Unconventional Oil & Natural Gas: Overview of Resources, Economics & Policy Issues

Transcription

1 Unconventional Oil & Natural Gas: Overview of Resources, Economics & Policy Issues Society of Environmental Journalists Annual Meeting New Orleans, Louisiana September 4, 2014 Center for Energy Studies David E. Dismukes, Ph.D. Center for Energy Studies Louisiana State University

2 Introduction Summary and Take Away New natural gas supply availability is having considerable impacts on all energy markets today as well as on a longer term, forward-looking basis. Energy-Related Carbon Dioxide 81.2% Shale revolution is now migrating into liquids and crude oil production. Facilitating additional natural gas production despite low prices and some dry gas well shut-ins and decreased natural gas well drilling. Considerable economic development opportunities are starting to arise leading to a burst in considerable capital investment. There are fuel/resource diversity concerns and continued natural gas resource development/environmental concerns and opposition. 2

3 Reminder The Way Things Were 3

4 Historic Trends Long Term US Crude Oil Production Forecast (2006) Relatively uninspiring U.S. crude oil production forecast Onshore (Lower 48) Offshore (Lower 48) 5.50 Million Barrels per day Source: USDOE/EIA, Annual Energy Outlook,

5 Historic Trends Long Term US Natural Gas Production Forecast (2006) Natural gas production forecasted to decrease starting in Onshore (Lower 48) Offshore (Lower 48) Trillion cubic feet Source: USDOE/EIA, Annual Energy Outlook,

6 Historic Trends Historic Monthly Rig Counts and Gas Production ( ) The maturing nature of US basins reflected in drilling productivity. Number of Operating Rigs 2,000 1,800 1,600 1,400 1,200 1, Dec-96 Jun-97 3 percent increase in production (Aug-99 to Sep-01) 158 percent increase in rigs (Apr-99 to Jul-01) Dec-97 Rig Count Production Jun-98 Dec-98 Source: Energy Information Administration, Department of Energy; and Baker-Hughes Inc. Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 4 percent decrease in production (Feb-04 to Aug-06) Dec-02 Jun-03 Dec percent increase in rigs (Apr-02 to Aug-06) Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec Month Moving Average (Bcf/d) 6

7 Historic Trends Resource Estimates: Restricted Areas (Percent Restricted) Policy advocacy focused on restricted areas as a potential solution to the resource constraint problem. ANWR = 3.5 TCF ANS = 35 TCF Source: Natural Gas: Can We Produce Enough? Independent Petroleum Association of America, website: 7

8 Historic Trends NPC Forecast North American Supply Disposition LNG provides 14% of the U.S. supply of natural gas by Source: National Petroleum Council 8

9 Historic Trends Crude Oil and Natural Gas Prices Prices reflected the state of, and outlook for, energy markets. $160 $140 Recession $16 $14 $120 First energy price crisis $12 Crude Oil ($/Bbl) $100 $80 $60 $10 $8 $6 Natural Gas ($/Mcf) $40 $4 $20 $2 $0 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Crude Oil (WTI) Jan-05 Jan-06 Jan-07 Jan-08 Natural Gas (Henry Hub) $0 Source: Federal Reserve Bank 9

10 What Changed? The Way Things Are 10

11 Recent Trends Unconventional vs. Conventional Geological Formations 11

12 Recent Trends Domestic Shale Gas Basins and Plays Unlike conventional resources, shale plays (natural gas, liquids, and crudes) are located almost ubiquitously throughout the U.S. and are the primary reason for the decrease in overall and regional natural gas prices. Source: Energy Information Administration, U.S. Department of Energy 12

13 Recent Trends Natural Gas Proved Reserves and Production Current U.S. natural gas reserves are approaching record levels not seen since Natural gas production is at levels that surpass historic peaks Dry Natural Gas Proved Reserves (Tcf) Reserves Production Marketed Production (Tcf) Source: Energy Information Administration, U.S. Department of Energy. 13

14 Recent Trends Shale s Share of Natural Gas Reserves The share of shale gas relative to total U.S. natural gas proved reserves has been increasing significantly, from less than 10 percent in 2007 to over 30 percent in % 30% 31% Percent 25% 20% 15% 13% 21% 10% 9% 5% 0% Source: Energy Information Administration, U.S. Department of Energy. 14

15 Recent Trends U.S. Dry Natural Gas Reserve Adjustments U.S. shale gas reserves are increasing, enough to more than offset the decrease in net reserves from all other sources in both 2008 and Tcf Shale All Other Sources Source: Energy Information Administration, U.S. Department of Energy. 15

