Semiannual Projections of Energy Supply and Demand Summer ...
Semiannual Projections of Energy Supply and Demand Summer Outlook 2012
This publication is available on the MPSC website at http://www.dleg.state.mi.us/mpsc/reports/energy/
Michigan Public Service Commission Department of Licensing and Regulatory Affairs PSC-PUB 0017 (Rev. 05/11)
Preface The Michigan Energy Appraisal is a semi-annual assessment of Michigan’s energy baseline. The assessment assists in developing a situational awareness of the state’s energy environment including recent events impacting supply and prices, expected conditions, and changes over the next six months. Additionally, it provides the necessary information to enable a reliable assessment of the risk posed by an energy supply disruption. The scope of the analysis varies by energy source. Michigan’s electricity prices, supply and availability are largely determined by events in Michigan and the Midwest. Natural gas supplies and prices are closely tied to national trends. Petroleum product markets in Michigan are affected by international market conditions and events and regional refinery production. For the appraisal, recent historical balances between Michigan’s energy consumption and supply are analyzed, and consumption and supplies are projected. Actual and expected energy prices are reviewed to identify changes impacting consumer costs. Generally, the fall appraisal focuses on the winter heating season, and the summer appraisal focuses on summer energy use, including peak electricity supply and demand and gasoline for the summer driving season. This report is prepared by the Management Services Division with assistance from the Regulated Energy Division, and the Operations & Wholesale Markets Division of the Michigan Public Service Commission (MPSC), Department of Licensing and Regulatory Affairs, State of Michigan. Project Manager Alex Morese Author/Editor David Binkley Electric David Binkley, Raushawn Bodiford, Lisa Kindschy Gasoline David Binkley Natural Gas David Binkley, Nora Quilico, Cindy Creisher, Jason Livingston Petroleum Alex Morese, David Binkley Forecasts David Binkley Database Development David Binkley A major source of data and analysis used in this appraisal is from the federal Energy Information Administration (EIA) at http://www.eia.doe.gov. The EIA collects national, state and international data on energy usage, prices, supply, etc., and provides expert analysis on trends in energy. The Energy Appraisal is available at: http://www.dleg.state.mi.us/mpsc/reports/energy/. Comments or questions on this appraisal are welcomed and may be directed to Alex Morese, Michigan Public Service Commission, P.O. Box 30221, Lansing, Michigan 48909, phone (517) 241-0292, fax (517) 241-6011, or email [email protected].
Issued: May 21, 2012
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HIGHLIGHTS Energy Appraisal Summer 2012 The demand for energy in Michigan is projected to experience modest decreases for all energy sources in 2012. A mild winter season is primarily responsible for decreases in electricity and natural gas whereas the high price of crude oil has been the major cause of reduced motor fuel demand. Projected steady growth in the U.S. and Michigan economies will place upward pressure on energy consumption; however, continued volatility in crude oil markets will likely exert downward pressure on both the economy and consumption, counterbalancing any potential increases. Due to above average reserves, no supply issues are anticipated for 2012. Petroleum – Increased demand in developing economies, tensions in North Africa and the Middle East, market speculation and reduced surplus production capacity have led to a sharp increase in crude oil prices. According to the EIA’s May 2012 “Short-Term Outlook,” the U.S. refiner acquisition cost of crude oil is expected to average $110 per barrel in 2012, while the spot price for West Texas Intermediate (WTI) is expected to average $104 per barrel. Domestic crude oil production increased by an estimated 190 thousand bbl/d (3.4 percent) in 2011. The share of total U.S. consumption met by net imports (including both crude oil and products) has been falling since 2005, and averaged 45 percent in 2011, down from 49 percent in 2010. Motor Gasoline – In 2012, gasoline sales in Michigan are expected to decrease 2.2 percent following a decline of 1.6 percent in 2011. Although recent oil market volatility has been significant, gasoline demand has been on an overall pattern of decline for the past six years. During the April‐through‐September summer driving season, regular gasoline retail prices are forecast to average about $3.79 per gallon, after peaking in April at a monthly average price of $3.90. Electricity – Assuming normal summer temperatures, Michigan’s total electric sales are projected to decrease by 0.2 percent in 2012. This would mark the second year in a row of declining electricity demand. Although slight growth is projected in the residential and industrial sectors, these increases are expected to be offset by a decline in commercial usage. Given the anticipated demand and reinforced by the availability of estimated reserve margins within the MISO and PJM footprints, there should be an adequate supply of electricity over the summer. Natural Gas – Total annual natural gas sales in Michigan for 2012 are projected to be 717.4 billion cubic feet (Bcf) across all sectors, a decrease of 4.8 percent over 2011 sales, assuming normal weather for remainder of year. The largest decreases are expected in the residential and commercial sectors where natural gas comprises 80 percent and 40 percent of energy consumption respectively. An unseasonably mild 2011/12 heating season with temperatures 20 percent above normal is largely responsible for the projected decrease. Distillate Fuel Oil - Distillate sales in Michigan for 2012 are projected to decrease by 1.4 percent to 1,023.6 million gallons. This is a similar trend to last summer where sales decreased by 0.67 percent as a result of high diesel fuel prices. The high price of crude is expected to put downward pressure on demand growth, despite modest and steady growth in industrial activity. May 21, 2012 Michigan Public Service Commission Department of Licensing and Regulatory Affairs 1
Electricity Demand Assuming normal summer temperatures, Michigan’s total electric sales are projected to decrease by less than half a percent (0.2 percent) in 2012. This would mark the second year in a row of declining electricity demand in Michigan. Although slight growth is projected in the residential and industrial sectors, these increases are expected to be offset by a decline in commercial usage. In the residential sector, demand grew as a result of a warmer than normal summer in 2011, but overall gains were counterbalanced by a mild heating season that was 20 percent warmer than normal. Industrial use is also expected to increase, largely due to modest growth in industrial capacity utilization and production1 (MI Industrial Production Index). Additionally, the mild 2011/12 winter season combined with a slowdown in employment growth was primarily responsible for the decrease in commercial sector use. Electricity sales will be higher than projected should summer weather be warmer than normal this season. The figure below shows a nationwide snapshot of the 2011/12 winter season with an industrial electricity demand comparison for the month of February. Michigan was one of only 12 states to show an increase in industrial demand. Several of the western states showed some of the largest increases.
The projected combined peak electrical demand for both the Consumers Energy and Detroit Edison service areas for this summer is 17,702 MW, an 18 percent decrease from 2011. The in-state generating capacity for the two utilities, including existing capacity contracts, totals 1 Data from the Michigan Industrial Production index is supplied by Global Insight, an economic forecasting company widely utilized in the energy field to analyze economic and industry data.
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17,626 MW after accounting for power outages and other disruptions (PRC basis2). The actual 2011 peak demand for Consumers was 8,930 MW last summer recorded on July 21; for Detroit Edison it was 12,547 MW, also recorded on July 21. In 2009, these two companies accounted for 87 percent of total electricity sales in Michigan. Supply The total generating and purchased power supply for Consumers and Detroit Edison this summer is expected to be approximately 19,199 MW, equivalent to 17,626 MW on a PRC basis. Consumers Energy plans to have 188 MW of surplus capacity over their forecasted peak demand of 8,003 MW. In contrast, Detroit Edison, anticipates having 777 MW less than their total planning requirement of 10,370 MW (forecasted peak demand of 9,991 MW plus planning reserve margin of 379 [UCAP basis]) and has purchased seasonal capacity for use in the month of July. Michigan relies partially on power purchased from out of state, so availability of generation in the Midwest is important. The Midwest Independent System Transmission Operator (MISO), and PJM Interconnection (PJM) each manage wholesale power markets, reliability, and planning in adjoining regions that include Michigan. In its 2010 Long-Term Assessment, the North American Electric Reliability Corporation (NERC) estimates reserve margins for the next 10 years that are significantly in excess of that required by the MISO and PJM for planning reserves. Price Electricity prices have increased for two of the state’s largest utility companies as a result of a smaller customer base, decreasing demand and the need to recover increasing fuel costs through the Power Supply Cost Recovery (PSCR) mechanism. Costs have risen largely due to transmission expenses and increasing fuel costs as reflected in MISO wholesale market prices. Consumers Energy’s rates reflect the company’s self-implementation of $118 million. Detroit Edison’s rates reflect the company’s final rate increase of $187.5 million. It is expected, however, that some of the factors driving these increases may be subsiding, namely fuel costs prices reflected in the MISO wholesale market. Residential Electricity Price Summary 2011
2012
Percent Change
Reference Case #
Monthly Bill*
¢/kWh
Monthly Bill
¢/kWh
Consumers Energy
$64.77
12.95
$65.61
13.12
+1.3%
U-16794
Detroit Edison
$67.81
13.56
$76.97
15.39
+13.5%
U-16472
*monthly bill calculations are based on usage of 500 kWh/month 2
The Midwest Independent System Transmission Operator has a resource adequacy methodology that addresses the fact that not all generation resources contribute equally to resource adequacy. By adjusting the capacity rating of a generation resource based on its equivalent forced outage rate demand, this unforced capacity method (UCAP) provides a way to recognize the relative contribution each generation resource makes towards resource adequacy. To facilitate compliance with the planning reserve margin target, MISO has established Planning Resource Credits (PRC), to measure each resource’s available capacity after discounting the resource’s effective forced outage rate. Because of this change, loads may now be stated in MW on a PRC basis.
