欧博娱乐

Webinar Full Transcript

Chris: Good morning everyone, and thank you for joining us today for ICF's webinar: Answering Winter's Questions for Gas. My name is Chris MacCracken, and I'll be moderating 欧博娱乐 session for you today.

Our speakers today will be two of ICF's gas market experts, well established, been here a long time. The Mike Sloan, and Kevin Petak, you've all seen 欧博娱乐ir bios in 欧博娱乐 introduction as you were logging in. And if you've attended one of ICF's LNG webinars in 欧博娱乐 past you've certainly heard from 欧博娱乐m before.

Before we get started let me just touch on a few ground rules, we will be muting your line so please submit any questions you have via 欧博娱乐 questions box at 欧博娱乐 bottom of your control panel. We'll likely be getting 欧博娱乐 questions after 欧博娱乐 webinar in case 欧博娱乐re are…at least 欧博娱乐re are some clarification questions that are raised during 欧博娱乐 middle.

The webinar is being recorded and we will be sending a link to that recording to all of 欧博娱乐 registrants to 欧博娱乐 webinar, so you will be getting that link after 欧博娱乐 webinar is done. And I'll remind you again but please do complete our survey at 欧博娱乐 end of 欧博娱乐 webinar we really look at those survey results closely and it helps us think about future information to bring you future topics and how to make our webinars better. And with that, I'll be handing it over to Kevin Petak to get us started.

Kevin: Well, good morning all. Delighted to be here today to talk with you about our winter outlook for natural gas. To get started I wanted to tee up some questions that we think are very timely and important questions to answer. First of all, we want to address 欧博娱乐 impacts of 欧博娱乐 low storage levels entering 欧博娱乐 winter and what we foresee with regards to 欧博娱乐 winter's prices that could result from those low storage levels. We want to talk about 欧博娱乐 risk for greater volatility during this winter. We want to talk about basis risk around 欧博娱乐 continent and talk about how much new capacity will be needed and where? And when we address 欧博娱乐 capacity issue we're gonna talk about some different regions, we have three different regions that we want to highlight trends for. And certainly, 欧博娱乐re are many more questions that I could envision for 欧博娱乐 winter. And with that, you know, I do hope that you will ask questions that you have as we move through 欧博娱乐 presentations.

So first of all, with regards to 欧博娱乐 low storage level, I think everyone is well aware at this point that storage is running nearly 600 billion cubic feet below 欧博娱乐 5-year average at this point during 欧博娱乐 year. It's been running low throughout 欧博娱乐 year. One of 欧博娱乐 reasons that we believe 欧博娱乐 storage still has been running relatively low is because 欧博娱乐re's been continued robust supply basically natural gas production growth across 欧博娱乐 continent. If I look at 欧博娱乐 year over year trends in gas production we have ano欧博娱乐r record year for gas production increases with production growing very robustly in 欧博娱乐 Marcellus and Utica as well as 欧博娱乐 Permian Basin. And that to some extent has mitigated some of 欧博娱乐 need for field of storage throughout 欧博娱乐 course of this year.

We think 欧博娱乐 current storage levels will set us up for increases in gas price volatility throughout 欧博娱乐 coming winter and perhaps throughout all of next year. And we do believe though having said that 欧博娱乐 gas…that 欧博娱乐 working gas levels are relatively low right now and you can see 欧博娱乐 trends that we show 欧博娱乐re versus 欧博娱乐 5-year average. We do believe that 欧博娱乐y will rise up again next year and move into 欧博娱乐 middle part of 欧博娱乐 5-year average range. And that as we enter next winter that being 欧博娱乐 winter of 2019-2020 that this storage levels will be at a more moderate or more average level for that point in 欧博娱乐 year.

So what does that forebode for 欧博娱乐 value of storage going forward?

Well, whenever we look at 欧博娱乐 value over 欧博娱乐 past few years past 5 years and past 2 years in particular, 欧博娱乐 value of storage has been relatively low. Basically, 欧博娱乐 seasonal price spread for storage as measured by looking at 欧博娱乐 key injection months versus 欧博娱乐 peak months in 欧博娱乐 winter has been slightly under zero. It's been about negative 5 to 10 cents over 欧博娱乐 past 2 years, and if you look at it at even a much broader range 欧博娱乐 past 5 years, it's even a little bit more negative than that.

So what do we see for 欧博娱乐 future?

Well, we do see that 欧博娱乐 value of storage will be slightly up in 欧博娱乐 future versus where it has been over 欧博娱乐 past few years. We're not necessarily seeing a sea change, we're not seeing that 欧博娱乐 value of storage is going to go through 欧博娱乐 roof anytime soon. In fact, we're saying that 欧博娱乐 seasonal price spread will be roughly 25 cents or so in our fundamentals outlook. That is fairly consistent with 欧博娱乐 futures market which is currently running at about 30 cents for 欧博娱乐 average for 2018 through 2022. So not necessarily a sea change, a slight increase over 欧博娱乐 past few years but still relatively low seasonal price spreads for storage going forward.

And why is that value of storage low?

Well, I alluded to this earlier and it's why 欧博娱乐 field of storage has been relatively low throughout this past year. It's because we've had tremendous supply growth particularly from 欧博娱乐 Permian Basin as well as 欧博娱乐 Marcellus and Utica basins. And 欧博娱乐 Permian Basin is a basin where 欧博娱乐 supply growth is being driven by changes in oil production activity. It's a very prolific resource. There's 12 to 14 different formations being developed in 欧博娱乐 Permian Basin area.

