nepool reliability committee – agenda item 2.2 october 5, 2005 mark babula – iso-ne

Prepared by Levitan & Associates, Inc.

* * D R A F T * * *Post Katrina and Rita Outlook on Fuel Supply Adequacy and Bulk Power Securityin New England – Winter 2005/06

NEPOOL Reliability Committee – Agenda Item 2.2October 5, 2005Mark Babula – ISO-NE

2Prepared by Levitan & Associates, Inc.

Agenda

• Hurricane impacts – Current and cumulative shut-in natural gas and oil production– Gulf of Mexico infrastructure update

• Natural gas and oil price outlook for 2005/06 heating season

• Natural gas / oil infrastructure considerations in New England with respect to bulk power security

• General Observations


Hurricanes Caused Extreme Disruption Across Gas / Oil Supply Chains

• Massive short-term shut-in gas production• High impact on gas gathering and processing plants• Pipelines

– Gathering systems– Long-haul pipelines serving Atlantic Seaboard

• Oil production• Refineries• Oil transportation and delivery systems


Current Gas and Oil Supply and Infrastructure Status - Hurricane Recovery• Current shut-in production as of September 28 (MMS)

– Gas = 8.0 Bcf/d• ~ 80% total Gulf of Mexico production • ~ 16% U.S. daily production

– Oil = 1.5 Million BPD• ~ 100% total Gulf of Mexico production• ~ 29% U.S. daily production

• Cumulative production loss to date– Gas = 180.6 Bcf or ~1% U.S. annual production– Oil = 37.9 million barrels or ~ 2% U.S. annual production

• Substantial decrease in gas deliverability on both Transco and Tennessee pipelines

– Transco • Initial loss of about 3.4 Bcf/d out of 8.0 Bcf/d total certificated deliverability due to Katrina• Emergency scheduling procedure invoked• Continued adverse operating impacts to market centers in NYC/LI

– Tennessee • 0.800 Bcf/d shut-in due to Rita• 0.650 Bcf/d remains shut-in due to Katrina


Gas Infrastructure Update

• Force Majeure with respect to physical deliveries at Henry Hub (Erath, LA) – resumption unlikely until mid-October

• Industry/Gov. assessment of offshore gas gathering systems: – Functionality of the off-shore gathering systems dependent on

resumption of offshore production and onshore processing

• Lake Charles LNG terminal remains down – Minor damage reported, full operation when power restored

• Excelerate Gulf Gateway offshore LNG terminal undamaged• Over a dozen gas processing plants off-line, several with significant

damage– Most are expected to return to operation by the end of October when

flooding recedes and power is restored

– Williams’ Cameron Meadows (LA) and Dynegy’s Venice (LA) plants may take longer to repair damages (1.3 Bcf/d processing capacity)


Oil Infrastructure Update

• Louisiana Offshore Oil Port (LOOP) operating at 100%– Largest crude oil import facility in U.S.

• 7 refineries around Lake Charles, LA / Port Arthur, TX – 1.7 Million BPD have suffered significant damage

– Repairs and start-ups may last a month or more

• 4 refineries likely to remain shut-down to EOY, ~5% of U.S. capacity– Chevron, Pascagoula, MS 325,000 BPD

– ConocoPhillips, Belle Chasse, LA 247,000 BPD

– ExxonMobil, Chalmette, LA 187,000 BPD

– Murphy Oil, Meraux, LA 120,000 BPD

Total 779,000 BPD


Oil Infrastructure Update (cont’d)

• Extended refinery shutdowns (> 2 weeks) equate to 14.8% of U.S. capacity

• Substantial damage to deepwater oil and gas production platforms: – Shut-in oil from Shell Mars, Mensa, Ursa, and Cognac

~450,000 BPD and shut-in natural gas ~0.7 Bcf/d – Shut-in oil from Chevron Typhoon 45,000 BPD and shut-in gas

