Post on 17-Jun-2020
Current and Future Natural Gas Supply as Feedstock
CERI Petrochemicals ConferenceJune 2007
1
Will We Have the Right Stuff?Will We Have the Right Stuff?
Current and Future Natural Gas SupplyCurrent and Future Natural Gas Supply as Feedstock
Dave Flint and Bob Dixon
CERI Petrochemical ConferenceCERI Petrochemical ConferenceJune 4, 2007
• Western Canada supply– Current trends
Current and Future Gas Supply Trends
– Fundamentals of short term supply
– Is unconventional gas the right stuff?
• Canadian supply in longer term
• US supply projections
2
• LNG – the genie in the bottle
Current and Future Natural Gas Supply as Feedstock
CERI Petrochemicals ConferenceJune 2007
2
Forward Energy Group IncGas Production by Year Onstream
6,000
8,000
10,000
12,000
14,000
dar D
aily
Sal
es G
as, M
Mcf
d
2005200420032002200120001999199819971996199519941993199219911990Solution Gas
1 year
3.2Bcfd3.4
Bcfd
1 year
60°N
70
60
80
90
100
110
120
6M 5M
120
60
70
80
90
100
110
4M3M
Lloydminster
Edmonton
Grande Prairie
Fort McMurray
Fort Nelson
Fort St. John
50
60
70
90
80
100
110
120
126
Rate Added per TownshipMMcfd
32 to 60 (8)16 to 32 (31)
8 to 16 (90)4 to 8 (196)2 to 4 (319)1 to 2 (464)0.5 to 1 (512)0 to 0.5 (1251)
Brazion, PermianBashaw & Nevis, CBM
Sundown, Cadotte
Drake, Notikewin
Elleh, Jean Marie
0
2,000
4,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006Year Onstream
Cal
end
Supply Trends49°N
10
1
20
30
40
50
Swift Current
Saskatoon
Lloydminster
Calgary
Hinton
Medicine HatLethbridge
10
20
30
40
1
Events Onstream 2003 - 2005, MMcfd
Natural Gas Supply Trends
2000 - 2004 Pool Discovery PeriodRate Added per Township
Abbey and Lacadena
Tay River, D3-B
Plays and Sources60°N
80
90
100
6M
110
120
80
120
90
5M
100
110
3M4M
90
80
100
110
120
126
Fort Nelson
Fort Saint John
Fort McMurray
Drilled and PredecessorWells Retained
32 to 42 (2)16 to 32 (3)8 to 16 (16)4 to 8 (20)2 to 4 (35)1 to 2 (45)0.5 to 1 (64)0.25 to 0.5 (44)0 to 0.25 (93)
DevonRate Added per Township, MMcfd
Events Onstream 2003 - 2005
Rate Additions by Deep Basin Play
700
800
900
1,000
MM
cfd
CardiumDunveganCadotte VikingViking OilBow IslandSpirit RiverU. Mannville S.BlueskyGethingEllerslieL. Mannville S.Cadomin
3Better information for E&P strategies
0
60
70
49°N
20
1
10
30
70
60
40
50
40
10
20
30
50
60
70
1
Hinton
Calgary
Saskatoon
Grande Prairie
Swift Current
Lloydminster
Edmonton
Medicine Hat
Lethbridge
Operator Benchmarking0
100
200
300
400
500
600
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Year Onstream
Rat
e A
dditi
ons
Sale
s G
as, M
CadominNikanassinMultiplay
High Impact Areas
Gas Supply Regions in North AmericaWCSBWCSB
• Largest natural gas supply region in North America
• Produces 6 Tcf per year
Regional Gas Supply
Produces 6 Tcf per year• Supplies over 23% of North
American consumption
LOWER 48LOWER 48• Supplies over 72% of North
America’s demand
4
• Produces 19 Tcf per year
LNGLNG• Future swing supply source
Balancing Natural Gas Policy, NPC (2003)
Continental market
Current and Future Natural Gas Supply as Feedstock
CERI Petrochemicals ConferenceJune 2007
3
• Total production grew by over 70% from 1990 to 2001
Supply by Period Onstream
WCSB Gas Production by Period Onstream
14,000
16,000
18,000
Mcf
d
Wells Onstream 1990 to 2005
Wells Onstream Pre-1990
• Total gas production recovering slowly since 2001
• Wells onstream since 1989 produce 85% of gas2,000
4,000
6,000
8,000
10,000
12,000
Cal
enda
r Dai
ly M
arke
tabl
e G
as R
ate,
MM
5
• Decrease of 300 MMcfd in 2007 due to reduced gas drilling
2006 production estimated at 16.9 Bcfd
01990