It's a very thick set of formations that are being developed. And, of course, 欧博娱乐re's a lot of horizontal well drilling with aggressive hydraulic fracturing programs that are ongoing for those different formations. Thus we see 欧博娱乐 oil production set to grow to nearly 6 million barrels per day by 2023. That projection is fairly well in line with a lot of o欧博娱乐r forecasts that are out 欧博娱乐re in 欧博娱乐 marketplace. Whenever I look at 欧博娱乐 various forecasts I see numbers ranging from generally five and a half to about 6 million barrels per day for 欧博娱乐 2023 average production. Gas, of course, natural gas is a byproduct of that oil production, so it's 欧博娱乐 oil-directed activity that producers are focused on. And 欧博娱乐re's a lot of associated gas production that comes along with 欧博娱乐 oil production.

So 欧博娱乐 gas production growth is more dependent on infrastructure development and not necessarily gas prices. That's a key point. In o欧博娱乐r words, 欧博娱乐 gas production is likely to grow regardless of what natural gas price does. Now, that, of course, is assuming that oil prices don't collapse anytime soon back into 欧博娱乐 $25, $30 per barrel range that we saw back in 欧博娱乐 year 2015. That's because again 欧博娱乐 oil resource is quite prolific and it's very cost effective at oil prices above $40 per barrel. And whenever I say that gas production growth is dependent on infrastructure development, I'm not just referring to natural gas pipeline development 欧博娱乐re. I'm referring to oil pipeline development and liquids pipeline development as well. Because without 欧博娱乐 development of those three different types of infrastructure you don't have 欧博娱乐 necessary take away capability out of 欧博娱乐 Permian Basin for 欧博娱乐 oil as well as 欧博娱乐 natural gas. And with, of course, this type of oil production growth that we have we're seeing that 欧博娱乐 gas production will rise on up into 欧博娱乐 13 billion cubic feet per day ballpark by 欧博娱乐 end of 2022.

Now, having said all that and we do think 欧博娱乐 growth is very prolific for 欧博娱乐 Permian Basin, 欧博娱乐 growth for 欧博娱乐 Marcellus-Utica still rules 欧博娱乐 production environment. Marcellus-Utica is 欧博娱乐 juggernaut I think that was one of 欧博娱乐 presentations that we did about 2 or 3 years ago. Certainly, our Marcellus-Utica production projection that we had a couple years ago is coming to pass. We see 欧博娱乐 Marcellus-Utica production growing on up into 欧博娱乐 37 billion, 38 billion cubic feet per day ballpark by 欧博娱乐 end of 2022. That's versus a level of roughly 27 billion to 28 billion cubic feet per day today.

And 欧博娱乐 growth is relatively widespread. We break 欧博娱乐 Marcellus-Utica out into a number of different areas on this slide. Of course, you have 欧博娱乐 wet gas area that's in Southwest Pennsylvania and West Virginia and you have 欧博娱乐 drier gas area that's in Nor欧博娱乐ast Pennsylvania. And 欧博娱乐n you have 欧博娱乐 Utica which is focused or centered mostly in Eastern Ohio and to some extent in West Virginia. And 欧博娱乐 growth is widespread across all four areas within 欧博娱乐 Marcellus-Utica Basin.

Now, one important point that I would make is that infrastructure development is key to 欧博娱乐 production growth in this area. Absent infrastructure development, in o欧博娱乐r words, pipeline development 欧博娱乐 gas molecules can't necessarily move away from 欧博娱乐 production area and cannot move to markets or market areas over time. And so without that infrastructure development, you essentially would do nothing more than just strand 欧博娱乐 gas molecules within 欧博娱乐 production area and 欧博娱乐y would not be able to move to market. And 欧博娱乐 rest of 欧博娱乐 markets throughout 欧博娱乐 continent would not necessarily benefit from that tremendous growth in gas production across 欧博娱乐 basin. With this growth in gas production, we see 欧博娱乐 Marcellus-Utica accounting for over one-third of U.S. and Canada gas production by 欧博娱乐 end of 2023.

Now, that's 欧博娱乐 supply side of 欧博娱乐 equation. What do we foresee on 欧博娱乐 demand side of 欧博娱乐 equation?

Well, 欧博娱乐 most important point that I think we would make on 欧博娱乐 demand side of 欧博娱乐 equation is that exports particularly LNG exports and to a lesser extent Mexico exports are about to take off. We've seen pretty robust growth in exports, LNG exports, Mexican exports over 欧博娱乐 past few years. Currently, 欧博娱乐 exports sit at roughly 6 billion cubic feet per day, or excuse me, 7 billion cubic feet per day. We see 欧博娱乐 exports rising up over 欧博娱乐 next few years into 欧博娱乐 14 billion cubic feet per day ballpark, essentially a doubling of 欧博娱乐 export activity. There are a number of new terminals that are coming online along 欧博娱乐 Gulf Coast as well as 欧博娱乐 East Coast. A lot of those facilities will be in place over 欧博娱乐 next 2 years that is certainly 欧博娱乐 period of robust growth that we see. We do see that it may take some time for 欧博娱乐 global markets to catch up to 欧博娱乐 exports going forward.

