Natural Gas Markets: Leveraging the Production Revolution into an Industrial Renaissance International Technical Conference Houston, Texas October 11, 2013 Center for Energy Studies David E. Dismukes, Ph.D. Center for Energy Studies Louisiana State University
Introduction Summary and Take Away New natural gas supply availability is having considerable impacts on all energy markets today and on a longer term basis. Energy-Related Carbon Dioxide 81.2% 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. 2
Recent Trends in Natural Gas Markets 3
Recent Trends Unconventional vs. Conventional Geological Formations 4
Recent Trends 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. Source: Energy Information Administration, U.S. Department of Energy 5
Recent Trends Natural Gas Proved Reserves and Production Current U.S. natural gas reserves are approaching record levels not seen since 1970. Natural gas production is at levels that surpass historic peaks. 350 30 Dry Natural Gas Proved Reserves (Tcf) 300 250 200 150 100 50 0 Reserves Production 1970 1975 1980 1985 1990 1995 2000 2005 2010 25 20 15 10 5 - Marketed Production (Tcf) Source: Energy Information Administration, U.S. Department of Energy. 6
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. 35% 30% 31% Percent 25% 20% 15% 13% 21% 10% 9% 5% 0% 2007 2008 2009 2010 Source: Energy Information Administration, U.S. Department of Energy. 7
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. Tcf 40 35 30 25 20 15 10 5 0-5 -10 2007 2008 2009 2010 Shale All Other Sources Source: Energy Information Administration, U.S. Department of Energy. 8
Recent Trends Annual Energy Outlook, Natural Gas Reserves Unconventional resources are not a flash in the pan and are anticipated to continue to increase over the next two decades or more. 320 300 Reserves - Tcf 280 260 240 220 200 2010 2015 2020 2025 2030 2035 Source: Energy Information Administration, U.S. Department of Energy 9
Recent Trends Alternative Natural Gas Reserve Forecasts 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.* 3,000 Estimated Reserves - Tcf 2,500 2,000 1,500 1,000 500 0 EIA AEO 2012 MIT ITG Investment Research IHS Energy 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. 10
Recent Trends Forecast U.S. Natural Gas Production 30 Shale availability will drive U.S. natural gas supply. 25 20 Shale Gas Production Tcf 15 10 Assc. Gas Production 5 0 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 Shale gas Tight gas Non-associated offshore Alaska Coalbed methane Associated with oil Non-associated onshore 11
Recent Trends Changes in AEO Natural Gas Price Forecasts Shale availability has significant impact on future price outlook. 16 14 Anticipated price outlook in 2009. (2010 $/MMBTU) 12 10 8 6 4 2 0 Anticipated price outlook today. 1997 2002 2007 2012 2017 2022 2027 2032 Actual Henry Hub AEO-2007 AEO-2008 AEO-2009 AEO-2010 AEO-2011 AEO-2012 Source: Energy Information Administration, U.S. Department of Energy 12
Recent Trends Changes in Well Costs and Productivity $18 $16 $14 $12 $10 $8 $6 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. 11.9 Well Cost (million $) 10.3 9.9 9.3 9.0 15.6 9.6 9.0 $25 $20 $15 $10 9.5 Well Performance (MMcfe/d) 23.6 23.6 17.7 18.9 8.0 10.5 15.0 $4 $2 $5 $0 2006 2007 2008 2009 2010 2008 2009 2010 $0 2006 2007 2008 2009 2010 2008 2009 2010 East Texas Deep Bossier Haynesville East Texas Deep Bossier Haynesville Source: U.S. Natural Gas Resources and Productive Capacity: Mid-2012, Prepared for Cheniere Energy, Advanced Resources International, Inc. August 23, 2012. 13
Liquids and Crude Oil Development 14
Liquids/Crude Oil Crude Oil and Natural Gas Price Decoupling Crude oil prices have doubled in the aftermath of the recession but natural gas prices have remained stable. Crude Oil ($/Bbl) $160 $140 $120 $100 $80 $60 $40 The price of crude oil has increased 140 percent since its low in February 2009. The price of natural gas has fallen 78 percent since June 2008. $14 $12 $10 $8 $6 $4 Natural Gas ($/Mcf) $20 $2 $0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 $0 Crude Oil (WTI) Natural Gas (Henry Hub) Source: Federal Reserve Bank of St. Louis. 15
Liquids/Crude Oil 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. Percent of Total Rigs 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Oil Gas Source: Baker Hughes. 16
Liquids/Crude Oil Can you insert a slide that shows a 17
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. 14 12 Cheniere Outlook, March 2012 Cheniere Outlook, April 2013 8 7 Natural Gas (Bcf/d) 10 8 6 4 6 5 4 3 2 Liquids (MMBbl/d) 2 1 0 2011 2012 2015 2020 2011 2012 2015 2020 Liquids Natural Gas 0 Source: Cheniere Energy Inc,, Corporate Presentations. Available at: http://phx.corporate-ir.net/phoenix.zhtml?c=101667&p=irolpresentations. 18
Natural Gas and Economic Development: Moving from Revolution to Renaissance 19
Economic Development U.S. Oil and Gas Employment v. Economy-wide Trends (2005 = 100) Oil 150and gas employment is almost 40 percent above its 2005 level while total U.S. employment struggles to regain four years of losses. Employment (2005 = 100) 140 130 120 110 Oil and gas employment Total emplyoment Upstream oil and gas employment clearly outperforming overall economy. 100 90 2005 2006 2007 2008 2009 2010 2011 Source: Bureau of Labor Statistics 20