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Michigan Electricity Sales Projection (Millions of kWh) Residential Historical
2009 Total 2010 Total 2011 Total
Projection
2012 January February March April May June July August September October November December
2012 Total 2011-2012 change
Commercial
32,750 34,798 34,609
38,110 38,390 38,131
Industrial
Total
27,010 30,664 31,074
97,870 103,852 103,814
3,198 2,649 2,763 2,443 2,647 2,995 3,623 3,593 2,853 2,466 2,580 3,112
3,119 2,873 2,947 2,842 3,079 3,299 3,591 3,523 3,137 3,076 3,019 3,064
2,377 2,467 2,589 2,512 2,654 2,734 2,630 2,690 2,672 2,726 2,586 2,511
8,694 7,989 8,298 7,798 8,380 9,028 9,845 9,805 8,662 8,268 8,185 8,686
34,923 0.9%
37,569 -1.5%
31,145 0.2%
103,637 -0.2%
NOTE: Projected electricity sales are based on historical trends. SOURCES: Historical Data -- Energy Information Administration, U.S Department of Energy. Projection -- Energy Data and Security, MPSC.
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Natural Gas Demand Total annual natural gas sales in Michigan for 2012 are projected to be 717.4 billion cubic feet (Bcf) across all sectors, a decrease of 4.8 percent over 2011 sales, assuming normal weather. The largest decreases are expected in the residential and commercial sectors where natural gas comprises 80 percent and 40 percent of energy consumption respectively. An unseasonably mild 2011/12 heating season with temperatures 20 percent above normal is largely responsible for the projected decrease. The electric power sector, however, continues to show yearly increases as natural gas generation becomes more widespread. This trend is likely to continue as long as the price of natural gas remains low in comparison to competing fuel sources. The graph below shows the relationship between increasing natural gas demand in the electric power sector and the falling price of natural gas for power producers. Summer peaks in July and August are the result of air conditioning use during hot summer weather. Natural Gas Demand in Electric Power Sector vs. Natural Gas Price
Supply Natural gas volumes in underground storage for the lower 48 states were 2,606 Bcf as of May 4, 2012, which is 44.5 percent above the five-year average inventory. Natural gas storage levels are normally built up during the summer months and are at their highest levels before the beginning of the withdrawal season.3 Storage is projected to be 668.8 Bcf in October 2012. This will place Michigan’s working gas storage at capacity and due to the 3
The withdrawal season is typically between November and March.
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large storage capacity in Michigan, inventories should be sufficient to meet anticipated demand for the coming winter. Michigan supplies close to 18 percent of their natural gas needs through substantial but declining production wells. This production is projected to decline by 5.2 percent in 2012 to 127.5 Bcf. Despite falling production, net interstate deliveries are projected to decrease 9 percent to 625.3 Bcf in 2012 as a result of a warmer than normal winter season.4 Interest has continued in the state’s Utica-Collingwood Shale for both natural gas and oil production, even with depressed natural gas prices.
Price Natural gas prices will continue to be influenced by the state of the U.S. economy, increased production and inventory levels. Natural gas wholesale (spot) prices have declined over the past year and are currently trading at prices significantly below those of one year ago. During the last half of March, the Henry Hub natural gas spot price averaged $2.23 per thousand cubic feet (Mcf); $1.98 below the price of $4.21 per Mcf, the average at the same time in 2011. The much higher than average storage levels and increased national production continue to exert downward pressure on natural gas prices in addition to having a stabilizing effect on price volatility. The EIA Short-Term Energy Outlook for May 2012 projects natural gas spot prices to average $2.45 per MMBtu (Million British Thermal Units) in 2012, and $3.17 per MMBtu in 2013.
The EIA’s projected prices reflect continued industry success in tapping the Nation’s extensive shale gas resource (natural gas produced from shale). The resilience of drilling levels, despite low natural gas prices, is in part a result of high crude oil prices, which significantly improve the economics of natural gas plays that have high concentrations of crude oil, condensates, or natural gas liquids. 4
Net interstate deliveries is natural gas from out of state used to meet total demand which excludes Michigan production and storage.
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The weighted average gas cost for the four largest gas utilities5 (commodity price/GCR factor6 + distribution charge) of Michigan is projected to be $7.90/Mcf for April 2012 through March 2013 with the commodity cost making up 65 percent of this price. The weighted average monthly customer charge for these same utilities is $10.60 a month. A residential customer’s annual bill for the April 2012-March 2013 gas year is forecasted to be $890 based on April 2012 billed gas cost recovery (GCR) factors.7 If commodity prices remain at current levels, this year’s average annual gas bill is expected to be nearly $100 less than last year. There are additional factors besides storage levels that may influence the price of natural gas over the summer. If this summer is significantly warmer than normal, the increased use of natural gas to meet peak electric loads will exert upward pressure on natural gas prices. An active hurricane season in the Gulf of Mexico can drive up prices if significant damage occurs to the natural gas production or distribution infrastructure. However, even if destructive hurricanes materialize, with the emergence of shale gas and the Rockies Express Pipeline (REX), Michigan has become less reliant on natural gas from the Gulf of Mexico. In 2000, shale gas only accounted for 1 percent of the nation’s supply mix. That number is up to 20 percent today, and expected to reach over 50 percent by 2030. The increase in supply diversity will also help to keep prices low and stable in Michigan for the upcoming year.
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Consumers Energy, Michigan Consolidated Gas (MichCon), SEMCO, Michigan Gas Utilities (MGU) MPSC Gas Cost Recovery Factors: http://www.dleg.state.mi.us/mpsc/gas/rates/gasrates.pdf 7 Also includes distribution charge and monthly customer charges 6
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Michigan Natural Gas Supply and Demand
When demand is in excess of deliveries, the difference is withdrawals from storage.
Michigan Natural Gas Supply and Demand (Billion Cubic Feet--BCF) Total Demand
Net Interstate Deliveries
Michigan Production
To (From) Storage
Storage Balance
703.1 745.7 753.4
623.1 562.1 690.3
148.2 141.9 134.5
68.2 -41.8 71.3
534.5 492.7 564.0
97.8
0.1
11.1
-94.2
469.8
February
90.6
14.3
10.0
-74.2
395.6
March
77.4
66.4
10.9
-18.1
377.5
April
64.7
80.8
10.4
18.4
395.9
May
46.6
87.5
10.7
48.4
444.3
June
36.4
78.4
10.5
51.2
495.5
July
36.5
75.6
10.7
49.4
544.9
August
38.2
74.0
11.0
46.3
591.2
September
30.6
72.2
10.6
51.2
642.4
October
41.7
61.1
10.7
26.4
668.8
November
62.8
28.0
10.4
-29.7
639.1
December
94.0
-13.1
10.4
-102.9
536.2
717.4 -4.8%
625.3 -9.4%
127.5 -5.2%
-27.8
536.2 -4.9%
Historical
2009 Total 2010 Total 2011 Total
Projection
2012 January
2012 Total 2011-2012 change
NOTES: Projected demand assumes normal weather for the remainder of the year. The Michigan production series is compiled by the Operations & Wholesale Markets Division, MPSC. Net interstate deliveries are calculated using total demand less the sum of Michigan production and change in Michigan storage. Storage balance is end of month/year. SOURCES: 'Historical Data -- Demand and Storage from Energy Information Administration, U.S. Department of Energy. Projection – Energy Data & Security Section, MPSC.