16 Recent Trends Annual Energy Outlook, Natural Gas Reserves Unconventional resources are not a flash in the pan and are anticipated to continue to increase over the next two decades or more Reserves - Tcf Source: Energy Information Administration, U.S. Department of Energy 16

17 Recent Trends Alternative Natural Gas Reserve Forecasts There are a wide range of unconventional shale gas reserve estimates that are as low as 436 Tcf to as high as 2,750 Tcf. This represents a range of between 18 years and over 100 years of available natural gas resources based upon current consumption levels.* 3,000 Estimated Reserves - Tcf 2,500 2,000 1,500 1, EIA AEO 2012 MIT ITG Investment Research IHS Energy Note: *Assumes an annual consumption level of 24.3 Tcf. The MIT study reached a mean estimate of technically recoverable resources of 631 Tcf with an 80 percent confidence interval of 418 to 871 Tcf. The ITG estimates of recoverable resources is for 10 overlapping plays, totaling 900 Tcf. These are the same 10 plays as estimated by the EIA s AEO (resulting in 426 Tcf). IHS Energy estimates show that total recoverable shale in the U.S. could be as high as 2,750 Tcf, significantly higher than their estimate of 1,268 in

18 Recent Trends Forecast U.S. Natural Gas Production 30 Shale availability will drive U.S. natural gas supply Shale Gas Production Tcf Assc. Gas Production Shale gas Tight gas Non-associated offshore Alaska Coalbed methane Associated with oil Non-associated onshore 18

19 Recent Trends Changes in AEO Natural Gas Price Forecasts Shale availability has significant impact on future price outlook Anticipated price outlook in (2010 $/MMBTU) Anticipated price outlook today Actual Henry Hub AEO-2007 AEO-2008 AEO-2009 AEO-2010 AEO-2011 AEO-2012 Source: Energy Information Administration, U.S. Department of Energy 19

20 Recent Trends Changes in Well Costs and Productivity $18 $16 $14 $12 $10 $8 $6 Encana reports a reduction in well costs of 15-30% through use of multi-pad drilling, improved rig efficiencies, and lower hydraulic fracturing costs. The use of higher water volumes, increased frac stages, and enhanced pay selection have resulted in % increases IP rates. Well Cost (million $) Well Performance (MMcfe/d) $25 $20 $15 $ $4 $2 $5 $ $ East Texas Deep Bossier Haynesville East Texas Deep Bossier Haynesville Source: U.S. Natural Gas Resources and Productive Capacity: Mid-2012, Prepared for Cheniere Energy, Advanced Resources International, Inc. August 23,

21 Unconventional Crude Oil and Liquids 21

22 Liquids/Crude Oil Crude Oil and Natural Gas Price Decoupling Crude oil prices have doubled in the aftermath of the recession but natural gas prices have remained stable. Crude Oil ($/Bbl) $160 $140 $120 $100 $80 $60 $40 The price of crude oil has increased 140 percent since its low in February The price of natural gas has fallen 78 percent since June $14 $12 $10 $8 $6 $4 Natural Gas ($/Mcf) $20 $2 $0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 $0 Crude Oil (WTI) Natural Gas (Henry Hub) Source: Federal Reserve Bank of St. Louis. 22

23 Unconventional Revolution U.S. Oil/Gas Rig Split Natural gas drilling emphasis over the past 20 years has shifted to crude oil drilling emphasis over the past two years. 100% 90% 80% Percent of Total (%) 70% 60% 50% 40% 30% 20% 10% 0% Crude Oil Natural Gas Source: Baker Hughes 23

24 Liquids/Crude Oil Annual Production from Unconventional Reservoirs In just one year, Cheniere has revised its forecasted natural gas production in 2020 from slightly less than 8 Bcf per day to more than 12 Bcf per day; and liquids production from 6 MMBbls per day to 7 MMBbls per day Cheniere Outlook, March 2012 Cheniere Outlook, April Natural Gas (Bcf/d) Liquids (MMBbl/d) Liquids Natural Gas 0 Source: Cheniere Energy Inc,, Corporate Presentations. Available at: ir.net/phoenix.zhtml?c=101667&p=irolpresentations. 24

25 Natural Gas and Economic Development: Moving from Revolution to Renaissance 25

26 Unconventional Revolution Changes in Crude Oil Reserves and Production Crude oil production and reserves are climbing back to levels not seen since the 1980s. U.S. Crude Oil Proved Reserves (Billion Bbl) U.S. Crude Oil Production (Billion Bbls Crude Oil Reserves Crude Oil Production Source: Energy Information Administration, U.S. Department of Energy. 26

27 Unconventional Revolution Annual Changes in U.S. Crude Oil Proved Reserves (Shale and Other) Changes in crude oil reserves have also been positive and increasing over the past several years. 5 Annual Change (Billion Bbl) Note: Includes crude oil and lease condensate. Source: Energy Information Administration, U.S. Department of Energy. 27

