Major Challenges for Gas: What Can be Expected for Mexico?

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1 Major Challenges for Gas: What Can be Expected for Mexico? Gas Future Forum, Mexico, April 3, 2014 BEG/CEE UT, 1

2 Overall Observations Resources Reserves Deliverability Deliverability is key Sweet spot geology Shale silos portfolio repositioning underway Liquids are critical to well economics Implications outside of U.S./Canada? U.S. demand build out is real Midstream, logistics challenges for both oil, gas Exports Desperately seeking expectations management Industry brand Managing SSHE risk Capital provider priorities BEG/CEE UT, 2

3 U.S. Crude Oil Production 300, ,000 U.S. Field Production Midwest (PADD 2) Field Production Gulf Coast (PADD 3) Field Production Excluding Federal OCS Federal OCS Gulf of Mexico Field Production What are the opportunities beyond Bakken, Eagle Ford, West Texas??? 200,000 Thousand Barrels 150, ,000 New Unconventional: PADD 2, red (Bakken) and PADD 3, gray (W Texas, Eagle Ford, Barnett) Gulf of Mexico Offshore, green 50,000 0 CEE analysis based on EIA BEG/CEE UT, 3

4 U.S. Dry Gas Production by Type 30,000,000 25,000,000 Pipe imports from Canada have balanced the market (2002 peak 3.7 TCF, ~16% of Lower 48 supply. Currently ~10% of L48 supply) 20,000,000 Other U.S. Shales Million Cubic Feet 15,000,000 CBM TX Barnett Shale LA Haynesville PA Marcellus 10,000,000 All Other (Onshore Conventional) 5,000,000 OCS Gulf of Mexico * estimates for other shales, CBM based on industry and state government data CEE analysis based on EIA, state government reporting BEG/CEE UT, 4

5 Dry Gas Production Growth Trends Slower growth with falling NG price and other constraints * indicates CEE estimates based on state government and industry information U.S. Total Dry Natural Gas Production 3% 7% 5% 1% Other U.S. Shales 129% 45% 43% *4% LA Haynesville 133% 63% 0% * 31% PA Marcellus + Other 100% 189% 92% *52% TX Barnett Shale 5% 11% 2% 9% CBM 1% 7% 6% * 6% All Other (Onshore Conventional) 10% 5% 7% *1% OCS Gulf of Mexico 8% 18% 15% 15% CEE analysis, EIA, state governments and other sources BEG/CEE UT, 5

6 Working to Re set the Treadmill Oil and gas additions must offset, and exceed, decline curves impacts (large arrows). As the best locations are played out, more drilling in marginal locations will be required (higher cost, higher price). EIA Drilling Productivity Report, Feb 14, BEG/CEE UT, 6

7 An Alternative View MM Foss, work in progress BEG/CEE UT, 7

8 BCFD CEE Estimated Growth in Industrial Gas Use After years of decline, industrial sector demand for natural gas is poised to grow by 1.3 TCF, or 18% between 2012 and MTG Metals Propylene Polyethylene Chlor Alkali Methanol Ammonia urea fertilizer Ethylene Crackers Base Demand (2012) Regional winners, losers; excludes proposed GTL BEG/CEE UT, 8

9 BEG/CEE UT, 9

10 Is U.S. LNG Competitive? BEG/CEE UT, 10

11 A strong demand stack scenario TCF LNG Exports 2030 = 1.0 (EIA ER = 3.5) Pipe Exports 2030 = 3.9 (EIA ER = 3.4) LNG exports CEE Pipeline exports CEE 30 Power generation CEE Power 2030 = 15.9 (EIA ER = 10.1) CEE assumes all possible EPA actions Industrial 2030 = 8.8 (EIA ER = 8.5) Industrial CEE Other (Res, Comm, Trans) EIA ER Dec 2013 Total demand CEE High Case 5 Other 2030 = 10.8 (residential+ commercial 10.5) Total supply EIA ER Dec 2013 CEE analysis; EIA ER refers to EIA Early Release, Dec 2013 (reference case) BEG/CEE UT, 11

12 A driver and an outcome Actual Ratio, Crude Oil (WTI, Bbl):Gas (HH, Mcf) Prices Actual Ratio, Crude Oil (Brent, Bbl):Gas (HH, Mcf) Prices Standard Ratio (BOE to Btu) Assumptions about the relationship of oil and gas prices are driving demand growth. Natural gas essentially became a byproduct of oil (again). Will this continue? CEE analysis; EIA, CME/NYMEX data BEG/CEE UT, 12

13 Volatility Returns 300% 250% 200% 150% Small changes in supplydemand balance exert large changes in price volatility. Natural gas has tended to demonstrate greater price volatility than oil. Y Y Change Cushing, OK Monthly Avg WTI Spot Price, % Y Y Change Henry Hub Monthly Average Spot Price, % 100% 50% 0% 50% 100% BEG/CEE UT, 13

14 Big Market, Many Bottlenecks BEG/CEE UT, 14

15 All are approximations (TCF) Burden of Proof Start Cum Gas to 2012 Cum Gas to 2050 (BEG) Remaining in Place as of 2012 Barnett (BEG) (PGC) Fayetteville (incl. Woodford) To replace GOM and (BEG) (PGC, incl. Woodford) Haynesville WCSB supply, shale (PSD) (PGC) Eagle Ford plays need (PSD)?? considerable Bakken/Three Forks development with (PSD)?? Marcellus attendant risks, uncertainties (PSD)? 563 (PGC, incl. Utica) 2 Gulf of Mexico (64% decline since 1997 peak of 5 TCF) 1970s (EIA)? 75 (PGC) 2 Western Canada Sedimentary Basin (15% decline since average of 5.8 TCF) 1970s (CAPP)? 4 66 (CAPP) Notes: 1 most wells and horizontal completions drilled since 1990s; 2 production ramp up in 1970s; 3 mainly GOM shelf; 4 marketed production and marketable gas reserves; forthcoming CEE case studies on GOM shelf and WCSB development pathways BEG Sloan; Powell Shale Digest; Potential Gas Committee; Canadian Association of Petroleum Producers BEG/CEE UT, 15

16 Established Endowments Diameter of bubble is total production, 2012, BOE; U.S. was 14 MMBOE. Countries with + are mainly gas producers. CEE analysis based on BP Statistical Review and EIA. BEG/CEE UT, 16

17 Upstream Regimes: Inverse Relationship Favorable Quality of Commercial Frameworks Alberta (Canada) U.S. Gulf of Mexico (GOM) (Federal, non moratoria) Colombia UK Brazil ( ) India Brazil Mexico Colombia(1995) (2001) Mexico U.S. GOM? Alberta (2007) Venezuela (1996) Norway Norway (1986) China Kuwait Iraq Nigeria Venezuela UAE Saudi Arabia Relative Risk/Reserve Position (BBOE) Base year: 1998 As of: 2012 Iran Other FSU Russia Favorable Source: Approximations, only. Based on Foss, et.al., BEG/CEE UT, 17

18 Key Challenges: Mexico and Beyond Long term commercial sustainability (control vs flexibility) Allocation of public benefits (transparency and confidence) Definition of public benefits (economic rent capture) Prove up of resource endowment (risk, uncertainty) Risk/reward balance BEG/CEE UT, 18

19 Broader Lessons Free enterprise matters! Cannot pick winners Access is key to flexible development Regulatory red tape, public opposition are equally bad time is money National oversight makes sense for large infrastructure But local control is desired and desirable Investment won t happen without clear price signals BEG/CEE UT, 19