What’s the projected natgas draw for power generation, and what’s the potential for some displacement via alternative energy, including any advancement in non-blue hydrogen?

Robert Mills, Director, Pickering Energy Partners

Bernadette Johnson, General Manager & Head of Power & Renewables, Enverus

Robert Mills (00:18): Morning and welcome. My name's Robert Mills. Thank you, Jordan. I'm a director on the private equity team at Pickering Energy Partners. Pickering is a boutique energy financial services firm covering public equity, private equity, research, consulting and, recently, investment banking. Today I have the opportunity to introduce Bernadette Johnson from Enverus. Bernadette is a general manager, executive vice president of power and renewables for Enverus. She started her career with Vintech, like so many other smart people in the natural gas space. That seems to be a theme. She went on to found Ponderous Advisors, which was later acquired by Drilling Info, which is now Enverus. Please help me in introducing Bernadette.

Bernadette Johnson (1:07): All right, thank you so much Robert, and thank you for the opportunity to speak today. I'm going to talk about power markets, a little bit of about hydrogen – only have two slides in here about hydrogen. I like to think we're paying attention to it as much as is due, right? Which is not a ton. So we'll talk about that. But I'll go ahead and get started. I'm going to speak to you about 15 minutes, and then we've got about five minutes for Q&A. So if you have questions, feel free to send them.

(1:35): All right, I'm going to stand to the side. I'm a little too short for this platform. All right, so natural gas demand as a refresher. What are we talking about? We're talking about power demand here. I'm just showing you residential, commercial, industrial and power. So power fired, natural gas fired power generation represent about 33% of natural gas demand in the U.S. And so this is a big chunk of demand. So what happens in the power market is meaningful for natural gas. It's also meaningful for other commodities like coal, the growing renewables, all the above. One of the things I like to start by just kind of prefacing is power is a very large market globally, power and electrification; the world is electrifying, meaning we're taking more primary fuels, we're turning it into electricity, and we're using electricity to fuel things, whether it's vehicles or anything else.

(2:25): So power being an important part of the overall energy ecosystem, and a part that's growing faster than overall energy demand is. So that push towards electrification is important here, and you're going to see that flow through the data. All right, so let's start with generation now. This again is power generation, not the natural gas demand portion yet – we're going to get there. Now this in a nutshell, power demand is growing. Low growth alone in ERCOT [Electric Reliability Council of Texas] is up 10%. Even adjusted for weather, adjusted for pandemic impact, it's up 10%. So we're seeing a lot of power generation, growth power, demand growth, power gen is growing to meet that need. So this is just a snapshot of some of the things that we track to predict what power will actually look like. I'm showing you power gen in the industrial sector. I'm also showing you the industrial production index.

(3:15): So a couple of interesting things here. So this data's lagged a few months, but you're seeing that blue line is 2022. It's trending above last year, trending above 2020, trending above 2019. So it's coming in higher. And again, this is a snapshot that's representative of demand, but this is only industrial activity, the overall production index, so early this year, you can see that in your chart to the right, you can see relatively strong. So a lot of that was manufacturers making up for outages. They saw in 2020 limitations in labor pool, some of the supply chain issues. We all hear about supply chain issues every day, no matter what it's about. And this is really just highlighting that a lot of these facilities were running above and beyond early this year, we've actually seen that. If I were able to show you the most recent data point we're seeing that remain pretty strong.

(4:06): So the world is certainly concerned about recession. We're seeing the fed rates go up, you're seeing that put a damper on demand, which is exactly what it's meant to do. So you're starting to see that flatten out, but it's still trending above where it was last year, the year before and the year before that. Now let's talk about fuel. So power demand is up. How are we generating that power? What fuel types are we using to generate that power? Here I'm showing you coal, natural gas and nuclear. So a couple things here. Start in the middle. Natural gas tracking pretty closely from a gigawatt hour standpoint with previous years, nuclear is down slightly, coal trending in the middle. A lot of coal retirements have already happened at this point. We'll see some more, but not a lot of change there in the past several years.

