CERI Commodity Report Natural Gas

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1 CERI Commodity Report Natural Gas October European Shale Gas Development In April, the United States Energy Information Administration (EIA) released an initial assessment of shale gas resources outside of the US. The European nations assessed in the EIA report are estimated to contain 9 TCF of technically recoverable shale gas, or approximately percent of the total resource base in the areas reviewed. The economically recoverable portion has yet to be determined, as exploration is in the early phase and data availability is limited. Approximately percent of Europe s shale gas resources are located in Poland, France, Norway, Ukraine, and Sweden. TCF Source: US EIA Poland France Norway Ukraine Sweden CERI Commodity Report Natural Gas Editor-in-Chief: Mellisa Mei (mmei@ceri.ca) Contents Featured Article... Natural Gas Prices... Weather... Consumption and Production... 9 Transportation... Storage... Liquefied Natural Gas... Drilling Activity... The success of the US shale gas industry has increased domestic production, lowered imports of pipeline gas and liquefied natural gas, and reduced prices to less than $ per MMBtu. According to the EIA, shale gas will account for percent of total US natural gas production by. Not surprisingly, the US shale gas boom has resulted in a significant increase in rigs and equipment available to drill the required horizontal wells. Since the fourth quarter of 9, the number of horizontal rigs in the US fleet has increased by percent. In addition, pressure pumping capacity continues to rise in North America, and now accounts for percent of the global capacity. The exploration and development of shale gas resources could have a tremendous impact on the economies of resource rich European nations over the long-term. Large capital investments would be required to support the exploration, development, production, processing, and transportation of new shale gas supplies. Because of the shift towards liquids drilling in North America (using rigs capable of drilling horizontal wells), in addition to an ongoing need especially in the US for companies to drill to hold land rights, it is unlikely that a significant number of rigs could be sent to Europe. In addition, North America is expected to remain deficient in pressure pumping capacity as demand continues to outstrip supply in. This is one area where international drilling and completion companies can help Europe develop its domestic capabilities. The International Energy Agency estimates that between and, cumulative investment in natural gas supply infrastructure in OECD Europe will total over $ trillion. Already, Schlumberger and Halliburton have set their sights on Europe, establishing a pressure pumping fleet in Poland. Spending by the industry is expected to result in direct, indirect, and induced economic benefits, which include job creation, growth in gross domestic product, and increased government tax revenues. Along with the economic benefits that could accrue to European nations, are the obvious energy security

2 Page benefits. Given the region s understandable concerns over the risk of future disruptions, achieving security of supply is one of the key goals of European energy policy. However, several European nations rely heavily on natural gas imports, particularly pipeline natural gas imports from Russia. (over 9 percent), shale gas is an effective solution to meeting GHG emission reduction targets. Commercial development of Europe s shale gas is not expected before the end of the decade, and before the benefits of shale gas production can be realized, technical and environmental challenges must be addressed. Much of Europe is distinctly different from North America when it comes to the level of maturity of its onshore natural gas industry. Since Poland could be viewed as a litmus test for the European shale industry it is important to consider a few items before passing judgement on the success, or failure, of the European shale gas story. Source: US EIA On November, the long awaited Nord Stream Pipeline, linking Russia and Germany, officially commenced operations. When the pipeline becomes fully operational in,. will be delivered to Western Europe. 9 The development of shale gas resources within the European Union (EU) would provide the region with a stable, relatively low cost source of natural gas, and enhance energy security through supply diversification. Within the EU, energy development and security go hand -in-hand with environmental policy, as the EU pushes towards greener sources of energy and must face the fact that wind and solar cannot meet its needs, without support from natural gas. Increasing shale gas production across Europe would place downward pressure on regional natural gas prices, and encourage greater use of this clean burning fuel. Shifting electricity production from coal to a combination of renewable sources and natural gas has been recognized as the fastest way to reduce GHG emissions in Europe. The GHG emissions of electricity generated from shale gas are percent that of coal, and only percent greater than the GHG emissions of electricity generated from conventional natural gas. For countries such as Poland that are heavily dependent on coal for electricity production Aside from the previously mentioned need for additional drilling and completion equipment in Europe, Doug Bentley, Schlumberger s unconventional resource manager for Continental Europe, summed up one of the key differences between North America and Europe in a June interview. Mr. Bentley compared Poland to Texas when discussing the Barnett, which is approximately, square kilometers and already had, natural gas wells before shale production took off. Because of the excellent data from well logs that existed, the Barnett was less about exploration and more about exploitation and experimentation. The area being considered in Poland is, square kilometers with about wells, and stratigraphic well data for Poland dates back to the 9s with little sensitivity for today s analysis. Put another way, the Polish experiment is about times the size of the Barnett experiment, with a mere wells. When considered in this context, it might not be much of a surprise that the early well results from Poland are not as strong as some had anticipated. However, a recent report from Bernstein Research concluded that Europe s shale gas experience would not be as successful as the US experience, comparing the initial results from two wells in Poland to wells drilled in the US that had average -day flow rates ranging from - MMCFPD. The wells in question were the Lebien (Legs Resources) and Lebrok (BNK Petroleum) wells in Poland s Baltic Basin. The Lebien well, which flowed at an initial rate of. MMCFPD, was not intended to be a commercial well, but rather to achieve a sustained gas production rate and gather data for drilling and stimulation designs for future wells. The US is almost years ahead of Poland with CERI Commodity Report - Natural Gas

