The Really Big Game Changer: Crude Oil Production …...Crude Oil and Natural Gas Prices Center for...

David E. Dismukes, Ph.D.

Center for Energy Studies

Louisiana State University

The Really Big Game Changer: Crude Oil

Production from Shale Resources and the

Tuscaloosa Marine Shale

Baton Rouge Chamber of Commerce

Regional Stakeholders Breakfast

June 27, 2012


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 longer term,

forward-looking basis.

• Shale revolution is now migrating into liquids and crude oil

production. Facilitating additional natural gas production

despite low prices.

• Considerable economic development opportunities.

• Early in the process, considerable uncertainties, considerable

risks, difficult to attain information, play understandings still

very preliminary – policy need to manage expectations despite

the (justified) excitement.


© LSU Center for Energy Studies

Introduction


Reminder – The Way Things Were

3 © LSU Center for Energy Studies

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

2004 2008 2012 2016 2020 2024 2028

Onshore (Lower 48) Offshore (Lower 48)

Mill

ion

Ba

rre

ls p

er

da

y

Relatively uninspiring U.S. crude oil production forecast.

Source: USDOE/EIA, Annual Energy Outlook, 2006 © LSU Center for Energy Studies

Long Term US Crude Oil Production Forecast (2006)

Center for Energy Studies Historic Trends

2.5

4.5

6.5

8.5

10.5

12.5

14.5

16.5

18.5

20.5

2004 2008 2012 2016 2020 2024 2028

Onshore (Lower 48) Offshore (Lower 48)

Trilli

on

cu

bic

fe

et

Natural gas production forecasted to decrease starting in 2016.

Source: USDOE/EIA, Annual Energy Outlook, 2006 © LSU Center for Energy Studies

Long Term US Natural Gas Production Forecast (2006)


Crude Oil and Natural Gas Prices


$0

$2

$4

$6

$8

$10

$12

$14

$16

$0

$20

$40

$60

$80

$100

$120

$140

$160

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

Crude Oil (WTI) Natural Gas (Henry Hub)

Source: Federal Reserve Bank

Cru

de

Oil

($/B

bl) N

atu

ral G

as ($

/Mcf)

Prices reflected the state of, and outlook for, energy markets.


First energy price crisis

Recession

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Dec-9

6

Jun-9

7

Dec-9

7

Jun-9

8

Dec-9

8

Jun-9

9

Dec-9

9

Jun-0

0

Dec-0

0

Jun-0

1

Dec-0

1

Jun-0

2

Dec-0

2

Jun-0

3

Dec-0

3

Jun-0

4

Dec-0

4

Jun-0

5

Dec-0

5

Jun-0

6

Dec-0

6

61

62

63

64

65

66

67

68

Rig Count

Production

Source: Energy Information Administration, Department of Energy; and Baker-Hughes Inc.

3 percent increase

in production

(Aug-99 to Sep-01)

131 percent

increase in rigs

(Apr-02 to Aug-06)

Num

ber

of O

pera

ting R

igs

12-M

onth

Movin

g A

vera

ge (

Bcf/

d)

158 percent

increase in rigs

(Apr-99 to Jul-01)

4 percent

decrease in production

(Feb-04 to Aug-06)

The maturing nature of US basins reflected in drilling productivity.

Historic Monthly Rig Counts and Gas Production (1997-2006)


Source: Natural Gas: Can We Produce Enough?” Independent Petroleum Association of America,

website: http://www.ipaa.org/govtrelations/factsheets/NaturalGasProdEnough.asp.

ANWR = 3.5 TCF

ANS = 35 TCF

Policy advocacy focused on restricted areas as a potential solution to

the resource constraint problem.

Resource Estimates: Restricted Areas (Percent Restricted)


Source: National Petroleum Council

LNG provides 14% of the U.S. supply of natural gas by 2025.

© LSU Center for Energy Studies

NPC Forecast North American Supply Disposition



What Changed? The Way Things Are

1


Unconventional vs. Conventional Geological Formations


1


Recent Trends

Source: Energy Tomorrow


Shale, Horizontal Drilling, and Fractionation

• Shale (unconventional) wells

differ from “conventional” wells

since they are drilled horizontally

and not vertically.

• Horizontal segments are then

“fractured” with higher pressure

water, chemicals and silica to

break up the formation.

• The fractionation process

releases/liberates the

hydrocarbons.