Economic Development 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. 108 106 Employment (2005 = 100) 104 102 100 98 96 States with major shale activity 94 2005 2006 2007 2008 2009 2010 2011 Shale states: LA, TX, AR, ND, UT, CO, & PA Source: Bureau of Labor Statistics 21
Economic Development 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. Number of Jobs (thousand) 30 29 28 27 26 25 24 23 22 21 20 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 $16 $14 $12 $10 $8 $6 $4 $2 $0 Henry Hub Price ($/Mcf) 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. 22
Economic Development Natural Gas Composition and Modern Chemistry Natural gas is the basic industrial building block for many household goods. Natural Gas Stream Methane Ethane Propane Butane Ethylene Propylene Butylene Textiles Paints Cosmetics Xylene Detergents Tires Toulene Toys Dry Cleaning Pharmaceuticals 23
Economic Development Incremental U.S. Chemical Industry Capital Expenditures 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. 16 $14.6 Number of Jobs (Million) 14 12 10 8 6 4 $5.7 $7.8 $11.3 $12.4 $7.1 $4.4 $4.7 $3.7 2 0 2010-2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: American Chemistry Council. 24
Economic Development 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. $16 $14 $12 Billion $ $10 $8 $6 $4 $2 $0 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. 25
Potential Changes in Power Generation 26
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. 27
Power Generation Electric Industry Environmental Regulations Create Uncertainty for Coal Revised Ozone NAAQS Beginning CAIR Phase I Seasonal NOx Cap CAIR Vacated CAIR Remanded Ozone Reconsidered Ozone NAAQS NO2 Primary NAAQS SO2 Primary NAAQS Proposed Transport Rule CO2 Regulation SO2/NOx Final Transport Rule Issued Effluent Guidelines proposed rule expected Transport rule (CSAPR) vacated SO2/NO2 Secondary NAAQS CAIR/CSAPR 316(b) final rule expected Effluent Guidelines Final rule expected Next Ozone NAAQS Revision Water 316(b) Compliance < 8 yrs after final rule Effluent Guidelines Compliance 3-5 yrs after final rule 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 PM-2.5 SIPs due ( 97) CAMR & Delisting Rule vacated Begin CAIR Phase I Annual NOx Cap PM2.5 Begin CAIR Phase I Annual SO2 Cap Proposed Rule for CCRs Management Next PM- 2.5 NAAQS Revision HAPs MACT proposed rule 316(b) proposed rule CO2 Final Rule for CCRs Final EPA Nonattainment Designations Mgmt HAPS MACT final rule expected PM-2.5 SIPs due ( 06) New PM-2.5 NAAQS Designations Begin Compliance Requirements under Final CCR Rule (ground water monitoring, double monitors, closure, dry ash conversion) Ash Compliance with CSAPR Hg/HAPS HAPS MACT Compliance 3 yrs after final rule -- updated from Wegman (EPA 2003) 28
Power Generation Coal-Fired Capacity Share by Age Category 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. Greater than 50 years: 45,382 MW; 12% of capacity; 72 units (averaging 630 MW) 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) Source: Energy Information Administration, U.S. Department of Energy 29
Power Generation Increased Natural Gas Use from CSAPR-Induced Coal Plant Retirements The retirement of 45 gigawatts of capacity would likely have an impact on overall natural gas usage (potentially 2 TCF). 3,000 Natural Gas Consumption (Bcf) 2,500 2,000 1,500 1,000 500 0 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. 30
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). 350 300 Down Down Up Up Wishful thinking Up Capacity (GW) 250 200 150 100 50 0 Coal Oil/gas steam Source: Energy Information Administration, U.S. Department of Energy. Natural gas combined cycle Natural gas combustion turbine Nuclear 2011 2025 2040 Renewable/ other 31
What About Gas Exports? 32
LNG Exports Considerable Underutilized LNG Regasification Capacity along GOM Regasification Existing T O A F J Under Construction Approved Liquefaction Existing Under Construction Approved P H N I K G D M R E L C B S Q 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 33
LNG Exports LNG Value Chain Feedstock (production) costs will be critical in determining the location of basinspecific production along the global LNG supply curve. Europe: Feedgas 56% ($/MMBtu) Liquefaction 11%-17% ($/MMBtu) Shipping & Fuel 20%-29% ($/MMBtu) Regas 4%-7% ($/MMBtu) Delivered Cost ($/MMBtu) Equivalent Oil Price* ($/BOE) Low High $4.00 $6.50 $1.25 $1.25 $1.40 $1.65 $0.50 $0.50 $7.15 $9.90 $41.47 $57.42 Asia: Low High $4.00 $6.50 $1.25 $1.25 $2.90 $3.45 $0.50 $0.50 $8.95 $11.70 $51.91 $67.86 Note: *uses a BOE conversion of 5.8 Mcf/BOE. Source: Cheniere. Henry Hub: $4.50 $5.00 WTI: $97.00 $100.00 34
LNG Exports Basin Competition 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. Canada 388 Tcf U.S. 862 Tcf Mexico 681 Tcf Brazil 226 Tcf Argentina 774 Tcf France 180 Tcf Algeria 231 Tcf South Africa 485 Tcf Poland 187 Tcf Libya 290 Tcf China 1,275 Tcf Australia 396 Tcf 35 Source: MIT Energy Initiative.
Conclusions 36
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. 37
Questions, Comments & Discussion dismukes@lsu.edu www.enrg.lsu.edu 38