28 Unconventional Revolution Annual Energy Outlook, Crude Oil Reserves Crude oil reserves are expected to increase over 20 percent by 2016 and then gradually increase by 18 percent another to Reserves, Billion Barrels Source: Energy Information Administration, U.S. Department of Energy 28

29 Unconventional Revolution Forecast U.S. Crude Oil Production U.S. production of crude oil is expected to increase at an average annual rate of four percent through Tight oil production increases from 1.31 million barrels per day in 2011 to 4.8 million barrels per day in 2020, an increase of 266 percent Million Bbls per day Net petroleum and biofuel imports Natural gas plant liquids Crude oil production (excluding tight oil) Other Tight oil production Source: Energy Information Administration, U.S. Department of Energy 29

30 Unconventional Revolution International Oil Supply, 2005 and 2013 U.S. oil production has increased since 2005 surpassing Saudi Arabia, Africa and the rest of the Middle East. In 2013, U.S. production of 12.3 MMBbl/d accounts for almost 14 percent of world supply. In 2005, U.S. production of 8.3 MMBbls/d accounted for almost 10 percent of world supply. Eurasia, 13.9% Saudi Arabia, 13.1% Africa, 11.9% Asia & Oceania, 10.0% Middle East, 10.0% U.S., 9.8% Central & S. America, 8.6% N. America, 8.1% Europe, 7.3% Iran & Iraq, 7.2% Eurasia, 15.1% U.S., 13.7% Saudi Arabia, 12.9% Africa, 10.4% Middle East, 10.4% Asia & Oceania, 9.9% Central & S. America, 8.8% N. America, 7.8% Iran & Iraq, 6.9% Europe, 4.2% Source: Energy Information Administration, U.S. Department of Energy. 30

31 Unconventional Revolution Net Import Share of U.S. Petroleum and Liquid Fuels, The share of U.S. net crude oil and product imports has been falling since The EIA expects the net import share to decrease to 26 percent in If however, high prices encourage U.S. development, the share of net imports could drop to zero by % 60% 50% 40% 30% 20% 10% 0% -10% Reference High Oil Price Low Oil Price High Oil and Gas Resource Low Oil and Gas Resource Source: Energy Information Administration, U.S. Department of Energy. 31

32 Manufacturing Independence Overview: Why Future Economic Development Will Not be Uniformly Distributed While the nature of manufacturing has admittedly changed given the outsourcing prior to the financial meltdown, the U.S. economy is beginning to emerge as a new manufacturing powerhouse. However, the U.S. economic recovery, and regional economic development opportunities over the next decade will likely be concentrated in a few states and regions. What determines the winners and losers in this economic resurgence? The winners will be those areas with access to low-cost energy supplies and transportation infrastructure that can move those supplies to rapidly emerging economic development opportunities in manufacturing that were unimaginable as recently as five years ago. Other important factors influencing manufacturing siting locations includes the presence of a skilled labor force, competitive wage levels, supportive tax policies, as well as fair and stable regulations and regulatory practices.. 32

33 Manufacturing Independence Relative Employment Changes, Shale vs. Non-Shale States (2005=100) Total employment and employment growth has been faster in unconventional shale-based states than in those without these unconventional resources Employment (2005 = 100) States with major shale activity Non-shale states Note: Shale states include Arkansas, Colorado, Louisiana, North Dakota, Pennsylvania, Utah and Texas Source: Bureau of Labor Statistics 33

34 Manufacturing Independence Percent Change in Real Quarterly GDP by State, 2013:III TO 2013:IV Many of the states with significant shale activity have the highest growth in quarterly GDP. North Dakota, Wyoming and West Virginia have the highest rates (8.4 percent, 8.4 percent and 7.5 percent, respectively). Louisiana is the third highest at 5.4 percent. CA 3.2 OR 1.2 WA 1.8 ID 2.7 MT 1.1 NV 4.7 UT 3.1 CO 3.7 AZ 3.2 States with significant shale activity. WY 8.4 NM 4.5 States without significant shale activity. ND 8.4 SD 1.3 NE 2.7 KS 3.1 TX 4.3 OK 2.9 MN 0.0 IA 0.3 MO 3.0 AR 3.0 LA 5.4 WI 1.8 IL 3.0 MS -3.0 MI 3.2 IN 4.2 AL.07 KY 3.1 TN 2.3 OH 2.6 GA 3.9 WV 7.5 PA 3.4 SC 2.3 FL 3.7 NY 1.3 VA 2.3 NC 4.1 ME 2.4 VT: 2.6 NH: 1.1 MA: 0.4 RI: 1.8 CT: 2.8 NJ: 2.6 DE: 2.2 MD:

