1. Examining Natural Gas and the 2016-17 Winter Heating Season
Lots of titles or terms for what’s happened in natural gas markets during the past few years.
“The Shale Revolution”
“Golden Age of Natural Gas”
The cautious: “Prudent Development: Realizing the Potential of American’s Natural Gas and Oil Resources”
Viewing this abundance through lens of changing economic picture and importantly the market dynamics of supply and demand. These dynamics have evolved quickly over just the past couple years.
Lots of potential for growth ahead.
October 19, 2016
Examining Natural Gas and
the Winter Heating Season

2. Heating Degree Days Oct-March Percentage Compared to Normal
US ENC
Colder Colder
Colder Colder
Warmer Warmer
? ?
Source: National Oceanographic and Atmospheric Administration.
Gas Market environment today vs. ten years ago
This provides context for how we can envision the natural gas market looking ahead.
The view will be shaped by new factors and not those that shaped views a decade ago.
Supply scarcity and demand uncertainty have given way to the abundance of supply.
How then do we view our energy portfolio within this new market environment? How does our view of how customers use energy, of energy efficiency, within this market context?
Three components to cover today:
An overview of the changes to the market – a baseline of facts that lead us to the present.
AGA market stability study on “Rethinking Natural Gas” – an effort to evaluate the potential drivers of natural gas demand to create a vision of where the market may be headed?
new confidence in the U.S. resource base highlighted by the development of shale gas and the technologies that support its extraction;
regulatory changes to local gas utility rate structures that enable commitments to energy efficiency;
improvements in natural gas appliance efficiency;
discernible environmental benefits attributed to natural gas compared to alternatives;
the possibility of U.S. liquefied natural gas (LNG) exports; and
U.S. natural gas supply can respond efficiently and robustly to foreseeable and plausible demand growth scenarios at an affordable cost compared to other energy alternatives.
a rallying of business, government, regulators, advocacy groups, and other stakeholders around the benefits of efficient and focused use of natural gas in the country’s energy mix. 
Because of these changes, there is more room for wise and efficient growth of natural gas consumption in today’s domestic energy market.

3. US consumption of natural gas down slightly year over year after mild winter. Strong exports & power generation have propped up gas demand.
Source: Bentek Energy LLC.

4. Domestic Natural Gas Market Observations in 2016
Domestic Production
Natural Gas and Power Generation
Natural Gas Acquisition Pricing
Underground Storage
Pipeline Exports to Mexico
LNG Exports
Pipeline Imports from Canada
Still on 2015: The US set a number of natural gas records.

5. That was then, this is now.
Production slows
2014
Record production in February of this year. Since then production has slowed – again, a perfectly rational response to a market that has traded in prices around $2 through the winter and less than $3 all year.
Note the lack of a steep drop-off in natural gas production. Drilling rigs are down, as we will see, but production has not shown a commensurate decline. Why?
Drilling and completion efficiencies.
Longer lateral lengths for horizontal well bores.
High-grading – to the extent that exploration and production has continued, operators tend to drill in the spots with the best economics.
Economics are improving – costs are coming down.
Source: Bentek Energy LLC.

6. “Drilled but uncompleted” gas well inventory helping sustain production.
Drilled but Uncompleted Wells
Here's Bentek's view of "drilled but uncompleted" gas wells. #'s dropped from 3,000 to 1,500 during 2015.
Source: Bentek

7. Natural gas for power generation setting records.
All time record for natural gas demand set in July, according to EIA.

8. Relatively low and stable natural gas prices.
The market rationalization of supply and demand – both topics of which I will cover in more detail shortly – means we have seen relatively low and stable natural gas prices.
Before and after chart of daily natural gas prices: 1) before the shale revolution in grey. 2) Colored lines at bottom represent daily
Source: Energy Information Administration

9. Natural gas storage level converging on near record inventory.
The supply picture is not only dry natural gas production, but a portfolio that includes Canadian pipeline imports of natural gas, LNG imports, and the flexibility afforded by extensive network of underground storage.
Record injection season:

10. Source: Bentek Energy

11. US Gas Imports from Canada
Reflects a larger trend in the electricity space. Coal is being replaced by natural gas and to a lesser extent renewables.

12. US Natural Gas Exports to Mexico
Reflects a larger trend in the electricity space. Coal is being replaced by natural gas and to a lesser extent renewables.

13. US gas exports to Mexico now more than 100 Bcf annually.
Reflects a larger trend in the electricity space. Coal is being replaced by natural gas and to a lesser extent renewables.

14. First Commissioning Cargo at Sabine Pass LNG Export Terminal (February 2016)

15. How much US LNG can the global market absorb? Maybe not much .…
Global LNG Supply and Demand Balance (MMTPA)
Looking towards 50 Bcfd of global LNG supply
Nearly 40 of demand.
Becomes a story of east Asian demand. Japan. China. Will the growth materialize. And questions:
Does economic growth in Asia spur more natural gas demand?
Will environmental concerns and a push towards switching to natural gas create new demand?
Source: Bloomberg New Energy Finance, Poten & Partners

16. Expectations for 2016-2017 Winter Weather
NOAA Forecast
October-December
NOAA Forecast
January-March
Source: National Weather Service Climate Prediction Center

17. Contributing Factors to Winter Gas Bills
Degree Day Changes
National Weather Service estimates 3,408 Heating Degree Days for the upcoming season.
8 percent warmer than normal (3,718).
12 percent colder than last year (3,042)
Henry hub 15% higher now compared to 1 year ago but 45% lower than the average price in 2014:
2014 = $4.39/MMBtu.
2015 = $2.61/MMBtu.
2016 = $3.01/MMBtu.
Cost of Gas
Sources: National Weather Service Climate Prediction Center;
Energy Information Administration Short Term Energy Outlook September 2016

18. Survey of AGA Members Question:
Do you expect normalized residential heating bills to go up this winter compared to last?
Response:
62 percent said yes, 38 percent said no.
By what percent will bills and throughput change compared to last winter?
9.6 percent increase in bills and 6.6 percent increase in throughput. Averages weighted by number of customers.
Looking towards 50 Bcfd of global LNG supply
Nearly 40 of demand.
Becomes a story of east Asian demand. Japan. China. Will the growth materialize. And questions:
Does economic growth in Asia spur more natural gas demand?
Will environmental concerns and a push towards switching to natural gas create new demand?

19. AGA Forecast for Winter Bills
On average, residential natural gas bills will be around 9 to 11 percent higher than the previous winter.
This year’s winter bills would be the fourth lowest in the past decade.
Winter bills were at their lowest last year followed by the winter heating season
This winter’s heating bills are expected to be about 28% lower than the 10 year high set during the winter of
Natural gas will continue to be the lowest-cost energy option for home heating.
Looking towards 50 Bcfd of global LNG supply
Nearly 40 of demand.
Becomes a story of east Asian demand. Japan. China. Will the growth materialize. And questions:
Does economic growth in Asia spur more natural gas demand?
Will environmental concerns and a push towards switching to natural gas create new demand?
Sources: Energy Information Administration Short Term Energy Outlook September 2016

20. Find Us Online Christopher McGill Brendan O’Brien www.aga.org
Christopher McGill
Vice-President, Energy Analysis and Standards
Brendan O’Brien
Senior Analyst, Energy Analysis and Standards