Natural Gas Markets: Leveraging the Production Revolution ...

David E. Dismukes, Ph.D. Center for Energy Studies Louisiana State University

Natural Gas Markets: Leveraging the Production Revolution into an Industrial Renaissance

Center for Energy Studies

International Technical Conference Houston, Texas October 11, 2013

Energy-Related Carbon Dioxide

81.2%

Summary and Take Away

2

• New natural gas supply availability is having considerable impacts on all energy markets today and on a longer term basis.

• Shale revolution is now migrating into liquids and crude oil production. Facilitating additional natural gas production despite low prices and some “dry” gas well shut-ins and decreased natural gas well drilling.

• Considerable economic development opportunities are

starting to arise leading to a burst in considerable capital investment.

• All industry stakeholders (labor, management, regulators, customers, interest groups) need to be aware of diversity sensitivities and continued natural gas resource development concerns and opposition.


© LSU Center for Energy Studies

Introduction


Recent Trends in Natural Gas Markets

3 © LSU Center for Energy Studies

Unconventional vs. Conventional Geological Formations



Recent Trends

Source: Energy Information Administration, U.S. Department of Energy

Domestic Shale Gas Basins and Plays



Unlike conventional resources, shale plays

(natural gas, liquids, and crudes) are

located almost

ubiquitously throughout the U.S. and

are the primary

reason for the decrease in overall and

regional natural gas

prices.

Recent Trends

Dry

Nat

ural

Gas

Pro

ved

Res

erve

s (T

cf)

Source: Energy Information Administration, U.S. Department of Energy.

-

5

10

15

20

25

30

0

50

100

150

200

250

300

350

1970 1975 1980 1985 1990 1995 2000 2005 2010

Reserves

Production

Marketed P

roduction (Tcf)

Current U.S. natural gas reserves are approaching record levels not seen since 1970. Natural gas production is at levels that surpass historic peaks.

6



Natural Gas Proved Reserves and Production

Recent Trends


Shale’s Share of Natural Gas Reserves

The share of shale gas relative to total U.S. natural gas proved reserves has been increasing significantly, from less than 10 percent in 2007 to over 30

percent in 2010.

7



9%

13%

21%

31%

0%

5%

10%

15%

20%

25%

30%

35%

2007 2008 2009 2010

Per

cent

Recent Trends


U.S. Dry Natural Gas Reserve Adjustments

U.S. shale gas reserves are increasing, enough to more than offset the decrease in net reserves from all other sources in both 2008 and 2010.

8



-10

-5

0

5

10

15

20

25

30

35

40

2007 2008 2009 2010

Shale All Other Sources

Tcf

Recent Trends

Res

erve

s - T

cf


Annual Energy Outlook, Natural Gas Reserves


200

220

240

260

280

300

320

2010 2015 2020 2025 2030 2035


Unconventional resources are not a “flash in the pan” and are anticipated to continue to increase over the next two decades or more.

Recent Trends


There are a wide range of unconventional shale gas reserve estimates that are as low as 436 Tcf to as high as 2,750 Tcf. This represents a range of between 18 years and over 100 years of available natural gas resources based upon current consumption

levels.*


0

500

1,000

1,500

2,000

2,500

3,000

EIA AEO 2012 MIT ITG InvestmentResearch

IHS Energy

Est

imat

ed R

eser

ves

- Tcf

Note: *Assumes an annual consumption level of 24.3 Tcf. The MIT study reached a mean estimate of technically recoverable resources of 631 Tcf with an 80 percent confidence interval of 418 to 871 Tcf. The ITG estimates of recoverable resources is for 10 overlapping plays, totaling 900 Tcf. These are the same 10 plays as estimated by the EIA’s AEO (resulting in 426 Tcf). IHS Energy estimates show that total recoverable shale in the U.S. could be as high as 2,750 Tcf, significantly higher than their estimate of 1,268 in 2010.

Recent Trends

Alternative Natural Gas Reserve Forecasts


Forecast U.S. Natural Gas Production


0

5

10

15

20

25

30

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Shale gas Tight gas Non-associated offshoreAlaska Coalbed methane Associated with oilNon-associated onshore

Tcf

Shale availability will drive U.S. natural gas supply.

Shale Gas Production

Assc. Gas Production

Recent Trends

(201

0 $/

MM

BTU

)


Changes in AEO Natural Gas Price Forecasts


0

2

4

6

8

10

12

14

16

1997 2002 2007 2012 2017 2022 2027 2032

Actual Henry Hub AEO-2007 AEO-2008 AEO-2009AEO-2010 AEO-2011 AEO-2012


Shale availability has significant impact on future price outlook.

Anticipated price outlook in 2009.

Anticipated price outlook today.