35 Manufacturing Independence Overview: Why Energy-Based Manufacturing What is energy-based manufacturing? Energy-based manufacturing is comprised of industries that focus or rely heavily on energy as the primary input to make their respective products. Energy is typically a feedstock for these industries which use energy to make a number of different products much like a baker uses a common input (flour) to make a variety of different products (biscuits, baguettes, pizza dough). These energy-based manufacturing industries are large, capitalintensive, and compete globally. Energy-based manufacturing wages are even higher than the already-above average manufacturing wage levels. 35

36 Manufacturing Independence Southern Manufacturing Wages vs. Southern Energy-Based Manufacturing Wages Energy-based manufacturing wages in the South are higher than the average manufacturing wage. In 2012, the average energy-based manufacturing wage was 1.5 times that of the average manufacturing wage growing at average annual rate of 5.2 percent (compared to the manufacturing average of 4.2 percent) Average Wage ($) $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 Southern energy-based manufacturing wages are high-growth oriented Manufacturing Average Energy-Based Manufacturing Average Note: Energy-based manufacturing includes: petroleum and coal products; chemical; and plastics and rubber products manufacturing. Source: Bureau of Economic Analysis, U.S. Department of Commerce. 36

37 Manufacturing Independence Industrial Natural Gas Usage Manufacturing industries use natural gas in a range of applications that include the generation of heat, steam, and power. Feedstock uses are equally important and are the building blocks of modern petrochemical manufacturing. Heat Power Generation Boiler/Steam Feedstock 37

38 Manufacturing Independence Natural Gas Price Outlook Annual Energy Outlook ( AEO ) Shale reserves have a significant impact on future price outlook. Abundant supplies should keep prices stable. The current AEO forecasts natural gas prices in 2030 at $5.29/Mcf (47 percent less than the 2009 AEO forecast). Natural Gas Price (2010 $/MMBtu) Anticipated price outlook in Anticipated price outlook today Historical Henry Hub AEO 2007 AEO 2008 AEO 2009 AEO 2010 AEO 2011 AEO 2012 AEO 2013 Source: Energy Information Administration, U.S. Department of Energy. 38

39 3.0 Energy Unconventional Production Revolution World Natural Gas Prices for Industry ($/MMBtu), 2012 U.S. natural gas prices are becoming increasingly competitive with other places around the globe that compete for new energy-based manufacturing investment. Canada $3.17 U.S. $3.40 Netherlands $10.31 UK Germany $10.26 $13.62 Turkey $10.98 Saudi Arabia $0.75 China $13.40 (LNG import) India $4.20 Japan $16.75 (LNG import) New Zealand $5.77 Argentina $11.00 Source: FERC; BP Statistical Energy Review; New Zealand Ministry of Business; Innovation & Employment; and recent tradepress. 39

40 Manufacturing Independence What the Strategic Factors Driving this Renewed Interest? The factors driving renewed U.S. manufacturing, particularly chemical manufacturing include: Low natural gas price Increasing U.S. competitiveness (Relative) regulatory certainty Agricultural and other final chemical output price stability Product affordability Strong global demand for chemicals U.S. import displacement opportunities 40

41 Manufacturing Independence Forecasted U.S. Imports U.S. imports are expected to drop by as much as 12 to 18 percent in 2016 and 2017 when new capacity comes online. 6 Forecast 5 Million nutrient tons Note: Forecasts based on various industry sources. Source: International Fertilizer Industry Association; Food and Agriculture Organization of the United Nations; and CF Industries. 41

42 Manufacturing Independence Existing U.S. Proposals as a Share of World While U.S. based projects plan to add an impressive amount of methanol capacity, proposed projects in China will add almost three times as much, totaling 25 to 30 million metric tons. Projects in New Zealand, Brazil, Russia, Azerbaijan and India total 3.2 million metric tons. Still, U.S. projects account for 33 percent of worldwide projects. 9 8 Million metric tons U.S. China Rest of World Source: American Oil & Gas Reporter; Oil and Gas Journal. 42