3 Page respect to the development of its industry, and Poland is already moving at a fast pace in order to catch-up. Although the enthusiasm for shale gas may have been tempered for some, it is far too soon to pass judgement on Poland s, or Europe s, shale gas industry. Source: Oil and Gas Watch Europe Source: US EIA Addressing the environmental concerns over shale gas drilling may be more critical to the success of the industry than the wells themselves. While hydraulic fracturing has been practiced for over years in North America, the safety record of the practice is now being challenged. The practice, used in conjunction with horizontal drilling, involves pumping a mixture of water, sand, and various chemical additives, under high pressure, into the wellbore, fracturing the shale rock to allow natural gas to flow to the surface. Although recent research results from the University of Texas have disproved the perceived link between hydraulic fracturing and groundwater contamination, environmental groups that vehemently oppose shale gas drilling continue to stage protests and pressure policy makers to ban the process across Europe. EU-wide environmental regulations apply to various aspects of shale gas production (e.g., Water Framework Directive, Groundwater Directive, Drinking Water Directive), but regulations specific to the shale gas industry do not yet exist, and may not be realistic given the divergence of energy policies among individual member states. Poland s energy strategy encourages the exploration and development of shale gas resources to reduce the country s import dependence. Conversely, France became the first nation to pass legislation prohibiting the use of hydraulic fracturing for shale oil and gas production earlier this year. The European Commission is currently preparing a legal assessment aimed at reviewing regulations on shale gas. 9 Shale gas development has the potential to transform Europe s energy landscape, providing economic, energy security, and environmental benefits. However, the shale gas industry outside of North America remains in its infancy, and environmental, as well as technical, challenges could hinder exploration and development efforts if they are not managed wisely.

4 Page Endnotes World Shale Gas Resources: An Initial Assessment of Regions Outside the United States, United States Energy Information Administration, April. Ibid. Annual Energy Outlook, United States Energy Information Administration, April. McCollum, Mark, Bank of America Merrill Lynch Global Energy Conference, Halliburton, November,, phx.corporate-ir.net/ External.File?item=UGFyZWSUQ9NDIzNzAMnxDaGlsZElEPTQN zyynnxuexblpti=&t=, Accessed on November,. Dezember, Ryan, Halliburton: Phenomenal Opportunities for Global Pressure Pumping Growth, Rigzone, September,, Accessed on November,. North American Pressure Pumping Trends, International I m p l i c a t i o n s, N a t u r a l G a s Am e r i c a s, h t t p : / / naturalgasforamerica.com/north-american-pressure-pumping-trendsinternational-implications.htm, Accessed on November,. World Energy Outlook, International Energy Agency, November. Russia, Country Analysis Brief, United States Energy Information Administration, November, cab.cfm?fips=rs, Accessed on November,. 9 Wiesmann, Gerrit, Russia-EU gas pipeline delivers first supplies, Financial Times, November,, s//eae-a-e-d-feabdc.html#axzzdkltlop, Accessed on November,. Power Perspectives : On the Road to a Decarbonised Power Sector Hultman, Nathan, Dylan Rebois, Michael Scholten, and Christopher Ramig, The greenhouse gas impact of unconventional gas for electricity generation, Environmental Research Letters, October,, 9.pdf Dunnahoe, Tayvis, Poland poised for productive shale development, E&P, June. Farey, Ben, No Shale Boom in Europe as First Wells Struggle, Bernstein Says, Bloomberg, November,, Accessed on November,. Operational update on Lebien LE-H and Warblino LE-H horizontal wells, Legs Resources Plc., September,, Accessed on November,. World Shale Gas Resources: An Initial Assessment of Regions Outside the United States, United States Energy Information Administration, April. Rasp, Gary, Early Results from Hydraulic Fracturing Study Show No Direct Link to Groundwater Contamination, University of Texas Press Release, November,, index.php?option=com_content&view=article&id=:early-resultsfrom-hydraulic-fracturing-study-show-no-direct-link-to-groundwatercontamination&catid=:press-releases&itemid=, Accessed on November,. No to shale drilling, with a French accent, Oil and Gas Watch Europe, Accessed on November 9,. Troy, Phaedra Friend, France ban hydraulic fracturing for shale oil and gas development, PennEnergy, July,, articles/pennenergy/petroleum/exploration///france - bans_hydraullic.html, Accessed on November 9,. 9 Wyciszkiewicz, Ernest, Agata Gostynska, Dorota liszczyk, Lidia Puka, Bartosz Wisniewski, Bartlomiej Znojek, Path to Prosperity or Road to Ruin? Shale Gas Under Political Scrutiny, The Polish Institute of International Affairs, October,. CERI Commodity Report - Natural Gas