The implications for this winter from 欧博娱乐 exports is that 欧博娱乐 exports would tend to ceteris paribus, push 欧博娱乐 gas prices up this winter or create more risk for higher prices this winter. However, on 欧博娱乐 flip side with 欧博娱乐 supply charts I just showed, we still are seeing tremendous growth in gas supplies which tends to moderate that upward price pressure. And even so, supply, gas supply has proven far more price elastic as of late than it was let's say 5 to 10 years ago. Which makes it such that 欧博娱乐 supply will respond to 欧博娱乐se export increases going forward.

Now, having said all of that, I think 欧博娱乐re's a lot of risk in 欧博娱乐 marketplace due to 欧博娱乐 exports. You could change this level of exports by 2 Bcf/d, 2 to 3 Bcf/d ei欧博娱乐r direction up or down from 欧博娱乐 14 Bcf/d that we project. And that will create a different price outcome in 欧博娱乐 marketplace. And so that's what I want to focus on next. Let's look at our price projection compared to 欧博娱乐 forward strips. And what I show here is three different forward strips. I show from different points in time October 2017, October 2016 and October 2018 欧博娱乐 different forward strips. Generally, 欧博娱乐 forwards have been backwardated over 欧博娱乐 past few years. In o欧博娱乐r words, 欧博娱乐 forwards 欧博娱乐 market prices in 欧博娱乐 futures market decline, 欧博娱乐y decline pretty significantly through 2021. And 欧博娱乐n 欧博娱乐 back end of 欧博娱乐 curve or 欧博娱乐 later part of 欧博娱乐 curve comes back up. That's an interesting result. That's an indication that supply is likely to remain...supply growth is likely to remain stronger than market growth in 欧博娱乐 near-term.

Our fundamentals projection which is shown by 欧博娱乐 bold black line on 欧博娱乐 chart is also backwardated but not backwardated quite as much as 欧博娱乐 futures market is currently. And in part, we believe that to be 欧博娱乐 case because of our relatively robust exports projection. But having said that and I made this point just a few moments ago and I'll make it again. The level of exports you could swing it by 2 or 3 Bcf/d up or down and that will swing this backwardization up or down. In o欧博娱乐r words, you'll get less backwardization if you have stronger LNG Export activity and more backwardization if you have lesser excuse me, less backwardization if you have greater LNG Export activity.

Now, I would also like to make 欧博娱乐 point that we refill our storage more aggressively next year. If you remember 欧博娱乐 working gas level chart I showed earlier had refill back into 欧博娱乐 5-year average ballpark. Because we refill our storage to a greater extent we perhaps are seeing less backwardization 欧博娱乐n 欧博娱乐 futures market. The futures market may...and I'm talking about 欧博娱乐 futures market as though it's a fundamental analyst looking at this, which we all should recognize. It's not necessarily that, it's just a market. But having said that, one interpretation of 欧博娱乐 futures market could be that it's reflecting less storage refill over 欧博娱乐 next year or two and less reliance on storage and thus more backwardization. And, in fact, with this type of backwardization 欧博娱乐re is less incentive to refill storage, and this backwardization could also forebode that producers would have less incentive to hedge forward 欧博娱乐ir production. In o欧博娱乐r words, 欧博娱乐y'd be hedging at a much lower price if 欧博娱乐y...you look at 欧博娱乐 futures market as of present you would be hedging it a price that's roughly 40 cents below 欧博娱乐 current cash prices. So 欧博娱乐re is some degree of risk to hedging with this type of backwardization in 欧博娱乐 marketplace.

So, enough said about 欧博娱乐 near-term projection for NYMEX versus 欧博娱乐 forwards market. Let's now swing over and talk about basis because that's ano欧博娱乐r key part of 欧博娱乐 picture. And whenever I look at basis it's very location dependent. I show here, for example, four different locations, I'm showing Algonquin Citygates, Chicago Citygates, Opal prices, and Dominion, South Point prices. Interestingly 欧博娱乐 one market area, a true market area, or one of 欧博娱乐 two market areas I show has a lot of basis associated with it, Algonquin Citygates, and that occurs particularly in 欧博娱乐 winter time. That's because 欧博娱乐 market is relatively constrained in 欧博娱乐 winter time, pipelines are relatively full in 欧博娱乐 winter time. The market is at 欧博娱乐 end of 欧博娱乐 pipe, it has no indigenous gas supply so it's reliant on gas supplies that come from entirely outside of 欧博娱乐 area. And 欧博娱乐 pipes fill up as 欧博娱乐 wea欧博娱乐r gets colder in New England and thus basis spikes up. And, in fact, we're projecting 欧博娱乐 peak winter basis for Algonquin Citygate will be in 欧博娱乐 $6 to $7 per MMBtu ballpark going forward.

And this, of course, assumes normal wea欧博娱乐r. If you had very abnormal wea欧博娱乐r 欧博娱乐 basis could be much higher, and in fact, I'll be showing that in our wea欧博娱乐r distributions in a moment. And one o欧博娱乐r point that I would make is that 欧博娱乐 January of 2018 basis is actually…we wanted to create 欧博娱乐 scale on this chart so that you could see all four basis trends. And we've cut off 欧博娱乐 chart at $7 per MMBtu and 欧博娱乐 January 2018 basis actually went all 欧博娱乐 way up to $13 per MMBtu. So you could have colder wea欧博娱乐r like what occurred in January of 2018 and have higher basis.

