Bureau of Economic Geology, The University of Texas at Austin

Gas-Power Linkages2011 Electric Market Forecasting Conference, EPIS, Inc

San Antonio, October 26-28, 2011Gürcan Gülen, Ph.D., Senior Energy Economist

©CEE-BEG-UT, 2

Gürcan Gülen, Ph.D.

The Boom-Bust Cycle for NG• 35 years ago, we were running out of gas• 25-30 years ago, we were in a “bubble” • Ten years ago, we thought we needed LNG• Today, we are “drowning in natural gas” and some wants

to export LNG• Shale is the “game changer” but still lots to learn• Even without GHG policy, move to gas seems inevitable

(we consumed >24 TCF in 2010 – first time in history)• Drilling is essential but challenged (cost, environmental

regulations, tax policies)

©CEE-BEG-UT, 3

Gürcan Gülen, Ph.D.

Natural Gas Resource Assessments

Technically recoverable assessments of the U.S. natural gas endowment 1970 to 2009 increased four to six

times: 2,084 Tcf in 2009

Source: Modified from Bill Fisher et. al., BEG-UT; GTI

©CEE-BEG-UT, 4

Gürcan Gülen, Ph.D.

Shale Gas is a Hedge for Offshore

Source: NPC 2007

651 TCF

©CEE-BEG-UT, 5

Gürcan Gülen, Ph.D.

Production Can Be Expensive

Compiled by CEE based on company financial reports

$-

$2

$4

$6

$8

$10

$12

1 2 3 4 5 6 7 8 9 10 11 12 13 14

10% Return

U.S. 09 Cash Operating Costs $/MCFE

U.S. All Source FD Costs 07-09 $/MCFE

Ave. Henry Hub Spot Price (Feb '11)

Ave. All

©CEE-BEG-UT, 6

Gürcan Gülen, Ph.D.

Oil Price Helps if Liquids Rich

Discount to Oil

CEE based on CME price data

0

5

10

15

20

25

Actual Ratio, Crude Oil:Gas Prices

Traditional 6:1 Ratio

©CEE-BEG-UT, 7

Gürcan Gülen, Ph.D.

*Price volatility ($2005)

Wellhead City Gate Res Com Ind Elec.Power

Before99:12

7.2% a 6.0% b 6.3% c 2.5% b

00:01-09:11

12.2% 10.5% 7.7% 5.3% 11.4% d 10.6% e

Change 71% 74% 22% 110%

a 76:01-99:12; b 83:10-99:12; c 81:01-99:12; d 01:01-09:12; e 02:01-09:12

* Std dev of change in price

CEE analysis

©CEE-BEG-UT, 8

Gürcan Gülen, Ph.D.

Changing Demand Structure (TCF)

Compiled by CEE based on EIA data

©CEE-BEG-UT, 9

Gürcan Gülen, Ph.D.

Impact of wind – high wind ‘13

Source: ERCOT

©CEE-BEG-UT, 10

Gürcan Gülen, Ph.D.

Compiled by Dr. Foss (CEE) based on EIA data

©CEE-BEG-UT, 11

Gürcan Gülen, Ph.D.

CEE Model (cents/kWh)

Coal Natural gas Nuclear Wind (onshore) Solar (CSP)0

5

10

15

20

25

30

9.06.4

10.2 10.8

27.9

Capital and O&M costs are based on U.S. EIA’s Nov 2010 report: http://www.eia.gov/oiaf/beck_plantcosts/index.html

NOTE: Excludes grid costs

©CEE-BEG-UT, 12

Gürcan Gülen, Ph.D.

More Risk for Coal

• Pending EPA regulations on CO2, SO2/NOX, mercury, ash

• 6 GW to 65 GW of coal capacity may retire 2011-15*

39 GW

*World Resources Institute, review of various studies.

Compiled by CEE based on EIA data

©CEE-BEG-UT, 13

Gürcan Gülen, Ph.D.

EPA Regulations Coal Retirement

Source: World Resources Institute

Assessment of probabilities and time frames for each factor

Evaluation of second or higher order drivers (environmental regulations – air, water; renewables – mandates, tax credits, feed-in-tariffs; coal mining costs & exports; nuclear policies and finance; smart grid & consumer

behavior; macroeconomics & demographics)

SO x

(EPA

CSA

PR)

NO

x (E

PA C

SAPR

)

Mer

cury

Ash

GHG

Met

hane

Coal

retir

emen

t

Nuc

lear

retir

emen

t

Gas p

rice

< $6

Gas p

rice

> $7

Mor

e re

new

able

s

Wat

er sc

arci

ty

Elec

tric

ity st

orag

e

High

er p

ower

dem

and

Low

er p

ower

dem

and

Dem

and

side

resp

onse

Smar

t grid

Factors Impacting Gas Use for Power