“ train wreck ” energy prices and infrastructure, the u.s. economy and the american consumer...

BELDEN & BLAKE CORPORATIONBELDEN & BLAKE CORPORATION

“Train Wreck”

Energy Prices and Infrastructure,the U.S. Economy

and the American Consumer

CIPA

June 1, 2002


Energy in the United StatesEnergy in the United States

1.1. Where we are today.Where we are today.

2.2. How we got there.How we got there.

3.3. Where we are heading.Where we are heading.


1.1. Where we are today.Where we are today.


Where We Are Today – OPECWhere We Are Today – OPEC• Regained control of the oil markets in 1999Regained control of the oil markets in 1999

• Lost control again in 2001 due to a collapse in Lost control again in 2001 due to a collapse in demand and increased non-OPEC supplydemand and increased non-OPEC supply

• Short term position may be tenuous (“Russian” Short term position may be tenuous (“Russian” factor)factor)

• Long term position may be stronger due to non-Long term position may be stronger due to non-OPEC supply concerns outside of RussiaOPEC supply concerns outside of Russia

• WorldwideWorldwide demand and the economy will be the demand and the economy will be the driversdrivers

• Wild cards – Israel, terror, VenezuelaWild cards – Israel, terror, Venezuela


Chavez FactorChavez Factor

Source: J.P. Morgan Chase

BELDEN & BLAKE CORPORATIONBELDEN & BLAKE CORPORATIONSource: APISource: API

TOTAL OIL INVENTORY AND PRICEMAY 9, 2002

700000

720000

740000

760000

780000

800000

820000

840000

860000

880000

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998

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1998

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1999

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1999

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31-M

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2000

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15.00

20.00

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35.00

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INVENTORY

PRICE


Natural Gas Inventory & Price SnapshotNatural Gas Inventory & Price SnapshotDuring the January 2001 Price SpikeDuring the January 2001 Price Spike

1/4/011/4/01 AverageAverage ChangeChange

Natural Gas In Storage (BCF)Natural Gas In Storage (BCF) 1,5621,562 2,2852,285 Down 32%Down 32%

Natural Gas Price Natural Gas Price $9.425$9.425 $2.300$2.300 Up 310%Up 310% ($/MMBtu, Henry Hub, LA)($/MMBtu, Henry Hub, LA)

Source: AGA, NYMEXSource: AGA, NYMEX


Natural Gas Inventory & Price SnapshotNatural Gas Inventory & Price SnapshotA Year LaterA Year Later

1/4/021/4/02 1/4/011/4/01 AverageAverage

Natural Gas In Storage (BCF)Natural Gas In Storage (BCF) 2,6662,666 1,5621,562 2,2852,285

Natural Gas Price Natural Gas Price $2.350$2.350 $9.425$9.425 $2.300$2.300 ($/MMBtu, Henry Hub, LA)($/MMBtu, Henry Hub, LA)

Source: AGA, NYMEXSource: AGA, NYMEX


Natural Gas 3/26/02 vs. Two Months EarlierNatural Gas 3/26/02 vs. Two Months Earlier

• April 2002 closed at $3.472 up 68%April 2002 closed at $3.472 up 68%

• Storage 120% above a year agoStorage 120% above a year ago

• 56% over 8-year average56% over 8-year average

• 9% over prior record in 19999% over prior record in 1999

• Gas rig count down 43% from 2001 peakGas rig count down 43% from 2001 peak

• Gas deliverability may be down as much as 5% Gas deliverability may be down as much as 5% year-to-yearyear-to-year


Where We Are TodayWhere We Are Today

The supply of all our major The supply of all our major

energy sources is limited by both energy sources is limited by both

natural and political factors.natural and political factors.


More importantly, the infrastructure More importantly, the infrastructure that makes it all work is inadequate that makes it all work is inadequate for modern needs; the infrastructure for modern needs; the infrastructure

is is notnot being modernized. being modernized.



• The entire energy complex continues to experience The entire energy complex continues to experience a politically induced backlasha politically induced backlash

• Last year it was high prices. This year it is Last year it was high prices. This year it is “Enronitis”“Enronitis”

• This backlash takes many forms and threatens to This backlash takes many forms and threatens to further inhibit and restrict the energy complex’s further inhibit and restrict the energy complex’s ability to continue to provide plentiful and cheap ability to continue to provide plentiful and cheap energy to American businesses and consumersenergy to American businesses and consumers



Some Recent Infrastructure EventsSome Recent Infrastructure Events

• Connecticut – Governor bans gas pipeline and Connecticut – Governor bans gas pipeline and electric transmission projectselectric transmission projects

• New York – Senators propose legislation banning New York – Senators propose legislation banning drilling in the Finger Lakes areadrilling in the Finger Lakes area

• Great Lakes – Drilling under the U.S. portion is Great Lakes – Drilling under the U.S. portion is bannedbanned

• Wyoming – US DOI Board of Appeals rejects CBM Wyoming – US DOI Board of Appeals rejects CBM leases for first timeleases for first time


The American success story of the past 100 The American success story of the past 100 years has had as its foundation:years has had as its foundation:

– – A free market economyA free market economy

– – A system of laws supporting property A system of laws supporting property rights for both the individual and rights for both the individual and the the enterprise enterprise

– – American ingenuityAmerican ingenuity

– – American hard work ethicAmerican hard work ethic

– – Plentiful and low priced energyPlentiful and low priced energy



2. How we got there.2. How we got there.


Critical Factors and TrendsCritical Factors and Trends

• Per capital consumption of energy up over 6% Per capital consumption of energy up over 6% in last ten yearsin last ten years

• We haven’t built a major refinery in this country We haven’t built a major refinery in this country in over 20 yearsin over 20 years

• We aren’t building enough pipelinesWe aren’t building enough pipelines

• No new nuclear facilities since the 70sNo new nuclear facilities since the 70s



• The national electric transmission grid and the The national electric transmission grid and the regulations governing it are outdatedregulations governing it are outdated

