Natural Gas Markets and Reliability of the Electric Power Industry William Trapmann, Energy Information Administration Natural Gas Division North American Electric Reliability Council Reliability Assessment Subcommittee May 4, 2000

EIA’s Analysis of the Kyoto Protocol n Requested by U.S. House of Representatives Committee on Science –Analyze a range of targets for U.S. energy-related carbon emissions –Assume no new policies or programs –Use a carbon price as the mechanism n EIA’s analysis indicates potential costs and targets of opportunity for emissions reductions

Projections of Carbon Emissions,

Projections of Carbon Prices,

Average Delivered Prices for Energy Fuels In the % Case,

Projections of U.S. Natural Gas Consumption,

Natural Gas End-Use Consumption,

,600 2,400 3,200 4,000 4,800 Reference % % % % % Electricity Generation, (billion kilowatthours)

Average Electricity Prices, (1996 cents per kilowatthour) Reference % % % % %

Electricity Generation by Fuel in Two Cases, (billion kilowatthours) Reference Case1990+9% Case Renewable Hydropower Nuclear Petroleum Natural Gas Coal

A Vast Network of Pipelines Provides Interstate Transportation

Natural Gas Supply and Disposition in the U.S., 1996 (Trillion Cubic Feet)

Participants Miles of Pipe Regulatory Regime Producers 8,000 Independents 0 Phased price deregulation 24 Majors Begun in 1979, completed in 1989 Pipelines ,000 Federal Energy Regulatory Commission (FERC) Natural Gas Marketers 2600Unregulated Local Gas Utilities 1,400833,000 State Utility Commissions End Users Residential 53 million 0Unregulated Commercial 4.5 million Industrial 40 thousand Electric Utilities Interstate - FERC Intrastate - State Commissions The Industry At A Glance

U.S. Natural Gas Production, Consumption, and Imports, (trillion cubic feet) Consumption Net Imports Production HistoryProjections }

Natural Gas Consumption is Expected to Increase for Each Consumer Group ProjectionsHistory Commercial Residential Industrial Electric Generator Trillion Cubic Feet

Natural Gas Market Outlook n Short-Term (Through 2001) –Wellhead prices average $2.48 per Mcf in 2000 (March STEO, $2.57 in 2001) compared to last year’s average price of $2.09 –Industrial and electric utility growth continue but slows n Long Term (through 2020) –Continued optimism about market growth (32 Tcf in 2020) –Increasing wellhead prices to $2.81 Mcf ($98) in 2020 –Declining margins/prices to small customers –Imports increase to 5.1 Tcf in 2020 –Rising prices and lower drilling costs increase reserve additions and production

The Supply Process Consists of a Number of Elements n Commodity n Transmission (long-haul) n Local delivery n Storage n Major Issues Related to Supply Acquisition –Supply reliability –Cost control

Onshore Offshore Undiscovered nonassociated Inferred nonassociated Unconventional Other unproved Proved Shale gas Coalbed methane Tight gas Lower 48 associated-dissolved Alaska Onshore Offshore Technically Recoverable U.S. Natural Gas Resources as of January 1, 1998 (trillion cubic feet)

Technically Recoverable Gas Resources in North America Comprise Almost 2,500 Trillion Cubic Feet

Lower 48 NA conventional History Projections Lower 48 AD Alaska Lower 48 NA unconventional Lower 48 offshore U.S. Natural Gas Production by Source, (trillion cubic feet)

Canada LNG Mexico History Projections U.S. Natural Gas Net Imports, (trillion cubic feet)

LNG Trade Is Important in U.S. Regional Markets Source: Energy Information Administration, Natural Gas Monthly (June 1999). From UAE, Algeria, and Australia 67 LNG Terminal Facilities To Japan Inactive, planned for late 2000 reopening Gas Storage (1998, Billion Cubic Feet)

Major Natural Gas Producing Basins and Associated Transportation Corridors

Trends in Transportation Contracts n LDCs hold the bulk of contracted capacity. n Contract expirations are significant over the next few years. (46% of current capacity will expire before 2002.) n In the aggregate total commitments have increased slightly. n The length and size of long-term contracts have decreased. Shippers want flexibility.

Locations of U.S. Underground Storage Sites and Working Gas Capacity, 1996 = Underground Storage Sites.

Monthly Natural Gas Storage Levels Have Varied Significantly Over the Past Few Years 5 year averages,

Supply Reliability n Commodity Availability n Delivery System –transportation –local distribution –storage n Price

Increased Price Volatility has Become Common in the Gas Industry Nominal Dollars 1999 Dollars January January 2000

Differences in Spot Prices -- July-December 1999

Differences in Spot Prices, Winter

Jan Jun NovJan Jun NovJan Jun Nov Total Electric utilities Total Natural Gas Use and Use for Electricity Generation by Month in the Mid-Atlantic Census Division, (quadrillion Btu)

Conclusions n Kyoto provisions likely to have a strong impact on electric generation industry and markets n Gas and electric generation will be heavily interdependent in the future n The natural gas resource base is abundant n Short-term supplies and adequacy of delivery system are key issues n Price security will be a critical element for success n Backup supplies may become increasingly important

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