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Petroleum World Outlook According to the EIA, world liquid fuels consumption grew by an estimated 0.8 million bbl/d to 87.9 million bbl/d in 2011. Moderate growth is expected over the next two years, with consumption reaching 88.8 million bbl/d in 2012 and 90.1 million bbl/d in 2013. Non‐OECD countries will account for essentially all of the world’s consumption growth over the next two years, with the largest contributions coming from China, the Middle East, and Central and South America. OPEC members’ crude oil production is expected to continue to rise over the next two years to accommodate the projected increases in world oil demand and to counterbalance supply disruptions. OPEC surplus production capacity will average 2.8 million bbl/d in 2012, lower than seen in recent years, but 20 percent higher than the 10 year average. Unplanned oil disruptions have been on the rise in 2012, after a welcome reprieve following the defeat of the Gaddafi regime in Libya. Fears surrounding possible conflict with Iran and the effects of Iranian sanctions have led a number of foreign companies investing in Iran’s upstream facilities to halt their activities. The EIA expects Iran’s crude production to fall by about 500 thousand bbl/d by the end of 2012, a decrease of 14 percent from 2011. Additionally, civil disputes in South Sudan, Sudan, Yemen and Syria have temporarily reduced or shut-in crude oil production. These supply disruptions accompanied by increases in demand have lead to increases in the price of crude oil. The EIA projects the U.S. refiner acquisition cost of crude oil is expected to average $110 per barrel in 2012, while the spot price for West Texas Intermediate (WTI) is expected to average $104 per barrel.8 The projected average WTI price discount of $6.00 is due primarily to physical pipeline capacity constraints which limit efficient movement of supplies to refining locations. Currently, the market relies on high-cost rail and trucks to ship both crude oil stored at Cushing and production from Canada and the Bakken formation (North Dakota) to the Gulf Coast and other locations. One project aimed at reducing constraints is the proposed reversal of the Seaway Pipeline, slated to initially transport up to 150,000 barrels per day (bbl/d) of crude oil from Cushing, Oklahoma to the Gulf Coast and increasing to 400,000 bbl/d by 2013. The ability to ship crude oil out of Cushing via pipeline will allow WTI and similar inland U.S. crudes to compete directly with the higher priced waterborne crude oils on the Gulf Coast (whose prices closely follow Brent), bringing the price of WTI more in line with global markets.
U.S. Outlook According to the EIA’s “Short Term Energy Outlook,” total U.S. liquid fuels consumption (motor gasoline, jet fuel, distillate fuel, biofuels, etc.) fell by an estimated 670 thousand bbl/d (3.5 percent) in the first quarter of 2012 from the same period last year. Motor gasoline and distillate fuel consumption accounted for much of that decline, but more moderate year-over-
8
The U.S. refiner acquisition cost of crude oil includes transportation and other fees paid by the refiner.
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year declines averaging about 30 thousand bbl/d are expected through the remainder of the year. Domestic crude oil production increased by an estimated 190 thousand bbl/d (3.4 percent) to 5.66 million bbl/d in 2011. A 450‐thousand bbl/d increase in lower‐48 onshore production in 2011 was partly offset by declines in Alaska and the Gulf of Mexico. The rise in production is driven by increased oil directed drilling activity, particularly in onshore tight oil formations in North Dakota and Texas. Production increases in these regions are mainly associated with accelerating horizontal drilling programs in the Bakken and Eagle Ford shale formations. The share of total U.S. consumption met by total liquid fuel net imports (including both crude oil and products) has been falling since 2005, and averaged 45 percent in 2011, down from 49 percent in 2010. EIA expects that the total net import share of consumption will be 43 percent in both 2012 and 2013.
Another factor that continues to influence prices is U.S. crude oil inventories. Inventories were 381.6 million barrels in the week ending May 11, 2012. This is 11.3 million barrels above levels from a year ago and at the top of the five-year average for this time of year. In fact, crude oil inventories have been very high from about May 2010 through September 2011 before dipping slightly toward the middle of the five-year average. Since January 2012, however, inventories have begun to build and are once again at the very top of the five-year average. Fears of global supply disruptions, however, have placed upward pressure on prices despite high inventories.
Midwest Outlook Inventories of crude oil in the Midwest are at the top of the five-year average for this time of year. Gasoline inventories in the Midwest are within the mid-range of levels usually seen at this time of year with 49.9 million barrels in stock, a 4.8 percent increase from last year. In contrast, distillate inventories are down nationwide and only slightly above levels seen a year ago at 29.9 million barrels in the Midwest for the week ending May 11, 2012. 10
U.S. Refiner Acquisition Cost of Crude Oil
U.S. Petroleum Demand Projections (Million barrels per day) 2010 3rd
4th
2011 1st
2nd
Yearly Ave
2012
3rd
4th
1st
2nd
3rd
4th
2010
2011
2012
PROJECTED Demand in 50 States Domestic Crude Oil Supply Total Petroleum Net Imports Crude Oil Price
3
19.47 19.22 19.08 1
2
18.75
18.84
18.68 18.42 18.78 18.97
5.44
5.60
5.53
5.59
5.57
5.93
6.13
9.86
8.55
8.71
8.97
8.29
7.76 7.84
6.21 8.30
6.10 8.48
18.87 19.18 6.26 5.48 7.54
9.44
18.84 18.76 5.66 8.43
6.18 8.04
74.05 81.59 93.85 108.23 100.59 104.55 107.88 109.42 110.50 110.50 76.71 101.81 109.57
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Notes: Includes only crude oil production. Additional sources of domestic petroleum supply include natural gas liquids, other 2 3 hydrocarbons, alcohol inputs and processing gains. Net Imports include deliveries to the Strategic Petroleum Reserve. In Dollars per barrel for Imported Crude Oil Refiner Acquisition Costs for imports and domestic. Sources: Energy Information Administration, U.S. Department of Energy, Short-Term Energy Outlook April 2012, and Petroleum Weekly Status Report.
U.S. Total Petroleum Demand and Net imports
Notes: The above projections and analysis were excerpted from the DOE Energy Information Administration’s (EIA) “Short-Term Energy Outlook,” April 2012, the EIA Weekly Petroleum Status Report, and other industry sources.
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Motor Gasoline Demand In 2012, gasoline sales in Michigan are expected to decrease 2.2 percent following a decline of 1.6 percent in 2011. A combination of Middle East tensions, market speculation and reduced global surplus production capacity has sustained a cost premium on crude oil and refined petroleum products for well over a year. Although recent oil market volatility has been significant, gasoline demand has been on an overall pattern of decline for the past six years, with the exception of 2010. In addition to demand destruction from higher gasoline prices, increasing vehicle fuel efficiency has also been a significant factor in declining demand with the average sales-weighted fuel economy reaching 23.4 MPG in 2011.9 This most recent fuel economy is an average of 12.5 percent higher than it was in 2008. Nationally, vehicle miles traveled are actually projected to increase by 1.2 percent according to the EIA, but still reflect an overall decrease in demand. Projected sales in Michigan for 2012 are 4,118.4 million gallons which are well below levels seen in 2009. Michigan Gasoline Demand and Real Gasoline Prices
Supply For the week ending May 4, refineries were operating at 86.4 percent of capacity nationally. This was up from the 83.8 percent capacity utilization rate seen a year ago at this time. These figures, however, conceal strong regional disparities caused by the divergence of cheaper West Texas Intermediate (WTI) and higher Brent crude oil prices in 2011, particularly in the Midwest and East Coast regions.10 For example, Midwest refineries averaged gross inputs that were 8 9
Univ. of MI Transportation Research Institute: http://www.umich.edu/~umtriswt/EDI_sales-weighted-mpg.html West Texas Intermediate (WTI) and Brent Crude are the two main price benchmarks traded on the New York Mercantile Exchange (NYMEX).
10
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percent above their five-year average, while those on the East Coast were running 22 percent lower than average. Midwest refineries benefitted from supplies of less expensive crude oil coming from Canada and increased production in the Bakken formation. The refining region most directly affecting Michigan (Illinois, Indiana, and Kentucky) is expected to produce an average of 1,819.3 million gallons a month in 2012, up 0.1 percent from 2011. In contrast, East Coast refineries are exposed to higher Brent Crude prices which decreases operating margins. This has led the closure of two key refineries in the Philadelphia area (ConocoPhillips Trainer refinery and Sunoco's Marcus Hook refinery) since September, 2011 and one major Caribbean export refinery supplying the East Coast (Hovensa’s U.S. Virgin Islands refinery). Nationally, imports of finished gasoline to the U.S. in mid-April, 2012 are 30 percent below levels seen at the same time last year. A ramp-up in crude production from unconventional plays such as the Bakken Shale in North Dakota and the Eagle Ford Shale in South Texas has led to predictions that US crude imports will continue to fall in the coming years. In 2011, the United States shifted to net product exporter status for the first time since 1949. National gasoline inventories are currently toward the top of the five-year average range for this time of year, down slightly from seasonal highs during December through February. For the week ending May 4, U.S. gasoline inventories stood at 207.1 million barrels (23.8 days of supply), 3.9 percent higher than the same period last year. Projected regional inventories for 2012 are 13.4 percent above levels of a year ago with projections averaging 265.6 barrels per month. This projected build is primarily a result of decreasing demand and increasing production in the Midwest region.
