FOCUS ISSUE-PLANNING AND FORECASTING
THE MONTHLY JOURNAL FOR PRODUCERSy
MARKETERSyPIPELINES, DISTRIBUTORS, AND
%a ENDUSERS...
Nopartof thispublicationmayb
States Copyright Act, without ei
222 RosewoodDrive, Danvers,
to the Permissions Department,
S...
Gas/Oil Comparison Shows Higher Prices
(Continuedfrom page 1 )
expect another dampened crude-oil
price cycle between the y...
I
asis = 1995 NorthAmerica (11.1 MMBD)
BOECDEuropeand Non-OECDEurope Combined
LSFO-Crude Differentials
We are projecting c...
Hea
CeS
associatedwith gastransmission.Thisreduction
will be primarily a result of increased transmis-
sion efficiencies a...
expansion. Furthermore, we do not project any
additional LNG terminals beyond the four cur-
rently in operation. Commensur...
of 6

Natural Gas Snell

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  • 1. FOCUS ISSUE-PLANNING AND FORECASTING THE MONTHLY JOURNAL FOR PRODUCERSy MARKETERSyPIPELINES, DISTRIBUTORS, AND %a ENDUSERS GasIOiI Comparison Shows Higher Prices Robert T. Snell e expect that future US. Gulf Coast well- Whead natural gas spot prices (Exhibit 1) will be determined by burner-tip competition with low sulfurfuel oil (LSFO) in New York Harbor along with an associated environmental premium. In our analysis, tariff and transportation provide the basis to net back spot gas to the U.S. Gulf Coastwellhead. In the long term, our forecasted gas prices are assumed to carryan increasingpremium over LSFO. Historically,resultingfromsurplusgasdeliverability, gas has been sold at a discount versus the LSFO parity price. Surplusgas deliverabilityhas instigated intense gas-to-gas price competition at the burner tip due to an increase in “system”gas availability from the integration of pipeline networks. It is our expectation that natural gas prices will sellat a premiumto LSFOinthefuture.We anticipate a long-term increase in the real price of spot gas at the wellhead.Wellheadgas prices are influenced by the following drivers: Crude price projections (global basket), LSFO-crude differentials (regional marginal refinery capacity), Gas premiums (gas-to-gas competition dis- counts versus environmental premiums), and Gas tariffs (transmission costs). Robert T. Snell is a senior consultant with the Houston consultingfirm of WrightKillenand Company. Crude Price The key driver for natural gas pricing is the crude-oil price. Although we project crude-oil prices will decline through 1999,we anticipate another crude-oil spike by the year 2000. Subsequent to this anticipated spike, we ure of Rate-BasedGas Pipelines: egic Trends and Responses WnodK. Dar 10 Survey: Electric-IndustryRegulatory ChangesAffect Gas Competition John L. Parodi 14 Large End User Seeks Refinement under New RegulatoryScheme Jon J. Schuch State Regulation End Users Industry Conditions Printed on recycled paper. @01995 John Wiley & Sons, Inc.
  • 2. Nopartof thispublicationmayb States Copyright Act, without ei 222 RosewoodDrive, Danvers, to the Permissions Department, Second-classpostage paidat New Y Subscriptionprice(1995): Oneyear: the following issuehas beenreceived sustainedintransitandwhereresewe pleasecall (212) 850-6347. E-mail: S Reprints:Reprint sales and inquiriesshouldbe directedt New York, NY 10158. Tel: (212) 850-8776. OtherCorrespondence:Addressallothercorrespondenceto: NaturalGas, IsabelleCohen, ManagingEditor,Professional,Reference,and Trade Group, John Wiley & Sons, Inc., 605 Third Avenue, New York, NY 10158. This publicationisdesi withthe understanding assistanceis required, to the su ,or other 2 NATURALGAS MAY 1995 0 1995 John Wiley & Sons, Inc.
  • 3. Gas/Oil Comparison Shows Higher Prices (Continuedfrom page 1 ) expect another dampened crude-oil price cycle between the years 2000 and 2010 (Exhibit 2). Thiscrude-oilforecastwasbased on a comprehensive crude-oil sup- ply anddemandbalanceonaworld- wide basis. Total worldwide crude consumption and demand were analyzed historically for the past five years and were projected for the next 15years. Historical crude- oil prices were also analyzed as far back as data were available to the year 1905. A rigorous analysis was performed whereby real crude-oil prices were curve-fit in order to provide a basis for future crude-oil pricing trends. s/LSFO Burn Tip Parity I 3.4 I I 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2005 2010 1991-1 994 Actual Prices, 1995+ProjectedPrices Crude-Oil Demand It is our expectation that world- wide economicexpansion willcon- tinue due to the following: Economic recovery in Western Europe and Japan, Continued economic strength in the Asia Pacific region, and StrongeconomicgrowthinLatin America. Worldwide crude-oil demand will be driven by global energy ex- pansion.We forecast that petroleum will continueto lose market share to natural gas on a global basis. Over the forecast period, global crude-oil demand will increase one million I 2005 2010 20151980 1985 1990 1995 nedGosineWave Function ...) with a subsequent weakening in the beginning of the 21st century ...) with a subsequent weakening in the beginning of the 21st century barrels per day per year. We anticipate the Asia Pacific region to continue to exhibit strong de- mand growth with a somewhat lower growth rate than exhibited in the recent past. Crude-Oil Supply required to meet marginal global crude-oil sup- ply requirements throughout the forecast pe- riod. We anticipate that non-OPEC crude-oil production will be flat throughout the forecast period, with rising production in developing countries being offset by decreases in devel- oped countries (Exhibit 3).Middle East crude-oil production will be MAY 1995 NATURALGAS 01995John Wiley & Sons, Inc. 3