• U.S. electric demand is up 23%, 1992 – 2000U.S. electric demand is up 23%, 1992 – 2000

• U.S. electric generation supply is up 6% over the U.S. electric generation supply is up 6% over the same periodsame period

• 95% of the new electric generation demand over 95% of the new electric generation demand over the next five to seven years may the next five to seven years may havehave to be to be satisfied by natural gassatisfied by natural gas



• The natural gas supply and the infrastructure to The natural gas supply and the infrastructure to transport it may not be there in a healthy transport it may not be there in a healthy economyeconomy

• Regulatory apparatus prohibits utilities from Regulatory apparatus prohibits utilities from entering into long-term supply arrangementsentering into long-term supply arrangements


California First; Guess Who NextCalifornia First; Guess Who Next• In 2000, California became a “third-world” country In 2000, California became a “third-world” country

in terms of its energy infrastructurein terms of its energy infrastructure

• California didn’t build a significant new electric California didn’t build a significant new electric generation facility between 1990 and 2000generation facility between 1990 and 2000

• Their gas pipeline infrastructure was inadequateTheir gas pipeline infrastructure was inadequate

• Their electric transmission grid was in poor shapeTheir electric transmission grid was in poor shape


California First; Guess Who NextCalifornia First; Guess Who Next• In 2000, California became a “third-world” country In 2000, California became a “third-world” country

in terms of its energy infrastructurein terms of its energy infrastructure

• California didn’t build a significant new electric California didn’t build a significant new electric generation facility between 1990 and 2000generation facility between 1990 and 2000

• Their gas pipeline infrastructure was inadequateTheir gas pipeline infrastructure was inadequate

• Their electric transmission grid was in poor shapeTheir electric transmission grid was in poor shape

• Some progress has been made, but will they now Some progress has been made, but will they now fall back into a deep sleep?fall back into a deep sleep?


U.S. Weekly Electricity GenerationU.S. Weekly Electricity Generation

Source: Energy Directions, Inc.Source: Energy Directions, Inc.

Billion kilowatt hours per monthBillion kilowatt hours per month


High Tech Power UsageHigh Tech Power Usage

• ““High-Tech’s” use of electric power was less than High-Tech’s” use of electric power was less than 1% of total electric demand in 19931% of total electric demand in 1993

• It is now 10-12%It is now 10-12%

• It may be over 20% by the end of the decadeIt may be over 20% by the end of the decade


3. Where we are heading.3. Where we are heading.

– – Political considerationsPolitical considerations


Observations About the American Observations About the American ConsumerConsumer

• We believe energy supply is abundantWe believe energy supply is abundant

• We believe it should be inexpensiveWe believe it should be inexpensive

• We are committed environmentalists and expect We are committed environmentalists and expect no incremental costs for energy associated no incremental costs for energy associated therewiththerewith

• We support and encourage the politician’s and We support and encourage the politician’s and news media’s assertions that the energy industry news media’s assertions that the energy industry is the enemy and the cause of our problemsis the enemy and the cause of our problems


Observations About the American ConsumerObservations About the American Consumer

• We remain poorly educated on energy issues We remain poorly educated on energy issues

• In the winter of 2000/2001, 57% of Californians In the winter of 2000/2001, 57% of Californians believed there was no shortage of electricitybelieved there was no shortage of electricity

• NIMBY – NIMBY – NNot ot IIn n MMy y BBack ack YYardard


Observations About Hard Working Observations About Hard Working EnvironmentalistsEnvironmentalists

• BANANA – BANANA – BBuild uild AAbsolutely bsolutely NNothing othing AAnywhere nywhere NNear ear AAnythingnything

• They have never seen a cost/benefit analysis that They have never seen a cost/benefit analysis that they likethey like

• They are crusaders; the most committed and well They are crusaders; the most committed and well financed movement in the worldfinanced movement in the world

• NOPE – NOPE – NNot ot OOn n PPlanet lanet EEartharth


Observations About American PoliticiansObservations About American Politicians

• They are poorly informed about energy (especially They are poorly informed about energy (especially at the local level)at the local level)

• Many take the position that there are no shortages, Many take the position that there are no shortages, only price-fixers and gougers (CA – jail for only price-fixers and gougers (CA – jail for generators) (Hawaii – Gasoline Price Caps)generators) (Hawaii – Gasoline Price Caps)

• They solve problems by affixing blame instead of They solve problems by affixing blame instead of directly confronting the issuesdirectly confronting the issues

• Why? Are they simply responding to what the Why? Are they simply responding to what the uninformed voter wants to hear?uninformed voter wants to hear?


Observations About American PoliticiansObservations About American Politicians

• They have been most skillful the past 30 years They have been most skillful the past 30 years hiding the true costs of the environmental hiding the true costs of the environmental movement from their constituentsmovement from their constituents

• It’s fixin’ to get a lot tougher to hideIt’s fixin’ to get a lot tougher to hide


Great Energy Fallacies of Our TimeGreat Energy Fallacies of Our Time

• Electric cars generate less pollutionElectric cars generate less pollution

• OPEC is the problem/solutionOPEC is the problem/solution

• Nuclear power is unsafeNuclear power is unsafe

• Fuel cells will save usFuel cells will save us

• Wind and solar power will save usWind and solar power will save us


Great Energy Fallacies of Our TimeGreat Energy Fallacies of Our Time

• Price fixing/gouging is rampant across the Price fixing/gouging is rampant across the entire energy industry landscapeentire energy industry landscape

• Building electric power generation facilities will Building electric power generation facilities will cure our problemscure our problems

• High voltage transmission lines cause cancerHigh voltage transmission lines cause cancer

• Energy conservation is easy to obtain, even Energy conservation is easy to obtain, even with low priceswith low prices


3.3. Where we are heading.Where we are heading.

– – The cycleThe cycle


Short Term HorizonShort Term Horizon

The high prices for naturalThe high prices for natural

gas and oil in late 2000 and early 2001gas and oil in late 2000 and early 2001

significantly dampened demand for energysignificantly dampened demand for energy

and helped to slow the U.S. economy.and helped to slow the U.S. economy.


