The Impact of the Unconventional Gas Supply on the Link...

Oran| 01-02 December 2014

The Impact of the Unconventional Gas Supply on the Link Between Oil

and Gas Prices in the US Market

Abderrezak Benyoucef

Sonatrach/Institut Algérien du Pétrole, IAP

Workshop sur les marchés gaziers

1st et 2nd December 2014

1


Objective

Overview of the U.S. oil and gas supply/demand

Regional NG prices

US weekly WTI and Henry Hub Natural Gas spot prices

Econometric relationship between natural gas and WTI

spot prices

Impact of the Unconventional Gas Supply

Conclusion

2

Outline


Until 2005, the U.S. Natural gas and WTI prices tended to move

together, with the market prices for oil (in dollars per barrel) and

natural gas (in dollars per million Btu) maintaining a relatively

stable ratio around 6:1

However, once oil prices began to rise in 2008, the spread

between oil and gas prices has widened dramatically

The aim of this study is to investigate the raisons of the apparent

decoupling of WTI and natural gas prices in the U.S. market

Certainly, the key question is whether this decoupling is

provisory or structural, i.e short-term or long term decoupling?

3

Objective


Overview of the U.S. oil and gas supply/demand

Figure 4: U.S oil production and net imports Figure 5: Total U.S oil and gas proved reserves

Figure 6: U.S oil and gas consumption

The U.S oil consumption and importshave been decreased since 2008 (Fig 4)

However, oil and gas reserves havenotably increased (Fig 5)

Therefore, gas consumption has alsoincreased since 2008 (Fig 6)

.Source: BP statistical review of world energy 2014

4

4,0

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80

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82

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84

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92

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94

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96

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98

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00

20

02

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12

Tcm

Bill

ion

bar

rels

US oil Proved reserves Gb (LHS) US NG proved reserves Tcm (RHS)

5,00

10,00

15,00

20,00

25,00

400,0

500,0

600,0

700,0

800,0

900,0

1000,0

1100,0

1200,0

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80

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96

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98

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00

20

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mb

/j

Bcm

US gas consumptionBcm (RHS) US oil consumption mb/j (RHS)


Regional natural gas prices

Figure 7: Natural Gas pricing mechanisms around the world

“Gas-on-gas” markets

Liberal markets with volatile prices generally not in ‘sync’ with other energy sources

Large number of suppliers and buyers.Ample storage and transport systems.Sophisticated markets with financial instruments.

1

US, UK, Canada

Prices indexed to substitute energy

prices

Gas prices movements in proportion with other fuels (especially oil-base products and coal)

Limited number of suppliers, many buyers.Storage and transport controlled by few players.Some financial markets trading gas.

2

Continental Europe SE Asia

Oil-linked price markets

Gas prices linked directly to oil prices, Large proportion of Imported gas

Limited number of suppliers and buyers.Storage and transport controlled players.No significant financial markets trading gas.

3

Japan, Korea, Taiwan

Regulated markets

Controlled markets with government mandated prices

Usually, limited number of buyers and sellers.Most infrastructure controlled by state.No or limited influence of market forces. Pooled prices often used. Government takes price risks.

4

Middle East, Russia, China

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0

2

4

6

8

10

12

14

16

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20

1996 2000 2004 2008 2012

Na

tura

l g

as

pri

ces

($/

mm

Btu

)

LNG Japan (cif)

Natural gas UK (Heren NBP Index)

US Henry Hub

Canada (Alberta)

Crude oil OECD countries (cif)

0

20

40

60

80

100

120

1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

$/b

bl

Dubai Brent West Texas Intermdiate

Regional natural gas prices vs. regional crude oil pricesFigure 8: Natural gas spot prices ($/mmBtu)

NG Markets: Regional markets

Prices and pricingmechanisms for natural gasvary dramatically aroundthe world (Fig. 8)

Oil Markets: Global market

Crude Benchmark for eachregion

Prices and pricing mechanismsare almost similar from region toan other (Fig 9)

Figure 9: oil spot prices ($/bbl)

Source: BP statistical review of world energy 2014

6


US weekly WTI and Henry Hub Natural Gas spot prices (1/3)

Figure 10: US weekly WTI and Henry Hub Natural Gas spot prices (from Jan 10, 1997 to Nov 07, 2014) Figure 11: Annualized volatility of HH natural gas

and WTI spot prices

NT= 52

NG price volatility > oil pricevolatility, except 2008.

