The Term Structure of Natural Gas and its Effect on Domestic Coal

Transcription

1 The Term Structure of Natural Gas and its Effect on Domestic Coal Houston Joe Graham Vice President, Americas Natural Gas, Electricity And Environmental Markets April 2016 London Houston Washington New York Portland Calgary Santiago Bogota Rio de Janeiro Singapore Beijing Tokyo Sydney Dubai Moscow Astana Kiev Porto Johannesburg Market Reporting Consulting Events

2 Agenda: Natural Gas Americas overview, Changing fundamentals drive trading practices Volume analysis Coal market adjustment Questions Market Reporting Consulting Events

3 Argus Media: global, market-focused, independent World s largest independently held energy and commodity PRA 750 staff, 19 global offices Publish > 8,000 daily commodity price assessments + energy market intelligence Benchmarking examples US refined products Global crude oil and condensate Air and coal Recent acquisitions MetalPrices.com, MetalPages (Metals) DeWitt, JJ&A (Petrochemicals) FMB (Fertilizers) Organic coverage expansions US Natural Gas Base Oils/ Waxes Services Price reporting and indexation Consulting Conferences illuminating the markets

4 Argus North American natural gas indexes Market Reporting Consulting Events

5 Argus publishes indexes for natural gas hubs 109 daily hub locations 84 bidweek hub locations Indexes determined based on volumeweighted average Transparency Volume Number of trades Low-high range

6 Regulation and compliance FERC recognizes that Argus natural gas methodology conforms with its pricereporting guidelines Annual internal audit to ensure compliance with FERC Argus globally adheres to IOSCO Price Reporting Principles Rolling internal audits (at least annually) Annual independent quality assurance review by PWC

7 The changing of North American natural gas fundamentals Regulation oversight drive a market Trading volumes fall among all platforms, PRAs Market Reporting Consulting Events

8 Traders say "the only place you will find a perfect hedge is in a Japanese garden.

9 Regulation change: Title VII Dodd Frank In June of 2010, significant changes were introduced into the derivatives market with the passage of Title VII of the Dodd Frank Act (Dodd Frank) It was designed to bring substantially increased regulation to the swaps markets Under Dodd Frank, federal regulators are charged with increased supervision of, among other things, the financial energy markets

10 A. 721(a)(21): Swap The Act s definition of Swap is very broad in scope and includes (but is not limited to) a commodity swap, an energy swap and an interest rate swap The Act also contains exclusions to the definition of a Swap and regulations concerning master agreements under which Swaps are traded NOTE: Neither a forward contract nor a physical option is considered a Swap under the Act

11 At its core, the aim of Dodd Frank was: to drive as much swaps activity to be executed, and cleared, on exchanges; to increase the amount and standardization of collateral to secure most transactions; and to impose greater and tighter regulation on the largest participants (banks) in the swaps market, including those that are key players in the energy markets by providing hedging products to producers and end-users.

12 The effect of Dodd Frank on liquidity In 2007 there were 67 global financial institutions with commodity trading division many of which traded physical energy products. In December of 2015 there were 18.

13 Production growth in North America Natural Born Drillers Production continues to accelerate Market Reporting Consulting Events

14 Key insights on US production The U.S. has experienced a rapid increase in natural gas and oil production from shale and other tight resources The number of wells drilled nationwide that produce both oil and natural gas increased from 37% in 2007 to 56% in 2012 Higher drilling efficiency and new well productivity, rather than an increase in the rig count, have been the main drivers of recent production growth Steep legacy production decline rates are being offset by growing production from new wells Six shale plays account for nearly 90% of domestic oil production growth and virtually all domestic natural gas production growth over the last few years The Bakken and Eagle Ford plays account for about two-thirds of oil production growth; the Marcellus play accounts for about three-quarters of natural gas production growth

15 Six gas plays account for nearly all gas growth

16 Shale gas production growth has been dramatic

17 Wells drilled since 2014 provide ½ of all production in 2015

18 US gas consumption and production are matched Us Natural Gas 30 Energy Crisis and Gas Bubble were long lasting Increase in US production started a decade ago Tcf Canadian imports effectively pushed out Consumption Marketed Production EIA US will have gas to spare Term structured prices are low

19 Expectations for natural gas consumption

20 What s driving flat price trading? Changing policies and regulations Technological breakthroughs Faster / slower economic growth Different relative fuel prices

21 NYMEX daily price movement Hurricane Katrina 2008 Banking Crisis Dodd Frank California Power Crisis

22 Implied volatility from 2013 to 2015 have fallen 36 Term Volatility 2013/ Volatity % Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

23 Forward curve moves lower, deters fixed-price trades Nymex 36 month forward curve $5.00 $4.50 $4.00 $ /1/ /1/2014 $3.00 $2.50 $2.00 $

24 Argus volume analysis Bid week volumes have declined Market Reporting Consulting Events

25 Why are physical fixed-price daily volumes down? Dodd Frank compliance concerns and an increase in production volumes have changed the reporting landscape Majority of daily trades were utility balancing and speculators More gas, less volatility has decreased the need for utility balancing Fixed price transactions create a credit event

26 Exchange traded contracts are down since 2012

27 Declines are result of seasonal trends 400 Daily reported activity 55, ,000 mn mmbtu/d ,000 46,000 trades , Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Volume Trades 40,000

28 Traded physical volumes falling 126,000 Total volume Form , , , , , tbtu Source: FERC Form 552

29 Top 20 participants account for nearly half the volume All currently reporting top 20 companies report to Argus Excerpt from Cornerstone Research Characteristics of US gas transactions