Price During the April‐through‐September summer driving season this year, regular gasoline retail prices are forecast to average about $3.79 per gallon, after peaking in April at a monthly average price of $3.90 per gallon. EIA expects regular gasoline retail prices to average $3.71 per gallon in 2012, compared with $3.53 per gallon in 2011. The projected increase in gasoline prices this year suggests that vehicle fueling costs for the average U.S. household will be about $250 higher in 2012 than they were in 2011 according to the EIA. According to AAA, the average price for a gallon of regular unleaded gasoline in Michigan was $3.69, as of May 21, 2012. This is 18 cents lower than at this time last year and 40 cents below the record high this year of $4.09 per gallon set on March 29, 2012. High prices have been supported by a number of factors including: fears of the closing of the Straits of Hormuz by Iran, reduced supply as a result of Iranian sanctions and reduced output from countries such as Libya, Syria and Yemen. The average weekly price of regular unleaded gasoline has not dropped below $3.00/gallon since December, 2011. 13
Michigan Gasoline Sales
Michigan Gasoline Sales Projection (Millions of Gallons) Total All Grades Historical
2009 2010 2011
Projection 2012
2012
Total Total Total January February March April May June July August September October November December Total
Historical (prior year) % Change
4,292.7 4,344.4 4,277.0
4,328.7
334.3 313.5 346.3 330.9 351.7 354.5 363.0 372.7 351.0 363.9 347.6 351.6
345.6 319.2 352.7 333.6 353.1 363.4 371.3 385.2 364.4 369.5 358.3 360.8
4,181.0
4,277.0
4,292.7 4,344.4
-0.8% 1.2% -1.6%
-2.2%
NOTE: These projections are based EIA forecasts of real gasoline prices. SOURCE: Historical data - Energy Information Administration, U.S. Department of Energy. Projections – Energy Data & Security Section, MPSC
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Regional Gasoline Supply and Demand
Regional Gasoline Supply and Demand (Millions of Gallons) Production
Inventories
Demand
Historical
2009 2010 2011
Average Average Average
1,635.2 1,808.4 1,817.8
352.3 271.9 234.2
1,841.7 1,813.7 1,752.7
Projection
2012
January February March April May June July August September October November December
1,809.4 1,625.2 1,812.5 1,727.1 1,810.3 1,857.8 1,950.8 1,879.2 1,828.2 1,862.4 1,835.8 1,832.5
318.2 320.8 253.5 229.6 241.0 248.4 265.4 256.8 292.8 242.1 260.2 258.6
1,630.7 1,532.3 1,716.1 1,680.2 1,747.0 1,756.8 1,789.2 1,816.5 1,697.7 1,756.6 1,690.2 1,721.3
2012 2011-2012 change
Average
1,819.3 0.1%
265.6 13.4%
1,711.2 -2.4%
NOTES: *Production projections are based on refinery utilizations and recent trends. Much of the recent increase in production, however, can be attributed to ethanol blending. The region is comprised of Illinois, Indiana, Kentucky, Michigan, Tennessee, and Ohio. SOURCE: Historical data - Energy Information Administration, U.S. Department of Energy. Projections –Energy Data & Security Section, MPSC
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Distillates Demand Distillate sales in Michigan are projected to decrease by 1.4 percent to 1,023.6 million gallons in 2012. This is a similar trend to last summer where sales decreased by 0.67 percent as a result of high diesel fuel prices. The high price of crude is expected to put downward pressure on demand growth, despite modest and steady growth in industrial activity. Industrial production is an important determinant of sales since the trucking and railroad industries are large consumers of diesel fuel. The industrial production index is expected to increase an average of 5.72 percent in 2012 compared to 2011. Diesel fuel remains the prime component of distillate demand, just under 95 percent, with the majority being used for transportation by highway trucks.
Supply Nationally, inventories of distillates are within the 5 year range for this time of year, but are down 13 percent from levels in 2011. Robust global distillate demand has led to a significant inventory draw, despite heightened U.S. production which increased by 6.2 percent in 2011. Along with high domestic prices, strong international markets for distillate fuel oils have spurred increased production. Regionally, production grew by 4.8 percent in 2011 and is projected to continue this trend in 2012 with a growth of 4.7 percent. In the United States, refineries typically optimize production for finished motor gasoline to meet domestic demand, while European refineries tend to produce higher percentages of distillate fuel oils, as diesel is used more broadly there for transportation. Due to crude supply disruptions to European refineries for much of the past couple years, the region has imported more finished products. By altering their production mix and increasing runs to maximize output, US refineries consistently set record levels of production in 2011. Weekly U.S. gross distillate export estimates (bound primarily for European and South American markets) were at record levels in the fourth quarter of 2011, topping more than 0.9 million bbl/d in October and November, and exceeding 1 million bbl/d in December. The graph below shows how refineries have shifted output toward increased distillate fuel production as international demand has increased.
16
Price According to the EIA, on‐highway diesel fuel retail prices, which averaged $3.84 per gallon in 2011, will average $4.06 per gallon in 2012. For the week of May 14, the average Midwest price of $3.90 was slightly lower than the U.S. average. According to AAA, the peak price of $4.85 recorded in Michigan was on July 17, 2008. Since October 2011, the spot price for ultra-low-sulfur distillate fuel has risen as the spot price for motor gasoline (RBOB) has declined, widening the spread between the two fuels.11 On November 14, 2011, ultra-low-sulfur distillate was nearly 65 cents per gallon higher than the price for RBOB. The spread between these product prices has not been more than 60 cents per gallon since November 2008. This is due in part to the increased global demand for distillate fuels as well as significant inventory draws.
Michigan residential heating oil prices averaged $3.75 per gallon (excluding sales tax) on March 19, 2012. The average price in mid-March 2011 was $3.63. The 2011/2012 heating season began with residential heating oil prices at a price of $3.47 per gallon (Oct. 3, 2011). Prices followed the volatility in the oil markets and fluctuated from a high of $3.83 per gallon to a low of $3.35 per gallon. Due to the mild winter, prices decreased by $0.41 during the month of December only to creep upward as the heating season progressed.
11
The spot price for motor gasoline is measured by New York Reformulated Blendstock for Oxygenate Blending (RBOB) spot prices in this chart.
17
Michigan Distillate Fuel Oil Sales
Michigan Distillate Fuel Oil Sales Projection (Millions of Gallons)
Historical
2009 2010 2011
Total Total Total
Projection
2012
January February March April May June July August September October November December
2012
Total
Other * Distillate 40.1 45.9 47.5
Diesel Fuel 923.6 999.5 991.0
Total 961.6 1045.5 1038.5
Prior Year 1104.2 961.6 1045.5
4.0 2.5 2.7 1.5 1.4 1.3 0.8 1.9 3.4 5.8 5.1 7.3
77.9 71.5 77.4 79.2 86.2 84.7 81.2 87.1 85.8 93.7 82.0 79.1
81.9 74.1 80.1 80.7 87.6 86.0 82.1 89.0 89.3 99.5 87.1 86.4
83.9 78.0 80.1 76.9 86.0 91.5 87.1 95.0 90.4 96.9 88.9 83.7
37.8
985.8
1,023.6
1,038.5
% Change -12.9% 8.7% -0.7%
-1.4%
NOTES: These projections assume normal degree day accumulations for the remainder of the year. Actual demand may vary as a result of actual temperature variations. Other distillates were assumed to decline at the same rate as diesel fuel. SOURCES: Historical data -- Energy Information Administration, U.S. Department of Energy. PROJECTIONS: Energy Data and Security Section, MPSC * = Other Distillate is comprised of: Kerosene, No. 1 Distillate and No. 2 Fuel Oil
18
Regional Distillate Fuel Oil Supply and Demand
Regional Distillate Fuel Oil Supply and Demand (Millions of Gallons) Production
Inventories
Demand **
Historical
2009 2010 2011
Average Average Average
658.9 706.8 740.8
533.6 512.0 513.4
685.5 737.3 743.5
Projection
2012
January February March April May June July August September October November December
766.6 715.6 723.4 746.5 800.6 779.7 782.8 797.7 773.1 795.5 794.4 831.6
580.8 554.4 508.6 508.7 527.0 523.9 527.1 507.8 517.4 478.3 501.3 541.2
739.3 688.2 759.3 742.8 755.6 748.5 724.5 771.6 771.3 837.2 764.6 748.4
2012
Average
775.6
523.0
754.3
NOTES: Production projections based on expected refinery capacity utilization and recent trends. Regional demand estimates are based on the recent regional trend. The region is comprised of Illinois, Indiana, Kentucky, Michigan, Tennessee, and Ohio. SOURCES: Historical data -- Energy Information Administration, U.S. Department of Energy; PROJECTIONS: Energy Data & Security Section, MPSC. ** EIA has discontinued supplying the data that comprised individual end use demand figures. Due to this change, a different dataset to represent diesel fuel, other uses and total distillate sales is now being used.