Recent Trends

Changes in Well Costs and Productivity

13



11.9 10.3 9.9 9.3 9.0

15.6

9.6 9.0

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

2006 2007 2008 2009 2010 2008 2009 2010

Well Cost (million $)

9.5

17.7 18.9

23.6 23.6

8.0 10.5

15.0

$0

$5

$10

$15

$20

$25

2006 2007 2008 2009 2010 2008 2009 2010

East Texas Deep Bossier Haynesville

Well Performance (MMcfe/d)

East Texas Deep Bossier Haynesville

Encana reports a reduction in well costs of 15-30% through use of multi-pad drilling, improved rig efficiencies, and lower hydraulic fracturing costs. The

use of higher water volumes, increased frac stages, and enhanced pay selection have resulted in 100-150% increases IP rates.

Source: U.S. Natural Gas Resources and Productive Capacity: Mid-2012, Prepared for Cheniere Energy, Advanced Resources International, Inc. August 23, 2012.

Recent Trends


Liquids and Crude Oil Development



Crude oil prices have doubled in the aftermath of the recession but natural gas prices have remained stable.


$0

$2

$4

$6

$8

$10

$12

$14

$0

$20

$40

$60

$80

$100

$120

$140

$160

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Crude Oil (WTI) Natural Gas (Henry Hub)

The price of natural gas has fallen 78

percent since June 2008.

Source: Federal Reserve Bank of St. Louis.

Cru

de O

il ($

/Bbl

) N

atural Gas ($/M

cf)

The price of crude oil has increased 140

percent since its low in February 2009.

Crude Oil and Natural Gas Price Decoupling

Liquids/Crude Oil

Source: Baker Hughes.

US Oil and Natural Gas Rig Count

The increase in crude oil prices has resulted in a revised emphasis in unconventional drilling. Developers are shifting rigs into basins that are

expected to yield crude and liquids rather than those with dry gas .

16



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan-90 Jan-95 Jan-00 Jan-05 Jan-10

Oil Gas

Per

cent

of T

otal

Rig

s Liquids/Crude Oil



Can you insert a slide that shows a

Liquids/Crude Oil

Annual Production from Unconventional Reservoirs

In just one year, Cheniere has revised its forecasted natural gas production in 2020 from slightly less than 8 Bcf per day to more than 12 Bcf per day; and

liquids production from 6 MMBbls per day to 7 MMBbls per day.

18


© LSU Center for Energy Studies Source: Cheniere Energy Inc,, Corporate Presentations. Available at: http://phx.corporate-ir.net/phoenix.zhtml?c=101667&p=irol-presentations.

Nat

ural

Gas

(Bcf

/d)

0

1

2

3

4

5

6

7

8

0

2

4

6

8

10

12

14

2011 2012 2015 2020 2011 2012 2015 2020

Liquids Natural Gas

Liquids (MM

Bbl/d)

Cheniere Outlook, March 2012 Cheniere Outlook, April 2013

Liquids/Crude Oil

http://phx.corporate-ir.net/phoenix.zhtml?c=101667&p=irol-presentations

http://phx.corporate-ir.net/phoenix.zhtml?c=101667&p=irol-presentations


Natural Gas and Economic Development: Moving from

“Revolution” to “Renaissance”



U.S. Oil and Gas Employment v. Economy-wide Trends (2005 = 100)


90

100

110

120

130

140

150

2005 2006 2007 2008 2009 2010 2011

Empl

oym

ent (

2005

= 1

00)

Oil and gas employment

Total emplyoment

Source: Bureau of Labor Statistics

Economic Development

Oil and gas employment is almost 40 percent above its 2005 level while total U.S. employment struggles to regain four years of losses.

Upstream oil and gas employment clearly

outperforming overall economy.



94

96

98

100

102

104

106

108

2005 2006 2007 2008 2009 2010 2011

Empl

oym

ent (

2005

= 1

00)

States with major shaleactivity

Shale states: LA, TX, AR, ND, UT, CO, & PA Source: Bureau of Labor Statistics


U.S. Employment Trends (2005=100): Total Employment, Select States The “multiplier” effects of upstream development have likely had significant

beneficial impacts on shale-producing states.

Louisiana Chemical Industry Employment and Henry Hub Spot Price


The chemical industry is particularly sensitive to natural gas prices. As natural gas prices increase, chemical industry employment decreases.


$0

$2

$4

$6

$8

$10

$12

$14

$16

20

21

22

23

24

25

26

27

28

29

30

Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

Louisiana Chemical Manufacturing Employment Natural Gas Price

Source: Bureau of Economic Analysis, U.S. Department of Commerce; and Energy Information Administration, U.S. Department of Energy.

Num

ber o

f Job

s (th

ousa

nd) H

enry Hub P

rice ($/Mcf)


Natural Gas Stream

Ethylene

Propylene

Butylene

Xylene

Toulene

Natural gas is the basic industrial building block for many household goods.

