Proof of Concept and Challenges: U.S. Natural...

Michelle Michot Foss

Chief Energy Economist, The University of Texas at Austin

2012 Summer Seminar

August 5-7, 2012

Proof of Concept and Challenges:

U.S. Natural Gas

2 © 2012 Electric Power Research Institute, Inc. All rights reserved.

On a lighter note…


U.S. Oil and Gas Today

The turnaround in production:

• Challenges “peak oil” and “peak gas”

• Pushed NG price lower, undermining climate, green energy

politics

• Contributed real economic benefits and returns to the

economies of host states (Texas, North Dakota, etc.) and

the U.S.

• Inspired potential new scenarios for U.S. energy security

and international geopolitics


Success Breeds New Concerns

Economic/commercial risks and uncertainties:

• Sustainability of U.S. unconventional nonassociated gas plays at

low NG prices

• Increasing complexity in production stream

– Oil, NGLs are higher value targets for drilling and production,

but are oil price sensitive (WTI/Brent)

– Average associated gas yield is about 20% of marketed

production, potential increase probably limited to 30%

– We balance with nonassociated (dry) gas, which must be

replaced; drilling is sensitive to NG price (Henry Hub)

• Longer term, NG price must rise to a level that can support

marginal cost of supply, given demand

– Growth transition with implications for outlooks


2000:2011 Production

Gains, 5.40

2000:2011 Production

Losses, (3.18)

2000:2011 Change in

Total Consumption, 1.04

(4.00)

(3.00)

(2.00)

(1.00)

-

1.00

2.00

3.00

4.00

5.00

6.00

TCF

Net Gains = 2.2 TCF

Gains in Production > Consumption

Small growth in total

consumption relative

to larger additions in

supply = current soft

price environment

EIA, U.S. marketed production, CEE analysis


Price Eras and Drivers

CME, USEIA, CEE

$0

$2

$4

$6

$8

$10

$12

$14

$16Henry Hub Monthly Average Spot

Price ($/MMBtu)

Avg Feb 89-Feb 92 ($1.61)

Avg Mar 92-Dec 98 ($2.11)

Avg Jan 99-Dec 01 ($3.46)

Avg Jan 02-Sep 09 ($6.32)

Avg Oct 09-Jun 12 ($3.87)

GOM Hurricane Events

El Paso pipeline

explosion, Carlsbad, NM August 19, 2000

Enron bankruptcy

December 4, 2001

California market

failure, 2000-2001

Lehman Brothers

bankruptcy September 15, 2008

U.S. shale gas drilling boom

Peak LNG imports with

new regas capacity,March-August 2007


Location, Location, Location

OCS-Gulf of Mexico27%

CBM6%

TexasBarnett Shale

0%

All Other (Conventional)

67%

OCS-Gulf of Mexico11%

CBM9%

TexasBarnett Shale

9%

OtherU.S. Shales

7%

All Other (Conventional)

63%

1997 Shares

2010 Shares

EIA, CEE


The Dash for Oil

Baker Hughes, EIA/CME

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Oil

Gas19 June 2009

$4.36

10 June 2005$7.11

10 June 2005$53.74

19 June 2009$70.62


-2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%

Haynesville

Arkoma Woodford

Fayetteville

Marcellus

Barnett

Granite Wash

Cana Woodford

Other

Williston

Permian

DJ - Niobrara

Eagle Ford

Utica

Mississippian

Ardmore Woodford

Drilling Activity Trends, Feb 11-Jun 12

Baker Hughes, CEE

Growth is where the liquids are


http://www.eia.gov/todayinenergy/images/2011.11.03/EagleFord.gif


$-

$2

$4

$6

$8

$10

$12

$14

$/M

CFE

10% Return

2011 U.S. Cash Operating Costs $/MCFE

2009-2011 U.S. All Source FD Costs $/MCFE

Henry Hub Spot Price $4/MCF

Ave

rage

All

Commercial Recoverability is Key

Industry financials, CEE

“We want to push costs below

$3 rather than wait for nat gas

prices to catch up”


Reductions in FD Capex but Cash Costs

Continue to Grow

• Spending is well above CF

• Credit revolvers depleting

• Increased scrutiny for

potential write downs

Bernstein Research, used

with permission

$-

$1

$2

$3

$4

$5

$6

$7

$8

Average All 2009 Average All 2010 Average All 2011

10% Return

U.S. Cash Operating Costs $/MCFE

U.S. All Source FD Costs $/MCFE

Henry Hub Spot Price $4/MCF

“Exploration groups love shale – they

can book a billion BOE. No one thinks

about the 6,000 wells the production

company has to drill.”