19
Michigan Public Service Commission Michigan Energy Appraisal P.O. Box 30221 Lansing, MI 48909
This publication is available on the MPSC website at http://www.dleg.state.mi.us/mpsc/reports/energy/
Michigan Public Service Commission Department of Licensing and Regulatory Affairs PSC-PUB 0017 (Rev. 05/11)
Preface The Michigan Energy Appraisal is a semi-annual assessment of Michigan’s energy baseline. The assessment assists in developing a situational awareness of the state’s energy environment including recent events impacting supply and prices, expected conditions, and changes over the next six months. Additionally, it provides the necessary information to enable a reliable assessment of the risk posed by an energy supply disruption. The scope of the analysis varies by energy source. Michigan’s electricity prices, supply and availability are largely determined by events in Michigan and the Midwest. Natural gas supplies and prices are closely tied to national trends. Petroleum product markets in Michigan are affected by international market conditions and events and regional refinery production. For the appraisal, recent historical balances between Michigan’s energy consumption and supply are analyzed, and consumption and supplies are projected. Actual and expected energy prices are reviewed to identify changes impacting consumer costs. Generally, the fall appraisal focuses on the winter heating season, and the summer appraisal focuses on summer energy use, including peak electricity supply and demand and gasoline for the summer driving season. This report is prepared by the Management Services Division with assistance from the Regulated Energy Division, and the Operations & Wholesale Markets Division of the Michigan Public Service Commission (MPSC), Department of Licensing and Regulatory Affairs, State of Michigan. Project Manager Alex Morese Author/Editor David Binkley Electric David Binkley, Raushawn Bodiford, Lisa Kindschy Gasoline David Binkley Natural Gas David Binkley, Nora Quilico, Cindy Creisher, Jason Livingston Petroleum Alex Morese, David Binkley Forecasts David Binkley Database Development David Binkley A major source of data and analysis used in this appraisal is from the federal Energy Information Administration (EIA) at http://www.eia.doe.gov. The EIA collects national, state and international data on energy usage, prices, supply, etc., and provides expert analysis on trends in energy. The Energy Appraisal is available at: http://www.dleg.state.mi.us/mpsc/reports/energy/. Comments or questions on this appraisal are welcomed and may be directed to Alex Morese, Michigan Public Service Commission, P.O. Box 30221, Lansing, Michigan 48909, phone (517) 241-0292, fax (517) 241-6011, or email [email protected].
Issued: May 21, 2012
The Department of Licensing and Regulatory Affairs will not discriminate against any individual or group because of race, sex, religion, age, national origin, color, marital status, disability, or political belief. If you need assistance with reading, writing, hearing, etc., under the Americans with Disabilities Act, you may make your needs known to this agency.
HIGHLIGHTS Energy Appraisal Summer 2012 The demand for energy in Michigan is projected to experience modest decreases for all energy sources in 2012. A mild winter season is primarily responsible for decreases in electricity and natural gas whereas the high price of crude oil has been the major cause of reduced motor fuel demand. Projected steady growth in the U.S. and Michigan economies will place upward pressure on energy consumption; however, continued volatility in crude oil markets will likely exert downward pressure on both the economy and consumption, counterbalancing any potential increases. Due to above average reserves, no supply issues are anticipated for 2012. Petroleum – Increased demand in developing economies, tensions in North Africa and the Middle East, market speculation and reduced surplus production capacity have led to a sharp increase in crude oil prices. According to the EIA’s May 2012 “Short-Term Outlook,” the U.S. refiner acquisition cost of crude oil is expected to average $110 per barrel in 2012, while the spot price for West Texas Intermediate (WTI) is expected to average $104 per barrel. Domestic crude oil production increased by an estimated 190 thousand bbl/d (3.4 percent) in 2011. The share of total U.S. consumption met by net imports (including both crude oil and products) has been falling since 2005, and averaged 45 percent in 2011, down from 49 percent in 2010. Motor Gasoline – In 2012, gasoline sales in Michigan are expected to decrease 2.2 percent following a decline of 1.6 percent in 2011. Although recent oil market volatility has been significant, gasoline demand has been on an overall pattern of decline for the past six years. During the April‐through‐September summer driving season, regular gasoline retail prices are forecast to average about $3.79 per gallon, after peaking in April at a monthly average price of $3.90. Electricity – Assuming normal summer temperatures, Michigan’s total electric sales are projected to decrease by 0.2 percent in 2012. This would mark the second year in a row of declining electricity demand. Although slight growth is projected in the residential and industrial sectors, these increases are expected to be offset by a decline in commercial usage. Given the anticipated demand and reinforced by the availability of estimated reserve margins within the MISO and PJM footprints, there should be an adequate supply of electricity over the summer. Natural Gas – Total annual natural gas sales in Michigan for 2012 are projected to be 717.4 billion cubic feet (Bcf) across all sectors, a decrease of 4.8 percent over 2011 sales, assuming normal weather for remainder of year. The largest decreases are expected in the residential and commercial sectors where natural gas comprises 80 percent and 40 percent of energy consumption respectively. An unseasonably mild 2011/12 heating season with temperatures 20 percent above normal is largely responsible for the projected decrease. Distillate Fuel Oil - Distillate sales in Michigan for 2012 are projected to decrease by 1.4 percent to 1,023.6 million gallons. This is a similar trend to last summer where sales decreased by 0.67 percent as a result of high diesel fuel prices. The high price of crude is expected to put downward pressure on demand growth, despite modest and steady growth in industrial activity. May 21, 2012 Michigan Public Service Commission Department of Licensing and Regulatory Affairs 1
Electricity Demand Assuming normal summer temperatures, Michigan’s total electric sales are projected to decrease by less than half a percent (0.2 percent) in 2012. This would mark the second year in a row of declining electricity demand in Michigan. Although slight growth is projected in the residential and industrial sectors, these increases are expected to be offset by a decline in commercial usage. In the residential sector, demand grew as a result of a warmer than normal summer in 2011, but overall gains were counterbalanced by a mild heating season that was 20 percent warmer than normal. Industrial use is also expected to increase, largely due to modest growth in industrial capacity utilization and production1 (MI Industrial Production Index). Additionally, the mild 2011/12 winter season combined with a slowdown in employment growth was primarily responsible for the decrease in commercial sector use. Electricity sales will be higher than projected should summer weather be warmer than normal this season. The figure below shows a nationwide snapshot of the 2011/12 winter season with an industrial electricity demand comparison for the month of February. Michigan was one of only 12 states to show an increase in industrial demand. Several of the western states showed some of the largest increases.
The projected combined peak electrical demand for both the Consumers Energy and Detroit Edison service areas for this summer is 17,702 MW, an 18 percent decrease from 2011. The in-state generating capacity for the two utilities, including existing capacity contracts, totals 1 Data from the Michigan Industrial Production index is supplied by Global Insight, an economic forecasting company widely utilized in the energy field to analyze economic and industry data.
2
17,626 MW after accounting for power outages and other disruptions (PRC basis2). The actual 2011 peak demand for Consumers was 8,930 MW last summer recorded on July 21; for Detroit Edison it was 12,547 MW, also recorded on July 21. In 2009, these two companies accounted for 87 percent of total electricity sales in Michigan. Supply The total generating and purchased power supply for Consumers and Detroit Edison this summer is expected to be approximately 19,199 MW, equivalent to 17,626 MW on a PRC basis. Consumers Energy plans to have 188 MW of surplus capacity over their forecasted peak demand of 8,003 MW. In contrast, Detroit Edison, anticipates having 777 MW less than their total planning requirement of 10,370 MW (forecasted peak demand of 9,991 MW plus planning reserve margin of 379 [UCAP basis]) and has purchased seasonal capacity for use in the month of July. Michigan relies partially on power purchased from out of state, so availability of generation in the Midwest is important. The Midwest Independent System Transmission Operator (MISO), and PJM Interconnection (PJM) each manage wholesale power markets, reliability, and planning in adjoining regions that include Michigan. In its 2010 Long-Term Assessment, the North American Electric Reliability Corporation (NERC) estimates reserve margins for the next 10 years that are significantly in excess of that required by the MISO and PJM for planning reserves. Price Electricity prices have increased for two of the state’s largest utility companies as a result of a smaller customer base, decreasing demand and the need to recover increasing fuel costs through the Power Supply Cost Recovery (PSCR) mechanism. Costs have risen largely due to transmission expenses and increasing fuel costs as reflected in MISO wholesale market prices. Consumers Energy’s rates reflect the company’s self-implementation of $118 million. Detroit Edison’s rates reflect the company’s final rate increase of $187.5 million. It is expected, however, that some of the factors driving these increases may be subsiding, namely fuel costs prices reflected in the MISO wholesale market. Residential Electricity Price Summary 2011
2012
Percent Change
Reference Case #
Monthly Bill*
¢/kWh
Monthly Bill
¢/kWh
Consumers Energy
$64.77
12.95
$65.61
13.12
+1.3%
U-16794
Detroit Edison
$67.81
13.56
$76.97
15.39
+13.5%
U-16472
*monthly bill calculations are based on usage of 500 kWh/month 2
The Midwest Independent System Transmission Operator has a resource adequacy methodology that addresses the fact that not all generation resources contribute equally to resource adequacy. By adjusting the capacity rating of a generation resource based on its equivalent forced outage rate demand, this unforced capacity method (UCAP) provides a way to recognize the relative contribution each generation resource makes towards resource adequacy. To facilitate compliance with the planning reserve margin target, MISO has established Planning Resource Credits (PRC), to measure each resource’s available capacity after discounting the resource’s effective forced outage rate. Because of this change, loads may now be stated in MW on a PRC basis.