43 Manufacturing Independence Recent and Proposed U.S. Ethylene Cracking Capacity Expansions Over 10 million tons of ethylene cracking capacity is either under construction or has been proposed. This represents more than 35 percent of current ethylene capacity. Owner/Operator Location Capacity Site Estimated (tonnes/year) Type Status In-Service 1. BASF-Total Port Arthur, TX 60,000 Brownfield Completed Dow Chemical Hahnville, LA 400,000 Brownfield Completed Westlake Chemical Lake Charles, LA 110,000 Brownfield Completed Williams Geismar, LA 230,000 Brownfield On Schedule Ineos Alvin, Tx 120,000 Brownfield On Schedule Westlake Chemical Calvert City, KY 80,000 Brownfield On Schedule BASF-Total Port Arthur, TX 100,000 Brownfield On Schedule Dow Chemical Plaquemine, LA 200,000 Brownfield On Schedule Dow Chemical Freeport, TX 200,000 Brownfield On Schedule LyondellBasell Channelview, TX 230,000 Brownfield On Schedule LyondellBasell La Porte, TX 390,000 Brownfield On Schedule Westlake Chemical Lake Charles, LA 110,000 Brownfield Postponed Aither Chemical Charleston, WV n.a. Greenfield Under Study Formosa Plastics Point Comfort, TX 800,000 Greenfield On Schedule ExxonMobil Chemical Baytown, TX 1,500,000 Greenfield On Schedule Chevron Phillips Baytown, TX 1,500,000 Greenfield On Schedule Dow Chemical Freeport, TX 1,500,000 Greenfield On Schedule OxyChem/Mexichem Ingleside, TX 550,000 Greenfield Postponed Shell Chemical Monaca, PA 1,000,000 Greenfield Under Study Sasol Lake Charles, LA 1,000,000 Greenfield Under Study Most large scale projects are three to four years away Total 10,080,000 Source: Platts, January Greenfield Brownfield 43

44 Manufacturing Independence U.S. Proposals as a Share of World Ethylene projects in the U.S. account for almost 30 percent of projects worldwide. U.S., 28% Middle East, 25% Asia, 24% South America, 13% Rest of World, 10% Source: Platts, 2013; Oil and Gas Journal; Company websites; and recent tradepress. 44

45 Ethylene Recent and Proposed U.S. Ethylene Cracking Capacity Expansions Over 10 million tons of ethylene cracking capacity is either under construction or has been proposed. This represents more than 35 percent of current ethylene capacity. Owner/Operator Location Capacity Site Estimated (tonnes/year) Type Status In-Service 1. BASF-Total Port Arthur, TX 60,000 Brownfield Completed Dow Chemical Hahnville, LA 400,000 Brownfield Completed Westlake Chemical Lake Charles, LA 110,000 Brownfield Completed Williams Geismar, LA 230,000 Brownfield On Schedule Ineos Alvin, Tx 120,000 Brownfield On Schedule Westlake Chemical Calvert City, KY 80,000 Brownfield On Schedule BASF-Total Port Arthur, TX 100,000 Brownfield On Schedule Dow Chemical Plaquemine, LA 200,000 Brownfield On Schedule Dow Chemical Freeport, TX 200,000 Brownfield On Schedule LyondellBasell Channelview, TX 230,000 Brownfield On Schedule LyondellBasell La Porte, TX 390,000 Brownfield On Schedule Westlake Chemical Lake Charles, LA 110,000 Brownfield Postponed Aither Chemical Charleston, WV n.a. Greenfield Under Study Formosa Plastics Point Comfort, TX 800,000 Greenfield On Schedule ExxonMobil Chemical Baytown, TX 1,500,000 Greenfield On Schedule Chevron Phillips Baytown, TX 1,500,000 Greenfield On Schedule Dow Chemical Freeport, TX 1,500,000 Greenfield On Schedule OxyChem/Mexichem Ingleside, TX 550,000 Greenfield Postponed Shell Chemical Monaca, PA 1,000,000 Greenfield Under Study Sasol Lake Charles, LA 1,000,000 Greenfield Under Study Most large scale projects are three to four years away Total 10,080,000 Source: Platts, January Greenfield Brownfield 45

46 Ethylene U.S. Proposals as a Share of World Ethylene projects in the U.S. account for almost 30 percent of projects worldwide. U.S., 28% Middle East, 25% Asia, 24% South America, 13% Rest of World, 10% Source: Platts, 2013; Oil and Gas Journal; Company websites; and recent tradepress. 46

47 Development Potential LSU-CES Study (2013): Louisiana Total Capital Expenditures by Sector The LSU Center for Energy Studies (CES) reports an estimated $53.4 billion in new energy-based manufacturing development, most of which is anticipated to occur between 2014 and $14 $12 $10 Billion $ $8 $6 $4 $2 $ LNG Export Cracker/Polymer Methanol/Ammonia Other GTL Source: David E. Dismukes (2013). Unconventional Resources and Louisiana s Manufacturing Development Renaissance. Baton Rouge, LA: Louisiana State University, Center for Energy Studies. 47