Some Industries Directly DamagedSome Industries Directly Damaged by last round of high pricesby last round of high prices

• Agriculture Industry Agriculture Industry (Entire)(Entire)

• Aluminum SmeltersAluminum Smelters

• Ammonia PlantsAmmonia Plants

• Brick MakersBrick Makers

• Carbon Black PlantsCarbon Black Plants

• Cement MakersCement Makers

• Chemical PlantsChemical Plants

• Citrus FarmsCitrus Farms

• Copper Mines/MillingCopper Mines/Milling

• Dairy FarmsDairy Farms

• Electric UtilitiesElectric Utilities

• Fertilizer PlantsFertilizer Plants

• Glass PlantsGlass Plants

• Greenhouses Greenhouses (Flower Industry)(Flower Industry)

• Methanol RefineriesMethanol Refineries

• Paper MillsPaper Mills

• Plastic PlantsPlastic Plants

• Potato ProcessorsPotato Processors

• Steel IndustrySteel Industry


The Emerging Energy CycleThe Emerging Energy Cycle• High prices cause demand for energy to drop at the High prices cause demand for energy to drop at the

same time energy supply starts to increase (March same time energy supply starts to increase (March 2000 – January 2001)2000 – January 2001)

• Energy prices drop (April – December 2001)Energy prices drop (April – December 2001)

• Oil and gas drilling activity and energy infrastructure Oil and gas drilling activity and energy infrastructure improvements slow down (July 2001 – Today)improvements slow down (July 2001 – Today)

• Energy supply drops. At the same time demand Energy supply drops. At the same time demand rebounds with the improving economy (Today)rebounds with the improving economy (Today)

• Another energy shortage occurs (Late 2002 – Early Another energy shortage occurs (Late 2002 – Early 2004)2004)

• The next one could be much worseThe next one could be much worse


Why It Could Be WorseWhy It Could Be Worse

• The recession and corresponding energy price The recession and corresponding energy price collapse have swept the energy supply and collapse have swept the energy supply and infrastructure problems under the rug. Will they infrastructure problems under the rug. Will they return as bigger problems when the economy return as bigger problems when the economy recovers?recovers?

• Supply drops are becoming steeper with each Supply drops are becoming steeper with each cycle; the infrastructure is further deterioratingcycle; the infrastructure is further deteriorating


Why It Could Be WorseWhy It Could Be Worse

• Energy price volatility and the political landscape Energy price volatility and the political landscape continue to make it hard for U.S. energy companies continue to make it hard for U.S. energy companies to access capital markets to access capital markets andand find places to drill find places to drill

• Lack of investment capital will delay the rebuilding Lack of investment capital will delay the rebuilding of the energy infrastructure. Will make problems of the energy infrastructure. Will make problems worse later in the decade.worse later in the decade.


Tough Times in the Oil PatchTough Times in the Oil Patch

• Invest $100 in DJIA stocks on 12/31/80Invest $100 in DJIA stocks on 12/31/80

• Now have $1,825Now have $1,825 (1) (2) (1) (2)

• Invest $100 in independent oil and gas Invest $100 in independent oil and gas companies on 12/31/80companies on 12/31/80

• Now have $51Now have $51 (1) (3) (1) (3)

• Energy stocks down 14% from their peak on Energy stocks down 14% from their peak on May 21st of last yearMay 21st of last year

• If you want to make a little bit of money in oil If you want to make a little bit of money in oil and gas; invest a lot of moneyand gas; invest a lot of money

(1)(1) As of 3/28/02.As of 3/28/02.(2)(2) Includes average dividend yield of 2.0% p.a. and dividends reinvested.Includes average dividend yield of 2.0% p.a. and dividends reinvested.(3)(3) Assumes no dividends paid.Assumes no dividends paid.


3. Where we are heading. 3. Where we are heading.


The First Decade of the 21The First Decade of the 21stst Century – Century –The Tough Options to Be BalancedThe Tough Options to Be Balanced


3. Where we are heading – physical considerations – 2000-2020

• Demand for energy increases 1.4% per year.Demand for energy increases 1.4% per year.

• Demand for electricity increases 1.8% per year.Demand for electricity increases 1.8% per year.

• Hydrocarbon’s market share increases from Hydrocarbon’s market share increases from 85% to 87%85% to 87%

• Imports rise from 60% to 69%Imports rise from 60% to 69%

Source: EIASource: EIA


U.S. Total Energy Demand – Market ShareU.S. Total Energy Demand – Market Share

Total ShareTotal Share

Source: Gas Technology InstituteSource: Gas Technology Institute

17%

21%

24%

23%

8%

3%4%

Domestic Oil

Imported Oil

Natural Gas

Coal

Nuclear

Hydro

Renewables


U.S. Total Energy Demand – Market ShareU.S. Total Energy Demand – Market Share

2%11%

55%

21%

9%

2%

Petroleum

Natural Gas

Coal

Nuclear

Hydro

Renewables

Electric ShareElectric Share

Source: Gas Technology InstituteSource: Gas Technology Institute


Nuclear PowerNuclear Power

• Still fulfills 8% of total U.S. energy needsStill fulfills 8% of total U.S. energy needs

• 21% of electric generation21% of electric generation

• More people will die today on U.S. highways than More people will die today on U.S. highways than have died in U.S. nuclear power accidents have died in U.S. nuclear power accidents throughout the industry’s historythroughout the industry’s history

• No new plants since the early 70sNo new plants since the early 70s– TMITMI– China SyndromeChina Syndrome– ChernobylChernobyl


Nuclear PowerNuclear Power

• Nuclear waste disposal remains biggest Nuclear waste disposal remains biggest problem – Nevada NIMBYproblem – Nevada NIMBY