3
Michigan Electricity Sales Projection (Millions of kWh) Residential Historical
2009 Total 2010 Total 2011 Total
Projection
2012 January February March April May June July August September October November December
2012 Total 2011-2012 change
Commercial
32,750 34,798 34,609
38,110 38,390 38,131
Industrial
Total
27,010 30,664 31,074
97,870 103,852 103,814
3,198 2,649 2,763 2,443 2,647 2,995 3,623 3,593 2,853 2,466 2,580 3,112
3,119 2,873 2,947 2,842 3,079 3,299 3,591 3,523 3,137 3,076 3,019 3,064
2,377 2,467 2,589 2,512 2,654 2,734 2,630 2,690 2,672 2,726 2,586 2,511
8,694 7,989 8,298 7,798 8,380 9,028 9,845 9,805 8,662 8,268 8,185 8,686
34,923 0.9%
37,569 -1.5%
31,145 0.2%
103,637 -0.2%
NOTE: Projected electricity sales are based on historical trends. SOURCES: Historical Data -- Energy Information Administration, U.S Department of Energy. Projection -- Energy Data and Security, MPSC.
4
Natural Gas Demand Total annual natural gas sales in Michigan for 2012 are projected to be 717.4 billion cubic feet (Bcf) across all sectors, a decrease of 4.8 percent over 2011 sales, assuming normal weather. The largest decreases are expected in the residential and commercial sectors where natural gas comprises 80 percent and 40 percent of energy consumption respectively. An unseasonably mild 2011/12 heating season with temperatures 20 percent above normal is largely responsible for the projected decrease. The electric power sector, however, continues to show yearly increases as natural gas generation becomes more widespread. This trend is likely to continue as long as the price of natural gas remains low in comparison to competing fuel sources. The graph below shows the relationship between increasing natural gas demand in the electric power sector and the falling price of natural gas for power producers. Summer peaks in July and August are the result of air conditioning use during hot summer weather. Natural Gas Demand in Electric Power Sector vs. Natural Gas Price
Supply Natural gas volumes in underground storage for the lower 48 states were 2,606 Bcf as of May 4, 2012, which is 44.5 percent above the five-year average inventory. Natural gas storage levels are normally built up during the summer months and are at their highest levels before the beginning of the withdrawal season.3 Storage is projected to be 668.8 Bcf in October 2012. This will place Michigan’s working gas storage at capacity and due to the 3
The withdrawal season is typically between November and March.
5
large storage capacity in Michigan, inventories should be sufficient to meet anticipated demand for the coming winter. Michigan supplies close to 18 percent of their natural gas needs through substantial but declining production wells. This production is projected to decline by 5.2 percent in 2012 to 127.5 Bcf. Despite falling production, net interstate deliveries are projected to decrease 9 percent to 625.3 Bcf in 2012 as a result of a warmer than normal winter season.4 Interest has continued in the state’s Utica-Collingwood Shale for both natural gas and oil production, even with depressed natural gas prices.
Price Natural gas prices will continue to be influenced by the state of the U.S. economy, increased production and inventory levels. Natural gas wholesale (spot) prices have declined over the past year and are currently trading at prices significantly below those of one year ago. During the last half of March, the Henry Hub natural gas spot price averaged $2.23 per thousand cubic feet (Mcf); $1.98 below the price of $4.21 per Mcf, the average at the same time in 2011. The much higher than average storage levels and increased national production continue to exert downward pressure on natural gas prices in addition to having a stabilizing effect on price volatility. The EIA Short-Term Energy Outlook for May 2012 projects natural gas spot prices to average $2.45 per MMBtu (Million British Thermal Units) in 2012, and $3.17 per MMBtu in 2013.
The EIA’s projected prices reflect continued industry success in tapping the Nation’s extensive shale gas resource (natural gas produced from shale). The resilience of drilling levels, despite low natural gas prices, is in part a result of high crude oil prices, which significantly improve the economics of natural gas plays that have high concentrations of crude oil, condensates, or natural gas liquids. 4
Net interstate deliveries is natural gas from out of state used to meet total demand which excludes Michigan production and storage.
6
The weighted average gas cost for the four largest gas utilities5 (commodity price/GCR factor6 + distribution charge) of Michigan is projected to be $7.90/Mcf for April 2012 through March 2013 with the commodity cost making up 65 percent of this price. The weighted average monthly customer charge for these same utilities is $10.60 a month. A residential customer’s annual bill for the April 2012-March 2013 gas year is forecasted to be $890 based on April 2012 billed gas cost recovery (GCR) factors.7 If commodity prices remain at current levels, this year’s average annual gas bill is expected to be nearly $100 less than last year. There are additional factors besides storage levels that may influence the price of natural gas over the summer. If this summer is significantly warmer than normal, the increased use of natural gas to meet peak electric loads will exert upward pressure on natural gas prices. An active hurricane season in the Gulf of Mexico can drive up prices if significant damage occurs to the natural gas production or distribution infrastructure. However, even if destructive hurricanes materialize, with the emergence of shale gas and the Rockies Express Pipeline (REX), Michigan has become less reliant on natural gas from the Gulf of Mexico. In 2000, shale gas only accounted for 1 percent of the nation’s supply mix. That number is up to 20 percent today, and expected to reach over 50 percent by 2030. The increase in supply diversity will also help to keep prices low and stable in Michigan for the upcoming year.
5
Consumers Energy, Michigan Consolidated Gas (MichCon), SEMCO, Michigan Gas Utilities (MGU) MPSC Gas Cost Recovery Factors: http://www.dleg.state.mi.us/mpsc/gas/rates/gasrates.pdf 7 Also includes distribution charge and monthly customer charges 6
7
Michigan Natural Gas Supply and Demand
When demand is in excess of deliveries, the difference is withdrawals from storage.
Michigan Natural Gas Supply and Demand (Billion Cubic Feet--BCF) Total Demand
Net Interstate Deliveries
Michigan Production
To (From) Storage
Storage Balance
703.1 745.7 753.4
623.1 562.1 690.3
148.2 141.9 134.5
68.2 -41.8 71.3
534.5 492.7 564.0
97.8
0.1
11.1
-94.2
469.8
February
90.6
14.3
10.0
-74.2
395.6
March
77.4
66.4
10.9
-18.1
377.5
April
64.7
80.8
10.4
18.4
395.9
May
46.6
87.5
10.7
48.4
444.3
June
36.4
78.4
10.5
51.2
495.5
July
36.5
75.6
10.7
49.4
544.9
August
38.2
74.0
11.0
46.3
591.2
September
30.6
72.2
10.6
51.2
642.4
October
41.7
61.1
10.7
26.4
668.8
November
62.8
28.0
10.4
-29.7
639.1
December
94.0
-13.1
10.4
-102.9
536.2
717.4 -4.8%
625.3 -9.4%
127.5 -5.2%
-27.8
536.2 -4.9%
Historical
2009 Total 2010 Total 2011 Total
Projection
2012 January
2012 Total 2011-2012 change
NOTES: Projected demand assumes normal weather for the remainder of the year. The Michigan production series is compiled by the Operations & Wholesale Markets Division, MPSC. Net interstate deliveries are calculated using total demand less the sum of Michigan production and change in Michigan storage. Storage balance is end of month/year. SOURCES: 'Historical Data -- Demand and Storage from Energy Information Administration, U.S. Department of Energy. Projection – Energy Data & Security Section, MPSC.
