The Impact of the Unconventional Gas Supply on the Link Between Oil and Gas Prices in the US Market

Transcription

1 Workshop sur les marchés gaziers 1st et 2nd 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 1

2 Outline 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

3 Objective 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

4 Bcm mb/j Billion barrels Tcm 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 50,0 45,0 40,0 10,0 9,0 8,0 35,0 30,0 25,0 20,0 7,0 6,0 5,0 4,0 US oil Proved reserves Gb (LHS) US NG proved reserves Tcm (RHS) Figure 6: U.S oil and gas consumption The U.S oil consumption and imports have been decreased since 2008 (Fig 4) However, oil and gas reserves have notably increased (Fig 5) Therefore, gas consumption has also increased since 2008 (Fig 6). Source: BP statistical review of world energy ,0 1100,0 1000,0 900,0 800,0 700,0 600,0 500,0 400,0 US gas consumptionbcm (RHS) 25,00 20,00 15,00 10,00 5,00 US oil consumption mb/j (RHS) 4

5 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. 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. 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. 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. US, UK, Canada Continental Europe SE Asia Japan, Korea, Taiwan Middle East, Russia, China 5

6 Natural gas prices ($/ mmbtu) $/bbl Regional natural gas prices vs. regional crude oil prices Figure 8: Natural gas spot prices ($/mmbtu) LNG Japan (cif) Natural gas UK (Heren NBP Index) US Henry Hub Canada (Alberta) Crude oil OECD countries (cif) Figure 120 9: oil spot prices ($/bbl) Dubai Brent West Texas Intermdiate Source: BP statistical review of world energy 2014 NG Markets: Regional markets Prices and pricing mechanisms for natural gas vary dramatically around the world (Fig. 8) Oil Markets: Global market Crude Benchmark for each region Prices and pricing mechanisms are almost similar from region to an other (Fig 9) 6

7 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 N T = 52 NG price volatility > oil price volatility, except

8 US weekly WTI and Henry Hub Natural Gas spot prices (2/3) 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

9 US weekly WTI and Henry Hub Natural Gas spot prices (3/3) Figure 13: Weekly and annual average report of WTI and Henry Hub NG spot prices Energy content equivalence: 1 barrel of WTI contains mmbtu. Usually, the ratio 6 to 1 is used (6-to-1) From the ratio of the energy content, it can be argued that the price of a barrel of crude oil should equal six times the price of an mmbtu of natural gas Oil and gas have different costs of production, transportation, processing and storage, and they serve different portfolios of end uses etc. Perhaps for this reason, economists proposed a variety of other rules-ofthumb, including the simple 10-to-1 ratio Since 2008, the annual average report WTIP/HHNGP > 10. 9

10 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) 150 multiple structural changes are detected for both the WTI spot prices and HH natural gas price in different periods The cointegrating WTIPFITTED HHNGPFITTED WTIP HHNGP relationship is not stable over long periods of time. 10

11 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 In addition to the econometric methods, further analysis is required to check the raisons behind this decoupling. 11

12 Impact of the Unconventional Gas Supply (1/4) Figure 15: Lease condensate and natural gas plant liquids proved reserves, Proved reserves of lease condensate and natural gas plant liquids have increased significantly in recent years The value of shale gas depends more on liquids than dry gas 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 12

13 Impact of the Unconventional Gas Supply (2/4) 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

14 Impact of the Unconventional Gas Supply (3/4) Breakeven Price of U.S. Shale Gas 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. 14

15 Impact of the Unconventional Gas Supply (4/4) 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 Howev er 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 Source: Baker Hughes Inc. (rigs); Thomson Reuters (prices) Recently, because liquids-rich from shale gas production have increased, the NGLs market is experiencing oversupply and lower prices, 15

16 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

17 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, 17

18 Merci de votre attention 18