• Environmentalists/consumers – NIMBY, Environmentalists/consumers – NIMBY, BANANA, NOPEBANANA, NOPE

• If you want clean air, definitely one of the fuels If you want clean air, definitely one of the fuels of the early 21st centuryof the early 21st century

• No CONo CO22 problems problems

• No SONo SO22, NO, NOxx problems problems


CoalCoal• Fulfills 24% of total U.S. energy needsFulfills 24% of total U.S. energy needs


• Excess capacity shut down due to CAAExcess capacity shut down due to CAA

• Virtually no new plants being builtVirtually no new plants being built

• Will have to step up later in the decadeWill have to step up later in the decade

• Enviros/Consumers – NIMBY and BANANAEnviros/Consumers – NIMBY and BANANA

• May be able to clean up SOMay be able to clean up SO22, NO, NOxx. Will be . Will be expensiveexpensive

• No solution for CONo solution for CO22 emissions emissions


HydropowerHydropower

• Fulfills 3% of total energy needsFulfills 3% of total energy needs

• 9% of electric generation – most in western U.S.9% of electric generation – most in western U.S.

• Low inventory for Western U.S. last summer Low inventory for Western U.S. last summer (“Train Wreck” – high prices, avoided blackouts (“Train Wreck” – high prices, avoided blackouts but hurt the region’s economy)but hurt the region’s economy)

• No more dams (BANANA, NOPE)No more dams (BANANA, NOPE)


PetroleumPetroleum

• Fulfills 38% of total U.S. energy needsFulfills 38% of total U.S. energy needs

• Only 2% of electric generationOnly 2% of electric generation

• High winter home heating oil demand pressures High winter home heating oil demand pressures summer gasoline supplies summer gasoline supplies

• High summer gasoline demand pressures High summer gasoline demand pressures winter home heating oil supplywinter home heating oil supply


• No new refineries built in this country in over 20 No new refineries built in this country in over 20 years (324 then to 150 +/- now)years (324 then to 150 +/- now)

• Must now import refined products to meet Must now import refined products to meet demanddemand

• 16 different blends of RFG in three grades (48 16 different blends of RFG in three grades (48 total) are complicating matters, especially to meet total) are complicating matters, especially to meet regional political interestsregional political interests

• We import almost 60% of the crude oil consumed We import almost 60% of the crude oil consumed in this countryin this country

PetroleumPetroleum


• Major U.S. accumulations off limits (ANWR, Major U.S. accumulations off limits (ANWR, coastal waters)coastal waters)

• Drilling wells – NIMBY, BANANADrilling wells – NIMBY, BANANA

• Building refineries – NIMBY, BANANABuilding refineries – NIMBY, BANANA

• Building oil-fired electric generation facilities – Building oil-fired electric generation facilities – NIMBY, BANANANIMBY, BANANA

PetroleumPetroleum


Source: APISource: API

U.S. NET OIL IMPORTSAPRIL 9, 2002

0%

10%

20%

30%

40%

50%

60%

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001


OPEC – Middle East OPEC – Middle East The World’s Primary Oil SourceThe World’s Primary Oil Source

• One of the most politically unstable regions on One of the most politically unstable regions on the planet.the planet.

• Remember Desert Storm in 1991? Why did Remember Desert Storm in 1991? Why did we fight that war?we fight that war?

• Do you have any doubt we would go there Do you have any doubt we would go there again to assure access to their oil to save our again to assure access to their oil to save our economy?economy?


OPEC – Middle EastOPEC – Middle EastThe World’s Primary Oil SourceThe World’s Primary Oil Source

• Will our children and grandchildren’s lives be Will our children and grandchildren’s lives be placed at risk fighting a war to preserve the placed at risk fighting a war to preserve the availability of availability of theirtheir oil? oil?

• Cost benefit analysis – how many lives do we Cost benefit analysis – how many lives do we risk? How many caribou per child or risk? How many caribou per child or grandchild?grandchild?

• The higher the percentage of imports, the The higher the percentage of imports, the more vulnerable we are, the greater the risk more vulnerable we are, the greater the risk we will go to war!we will go to war!


Terrorism & OPEC OilTerrorism & OPEC Oil

• High oil importsHigh oil imports

• Expose U.S. economically and politically to Expose U.S. economically and politically to supply disruptionssupply disruptions

• Certain OPEC countries finance and harbor Certain OPEC countries finance and harbor terroriststerrorists

• Unacceptable compromises to protect access to Unacceptable compromises to protect access to oil supply?oil supply?


Why do we do business with terrorists?Why do we do business with terrorists?

Source: EIA, Pritchard Capital Partners


Why do we do business with terrorists?Why do we do business with terrorists?

Source: EIA, Pritchard Capital Partners

BECAUSE WE HAVE NO CHOICE!BECAUSE WE HAVE NO CHOICE!


The U.S. Foreign Policy DilemmaThe U.S. Foreign Policy Dilemma


RenewablesRenewables

• Includes wind and solar power and alternative Includes wind and solar power and alternative fuels such as biomass, fuel cellsfuels such as biomass, fuel cells

• Fulfill 4% of total U.S. energy needsFulfill 4% of total U.S. energy needs

• 2% of electric needs2% of electric needs

• Environmental movement loves them!Environmental movement loves them!

• Some progress being made but still requires Some progress being made but still requires subsidiessubsidies


RenewablesRenewables

• Consumers have not been willing to pay higher Consumers have not been willing to pay higher prices necessary to make them competitiveprices necessary to make them competitive

• Windmills are killing more birds than the oil Windmills are killing more birds than the oil industry ever has. industry ever has.

• Windmills AKA “bird threshers.”Windmills AKA “bird threshers.”

• I have yet to see one dead bird killed by a I have yet to see one dead bird killed by a windmill on television!windmill on television!


