Natural Gas OutlookNatural Gas OutlookThe Tennessee Regulatory Authority

Natural Gas SymposiumAugust 19, 2003

Roy KassEnergy Information Administration (EIA)Roy.Kass@eia.doe.gov

www.eia.doe.gov

OutlineOutline

• Natural Gas Market Overview

• Short-term Outlook

- Supply

- Consumption

- Prices

Natural Gas Spot Prices Are VolatileNatural Gas Spot Prices Are Volatile

Source: Natural Gas Intelligence, Natural Gas Index

$18.85 on 2/25/03

0.50

2.50

4.50

6.50

8.50

10.50

De

c-9

7

Ap

r-9

8

Au

g-9

8

De

c-9

8

Ap

r-9

9

Au

g-9

9

De

c-9

9

Ap

r-0

0

Au

g-0

0

De

c-0

0

Ap

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1

Au

g-0

1

De

c-0

1

Ap

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2

Au

g-0

2

De

c-0

2

Ap

r-0

3

Do

lla

rs p

er

MM

Btu

Henry Hub Daily Midpoint Price

$1

$2

$3

$4

$5

Constant 2003 Dollars

Nominal DollarsProjection

$0

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Do

llar

s p

er T

ho

usa

nd

Cu

bic

Fee

t

Sources: History: EIA; Projections: Short-Term Energy Outlook, August 2003

Average Annual Wellhead Prices Have Been Average Annual Wellhead Prices Have Been Close To The Record High Price Set In 1983Close To The Record High Price Set In 1983

This Winter Was Colder Than Last WinterThis Winter Was Colder Than Last WinterAnd Colder than Normal in Some RegionsAnd Colder than Normal in Some Regions

(Cumulative Heating Degree Days, Heating Season 2002-2003)(Cumulative Heating Degree Days, Heating Season 2002-2003)

Source: Derived from Heating Degree Day Monitoring, National Climatic Center.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

02-N

ov-0

2

09-N

ov-0

2

16-N

ov-0

2

23-N

ov-0

2

30-N

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2

07-D

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2

14-D

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2

21-D

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2

28-D

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04-J

an-0

3

11-J

an-0

3

18-J

an-0

3

25-J

an-0

3

01-F

eb-0

3

08-F

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3

15-F

eb-0

3

22-F

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3

01-M

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3

08-M

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3

15-M

ar-0

3

22-M

ar-0

3

29-M

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3

Hea

tin

g D

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ays

United States United States Normal

United States Last Year

Factors Contributing to High Gas Factors Contributing to High Gas Prices Prices

Winter 2002/2003• High crude prices

• Cold weather in major gas markets

• Weak production

• Decrease in net imports in 2002

• Relatively heavy stock drawdown

Summer 2003• Storage inventory less

than historical level• Concern about supply

adequacy next winter• Lags in bringing new

production to market• Limited demand

response to date

Working Gas in Underground Storage Working Gas in Underground Storage Compared with 5-Year RangeCompared with 5-Year Range

–Source: EIA, Weekly Natural Gas Storage Report, August 14, 2003

EIA Has Changed DefinitionEIA Has Changed Definitionof Consuming Sectorsof Consuming Sectors

Concept Old Paradigm New Paradigm

Industrial Reported by gas companies as deliveries to industrial or nonutility generators

Reported by gas companies as deliveries to industrial

Electric Utility/

Electric Power

Reported receipts by regulated utilities

Reported receipts by regulated utilities and NUGS in power business

Impact of New Definitions:Impact of New Definitions:Total United States, 2001Total United States, 2001

• Industrial Deliveries reduced by 1.3 Tcf

• Electric Consumption increased by 2.6 Tcf

• Net increase of 1.3 Tcf for the year

0

1

2

3

4

5

6

7

8

9

10

Industrial Electric Other

Old Paradigm

New Paradigm

Short-Term Outlook for Natural GasShort-Term Outlook for Natural Gas

• Demand is expected to be essentially flat in 2003 and 2004 (under assumptions of normal weather)

• Supply picture is mixed

– Increasing completion rates are necessary to offset decline from producing wells

– Year-over-year production is expected to increase in ’03 with rising numbers of gas rigs drilling

– Net imports are expected to increase in 2003 and 2004 with notable increases in LNG imports

– Storage refill is questionable (but recent signs are positive)

• Extremes in market or weather conditions would change this outlook.