Large Unexpensed, Uncapitalized

Costs Have Accrued…

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

2009 2010 2011

$ M

illi

on

s

Excluded from Full Cost Amortization Pool

Suspended Costs (Successful Efforts)

Costs not flowing through the income statement and not being reported as

costs incurred in the footnotes


• Delayed to match

reserve additions

or revenues

• Appear to have

ballooned with

falling gas prices

• Drawing attention

from ratings

groups


…and PUD Bookings are Vulnerable

55,859

68,59370,707

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2009 2010 *2011

U.S

. PU

Ds

(BC

FE)

* One operator did not report

(merger), difference is less than 3% Impact of SEC

5-year rule



Perspective is Useful…

McKinsey & Company for Shell, 2001 NPC Study


…Because Oil and Gas Technology

is Slow

Baker Hughes

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%% Horizontal

% Vertical

• Key transactions for horizontal technology,late 1980s (1989)

• First Barnett Shale well, 1981• Chevron Barnett test, 1997• Horizontal drilling applied in Barnett, 2003


Short Run:

Weather; Producer Discipline

$0

$2

$4

$6

$8

$10

$12

$14

$16

-200

0

200

400

600

800

1,000H

en

ry Hu

b Sp

ot P

rice (w

ee

kly, $/M

MB

tu)

Act

ual

Sto

rage

Min

us

5-y

ear

Ro

llin

g A

vera

ge (

BC

F)

L48 Total

HH Spot ($/MMBtu)

Bearish: Actual above average (surplus)

Bullish: Actual below average (deficit) $4 in 2012 could be possible, IF… EIA, CME, CEE


Will Oil:Gas Price

Spreads Persist?

“A ‘fair’ price for gas

would be at par with that

of oil, Qatar’s Energy

Minister Mohammed Al-

Sada said.” – November 15, 2011,

Bloomberg

USEIA, CEE analysis 0

5

10

15

20

25

30

35

40

45

Actual Ratio, Crude Oil (WTI, Bbl):Gas (HH, Mcf) Prices

Standard Conversion

0

10

20

30

40

50

60Actual Ratio, Crude Oil (WTI, Bbl):Gas (HH, Mcf) Prices

Standard Conversion

EIA, CME, CEE


$3

$4

$5

$6

$7

$8

$9

$10

$11

Moderate Price Deck (Michot Foss, OIES NG 18, 2007)

Volatile Price Deck (Michot Foss, OIES NG 58, 2011)

Possible Scenarios

www.oxfordenergy.org

HH $3-6

Lower rather than higher prices

to 2015 with new supply

HH $3-10 ($6 median)

Higher, less stable prices to 2020 with

supply constraints and demand

recovery and growth

NG (HH)

price

dependent

(70-80%)

Oil price

dependent

(20-30%)

http://www.oxfordenergy.org/


Key Drivers for Scenarios

Variable Moderate Volatile

Shale deliverability Full deliverability Reality check

Non-shale deliverability Recovery Declines

Policy, regulation Favorable Unfavorable

Economic recovery Weaker Stronger

Gas-fired power Slow increase Rapid increase

Industrial Modest growth Strong growth

Midstream, downstream

bottlenecks

None Many

Oil:gas spread Wider Narrower

Business model “Lower price, higher

volume”

“Higher price,

lower volume”


A Possible Outcome

$0

$1

$2

$3

$4

$5

$6

$7

$8

Re

al $

/MM

Btu

Foss/CEE Projection

EIA AEO April 2011

Actual Spot

YTD

Both supply and demand side

constraints

• Supply: effect of producer

discipline, above ground risks

• Demand: search for organic growth

• How to balance the surplus Timing?


Bottom Line

• We have a large, rich resource endowment

• Investment was relatively easy to mobilize

– High price signal

– Private lands and minerals

• Conflicting conditions

– With recession, strong supply-demand imbalance

• Upstream and midstream businesses are both in transition

• Does $4 even work for incremental dry gas?

– Producer costs

– Drilling shifts, oil capex competition

– Reserves write-downs

Proof of Concept and Challenges: U.S. Natural...

Documents

Transcript of Proof of Concept and Challenges: U.S. Natural...