• Some environmental and water

use concerns expressed in some

areas of the country on this

drilling process.

Recent Trends


Production from a Typical Well and Shale Well


Recent Trends

Illustrative production decline from a

convention vs. shale producing well. As

much as 80 percent of total production

thought to occur in the first two to three

years.

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

Domestic Shale Gas Basins and Plays


1


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


Game Changer 1: Natural Gas

1


$/M

cf

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

Natural Gas Price Variability


$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

average for period

2000-2001 heating season

through 2008: $6.24 (standard deviation: $2.39)

since 2009: $4.11 (standard deviation: $0.70)

1


The 2001 to 2009 market trend of higher average prices coupled with high

volatility is reversing itself and post 2009 prices are significantly lower.

Average 1997

through 2000: $2.79 (standard deviation: $1.28)

Natural Gas Trends

Dry

Na

tura

l G

as P

rove

d R

ese

rve

s (

Tcf)


Natural Gas Proved Reserves and Production


-

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

Ma

rke

ted P

rod

uctio

n (T

cf)

1


Current U.S. natural gas reserves are approaching record levels not seen

since 1970. Natural gas production is at levels that surpass historic peaks.

Natural Gas Trends

Imp

ort

s -

Bcf


Natural Gas Imports

Center for Energy Studies P

erc

en

t of T

ota

l U.S

. Su

pp

ly - %

0%

5%

10%

15%

20%

25%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

LNG Imports Pipeline Imports Imports as a Percent of Total Supply


Natural gas imports, once thought the be the supply remedy for meeting

future gas needs are falling to levels also not seen since the 1990s.

Natural Gas Trends

Re

se

rve

s -

Tcf


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.

Natural Gas Trends

Basin Competition


Source: MIT Energy Initiative. 20 © LSU Center for Energy Studies

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.

Natural Gas Trends


Forecast U.S. natural gas production, 1990-2035


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

(20

10

$/M

MB

TU

)


Choosing Most Current Natural Gas Price Forecasts: AEO-2007 to AEO-2012


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-2009

AEO-2010 AEO-2011 AEO-2012


Shale availability has significant impact on future price outlook.

Anticipated price outlook in 2009.

Anticipated price outlook today.

Natural Gas Trends


Game Changer 2: Crude and Liquids

2


Crude Oil and Natural Gas Prices

Center for Energy Studies Crude Oil Trends

$0

$2

$4

$6

$8

$10

$12

$14

$16

$0

$20

$40

$60

$80

$100

$120

$140

$160

Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

Crude Oil (WTI) Natural Gas (Henry Hub)

Source: Federal Reserve Bank

Cru

de

Oil

($/B

bl)

Na

tura

l Ga

s ($

/Mcf)

Two significant breaks (decoupling) of natural gas and crude oil prices.


First price

decoupling: Gas

Up, Crude Down

Second price

decoupling: Crude

Up, Gas Down

Recession

0

20

40

60

80

100

120

140

160

180

200

0

500

1,000

1,500

2,000

2,500

2000 2002 2004 2006 2008 2010

Onshore Offshore


Domestic Rig Counts – Onshore vs. Offshore

25

U.S

. O

nsh

ore

Rig

Co

un

t

Source: Baker Hughes.

U.S

. Offs

ho

re R

ig C

ou

nt

Deepwater Horizon

Spill

Onshore rig counts are moving close to their pre-recession levels,

primarily motivated by increased crude oil drilling, not natural gas.

Crude Oil Trends


26

Domestic Rig Count – Crude Oil vs. Natural Gas

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jul-87 Jul-90 Jul-93 Jul-96 Jul-99 Jul-02 Jul-05 Jul-08 Jul-11

Pe

rce

nt o

f To

tal R

igs

Source: Baker Hughes.

Oil Rigs

Gas Rigs

For the first time in 16 years, the number of oil rigs is

equivalent to gas rigs.

Crude Oil Trends

Rig Count and Crude Oil Price, (Each State Measured Relative to 1999 Activity)


$0

$2

$4

$6

$8

$10

$12

$14

0

200

400

600

800

1,000

1,200

1,400

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

N. Louisiana Texas Pennsylvania

New Mexico Oklahoma Wyoming

Colorado Natural Gas Price

Source: Baker Hughes; and Federal Reserve Bank of St. Louis.