48 Development Potential Manufacturing Renaissance The LSU-CES study identified gas-to-liquids and LNG export as the majority of proposed capital spending. LNG Export, $19.5 billion, 37% Cracker/Polymer, $14.8 billion, 28% GTL, $12.5 billion, 23% Methanol/Ammonia, $4.2 billion, 8% Other, $2.4 billion, 4% Source: David E. Dismukes (2013). Unconventional Resources and Louisiana s Manufacturing Development Renaissance. Baton Rouge, LA: Louisiana State University, Center for Energy Studies. 48

49 Development Potential Potential Economic Impacts/Benefit: Construction, State Not quiet as clear will be the additional power/gas requirements for all the new residential and commercial activities supporting development/operation. Should elevate regional usage trends relative to national averages. Construction Impacts Total Output (million $) Direct $ 17,727.7 $ 4.4 $ 1,715.4 $ 2,458.1 $ 3,538.2 $ 3,872.0 $ 4,091.7 $ 1,890.0 $ $ - Indirect $ 2,846.2 $ 0.7 $ $ $ $ $ $ $ 25.4 $ - Induced $ 5,516.8 $ 1.4 $ $ $ 1,101.1 $ 1,204.9 $ 1,273.3 $ $ 49.1 $ - Total $ 26,090.6 $ 6.4 $ 2,524.6 $ 3,617.7 $ 5,207.3 $ 5,698.5 $ 6,021.9 $ 2,781.6 $ $ - Employment (jobs) Direct 120, ,623 16,655 23,973 26,234 27,723 12,806 1,070 - Indirect 19, ,858 2,662 3,832 4,194 4,432 2, Induced 49, ,745 6,799 9,786 10,709 11,317 5, Total 188, ,225 26,116 37,591 41,138 43,472 20,080 1,678 - Wages (million $) Direct $ 5,777.7 $ 1.4 $ $ $ 1,153.1 $ 1,261.9 $ 1,333.5 $ $ 51.5 $ - Indirect $ $ 0.2 $ 80.8 $ $ $ $ $ 89.0 $ 7.4 $ - Induced $ 1,549.7 $ 0.4 $ $ $ $ $ $ $ 13.8 $ - Total $ 8,162.6 $ 2.0 $ $ 1,131.8 $ 1,629.1 $ 1,782.8 $ 1,884.0 $ $ 72.7 $ - 49

50 Development Potential Industrial Production and Capacity Indices Industrial capacity development leads later production (and employment trends). Recent development announcements suggest a strong steady opportunity for U.S. manufacturing output and employment growth. 10% 5% Positive turn in capacity development Percent Change 0% % -10% -15% Roughly 18 month lag in production response. -20% Industrial Production Industrial Capacity Source: Federal Reserve Bank. 50

51 Changes in Power Generation 51

52 New Natural Gas Uses New Natural Gas End Uses & Fuel Diversity Concerns As noted earlier, the industrial renaissance is likely to lead to the first increase in industrial natural gas demand in decades. The extent and degree of this is indeterminate. Consider that a new GTL plant or a new LNG facility, use roughly 2/Bcfd alone at full capacity (730 Bcf of annual load each). However, power generation has been and will continue to be a significant natural gas end use. Environmental regulations are having a considerable impact on developers capacity development decisions. The low cost of natural gas is clearly provides a preference to new gas over new coal. 52

53 New Natural Gas Uses Electric Industry Environmental Regulations Create Uncertainty for Coal Revised Ozone NAAQS Beginning CAIR Phase I Seasonal NOx Cap CAIR Vacated CAIR Remanded Ozone Reconsidered Ozone NAAQS NO2 Primary NAAQS SO2 Primary NAAQS Proposed Transport Rule CO2 Regulation SO2/NOx Final Transport Rule Issued Effluent Guidelines proposed rule expected Transport rule (CSAPR) vacated SO2/NO2 Secondary NAAQS CAIR/CSAPR 316(b) final rule expected Effluent Guidelines Final rule expected Next Ozone NAAQS Revision Water 316(b) Compliance < 8 yrs after final rule Effluent Guidelines Compliance 3-5 yrs after final rule PM-2.5 SIPs due ( 97) CAMR & Delisting Rule vacated Begin CAIR Phase I Annual NOx Cap PM updated from Wegman (EPA 2003) Begin CAIR Phase I Annual SO2 Cap Proposed Rule for CCRs Management Next PM- 2.5 NAAQS Revision HAPs MACT proposed rule 316(b) proposed rule CO2 Final Rule for CCRs Final EPA Nonattainment Designations Mgmt HAPS MACT final rule expected PM-2.5 SIPs due ( 06) New PM-2.5 NAAQS Designations Begin Compliance Requirements under Final CCR Rule (ground water monitoring, double monitors, closure, dry ash conversion) Ash Compliance with CSAPR Hg/HAPS HAPS MACT Compliance 3 yrs after final rule 53