~60 MMcf/d– Not likely to return to production until January 2006


Winter 2005/2006 Price Outlook


Gas and Oil Price Outlookthru March 2006

• Pre/Post Katrina & Rita NYMEX futures prices (12-month strip November 2005 - October 2006)

– Gas prices into-the-pipe likely to retain Katrina / Rita price impacts through 2005/06 heating season, a 24% increase from pre-Katrina levels

– Crude oil and RFO prices have remained relatively stable at pre-Katrina levels

– Withdrawals from SPR and European stockpiles as well as increased oil imports have tempered crude price run-up

– Heating oil prices jumped 10% following Katrina / Rita


Gas and Oil Price Outlook thru March 2006 (cont’d.)

• 2004 v. 2005 NYMEX daily front month prices and daily 12 month strip prices show no significant backwardation through Q1 2006– Pronounced upward gas price pressure following Ivan, Katrina and Rita

– Pre-Katrina gas price volatility pattern continues

– More significant Katrina and Rita heating oil price impacts (refinery outages)

– Crude oil price impacts suppressed by global market trends

• Good prospects for gas and oil mean price reversion towards end of Q2 2006


Daily Spot Gas Prices

Henry HubDawnAlgonquin CitygatesTransco Z6 NY

$8.00

$9.00

$10.00

$11.00

$12.00

$13.00

$14.00

$15.00

$16.00

$17.00

$18.00

8/1/

05

8/8/

05

8/15

/05

8/22

/05

8/29

/05

9/5/

05

9/12

/05

9/19

/05

9/26

/05

Sp

ot

Gas

Pri

ce (

$/M

MB

tu)

Katrina MakesLandfall

Rita EntersGOM


NYMEX Future Prices, November 2005 – October 2006 Before and After Katrina Makes Landfall

Natural Gas (Henry Hub)

Crude Oil (WTI)

Heating Oil (NYH)

1.0% RFO (NYH)

LAI Regression

8/23/05 9.49 11.45 13.47 7.578/24/05 9.71 11.74 13.88 7.758/25/05 9.65 11.78 13.93 7.778/26/05 9.63 11.56 13.67 7.648/29/05 10.35 11.67 13.94 7.70 Katrina Makes Landfall8/30/05 10.62 11.90 14.76 7.848/31/05 10.43 11.86 14.61 7.829/01/05 10.63 11.97 15.23 7.899/02/05 10.56 11.73 14.55 7.749/06/05 10.57 11.59 14.37 7.659/07/05 10.41 11.34 13.88 7.509/08/05 10.61 11.38 13.82 7.539/09/05 10.65 11.29 13.69 7.479/12/05 10.52 11.15 13.26 7.399/13/05 10.36 11.11 13.41 7.369/14/05 10.65 11.42 13.91 7.559/15/05 10.83 11.35 13.85 7.519/16/05 10.88 11.05 13.54 7.339/19/05 11.74 11.62 14.60 7.689/20/05 11.63 11.42 14.48 7.55 Rita Enters GOM9/21/05 11.60 11.48 14.50 7.599/22/05 11.62 11.48 14.50 7.599/23/05 11.41 11.18 14.07 7.419/26/05 11.76 11.42 14.62 7.559/27/05 11.77 11.32 14.54 7.499/28/05 11.76 11.35 14.55 7.51

NYMEX Futures (Nov-05 to Oct-06)$/MMBtu


Heating Oil and Henry Hub Forward Prices

8.00

9.00

10.00

11.00

12.00

13.00

14.00

15.00

16.00

Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06

Fo

rwar

d P

rice

($/

MM

Btu

)

NYH Heating Oil (Aug 23)

NYH Heating Oil (Sep 27)

Henry Hub (Aug 23)

Henry Hub (Sep 27)


Crude Oil and Residual Fuel Oil Forward Prices

6.00

7.00

8.00

9.00

10.00

11.00

12.00

Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06

Fo

rwar

d P

rice

($/

MM

Btu

)

WTI Crude Oil (Aug 23)

WTI Crude Oil (Sep 27)

NYH 1.0% RFO (Aug 23)