5 Page US$/MMBtu Henry Hub/AECO Beginning of Next Month Spot Price Henry Hub 9 AECO-C Differential - Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- US$/MMBtu Henry Hub/Chicago Beginning of Next Month Spot Price Henry Hub 9 Chicago Differential Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- SOURCE: CERI, Platts Gas Daily Price Guide. SOURCE: CERI, Platts Gas Daily Price Guide. US$/MMBtu Henry Hub/Rockies Beginning of Next Month Spot Price Henry Hub 9 Rockies Differential - Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- US$/MMBtu Henry Hub/Southern California Beginning of Next Month Spot Price Henry Hub 9 Southern California Differential - - Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- SOURCE: CERI, Platts Gas Daily Price Guide. SOURCE: CERI, Platts Gas Daily Price Guide.

6 SOURCE: Canadian Gas Association. SOURCE: CERI, Canadian Gas Association, Statistics Canada. Page, 9 US Heating Degree Days -Year Avg. SOURCE: Canadian Gas Association, NOAA. SOURCE: CERI, NOAA, EIA. Canadian Heating Degree Days vs Residential and Commercial Consumption Degree Days, Degree Days Consumption CERI Estimate, Jan- Jul- Jan- Jul- Jan-9 Jul-9 Jan- Jul- Jan- Jul- US Heating Degree Days vs Residential and Commercial Consumption Degree Days, Degree Days Consumption CERI Estimate, Jan- Jul- Jan- Jul- Jan-9 Jul-9 Jan- Jul- Jan- Jul- CERI Commodity Report - Natural Gas

7 SOURCE: Environment Canada. SOURCE: Environment Canada. SOURCE: NOAA. SOURCE: NOAA. Page

8 Page SOURCE: NOAA. SOURCE: NOAA. SOURCE: Environment Canada. CERI Commodity Report - Natural Gas

9 SOURCE: Statistics Canada. SOURCE: Statistics Canada, NEB. SOURCE: EIA. SOURCE: EIA. Page 9 Canadian Consumption By Sector Industrial & Power Commercial Residential Jan- Jul- Jan- Jul- Jan-9 Jul-9 Jan- Jul- Jan- US Marketable Production US Total Louisiana GOM Federal Waters Texas Jan- Jul- Jan- Jul- Jan-9 Jul-9 Jan- Jul- Jan- Jul-

10 Page BC, Yukon, NWT Marketable Production SK Marketable Production AB Marketable Production 9 East Coast Marketable Production 9 SOURCE: Statistics Canada, NEB. SOURCE: Statistics Canada, NEB. SOURCE: Statistics Canada, NEB. SOURCE: Statistics Canada, NEB. CERI Commodity Report - Natural Gas

11 SOURCE: CERI. SOURCE: CERI. SOURCE: NEB. SOURCE: NEB. Page System Field Receipts TransCanada + Westcoast; Monthly Average 9 Canadian Gas Exports to the US By Export Point - West 9 Kingsgate Monchy Elmore Huntingdon Aug- Oct- Dec- Feb- Apr- Jun- Aug- Alberta System Deliveries Empress McNeil AB-BC Alliance Oct- Dec- Feb- Apr- Jun- Aug- Oct- Canadian Gas Exports to the US By Export Point - East 9 Emerson Iroquois Niagara Others Aug- Oct- Dec- Feb- Apr- Jun- Aug-

