Will The Plays Be Commercial? Impact on Natural Gas Price

Transcription

1 North American Shale Gas Will The Plays Be Commercial? Impact on Natural Gas Price Arthur E. Berman Slide 1

2 Natural Gas Prices Natural gas prices will increase over the next months to meet the marginal cost of production ($7-9/MMBtu). Shale plays will under-perform expectations although they will be an important component of supply. Shale marginal costs will continue to increase as core areas are depleted and because of environmental & other regulatory issues. Natural gas demand will grow 10-20% due to retirement of coal-fired plants over next 5 years will exceed market expectations. North America will become a gas-based economy because of necessity and environmental regulation. The Gulf of Mexico oil spill and drilling moratorium will accentuate the move to natural gas. LNG is the black swan. Slide 2

3 Can Shale Plays Be Commercial? Shale gas plays are marginally commercial at best. Resources & reserves are probably smaller than commonly thought. They are not low-cost plays. Shale plays will provide 7-10 years of supply for North America. Conventional and tight gas plays will provide years of gas supply. Proved reserves provide 10 additional years. No shortage of natural gas supply but what will it cost? Technologies that have made shale plays possible can now be applied to higher quality reservoirs. Companies pursuing shale plays & the analysts that promote them need to get over the love affair and get on with the relationship! Slide 3

4 Get over the love affair: 100 Years Of U.S. Natural Gas Supply? Potential Gas Committee: 1,836 Tcf technically recoverable resources (TRR-P3) (P1) Tcf proved (~90 years at current demand of 23 Tcf per year). 616 Tcf (~1/3) is shale gas (~27 years of supply). The P2 probable component of TRR is 441 Tcf (~ 19 years supply). About 147 Tcf (~1/3) of P2 is shale gas, nearly 6.5 years at current consumption. That s a lot of gas from shale, but not as much as generally perceived. Operators claim higher volumes than PGC in the Haynesville and Marcellus plays. Shale gas is now 15 to 20% of total U.S. natural gas production. Tight gas and conventional resources comprise 1,067 Tcf. Reserve Category Definitions Proved P1 - reasonable certainty Probable P2 - more likely than not Possible P3 - less likely than probable From Potential Gas Committee (2009) Slide 4

5 Probabilistic Reserve Estimates for North American Shale Plays CLASS P 10 P 50 P 90 U.S CANADA TOTAL Source: Developed from TRR by Medlock (2010) Why do our estimates differ from the mainstream? Slide 5

6 Individual Well Evaluations Barnett Shale Example: The heart of our view Slide 6

7 Why Operator EUR Is Too High: Barnett Shale Example 2.8 Bcf Hyperbolic decline model looks reasonable. Hyperbolic exponent of 1.67 seems high. 50-year well life seems high. 2.8 Bcf EUR in range of claims by major Barnett operators ( Bcf/well). Cautionary observations: cumulative production only 0.9 Bcf/5.5 years, IP 30 < 1 MMcfd. Slide 7

8 Two-stage Decline Model: Why Operator EUR Is Too High Transient Decline 1.3 Bcf Exponential Decline Transient/transitional decline behavior should be excluded from decline curve model it has nothing to do with future trend. Excellent match using exponential model over ~ 4 years of production. 1.3 Bcf EUR, 12-year well life more consistent with our analysis of Barnett wells. Validate reserve forecasts with NPV 10 models to avoid meaningless reserves with no net value. Slide 8

9 Type Curve Comparison: Haynesville Shale The Difference Lies in Forecasting Future Decline Trends. Particularly the hyperbolic b exponent. Slide 9

10 Barnett Shale: Testing The 40- To 65-year Production Life Claim Slide 10

11 Barnett Shale: It s About NPV, Not Estimated Ultimate Recovery Barnett Type Well: Incremental NPV10 By Production Period 100% 90% 10.7% 2.8% 1.1% 0.0% 80% 16.2% 70% 60% 50% 40% 30% 20% 10% 0% 69.2% Chesapeake Type Well for the Barnett Play Initial Production of 2 MMscf per day, 70% of value produced in 1st 5 years, and 85% in 1st 10 years, Negligible value added after 20 years yet operators claim significant EUR comes after year 20, Valueless volumes are being used to dilute finding and development cost numbers, and Actual Barnett decline rates: 45% of EUR in Year 1, 65% by end of 2nd, 75% by end of 3rd. 0-5 yrs yrs yrs yrs yrs yrs Source: Lynn Pittinger and Art Berman (2010) Time Period of Production Slide 11

12 Most Haynesville Shale wells non-commercial: HK & EXCO may be exceptions Haynesville Shale Major Operator EUR Estimated Ultimate Recovery (Bcf) HK EXCO ECA CHK EOG Mean EUR = 2.4 Bcf, Mode = 1.5 Bcf, Median = 2.0 Bcf: operator guidance is 7-8 Bcf/well. Minimum Economic Threshold = 5.0 Bcf: 12% of wells. Best wells are 7-9 Bcf EUR. A conventional trap play (not a manufacturing play). Petrohawk and Exco have the best wells. Chesapeake & EOG are in denial about poor results. Slide 12

13 Haynesville Well Economics Break-even Gas Price Wellhead) EUR Scenario EUR/Well (Bcf) Full Cycle Point Forward Group Avg, Projected w/ b = $9.25 $7.50 Group Avg, Projected w/ b = $8.10 $6.50 Group Avg, Projected w/ b = $7.00 $5.50 Operator View 6.5 $4.50 $3.75 Assumptions: $5,000/acre, 120 acre/well, 50% Ends Up Core 100% WI, Before Income Taxes $8 MM D&C, 90% Success Rate 75% NRI, 7% Severance & Ad Valorem Taxes $1.25/Mscf LOE + G&A 8 Months to Complete Slide 13