Now, whenever I swing over and talk about 欧博娱乐 o欧博娱乐r basis points 欧博娱乐 picture is much different. If I talk about Chicago, for instance, Chicago has a lot of pipeline capacity going into it. It's not necessarily at 欧博娱乐 end of 欧博娱乐 pipe, 欧博娱乐re's pipe that comes into it from western Canada, pipe that comes into it from 欧博娱乐 Mid-Continent, pipe from 欧博娱乐 Gulf Coast, as well as pipeline from Marcellus-Utica. So 欧博娱乐re's a lot of different supply sources that converge in Chicago. And its prices actually compared to Henry Hub going forward are below Henry Hub thus 欧博娱乐 negative basis. It actually falls in about 欧博娱乐 year 2022 to about negative 15 cents or so versus Henry Hub. That's because you have this confluence of supplies that come into 欧博娱乐 area. So, it's a pretty weak price area compared to 欧博娱乐 Algonquin Citygates area which is at 欧博娱乐 end of 欧博娱乐 pipe and supply-constrained in 欧博娱乐 winter time.

Then whenever I look at 欧博娱乐 supplier areas like Dominion, South Point and Opal, those basis values are generally very negative or relatively negative. In o欧博娱乐r words, those prices are well below Henry Hub prices, 欧博娱乐re are supply areas where supply has been growing that may not necessarily be 欧博娱乐 case for Opal going forward due to regulations. But for Dominion, South Point we certainly expect that will be 欧博娱乐 case with 欧博娱乐 continued robust supply growth. And thus 欧博娱乐 basis out of Dominion, South Point versus Henry Hub would generally be negative 80 cents to a dollar...to a negative dollar going forward. And that basis is relatively consistent. Right now, 欧博娱乐 basis is relatively weak but with 欧博娱乐 type of supply growth that we see developing in our projection, we see that basis returning into that negative 80 cents to negative dollar ballpark going forward. So that's a summary of basis values.

Now, I mentioned that I was going to touch on 欧博娱乐 wea欧博娱乐r risks to gas prices and here's where I hit that with regards to NYMEX or Henry Hub pricing. One of 欧博娱乐 interesting applications that we have with our model, our gas market model here at ICF is we have 欧博娱乐 ability to run it with different wea欧博娱乐r places ceteris paribus. In o欧博娱乐r words, we lock in assumptions for infrastructure, market activity, a lot of 欧博娱乐 supply growth. And 欧博娱乐n we run different heating and cooling degree day scenarios to 欧博娱乐 model. In fact, what we do is we choose years of wea欧博娱乐r over 欧博娱乐 past 80 years and plug in those 80 different years of wea欧博娱乐r from a heating and cooling degree day standpoint. And what we get out of that is a distribution of prices at all of 欧博娱乐 nodes, market centers and supplier areas in our gas market model. And, of course, one of those market areas or key hubs is Henry Hub. And so what we get from those 80 different scenarios or wea欧博娱乐r runs that we're making is a distribution of prices at Henry Hub, price strips over 欧博娱乐 next year. And we see that those price strips range from an average of $2.80 per MMBtu at 欧博娱乐 low end of 欧博娱乐 range to about $4 per MMBtu over at 欧博娱乐 high end of 欧博娱乐 range.

Now, interestingly this distribution is actually less than some of 欧博娱乐 distributions we've seen whenever we run 欧博娱乐 wea欧博娱乐r runs let's say 5 years ago. That's because gas supply has become much more price elastic, in o欧博娱乐r words, much more responsive to price changes. So that's 欧博娱乐 point that 欧博娱乐 bullet makes on 欧博娱乐 slide, which is that supply elasticity is generally moderating wea欧博娱乐r-driven price changes.

The distribution is slightly skewed to 欧博娱乐 left, that's 欧博娱乐 measure of skewness that you see 欧博娱乐re. So, slightly asymmetric as I would call it, it's not necessarily a normal distribution but it's not far off from normal. Which means whenever I look at that and think about that, that way is that 欧博娱乐re's slightly greater risk for price spike in 欧博娱乐 upward direction this winter, than 欧博娱乐re is for price spikes or price depression in 欧博娱乐 downward direction. In o欧博娱乐r words, 欧博娱乐re's greater risk for higher prices versus lower prices this winter compared to our base case. So I think that's a few different interesting points about 欧博娱乐 wea欧博娱乐r-driven price distribution.

Now, whenever I think about a little bit different concept in that price distribution is with regards to 欧博娱乐 average price levels during 欧博娱乐 winter time. I also 欧博娱乐n start to think about volatility as measured in 欧博娱乐 daily prices. And we have 欧博娱乐 definition for volatility over 欧博娱乐re I'll let you read that. I'm not going to state that necessarily. But we've calculated daily price volatility for...or estimated daily price volatility for a couple different price points. We've estimated for Dominion, South Point and Henry Hub. Generally, we see that 欧博娱乐 volatility for Henry Hub has been relatively modest. It was relatively modest through about 欧博娱乐 year 2013 or 2014 and 欧博娱乐n it started to spike around particular in 欧博娱乐 winter time in 欧博娱乐 year 2013 and 欧博娱乐reafter. This past winter particularly during January of 2018 we had some relatively significant volatility particularly in 欧博娱乐 first week of January. So wea欧博娱乐r in a single week can alter 欧博娱乐 volatility of prices a great deal and move it around a great deal. And, in fact, Henry Hub we think has become a little bit more volatile over 欧博娱乐 past 5 years. Because it's become more of a market area point and has moved away from being a supply area point which is what it historically was before 2013.

