DUAL PLENARY SESSION: FUTURE OUTLOOK FOR OIL & GAS PRODUCTION. North American Natural Gas Outlook

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1 DUAL PLENARY SESSION: FUTURE OUTLOOK FOR OIL & GAS PRODUCTION United States Association for Energy Economics North American Natural Gas Outlook November 5, 212 R. Dean Foreman, Ph.D. Chief Economist Talisman Energy

2 GLOBAL LANDED GAS PRICES OCTOBER 212 Source: U.S. Federal Energy Regulatory Commission A strong regional price divergence creates a huge pull for liquefied natural gas out of North America 2

3 NORTH AMERICAN GAS RECOVERABLE RESOURCES 211 Price or Supply Cost ($/MMBtu) 1. Base case low reserves Base case high reserves , 1,5 2, 2,5 3, 3,5 4, Recoverable Resource (TCFG) Source: U.S. National Petroleum Council, Resource Supply Task Group (211) At supply costs of $5/MMBtu or less, ~1,5 TCF recoverable resources was found under any scenario with the possibility of twice this amount with ambitious progress 3

4 BCFD 1 8 NORTH AMERICAN GAS DEMAND By Sector Sept. 212 Difference BCFD 12 1 Gas Displacement of Coal- Fired Power Generation Modest growth potential remains in the industrial, transportation and residential & commercial sectors 6 4 Power Transportation Industrial Although the power sector has led recent demand growth, coal-to to- gas substitution should normalize over the next few years 2 Residential & +.6 Commercial U.S. energy policy could be a panacea in the long- run, but near-term demand growth remains tempered Source: I.H.S.CERA Despite Despite modest modest gains gains across across most most sectors, sectors, normalization normalization of of coal-to-gas coal-to-gas switching switching should should keep keep gas gas demand demand fairly fairly flat flat through through

5 NORTH AMERICAN GAS SUPPLY BCFD Gas Supply by Source LNG Imports Demand Shale Sept. 212 Difference BCFD Shale Gas Other Liquids-Rich & Associated Eagle Ford 4 CBM and Tight Gas 2 Conventional Sources: I.H.S.CERA, CIBC and TLM estimates 2 Marcellus Haynesville 1 Barnett Other Dry Shales Growth Growth is is dominated dominated by by liquids-rich, liquids-rich, associated- associated- and and dry dry Marcellus Marcellus shale shale gas, gas, which which underpin underpin continued continued structural structural changes changes in in North North American American gas gas supplies supplies 5

6 MBD TIGHT OIL RECENT DEVELOPMENTS North American Unconventional Production Scenarios High Low High US$/Bbl Tight Oil Economics- Half-Cycle Breakeven +3% April +1% August WTI crude spot price : $85/Bbl +16% -4% 4 Likely Low % Sources: I.H.S. CERA (Aug. 212), Wood Mackenzie (June 212); CIBC (Aug. 212), U.S. NPC (211) Eagle Ford- Cleveland West Oil & Condensate Bakken- Sanish Parshall DJ Niobrara PRB Niobrara A step step change change in in oil oil supply supply emerges emerges as as unconventional unconventional oil oil production production exceeds exceeds the the most most optimistic optimistic National National Petroleum Petroleum Council Council scenarios, scenarios, and and economics economics prove prove to to be be favourable favourable 6

7 IRR(%) 7 6 ACTIVITY DRIVERS RETURNS AND LAND RETENTION Returns by Play at $9/Bbl WTI (Aug. 212) TLM Plan 213 range 213 to 215 Land-Retention Drilling Marcellus Bakken Eagle Ford Haynesville Henry Hub Gas Price ($/MMBtu) Other Liquids- Rich* *Anadarko, Bakken, Mississippi Lime, and Permian Sources: ITG, Company Reports, Consensus Forecast Barnett Niobrara ~17 million acres (75% prospective) Utica 2k 3k wells Total D&C Spend ~ $1-$2B ~4 BCFD in Mississippi Lime Eagle Ford It would take approximately years at current rig activity levels to fulfill land commitments in these 5 plays alone! Not Not only only are are liquids-rich liquids-rich plays plays economic economic near near current current prices, prices, but but the the wave wave of of land land retention retention commitments commitments could could persist persist for for ~3 ~3 years years if if properly properly funded funded by by industry industry 7

8 Bullish Neutral Bearish NORTH AMERICA NATURAL GAS DYNAMICS Full Cycle Cost Drilling Activity Hedging Activity Coal-Gas Substitution Economy Seasonal Weather Well & Rig Productivity Liquids Focus Uncompleted Wells Land Retention + Joint Venture Capital Production Storage Levels Nymex Natural Gas Price Projections External Sources ($/MMBtu) Sources Maximum P25 Median P75 Minimum The consensus expects gas to sustain prices below ~$4/MMBtu through 213. Uncertainty widens over-time but reflects the structural effects of prospective unconventional gas supply 8

9 KEY POINTS Unprecedented opportunity. Regional divergence of natural gas prices presents strong motivation for new gas trade and domestic unconventional developments Steady near-term course for North American gas. Limited potential demand growth coupled with strong gas supply additions, underpinned by structural changes in unconventional production, reinforce the status quo Liquids are key. Premium values for oil, condensate and some natural gas liquids are driving the next wave for the industry Globalization of unconventionals. The global impact of shale oil and gas is an ongoing story: a potentially great one for global economics & energy and a genuine challenge for greenhouse gas emissions 9