Five Things You Should Know

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1 Bureau of Economic Geology, Jackson School of Geosciences, The University of Texas at Austin Five Things You Should Know Tx Industries of the Future, March 7, 2013 M.M. Foss, 9/25/2012, BEG/CEE-UT, 1

2 #1 THE BESTEST CHEAPEST NATTY COMES WITH OIL M.M. Foss, 9/25/2012, BEG/CEE-UT, 2

250 200 3,000,000 2,500,000 150 2,000,000 1,500,000 100 1,000,000 50 500,000 0

3 4,000,000 3,500,000 Rolling Stone 500 U.S. Field Production of Crude Oil (Thousand Barrels) Oil is good! ,000,000 2,500, ,000,000 1,500, ,000, , ; _Songs_of_All_Time; USEIA M.M. Foss, 9/25/2012, BEG/CEE-UT, 3 0

4 A potential widening price deck $11 $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 HH $3-6 Lower rather than higher prices to 2015 with new supply "Moderate" Price Deck (Michot Foss, OIES NG 18, 2007) HH $3-10 ($6 median) Higher, less stable prices to 2020 with supply constraints and demand recovery and growth Spot price events below $3 can happen "Volatile" Price Deck (Michot Foss, OIES NG 58, 2011) Production (22-25 TCF): HH price dependent (70-80%), NAG, dry Changing Supply Mix NGLs, Condensate, NAG, wet (oil linked) Oil price dependent (20-30%+), AG annual average, real price M.M. Foss, 9/25/2012, BEG/CEE-UT, 4

5 Watch for OPEC pressures New projects, new barrels Challenges from Chinese NOCs Global economic recovery whither Europe? India weaknesses A normal Chinese growth rate Central banks and money supply End of the commodity super-cycle? The Dollar Countdown for mining CEOs M.M. Foss, 9/25/2012, BEG/CEE-UT, 5

6 #2 YEAR OF THE SORTING HAT M.M. Foss, 9/25/2012, BEG/CEE-UT, 6

7 Production by type: backing into shales 25,000, % Change 20,000,000 CBM TX Barnett Shale Other U.S. Shales LA Haynesville PA Marcellus 3% 6% 92% Million Cubic Feet 15,000,000 10,000,000 All Other (Conventional) -1% -9% -8% 5,000,000 - OCS-Gulf of Mexico -20% * estimates for other shales, CBM based on industry and state government data M.M. Foss, 9/25/2012, BEG/CEE-UT, 7

8 The Decline Curve Debate and Why It Matters (NG58; OGI Feb 2013) M.M. Foss, 9/25/2012, BEG/CEE-UT, 8

9 Upstream business models both influence and are influenced by play concepts Unconventional resources is perceived to reduce exploration risk, but development risk is high and can grow Conventional GOM, traditional onshore Hydrocarbon system dependent Initial leasing to define prospect Internal funds, limited external funding for exploration risk Cash flow sustains exploration Unit cost discipline to manage through cycles External funds may be sourced to develop PUD Classic upstream returns Unconventional CBM, tight gas, now shale Source rock, geology controls Build large land positions with external funding Wall Street drill and flip Manufacturing development Large scale production High sensitivity to commodity price risk Utility returns M.M. Foss, 9/25/2012, BEG/CEE-UT, 9

10 Typical upstream cycle Variables: type of well, field, play; shape of cum curve (conventional, unconventional); producer finance structure; commodity price (current, expected) Smaller companies operate to P&A Cumulative Production Diminishing returns and higher overhead encourages larger companies to sell off Larger companies enter to acquire uplift ; fund development Independents wildcat to discover and prove up Time M.M. Foss, 9/25/2012, BEG/CEE-UT, 10

11 Business models and discipline Many prevailing challenges Maturing locations and replacement Inefficiencies associated with scale up (human resources, drilling systems and materials, etc) Cost of capital and credit quality Regulatory oversight and uncertainty Industry organization, business models driven by SSHE realities SSHE = discipline; larger companies can more easily warehouse reputational risk Tradeoff is higher overhead cost, reflected in long run price Implications consolidation, but what path? Chance of prolonged lack of discipline and lower rather than higher price outlook? M.M. Foss, 9/25/2012, BEG/CEE-UT, 11