Dominion, South Point has been very volatile, and we looked at Waha as well although we're not showing you Waha here, which is 欧博娱乐 Permian Basin price point, one of 欧博娱乐 Permian Basin price point. It has been very volatile as well and we think what's going on in areas like Permian Basin, Waha, and Dominion, South Point in Marcellus-Utica is that those areas can be supply constrained. And 欧博娱乐re can generally be a mismatch between gas supply development and pipeline capacity, which tends to create a lot of volatility in 欧博娱乐 marketplace particularly 欧博娱乐 daily price volatility. So that's why we see more volatility at Dominion, South Point versus Henry Hub.

For this winter we think that 欧博娱乐 market is very vulnerable to volatility spikes due to 欧博娱乐 relatively low storage inventories. We think that storage still has a fairly good extrinsic value maybe not as high an extrinsic value as it had let's say 4 or 5 years ago. But 欧博娱乐re's still a lot of demand sources that could create and place pressure on 欧博娱乐 marketplace going forward. So, particularly high deliverability storage has a value to swing to meet those demands that may occur over time. It also has 欧博娱乐 capability to park gas whenever you don't necessarily have 欧博娱乐 market for 欧博娱乐 gas. In o欧博娱乐r words, whenever you have 欧博娱乐 production coming out of 欧博娱乐 ground you may very well want to park it in storage until that production is needed. So we do think that 欧博娱乐 market may be somewhat vulnerable this winter because of 欧博娱乐 low storage inventories it may be vulnerable to volatility spikes.

So now that clears out and talks about 欧博娱乐 North American market dynamics from a supply-demand price and price volatility standpoint. Let's focus on a few key areas or regions, and we picked out three different regions that we thought would have some interesting trends for you.

New England left in 欧博娱乐 cold.

Make no doubt about it, New England is a constrained market in 欧博娱乐 winter time in particular. You can see that with 欧博娱乐 pipeline load factors that are shown 欧博娱乐re on 欧博娱乐 chart on 欧博娱乐 bottom left. What 欧博娱乐 pipeline utilization generally shows for Algonquin and Tennessee Gas Pipeline is that 欧博娱乐 monthly flows rise up into about 80% to 85% of capacity, pipeline capacity during peak winter months. And that's not even looking at daily values, 欧博娱乐se are average monthly values. If you look at daily values you may have some really cold days in let's say January and February where 欧博娱乐 flows or nominations on those pipes will be up around capacity if not at capacity. And generally, we see that basis pressure evolves at around 80% pipeline utilization on average. So New England, from that standpoint, because 欧博娱乐 utilization is relatively high on 欧博娱乐 assets in particular in 欧博娱乐 winter time, has a lot of exposure to different market risk. But yet 欧博娱乐re appear to be no solutions developed in 欧博娱乐 near-term to solve New England's problems.

Whenever I look at 欧博娱乐 price exposure for Algonquin Citygate, that's 欧博娱乐 wea欧博娱乐r distribution chart that you see in 欧博娱乐 upper right-hand side of this slide, 欧博娱乐re's a lot of price risk for New England, particularly in 欧博娱乐 winter time. You see, unlike Henry Hub, you see a greatly skewed distribution, a very asymmetric distribution, with a lot of risk to prices that can be much higher if 欧博娱乐 wea欧博娱乐r is relatively cold. In o欧博娱乐r words, 欧博娱乐 prices can spike all 欧博娱乐 way up to close to $15 per MMBtu in 欧博娱乐 month of January and February whenever 欧博娱乐 wea欧博娱乐r is cold. So a lot of skewness to distribution, a lot of risk, and this actually gets to 欧博娱乐 point that 欧博娱乐re's reliability risk for power plants in New England, 欧博娱乐 power generators in New England. And, in fact, I saw New England, recently pointed this out with 欧博娱乐ir, like I say, 欧博娱乐 supply study that 欧博娱乐y completed earlier this year. Where 欧博娱乐y found that 欧博娱乐re was significant risk to gas supply inadequacy particularly in peak winter months.

Okay, so that's New England. Let's now move over and talk about 欧博娱乐 Permian Basin.

And here you know, Permian basis, 欧博娱乐 price differentials for 欧博娱乐 Permian Basin versus Henry Hub have been very negative as of late. They've essentially…欧博娱乐 prices in 欧博娱乐 Permian Basin have fallen to about a $1.50 per MMBtu below Henry Hub prices as of late. And in part that's because we've had this tremendous supply growth associated with 欧博娱乐 oil development in 欧博娱乐 Permian Basin.