8
Petroleum World Outlook According to the EIA, world liquid fuels consumption grew by an estimated 0.8 million bbl/d to 87.9 million bbl/d in 2011. Moderate growth is expected over the next two years, with consumption reaching 88.8 million bbl/d in 2012 and 90.1 million bbl/d in 2013. Non‐OECD countries will account for essentially all of the world’s consumption growth over the next two years, with the largest contributions coming from China, the Middle East, and Central and South America. OPEC members’ crude oil production is expected to continue to rise over the next two years to accommodate the projected increases in world oil demand and to counterbalance supply disruptions. OPEC surplus production capacity will average 2.8 million bbl/d in 2012, lower than seen in recent years, but 20 percent higher than the 10 year average. Unplanned oil disruptions have been on the rise in 2012, after a welcome reprieve following the defeat of the Gaddafi regime in Libya. Fears surrounding possible conflict with Iran and the effects of Iranian sanctions have led a number of foreign companies investing in Iran’s upstream facilities to halt their activities. The EIA expects Iran’s crude production to fall by about 500 thousand bbl/d by the end of 2012, a decrease of 14 percent from 2011. Additionally, civil disputes in South Sudan, Sudan, Yemen and Syria have temporarily reduced or shut-in crude oil production. These supply disruptions accompanied by increases in demand have lead to increases in the price of crude oil. The EIA projects the U.S. refiner acquisition cost of crude oil is expected to average $110 per barrel in 2012, while the spot price for West Texas Intermediate (WTI) is expected to average $104 per barrel.8 The projected average WTI price discount of $6.00 is due primarily to physical pipeline capacity constraints which limit efficient movement of supplies to refining locations. Currently, the market relies on high-cost rail and trucks to ship both crude oil stored at Cushing and production from Canada and the Bakken formation (North Dakota) to the Gulf Coast and other locations. One project aimed at reducing constraints is the proposed reversal of the Seaway Pipeline, slated to initially transport up to 150,000 barrels per day (bbl/d) of crude oil from Cushing, Oklahoma to the Gulf Coast and increasing to 400,000 bbl/d by 2013. The ability to ship crude oil out of Cushing via pipeline will allow WTI and similar inland U.S. crudes to compete directly with the higher priced waterborne crude oils on the Gulf Coast (whose prices closely follow Brent), bringing the price of WTI more in line with global markets.
U.S. Outlook According to the EIA’s “Short Term Energy Outlook,” total U.S. liquid fuels consumption (motor gasoline, jet fuel, distillate fuel, biofuels, etc.) fell by an estimated 670 thousand bbl/d (3.5 percent) in the first quarter of 2012 from the same period last year. Motor gasoline and distillate fuel consumption accounted for much of that decline, but more moderate year-over-
8
The U.S. refiner acquisition cost of crude oil includes transportation and other fees paid by the refiner.
9
year declines averaging about 30 thousand bbl/d are expected through the remainder of the year. Domestic crude oil production increased by an estimated 190 thousand bbl/d (3.4 percent) to 5.66 million bbl/d in 2011. A 450‐thousand bbl/d increase in lower‐48 onshore production in 2011 was partly offset by declines in Alaska and the Gulf of Mexico. The rise in production is driven by increased oil directed drilling activity, particularly in onshore tight oil formations in North Dakota and Texas. Production increases in these regions are mainly associated with accelerating horizontal drilling programs in the Bakken and Eagle Ford shale formations. The share of total U.S. consumption met by total liquid fuel net imports (including both crude oil and products) has been falling since 2005, and averaged 45 percent in 2011, down from 49 percent in 2010. EIA expects that the total net import share of consumption will be 43 percent in both 2012 and 2013.
Another factor that continues to influence prices is U.S. crude oil inventories. Inventories were 381.6 million barrels in the week ending May 11, 2012. This is 11.3 million barrels above levels from a year ago and at the top of the five-year average for this time of year. In fact, crude oil inventories have been very high from about May 2010 through September 2011 before dipping slightly toward the middle of the five-year average. Since January 2012, however, inventories have begun to build and are once again at the very top of the five-year average. Fears of global supply disruptions, however, have placed upward pressure on prices despite high inventories.
Midwest Outlook Inventories of crude oil in the Midwest are at the top of the five-year average for this time of year. Gasoline inventories in the Midwest are within the mid-range of levels usually seen at this time of year with 49.9 million barrels in stock, a 4.8 percent increase from last year. In contrast, distillate inventories are down nationwide and only slightly above levels seen a year ago at 29.9 million barrels in the Midwest for the week ending May 11, 2012. 10
U.S. Refiner Acquisition Cost of Crude Oil
U.S. Petroleum Demand Projections (Million barrels per day) 2010 3rd
4th
2011 1st
2nd
Yearly Ave
2012
3rd
4th
1st
2nd
3rd
4th
2010
2011
2012
PROJECTED Demand in 50 States Domestic Crude Oil Supply Total Petroleum Net Imports Crude Oil Price
3
19.47 19.22 19.08 1
2
18.75
18.84
18.68 18.42 18.78 18.97
5.44
5.60
5.53
5.59
5.57
5.93
6.13
9.86
8.55
8.71
8.97
8.29
7.76 7.84
6.21 8.30
6.10 8.48
18.87 19.18 6.26 5.48 7.54
9.44
18.84 18.76 5.66 8.43
6.18 8.04
74.05 81.59 93.85 108.23 100.59 104.55 107.88 109.42 110.50 110.50 76.71 101.81 109.57
1
Notes: Includes only crude oil production. Additional sources of domestic petroleum supply include natural gas liquids, other 2 3 hydrocarbons, alcohol inputs and processing gains. Net Imports include deliveries to the Strategic Petroleum Reserve. In Dollars per barrel for Imported Crude Oil Refiner Acquisition Costs for imports and domestic. Sources: Energy Information Administration, U.S. Department of Energy, Short-Term Energy Outlook April 2012, and Petroleum Weekly Status Report.
U.S. Total Petroleum Demand and Net imports
Notes: The above projections and analysis were excerpted from the DOE Energy Information Administration’s (EIA) “Short-Term Energy Outlook,” April 2012, the EIA Weekly Petroleum Status Report, and other industry sources.
11
Motor Gasoline Demand In 2012, gasoline sales in Michigan are expected to decrease 2.2 percent following a decline of 1.6 percent in 2011. A combination of Middle East tensions, market speculation and reduced global surplus production capacity has sustained a cost premium on crude oil and refined petroleum products for well over a year. Although recent oil market volatility has been significant, gasoline demand has been on an overall pattern of decline for the past six years, with the exception of 2010. In addition to demand destruction from higher gasoline prices, increasing vehicle fuel efficiency has also been a significant factor in declining demand with the average sales-weighted fuel economy reaching 23.4 MPG in 2011.9 This most recent fuel economy is an average of 12.5 percent higher than it was in 2008. Nationally, vehicle miles traveled are actually projected to increase by 1.2 percent according to the EIA, but still reflect an overall decrease in demand. Projected sales in Michigan for 2012 are 4,118.4 million gallons which are well below levels seen in 2009. Michigan Gasoline Demand and Real Gasoline Prices
Supply For the week ending May 4, refineries were operating at 86.4 percent of capacity nationally. This was up from the 83.8 percent capacity utilization rate seen a year ago at this time. These figures, however, conceal strong regional disparities caused by the divergence of cheaper West Texas Intermediate (WTI) and higher Brent crude oil prices in 2011, particularly in the Midwest and East Coast regions.10 For example, Midwest refineries averaged gross inputs that were 8 9
Univ. of MI Transportation Research Institute: http://www.umich.edu/~umtriswt/EDI_sales-weighted-mpg.html West Texas Intermediate (WTI) and Brent Crude are the two main price benchmarks traded on the New York Mercantile Exchange (NYMEX).
10
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percent above their five-year average, while those on the East Coast were running 22 percent lower than average. Midwest refineries benefitted from supplies of less expensive crude oil coming from Canada and increased production in the Bakken formation. The refining region most directly affecting Michigan (Illinois, Indiana, and Kentucky) is expected to produce an average of 1,819.3 million gallons a month in 2012, up 0.1 percent from 2011. In contrast, East Coast refineries are exposed to higher Brent Crude prices which decreases operating margins. This has led the closure of two key refineries in the Philadelphia area (ConocoPhillips Trainer refinery and Sunoco's Marcus Hook refinery) since September, 2011 and one major Caribbean export refinery supplying the East Coast (Hovensa’s U.S. Virgin Islands refinery). Nationally, imports of finished gasoline to the U.S. in mid-April, 2012 are 30 percent below levels seen at the same time last year. A ramp-up in crude production from unconventional plays such as the Bakken Shale in North Dakota and the Eagle Ford Shale in South Texas has led to predictions that US crude imports will continue to fall in the coming years. In 2011, the United States shifted to net product exporter status for the first time since 1949. National gasoline inventories are currently toward the top of the five-year average range for this time of year, down slightly from seasonal highs during December through February. For the week ending May 4, U.S. gasoline inventories stood at 207.1 million barrels (23.8 days of supply), 3.9 percent higher than the same period last year. Projected regional inventories for 2012 are 13.4 percent above levels of a year ago with projections averaging 265.6 barrels per month. This projected build is primarily a result of decreasing demand and increasing production in the Midwest region.