Methane Ethane Propane Butane Paints

Dry Cleaning

Detergents Tires

Toys

Textiles Cosmetics

Pharmaceuticals

Natural Gas Composition and Modern Chemistry


© LSU Center for Energy Studies 23



The American Chemical Council estimates that U.S. chemical industry capital investments will total $71.7 billion through 2020. These investments are based on a

“renewed competitiveness from shale gas.”


$5.7

$7.8

$11.3

$14.6

$12.4

$7.1

$4.4 $4.7 $3.7

0

2

4

6

8

10

12

14

16

2010-2012 2013 2014 2015 2016 2017 2018 2019 2020

Num

ber o

f Job

s (M

illio

n)

Source: American Chemistry Council.


Incremental U.S. Chemical Industry Capital Expenditures

Louisiana Total Capital Expenditures by Sector


Recent LSU-CES Study found that the total capital investment associated with all announced natural gas-driven manufacturing investments in Louisiana totals over $62

billion. Most of the investment is anticipated to occur between 2014 and 2017.


Bill

ion

$

$0

$2

$4

$6

$8

$10

$12

$14

$16

2011 2012 2013 2014 2015 2016 2017 2018 2019

LNG Export Cracker/Polymer Methanol/Ammonia Other GTL

Source: David E. Dismukes (2013). Unconventional Resources and Louisiana’s Manufacturing Development Renaissance. Baton Rouge, LA: Louisiana State University, Center for Energy Studies.



Potential Changes in Power Generation



New Natural Gas End Uses and Fuel Diversity Concerns

New Natural Gas End Uses & Fuel Diversity Concerns


• As noted earlier, the industrial “renaissance” is likely to lead to the first increase in industrial natural gas demand in decades. The extent and degree of this is indeterminate. Consider that a new GTL plant or a new LNG facility, use roughly 2/Bcfd alone at full capacity (730 Bcf of annual load each).

• However, power generation has been – and will continue to be – a significant natural gas end use.

• Environmental regulations are having a considerable impact on developers’ capacity development decisions.

• The low cost of natural gas is clearly provides a preference to new gas over new coal.

Power Generation


28

Ozone

PM2.5

Beginning CAIR Phase I Seasonal NOx Cap

HAPs MACT proposed

rule

Revised Ozone NAAQS

Begin CAIR

Phase I Annual

SO2 Cap

Next PM-2.5

NAAQS Revision

Next Ozone NAAQS Revision

SO2 Primary NAAQS

SO2/NO2 Secondary

NAAQS

NO2 Primary NAAQS

SO2/NOx

New PM-2.5 NAAQS Designations

Hg/HAPS

Final EPA Nonattainment Designations

PM-2.5 SIPs due (‘06)

Proposed Transport Rule

HAPS MACT final rule expected

CAIR Vacated

HAPS MACT Compliance 3 yrs

after final rule

CAIR Remanded

CAIR/CSAPR

Begin CAIR

Phase I Annual

NOx Cap

PM-2.5 SIPs due (‘97)

316(b) proposed rule

316(b) final rule expected

316(b) Compliance < 8 yrs after final rule Effluent

Guidelines proposed rule

expected

Water

Effluent Guidelines Final rule expected Effluent Guidelines

Compliance 3-5 yrs after final rule

Begin Compliance Requirements under Final CCR Rule (ground water

monitoring, double monitors, closure, dry ash conversion)

Ash

Proposed Rule for CCRs

Management

Final Rule for CCRs Mgmt

Final Transport Rule Issued

Compliance with CSAPR

CO2

CO2 Regulation

Reconsidered Ozone NAAQS

-- updated from Wegman (EPA 2003)

CAMR & Delisting Rule vacated

2008 2011 2012 2013 2015 2016 2009 2010 2017 2014

Electric Industry Environmental Regulations Create Uncertainty for Coal

Transport rule (CSAPR) vacated

Power Generation

Coal-Fired Capacity Share by Age Category


29 © LSU Center for Energy Studies Source: Energy Information Administration, U.S. Department of Energy

Less than 30 years: 79,876 MW; 22% of capacity; 73 plants (averaging 1,094 MW)

30 to 50 years: 238,934 MW; 66% of capacity;

208 plants (averaging 1,149 MW)

Greater than 50 years: 45,382 MW; 12% of capacity; 72 units (averaging 630 MW)

There is a considerable amount of legacy coal capacity (45 GWs) that is relatively old, and in some instances, has few to little controls to meet

anticipated standards.