NYH 1.0% RFO (Sep 27)


Natural Gas and Oil Infrastructure Considerations in New England


Approximate Sources of Gas Supply for New England

Iroquois9%

M&N13%

Algonquin39%

PNGTS 7%

Tennessee32%

Distrigas9%

Gulf of Mexico91%

Distrigas11%

Canada59%

Gulf of Mexico

30%

Canada100%

Canada100%

Sable Island100%

Note: Algonquin receives some Sable Island gas via Hubline


Sable Island Production Depletion Trend

0

100

200

300

400

500

600

700

Pro

du

cti

on

(M

Mc

f/d

)


LAI Outlook on Regional Deliverability Affecting Bulk Power (Heating Season, 2005-06)

TransCanada

Union Gas

Iroquois

Maritimes & Northeast

PNGTS

Distrigas

Algonquin

Tennessee Line 200

Tennessee Line 300

Business As Usual

Potential Adverse Exposure

Anticipated Constraints


New England Gas Pipeline Operational Flow Order Penalties

AlgonquinThree times the Algonquin Citygate price, up to $15 / Dth

Iroquois$2.50 / Dth, up to 50 Dth$25 / Dth, for additional overruns

M&NAction Alert 150% of gas price at DracutOFO 300% of gas price at Dracut

PNGTS $2.50 / Dth, up to 50 Dth$25 / Dth, for additional overruns

Tennessee

Action Alert $0.2198/Dth

Critical Day1st Critical Day: ($5 + Spot Price)/Dth2nd Critical Day: ($10 + Spot Price)/Dth

Balancing Alert ($15 + Spot Price)/Dth

1 Dth = 1 MMBtu


Pipeline Tariff RestrictionsAffecting Non-Core

• Iroquois has banished free riders– Quick start units cannot rely on line-pack in RTM w/o

confirmation of nomination and upstream supply– Substantial hourly swing permitted for entitlement holders, i.e.,

120% of the uniform take for 3 consecutive hours, twice a day

• Tennessee and Algonquin can compel shippers to use gas ratably (uniform hourly flow) during cold snaps, capacity constraints/reductions or contingency events– LDCs have greater ability to manage hourly variances– Combined cycle plants operating around the clock may be able

to manage variances– Combined cycle plants and peakers scheduled to follow load in

DAM or RTM are exposed to heavy penalties


Oil Infrastructure in New England• No pipeline network linking New England with major refineries• Limited pipeline products distribution within New England• Distillate and RFO delivered by tankers and barges to Boston,

New Haven, Portsmouth, Portland, Bridgeport • Limited truck or rail transportation to inland power plants• Supplies from East & Gulf coast refineries, New Brunswick &

Foreign sources• Storage at port terminals, regional terminals, and at plant sites

(MMBbls)Terminal Storage Capacity

Plant Storage Capacity

Total NE

Sales (2003)

Oil Sales for

Generation (2003)

Distillate 6.1 1.1 101.9 0.6

RFO 7.0 16.3 33.1 24.1


New England Sales of Distillate Fuel Oilby Sector - 2003

Source: EIA

Electric1%

Residential51%

Other30%

Commercial /Industrial

18%


Distillate Market Constraints • High and volatile distillate oil prices should rationalize oil stocks to New

England ports and marine terminals • Severe constraints on redelivery during cold snaps from terminals to end-

users– Extreme limitations concerning number of trucks, drivers, hours, hazardous

roads – Core markets top priority for deliveries– Generator plant site refills problematic

• Gas-fired combined cycle capacity in New England– ~6,500 MW (19%) has back-up fuel capability– Average on-site storage = 23,300 Bbls, about 67 hours equivalent operation

at full load*– Allowable winter generation on oil: 8.5 TWH, but 28.5% permitted only when

gas is “unavailable”**LAI estimate based on averages from Tables 2 and 7 of “Dual-Fuel Generating Capacity and Environmental Constraints