19911992
19931994
19951996
19971998
19992000
20012002
20032004
20052006E
2007Fsource: Forward Energy, CAPP
Competing Forces on Gas Supply
Production Lost
Rate Additions
Investment Environment
Profitability
Production Rate
XComposite
Decline Rate
WellsX
Rate Addedper Well
Gas prices
F&D costs
Capital efficiency
Cash flow
Alternative investments
6
•Changing slowly•Low control
•Changing rapidly•High operator control
Portfolio
New opportunities
Technology
Current and Future Natural Gas Supply as Feedstock
CERI Petrochemicals ConferenceJune 2007
4
• Rate loss from decline increased from 2.5 Bcfd to 3.9 Bcfd in 2004
WCSB Rate Losses and Rate Additions
Rate Losses and Rate Additions
3,500
4,000
4,500Rate Lost from DeclineRate Added from New WellsNet Rate Added
• Annual rate loss has averaged 3.7 Bcfd since 2001
• Net rate added has been decreasing
500
1,000
1,500
2,000
2,500
3,000
Rat
e A
dds/
Loss
es, M
Mcf
d
7Rate losses and rate additions close to balance
• 2002 correction may be a useful model for 2007
-500
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
• Supply additions were 1.7 Bcfd in 1990, rising to 3.9 Bcfd in 2001, R t dditi
Rate Additions by Year Onstream
Rate Added and Event Count
3,500
4,000
4,500
14,000
16,000
18,000First Year Rate AddedEvent Count
• Rate additions averaged 3.6 Bcfd from 2001 to 2005
• Events are the new connections that provided the new rate additions
• Connections lag500
1,000
1,500
2,000
2,500
3,000
Rat
e A
dded
, MM
cfd
2,000
4,000
6,000
8,000
10,000
12,000
Even
t Cou
nt
8Connections increasing more rapidly than rate additions
• Connections lag drilling0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Year Onstream
0
• Since 2000, rate additions static but the number of connections has increased 69%– this is the treadmill!
Current and Future Natural Gas Supply as Feedstock
CERI Petrochemicals ConferenceJune 2007
5
Rate Added per Foot Drilled296
243 241
201190
285
220
241
273
200
250
300
ousa
nd F
eet D
rille
d
Rate Added per Event
814 800
705681
609
539594620
721
500
600
700
800
900Ev
ent,
Mcf
d
Rate Added per Connection
-12%146
121114 109
91
7468
0
50
100
150
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Year Onstream
Rat
e A
dded
, Mcf
d pe
r Tho
Source: Forward Energy Group
344319 303
265
216 212
402
0
100
200
300
400
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Year Onstream
Rat
e A
dded
per
E
Source: Forward Energy Group
• Production replacement per foot drilled has decreased by 12% per year
-10%
9
• In 2005, the same event connected and foot drilled resulted in only 30% of the 1995 rate additions per unit
• Supply from previously-unprofitable, lower deliverability opportunities increased in response to higher prices and improved technology
Decreasing results for same activity is the consistent driver of F&D cost increase
WCSB Drilling Cost per Foot Drilled by YearTotal Drilling Capital / Total Feet Drilled
200
250
oot
• Total drilling capital / Total feet drilled
• Cost per unit has been increasing at
Drilling Cost per Foot
9%
50
100
150
Dril
ling
Cap
ital p
er F
oot D
rille
d, $
/ fo been increasing at
9% per year since 1999
• Rapid cost increases in 2005 (14%) and continuing at least 15% into 2006
10
01990
19911992
19931994
19951996
19971998
19992000
20012002
20032004
20052006E
2007FSource: Forward Energy, CAPP
Cost inflation is accelerating, driving F&D costs
Current and Future Natural Gas Supply as Feedstock
CERI Petrochemicals ConferenceJune 2007
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WCSB Gas F&D Cost by YearGas-directed Capital / EUR Connected