Power Generation

Increased Natural Gas Use from CSAPR-Induced Coal Plant Retirements



Nat

ural

Gas

Con

sum

ptio

n (B

cf)

0

500

1,000

1,500

2,000

2,500

3,000

New Generation (Retired Coal)

Note: Assumes 160 Bcf of NGV natural gas use. Also assumes retirement of 45 GW of coal-fired capacity, replaced with new natural gas generation with an 85 percent capacity factor and a 7,600 Btu/kWh heat rate.

The retirement of 45 gigawatts of capacity would likely have an impact on overall natural gas usage (potentially 2 TCF).

Power Generation

U.S. Generation Capacity by Fuel Type: 2011, 2025 and 2040


EIA estimates the growth in new generation to come primarily from natural gas (~170 GWs) and renewables (~75 GWs).


0

50

100

150

200

250

300

350

Coal Oil/gassteam

Natural gascombined

cycle

Natural gascombustion

turbine

Nuclear Renewable/other

2011 2025 2040

Cap

acity

(GW

)


Down Up Wishful thinking

Up Up Down

Power Generation

What About Gas Exports?

32



Considerable Underutilized LNG Regasification Capacity along GOM

A

B

C

D

E

Existing

J

F

Existing A. Everett, MA: 1.035 Bcfd B. Cove Point, MD: 1.8 Bcfd C. Elba Island, GA: 1.6 Bcfd (+0.5 Expansion) D. Lake Charles, LA: 2.1 Bcfd E. Energy Bridge, GOM: 0.5 Bcfd F. Northeast Gateway, Offshore MA: 0.8 Bcfd G. Freeport, TX: 1.5 Bcfd (+2.5 Expansion) H. Sabine, LA: 4.0 Bcfd I. Hackberry, LA: 1.8 Bcfd (+0.85 Expansion) J. Neptune, Offshore MA: 0.4 Bcfd K. Sabine Pass, TX: 1.0 Bcfd (+ 1.0 Expansion) Under Construction L. Pascagoula, MS: 1.0 Bcfd Approved M. Corpus Christi, TX: 1.0 Bcfd N. Corpus Christi, TX: 2.6 Bcfd O. Fall River, MA: 0.8 Bcfd P. Port Arthur, TX: 3.0 Bcfd Q. Logan, NJ: 1.2 Bcfd R. Port Lavaca, TX: 1.0 Bcfd S. Baltimore, MD: 1.5 Bcfd T. LI Sound, NY: 1.0 Bcfd

H I K

Regasification

Under Construction

Approved

Existing

Liquefaction

Under Construction

Approved

G

L

M

N

O T

P

Q

R

S

LNG Exports Center for Energy Studies

© LSU Center for Energy Studies 33

LNG Value Chain

34 Source: Cheniere. Note: *uses a BOE conversion of 5.8 Mcf/BOE.

Feedstock (production) costs will be critical in determining the location of basin-specific production along the global LNG supply curve.

Europe: Low High Asia: Low High

Feedgas 56%

($/MMBtu)

$4.00 $6.50

$4.00 $6.50

Liquefaction 11%-17%

($/MMBtu)

$1.25 $1.25

$1.25 $1.25

Shipping & Fuel 20%-29% ($/MMBtu)

$1.40 $1.65

$2.90 $3.45

Regas 4%-7%

($/MMBtu)

$0.50 $0.50

$0.50 $0.50

Delivered Cost

($/MMBtu)

$7.15 $9.90

$8.95 $11.70

Equivalent Oil Price* ($/BOE)

$41.47 $57.42

$51.91 $67.86

Henry Hub: $4.50 $5.00

WTI: $97.00 $100.00



LNG Exports

Basin Competition

Source: MIT Energy Initiative. 35

China 1,275 Tcf

Australia 396 Tcf South

Africa 485 Tcf

Argentina 774 Tcf

Brazil 226 Tcf

Mexico 681 Tcf

Canada 388 Tcf

U.S. 862 Tcf

France 180 Tcf

Poland 187 Tcf

Algeria 231 Tcf

Libya 290 Tcf

Close to 6,000 TCF of shale gas opportunities around the world. Coupled with 9,000 Tcf in conventional suggest a potentially solid resource base for many decades.



LNG Exports


Conclusions



Conclusions


• Natural gas markets continue to be resilient. Prices anticipated to remain affordable and less volatile.

• While some (dry methane) wells have shut/back or are shut-in, this has not been enough to stall the increases in production.

• Natural gas supply growth increasingly driven by “associated” natural gas – a byproduct of increasing production coming from higher hydrocarbon-based production (Marcellus, Eagle Ford, Bakken).

• Economic growth is tepid and likely to not upset this balance – however, a big upward swing in economy-driven demand could make that change happen.

• New end uses are a blessing (new manufacturing, more efficient/cleaner power generation) but need to be watched for unanticipated consequences.

Conclusions

Questions, Comments & Discussion


38

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