54 New Natural Gas Uses Coal-Fired Capacity Share by Age Category There is a considerable amount of legacy coal capacity (45 GWs) that is relatively old, and in some instances, has few to little controls to meet anticipated standards. Greater than 50 years: 45,382 MW; 12% of capacity; 72 units (averaging 630 MW) Less than 30 years: 79,876 MW; 22% of capacity; 73 plants (averaging 1,094 MW) 30 to 50 years: 238,934 MW; 66% of capacity; 208 plants (averaging 1,149 MW) Source: Energy Information Administration, U.S. Department of Energy 54

55 New Natural Gas Uses U.S. Power Generation Fuel Mix Over 250,000 MWs of natural gas power generation capacity has been added over the past decade at the expense of coal and nuclear. Petroleum Other 3% 1% Renewables 9% Renewables 13% Other 0.5% Petroleum 1% Natural Gas 16% Coal 51% Nuclear 19% Coal 42% Nuclear 20% Natural Gas 25% Source: Energy Information Administration, U.S. Department of Energy. 55

56 New Natural Gas Uses U.S. Generation Capacity by Fuel Type: 2011, 2025 and 2040 EIA estimates the growth in new generation to come primarily from natural gas (~170 GWs) and renewables (~75 GWs) Down Down Up Up Wishful thinking Up Capacity (GW) Coal Oil/gas steam Source: Energy Information Administration, U.S. Department of Energy. Natural gas combined cycle Natural gas combustion turbine Nuclear Renewable/ other 56

57 Natural Gas Uses Growth Opportunities or Fly in the Ointment? New Natural Gas Uses 57

58 Natural Gas Uses (NGV) Natural Gas Vehicles A natural gas vehicle ( NGV ) uses compressed natural gas ( CNG ) or, less commonly, liquefied natural gas ( LNG ) as a clean alternative to other automobile fuels. CNG produces nearly 40 percent less CO2 than refined products. In 2008, NGVs used 215 million gasoline gallon equivalent ( GGE ). To compare, total gasoline usage in 2008 was 55 million gallons per day, or a total of 20 billion gallons. Currently in the U.S., about 12 to 15 percent of public transit buses in run on natural gas (either CNG or LNG). States with the highest consumption of natural gas for transportation are California, New York, Texas, Georgia, Massachusetts and D.C. One major limitation is that CNG vehicles require a greater amount of space for fuel storage. 58

59 Natural Gas Uses (NGV) Potential NGV Usage The large potential size of NGV market has a number of competing end-use categories (i.e., chemicals, manufacturing) concerned. Natural Gas Consumption (Bcf/d) Light Duty Heavy Duty Medium Duty NGV Use Categories Source: Data and forecast from EIA, Encana, 2010 Displacement opportunities exclude Air, International Shipping, Military, Pipeline Fuel. Displaceable Market Volume: 61.6 Bcfe/d Marine Rail Upstream 59

60 Natural Gas Uses (NGV) Natural Gas Consumption by Sector Currently, NGVs account for less than 0.18 percent of U.S. natural gas consumption, but the rate of growth in consumption (158 percent) over the past decade has surpassed all other end-uses. Natural Gas Consumption (Tcf) Residential Commercial Industrial Electric Power NGV NGV Consumption (Bcf) Source: Energy Information Administration, U.S. Department of Energy. 60

61 Natural Gas Uses (NGV) Retail Gasoline Prices and Natural Gas GGE Basic economics, primarily lower relative prices, have played an important role in driving recent increases in natural gas vehicle use. $4.00 $3.50 $3.00 $ per Gallon $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Gasoline Natural Gas (GGE) Source: Energy Information Administration, U.S. Department of Energy. 61

62 Natural Gas Uses (NGV) Leading States in NGV Preferences Many states have generous incentive programs that range from additional tax incentives, to infrastructure grant support. Federal benefits include alternative fuel infrastructure tax credit, an excise alternative fuel tax credit and an alternative fuel tax exemption. Alternative fuel tax credits and/or infrastructure development credits Alternative fuel use and infrastructure grant support Source: U.S. Department of Energy. 62

63 Natural Gas Uses (NGV) Potential Natural Gas Consumption NGV NGV consumption of natural gas is estimated to increase at an average annual rate of 7 percent through 2035, less than 1 Tcf % Natural Gas Consumption (Tcf) NGV use of natural gas will stay below one percent of total U.S. natural gas consumption. 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% NGV Consumption (% of Total) % Consumption Percent of Total Source: Energy Information Administration, U.S. Department of Energy. 63