Analysis” Interim Report


New England Sales of Residual Fuel Oilby Sector - 2003

Source: EIA

Electric73%

Commercial11%

Industrial16%


RFO Outlook – Winter 2005-06

• RFO capacity characteristics– Plants with waterborne delivery should be able to obtain

necessary fuel supplies– On-site storage 16.3 MM Bbl

• Typical RFO Unit Parameters– Minimum run time 8 – 50 hrs– Minimum down time 8 – 50 hrs– Cold start 6 – 20 hrs– Hot start 2 – 12 hrs

• State regulations and/or air permits limit % Sulfur content – Typical requirement = 0.5% Sulfur or less


Northeast Home Heating Oil Reserve

Terminal Location Inventory

HessWoodbridge,

NJ1,000,000 Bbl

Magellan Midstream

New Haven, CT

500,000 Bbl

Motiva EnterprisesNew Haven,

CT250,000 Bbl

Motiva Enterprises Providence, RI 250,000 Bbl

2.0% of total distillate sales for 20038 days of Winter season sales of No. 2 Heating OilNo home heating oil reserve in MA, NH, ME and VT


General Observations


Summary Observations re Katrina / Rita Impacts on New England

• Total anticipated natural gas production losses for 2005 may exceed 300 Bcf (1.6% of total U.S. annual production)

– 2006 winter losses may be more

• About 1 Bcf/d (10% of Gulf production) may be unavailable this winter – assuming no additional weather induced destruction

• Substantial lost offshore gas gathering capacity is likely to result in a continuing supply deficit thru Q2 2006 on those trunklines serving the Atlantic seaboard -- in particular, Transco and Tennessee pipelines

• Substantial loss of oil refinery capacity in the Gulf portends tight distillate supplies and very high prices at least through the heating season, perhaps through 2008

• Crude and fuel oil production losses can be mitigated by increased imports—at high incremental costs


Summary Observations re Katrina / Rita Impacts on New England (cont’d)

• Increased natural gas imports from western and Atlantic Canada as well as LNG from Distrigas are unlikely to significantly replace lost production from the Gulf of Mexico on a sustained basis

• Increased natural gas withdrawals from major storage fields at Dawn, Ellisburg, Leidy, & other Columbia/Dominion storage facilities are predominantly for peak shaving of core gas markets and are not a base load substitute for reduced production from the Gulf of Mexico

• Increased interconnect gas flows at Wright, Brookfield, Shelton and/or Mendon may alleviate gas supply constraints, but are unlikely to be sustainable throughout the entire heating season to assure quick-start (gas turbine) or combined cycle operations, particularly in Connecticut

• Gas supply constraints are likely to impact non-core customers, i.e. electric sector, disproportionately


Summary Observations re Katrina / Rita Impacts on New England (cont’d)

• Uncertainties about gas supply and deliverability for power generation in New England heighten the region’s dependence on oil-fired generation– Quick start units may require distillate oil rather than gas – Exploitation of pipeline line pack ill-advised and potentially

detrimental to core gas customers– Residual Fuel Oil should be available at high prices by tanker or

barge to coastal locations throughout the heating season– Trucking logistics to replenish fuel oil inventories at generating

plants during cold snaps appear daunting and would be detrimental to core


Data Sources

• U.S. Energy Information Administration Data and Reports• U.S. Department of Energy, Office of Fossil Energy• ICF Consulting, “A study of New England and Massachusetts Petroleum

Infrastructure and Distribution Systems”, submitted to Commonwealth of Massachusetts, Division of Energy Resources (2002)

• U.S. Army Corps of Engineers Navigation Data Center• ISO New England RSP05 Report• ESS Group, “Dual-Fuel Generating Capacity and Environmental Constraints

Analysis Interim Report”, prepared for ISO-NE • Electricity Sector Information Sharing Analysis Sector• Sprague Marketwatch• Northeast Gas Association• Massachusetts Division of Energy Resources

nepool reliability committee – agenda item 2.2 october 5, 2005 mark babula – iso-ne

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