Oil, Gas and Power Prices Have Fallen and Can t Get Up Implications for the Power Industry Municipal Power & Utilities Assembly Mike Zenker, Managing Director of Research NextEra Energy Resources September 15, 216
In inflation-adjusted dollars, what year did the world experience peak oil prices? 1) 214 2) 27 3) 1973 4) 1864 2
Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 U.S. Crude Oil Prices 12 1 West Texas Intermediate Oil Prices ($/barrel) 8 6 4 15-year low Today s price = $47/bl 2 3 Source: NYMEX
$/MMBtu On the 1 th year anniversary of the shale gas revolution, spot gas prices have hit 17-year lows earlier this year 16 Natural Gas Prices Henry Hub 14 12 1 8 6 17-year low 4 2 Today s price = $2.85/MMBtu 4
Apr-1 Apr-2 Apr-3 Apr-4 Apr-5 Apr-6 Apr-7 Apr-8 Apr-9 Apr-1 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Dollars per MMBtu All fuel prices have been in decline forcing them to compete aggressively with each other in the power sector $3 $25 Competing Fuel Costs $2 $15 $1 $5 $ Western Coal (Delivered) Oil (WTI) Appalachian Coal (Delivered) Henry Hub Gas 5
Index (Jan 1, 28 = 1) Not just energy: commodity prices worldwide have pulled back, partly owing to reduced demand growth from China Global Commodity Prices 2 18 16 14 12 1 8 6 4 China Olympics 2 Gas from Oil Wells 28 29 21 211 212 213 214 215 216 Crude Oil Copper Corn Henry Hub 6
Dollars Dollars per Barrel 7 Oil Prices Drive Oil & Gas Company Stock Prices 12 6 1 5 4 3 2 8 6 4 1 2 Dec-1 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Oil & Gas Company Stock Index (left axis) Oil Price (right axis) 7
OPEC traditionally cut crude output in response to an oil price fall 34 32 OPEC Crude Output vs Brent Prices OPEC responds to price weakness with supply cuts OPEC responds to price weakness with supply increase $14 $12 $1 3 MMbbls $8 $6 $/bbl 28 26 OPEC Production (left axis) Brent (right axis) $4 $2 $ 8
The coming flip from stock builds (bearish) to stock draws (bullish) should be price supportive 2,5 2, 1,5 Implied Stock Build Mbbls/d 1, 5-5 -1, Stocks draws expected in 4Q 16 and beyond in Base case 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 9
Supply Gap: 54 MMbbls/d Longer term, North American supply growth is not likely to be high enough to offset global supply decline rates and keep pace with global demand growth Projected Global Changes in Oil Supply and Demand 12 (Cumulative 215-225) 1 8 MMbbls/d 6 4 93 43 4.5% Per Annum 11 1.1 MMbbls/d per Annum OPEC North America growing at 2 MMbbls/d 8 2 Non-OPEC, Yet to Find Supply: 26 MMbbls/d 2 5 5 215 Global Supply 4.5% Global Decline Rate Global Supply Net of Declines Global Demand Growth 225 Supply Supply Needed to Fill Gap Fresh drilling outside of North America is needed and prices need to be $66+/bbl to encourage sufficient level of drilling 1
Aerial Extend of Marcellus and Utica Plays Marcellus Shale Utica Shale 11
Forecasters have repeatedly raised their outlooks for the Northeast Wood Mackenzie Marcellus & Utica Production Forecasts H215 Forecast of 22 & 225 Production 2H 215 2H 214 1H 214 Bcf/d Current production 2H 213 1H 213 1H 212 1H 211 1H 21 12 Source: Wood Mackenzie
The Marcellus/Utica have fundamentally altered the North American supply picture Bcf/d 25 2 15 1 5 17.2 Production by Basin 14.3 14.1 21 6.2 4.9 3.4 Bcf/d - 25 2 15 1 5 Texas Canada Rockies Gulf of Mexico 18.9 14.8 13.1 215 3. Oklahoma Marcellus + Utica 6. 19.9 - Texas Canada Rockies Gulf of Mexico Oklahoma Marcellus + Utica 13
How Big Are These Wells? 4 x Scotts Run = 2 MMcf/d Riviera Beach, FL = 1,25 MW 14
Supply growth from PA/OH will be paced by pipeline development Major Natural Gas Pipelines 15
Associated gas from oil wells along with Northeast shales have been/will be responsible for all of the growth in U.S. gas supply U.S. Supply (Bcf/d) Y-o-Y Change in U.S. Production (Bcf/d) 1 8 6 4 Actual Forecast 8 6 4 2 Actual Oil supply rebound Forecast Tranche of new pipes 2-2 213 214 215 216 217 218 219 22 221-4 214 215 216 217 218 219 22 221 Associated Other Northeast. Northeast Associated Other Total US Y-o-Y declines in associated gas and other basins cause U.S. production to decline in 216 and 217, followed by recovery in 218+ 16
Weekly Coal-fired Generation GWH Weekly Gas-fired Generation GWH 44, 39, 34, 29, 24, 19, 14, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 5-Year Range 213 214 215 216 5, 45, 4, 35, 3, 25, 2, 15, 1, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 5-Year Range 213 214 215 216 Gas generation hitting all time highs as coal generation hit all time lows 17