Electricity – Electricity – “Train Wreck” “Train Wreck” – Healthy Economy– Healthy Economy

• Problems were critical in California and entire Problems were critical in California and entire western U.S. early last yearwestern U.S. early last year

• Over-reliance on gas generation facilities for at least Over-reliance on gas generation facilities for at least the next five years causingthe next five years causing

– Intermittent extremely high natural gas pricesIntermittent extremely high natural gas prices– Possible shortages of natural gasPossible shortages of natural gas– U.S. economy problemsU.S. economy problems

• Shortages of electricity, possibly spreading Shortages of electricity, possibly spreading nationally (New York City next?)nationally (New York City next?)


Electricity – Electricity – “Train Wreck” “Train Wreck” – Healthy Economy– Healthy Economy

• May require May require significantsignificant reductions in demand reductions in demand growthgrowth

• Only two options to natural gasOnly two options to natural gas– Nuclear (7 – 10 years)Nuclear (7 – 10 years)– Coal (5 – 7 years)Coal (5 – 7 years)

• We may soon have a major “wire” shortage! We may soon have a major “wire” shortage! Public believes high voltage lines cause cancer Public believes high voltage lines cause cancer (NIMBY). Maybe more critical than generation (NIMBY). Maybe more critical than generation capacity shortfall (much longer term problem).capacity shortfall (much longer term problem).


High Voltage Line GrowthHigh Voltage Line Growth

Source: Wall Street JournalSource: Wall Street Journal

Circuit miles of overhead electric lines of 22,000 volts and Circuit miles of overhead electric lines of 22,000 volts and above in service in the 50 states (in thousands)above in service in the 50 states (in thousands)


Annual Investments in Transmission are Declining.Annual Investments in Transmission are Declining.

Source: Edison Electric Institute


What Infrastructure Can Mean to PricesWhat Infrastructure Can Mean to Prices

Figures are monthly averages in dollars per megawatt-hour.Figures are monthly averages in dollars per megawatt-hour.Wholesale electricity costs in regional markets.Wholesale electricity costs in regional markets.Source: Wall Street JournalSource: Wall Street Journal


Natural Gas – Natural Gas – “Train Wreck” “Train Wreck” – Healthy Economy– Healthy Economy

• Fulfills 24% of total U.S. energy needsFulfills 24% of total U.S. energy needs


• Use for electricity increasing rapidlyUse for electricity increasing rapidly

• Fuel of choice politicallyFuel of choice politically

• Fuel of choice environmentallyFuel of choice environmentally


• Most friendly of hydrocarbon fuels, COMost friendly of hydrocarbon fuels, CO22, SO, SO22, NO, NOxx

• Not enough pipelines to move it around, especially Not enough pipelines to move it around, especially California, problem is worsening nationally California, problem is worsening nationally (Beware East Coast) (Beware East Coast)

• Major U.S. accumulations placed off limits by Major U.S. accumulations placed off limits by government (Alaska, Rocky Mountains, coastal government (Alaska, Rocky Mountains, coastal waters)waters)

• We almost ran out of it in the winter of 2000/2001 We almost ran out of it in the winter of 2000/2001

• Used to be a fuel for heating and industrial Used to be a fuel for heating and industrial processesprocesses



• Now a year-round fuel due to electric loadNow a year-round fuel due to electric load

• Due to political and environmental policies, we Due to political and environmental policies, we now over-rely on itnow over-rely on it

• Long term is there enough available to our meet Long term is there enough available to our meet needs?needs?



Sources of Demand…Sources of Demand…


Forecast: Electric GenerationForecast: Electric Generation


• Why it alone may not be enough. Why we may Why it alone may not be enough. Why we may need both coal and nuclear.need both coal and nuclear.

• The seeds were planted 17 years ago.The seeds were planted 17 years ago.

• The natural gas supply problem was here in The natural gas supply problem was here in 1996; hidden by subsequent warm winters.1996; hidden by subsequent warm winters.

• Now being hidden again by economic Now being hidden again by economic slowdown/recession and the warmest winter in slowdown/recession and the warmest winter in 108 years108 years

Natural GasNatural Gas

BELDEN & BLAKE CORPORATIONBELDEN & BLAKE CORPORATIONSource: Baker-HughesSource: Baker-Hughes

U.S. ROTARY RIG COUNTAPRIL 9, 2002

0

500

1000

1500

2000

2500

3000

3500

4000

1942

1944

1946

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

YEAR

RIG

S

BELDEN & BLAKE CORPORATIONBELDEN & BLAKE CORPORATIONSource: Gas Technology InstituteSource: Gas Technology Institute

U.S. NATURAL GAS DEMANDAPRIL 9, 2002

0

5000

10000

15000

20000

25000

30000

35000

40000

1946

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

YEAR

BC

F D

EMA

ND


High drilling activity in earlyHigh drilling activity in early

80s plus low demand 80s plus low demand

equalsequals

Natural Gas “Train Wreck”Natural Gas “Train Wreck”


HugeHuge

Oversupply by 1986Oversupply by 1986

Natural Gas “Train Wreck”Natural Gas “Train Wreck”


Eight Things HappenedEight Things HappenedBetween 1986 and 1996Between 1986 and 1996

1. Improved completion technology1. Improved completion technology

2. Horizontal drilling2. Horizontal drilling

3. 3-D seismic3. 3-D seismic

4. Coalbed methane production4. Coalbed methane production

5. Gulf of Mexico production5. Gulf of Mexico production

6. Pipeline deregulation6. Pipeline deregulation

7. Rapid import growth7. Rapid import growth

8.8. Historically low drilling activity decimates E&P Historically low drilling activity decimates E&P infrastructureinfrastructure


1. Improved completion technology1. Improved completion technology2. Horizontal drilling2. Horizontal drilling3. 3-D seismic3. 3-D seismic4. Coalbed methane production4. Coalbed methane production5. Gulf of Mexico production5. Gulf of Mexico production

• Gradually changed the production profile of our gas well Gradually changed the production profile of our gas well inventory from low volume/low decline to high volume/high inventory from low volume/low decline to high volume/high declinedecline

• ArtificiallyArtificially propped up deliverability with propped up deliverability with veryvery low gas rig low gas rig countcount

• Coupled with gas bubble to provide ten years of Coupled with gas bubble to provide ten years of substantialsubstantial oversupplyoversupply

Eight Things HappenedEight Things Happened


U.S. Decline Curve – U.S. Decline Curve – A steep decline curve makes supply growth difficult to achieve.A steep decline curve makes supply growth difficult to achieve.