7



Figure 12: WTI weekly spot prices reports

REPORT6 is:

(WTI weekly spot prices/6)

REPORT10 is: (WTI weekly

spot prices/10)

HHNGP is Henry Hub

Natural gas weekly spot

prices

WTIP is WTI weekly spot

prices

8



Figure 13: Weekly and annual average report of WTI and Henry Hub NG spot prices

From the ratio of the energy content, itcan be argued that the price of a barrelof crude oil should equal six times theprice of an mmBtu of natural gas

Oil and gas have different costs ofproduction, transportation, processingand storage, and they serve differentportfolios of end uses etc.Perhaps for this reason, economistsproposed a variety of other rules-of-thumb, including the simple 10-to-1ratio

Since 2008, the annual average reportWTIP/HHNGP > 10. Energy content equivalence: 1 barrel of

WTI contains 5.825 mmBtu. Usually, theratio 6 to 1 is used (6-to-1)

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Econometric relationship between natural gas and WTI spot prices (1/2)

Figure 14 : Bai-Perron multiple breakpoint tests for the HH natural gas spot prices ($/mmBtu) and WTI spot prices ($/bbl)

multiple structural changes

are detected for both the

WTI spot prices and HH

natural gas price in

different periods

The cointegrating

relationship is not stable

over long periods of time.

10

0.0

2.5

5.0

7.5

10.0

12.5

15.0

0

25

50

75

100

125

150

1998 2000 2002 2004 2006 2008 2010 2012 2014

WTIPFITTED WTIP

HHNGPFITTED HHNGP


Econometric relationship between natural gas and WTI spot prices (1/2)

There is no cointegration relationship which could be deduced

from the Johanson test over the whole sample. However, several

structural changes are detected for both the WTI spot prices and

HH natural gas price using the Bai and Perron (1998, 2003) tests.

Hence, from the statistical side, there is no long run relationship

between Henry Hub natural gas spot price and WTI spot price, since

2008.

In addition to the econometric methods, further analysis is

required to check the raisons behind this decoupling.

11


Impact of the Unconventional Gas Supply (1/4)

Figure 15: Lease condensate and natural gas plant liquids proved reserves, 2000- 2011

Proved reserves of lease condensate

and natural gas plant liquids have

increased significantly in recent years

The most important characteristic of a

shale well is its components

Shale gas actually contains a very large

percentage of liquids, whose prices are

highly linked to oil prices

Value of liquids

Value of dry gas

Value of shale gas

The value of shale gas depends more

on liquids than dry gas

12


Breakeven Price of U.S. Shale Gas

The long term price of natural gas can only be as low as the breakeven

price for profitable extraction of natural gas from shale wells across the US

NGLs and crude oil prices are tied to global markets, they have significant

impact, because they often make shale wells profitable even when natural

gas prices are low

By selling these liquids at their high, stable prices, shale gas wells can profit

even in low gas price environment.


13


In a recent study of Harvard university , “typical well” analysis was

performed for each individual shale fields in the U.S

Historic and projected NGL and oil prices assumptions are used in the

breakeven calculations, for instance the WTI price is assumed to be $90

in 2014 and $96 in 2016 and henceforth

The weighted average calculates the 10-year typical breakeven gas price

to be $4.04/mmBtu and $3.83/mmBtu for 30-year typical breakeven

In case of LNG export, with all cost constituents accounted (Wellhead

price, pipeline transportation, liquefaction overseas transport,

regasification), the minimum (breakeven) price for U.S. to export LNG to

Asia is $9.03/mmBbtu.

Breakeven Price of U.S. Shale Gas


14


Shale gas perspectives Figure 16: Weekly rig count and WTI-to-natural-gas ratio

Still, less land rigs have continued to produce a

greater volume of gas

In part, crude and NGL output pay the rent,

It also is a reflection of advances in drilling

efficiency

However

Since crude oil prices rose faster than natural gas

prices, exploration and development activities

continued their trend toward liquids-focused drilling

The rig distribution began an appreciable shift in

the second half of 2009, with oil-directed rigs

comprising nearly sixty percent

Recently, because liquids-rich

from shale gas production have

increased, the NGLs market is

experiencing oversupply and

lower prices,

Source: Baker Hughes Inc. (rigs); Thomson Reuters (prices)


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Conclusion

Econometric methods show strong cointegration between Henry Hub

natural gas and WTI spot prices until 2008

But henceforth, it has noted an apparent decoupling between these two

prices, which is mainly due to the emergence of shale gas production

Hence, the recent trend of the natural gas price is reasonable since oil

and shale gas prices are currently in a complementarity phase ; the

higher the oil price the lower the gas price

Because, when the price of oil is high the NGLs from shale gas follow the

same trend and can easily cover the cost of shale gas exploration and

processing

16


Conclusion

Nevertheless,

It has noted that the U.S. NGLs domestic market is experiencing

oversupply and NGLs prices are decreasing

Explorers are shifting increasingly toward liquids rather than natural

gas

If the United States begins exporting LNG, the NG breakeven price

should rise

Hence, In the long-term, or at least in the medium-term, international

arbitrage should be established and U.S gas prices should, most likely,

rise at least to achieve the breakeven of LNG export,

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Merci de votre attention

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