Production Demand Production Demand Production Demand Production Demand Production Demand Production Demand Tighter gas markets in 217, but 218 pipe additions suggest another leg down in price starting that year Y-o-Y Bcf/d Forecast U.S. Natural Gas Supply and Demand Change 8 6 4 2-2 Other Associated Northeast Total Production Tighter market (year-over-year excluding power demand) Looser market -4 216 217 218 219 22 221 Gas prices should rise modestly in 217 and fall again in 218 and beyond 18
Significant coal and nuclear retirements Eastern Interconnect Supply Evolution (21-222) Capacity (GW) 3 25 2 15 1 5 (5) (1) (15) (2) History Outlook Cumulative Builds Cumulative Builds (GW) 21 211 212 213 214 215 216 217 218 219 22 221 222 Solar Hydro Nuclear Other Oil Gas Coal Wind Cummulative Builds 9 8 7 6 5 4 3 2 1 (1) (2) (3) (4) (5) (6) 19
U.S. electricity demand has been virtually flat since 28 with long-term forecasted growth rates falling annually U.S. Demand Growth Regional Demand Growth TWh 5, 4,5 4, 3,5 3, 2,5 27 28 29 21 211 213 212 214 Forecast 1-yr CAGR 27 1.57% 28 1.47% 29 1.36% 21 1.51% 211 1.36% 212 1.3% 213 1.5% 214.93% 215.64% 215 1.6% 1.4% 1.2% 1.% 1-yr CAGR.8%.6%.4%.2%.% -.2% -.4% 1.5% 1.2% 1.4% 1.2% 1.2% 1.1%.7%.6%.5%.2%.% -.2% 1.3% 1.2% 1.% 1.1% 1.% 1.%.2%.2% Peak Demand Energy Demand 2
1861 1868 1875 1882 1889 1896 193 191 1917 1924 1931 1938 1945 1952 1959 1966 1973 198 1987 1994 21 28 215 The all-time peak of crude prices was in 1864 14 Oil Prices 12 Peak in 1864 West Texas Intermediate Oil Prices ($/barrel) 1 8 6 4 2 21
Disclaimer This presentation was prepared by NextEra Energy Power Marketing, LLC ( NEPM ) exclusively for customer s ( Company ) beneficial and internal use. These materials do not constitute advice or a recommendation about the value or advisability of trading in commodity interests, including any commodity futures contract, option on a futures contract, swap, or commodity option. These materials are provided for discussion purposes only and are incomplete without reference to, and should be viewed only in connection with, the accompanying oral presentation provided by NEPM. Such materials are presented for discussion purposes only and are not an offer or a commitment of NEPM or any parent or affiliate of NEPM. The transaction or transactions described herein is subject to further review and approval of NEPM and may require revised or additional provisions or the execution of other agreements. Without limiting any of the foregoing, credit approval will be required for this transaction and all of its terms and provisions. Please also be advised that NEPM makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or accounting effects of consummating a possible transaction. Nothing in these materials constitutes investment, legal, accounting or tax advice or otherwise constitutes a recommendation to you. You should conduct your own independent analysis of the matters referred to herein. The opinions, estimates, projections and other information contained in these materials are those of NEPM as of the date hereof and are subject to change without notice (with no obligation on NEPM s part to update). NEPM makes every effort to ensure that the contents hereof have been compiled or derived from sources believed reliable and contain information that is accurate and complete. Information may be available to NEPM and/or its affiliates that is not reflected herein. Furthermore, NEPM makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein, and accepts no liability whatsoever for any loss (howsoever arising and whether direct or consequential) arising from any use of, or reliance on, these materials or their contents. Neither this presentation nor any of its contents may be disclosed by the Company without the prior written consent of NEPM. Cautionary Statements and Risk Factors that May Affect Future Results Any statements made herein about future operating and/or financial results and/or other future events are forward-looking statements under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These forward looking statements may include, for example, statements regarding anticipated future financial and operating performance and results, including estimates for growth. Actual results may differ materially from such forward-looking statements. A discussion of risk factors that could cause actual results or events to vary is contained in the Appendix herein and in our Securities and Exchange Commission (SEC) filings. 22