Post on 21-Jul-2020
1
Natural Gas Outlook
November 17, 2010By:
John A. Harpole
Presentation to:2010 Fertilizer Outlook and Technology Conference
Savannah, Georgia
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Fertilizer Industry vs. Natural Gas Industry
Source: http://www.search.com/reference/Lucy_van_Pelt
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What will impact natural gas prices during the next 5 years?
• Shale gas/productivity gains (We aren’t exploring, we are manufacturing gas.)
• Lower EPA Air Standards (demand increase)• Renewable Portfolio Standards (in an
inexpensive gas environment?)• Coal to gas conversion (demand increase)• Demand in Mexico (potential demand increase)• LNG exports from North America (China is
waiting)
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Historical NYMEX Prices
$0.000
$2.000
$4.000
$6.000
$8.000
$10.000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Year
$/M
MB
tu
NYMEX - Average last 3 days of close as reported in Platts Gas Daily Report, A McGraw Hill Publication
5
$0
$1
$2
$3
$4
$5
$6
$7
11/1
/201
02/
1/20
115/
1/20
118/
1/20
1111
/1/2
011
2/1/
2012
5/1/
2012
8/1/
2012
11/1
/201
22/
1/20
135/
1/20
138/
1/20
1311
/1/2
013
2/1/
2014
5/1/
2014
8/1/
2014
11/1
/201
42/
1/20
155/
1/20
158/
1/20
1511
/1/2
015
$/M
MB
tu
BENTEK Est.
BENTEK Expects The Forward Curve To Fall Further
NYMEX
Source: BENTEK
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Part 1: Shale Gas
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88Source: America’s New Natural Gas, America’s Natural Gas Alliance
EVOLUTION IN GAS WELL COMPLETION TECHNOLOGY
- THE KEY TO TODAY’S NATURAL GAS REVOLUTION
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Cody
PierreFayetteville
Haynesville
Eagle Ford
Horn River
Montney
Deep Basin Colorado Group
Mowry
Gammon
Bakken
Baxter/Mancos
Mancos
Barnett/Woodford
Barnett
NEW SHALE PLAYS IN NORTH AMERICA- “A Game Changer”
MulkyNew Albany
Antrim
Marcellus/Ohio/Huron
Utica
Woodford
Floyd-Neal
Niobrara
Lewis
Source: America’s Natural Gas Alliance website
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Eastern U.S. Gas Shale BasinsResource
Endowment (Tcf)
Produced/Proved Reserves (Tcf)*
Undeveloped Recoverable
Resource (Tcf)*
Barnett 250 19 40
Fayetteville 320 3 50
Woodford 300 2 30
Haynesville 790 1 130
Marcellus 1,760 - 220
Total 3,420 25 470*As of end of 2008
U.S. Proved Natural Gas Reserves as of 2005: 192.5 Tcf
Source: Gas Shales Drive the Unconventional Gas Revolution, Vello A. Kuuskraa, Advanced Resources International, Inc., 3/5/2010
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45.0
50.0
55.0
60.0
65.0
1/1 2/1 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10/1 11/1 12/1
Comparison of Marketed Production
Production Continues To Climb
Source: BENTEK Supply and Demand Report
Jan JulApr Oct
Aver
age
Dai
ly C
onsu
mpt
ion
(Bcf
d)
-2% 1%
Data through October 28, 2010
200820092010
Q-2Q-1 Q-3 Q-4
Hurricanes
Maintenance
Freeze-offs
5% TD 6%QTD
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Historic Relationship Between Rig Count & Production No Longer Holds
50.052.054.056.058.060.062.064.066.068.0
0
500
1,000
1,500
2,000
2,500
3,000
Jan-
07
Apr
-07
Jul-0
7
Oct
-07
Jan-
08
Apr
-08
Jul-0
8
Oct
-08
Jan-
09
Apr
-09
Jul-0
9
Oct
-09
Jan-
10
Apr
-10
Jul-1
0
Active Rig CountGross Production (wet)
Act
ive
Rig
Cou
nt
Average Daily Production (B
cfd)
Source: BENTEK, RigData
09 Production Grew By Nearly 3%, But The Rig Count Fell By 42%
13
13
14
14
15
15
16
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
0
1,500
3,000
4,500
6,000
7,500
2006 2007 2008 2009
Estim
ated
Ulti
mat
e R
ecov
ery
(EU
R) (
Bcf
e)
Average Lateral Len
gth (Ft)
Longer Laterals & Increased Fracing Drive Production Gains
5 Stages 5 Stages
11 Stages
9 Stages
Experience of Newfield Exploration Co in Woodford
Source: BENTEK
17
Technological Advances Enable Multi-WellPads & Increase Recovery Rates
Drilling U
nit Boundary
Lega
l Act
ivity
Lim
it
12 Stage Frac
17 Stage Frac
5 Additional Frac Stages = 1.250 MMcf EUR / Well
@ $4.50 per Mcf = $5,625,000
Source: BENTEK
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Multi-Well Pad Drilling Reduces Land Disruption
Source: BENTEK
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Why Is Production Growing With Low Prices?