  • 4. I asis = 1995 NorthAmerica (11.1 MMBD) BOECDEuropeand Non-OECDEurope Combined LSFO-Crude Differentials We are projecting cyclical LSFO-crude dif- ferentials on the basis of marginal regional refinery capacity. We anticipate the spread between light and heavy products to remain depressed through 1998 and then to increase significantly. Our outlook for increased LSFO- crude differentials is predicated by our rising crude price projections and subsequent product price increases. The cyclical nature of LSFO- crude differentials is a direct consequence of the investment cycle in bottoms-upgrading capabil- ity. As crude prices rise in absolute terms, the marginal heavy crude barrel will enter the market, which eventually will reach marginal bottoms-upgrading capacity.Nevertheless, there is a correlation between refinery product differ- entials and absolute crude-oil price (Exhibit4). In real terms, we anticipate an increase in the price of LSFO of approximately 2 percent annually into the year 2015. Gas Premiums Wellhead gas prices are affected to a lesser extent by the gas premiuddiscount relative to LSFO burner-tip parity. On the basis of an environmental premium, we anticipate small increases in the natural gas premium into the next century. Historically, natural gas has been sold at a discount relative to LSFO due to intense gas-to-gas competition. Although this premium has little impact on the absolute price of gas,we expectthe gas premium to increaseslightlyover time, reflecting the break-even environmental rent of gas versus oil. However, this premium will be capped by the ability of marginal con- sumers to switch from gas to oil. ..- we expect the gas remium to increase slightly over time. . .. Gas Tariffs Commensurate with these minor increases in gas premiums, we anticipate a directionally offsetting reduction in tariff and fuel costs 4 NATURALGAS MAY 1995 0 1995John Wiley & Sons, Inc.
  • 5. Hea CeS associatedwith gastransmission.Thisreduction will be primarily a result of increased transmis- sion efficiencies associated with the deregula- tion of the pipeline industry. Supply and Demand Balances We expect that these projected supply con- straints will lead to an eventual gas premium over LSFO parity. This expectation is based on the assumption that future environmental regu- lationswill exert upward pressure on long-term gas premiums. From 1990to 2010, there is the potential for gas demand to grow from 19.8 trillion cubic feet a year to 22 trillion cubic feet a year. . - .anticipate a directionally offsetting reduction in tariff gas transmission. and fuel costs associat Our base-case supply projections assume that by theyear 2010,only 20.7trillioncubicfeet a year could be reached, leaving a deficit of one to two trillion cubic feet a year of unsatisfied natural gas demand. We expect that the supply gap is not likely to lead to significant reserve additions or increased LNG imports. Residential/commercialconsumers will im- prove energy efficiency and increase electricity use. We project gas demand in this sector to remain relatively flat after 1995.Demand in the power generation sector will increase through 1995 as the U.S. economy continues to grow. Furthermore, we anticipate an increasing pref- erence for gas vis-a-vis LSFO due to the relative environmental advantage of gas over oil. Indigenous Supply We expect that Lower Forty-Eight gas pro- duction will decline as natural gas reserves decline.Domesticsupply is expected to decline over the forecast period (Exhibits 5 and 6). New technology advancements in natural gas production will ameliorate long-term supply depletion. We anticipate additional unconven- tional supply sources from the following: Devonian shale, Coalbed methane, and Deep gas. Imports We anticipate that in the United States,LNG terminals will be limited to approximately 1.5 trillion cubic feet a year without significant MAY 1995 NATURALGAS 01995John Wiley & Sons, Inc. 5
  • 6. expansion. Furthermore, we do not project any additional LNG terminals beyond the four cur- rently in operation. Commensurate with this expectation, we anticipate that by 1997 Cana- dian importswill increaseinthe shortterm to 2.5 trillion cubic feet a year and henceforth will remain constant due to pipeline constraints. Conclusions Gulf Coast natural gas prices will be funda- mentally linked by burner-tip competition with low sulfur fuel oil. We are projecting real natural gas prices to decline through 1999, but in the longer term we forecast an increase in the real price of spot gas at the wellhead as a result of our IExhibit 5. Gas ProductionWill Decline I - . Lower 48 Gas Production Trillion Cubic Feet Per Year (TCFPY) 20 , I fuel oil price projections.We anticipate significant increases in crude-oil price into the beginning of the next century. Commensurate with our crude- oil price projections,we are projecting cyclicalLSFO-crudedifferentialson the basis of marginal regional refinery ca- pacity.We anticipate the primary driv- ingforce,the spread between light and heavy products, to increase signifi- cantlyfromcurrent levels.Inthe United States,we also expect small increases in the natural gas premium into the next century on the basis of an envi- ronmental premium. 1 Exhibit 6. I - .As Natural Gas Reserves Decline Lower 48 Natural Gas Reserves Billion Cubic Feet (BCF) 200.00 I I I I I ! I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 6 NATURALGAS MAY 1995 01995John Wiley & Sons, Inc.

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