12 #3 COMMERCIAL AND TECHNICAL RISKS, UNCERTAINTIES ARE KEY M.M. Foss, 9/25/2012, BEG/CEE-UT, 12

A large resource endowment does not eliminate price change and volatility North America is moving to a period in its history in which it will no longer be selfreliant in meeting its growing natural

13 A large resource endowment does not eliminate price change and volatility North America is moving to a period in its history in which it will no longer be selfreliant in meeting its growing natural gas needs; production from traditional U.S. and Canadian basins has plateaued. NPC 2003 BEG/Sloan Foundation, 2012 (4 shale basins) Technically Recoverable Assessments of the U.S Natural Gas Endowment to 2009 increased four to six times: 2,084 Tcf in 2009 (PGC) Modified from Bill Fisher et. al., Bureau of Economic Geology, for NARUC Moratoria Study, 2009 M.M. Foss, 9/25/2012, BEG/CEE-UT, 13

14 Glubbausage $16 $14 $12 $10 Henry Hub Monthly Average Spot Price ($/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) California market failure, U.S. shale gas drilling boom Investment in frontier shales may help with deliverability in future, but contingent on supply-demand fundamentals and external forces $8 Avg Oct 09-Jun 12 ($3.87) Lehman Brothers bankruptcy September 15, 2008 $6 $4 GOM Hurricane Events El Paso pipeline explosion, Carlsbad, NM August 19, 2000 $2 Enron bankruptcy December 4, 2001 Peak LNG imports with new regas capacity, March-August 2007 $0 CME, USEIA, NOAA, CEE analysis M.M. Foss, 9/25/2012, BEG/CEE-UT, 14

15 #4 ALL POLITICS IS LOCAL And how M.M. Foss, 9/25/2012, BEG/CEE-UT, 15

16 Gastration M.M. Foss, 9/25/2012, BEG/CEE-UT, 16

17 Golf with the President To export. Or not to export. What really is the problem for U.S. manufacturing? Cheap supply = light handed tax treatment? Cheap supply = light handed environmental oversight? My fear is that the Obama administration wants to do away with tax credits [cost recovery] for the oil and gas industry while continuing subsidies for the renewables. Between the EPA and the Treasury [this would] accomplish a significant slowdown in oil and gas development. The new team is going to be as green as the old team. M.M. Foss, 9/25/2012, BEG/CEE-UT, 17

18 Canaport LNG History Winter 2012/ Sendout Mcf /1/ /3/ /5/ /7/ /9/ /11/ /13/ /15/ /17/ /19/ /21/ /23/ /25/ /27/ /29/ /31/2012 1/2/2013 1/4/2013 1/6/2013 1/8/2013 1/10/2013 1/12/2013 1/14/2013 1/16/2013 1/18/2013 1/20/2013 1/22/2013 1/24/2013 1/26/2013 1/28/2013 1/30/2013 M.M. Foss, 9/25/2012, BEG/CEE-UT, 18

19 #5 PARADIGM SHIFTS: WATCH THIS SPACE M.M. Foss, 9/25/2012, BEG/CEE-UT, 19

20 What do we want? The open access bargain included risk transfer to volatility-loving entities Problem lack of spreads, basis blowouts We value reliability, how best to price it? Gas pipes for power and socialization Is the customer bill getting too loaded up (renewables and related transmission)? Special frameworks for special projects nuclear? Coal CCS? Peak gasoline, peak power And the implications M.M. Foss, 9/25/2012, BEG/CEE-UT, 20

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

Major Challenges for Gas: What Can be Expected for Mexico? Gas Future Forum, Mexico, April 3, 2014 BEG/CEE UT, 1 Overall Observations Resources Reserves Deliverability Deliverability is key Sweet spot