3 38
4.40
4.00
4.50
5.00
• Gas-directed capital / extrapolated recovery in newly-connected zones
Gas F&D cost
2005 gas at $4.40 per Mcf F&D requires a $6.16 cash netback from the 2005 sales price of $8.41
M f t id 10% t
21%
0.790.67
0.77 0.71
1.02 0.98 0.95
1.261.47 1.40
1.88
2.30 2.24
3.38
2.87
0.50
1.00
1.50
2.00
2.50
3.00
3.50
$ C
dn /
Mcf
• Increasing at 21% per year since 1999
• Most of F&D cost increase is in lower EUR per well
per Mcf to provide a 10% return
11
0.001990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: Forward Energy, CAPP
Increasing costs threaten profitability and investment
• To sustain investment return, increasing F&D cost must be matched by increasing netback and therefore, increasing price
Natural Gas Price by Year, Canada
6.25 6.38
8.41
6.737.08
7.00
8.00
9.00
• Increased at > 22% per year between 1999 and 2005
• Commodity price
Gas Price
>22%
1.571.35 1.36
1.71 1.86
1.391.68
1.94 1.92
2.48
4.66
5.57
3.93
0 00
1.00
2.00
3.00
4.00
5.00
6.00
$ C
dn /
Mcf
Commodity price increases supported projects despite increased F&D cost
• Estimated 20% decrease in price in 2006
12
0.001990
19911992
19931994
19951996
19971998
19992000
20012002
20032004
20052006E
2007FSource: Forward Energy, CAPP, ARC Financial
What happens when gas prices decrease?
• Rate additions at increasing F&D costs sustained by increasing prices• Activity and rate adds will decrease when price decreases
Current and Future Natural Gas Supply as Feedstock
CERI Petrochemicals ConferenceJune 2007
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• Active gas rigs dropped below 2005 levels in August 2006
• Dropped below 2004
Drilling Response
Canada Active Gas Rigs
500
600
700
Dropped below 2004 levels in October
• Year to date 2007 active gas rigs are 56% of the comparable 2006 period 100
200
300
400
500
Act
ive
gas
rigs
200420052006
13Rapid response after a record first half of 2006
• Operators have announced reduced shallow gas and CBM programs• Lower utilization rate of shallow rigs
0Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2007
Source: Baker Hughes Rig Count
• Connections and completions flat 2004 to 2006
• CAODC and PSAC
Drilling Response
Completions, Connections and Gas Price
14 000
16,000
18,000
20,000
ectio
ns
$7 00
$8.00
$9.00
$10.00
Gas Connections
Natural Gas Well Completions
Price $Cdn / Mcf
CAODC and PSAC forecasts 2007 gas completions down 20% to 30%
• We assume a 10% decrease in activity
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Gas
wel
l com
plet
ions
and
zon
e co
nn
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$ C
dn /
Mcf
?
14Lower drilling = lower production
• Decrease in rate added depends on rate added per new event
01995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006E 2007F
$0.00
Source: Forward Energy, CAPP, CAODC, PSAC
Current and Future Natural Gas Supply as Feedstock
CERI Petrochemicals ConferenceJune 2007
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• F&D costs have been increasing rapidly
• Decreasing rate additions and reserves per well has been the major driver of increased F&D costs
Profitable Production Replacement
• Cost inflation has been a recent contributor
• Increased gas commodity prices supported investment at the increased F&D costs until 2006
• Current slowdown in drilling will result in lower supply, higher gas prices and, in time, lower input
15
pp y g g p pcosts
• WCSB gas F&D costs are less competitive with US basins due to stronger Canadian dollar
Gas Accumulation Types
16Will unconventional gas rescue WCSB supply?