14 Shale Plays Always Contract To A Fairway or Core Area: Haynesville Shale Example Core area based on generous mapping of EUR > 4.5 Bcf The core area in this view includes 110,000 acres or about 5 Townships This represents approximately 8% of the play area in Louisiana defined by limits of drilling (1.5 million acres or 65 Townships Slide 14

15 The Barnett Core Area Core Area "There was a time you all were told that any of the 17 counties in the Barnett Shale play would be just as good as any other county," McClendon said. "We found out there are about two or two and a half counties where you really want to be. --Bloomberg News October 14, 2009 Slide 15

16 What defines a core? An area where conditions provide the potential for commercial success What are these conditions? Wise Denton Tarrant Barnett H Wells 1 st Year Cumulative Production Petroleum system risk elements reservoir presence & quality: mineralogy, thermal maturity--relative permeability to gas, proximity to regional fractures, charge efficiency: thermal maturity, richness, charge access, trap: faults & fractures act as baffles--great wells have much greater drainage areas than can be inferred from induced fractures, seal: hydraulic fracture barriers. Even within the core, the wells performance is not uniform Different drilling & completion methods, different operators, Complex natural system, not a factory. Slide 16

17 Why Are We Focused Only On Shale Gas? Coalbed Gas Shale Gas Conventional & Tight Gas 163 Tcf 616 Tcf 1,067 Tcf Conventional & Tight Gas Resource is >70% greater than Shale and is a superior reservoir Slide 17

18 Unit Costs Appear To Be Understated Companies state that shale gas is profitable at market prices of $5.00 per Mcf and in some cases lower, but their average unit cost from financial statements is higher than that. Futures hedging has minimized cash losses since the early 2009 price drop, but now it is difficult to find suitable hedge prices for significant volumes in a lowprice environment. Yet if the shale plays are so profitable, why can t the companies pay for drilling & leasing out of cash flow? What about paying down debt? Perhaps, they are losing money but plan on making it up on volume! Slide 18

19 The Truth About The Low Cost Of Shale Gas Plays? Unit Costs Based on K Filings U.S. Dollars Per Mcfe $14.00 $12.00 $10.00 $8.00 $6.00 True Cost Per Mcfe 2010 Hedge-True Cost $5.50 $5.62 $4.66 $4.74 $6.39 $8.16 $8.22 $8.55 $8.67 $9.11 $10.37 $11.96 $4.00 $2.00 $0.00 $3.16 $2.23 $0.24 ($0.01) ($2.00) ($4.00) ($6.00) ($8.00) ($1.47) ($2.22) ($2.29) ($2.39) ($3.07) General increase in company focus on shale plays ($4.40) ($4.71) ($5.44) EOG XTO RRC SWN DVN ECA CRZO KWK CHK GDP HK EXCO Slide 19

20 Canadian gas exports to the U.S. have fallen Exports are down 750 MMcfd YOY and have fallen 1.5 Bcfd since 2006 Marcellus production will further limit U.S. demand Wyoming gas producers are building a pipeline to the West Coast Restrictions on drilling and hydraulic fracturing and new production taxes in the Marcellus may affect demand positively for Canadian gas demand Slide 20

21 Conclusions: Will The Shale Plays Be Commercial? Shale gas has added new supply but it will be more expensive than advertised resources & reserves are overstated, cost is understated, the plays always contract to a core that is much smaller than initial resource estimates, the enthusiasm for shale has marginalized funding for conventional and tight resources that are probably cheaper to find and produce, we are optimistic that value-oriented players will make shale plays more competitive in the long term. Slide 21

22 Conclusions: Will The Shale Plays Be Commercial? LNG is a black swan for the shale revolution Qatar and Yemen have the capacity to deliver gas to North America at a more competitive price than shale can offer, They can deliver gas to North American for $3.50/Mcf, Its impact has been limited recently by robust global demand and low North American gas prices because of over-production, Over the next several years, LNG may define the upper range of gas prices in North America. Slide 22

23 Wage Impact of Gulf of Mexico Drilling Moratorium Slide 23

24 Conclusions: How will the shale plays affect gas prices? Prices will rise to the $7-9/MMBtu range but there are countervailing factors that may modulate the increase. Shale gas is not low cost this will become apparent as capital markets tighten & operators are forced to slow the drilling treadmill. Environmental regulations will favor natural gas over coal and increase demand. Continued over-production in both the U.S. and Canada along with spare capacity from uncompleted wells will be the main factors checking the price rise. Slide 24

25 Conclusions: How will the shale plays affect gas prices? U.S. operators have shifted emphasis to liquid-rich shale plays and this will help reduce the over-supply. The Gulf of Mexico oil spill and drilling moratorium will accelerate the shift to a natural gas-based economy in North America. Canadian natural gas exports to the U.S. will be challenged by Marcellus production. There are many problems looming for the Marcellus play. In the long term, the future is bright for natural gas E&P and gas prices. Finding strategies to make it through the next months is the key! Slide 25

26 Acknowledgments Mike Bodell Allen Brooks Perry Fischer Robert Gray Jim Halloran IHS Lynn Pittinger Keith Shanley Slide 26

27 North American Shale Gas Will The Plays Be Commercial? Impact on Natural Gas Price Arthur E. Berman Slide 27