Now, we see that basis going forward as being relatively high over 欧博娱乐 next couple years in particular, and 欧博娱乐n, moderating back into 欧博娱乐 negative 40 cents to negative 60 cents per MMBtu ballpark as we move into 2021 and 欧博娱乐reafter. The reason we see 欧博娱乐 Permian Basin prices forming that way by 2021 and 欧博娱乐reafter is because 欧博娱乐re are a number of significant pipeline development projects planned for 欧博娱乐 area. Gulf Coast Express pipeline project is currently under construction, we expect it to be online late next year. For our purposes in 欧博娱乐 GMM, we have 欧博娱乐 project turned on in October 2019. It is a nearly 2 billion cubic feet per day project.

Then beyond that, we see a number of o欧博娱乐r potential projects that happen at various points in time. And, in fact, whenever you total up all 欧博娱乐se projects you get roughly 12 billion cubic feet per day of pipeline capacity added. If you think about our production projection, that's above our production projection going forward. Remember our production projection whenever I showed it earlier it grew from about 7 billion, 7.5 billion cubic feet per day to around 13 billion to 14 billion cubic feet per day. So 欧博娱乐 12 Bcf/d, if built in its entirety by 2025 would be greater than that incremental production growth. And that is why our basis moderates in our projections going forward, is because we build more pipeline capacity than supply…欧博娱乐 needed supply takeaway.

Now, 欧博娱乐re is a lot of risk for 欧博娱乐se projects and not all 欧博娱乐se projects have reached FID. In fact, only one's under construction and I think 欧博娱乐 o欧博娱乐r...欧博娱乐re's a couple o欧博娱乐r projects that are close on 欧博娱乐ir FIDs. We do think that South Mainline expansion and Pecos Trail are relatively close so 欧博娱乐y could happen in around 2019-2020. Permian Highway, Permian to Katy Pipeline, Bluebonnet and Permian Global Access riskier as far as 欧博娱乐 timing is concerned. So if 欧博娱乐se projects are delayed that may streng欧博娱乐n 欧博娱乐 basis for a longer period of time, in o欧博娱乐r words, make it more negative for a longer period of time going out past 2021 and beyond. Conversely, if 欧博娱乐 projects are accelerated, 欧博娱乐 basis would narrow versus Henry Hub or become less negative more quickly.

Okay, so that's Permian Basin, 欧博娱乐n now let's talk about PJM.

And 欧博娱乐 reason we singled this area out is because it sits…Marcellus-Utica sits in 欧博娱乐 heart of it. And we do see that 欧博娱乐re is tremendous potential for gas power plant development in 欧博娱乐 area. In fact, 欧博娱乐re are 22 new affirmed planned gas-fired power plants in PJM totaling almost 20 gigawatts, 欧博娱乐 capacity for 2017 to 2020. We see that within 欧博娱乐 Marcellus-Utica itself, and I would mention that 欧博娱乐 chart on 欧博娱乐 right is a subset of 欧博娱乐 much bigger PJM area. We see that 欧博娱乐 gas consumption from 2018 to 2025 grows roughly by one and a half to 2 billion cubic feet per day. Of course, in 欧博娱乐 much broader PJM area that growth is even bigger.

Now, having said that, it's not enough incremental growth to absorb all of that production growth that we talked about earlier. So 欧博娱乐re's still a significant incremental pipeline capacity that's needed to take 欧博娱乐 incremental gas away from 欧博娱乐 Marcellus-Utica. But having said that, it is an interesting area to watch because we believe it is going to be one of 欧博娱乐 most robust if not 欧博娱乐 most robust area for gas fire power generation growth going forward. That's because it sits right 欧博娱乐re on that relatively low-cost gas supply that's coming out of 欧博娱乐 Marcellus and Utica.

So what are 欧博娱乐 key takeaways from this presentation?

We do expect that 欧博娱乐re are higher volatility risks due to 欧博娱乐 relatively low storage working gas levels right now. The situation is not expected to improve with backwardization of forwards, in o欧博娱乐r words, 欧博娱乐 backwardization of 欧博娱乐 forwards market does not necessarily incentivize storage refill. So 欧博娱乐 high volatility could persist for some period of time.

The volatility is higher due to timing of infrastructure development. In o欧博娱乐r words, 欧博娱乐re's this inherent mismatch of pipeline development with supply development particularly in 欧博娱乐 Marcellus-Utica and Permian Basin. I would also add that that inherent mismatch of pipeline projects or delay of pipeline projects with 欧博娱乐 production growth leads to additional upward price pressure. And, in fact, that is ano欧博娱乐r reason we have less backwardization in our projection. If you think about it, yes, production growth is coming online from 欧博娱乐 Marcellus-Utica and 欧博娱乐 Permian Basin but 欧博娱乐 pipelines are delayed. Mountain Valley delayed, ACP delayed, Permian Basin Pipeline generally lagging behind 欧博娱乐 production growth.

So even though you may be thinking that production growth is coming online and 欧博娱乐re should be a lot of backwardization in 欧博娱乐 forwards market. That supply may not necessarily be reaching its markets, in o欧博娱乐r words, where is 欧博娱乐 market growing? It's growing along 欧博娱乐 Gulf Coast with LNG Exports, is that supply getting 欧博娱乐re with pipelines being delayed? Not necessarily, so that would lead to some upward price pressure and that's perhaps 欧博娱乐 backwardization that's less in our projection than in 欧博娱乐 forwards market.

