The Shale Gas Revolution -...

The Shale Gas RevolutionLucian Pugliaresi

Energy Policy Research Foundation, Inc.

Presentation on behalf of the

Japan Oil, Gas, and Metals Corporation

Tokyo

February 2, 2010

Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org 1

January 28, 2010Davos, Switzerland

Unconventional gas will transform the entire energy production landscape in the United States.........and alters the U.S. energy outlook for probably a hundred years*

Tony HaywardChief Executive OfficerBP plc

*In 2009 the United States became the world’s largest producer of natural gas

2Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org

Overview

Natural gas markets around the world are undergoing rapid and fundamental shifts in supply, demand, and pricingEuropean importers are reducing imports from Gazprom and in many cases dropping to (or maybe below) take-or-pay contract minimums.

Turning to lower cost LNG spot cargos when available At the same time, supply of liquefied natural gas (LNG) has increased globally… …and the outlook for natural gas production in the U.S. has changed radically with a breakthrough in the production of gas from shale rock formationsSurge in U.S. shale gas production is gaining interest worldwideWorld markets are saturated with natural gas, pressuring prices


Natural Gas Consumption Through 2030

0

20

40

60

80

100

120

140

160

18019

8019

8219

8419

8619

8819

9019

9219

9419

9619

9820

0020

0220

0420

0620

0820

1020

1220

1420

1620

1820

2020

2220

2420

2620

2820

30

tcf p

er y

ear

OECD

Non-OECD

Total

Source: EIA International Energy Outlook 2009


1

1.2

1.4

1.6

1.8

2

2.2

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

trill

ion

cubi

c fe

et

Source: EIA Data

U.S. Monthly Marketed Natural Gas Production1973 - 2009


U.S. Proven Gas Reserves Since 1980

0

50

100

150

200

250

30019

80

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

tcf

~50% increase in 8 years – nearly all

from shale gas


EIA 2010 Natural Gas Production Forecast


Shale Gas Revolution in North America

Rise in North American gas production in recent years is due to the growing role of the unconventional natural gas, mainly shale gas.

Due to improvements in drilling technology and well-completion methods, U.S. and Canadian gas shale plays currently account for about 10% of the natural gas supply of both countries


U.S. Shale Basins

Source: DOE


Shale Production Technology

Horizontal drilling enables producers to hit the “sweet spot” of a shale formation

Horizontal drilling is often combined with hydraulic fracturing, where rock formations are broken apart and pumped with slick water and sand at a high pressure to break the sediment and release the gas

Wells initially produce gas at a very high rate, then flow quickly tapers off and stabilizes

Wells in the recent past that took 60 days to develop can now be completed in 28 days


Casing Zones and Cement Programs

Source: DOE Shale Primer


Hydraulic Fracturing of Marcellus Shale

Source: DOE Shale Primer, Chesapeake


U.S. Shale Supply Cost Curve

0

5

10

15

20

25

30

35

40

45

0

1

2

3

4

5

6

7

8

45 50 55 60 65 70

$/bo

e

$/m

cf

bcf/d

Base Production

Marcellus

Barnett Core

Haynesville

Barnett Non-Core

Fayetteville Woodford

Source: Wood Makenzie, EPRINC calculations


Coal, Oil, and Gas Prices in the U.S.


Challenges Remain (but they can be overcome)

Barriers to developing shale gas and bringing it to the market outside of North America remain significant, including:

• difficult geologic formations• shortage of adequate infrastructure• variations in size and maturity of basins• physical access• exploitation costs • environmental concerns• regulatory and institutional constraints


The Evolving Industry

Global economic downturn has slowed down the capital-intensive development of unconventional resources

Production has held up even as gas prices dipped below $3/MMBtu. It is unclear whether production would be sustained under such conditions in the long term.

Uncertainties remain about projecting shale gas production in the U.S. –decline rates have been difficult to predict

Environmental concerns regarding chemicals sometimes used in the fracturing process.

More experience and time is needed to establish the decline rates and production lifespan of shale gas wells


Environmental Concerns

There are two major environmental concerns facing shale gas production.

Both relate to the hydraulic fracturing process and worries over the possible contamination of underground drinking water.


Hydraulic Fracturing and Well Casing

Hydraulic fracturing usually occurs below water aquifers – fracturing fluid is pumped down the well at high pressure to create pores in the shale rock.

Therefore wells must be drilled through the water aquifer.

Environmentalists worry that the well casing could leak fracturing chemicals and contaminate the aquifer.