(4:53): So power demand is up, but hydrocarbon and nuclear generation is relatively flat. And so this is the renewable story. I'm going to show you that as well. But if these are flat, despite overall demand being up and generation being up, where's it coming from? The short answer is renewables. Now this is similar data, but this time it's in a Bcfe – Bcf equivalent per day. And I'm showing you natural gas on the far left, coal fire generation there in the middle. And then wind and solar. So again, we converted it to its Bcf equivalent. And you can see here again the natural gas tracking pretty closely with previous years. It's coal fire generation a little bit lower, call it middle range, and then wind and solar tracking above. So wind and solar continues to grow, specifically solar. We'll look at that in a few slides. But solar is now far outpacing wind in terms of additional capacity added utilization, those types of things.

(5:54): Now dig into gas burn for power generation a little bit more. So there's a little bit of, we'll call it flatness here, not necessarily bad news, but you're not seeing the natural gas demand for power generation grow at the same pace. That load is growing, and you can see it here. So the orange here is basically forecast. The total is a model of what should we have generated using power or using natural gas and power generation based on the dispatch curve of power, but also based on weather. So at the temperatures we saw this summer that were relatively hot and strong, we should have seen more power generation from natural gas. And so that pink line I put there at the bottom, it's showing you that up slight upward trend in the pink. The pink is showing you the difference between the green and the orange. So when green is above the orange, it means we should have generated more with natural gas than we actually did. So the actuals that you're seeing are trending a little bit low. When you weather normalize them, it's not perfect news for natural gas, but it's not terrible news. Natural gas is still hanging in there pretty well in the overall power generation stack.

(7:03): Now renewable generation. So first we've got solar, then hydrogen in the middle and then wind. And you can see it here, same format. The 2022 line is blue trending above last year in previous years for both solar and for wind generation. And so this is going to continue, if I show you this slide next year, you're going to also see those, the new year line continue to trend above. So renewables are definitely growing as a percentage of power generation. It doesn't necessarily mean overall bad news for natural gas, but you are seeing these grow significantly as a percentage. We also track things like the Inflation Reduction Act, and that certainly is going to give renewables an additional boost. And so this trend will continue for several years to come at least.

(7:51): So what happens between now and 2025? So here I'm showing you historically, and this again is broken out by percentage for coal, gas, wind, and solar is orange, and then other. And so what you're seeing here is first look at the pink – I'm showing you back to 2016 – and then out through 2025, you can see coal is still on the down trend. That's not a surprise, right? We're retiring coal. The coal facilities we have, we're using less frequently. The green in the middle, the gas that if you could look at the numbers actually stays relatively consistent. So coal is losing ground, natural gas is staying pretty consistent. Wind and solar in orange is growing as a percentage of the generation mix. And then on top blue, roughly flat. And so this again, highlights, powered gen is changing, load is growing, renewables are coming in. More and more resources are intermittent and not predictable.

(8:42): So those are the renewables. But we need natural gas as a backstop. We need natural gas when it's not windy and when it's not sunny. So until the day that renewables become predictable or dispatchable, and in reality that means a ton of battery capacity, then this picture is not likely to change. So one of the big questions we get is natural gas losing ground? Is it truly just a bridge fuel? And do we see this idea of peak natural gas demand? Like, you talk about peak oil demand, and the short answer for me is no, I live in this power market today every day, but my roots are natural gas and understanding how these markets interact. And I would say with technology we have today with the trends that we're seeing, there's really no way to displace natural gas from the power generation stack unless we are willing to give up quality of life.

(9:32): Unless we're willing to not have power generation for a significant part of our day. So go home, you can't flip the light switch. And so this picture, again, based on today's technology, today's battery chemistry, all the things we know today, there's no clear path to changing this picture significantly retirement. So what are we seeing in terms of retirements? Because there's certainly a disconnect between policy and what you're seeing different goals set, whether it's California or at a federal level to reduce carbon emissions. And generally that means less hydrocarbons, more clean energy or renewables. So I like to think of those goals and those policies as aspirational, right? So today you see targets, we're not going to sell combustion engines after a certain date or we're not going to sell natural gas heat after a certain date. And again, it's aspirational, it's not with what we have today, we're actually not able to achieve that.

