North American Natural Gas Exports and Future U.S. Supply: Sound and Fury

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1 North American Natural Gas Exports and Future U.S. Supply: Sound and Fury Arthur E. Berman Labyrinth Consulting Services, Inc. Corpus Christi SIPES Corpus Christi, Texas August 26, 2014 Slide 1

The Future of North American Natural Gas Exports A global context is essen4al to understand the export future of both heavy oil and natural gas. The U.S.

There is no shale gas revolu4on it is a rally that has bought us another decade of supply.

2 The Future of North American Natural Gas Exports A global context is essen4al to understand the export future of both heavy oil and natural gas. The U.S. and Canada are not natural gas super powers. The U.S. does not have 100 years of gas nor will LNG export become significant in global markets or poli4cs. There is no shale gas revolu4on it is a rally that has bought us another decade of supply. Russia s natural gas deals with China and Austria fundamentally alter the global LNG market. North American LNG exports will be limited and will face increasing compe44on on price and market- share. The U.S. will face increasing challenges to meet domes4c gas demand in the next decade. Slide 2

3 North American Natural Gas Exports: The Context OPINION Putting America's Energy Leverage to Use Undermine Putin and help the U.S. economy by capitalizing on our natural-gas bonanza. By JOHN HOEVEN And JOHN MCCAIN July 28, :31 p.m. ET It is a tale Told by an idiot, full of sound and fury, Signifying nothing. - - Macbeth Act 5, scene 5, Today, the U.S. has the leverage to liberate our allies from Russia's stranglehold on the European natural gas market. Thanks to new technologies such as hydraulic fracturing and horizontal drilling, America is producing more than 30.2 trillion cubic feet of natural gas a year, but only using 26.6 trillion. Oil and gas companies are forced to burn off natural gas that isn't used - - John Hoeven and John McCain Policy makers are ignorant about energy. Senators Hoeven and McCain subtract consump4on from gross withdrawals and conclude that the difference is surplus supply. They conclude that this surplus is flared because there is no infrastructure due to no demand. This surplus is almost 10 Bcf/day! Apparently, they didn t bother to look at EIA s Annual Energy Outlook 2014 where everything they don t know is in a single spreadsheet. Trillions(of(Cubic(Feet(of(Gas(Per(Year( 35" 30" 25" 20" 15" 10" 5" 0" U.S.(Natural(Gas(Produc:on(&(Consump:on( Dry"Gas"Produc7on" Consump7on" 2011" 2012" 2013" 2014" 2015" 2016" 2017" 2018" 2019" 2020" Slide 3

4 A Global View of Natural Gas Proved Reserves Natural(Gas(Proved(Reserves( Proved(Reserves(of(Natural(Gas( 1800& 1,680& 1,400% 1600& 1400& 1,200% 1,193% 1,104% Trillions(of(Cubic(Feet(of(Gas( 1200& 1000& 800& 600& 400& 200& 1,168& 890& 305& 284& 265& 215& 195& 180& 159& 147& 141& 112& 107& 85& 83& 77& 71& 65& 64& 61& Trillions(of(Cubic(Feet(of(Gas( 1,000% 800% 600% 400% 200% 872% 617% 330% 291% 215% 197% 179% 159% 130% 127% 116% 103% 72% 71% 65% 63% 55% 54% 0& Russia& Iran& Qatar& United&States& Saudi&Arabia& Turkmenistan& UAE& Venezuela& Nigeria& Algeria& Europe& Indonesia& Iraq& China& Kazakhstan& Malaysia& Egypt& Norway& Uzbekistan& Kuwait& Canada& 0% Iran% Russia% Qatar% Turkmenistan% US% Saudi%Arabia% UAE% Venezuela% Nigeria% Algeria% Australia% Iraq% China% Indonesia% Norway% Canada% Egypt% Kuwait% Libya% Kazakhstan% Source: EIA Source: BP The U.S. is a weak 4 th (EIA) or 5 th (BP) in world proven natural gas reserves and Canada is 21 st (EIA) or 17 th (BP). Slide 4

5 A Global View of Natural Gas Proved Reserves Slide 5

The Power Of Siberia Pipeline Changes Everything Source: Gazprom Russia s gas deal with China: 1.9 2.3 Tcf/year (5-6 Bcf/d) for 30 years. Sets a $10/MMBtu benchmark price for Asia without oil linkage.

6 The Power Of Siberia Pipeline Changes Everything Source: Gazprom Russia s gas deal with China: Tcf/year (5-6 Bcf/d) for 30 years. Sets a $10/MMBtu benchmark price for Asia without oil linkage. Gas agreement has far- reaching implica4ons for global LNG markets. Russia plans to be the leading supplier to Asian gas markets. Russia s East Siberia proven reserves: 196 Tcf & 7 billion barrels of oil, 3-4mes Canadian reserves and more than U.S. shale gas reserves. This is only the beginning: pipelines to Korea & Japan are planned. Slide 6

The South Stream Pipeline Changes Everything Source: Gazprom Russia s gas deal with Austria is poten4ally larger than the deal with China: 2.3 Tcf/ year (6 Bcf/d).