U.S. Natural Gas Production Growth is U.S. Natural Gas Production Growth is Modest in 2003 and 2004Modest in 2003 and 2004

17.8 17.7 17.818.1

18.818.6

18.9 18.9 19.018.8

19.0

19.7

19.0

19.6 19.5

15

16

17

18

19

20

1990 1992 1994 1996 1998 2000 2002 2004

TC

F

U.S. Dry Gas Production

Sources: EIA, Short-Term Energy Outlook, August 2003

Notes: Includes LNG. Net Imports equal imports minus exports.

Sources: EIA, Short-Term Energy Outlook, August 2003

Projections

LNG590LNG

490LNG230

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

BC

F

Imports Exports

Imports and Exports Increase in ’03 and Imports and Exports Increase in ’03 and ’04, Net Imports will Increase Slightly’04, Net Imports will Increase Slightly

Gas Storage Projections For 2003, Compared to Historical Levels

Note: The gray shaded area represents the range of working gas in storage levels during the years 1998 to 2002. Source: EIA Weekly Natural Gas Storage Survey and EIA estimates. Max refill rate is the max monthly rate observed between 1998 and 2002. EIA estimate is based on EIA’s STEO forecast August, 2003.

0

500

1,000

1,500

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2,500

3,000

3,500

04/01/03 04/22/03 05/13/03 06/03/03 06/24/03 07/15/03 08/05/03 08/26/03 09/16/03 10/07/03 10/28/03

Wor

king

Gas

in S

tora

ge (

Bill

ion

Cub

ic F

eet)

Band is Maximum and Minimum Values

1998-2002

~ 2,853 Bcfassuming 5-Yr. Avg. Refill Rate

2,188 Bcf in Underground Storage as of August 8, 2003

~ 3,053 Bcf assuming 5-Yr Maximum

Refill Rate

Projections

Total Natural Gas Demand Is Expected to Total Natural Gas Demand Is Expected to Remain Flat For the Next Two YearsRemain Flat For the Next Two Years

Sources: History: EIA; Projections: Short-Term Energy Outlook, August 2003.

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Per

cen

t C

han

ge

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90

Bil

lio

n C

ub

ic F

eet

per

Day

– Percent Change (Left Axis) – Total (Right Axis)

History Projection

Natural Gas in Storage on Nov. 1 Will Be Natural Gas in Storage on Nov. 1 Will Be Within the Range of the Past Five YearsWithin the Range of the Past Five Years

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Wo

rkin

g G

as i

n S

tora

ge

(bil

lio

n c

ub

ic f

eet)

Level as ofAugust 8, 2003

2,188 Bcf

Average Refill Rate1998-2002

Estimate:2,853 Bcf

Storage Stocks as of October 31Source: EIA data and estimate assuming average refill rate for August 9 – Oct. 31.

–Beginning Fill Season

–End Fill Season

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0Ja

n-0

1

Mar

-01

May

-01

Jul-

01

Sep

-01

No

v-0

1

Jan

-02

Mar

-02

May

-02

Jul-

02

Sep

-02

No

v-0

2

Jan

-03

Mar

-03

May

-03

Jul-

03

Sep

-03

No

v-0

3

Jan

-04

Mar

-04

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-04

Jul-

04

Sep

-04

No

v-0

4

Monthly

Do

llar

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er T

ho

usa

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bic

Fee

t Projections

Natural Gas Spot Prices Are Expected to Natural Gas Spot Prices Are Expected to Average about $5 for remainder of 2003Average about $5 for remainder of 2003

(Base Case and 95% Confidence Interval*)(Base Case and 95% Confidence Interval*)

Sources: History: Natural Gas Week; Projections: EIA’s Short-Term Energy Outlook, August 2003.

*The confidence intervals show +/- 2 standard errors based on the properties of the model. The ranges do not include the effects of major supply disruptions.

Average Spot Price:

about $5.40 /Mcf in 2003

about $4.46 /Mcf in 2004

Mechanisms to Manage Price Risk

Trading in Futures Contracts

Longer-Term Contracts

Fixed-Price Contracts

Storage for Physicals Hedging

Ability to Use an Alternate Fuel

Residential Customers Can Choose Budget Payment Plans

The natural gas market will remain relatively tight over the near term. However, prices this winter will be slightly lower than last winter’s prices.

The gas market is vulnerable to upward price pressures from developments like severe weather or disruptions in supplies.

SummarySummary