64 Natural Gas Uses What About Gas Exports? 64

65 Natural Gas Uses (LNG) Considerable Underutilized LNG Regasification Capacity along GOM Regasification Existing T O A F J Under Construction Approved Liquefaction Existing Under Construction Approved P H I N K D G M R E L C B S Q Existing A. Everett, MA: Bcfd B. Cove Point, MD: 1.8 Bcfd C. Elba Island, GA: 1.6 Bcfd (+0.5 Expansion) D. Lake Charles, LA: 2.1 Bcfd E. Energy Bridge, GOM: 0.5 Bcfd F. Northeast Gateway, Offshore MA: 0.8 Bcfd G. Freeport, TX: 1.5 Bcfd (+2.5 Expansion) H. Sabine, LA: 4.0 Bcfd I. Hackberry, LA: 1.8 Bcfd (+0.85 Expansion) J. Neptune, Offshore MA: 0.4 Bcfd K. Sabine Pass, TX: 1.0 Bcfd (+ 1.0 Expansion) Under Construction L. Pascagoula, MS: 1.0 Bcfd Approved M. Corpus Christi, TX: 1.0 Bcfd N. Corpus Christi, TX: 2.6 Bcfd O. Fall River, MA: 0.8 Bcfd P. Port Arthur, TX: 3.0 Bcfd Q. Logan, NJ: 1.2 Bcfd R. Port Lavaca, TX: 1.0 Bcfd S. Baltimore, MD: 1.5 Bcfd T. LI Sound, NY: 1.0 Bcfd 65

66 Natural Gas Uses (LNG) LNG Value Chain Feedstock (production) costs will be critical in determining the location of basin-specific production along the global LNG supply curve. Europe: Feedgas 56% ($/MMBtu) Liquefaction 11%-17% ($/MMBtu) Shipping & Fuel 20%-29% ($/MMBtu) Regas 4%-7% ($/MMBtu) Delivered Cost ($/MMBtu) Equivalent Oil Price* ($/BOE) Low High $4.00 $6.50 $1.25 $1.25 $1.40 $1.65 $0.50 $0.50 $7.15 $9.90 $41.47 $57.42 Asia: Low High $4.00 $6.50 $1.25 $1.25 $2.90 $3.45 $0.50 $0.50 $8.95 $11.70 $51.91 $67.86 Note: *uses a BOE conversion of 5.8 Mcf/BOE. Source: Cheniere. Henry Hub: $4.50 $5.00 WTI: $97.00 $

67 Natural Gas Uses (LNG) Motivations for Moving Shale Gas to Global Consuming Areas Excess U.S. shale production. Growing global energy demand. Climate change issues. $/mmbtu Japan LNG U.K. NBP U.S. Henry Hub German Border Global natural gas price differentials Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Source: Marathon. 67

68 Natural Gas Uses (LNG) FOB Gas Price Necessary to Yield 12 Percent Return (Atlantic Delivery) U.S. is likely to be at the upper end of the global LNG supply curve ADGAS Qatargas-4 Arun Liquid Niugini Gas Altantic LNG Bontang Qatargas Altantic LNG 2&3 Qalhat LNG Atlantic LNG 4 EG LNG ELNG 2 Damietta ELNG 1 Darwin Brunei LNG OLNG MLNG Tiga Tangguh Brass LNG MLNG Yemen LNG MLNG Dua Peru LNG North West Shelf Angola LNG Kenai US Shale Gas Snohvit QCLNG PNG LNG Pluto Gorgon Sakhalin 2 $/MMBtu Source: Pacific LNG. 68

69 Natural Gas Uses (LNG) Basin Competition Close to 6,000 TCF of shale gas opportunities around the world. Coupled with 9,000 Tcf in conventional suggest a potentially solid resource base for many decades. Canada 388 Tcf U.S. 862 Tcf Mexico 681 Tcf Brazil 226 Tcf Argentina 774 Tcf France 180 Tcf Algeria 231 Tcf South Africa 485 Tcf Poland 187 Tcf Libya 290 Tcf China 1,275 Tcf Australia 396 Tcf Source: MIT Energy Initiative. 69

70 Conclusions 70

71 Conclusions Conclusions Natural Gas Markets Natural gas markets continue to be resilient, affordable and less volatile. Natural gas supply growth increasingly driven by associated natural gas a byproduct of increasing production coming from higher hydrocarbon-based production (Marcellus, Eagle Ford, Bakken). New end uses are a blessing (new manufacturing, more efficient/cleaner power generation) but need to be watched for unanticipated consequences. Continued resource development is policy dependent. Changes in economic and environmental policy can impact the trajectory of unconventional resource development. 71

72 Questions, Comments and Discussion 72