(10:27): Now we will have scientific breakthroughs, we'll have breakthroughs and battery chemistry that change the game for battery, but we haven't yet. And so basically a lot of those policies you're kind of betting on when do those breakthroughs happen, and you really can't time scientific breakthroughs. So I think of them as aspirational. That being said, some of those policies and some of those directives say retire certain types of power generation fleets by certain dates. And so some of that you see flow through to the numbers. You also see nukes things like nukes announcements to retire nukes because the economics don't work. So there's things like that that are underpinning some of this. And then of course pink here on the bottom is coal. Coal will continue to retire coal. And you can see that reflected in the data. You don't see too much natural gas planned retirements, you see a little bit.

(11:14): And then you see nuclear, that main data point out in 2030, that's the Diablo Canyon, that's California. So that facility was slated to close in 2024, and in 2025, they extended that and now it's going to be 2030 at the earliest. So again, that kind of pinpoints the policies. The goals are aspirational. When we actually get to those dates, you're seeing many of them get pushed back because we actually need power generation from nuclear facilities in particular. All right, now I'm going to show you some regional details and then we'll talk a little bit about hydrogen. Okay? So regionally, this chart here, the pie chart, this is the whole U.S., and I'm going to walk you through certain regions and show you how it differs. This is the whole U.S. That pie chart is the 2021 actual generation mix. So that's actual generation, not name, plate, capacity, nothing else. It's actual generation.

(12:04): Where did our power come from? Whole countrywide, you see 38% natural gas, 22% coal, 19% nuclear. Then about, I think it's 19% or so coming from renewables, which is hydrogen, wind and also solar. The chart on the left you're seeing is announced projects. So what's getting built, what's changing, what infrastructure is announced and planned and in line in the interconnection queues to start production, you have a lot of solar, a lot of solar. So that lighter pink on the bottom, that's solar. Solar's really picked up and taken over as the primary project capacity we're seeing, whereas five years ago, seven years ago, it was wind. You also see energy storage. So that darker pink on the top, those are power storage facility – so batteries, basically. And you do see a lot of those projects that are announced or happening. All right, ERCOT. So we're sitting in ERCOT. I think it's interesting after Yuri, everybody thinks they're an expert on ERCOT – like everybody, my grandma included. So this is what it actually looks like. Natural gas, 42%, coal's still 19%. Some very big base load facilities that we rely on for coal. 25% wind, you have solar up there at 4%, but that's growing pretty significantly. So a lot of wind was placed in West Texas. We still get a lot of wind, but the new projects that are coming are primarily solar. And you can see that in that barge chart.

(13:35): What about California? California looks quite different, right? So here you see almost no coal, no coal to speak of. You see about 50% natural gas. You see a lot of renewable. So we hear a lot about California, You hear about this duck curve, right? That there's a ton of solar in the middle of the day. Then all of a sudden the sun starts going down, everybody starts going home. That's the point in the day where there's peak power at an hourly level. You see the sun come down, the natural gas fire plants have to ramp up very quickly and it puts a lot of stress in the grid. So a lot of all the news you hear about power in Caiso is really because of that pie chart and what it looks like and how their generation mix has changed over time. What does that mean to me?

(14:14): It means that 49% natural gas, it's pretty safe. Do I think it goes much lower than that? Not with today's technology. How would you meet power demand in California without it? There's really not a clear path forward. This chart here for new projects, you see a ton of solar, not a ton. You see solar, but they already have a ton of solar and you see a lot of energy storage. So tons of buzz about energy storage. One of the stats I like to quote is the biggest battery today is in Florida, I think it's in Florida, and it's called Manatee. And it's got it's, it's funny, it's kind of like college football stadiums. The biggest before this was 400 megawatts. This one's 406. So it's the biggest, but it's the biggest by a tiny bit the hourly. So we think about storage for power, the same way you think about gas.