Source: EOG ResourcesSource: EOG ResourcesJohnson Rice & Co., L.L.C.Johnson Rice & Co., L.L.C.


Exacerbated byExacerbated by::

6. Pipeline deregulation6. Pipeline deregulation

• Substantial efficiencies gained from:Substantial efficiencies gained from:– Pipeline interconnectionsPipeline interconnections– End of “dedication” to interstate commerceEnd of “dedication” to interstate commerce– HubsHubs– Price transparencyPrice transparency



PlusPlus::

7. Rapid import growth7. Rapid import growth

• Supply further supported by large Canadian import growthSupply further supported by large Canadian import growth


BELDEN & BLAKE CORPORATIONBELDEN & BLAKE CORPORATIONSource: EIASource: EIA

NET NATURAL GAS IMPORTSAPRIL 9, 2002

0

500

1000

1500

2000

2500

3000

3500

4000

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

BC

F


AndAnd::

8. Historically low drilling activity decimates E&P 8. Historically low drilling activity decimates E&P infrastructureinfrastructure



U.S. Oil & Gas Rig FleetU.S. Oil & Gas Rig Fleet

Source: Raymond JamesSource: Raymond James


Conclusion Conclusion – 1986-1996– 1986-1996

We got away with low drilling activity due to:We got away with low drilling activity due to:

• • Large oversupply after early 1980s drilling boomLarge oversupply after early 1980s drilling boom

• • New technology changing the well inventory decline New technology changing the well inventory decline profile profile

• • Huge growth in Canadian importsHuge growth in Canadian imports

• • Pipeline infrastructure improvementsPipeline infrastructure improvements

• • Generally warm wintersGenerally warm winters



Natural Gas Supply “Train Wreck”Natural Gas Supply “Train Wreck”

• Capital investment/oil and gas price collapse in Capital investment/oil and gas price collapse in 1998/1999 +1998/1999 +

• Causes low drilling activity and low supply Causes low drilling activity and low supply replacement +replacement +

• High deliverability decline profile of well inventory +High deliverability decline profile of well inventory +

• No new pipeline efficiency gains +No new pipeline efficiency gains +

• Minimal import gains +Minimal import gains +

• Cold 4th quarter 2000 weather =Cold 4th quarter 2000 weather =


•• 2000 natural gas supply crunch2000 natural gas supply crunch

•• High winter 2000/2001 gas pricesHigh winter 2000/2001 gas prices

•• Coupled with crude oil to contribute Coupled with crude oil to contribute substantially to current economic substantially to current economic slowdown/recessionslowdown/recession

Natural Gas Supply “Train Wreck”Natural Gas Supply “Train Wreck”


The Big QuestionsThe Big Questions

1.1. Long term, can natural gasLong term, can natural gassupply keep up with demand?supply keep up with demand?

2.2. How fast can we rebuild the E&PHow fast can we rebuild the E&Pinfrastructure?infrastructure?


Gas Supply/Demand/Price Gas Supply/Demand/Price (All Volumes in TCF)(All Volumes in TCF)

Prior PeriodPrior Period LESSLESS:: Gas U.S. Well Gas U.S. Well PLUSPLUS:: Pipeline Pipeline EQUALSEQUALS: : Price PerPrice Per DateDate RigsRigs DeliverabilityDeliverability ImportsImports ConstraintsConstraints Net SupplyNet Supply DemandDemand MCFMCF

1974 ----- N/A 0.1 N/A 21.6 21.2 NMF1974 ----- N/A 0.1 N/A 21.6 21.2 NMF

Sources: Baker-Hughes, Gas Technology Institute, HaverSelect, EIASources: Baker-Hughes, Gas Technology Institute, HaverSelect, EIA




1974 ----- N/A 0.1 N/A 21.6 21.2 NMF1974 ----- N/A 0.1 N/A 21.6 21.2 NMF

1986 9291986 929(1)(1) 24.0 0.7 3.5 24.0 0.7 3.5(2) (2) 21.2 21.2(3)(3) 16.2 $1.71 16.2 $1.71

Sources: Baker-Hughes, Gas Technology Institute, HaverSelect, EIASources: Baker-Hughes, Gas Technology Institute, HaverSelect, EIA (1)(1) Assumes 60/40 split, oil to gas Assumes 60/40 split, oil to gas (2) (2) Extrapolated from GTI early 1990s data trendsExtrapolated from GTI early 1990s data trends (3)(3) Assumes net supply growth of gas equal to oil (1974–1986) Assumes net supply growth of gas equal to oil (1974–1986)




1974 ----- N/A 0.1 N/A 21.6 21.2 NMF1974 ----- N/A 0.1 N/A 21.6 21.2 NMF

1986 9291986 929(1)(1) 24.0 0.7 3.5 24.0 0.7 3.5(2) (2) 21.2 21.2(3)(3) 16.2 $1.71 16.2 $1.71

1996 383 19.6 2.8 0.51996 383 19.6 2.8 0.5 21.9 22.0 $2.59 21.9 22.0 $2.59





1974 ----- N/A 0.1 N/A 21.6 21.2 NMF1974 ----- N/A 0.1 N/A 21.6 21.2 NMF

1986 9291986 929(1)(1) 24.0 0.7 3.5 24.0 0.7 3.5(2) (2) 21.2 21.2(3)(3) 16.2 $1.71 16.2 $1.71