7 The South Stream Pipeline Changes Everything Source: Gazprom Russia s gas deal with Austria is poten4ally larger than the deal with China: 2.3 Tcf/ year (6 Bcf/d). Gas will pass through the Baumgarten Hub in Austria to Germany. Adds to 1.9 Tcf/year (5 Bcf/d) through North Stream Pipeline. Russia is the leading supplier to European gas markets and this will almost double its supply. Slide 7

Resource Es4mates: The Myth of 100 Years of Natural Gas SUMMARY*OF*POTENTIAL*GAS*COMMITTEE*2012*REPORT Technically*Recoverable*Resources*(TRR) Tcf Probable(including(CBM((existing(fields) 723

50%(of(Probable(TRR 361 Total&Potential&Reserves 666 Years*of*Reserves*(Total* *2013*Consumption) 26 Data source: Potential Gas Committee (2013) There never was 100 years of total technically

8 Resource Es4mates: The Myth of 100 Years of Natural Gas SUMMARY*OF*POTENTIAL*GAS*COMMITTEE*2012*REPORT Technically*Recoverable*Resources*(TRR) Tcf Probable(including(CBM((existing(fields) 723 Possible((new(fields) 1,001 Speculative((frontier) 655 Separately(Aggregated(Amount 6 Total 2,384 Years*of*Technically*Recoverable*Resources 92 Potential*Reserves Tcf Proved(Reserves %(of(Probable(TRR 361 Total&Potential&Reserves 666 Years*of*Reserves*(Total* *2013*Consumption) 26 Data source: Potential Gas Committee (2013) There never was 100 years of total technically recoverable resources (TRR): only 92 years. 28 years of probable TRR: the only meaningful category because plays have been tested. 14 years of shale gas reserves assuming 50% of probable resources will become reserves at some price much higher than today s probable range. Shale resource assessments are only relevant as a factor in evalua4ng untested plays. They are worthless once produc4on history is established. Resource es4mates create an inflated impression of play poten4al among poli4cians, journalists and investors. Much of this gas is too deep, or in accumula4ons too small to ever be developed, or is inaccessible. Slide 10

9 Shale Gas $4.00 Break- Even Economics Exclude Important Costs Expense&Deducts&from&Henry&Hub&Price&$/Mcfe& $3.00& $2.50& $2.00& $1.50& $1.00& $0.50& Expense&DeducNons&for&Shale&Gas&Companies& RelaNve&to&Henry&Hub&Based&on&3Q&2013&10UQ's& $0.51& $0.13& $0.35& $0.69& $0.44& $0.38& $0.79& $0.90& G&A& Taxes& LOE& Gathering,&Trans.&&&Selling& Henry&Hub&U&Realized&Price& $0.32& $0.15& $0.43& $0.79& $0.52& $0.15& $0.35& $0.64& $0.52& $0.15& $0.35& $0.64& $0.32& $0.17& $0.76& $0.00& $1.48& $0.24& $0.09& $0.87& $0.00& $0.00& $0.55& $0.54& $0.36& $0.17& $0.17& $0.00& RRC& SM& Cabot& EXCO&TX& EXCO&Marc& CHK& SWN& Source: Company 3Q Q Filings No shale gas play is commercial at $4 gas prices (except ~3% of the Marcellus core). Many analysts do not include fixed costs in their break- even price. But these costs are part of the operator s main business and not an incremental add- on. This is like evalua4ng Wal Mart on the basis of wholesale vs. retail price without the cost of buildings, employees, distribu4on, adver4sing, etc. For shale gas, these costs average about $2.00/MMBtu. Slide 11

10 Shale Plays Are Not Profitable At The Corporate Level With Current Gas Prices Year%End)2013 Cash)Flow 105,785 Capex %120,615 Debt 167,434 Equity 326,991 Capex/Cashflow 114% Debt/Equity 51% Capex/Cashflow)Deficit %14,830 Fourth)Quarter)2013 Annualized)Cash)Flow 106,521 Annualized)Capex %125,727 Capex/Cashflow %118% Annualized)Deficit %19,206 Source: Google Finance, Yahoo Finance 50 E&Ps represent ~40% of U.S. gas produc4on. Overall ~50% gas- weighted. E&P capex exceeds cash flow by $37 billion annually. $400 billion debt load. Debt- to- Equity ra4o is 51%. Slide 12