(15:06): It's the size of the facility, but also the injection or withdrawal rate. So you have the same concepts in power. What's unique about this facility is that you can pull the power out very quickly. So it's 900 megawatt hours, which means you could drain that battery in about half an hour because of the overall capacity. So the interesting thing though is that battery is huge, right? It's the biggest in the world that would power ERCOT for about 40 seconds on an 80,000 megawatt day, a peak summer day. So 40 seconds. So how many of those would we need? If we needed to cover two days, we'd need about 4,000 of them and just in ERCOT. So you start to scale this up and you start to see the scope of the problem. So when we talk about technology, yes, we're investing in these, yes, we'll have more of these, but these batteries are not like a silver bullet that's going to solve all these challenges and push natural gas down and increase renewables dramatically.

(16:00): All right, we have a few seconds left. So let me go quick, PJM. This one looks a little different. 37% natural gas, a lot of nuclear still present up here. And a lot of coal PJMs been the slowest to adopt renewables. And a lot of that is based on how the market's designed, but they are seeing a lot of projects be announced and come up. So this will be an area where you do see a lot of growth in the future. SPP, this one is pretty significantly wind. So 36% coal, 20% natural gas, tons of wind at 34%. SPP power prices go negative all the time because there's too much wind and there's not transmission line capacity to export it. So this is also a good example of a market where you change the mix and you start to see really wild things happen with pricing.

(16:46): All right, so that was regionally power. Hopefully I gave you a snapshot of the power mix where we get power from on the natural gas side, How much of that fires it? Now, a little bit of hydrogen only have two slides. So we'll go quick. What is hydrogen? So it's hydrogen is hydrogen. How do you produce hydrogen for a market? You have gray hydrogen, basically you just pull it out of natural gas molecules. You have blue, you pull it out of natural gas, and then you sequester the CO2 emissions. So CCUS, right? So that's paired with CCS. Then you have green, which is basically hydrogen pro produced from splitting water molecules using electrolysis. So there's different ways to get hydrogen. I'll tell you in a nutshell, it's funny, I like these charts. If you look at the one on the left, this is the IEA hydrogen consumption outlook.

(17:33): It starts from nothing and then it grows to a little bit. But again, it starts at nothing. And that chart has basically started at nothing for a while. The world's been saying, Oh, hydrogen's going to take off. It's going to be a thing. There are some projects, but it's still very, very tiny portion of the energy mix and I don't anticipate that changing. And then you have here on the right, the BP's, low carbon, hydrogen supply outlook. Again, it starts very small. You have different scenarios here based on what could happen. But in any case, you're starting small and you're growing to a little bit. So this is not going to be a huge market. Economics are challenging, especially when gas prices are anywhere near where they're at today or above $2. You also have infrastructure. So think of if you had to create a whole new natural gas infrastructure, how would you do that?

(18:19): You need pipelines, you need pretty expensive facilities, whether it's gas processing or whatever. Hydrogen is very similar. So if we're going to have a huge market for hydrogen, we basically need a ton of infrastructure to facilitate that, which is very expensive and very challenging to do. On top of that, it's very flammable, it's very hard to detect. It's, it's just a really hard fuel to try to use. So I'm not very bullish on hydrogen, but I think I'm also a magnet for hydrogen evangelists that like to debate hydrogen. So there's probably one here, so we'll see. But I'm not very bullish, hydrogen, but there are some, there's a few folks out there that are, all right, we're over on time. So real quick, gas demand will look different in the power sector. It's changing, but also the time of day when you use it the flexibility of those gas power, fire power plants that we need does look a little different.

(19:07): But gas isn't going anywhere. Renewables are growing as a percentage of the gen mix, but they remain intermittent. They must be back stopped by dispatch. Dispatchable and flexible resources, which is natural gas. Natural gas is the most flexible combined cycle. They were peaking units forever for a reason because you can do a lot with natural gas and more and more will need that, and there's no path to getting rid of that. And then finally, additional demand for natural gas in hydrogen. So think that blue primarily that blue natural gas is what a lot of folks are jazzed about. It's an r and d. It's expensive. The economics don't work. It's hard to move. Infrastructure doesn't exist yet. All of those things are true. And so I'm not very bullish on it. It will depend highly on gas prices. It would depend on technologies like CCUS and the ability to sequester. And then also geographically, it's really going to depend. Are you going to see big hydrogen up in the northeast? Probably not. We can't get gas pipes built, right? So how are we going to build hydrogen infrastructure? So at least that's my take.