural gas throughput on their systems. These adjustments are
intended to make a gas LDC indifferent to changes in the amount of natural gas delivered on its system.
decoupling programs to encourage the adoption of full fuel-cycle energy efficiency goals which could result in
increased direct use of natural gas, thereby reducing total energy consumption.
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Residential gas and electric prices reflect full fuel-cycle costs: residential electric prices are substantially higher
than residential natural gas prices because electric prices include the generating cost of converting natural gas,
coal, oil and nuclear fuel into electricity.
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The higher the ratio to gas prices to electric prices, the easier for natural gas to displace electricity . In 2011, the
ratio of residential electric retail prices to residential gas prices ranged from a low of 2.2 in the Pacific Northwest
to a high of 3.7 in the Middle Atlantic. The ratio of average projected electric residential prices to average
projected residential natural gas prices for 2012-35 ranges from a low of 2.5 for the Pacific Northwest to a high of
5.2 for California.
Three Times More Energy Reaches the Customer with Natural Gas
Production &
Transportation
Electricity
32% Efficient
100 MMBtu
Energy Source
Conversion1
Distribution
95
34
Delivered
To Customer
32
Total CO2e
equivalent2
CO2
emissions from
typical household use3 (metric tons)
Natural Gas
92% Efficient
1.4
100 MMBTU
Energy Source
8.7
0
93
0
10.1
92
Not
Applicable
Total CO2e
equivalent2 emissions
CO2
from
typical household use3 (metric tons)
0.5
1 Includes all energy inputs, including renewable sources – based on actual fuel mix in 2007
2 Includes greenhouse gas impact from unburned methane
3 Energy consumed in space and water heating, clothes drying, and cooking.
NOTE: This full-fuel-cycle examines all impacts from the energy source through consumption
0.1
5.8
6.4
Annual Electric and Natural Gas Energy
Efficiency Program Spending in the U.S.
Innovative Business Strategies
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Enron’s gas bank
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NG Advantage