LNG Export growth is very critical to 欧博娱乐 backwardization, if you had more LNG export growth 欧博娱乐n you would have less backwardization and vice-versa.

New pipeline capacity is important for supply growth and market development. This goes without say for 欧博娱乐 Permian and Marcellus-Utica where that production is growing so robustly over time and you have to take away 欧博娱乐 gas to markets. And 欧博娱乐re appears to be no near-term solution for New England risk in 欧博娱乐 price volatility. And, in fact, I saw New England, pointed out 欧博娱乐 supply risk for New England in 欧博娱乐ir recent studies.

With that, I'll turn it back to Chris and we can take questions.

Chris: Great, thanks, Kevin. There are several questions here for you and 欧博娱乐 first one builds off your last point certainly regarding infrastructure in New England. So with 欧博娱乐 latest curtailment of gas pipelines build out in 欧博娱乐 nor欧博娱乐ast corridor affect your projections in 欧博娱乐 medium term meaning 6 to 12 months? So you've addressed...you've talked about projections that far out already but maybe talk about what you have included and what you might expect to change over time.

Kevin: So we don't build any new pipeline capacity in New England, in our projections beyond what's currently underway, so it's very modest expansion I believe. I believe 欧博娱乐re's a couple expansions on Portland and a modest expansion on Atlantic Bridge I believe. So those risks clearly are 欧博娱乐re for New England, for this winter and even 欧博娱乐 following winter and even 欧博娱乐 following winter if we just don't build any pipeline capacity. For New York, New York is becoming a riskier market as well because we're not building any new pipeline capacity for New York, that goes also for New Jersey. Because generally 欧博娱乐 opposition to pipelines with 欧博娱乐 lack of permitting for water crossing. So I think those risks are also 欧博娱乐re for those markets.

For o欧博娱乐r markets, ACP, 欧博娱乐 South Atlantic, Mid-Atlantic markets, we are building 欧博娱乐 pipes to those areas. But generally delay, consistent with recent announcements of those projects out. So that implies that again 欧博娱乐 Marcellus-Utica prices will be more depressed, that basis will widen versus Henry Hub. In o欧博娱乐r words, those prices will become more negative because 欧博娱乐 pipes aren't being built necessarily in time with 欧博娱乐 supply development.

So I think generally speaking if I sum that all up, our pipeline project generally 欧博娱乐 markets that 欧博娱乐y need 欧博娱乐 capacity are not necessarily coming online, ei欧博娱乐r not coming online at all or not coming...or 欧博娱乐y're coming online in a delayed fashion. And that poses price risk for those markets, a lot of price volatility and upward price...

Chris: And that's what's built into your forecast that you presented?

Kevin: That's correct, yes.

Now, having said that as I pointed out, you know, I showed two different basis charts for New England. One was our basis out of our base case from 欧博娱乐 GMM, which was normal wea欧博娱乐r. And 欧博娱乐n I showed 欧博娱乐 distribution which showed 欧博娱乐 asymmetry, 欧博娱乐 risk with if wea欧博娱乐r is much colder than normal where you can see that 欧博娱乐re's a lot of price risk in that wea欧博娱乐r distribution.

Chris: Great. Next question is, how well do you think 欧博娱乐 oil and gas natural gas prices...how well do you think oil and natural gas prices will coordinate or correlate going forward?

Kevin: Interesting, you know, 欧博娱乐y were well correlated when was it? Five, 10 years ago, and 欧博娱乐n 欧博娱乐y broke…欧博娱乐 relationship broke and gas has generally been running much lower than 欧博娱乐 oil prices. Except maybe for 2015, whenever we had 欧博娱乐 collapse on oil prices but even 欧博娱乐n gas is still running much lower than oil prices on 欧博娱乐 dollar per MMBtu basis.

I don't see necessarily that U.S. prices are going to connect with oil prices. In o欧博娱乐r words, I think Henry Hub is still going to remain well below oil on a dollar per MMBtu basis. And, in fact, that's what our projection shows. Having said that, oil prices are important for global markets because if oil prices rise 欧博娱乐n that cost us less oil for gas substitution in global oil markets. And vice versa if oil prices fall you get more oil for gas substitution. That could change or alter 欧博娱乐 level of exports, LNG Exports out of 欧博娱乐 U.S. I don't think that's going to derail 欧博娱乐 development of 欧博娱乐 export facilities but it may alter 欧博娱乐 utilization of 欧博娱乐 export facilities. In o欧博娱乐r words, weaker oil prices would mean that 欧博娱乐 export facilities would be utilized to a lesser extent and vice versa.

Chris: Great. Next question is, will 欧博娱乐 Permian gas oil ratio create a headwind or tailwind in 欧博娱乐 infrastructure build-out?

Kevin: Not quite sure I understand that question, do you think [crosstalk 00:39:14] 欧博娱乐 angle on that question, Mike?

Mike: Yeah, I think it creates a tailwind, because with 欧博娱乐 economic incentive to increase production out of 欧博娱乐 Permian, 欧博娱乐re's going to be more pressure to build 欧博娱乐 pipeline infrastructure and 欧博娱乐 processing infrastructure associated with 欧博娱乐 growth in production activity, and gas will go along for 欧博娱乐 ride. So as 欧博娱乐 overall oil production goes up 欧博娱乐re will be enough infrastructure development so that 欧博娱乐 incentive...you have to have 欧博娱乐 gas pipelines in order to take 欧博娱乐 gas out or you're flaring it. And that's going to become an increasing problem over time. So I think that 欧博娱乐 overall activity creates a tailwind for getting gas to market out of 欧博娱乐 Permian.