12 SOURCE: NEB. SOURCE: NEB. SOURCE: NEB, EIA. SOURCE: NEB. Page US Imports of Canadian Gas By US Region Central Northeast Pacific NW California Aug- Oct- Dec- Feb- Apr- Jun- Aug- Total US Pipeline Gas Imports Canada Mexico Aug- Oct- Dec- Feb- Apr- Jun- Aug- Average Canadian Export Price By US Region C$/GJ Pacific NW California Central Northeast Aug- Oct- Dec- Feb- Apr- Jun- Aug- Canadian Gas Imports By Import Point. Courtright Sarnia St. Clair Other Aug- Oct- Dec- Feb- Apr- Jun- Aug- CERI Commodity Report - Natural Gas

13 SOURCE: CERI, Platts Gas Daily. SOURCE: CERI, Platts Gas Daily. SOURCE: CERI, Platts Gas Daily. SOURCE: CERI, Platts Gas Daily. Page US Lower- Working Gas Storage BCF, Month End, -Year Avg.,,,,,,, US Storage by Region BCF, Month End,, East West Producing Region,,,,,, Oct- Dec- Feb- Apr- Jun- Aug- Oct-

14 SOURCE: CERI, Platts Gas Daily. SOURCE: CERI, Platts Gas Daily. SOURCE: CERI, Platts Gas Daily. Page Western WC_IJ_WD Canada Storage Injections/Withdrawals BCF, Month End -Year Avg BCF, Month End Canadian Storage Injections/Withdrawals -Year Avg Eastern Canadian Storage BCF, Month End -Year Avg CERI Commodity Report - Natural Gas

15 Page US Western Consuming Region Storage BCF, Month End -Year Avg US Producing Region Storage BCF, Month End -Year Avg US Eastern Storage BCF, Month End -Year Avg US Storage BCF, Month End -Year Avg SOURCE: CERI, Platts Gas Daily. SOURCE: CERI, Platts Gas Daily. SOURCE: CERI, Platts Gas Daily. SOURCE: CERI, Platts Gas Daily.

16 SOURCE: US DOE. SOURCE: US DOE. SOURCE: US DOE. SOURCE: US DOE. Page Eastern US LNG Imports By Facility BCF Cove Point Elba Island Everett NE Gateway Neptune Sep- Nov- Jan- Mar- May- Jul- Sep- US LNG Imports By Origin BCF Egypt Nigeria Trinidad Norway Qatar Yemen Peru Sep- Nov- Jan- Mar- May- Jul- Sep- US GOM LNG Imports By Facility BCF Freeport Lake Charles Sabine Pass Cameron Golden Pass Gulf LNG Sep- Nov- Jan- Mar- May- Jul- Sep- Volume-Weighted Average LNG Price US$/MMBtu 9 CERI Commodity Report - Natural Gas

17 Page US LNG Exports BCF Japan China Sep- Nov- Jan- Mar- May- Jul- Sep- US LNG Exports By Exporter BCF ConocoPhillips Marathon ConocoPhillips purchased Marathon Oil's percent share of the Nikiski LNG facility in September. One additional cargo will be exported before the facility is preserved in a cooled-down state. Sep- Nov- Jan- Mar- May- Jul- Sep- SOURCE: US DOE, NEB. SOURCE: US DOE. SOURCE: EIA, US DOE. SOURCE: US DOE.

18 SOURCE: CERI, CAODC, Baker Hughes. SOURCE: CERI, CAODC. SOURCE: CERI, CAODC. SOURCE: CERI, CAODC. Page North American Active Rigs Rigs, US WCSB,,,, Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- WCSB Active Rigs by Province Weekly Average Rigs SK AB BC Jan-9 May-9 Sep-9 Jan- May- Aug- Dec- Apr- Aug- Canadian Rig Fleet Utilization Weekly Average Active Rigs Rigs, Active Rigs Total Rig Drilling Fleet 9 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- Western Canada Active Rigs Weekly Average Rigs -Year Avg Week Number CERI Commodity Report - Natural Gas

19 SOURCE: CERI, Baker Hughes. SOURCE: CERI, Baker Hughes. SOURCE: CERI, Baker Hughes. Page 9 US Total Active Rigs Rigs, Oil-Directed Gas-Directed Gas-Directed %,,,,,, Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- US Gulf of Mexico Active Rigs Rigs Oil-Directed Gas-Directed Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-9 Jan- Jan- % 9% % % % % % % % % %