There is little evidence to support this concern


Fracturing Water Treatment and Disposal

The hydraulic fracturing process uses millions of gallons of water and often produces additional water.

This water may contain various chemicals, from both the fracturing process and produced water, that is not potable and must be treated.Currently this is done by storing water in pits. Environmentalists worry that this water could leak through the ground and contaminate aquifers.

There are several options for dealing with this concern, including:

Onsite treatmentOnsite tank storageRemoval by tanker trucks


Possible Fracturing Legislation

A recent Congressional hearing on the ExxonMobil-XTO merger made it clear that the Federal Government does not intend to ban hydraulic fracturing

Federal regulation is possible and could involve disclosure of chemicals, although regulation may continue to be left up to the states.

New York State has opposed hydraulic fracturing in the New York City watershed

Chesapeake has agreed to put off drilling the watershedMeanwhile, Pennsylvania has strongly supported shale gas development.

It has brought thousands of jobs and billions in revenue to the stateNY is struggling financially and may eventually support development, albeit with further regulation


U.S. Nat Gas Production and Imports

1

1.2

1.4

1.6

1.8

2

2.2

2.4Ja

n-19

99

Oct

-199

9

Jul-2

000

Apr-

2001

Jan-

2002

Oct

-200

2

Jul-2

003

Apr-

2004

Jan-

2005

Oct

-200

5

Jul-2

006

Apr-

2007

Jan-

2008

Oct

-200

8

Jul-2

009

tcf p

er m

onth

Pipeline Imports (Canada and Mexico) (MMcf)

LNG Imports (MMcf)

U.S. Natural Gas Marketed Production (MMcf)

Source: EIA Data


Foreign Interest in Shale Gas


U.S. Shale Industry Draws Foreign Investment

BP acquired part of Oklahoma’s Woodford shale gas play from Chesapeake Energy in 2008 for $3.65 billion

EnCana and Royal Dutch Shell began developing the Haynesville Shale in Louisiana and Texas

StatoilHydro and Chesapeake Energy jointly develop Marcellus shale basin and 14 different shale plays in other countries

ExxonMobil began exporting its expertise and know-how from its North American shale gas operations to European gas markets

Total’s invested $2.3 billion in Chesapeake's acreage in Barnett and other plays


Potential for Shale Outside North America

China and much of Europe possess shale formations similar to those found in the U.S.

However, the potential for large-scale gas production remains unknown – significant production is about a decade away

Exploration in Europe is being carried out largely by joint ventures with companies that have experience in North American ShaleExploration in China is at an earlier stage than European explorationSuccessful shale development could have huge implications for historical exporters (Gazprom)


European Shale Exploration Sites

From the Economist


Exploration in Europe and China – Utilizing American Experience

A major reason for European and IOC investment in U.S. shale is experience…ExxonMobil is active in Germany and Hungary

Exxon has struggled with early exploration in Hungary – this may have influenced their acquisition of XTO

ConocoPhillips and 3 Legs Resources exploring in PolandPolish shale similar to Barnett in Texas

Shell carrying out exploration in SwedenTotal and UK Devon active in FranceChina has recently agreed to deals with Shell and BP to explore in China


Constraints to European Development

Very early in E&P processEuropean companies do not have the same amount of experience as their U.S. counterparts and Europe lacks the type of small, independent companies that initiated U.S. shale developmentAlso lack logistical infrastructure to bring new production to market

Geology is similar, but not identical to North AmericaHigher population density means makes access more difficult

This may cause additional transportation problems


Unconventional Reserves Around the World

28Source: Statoil

Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org

LNG

&

Natural Gas Pricing


World LNG and Unconventional Gas Production


Russian Export and U.S. Henry Hub Gas Prices vs. Oil

0

5

10

15

20

25

Jan-

2000

Jul-2

000

Jan-

2001

Jul-2

001

Jan-

2002

Jul-2

002

Jan-

2003

Jul-2

003

Jan-

2004

Jul-2

004

Jan-

2005

Jul-2

005

Jan-

2006

Jul-2

006

Jan-

2007

Jul-2

007

Jan-

2008

Jul-2

008

Jan-

2009

Jul-2

009

Jan-

2010

$ pe

r mill

ion

BTU

Russian Natural Gas Border Price in Germany ($ per million BTU)

NYMEX-Henry Hub Natural Gas Front Month Futures Contract ($ per million BTU)

Brent Crude - Pushed Forward 6 Months ($ per million btu)

Russian Natural Gas Price Estimate

Henry Hub - EIA Estimate - 2010 Average

Russian export prices track crude prices from 6 months prior, therefore prices in