Source: ICE
Avg. 2008 - $8.85
Since 1/1/09 - $4.19Avg. 2007 - $6.94
20Vertical Rigs
Horizontal Rigs
Directional Rigs 0200400600800
1000
Dir Ver Hor
U.S. Active Rigs
Barnett Shale Gas
Play
Marcellus Shale Gas
Play
Fayetteville Shale Gas
Play
Haynesville Shale Gas
Play
Woodford Shale Gas
Play
Pinedale/Jonah Tight Gas
Granite Wash Tight Gas
Williston BasinBakken Shale (Oil Play)
Emerging Eagle Ford Shale Play
Permian Basin-Oil Targets
U.S. Active Rig Is Scattered & Focused On Both Oil and Gas
RigData: Lower 48 States, Aug 2010
NiobraraShale (Oil Play)
Oil & LiquidsFairway
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The Forward Curves Encourage Drilling
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$/M
cfe
$5.26 Apr 11 to Dec 13
$4.42 Winter 10-11
$3.82 September 10
12-1 Crude to Gas Ratio Source: BENTEK
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Part 2: EPA
EPA has promulgated National Ambient Air Quality Standards (NAAQS) for six pollutants:
• Ozone (1Hr & 8HR O3)• Particulate Matter (PM10, PM2.5)• Sulfur Dioxide (SO2)• Nitrogen Oxide (NO2)• Carbon Monoxide• Lead (Pb)Source: The SIP Planning Process: An Overview of The Clean Air Act’s (CAA) Requirements for State Implementation Plan (SIP) Development & Approval, January 8, 2010
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EPA’s Effort to Tighten Air Standards
• Lisa Jackson at EPA is moving to change the 75 ppb standard for ozone to a new standard within the range of a 60-70 ppb.
• On January 6, 2010, EPA proposed to strengthen the NAAQS for ground-level ozone, the main component of smog.
• EPA will issue final standards by December 1, 2010.
Source: Fact Sheet Proposal to Revise the National Ambient Air Quality Standards for Ozone
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EPA Effort (cont’d)
Estimated Timeline for Implementing the Proposed Ozone Standards
– January 2011: States must recommend areas to be designated attainment, nonattainment or unclassifiable.
– July 2011: EPA makes final area designations.– August 2011: Designations become effective.– December 2013: State Implementation Plans (SIP),
outlining how states will reduce pollution to meet the standards, are due to EPA.
Source: Fact Sheet Proposal to Revise the National Ambient Air Quality Standards for Ozone
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Counties With Monitors Violating the March 2008 Ground-Level Ozone Standards0.075 parts per million
322 of 6751 monitored counties violate the standard
(Based on 2006 – 2008 Air Quality Data)
Notes:1. Counties with at least one monitor with complete data for 2006 – 20082. To determine compliance with the March 2008 ozone standards, the 3-year average is truncated to three decimal places.