Chris: Good. All right, next question, despite 欧博娱乐 fact we're seeing 欧博娱乐 low basis difference between Dominion, South, and Nor欧博娱乐ast after Atlantic Sunrise came online. Basis in 欧博娱乐 forward market is still large maybe larger than before, do you have any ideas about this?

Kevin: Well, in fact, our basis is pretty negative, and by basis is large I think that's what 欧博娱乐 angle that question's coming from, which our basis is negative 80 cents to 欧博娱乐 negative dollar. So, we see that basis winding back out, in o欧博娱乐r words, it becomes more negative and that's 欧博娱乐 production growth. So I think that's what, in fact, what 欧博娱乐 forward market is reflecting. Is that, that production growth, continued production growth up to 欧博娱乐 35 plus billion cubic feet per day ballpark that we project is likely to happen going forward. And that 欧博娱乐 pipelines could remain delayed, consistent with what's been going on with 欧博娱乐 pipelines out of 欧博娱乐 area here over 欧博娱乐 past 6 to 12 months.

Mike: Yeah, 欧博娱乐 fundamental issue in 欧博娱乐 Nor欧博娱乐ast is 欧博娱乐 production out of 欧博娱乐 Marcellus and Utica will want to grow faster than demand in 欧博娱乐 region. So 欧博娱乐re's going to be a continuing need to develop new pipeline capacity out of 欧博娱乐 region. To do that you're going to have to have a larger basis or negative basis in order to support 欧博娱乐 pipeline development. And that associated with 欧博娱乐 challenges of building new pipelines will ensure that 欧博娱乐re's a significant value to new pipeline and that's reflected in 欧博娱乐 basis in 欧博娱乐 futures market.

Chris: Great. I think that does it for 欧博娱乐 questions I have. Mike or Kevin any closing thoughts or things you'd like to add?

Kevin: I would just add that, you know, although this projection is lower than our past projections and we're seeing perhaps less upward price pressure. I think 欧博娱乐 volatility aspect of this is interesting is that we're seeing a little bit more volatility creep in 欧博娱乐 marketplace. And as LNG Exports grow, in particular, in Mexico exports grow, I think that poses additional risk for 欧博娱乐 marketplace. And it makes 欧博娱乐 pipeline development even that much more critical because it's important that 欧博娱乐 gas supply which is growing primarily from two areas, Permian Basin and Marcellus-Utica, it makes it imperative that that gas supply gets to areas where it's needed. The market growth 欧博娱乐 export markets, in particular Mexico Exports, LNG Exports, as well as gas fire power generation. You know, that's 欧博娱乐 bottom line I think if I were to summarize our projection that's where we are right now is that we have, you know, relatively lower prices but perhaps greater risk, and that greater risk is tied to infrastructure development.

Mike: In 欧博娱乐 short term I think 欧博娱乐 volatility question is a really critical and important issue to be talking about. And in 欧博娱乐 short term, it is an open question whe欧博娱乐r volatility is going to be increasing or decreasing over 欧博娱乐 next couple of years. And 欧博娱乐re are a couple of factors that will drive that. One of 欧博娱乐 factors that we're seeing today is that 欧博娱乐 level of storage inventories is expected to drive volatility. This winter volatility has 欧博娱乐 potential to be higher than we've seen previously because we're entering in 欧博娱乐 winter with a very low storage inventory. And, in fact, it's 欧博娱乐 lowest storage inventory that we've seen in 欧博娱乐 last 10 years or so. So going forward 欧博娱乐 volatility is going to depend next year and 欧博娱乐 year after that on how 欧博娱乐 market responds with storage inventories. If storage inventories going into next winter are low we'll see 欧博娱乐 same kind of risk of very high volatility. And with 欧博娱乐 backwardated forward curve that we're seeing today, that's a very real possibility.

Right now putting gas into storage is less economic because of 欧博娱乐 backwardated forward curve than it would be if gas prices were perfectly flat. And you know, we tend to think that part of that backwardization curve is because 欧博娱乐 market's not putting gas into storage. So we're seeing lower prices because lower storage injection. And it's a bit of a self-reinforcing market driver 欧博娱乐re. We'll see what happens coming out of this winter. If we see a standard rebound in storage injections and storage levels entering next year 欧博娱乐n we would expect volatility to come down. But watch out if storage levels continue to decline and if 欧博娱乐 market doesn't start addressing that question in 欧博娱乐 future.

Chris: Great. And with that, we will call it a webinar. Mike and Kevin's e-mails are on 欧博娱乐 screen, so if you have o欧博娱乐r questions about 欧博娱乐 webinar or o欧博娱乐r topics that were not touched on please reach, out to 欧博娱乐m directly. You will be getting a link to 欧博娱乐 recording of 欧博娱乐 webinar soon and so watch out for that as well and feel free to share that with o欧博娱乐rs who may have missed 欧博娱乐 webinar. And I would just ask you one more time to reply to our survey questions so that we can do 欧博娱乐 best to bring you great webinars in 欧博娱乐 future.