11 The Balance Sheets Are Worse For Gas- Weighted E&Ps Company Year1Total Range1Resources Capex/Cash1Flow 174% 232% 192% 146% 188% Debt/Equity 130% 122% 83% 88% 106% Encana Capex/Cash1Flow 118% 112% 117% 205% 134% Debt/Equity 150% 146% 95% 45% 87% Chesapeake Capex/Cash1Flow 143% 408% 161% 264% 223% Debt/Equity 81% 82% 65% 83% 77% Southwestern Capex/Cash1Flow 118% 127% 126% 126% 124% Debt/Equity 54% 55% 34% 37% 45% Cabot Capex/Cash1Flow 117% 142% 178% 177% 145% Debt/Equity 52% 51% 45% 52% 50% Talisman Capex/Cash1Flow 139% 151% 179% 156% 158% Debt/Equity 65% 46% 50% 47% 52% Devon Capex/Cash1Flow 124% 131% 149% 192% 136% Debt/Equity 59% 49% 51% 62% 55% TOTAL Capex/Cash1Flow 131% 186% 151% 203% 165% Debt/Equity 76% 69% 60% 59% 87% Source: Google Finance (Operators > 60% Gas- Weighted & Market Cap >$5 B) Slide 13

12 EIA Forecast for Endless Produc4on Growth at Low Gas Prices Gas'Produc<on'Base'&'Number'of'New'Producing'Wells' Number'of'New'Producing'Wells'&'Henry'Hub'Gas'Price' Number"of"New"Producing"Wells" Produc?on"Base" New$Prod$Wells$ Constant$HH$Price$ 50,000" 120" 50,000$ $8.00$ 45,000" 40,000" 100" 45,000$ 40,000$ $7.00$ New'Producing'Wells'Per'Year' 35,000" 30,000" 25,000" 20,000" 15,000" 80" 60" 40" Billions'of'Cubic'Feet'of'Gas'Per'Day' Number'of'New'Producing'Wells'Per'Year' 35,000$ 30,000$ 25,000$ 20,000$ 15,000$ $6.00$ $5.00$ $4.00$ $3.00$ $2.00$ Constant'2012'Henry'Hub'Price' 10,000" 5,000" 20" 10,000$ 5,000$ $1.00$ 0" 2014" 2015" 2016" 2017" 2018" 2019" 2020" 2021" 2022" 2023" 2024" 2025" 2026" 2027" 2028" 2029" 2030" 2031" 2032" 2033" 2034" 2035" 2036" 2037" 2038" 2039" 0" Source: EIA 0$ 2013$ 2014$ 2015$ 2016$ 2017$ 2018$ 2019$ 2020$ 2021$ 2022$ 2023$ 2024$ 2025$ 2026$ 2027$ 2028$ 2029$ 2030$ 2031$ 2032$ 2033$ 2034$ 2035$ 2036$ 2037$ 2038$ 2039$ $0.00$ Source: EIA EIA forecast shows gas produc4on exceeding 80 Bcf/d in 2020, 90 Bcf/d in 2026 and 100 Bcf/d in The number of new producing wells will increase to almost 40,000 per year before gas prices reach $5/MMBtu in 2024 (~29,500 wells had first produc4on in 2013). This is only possible if wells are profitable at less than $5 gas price, or if outside capital con4nues to be available to cover another 10 years of unprofitable drilling. Coal plant closures will require addi4onal 5 Bcf/d by Mexico pipeline exports will exceed 4 Bcf/d by EIA model assumes a nearly infinite poten4al supply and con4nued unprofitable drilling and produc4on for 25 more years. Slide 19

Conclusions: The fairy tale of shale gas boundless abundance is based on belief in unrealis4c forecasts and failure of due diligence the plays are not commercial below at least $6 gas prices.

13 Conclusions: The fairy tale of shale gas boundless abundance is based on belief in unrealis4c forecasts and failure of due diligence the plays are not commercial below at least $6 gas prices. Over- produc4on was possible because of a global capital bubble created by low interest rates and lack of a beker or safer yield than U.S. shale gas investment. Now producers want permission to export gas to higher- cost markets because they fear that the capital may stop with high debt and nega4ve cash flow. Russia has fundamentally changed the pricing structure for LNG it is impossible for LNG to complete with conven4onal gas moved by pipeline. Once Iran regains acceptable trading status, even more pipeline gas will be available. North American LNG export will proceed but will probably stall when the truth of supply causes domes4c prices to increase. At higher prices, shale gas will buy an North America an addi4onal decade of supply. By the mid- 2020s there will be supply issues for both oil and gas in North America and, perhaps, the world. It is a tale Told by an idiot, full of sound and fury, Signifying nothing. - - Macbeth Act 5, scene 5, Slide 20

Comparison of Netbacks from Potential LNG Project with ALCAN Pipeline Project

Comparison of Netbacks from Potential LNG Project with ALCAN Pipeline Project June 20, 2008 Barry Pulliam Senior Economist Econ One Research 5th Floor 601 W 5th Street Los Angeles, California 90071 213