Source: Air Quality Management Overview Presentation, RAQC Board Meeting, March 5, 2010, Paul R. Tourangeau 25
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Counties With Monitors Violating Proposed Primary 8-hour Ground-level Ozone Standards0.060 – 0.070 parts per million
EPA will not designate areas as nonattainment on these data, but likely on 2008 – 2010 data which are expected to show improved air quality.
Notes:1. No monitored counties outside the continental U.S. violate.2. EPA is proposing to determine compliance with a revised primary ozone standard by rounding the 3-year average to three decimal places.
515 counties violate 0.070 ppm
93 additional counties violate 0.065 ppm for a total of 60842 additional counties violate 0.060 ppm for a total of 650
Source: Air Quality Management Overview Presentation, RAQC Board Meeting, March 5, 2010, Paul R. Tourangeau 26
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Part 3: Renewable Portfolio Standards (RPS)The IPAMS/Bentek Study
• Wind is intermittent, not dispatchable• Coal plants “cycle down” to accept wind
into the grid• “Cycling coal plants” are inefficient and
produce more pollution than wind generation saves
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Typical 100 MW Wind Plant Generation vs. Hourly System Load
0102030405060708090
100
12:0
0 A
M1:
00 A
M2:
00 A
M3:
00 A
M4:
00 A
M5:
00 A
M6:
00 A
M7:
00 A
M8:
00 A
M9:
00 A
M10
:00
AM
11:0
0 A
M12
:00
PM
1:00
PM
2:00
PM
3:00
PM
4:00
PM
5:00
PM
6:00
PM
7:00
PM
8:00
PM
9:00
PM
10:0
0 P
M11
:00
PM
Win
d G
ener
atio
n (M
W)
20002500300035004000450050005500
Syst
em L
oad
(MW
)
Wind Generation (MW) Load (MW)
Source: Brett Oakleaf, Invenergy LLC
Output is Not Correlated with Load
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Xcel Defined Wind Event:7/2/2008
Coal Wind
Gas
Source: PSCo Training Manual
4:00 AM 8:00 AM
When Wind Blows At Night, Coal Gen Ramps Down
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The Problem Lies In The Interaction Between Wind and Coal Generation
Wind Causes PSCO To Cycle Its Coal Plants, Which Raises Emissions
May 102008
May 132008
May 122008
May 112008
May 142008
Noon Noon Noon Noon Noon
Source: CEMS data
Hou
rly C
oal G
ener
atio
n (M
W)
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Cherokee+43%+9%+5%
Comanche-39%--33%
--
Pawnee+17%
----
Source: CEMS, BENTEK Energy
LegendPlant NamePct Chg SO2 06-09 Emission Rate Pct Chg NOX 06-09 Emission RatePct Chg CO2 06-09 Emission Rate
Emissions At Non-attainment Area Coal Plants Impacted By Cycling Are Rising
Denver Nonattainment Area
Arapahoe+14%+6%+9%
Valmont+173%+3%+2%
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Part 4: Coal to Gas Conversion
“Barclays Capital analysts estimate 27,000 megawatts of production, or more than 2% of U.S. [coal fired electric] generating capacity, could close in four to five years.”
Source: Coal Plants Face Tight Pollution Regulations, Mark Peters, The Wall Street Journal, 2/10/2010
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Bernstein Research Forecast• Existing coal fired generation plants are expected
to decline by nearly 400 million MWh by 2015.*• Model assumes all coal fired power plants must
install SO2 scrubbers to meet EPA emissions standards for mercury and acid gases.*
• U.S. gas consumption would have to increase by at least 2.1 Tcf per year.
• This implies a 10% increase in U.S. consumption of natural gas by 2015.
