UNDERSTANDING NATURAL GAS MARKETS Table of Contents PREVIEW Overview ......................................................................2 The North American Natural Gas Marketplace ...............4 Natural Gas Supply .......................................................8 Natural Gas Demand ...................................................12 Natural Gas Exports ....................................................15 How Natural Gas is Traded ..........................................16 Conclusion: A New Era For U.S. Natural Gas Markets ...20 Glossary .....................................................................20 References .................................................................23 Understanding Natural Gas Markets 2 Overview Production of Shale Gas Natural Gas is an Important Source of Energy for the United States. 2006 2013 Natural gas is an attractive fuel because it is clean burning and efficient, and ample supplies of natural gas are available from domestic resources. Recently, natural gas production in the U.S. has increased substantially due to technological advancements in natural gas extraction methods. This increased production has 5% 40% displaced traditional supply sources and resulted in reduced prices for natural gas consumers. The prospect of ample natural gas supplies, continued low prices, and the favorable environmental and economic position of natural gas-fired electric generation plants As of 2013, shale gas production accounted for approximately 40% are leading to expectations of growing U.S. demand for natural gas, of U.S. Lower 48 natural gas production, compared to about 5% in 2006. especially in the electric and industrial sectors, and potentially for export as liquefied natural gas1 (LNG). for approximately 40% of U.S. Lower 48 natural gas production, The increases in U.S. natural gas production have come from compared to about 5% in 2006. This unexpected production growth unconventional shale gas resources, which have become more has led to major changes in the landscape of the U.S. natural gas industry. accessible and economic due to advancements in horizontal drilling The important trends now affecting the industry include the following: and hydraulic fracturing. These technological advancements have resulted in domestic production growth that has exceeded even the • U.S. natural gas demand is increasingly served by domestic most optimistic forecasts of natural gas production from a decade production from unconventional shale gas sources rather than ago (see Figure 1). As of 2013, shale gas production accounted imported natural gas from Canada and other conventional 1 LOWER 48 DRY GAS PRODUCTION BY TYPE (Bcf/d) 70 AEO 2004 Forecast Reference AEO 2004 Forecast Rapid Tech AEO 2004 Forecast Slow Tech 60 50 40 30 20 Volume Produced (Bcf/d) Volume 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: 2000-2010 data from EIA AEO 2013, 2011-2013 data is from EIA AEO 2014 Early Release. Unconventional Production includes Coalbed Methane, Tight Gas, and Shale Gas production. Conventional Production Unconventional Production Conventional Production includes Lower 48 Offshore and Lower 48 Onshore. 3 supplies. The technological advancements that have led to The shale gas revolution has led to U.S. natural gas supply growth growing shale gas production were spurred, in part, by the high that has exceeded demand growth. As a result, Canadian imports natural gas prices that existed during much of the last decade. and other conventional supplies have been displaced, prices have fallen substantially and price volatility has declined to some extent • Natural gas use for electricity generation is poised to increase (see Figure 2). The current environment is a considerable change due to low natural gas prices and expectations that coal-fired from the tight supply-demand balance that characterized U.S. power plants will continue to be retired due to environmental natural gas markets for much of last decade, and led to natural regulations. Low natural gas prices are also expected to drive gas price spikes in several periods during 2000-2008. The last demand growth in the industrial sector. large price spike in the summer of 2008 gave way to a substantial price decline as shale gas production increased and the economic • The growth in shale gas production has resulted in shifting recession brought on by the global financial crisis decreased the flows on the U.S. interstate pipeline network. In particular, demand for natural gas. While demand has increased since 2009, Marcellus shale production in Pennsylvania and West Virginia is domestic shale production has increased even faster. The result has in relatively close proximity to the major east coast consuming been relatively low prices over the past several years, but not as low markets. This is reducing the need for long-haul pipeline as the prices experienced during most of the 1990s. transportation from traditional supply areas while at the same time increasing the need for local pipeline infrastructure to This brochure examines these trends in more detail and describes support the new production. some of the key changes that will affect U.S. natural gas markets and prices in the coming years, including expectations for natural • The substantial production increases, and low prices in the gas demand growth in the electric and industrial sectors and the U.S. relative to overseas, are leading to the development of prospects for LNG exports from the U.S. to overseas markets. both LNG and pipeline export projects. These projects could result in the U.S. becoming a net exporter of natural gas2, whereas historically the U.S. was a net importer due to its reliance on Canadian natural gas supplies in meeting domestic consumption. 2 NYMEX NATURAL GAS 12-MONTH AVERAGE FUTURE PRICES (April 1990-December 2013) 16 1990–1999 2000–2008 2009–2013 14 12 12-Month Standard Year 10 Average Deviation 1990–1999 $2.04 0.32 8 2000–2008 $6.45 2.45 6 2009–2013 $4.32 0.80 4 Future Price (US$/MMBtu) 2 0 Apr-91 Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Source: Bloomberg. Understanding Natural Gas Markets 4 The North American Natural Gas Storage Marketplace The natural gas production and delivery system is not designed to produce and transport the entire amount of natural gas consumers want during periods of peak demand. In order to meet peak The U.S. relies on natural gas as demand, large customers and distribution companies inject gas into an important part of its energy underground storage located near final consumers. The stored gas is withdrawn to meet consumers’ needs during times of peak demand, portfolio. such as a cold winter day. There is also a substantial amount of Natural gas provides 27% of the marketable energy consumed in storage in producing areas, which allows producers to maintain the United States.3 Oil products and coal are the other two major constant production and helps balance supply and demand. sources of energy. Natural gas is a valued source of energy because it is versatile and burns cleanly. As a result, natural gas use is commonplace in applications including cooking, residential and commercial heating, industrial process feed stocks, and electricity generation. Physical Structure of the U.S. Natural Gas Industry Figure 3 is a schematic illustration of the physical structure of the natural gas industry and illustrates the principal activities required to supply gas to consumers. The primary activities are: Underground Storage in Salt Caverns Exploration and Production Exploration and production include finding and developing natural Local Distribution gas by drilling wells, and ultimately producing gas from natural gas Local distribution companies own and operate the network of fields or gas that is produced in association with crude oil. pipes that carry natural gas from high-pressure trunk lines to final consumers. These consumers include residential, commercial, Processing electric generation, and industrial customers, although large electric generators and industrial customers frequently take service directly Natural gas processing removes impurities and separates higher- from a pipeline rather than from a local distribution company. valued products (known as natural gas liquids or NGLs) that are sold in separate markets. Processing prepares a dry gas stream that meets industry standards for transportation in high-pressure Liquefied Natural Gas pipelines. Pipeline companies require that the natural gas provided at the inlet of their pipelines conforms to certain quality Imports of LNG have never been a large part of the U.S. natural gas specifications in order for it to be transported on their systems. Only supply, but in the 2000’s when natural gas was perceived to be in natural gas that meets these specifications is transported on the short supply and prices were high, LNG import quantities grew and extensive North American pipeline grid. several new large-scale LNG import terminals were constructed. Due to the rise in shale gas production and the fall in natural gas prices, many of these new import facilities have generally been Transportation unutilized. Natural gas is transported in high-pressure pipelines from producing areas to local distribution companies, storage areas, industrial end The U.S. currently imports less than one percent of its natural gas users, and electricity generation