Emerging Fundamentals in Global Natural Gas Markets: The US, Shale and LNG

Transcription

1 Emerging Fundamentals in Global Natural Gas Markets: The US, Shale and LNG Kenneth B Medlock III, PhD James A Baker III and Susan G Baker Fellow in Energy and Resource Economics, and Senior Director, Center for Energy Studies August 14, 2014

2 Setting the Stage: Total Primary Energy Requirement 2

3 Total Primary Energy Requirement Baker Institute CES forecast of TPER by fuel,

4 Oil Demand Baker Institute CES forecast of petroleum demand by country, Demand will continue to grow, driven largely by very populous developing economies such as China and India. 4

5 Natural Gas Demand Baker Institute CES forecast of natural gas demand by country, Similar patterns as with oil demand driven by Asia 5

6 Coal Demand Baker Institute CES forecast of coal demand by country, Infrastructure in China has been developed around coal will China switch away, or upgrade environmental controls? 6

7 Let s focus on natural gas 7

8 Rewind to 2003 LNG is coming to North America

9 Then, shale happened in the US and Canada

10 we quickly realized shale resources are everywhere * Major North American Shale Plays (~1,930 tcf) European, Latin American, African and Pacific Shale Plays (~4,670 tcf) *Over 6,600 tcf of shale according to ARI report, 2011

11 North American Shale Resources Shale oil and gas resources are largely east of the Rockies. Source: Gallery of World Hydrocarbon Endowment & Shale Gas Resources,

12 Geology AND market structure yields the recipe for success and a massive competitive advantage Geology is a necessary condition for vibrant and successful upstream activity but it is NOT sufficient! A host of above ground factors must be aligned for commercial success to be realized. Once in play, commercial success builds on itself because it encourages entrepreneurial activity, and creates an environment that is attractive to capital inflows. Thus, a variety of regulatory and market institutions must be in place if regions outside the US are to reach their full development potential. 12

13 The sufficient conditions Upstream firms negotiate directly with landowners for access to mineral rights. A market in which liquid pricing locations, or hubs, exist and are easily accessed due to liberalized transportation services being unbundled from pipeline ownership. A well-developed pipeline network that can accommodate new production volumes. A market in which interstate pipeline development is relatively seamless due to a well-established governing body the Federal Energy Regulatory Commission (FERC) and a comparatively straightforward regulatory approval process. A market in which demand pull is sufficient, and can materialize with minimal regulatory impediment thus allowing new supplies to compete for market share. A market where a well-developed service sector exists that can facilitate fast-paced drilling activity and provide rapid response to demands in the field. A competitive service sector that strives to lower costs and advance technologies in order to gain a commercial advantage. A rig fleet that is capable of responding to upstream demands without constraint. A deep set of upstream actors the independent producer that can behave as the entrepreneur thereby facilitating a flow of capital into the field toward smaller scale, riskier ventures than those typically engaged by vertically integrated majors. 13

14 Will it Last? Shale Well Performance Well-specific EURs can vary within a shale play substantially - Ultimately, profitability matters, as there is little debate about resource scale - Some wells are profitable at $2.65/mcf, others need $8.10 median is $4.85. EUR 2.83 bcf 1.51 bcf 0.93 bcf 14

15 The Recent US Natural Gas Supply Surge The last 7 years have seen tremendous growth in US natural gas production, largely driven by shale gas resource development. Source: EIA

16 Longer Term Shale Production in the US Strong growth of total dry gas production through 2020 followed by stabilization, with shale gas continuing to increase share. (Not pictured) Canadian supply grows more strongly post 2020 as prices strengthen and US LNG creates additional demand pull along existing pipelines. Source: BIPP CES RWGTM

17 A subject of intense discussion: The impact of US LNG exports Note: Selected Status Quo modeling results using the Rice World Gas Trade Model (RWGTM) are included in what follows. The RWGTM is built in the Marketbuilder software platform licensed to CES by Deloitte. Detail on RWGTM data development, inputs and model structure is available upon request. 17

18 International Natural Gas Prices Will the change in regional gas price relationships since March 2011 persist? - Unexpected demand shocks in Asia and the US have exacerbated spreads - Recent developments indicate what relaxation of constraints will do to prices Price data from Platts; LNG Oil-Index author s calculation 18

19 Where will prices change most? US exports and other supplies will put downward pressure on price. This will be exacerbated by demand reductions from re-activation of nuclear fleet in Japan and increased supplies from China shale, East Africa, Australia, Russia. P P S S + m Price spread prior to trade P Td Exports, x S P Tf Imports, m D D + D D + x Q Q Domestic Market Foreign Market 19

20 RWGTM Status Quo Case: LNG Imports by Country, Diversity in the LNG import picture, with China surpassing Japan in the mid 2020s, and India emerging in the 2030s. Source: Baker Institute RWGTM February

21 RWGTM Status Quo Case: LNG Exports by Country, Qatar and Australia account for over 40% of global LNG exports, and the US enters in 2016 which helps drive price decline in Asia. Source: Baker Institute RWGTM February

22 RWGTM Status Quo Case: Global Marker Prices, The prices indicated are spot prices; contract prices may be different, but short term trade will continue to expand. Global prices remain above the US price, but trade closes the spread. Source: Baker Institute RWGTM February

23 Questions/Comments 23

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