1996 383 19.6 2.8 0.51996 383 19.6 2.8 0.5 21.9 22.0 $2.59 21.9 22.0 $2.59

2000 522 18.92000 522 18.9 3.5 3.5 0.4 0.4 22.0 22.7 $3.89 22.0 22.7 $3.89





1974 ----- N/A 0.1 N/A 21.6 21.2 NMF1974 ----- N/A 0.1 N/A 21.6 21.2 NMF

1986 9291986 929(1)(1) 24.0 0.7 3.5 24.0 0.7 3.5(2) (2) 21.2 21.2(3)(3) 16.2 $1.71 16.2 $1.71

1996 383 19.6 2.8 0.51996 383 19.6 2.8 0.5 21.9 22.0 $2.59 21.9 22.0 $2.59

2000 522 18.92000 522 18.9 3.5 3.5 0.4 0.4 22.0 22.7 $3.89 22.0 22.7 $3.89

2001 720 19.4 3.6 0.6 22.4 21.3 2001 720 19.4 3.6 0.6 22.4 21.3 $10.295- $10.295-

$1.695 $1.695



When Will the Next Train Wreck Occur?When Will the Next Train Wreck Occur?


Rig Count Starts to DropRig Count Starts to Drop

Source: Baker-HughesSource: Baker-Hughes

U.S. RIG COUNT - GAS RIGSMAY 9, 2002

0

200

400

600

800

1,000

1,200

1/1/

1997

4/1/

1997

7/1/

1997

10/1

/199

7

1/1/

1998

4/1/

1998

7/1/

1998

10/1

/199

8

1/1/

1999

4/1/

1999

7/1/

1999

10/1

/199

9

1/1/

2000

4/1/

2000

7/1/

2000

10/1

/200

0

1/1/

2001

4/1/

2001

7/1/

2001

10/1

/200

1

1/1/

2002

4/1/

2002

7/1/

2002

10/1

/200

2

1/1/

2003

YEAR

RIG

S

GAS RIGS

BELDEN & BLAKE CORPORATIONBELDEN & BLAKE CORPORATIONSource: Baker-HughesSource: Baker-Hughes

U.S. RIG COUNT - GULF OF MEXICOMAY 9, 2002

80

90

100

110

120

130

140

150

160

170

180

1/1/

1997

4/1/

1997

7/1/

1997

10/1

/199

7

1/1/

1998

4/1/

1998

7/1/

1998

10/1

/199

8

1/1/

1999

4/1/

1999

7/1/

1999

10/1

/199

9

1/1/

2000

4/1/

2000

7/1/

2000

10/1

/200

0

1/1/

2001

4/1/

2001

7/1/

2001

10/1

/200

1

1/1/

2002

4/1/

2002

7/1/

2002

10/1

/200

2

1/1/

2003

YEAR

RIG

S




1974 ----- N/A 0.1 N/A 21.6 21.2 NMF1974 ----- N/A 0.1 N/A 21.6 21.2 NMF

1986 9291986 929(1)(1) 24.0 0.7 3.5 24.0 0.7 3.5(2) (2) 21.2 21.2(3)(3) 16.2 $1.71 16.2 $1.71

1996 383 19.6 2.8 0.51996 383 19.6 2.8 0.5 21.9 22.0 $2.59 21.9 22.0 $2.59

2000 522 18.92000 522 18.9 3.5 3.5 0.4 0.4 22.0 22.7 $3.89 22.0 22.7 $3.89

2001 720 19.4 3.6 0.6 22.4 21.3 2001 720 19.4 3.6 0.6 22.4 21.3 $10.295- $10.295-

$1.695 $1.695

20022002(4) (4) 939 18.8 3.5 0.6 939 18.8 3.5 0.6 21.7 22.5 21.7 22.5 $1.98-$1.98- $4.00 $4.00

Sources: Baker-Hughes, Gas Technology Institute, HaverSelect, EIASources: Baker-Hughes, Gas Technology Institute, HaverSelect, EIA (1)(1) Assumes 60/40 split, oil to gas Assumes 60/40 split, oil to gas (2) (2) Extrapolated from GTI early 1990s data trendsExtrapolated from GTI early 1990s data trends (3)(3) Assumes net supply growth of gas equal to oil (1974–1986) Assumes net supply growth of gas equal to oil (1974–1986) (4) (4) Forecasted, except rigsForecasted, except rigs




1974 ----- N/A 0.1 N/A 21.6 21.2 NMF1974 ----- N/A 0.1 N/A 21.6 21.2 NMF

1986 9291986 929(1)(1) 24.0 0.7 3.5 24.0 0.7 3.5(2) (2) 21.2 21.2(3)(3) 16.2 $1.71 16.2 $1.71

1996 383 19.6 2.8 0.51996 383 19.6 2.8 0.5 21.9 22.0 $2.59 21.9 22.0 $2.59

2000 522 18.92000 522 18.9 3.5 3.5 0.4 0.4 22.0 22.7 $3.89 22.0 22.7 $3.89

2001 720 19.4 3.6 0.6 22.4 21.3 2001 720 19.4 3.6 0.6 22.4 21.3 $10.295- $10.295-

$1.695 $1.695

20022002(4,5)(4,5) 939 18.8 3.5 0.6 939 18.8 3.5 0.6 21.7 22.5 21.7 22.5 $1.98-$1.98- $4.00 $4.00

20072007(5) (5) ??? 24.0 4.3 1.2 ??? 24.0 4.3 1.2 27.1 27.1 ??? 27.1 27.1 ???