Rig

Co

un

t (J

an

ua

ry 1

99

9 =

10

0)

He

nry

Hu

b ($

/Mcf)


Drilling rig activity increasing rapidly in liquids rich shale.

Crude Oil Trends


Rig Count, North Louisiana (Haynesville) and Texas District 1 (Eagle Ford)


$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

0

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200

300

400

500

600

700

800

900

1,000

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11

North Louisiana Texas - District 1 Spot Price Differential

Rig

Co

un

t (J

an

ua

ry 2

00

9=

10

0)

$/B

OE

Indexing the rig change from January 2009 highlights the basin preference.

Haynesville is losing its

competitive advantage due to the

liquids preference associated

with other shales.

Source: Baker Hughes. Rig counts are indexed to the level of active drilling rigs in each reported area as of January 2009.

Crude Oil Trends


2


Can you insert a slide that shows a

Crude Oil Trends

Annual Production, Unconventional Resources



Bcf/d MMBBl/d

Source: Advanced Resource Intl; presentation to Cheniere Board, March 2011; Cheniere Research

0

1

2

3

4

5

6

7

8

2010 2011E 2012E 2013E 2014E 2015E 2020E

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Includes Eagle Ford, W. Barnett, Bakken Shales;

Granite Wash, Piceance & Uinta Tight Sands

Liquids

Gas

Liquids production from shale plays > 3 million barrels per day by 2020

Associated natural gas > 7 Bcf/d of “costless” supply (or about 2.3 Bcf/d per

every 1.0 MMBbls/d of shale-based liquids production).

Crude Oil Trends


Closer to Home: Louisiana and the

Tuscaloosa Marine Shale (“TMS”)

3



Crude Oil Shale Opportunities -- Louisiana

32 © LSU Center for Energy Studies Source: Oil and Gas Journal and Louisiana Geological Survey.

• 1998 LGS Study primary

publicly-available source of

information on the formation.

• Lies between sands of the

upper and lower Tuscaloosa.

• Approximately 2.7 MM acres.

• Varies in thickness from 500

feet (MS) to around 800 feet

(LA).

• Shallowest opportunity

around 10,000 feet – mostly

between 11,000 to 12,000 –

some areas as deep as

16,000 (EBR).

• Estimated potential resource

of 7 BBbls.



Cumulative TMS Wells Drilled

33 © LSU Center for Energy Studies Source: Amelia Resources.


Approximately 13 wells drilled to date.

Production Decline Curve Differences


3



• Recently-drilled

wells located

primarily in

southwestern MS

and in the Florida

parishes.


Tuscaloosa Marine Shale Wells




Tuscaloosa Trend Scout Report, Score Card




TMS Daily Oil Production



Initial production (“IP”) rates important, but only one of several statistics that

should be reviewed given typical production characteristics and uncertainty.


The Early Days, Eagle Ford Shale




United States Employment (2005 = 100)


90

100

110

120

130

140

150

2005 2006 2007 2008 2009 2010 2011

Em

plo

ym

en

t (2

00

5 =

10

0)

Oil and gas employment

Total emplyoment

Source: Bureau of Labor Statistics


Oil and gas employment is almost 40 percent above its 2005 level while total

U.S. employment struggles to regain four years of losses.


U.S./Shale Producing State Employment (2005 = 100)


94

96

98

100

102

104

106

108

2005 2006 2007 2008 2009 2010 2011

Em

plo

ym

en

t (2

00

5 =

10

0)

States with major shale activity

Non-shale states

Shale states: LA, TX, AR, ND, UT, CO, & PA

Source: Bureau of Labor Statistics


A comparison of total employment tells story beyond just oil and gas.

Recession not as severe; recovery more robust.


Conclusions

4



Conclusions


• Exceptional industry performance: employment up; reserves up;

production up; investment/capacity up; and exports up.

• Traditional sectors of energy industry have proven they are high

technology, high capital, and high growth – you’d have a hard time

figuring that out watching the nightly news.

• Policy and perception continue to be things that plague continued

industry development. It is hard to imagine the development and

innovation that could arise if the current policy uncertainty were

removed.

• Policy uncertainty is the biggest impediment to continued

development. Significant short-term policy retrenchment on

unconventional resources could lead to economic impacts that

would pale in comparison to past financial and housing crisis.

Conclusions


Questions, Comments and Discussion

43

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