H1 2010 will reflect crude’s late 2009 rebound and Russian gas will likely cost

twice as much as Henry Hub in 2010.Source: EIA Data, IMF Data, EPRINC Calculations


Natural Gas and Crude Oil Prices Through 2030

0

5

10

15

20

25

2007

$ p

er m

illio

n BT

U

Henry Hub Spot Price

Imported Low-Sulfur Light Crude Oil ($ per million BTU)

Source: EIA Annual Energy Outlook 2009


Total LNG Imports - 2008

Source: BP Statistical Review 2009, OGJ Data, EPRINC Calculations

0102030405060708090

100

billi

on cu

bic

met

ers

U.S. LNG import capacity utilization was less than

10% in 2008


Total LNG Exports - 2008

Source: BP Statistical Review 2009

0

5

10

15

20

25

30

35

40

billi

on cu

bic

met

ers


Spot LNG Trade by Country

Source: CIIGNL (2009)


LNG Liquefaction Capacities Through 2015

Source: IEA Data

36

0

100

200

300

400

500

600

bcm

/yea

r

2013

2012

2011

2010

2009

Capacity under construction **

Capacity end - 2005*

Projected total capacity ***


LNG Trade and Implications

LNG shipments that were redirected from North American markets to Europe have helped to keep spot prices lower than prices indexed to crude oil

Some European gas customers are seeking renegotiation of long-term contracts, potentially changing the current oil-linked natural gas price index

Successful North American development of unconventional gas resources has already and is anticipated to reduce U.S. and Canadian LNG imports.


Range of U.S. Gas Price Projections

38Source: Statoil


Asian LNG Imports – 2008 and 2009


Global Gas Prices – 2009


Fuel Oil vs. Spot LNG -- 2009


Will GTL Make a Comeback?


Gas-to-Liquids Technology

•Turning natural gas in liquid petroleum products•GTL technologies are often derived from the Fischer-Tropschprocess (although several methods exist)•Combines natural gas molecules to form liquids: largely middle distillates and along with napthas/gasoline and lubricants

•Overall, the process results in a very clean and very high value barrel of liquids•No “bottom of the barrel products”

•The technology still faces many technological and capital cost hurdles

•Energy waste presents significant questions regarding the process’s long-term economic viability

•Some current technologies yield only 60% of the energy content 43Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org

Why GTLs?

• Monetize stranded gas and associated gas•Transform Natural Gas into a more valuable product•Liquids can be transported more easily than gas, therefore reaching additional markets•Some countries (Japan) wish to switch liquid fuels dependency from crude oil to natural gas •GTL fuels burn more cleanly than crude derived fuels•Shift in Gas Market Pricing Makes GTL and DME Research a Priority?


Niigata Demo Plant

•JV between Nippon Oil, JOGMEC, JAPEX, INPEX, and Chiyoda

•500 b/d•Completion: April 2009•Cost: 36 billion yen (~ $400 million)•Designed not for commercial production but to research Japanese technology and to determine whether such technology can be scaled economically

•Successor to Yufutsu Pilot Plant•Can handle gas with high CO2 content


Niigata Japan GTL Process


Niigata Japan GTL Plant


Crude vs. GTL Finished Products

Refined Brent (vol%) GTL-FT (vol%)

LPG 3

Naptha + Gasoline 37 15-25

Distillates 40 50-80

Fuel Oils 40

Lubes + Wax 0-30

Source: BP, E-MetaVentures, Inc. from IAEE Annual Int’l Conference, 2003


A Brief History of GTLs

• SASOL developed GTL technology in the 1950’s using the FT process.

•Interest grew from the 1980’s to early 2000’s•SASOL is still a leader in GTL technology•Several IOCs currently constructing large plants

•Most commercial GTL plants operate in South Africa, Qatar, and Malaysia•Demo plants scattered throughout the world, from the U.S. to Japan


GTL Plants Under Construction

• Two common themes:•Over-budget•Behind Schedule

•Projections for capital cost improvements made in the early 2000’s have not materialized

•Construction has been delayed across the board and projects are coming in significantly over budget

•Unforeseen technical challenges have played a large role•Many planned projects have been cancelled

•Per barrel costs for projects under construction are several times greater than those of a new crude oil refinery


Shell Pearl

• Shell and Qatar Gas constructing plant in Ras Laffan, Qatar with capacity of:

•140,000 b/d of liquids•120,000 boe of LPGs, condensates, and ethane

•Expected Completion: late 2010-2011•Initial Projected Cost: $6 billion•Final Expected Cost: $18-$19 billion

•Cost per barrel of liquids: $129,000 – $136,000


A Modern, Commercial Plant: ORYX

• SASOL and QATAR Petroleum•Capacity has grown to over 32,000 b/d

•Plant was completed in 2006 but production did not begin in earnest until 2009

•Faced catalyst problems•Cost: $1 billion

•Cost per barrel: $31,250•Cost is deceivingly low because plant was delayed for several years


Chevron Escravos

•Facing issues similar to that of Shell’s Pearl – over budget •Chevron and SASOL project in Nigeria.