Sources: Baker-Hughes, Gas Technology Institute, HaverSelect, EIASources: Baker-Hughes, Gas Technology Institute, HaverSelect, EIA (1)(1) Assumes 60/40 split, oil to gas Assumes 60/40 split, oil to gas (2) (2) Extrapolated from GTI early 1990s data trendsExtrapolated from GTI early 1990s data trends (3)(3) Assumes net supply growth of gas equal to oil (1974–1986) Assumes net supply growth of gas equal to oil (1974–1986) (4) (4) Forecasted, except rigsForecasted, except rigs (5)(5) GTIs March 2001 forecast for 2002 – 2 year delay GTIs March 2001 forecast for 2002 – 2 year delay


U.S. Oil & Gas Rig FleetU.S. Oil & Gas Rig Fleet

Source: Raymond JamesSource: Raymond James


ConclusionsConclusions

• Natural gas must lead the way for at least the Natural gas must lead the way for at least the next five years to meet electric demand growth next five years to meet electric demand growth inin additionaddition toto gas’ traditional uses for home and gas’ traditional uses for home and commercial heating and industrial processescommercial heating and industrial processes

• Supply may be inadequate (U.S. Economy)Supply may be inadequate (U.S. Economy)

• Aggressive steps must be takenAggressive steps must be taken


What Must HappenWhat Must Happen

• The consumer The consumer mustmust bebe educatededucated and his or her and his or her voice heard. What are we willing to pay for a clean voice heard. What are we willing to pay for a clean environment? At what cost? $$, lost jobs, energy environment? At what cost? $$, lost jobs, energy security, American lives.security, American lives.

• Start looking for viable solutions.Start looking for viable solutions.

• Further educate the consumers/politicians at the Further educate the consumers/politicians at the national national andand locallocal levellevel..

• BANANA, NIMBY and NOPE must be minimized.BANANA, NIMBY and NOPE must be minimized.

• Current environmental rules must be subjected to Current environmental rules must be subjected to rigorous cost/benefit scrutiny and analysis.rigorous cost/benefit scrutiny and analysis.


What Must HappenWhat Must Happen

• MustMust drill a lot of wells in places now off limits. drill a lot of wells in places now off limits.

• Must have access to large amounts of investment Must have access to large amounts of investment capital. capital.

• Must rebuild the drilling rig/industry personnel Must rebuild the drilling rig/industry personnel infrastructure (lost 70% of workers and drilling rigs infrastructure (lost 70% of workers and drilling rigs the past 20 years).the past 20 years).

• Energy suppliers should work more closely Energy suppliers should work more closely together to assure that a diversified mix of energy together to assure that a diversified mix of energy is available at an affordable cost to the consumer.is available at an affordable cost to the consumer.


What Must Happen What Must Happen ((MostMost Critical) Critical)

• Utilities Utilities mustmust be able to enter into long-term supply be able to enter into long-term supply arrangements and be able to pass through the arrangements and be able to pass through the costs costs even wheneven when, over the contract term, spot , over the contract term, spot prices end up being lowerprices end up being lower

• The energy industry must find a way to remove The energy industry must find a way to remove itself from the role of VILLIAN!itself from the role of VILLIAN!

• Some of the large cash flows we are going to Some of the large cash flows we are going to experience should be allocated to public/political experience should be allocated to public/political educationeducation

• A 10-fold increase may not be enough!A 10-fold increase may not be enough!

BELDEN & BLAKE CORPORATIONBELDEN & BLAKE CORPORATIONSource: NOAASource: NOAA

WINTER HEATING DEGREE DAYSAPRIL 9, 2002

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%82

-83

83-8

4

84-8

5

85-8

6

86-8

7

87-8

8

88-8

9

89-9

0

90-9

1

91-9

2

92-9

3

93-9

4

94-9

5

95-9

6

96-9

7

97-9

8

98-9

9

99-0

0

00-0

1

01-0

2

HEATING SEASON

% C

OLD

ER/(W

AR

MER

) TH

AN

NO

RM

AL

BELDEN & BLAKE CORPORATIONBELDEN & BLAKE CORPORATIONSource: NOAASource: NOAA

WINTER HEATING DEGREE DAYSAPRIL 9, 2002

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%59

-60

60-6

1

61-6

2

62-6

3

63-6

4

64-6

5

65-6

6

66-6

7

67-6

8

68-6

9

69-7

0

70-7

1

71-7

2

72-7

3

73-7

4

74-7

5

75-7

6

76-7

7

77-7

8

78-7

9

HEATING SEASON

% C

OLD

ER/(W

AR

MER

) TH

AN

NO

RM

AL


• 1959 – 19791959 – 1979 3.03% colder than normal3.03% colder than normal

• 1982 – 20021982 – 2002 3.38% warmer than normal3.38% warmer than normal

• 1959 – 20021959 – 2002 0.06% warmer than normal0.06% warmer than normal

• + .015+ .015oo F per day F per day

• In 67 days, 66 days normal and one day it is 1In 67 days, 66 days normal and one day it is 1oo F F above normalabove normal

Global Warming?Global Warming?


ReferenceReference

Hot Talk Cold ScienceHot Talk Cold ScienceGlobal Warming’s Unfinished DebateGlobal Warming’s Unfinished Debate

by: S. Fred Singerby: S. Fred Singer

Climate of FearClimate of FearWhy We Shouldn’t Worry About Global WarmingWhy We Shouldn’t Worry About Global Warming

by: Thomas Gale Mooreby: Thomas Gale Moore


Enron – What Does It Mean?Enron – What Does It Mean?

• Our credibility as an industry has taken another hitOur credibility as an industry has taken another hit

• Bad news for California. Consumers will believe the Bad news for California. Consumers will believe the electric problems caused by Enron, not electric problems caused by Enron, not infrastructure.infrastructure.

• Counter-party risk aversion.Counter-party risk aversion.

• The requirement for more equity.The requirement for more equity.

• More fertile ground and financial resources for the More fertile ground and financial resources for the tort lawyers.tort lawyers.

BELDEN & BLAKEBELDEN & BLAKE CORPORATIONCORPORATION

John L. SchwagerJohn L. SchwagerPresident and CEOPresident and CEO

[email protected]@beldenblake.com

“ train wreck ” energy prices and infrastructure, the u.s. economy and the american consumer...

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