*Source: Bernstein Research, Black Days Ahead for Coal presentation, March 19, 2010
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ME
NHVT
MARINY
NJ
DEMD
PA
VA
NC
WV
OH
MIWI
MN
IA
IL IN
KY
TNSC
FL
GAAL
MS
LA
AR
MO
TX
OK
KS
NE
NM
CO
WY
MT ND
SD
UT
AZ
NV
ID
WA
OR
CA
CT
3%4 plants
5% 3 plants
5% 3 plants
6% 5 plants
7% 6 plants
8% 6 plants
8% 8 plants
13% 9 plants
14% 8 plants
3%3 plants
3%3 plants
4%2 plants
2% 3 plants
2% 4 plants
1% 1 plant
1% 1 plant
1% 1 plant
1% 1 plant
1% 1 plant
1% 1 plant
0.4% 1 plant
0.3% 1 plant
75 Worst Coal Power PlantsPercent of Total Pollution
Sources: “Dirty Kilowatts – America’s Most Polluting Power Plants”, Environmental Integrity Project (July 2007),EIA-860 December 2008, Analysis/Summary by F.P. LeGrand
Population< 1 million 1-5 million
5-10 million10-15 million> 15 million
Population< 1 million 1-5 million
5-10 million10-15 million> 15 millionShale plays
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Part 5: Demand in Mexico• During the next 10 years, Mexico plans to build
an incremental 25,000 MW of electric power generation (POISE)
• This could equal 4.5 BCF per day of new gas demand (1.64 TCF per year)
• Mexico is currently looking for new pipeline interconnects into the U.S. for incremental supply at:
• Monterrey• Chihuahua • Baja
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Part 6: LNG Exports from North America
3737
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3939Presentation to Senate Business and Commerce Committee & Senate Natural Resources Committee, April 15, 2008.
4040
41
Chengdu, China, September 2010
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Don’t be fooled…
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China Growth
• From 2000 onward, more than half of the growthin the global energy demand came from China.
• In the last decade, China’s energy consumption has more than doubled.
• In 2003, China became the world’s second largest oil consumer, surpassing Japan.
• In 2010 China surpassed the U.S. in total energy consumed. A position that the U.S. had held for over 100 years.
Nobuyuki Higashi, Natural Gas in China: Market evolution and strategy, June 2009
Michael J. Economides with Xina Xie, Energy: China's Choke Point
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China Growth• In the 12th Five-Year Plan, China’s annual
investment for infrastructure (highway construction, pipeline construction, etc.) will be $165 billion per year.1
• 20% of China’s total energy is consumed in the production of concrete
• China’s natural gas demand is 10% of U.S. demand• From a regulatory and consumption standpoint they
are where the U.S. was in the 1930-1940’s• 30% of China’s natural gas supply is imported• According to PetroChina, only the third horizontal
shale natural gas well was completed in all of Asia this past summer.1
1Source: China Daily 11/09/2010, page 13
Nobuyuki Higashi, Natural Gas in China: Market evolution and strategy, June 2009
Michael J. Economides with Xina Xie, Energy: China's Choke Point
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What can you do?
• Buy gas in the ground to lock in a favorable price.
• Industrial customer example• West coast utility example• Volumetric Production Payments and long
term fixed price supply contracts (HB 1365)
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Summary
• Most “experts” project flat gas prices for the next 5 years.
• In 20 years, we have never seen flat gas prices.
• The billion dollar question: Will EPA, RPS and LNG issues “counter balance” new shale gas productivity?
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Citations for ReportAll of the information utilized for this report is a compilation of information pulled from the following data sources:Bentek Energy Institute for Energy Research (IER) Energy Information Administration (EIA)Bernstein ResearchBrett Oakleaf, Invenergy LLCPaul R. Tourangeau, Colorado Dept. of Public Health & EnvironmentElectric Power Research Institute (EPRI)EnCanaMark Peters, The Wall Street Journal, 02/10/2010America’s Natural Gas AllianceNobuyuki Higashi, Natural Gas in China: Market evolution and strategy, June 2009
Michael J. Economides with Xina Xie, Energy: China's Choke PointTrain pictures: http://www.darkroastedblend.com/2009/03/train-wrecks.html
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John A. HarpolePresident
Mercator Energy LLC26 W. Dry Creek Circle, Suite 410
Littleton, CO 80120www.mercatorenergy.com
(303) 825-1100 (work)(303) 478-3233 (cell)
Contact Information