Price During the April‐through‐September summer driving season this year, regular gasoline retail prices are forecast to average about $3.79 per gallon, after peaking in April at a monthly average price of $3.90 per gallon. EIA expects regular gasoline retail prices to average $3.71 per gallon in 2012, compared with $3.53 per gallon in 2011. The projected increase in gasoline prices this year suggests that vehicle fueling costs for the average U.S. household will be about $250 higher in 2012 than they were in 2011 according to the EIA. According to AAA, the average price for a gallon of regular unleaded gasoline in Michigan was $3.69, as of May 21, 2012. This is 18 cents lower than at this time last year and 40 cents below the record high this year of $4.09 per gallon set on March 29, 2012. High prices have been supported by a number of factors including: fears of the closing of the Straits of Hormuz by Iran, reduced supply as a result of Iranian sanctions and reduced output from countries such as Libya, Syria and Yemen. The average weekly price of regular unleaded gasoline has not dropped below $3.00/gallon since December, 2011. 13
Michigan Gasoline Sales
Michigan Gasoline Sales Projection (Millions of Gallons) Total All Grades Historical
2009 2010 2011
Projection 2012
2012
Total Total Total January February March April May June July August September October November December Total
Historical (prior year) % Change
4,292.7 4,344.4 4,277.0
4,328.7
334.3 313.5 346.3 330.9 351.7 354.5 363.0 372.7 351.0 363.9 347.6 351.6
345.6 319.2 352.7 333.6 353.1 363.4 371.3 385.2 364.4 369.5 358.3 360.8
4,181.0
4,277.0
4,292.7 4,344.4
-0.8% 1.2% -1.6%
-2.2%
NOTE: These projections are based EIA forecasts of real gasoline prices. SOURCE: Historical data - Energy Information Administration, U.S. Department of Energy. Projections – Energy Data & Security Section, MPSC
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Regional Gasoline Supply and Demand
Regional Gasoline Supply and Demand (Millions of Gallons) Production
Inventories
Demand
Historical
2009 2010 2011
Average Average Average
1,635.2 1,808.4 1,817.8
352.3 271.9 234.2
1,841.7 1,813.7 1,752.7
Projection
2012
January February March April May June July August September October November December
1,809.4 1,625.2 1,812.5 1,727.1 1,810.3 1,857.8 1,950.8 1,879.2 1,828.2 1,862.4 1,835.8 1,832.5
318.2 320.8 253.5 229.6 241.0 248.4 265.4 256.8 292.8 242.1 260.2 258.6
1,630.7 1,532.3 1,716.1 1,680.2 1,747.0 1,756.8 1,789.2 1,816.5 1,697.7 1,756.6 1,690.2 1,721.3
2012 2011-2012 change
Average
1,819.3 0.1%
265.6 13.4%
1,711.2 -2.4%
NOTES: *Production projections are based on refinery utilizations and recent trends. Much of the recent increase in production, however, can be attributed to ethanol blending. The region is comprised of Illinois, Indiana, Kentucky, Michigan, Tennessee, and Ohio. SOURCE: Historical data - Energy Information Administration, U.S. Department of Energy. Projections –Energy Data & Security Section, MPSC
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Distillates Demand Distillate sales in Michigan are projected to decrease by 1.4 percent to 1,023.6 million gallons in 2012. This is a similar trend to last summer where sales decreased by 0.67 percent as a result of high diesel fuel prices. The high price of crude is expected to put downward pressure on demand growth, despite modest and steady growth in industrial activity. Industrial production is an important determinant of sales since the trucking and railroad industries are large consumers of diesel fuel. The industrial production index is expected to increase an average of 5.72 percent in 2012 compared to 2011. Diesel fuel remains the prime component of distillate demand, just under 95 percent, with the majority being used for transportation by highway trucks.
Supply Nationally, inventories of distillates are within the 5 year range for this time of year, but are down 13 percent from levels in 2011. Robust global distillate demand has led to a significant inventory draw, despite heightened U.S. production which increased by 6.2 percent in 2011. Along with high domestic prices, strong international markets for distillate fuel oils have spurred increased production. Regionally, production grew by 4.8 percent in 2011 and is projected to continue this trend in 2012 with a growth of 4.7 percent. In the United States, refineries typically optimize production for finished motor gasoline to meet domestic demand, while European refineries tend to produce higher percentages of distillate fuel oils, as diesel is used more broadly there for transportation. Due to crude supply disruptions to European refineries for much of the past couple years, the region has imported more finished products. By altering their production mix and increasing runs to maximize output, US refineries consistently set record levels of production in 2011. Weekly U.S. gross distillate export estimates (bound primarily for European and South American markets) were at record levels in the fourth quarter of 2011, topping more than 0.9 million bbl/d in October and November, and exceeding 1 million bbl/d in December. The graph below shows how refineries have shifted output toward increased distillate fuel production as international demand has increased.
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Price According to the EIA, on‐highway diesel fuel retail prices, which averaged $3.84 per gallon in 2011, will average $4.06 per gallon in 2012. For the week of May 14, the average Midwest price of $3.90 was slightly lower than the U.S. average. According to AAA, the peak price of $4.85 recorded in Michigan was on July 17, 2008. Since October 2011, the spot price for ultra-low-sulfur distillate fuel has risen as the spot price for motor gasoline (RBOB) has declined, widening the spread between the two fuels.11 On November 14, 2011, ultra-low-sulfur distillate was nearly 65 cents per gallon higher than the price for RBOB. The spread between these product prices has not been more than 60 cents per gallon since November 2008. This is due in part to the increased global demand for distillate fuels as well as significant inventory draws.
Michigan residential heating oil prices averaged $3.75 per gallon (excluding sales tax) on March 19, 2012. The average price in mid-March 2011 was $3.63. The 2011/2012 heating season began with residential heating oil prices at a price of $3.47 per gallon (Oct. 3, 2011). Prices followed the volatility in the oil markets and fluctuated from a high of $3.83 per gallon to a low of $3.35 per gallon. Due to the mild winter, prices decreased by $0.41 during the month of December only to creep upward as the heating season progressed.
11
The spot price for motor gasoline is measured by New York Reformulated Blendstock for Oxygenate Blending (RBOB) spot prices in this chart.
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Michigan Distillate Fuel Oil Sales
Michigan Distillate Fuel Oil Sales Projection (Millions of Gallons)
Historical
2009 2010 2011
Total Total Total
Projection
2012
January February March April May June July August September October November December
2012
Total
Other * Distillate 40.1 45.9 47.5
Diesel Fuel 923.6 999.5 991.0
Total 961.6 1045.5 1038.5
Prior Year 1104.2 961.6 1045.5
4.0 2.5 2.7 1.5 1.4 1.3 0.8 1.9 3.4 5.8 5.1 7.3
77.9 71.5 77.4 79.2 86.2 84.7 81.2 87.1 85.8 93.7 82.0 79.1
81.9 74.1 80.1 80.7 87.6 86.0 82.1 89.0 89.3 99.5 87.1 86.4
83.9 78.0 80.1 76.9 86.0 91.5 87.1 95.0 90.4 96.9 88.9 83.7
37.8
985.8
1,023.6
1,038.5
% Change -12.9% 8.7% -0.7%
-1.4%
NOTES: These projections assume normal degree day accumulations for the remainder of the year. Actual demand may vary as a result of actual temperature variations. Other distillates were assumed to decline at the same rate as diesel fuel. SOURCES: Historical data -- Energy Information Administration, U.S. Department of Energy. PROJECTIONS: Energy Data and Security Section, MPSC * = Other Distillate is comprised of: Kerosene, No. 1 Distillate and No. 2 Fuel Oil
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Regional Distillate Fuel Oil Supply and Demand
Regional Distillate Fuel Oil Supply and Demand (Millions of Gallons) Production
Inventories
Demand **
Historical
2009 2010 2011
Average Average Average
658.9 706.8 740.8
533.6 512.0 513.4
685.5 737.3 743.5
Projection
2012
January February March April May June July August September October November December
766.6 715.6 723.4 746.5 800.6 779.7 782.8 797.7 773.1 795.5 794.4 831.6
580.8 554.4 508.6 508.7 527.0 523.9 527.1 507.8 517.4 478.3 501.3 541.2
739.3 688.2 759.3 742.8 755.6 748.5 724.5 771.6 771.3 837.2 764.6 748.4
2012
Average
775.6
523.0
754.3
NOTES: Production projections based on expected refinery capacity utilization and recent trends. Regional demand estimates are based on the recent regional trend. The region is comprised of Illinois, Indiana, Kentucky, Michigan, Tennessee, and Ohio. SOURCES: Historical data -- Energy Information Administration, U.S. Department of Energy; PROJECTIONS: Energy Data & Security Section, MPSC. ** EIA has discontinued supplying the data that comprised individual end use demand figures. Due to this change, a different dataset to represent diesel fuel, other uses and total distillate sales is now being used.
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Michigan Public Service Commission Michigan Energy Appraisal P.O. Box 30221 Lansing, MI 48909