•34,000 b/d of liquids•Uses SASOL Slurry Phase Technology

•Expected Completion: 2012•Initial Projected Cost: $1.7 billion•Final Expected Cost: $6.9 billion

•Cost per barrel of liquids: $202,000


World GTL/Petrotrin – Small Scale GTL

•Trinidad and Tobago•2,250 b/d

•Expected Completion: 2010?•Initial Projected Cost: $150 million•Final Expected Cost: $445 million

•Cost per barrel of liquids: $197,000


Capital Cost Barrier

• Saudi Arabia is building three new crude oil refineries, for domestic consumption and exports

•Each is 400,000 b/d•All should be completed by 2013•Cost is around $10 - $12 billion, or $25,000 - $30,000 per barrel of capacity

•Meanwhile, GTL plants under construction cost $100,000 -$200,000 per barrel of capacity

•To be successful, capital costs must come down and gas must remain discounted to crude oil (and the technology must be refined)


GTL & DME Gross Margins

-100

-50

0

50

100

150

200

Jan-

2000

Aug-

2000

Mar

-200

1

Oct

-200

1

May

-200

2

Dec-

2002

Jul-2

003

Feb-

2004

Sep-

2004

Apr-

2005

Nov

-200

5

Jun-

2006

Jan-

2007

Aug-

2007

Mar

-200

8

Oct

-200

8

May

-200

9

$/bb

l

Gross GTL Margins – 1 barrel of low sulfur diesel minus natural gas feedstock costs

GTL Gross Margin - $ per Barrel of Low-Sulfur Diesel

Henry Hub NYMEX Front Month Natural Gas Price - $ per Barrel of Oil Equivilent (5.8 MMBtu)

New York Harbor No 2 Diesel Low Sulfur Spot Price - $ per Barrel


Are GTL Capital Costs on the Decline?

Source: E-MetaVentures, Inc. from IAEE Annual Int’l Conference, 2003

Shell’s recent difficulties with its Pearl plant would

suggest that costs have drastically risen – this cost is equivalent to current crude

refinery projects


Capital Costs and the Gas Crude Spread*

0

200000

400000

600000

800000

1000000

1200000

0

50

100

150

200

250

300

40 60 80 100 120 140 160 180 200

$ pe

r bar

rel o

f ins

talle

d ca

paci

ty

$ pe

r bar

rel

Price of Oil - $ per barrel

Gross Margin - 80% discount to oil

Gross Margin ($ per barrel of Distillate, assumed to be the price of crude oil plus 10%) - left axis

Feedstock costs and operating costs ($5/bbl) per barrel of product output (Includes 40% energy penalty) - left axis

Break even capital cost per barrel of installed capacity at a given oil price (required to break even over 20 years | refined product value minus feedstock and operating costs of $5/bbl) - right axis

Break even capital cost per barrel of installed capacity - 80% discount to oil

Current capital costs ($200,000/bbl) atChevron's Escravos plant requirie $90 oil to break even.

To be competitive at current prices, capital costs would have to be reduced to $125,000/bbl

*EPRINC preliminary estimates 58Energy Policy Research Foundation, Inc. | 1031 31st St, NW Washington, DC 20007 | 202.944.3339 | www.eprinc.org

Projected GTL Capacity - NPC

Source: NPC


Gas to Oil Pricing Likely to Become Permanently De-Linked

Stability of Indices No Longer Assured ---- “ S” Curve More Robust than Most, but Pressure forChange Will Remain (Europe – Gazprom Index No Longer Workable)

Gas Rich Scenario Can Reduce the Cost of GHG Controls

Strategic Shifts: Russia and Central Asia Natural Gas Leverage on the Decline – Greater Openessto Foreign Investment

Shale/Uncoventional Gas Technology Migration Will Accelerate –Reserve Growth Likely to Continue

Long Term Prospects for GTL and DME Will Continue to Improve

CHANGE IS COMING!


The Shale Gas Revolution -...

Documents

Transcript of The Shale Gas Revolution -...