Current and Future Natural Gas Supply as Feedstock
CERI Petrochemicals ConferenceJune 2007
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What’s in a name?
CONVENTIONAL1. Discrete gas pools in pervasively
water saturated rock - aquifer2. Only high quality reservoir
accumulates gas in place
UNCONVENTIONAL1. Pervasive gas saturated
accumulations - gasifer2. Very large gas in place in
reservoir of all qualitiesaccumulates gas in place3. Discovery is uncertain, recovery
is certain4. Discovery process is efficient
.5. R&D to increase success
6. Remaining resource, in small undiscovered pools, is small
reservoir of all qualities3. Discovery is certain, recovery is
uncertain4. Recovery is inefficient but
improves with technology5. R&D to improve recovery and
characterization6. Remaining resource in lower
quality reservoirs is large7 I d t i f WCSB
17
7. “Official” view of WCSB remaining resources
“Glass is mostly empty”
7. Industry view of WCSB remaining resources – believed in US
“Glass is mostly full”
Models define how we evaluate potential
WCSB Gas Production, by Resource Type
10
12
14
16
18ShaleCoalbed MethaneTight (3 plays)Conventional
US Lower 48 Gas Production, by Resource Type
40
50
60
Gas Production Profiles
WCSB Gas Production, by Resource Type
10
12
14
16
18ShaleCoalbed MethaneTight (3 plays)Conventional
CBM: 240 MMcfd in ’05Shale: none
0
2
4
6
8
10
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Bcf
d
0
10
20
30
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Bcf
d
ShaleCoalbed MethaneTight Conventional
US Lower 48
0
2
4
6
8
10
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Bcf
d
Western Canada
18Better understanding of unconventional gas required
• Conventional gas in decline• Tight gas in lower 48 over
30% of 2005 total • CBM and shale gas significant
• CBM growing rapidly• Tight gas not reported
– estimate over 30% of 2005 total
• Conventional gas in decline
Current and Future Natural Gas Supply as Feedstock
CERI Petrochemicals ConferenceJune 2007
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Plays and Characterization
3.0
Production by Tight Gas RegionWCSB Gas Production, by Resource Type
4
6
8
10
12
14
16
18B
cfd
ShaleCoalbed MethaneTight (3 plays)Conventional
0 5
1.0
1.5
2.0
2.5B
cfd
Jean MarieShallow biogenicDeep Basin trap
0
2
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
19
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
0.0
0.5
Three major tight gas regions – recent growth trends
60°N
100
6M
110
120 120
5M
100
110
3M4M
Fort Nelson
90
100
110
120
12660°N
100
6M
110
120 120
5M
100
110
3M4M
Fort Nelson
90
100
110
120
12660°N
100
6M
110
120 120
5M
100
110
3M4M
Fort Nelson
90
100
110
120
126
Cumulative Gas per TownshipBCF
>12864 to 12832 to 6416 to 328 to 164 to 82 to 40 to 2
Jean Marie
Cum production: 1.3 tcf (raw)
4.5% of rate additions 03-05
2.5% of production 03-05
Marginal economics?Reduced drilling activity in
80
60
70
90
70
80
60
50
90
Lloydminster
Edmonton
Hinton
Grande Prairie
Fort McMurray
Fort St. John
50
40
60
70
80
80
60
70
90
70
80
60
50
90
Lloydminster
Edmonton
Hinton
Grande Prairie
Fort McMurray
Fort St. John
50
40
60
70
80
80
60
70
90
70
80
60
50
90
Lloydminster
Edmonton
Hinton
Grande Prairie
Fort McMurray
Fort St. John
50
40
60
70
80
Milk River – Med Hat – 2WS
Cum production: 14 tcf (raw)
11% of rate additions 03-05
10% of production 03-05
Deep Basin tight gas
Cum production: 17 tcf (raw)
21.5% of rate additions 03-05
Reduced drilling activity in CBM, shallow gas and the
Jean Marie plays in 2006-07
2049°N
20
1
10
30
40
Swift Current
Saskatoon
Calgary
Medicine HatLethbridge
20
30
10
1
49°N
20
1
10
30
40
Swift Current
Saskatoon
Calgary
Medicine HatLethbridge
20
30
10
1
49°N
20
1
10
30
40
Swift Current