30 FERC 552 filings reveal reduction in fixed price trading Reportable volume down slightly Above 120,000 Tcf in each of last five years Bid week indexed transactions are 47pc of all reportable trades However a small fraction is fixed price, and this is declining Fixed price trades reported to PRAs decline Differences in trading practices are apparent Utica rises while Marcellus does not Fixed price is popular in West, Rockies, Midcontinent Texas intrastates and Gulf Coast are dormant

31 Final thoughts Trading volumes have declined but.. Market Reporting Consulting Events

32 Addition of natural gas usage in generation

33 Variation of Prime mover costs $/MWh

34 Over time electricity shifts to lower carbon options US Net Generation Net Trillion Kilowatt hours History Projections Natural Gas Renewables Nuclear Oil and other liquids Coal

35 Shale plays have very steep decline curves Million cubic feet per year

36 Electricity demand growth slows, yet expected to increase by 28% by 2040 Electric Usage Average 2.4% Growth in GDP and.09% Elec usage GDP

37 If natural gas prices stay low, coal is permanently displaced as the leading generation source Billion kilowatt hours Coal Reference Natural Gas High Natural Gas prices

38 Summary: Markets run their course with gas bounty Large amounts of physical gas still flow, however traded volumes are down on all platforms, PRAs despite an increase in production Fixed price trading has fallen in favor of index-based deals The exit of liquidity providers (banks) has reduced the number of market participants and increased the bid/offer market spreads especially in low volume markets, adding to transaction costs

39 Global unresolved issues Long-term effects of economic issues in the United States, Europe, and China, and their impacts on demand, export markets The timing of Japan s full recovery from the impacts of the 2011 nuclear disaster at Fukushima Global shale gas and shale oil production potential Changing policies and regulations Changing consumer preferences and technological breakthroughs

40 Future thoughts While coal still remains a large source of U.S. electricity generation, it s role declines as natural gas and renewables pick up increasing market share Natural gas production is steady and serves the industrial and power sectors Role of nuclear power in the U.S. generation mix stays relatively steady The U.S. becomes a larger exporter of natural gas than originally thought U.S. energy-related carbon dioxide emissions remain more than five percent below their 2005 level through 2040, reflecting increased efficiency and the shift to a less carbon-intensive fuel mix

41 Coal market adjustment to changes in natural gas market Market Reporting Consulting Events

42 Radical adjustment to coal supply underway as demand displaced Production falling around 30pc in 1Q16 after steep declines in 2015 Most of the decline at ongoing operations rather than mine closures Coal production 300 Other Northern App PRB Illinois Basin Central App mn st Inventory starting to fall from high levels Further declines in supply likely if current prices persist 0 Mar-13 Mar-14 Mar-15 Mar-16 Copyright 2016 Argus Media Ltd. All rights reserved.

43 Variability in demand increasing as sector shrinks Seasonal swings in coal consumption getting larger Coal burn Indexed July = January Periods of very low natural gas prices exacerbate intraseason volatility Higher average inventory relative to consumption to balance supply/demand risks? Very low nat gas prices 50 Jan 05 Jan 07 Jan 09 Jan 11 Jan 13 Jan 15 Copyright 2016 Argus Media Ltd. All rights reserved.

44 Several factors reducing coal demand visibility Competition from natural gas o Strong supply growth pushed into price elastic portion of demand -> electric power as it competes with coal o Shrinking liquidity in natural gas prices suppressing volatility, supporting coal-togas switching US Natural Gas demand 3.5 Commercial Electric Power Residential Industrial Tcf 1.0 Rapid growth in renewables generation Uncertainty on implementation of regulation on emissions Copyright 2016 Argus Media Ltd. All rights reserved.

45 Coal sector poorly positioned to improve flexibility Productivity improvements approaching limits after several years of difficult conditions Most producers financially distressed with zero balance sheet flexibility Shippers response to transportation issues lagging not leading Coal consumers are not winning in a low coal price environment as utilization falls Copyright 2016 Argus Media Ltd. All rights reserved.

46 Temporary low in prices can have long lasting impacts Coal price liquidity and volatility also falling as prices follow natural gas market lower Coal prices Illinois Basin Northern App Capp Nymex Spec PRB (RHS) $/st Experience of uneconomic pricing can permanently alter supply Coal industry only has the capability to deal with current crisis rather than future challenges Magnifies risks if demand stronger than expected? Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Source: Argus Copyright 2016 Argus Media Ltd. All rights reserved.

47 Any Questions? Market Reporting Consulting Events

48 Joe Graham VP Americas Natural Gas Phone: Office: Web: Houston Hayden Atkins Consultant Phone: Office: : Hayden.atkins@argusmedia.com New York Copyright notice All intellectual property rights in this presentation and the information herein are the exclusive property of Argus and and/or its licensors and may only be used under licence from Argus. Without limiting the foregoing, by reading this presentation you agree that you will not copy or reproduce any part of its contents (including, but not limited to, single prices or any other individual items of data) in any form or for any purpose whatsoever without the prior written consent of Argus. Trademark notice ARGUS, ARGUS MEDIA, the ARGUS logo, DEWITT, FMB, FUNDALYTICS, METAL-PAGES, JIM JORDAN & ASSOCIATES, JJ&A, ARGUS publication titles and ARGUS index names are trademarks of Argus Media Limited. Disclaimer All data and other information presented (the Data ) are provided on an as is basis. Argus makes no warranties, express or implied, as to the accuracy, adequacy, timeliness, or completeness of the Data or fitness for any particular purpose. Argus shall not be liable for any loss or damage arising from any party s reliance on the Data and disclaims any and all liability related to or arising out of use of the Data to the full extent permissible by law.