Saskatoon
Calgary
Medicine HatLethbridge
20
30
10
1
Wells Onstream to 2005, Production to Feb 2007
Western Canada Tight Gas
Tight Gas RegionsCumulative Raw Gas per Township, Bcf
0 100 200 km
0 50 100 miles
% p15% of production 03-05
Current and Future Natural Gas Supply as Feedstock
CERI Petrochemicals ConferenceJune 2007
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Illustrative long term supply outlook for Canada
16
18
20
22 LNG Imports BC
LNG Imports Que
LNG Import EastCoastNewfoundland
Natural Gas Production Outlook – Continuing Trends Scenario • Continuing Trends preliminary scenario
• Decline of WCSB ti l &
2
4
6
8
10
12
14
16
Bcf
/d
Nova Scotia Deep
Panuke
Sable &SurroundingsMackenzie
WCSB Shale
WCSB Tight
WCSB MV CBM
WCSB HC CBM
WCSB Additions
WCSB Non Assoc
conventional & limited replacement
• Unconventional from WCSB grows
• Mackenzie onstream i 2012 E t C t
21Unconventional, Mackenzie and LNG required
02004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
WCSB Solution
Source: National Energy Board, Consultations on Preliminary Results February 2007
in 2012, East Coast LNG earlier
Base case assumes business as usual, 2.8% economic growthAssumes gas price of $7/mcf US Henry Hub
• Gas consumption increases in medium term until electrical switches to coal
Long term supply/demand outlook for United States
US Natural Gas Production, Consumption and Imports
24
26
28
Consumption
LNG Imports
Projections
• US gas production grows despite recent declines in Gulf
• Pipeline imports from Canada decrease
12
14
16
18
20
22
Tcf
Pipeline Imports (Canada)
Dry Gas Production
22Greenhouse gas policies would limit new coal generation
• LNG is plug number to meet consumption
Base case assumes policy neutral: no carbon taxes affecting coalForecasts prices of $5-$6/mcf Henry Hub ($US 2005) over period
102005 2010 2015 2020 2025 2030
Source: EIA
Current and Future Natural Gas Supply as Feedstock
CERI Petrochemicals ConferenceJune 2007
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8
10
Lower 48 Non-Associated Unconventional
ProjectionsHistory
Natural Gas Production by Source, 1990-2030trillion cubic feet
US Dry Gas Production base case• Unconventional
growth is slower, gas shales growing
Sh t t
0
2
4
6
Alaska
Lower 48 Non-Associated Offshore
Lower 48Associated-Dissolved
Lower 48 Non-Associated Conventional Onshore
• Short-term production hiccup
• Reverse declines in Gulf of Mexico by tying in Deepwater oil and gas fields
23
01990 1995 2000 2005 2010 2015 2020 2025 2030
EIA AEO 2007
A generous production forecast
• Assumes Alaska pipeline in 2018
Actual US production flat despite record onshore drillingGulf of Mexico offshore production declining – not just hurricanes!
LNG Supply
24Unconventional largest single source of supply
Current and Future Natural Gas Supply as Feedstock
CERI Petrochemicals ConferenceJune 2007
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Will We Have the Right Stuff?
• Challenge to sustain production profitably in WCSB– More feet drilled for less gas production and reserves– Supply costs and F&D costs are increasing– Uncompetitive costs and economics for WCSB gas projects will
reduce reinvestment
• Unconventional gas, Mackenzie and LNG – Will be required to replace declining WCSB output– Project economics are challenging, supply timing uncertain
25
• US production is forecast not to meet consumption
• LNG will be the swing source for North America
Yes . . . but volatile supply won’t be cheap!
Will We Have the Right Stuff?Will We Have the Right Stuff?
Current and Future Natural Gas SupplyCurrent and Future Natural Gas Supply as Feedstock
dave.flint@forwardenergy.ca
CERI Petrochemical ConferenceCERI Petrochemical ConferenceJune 4, 2007