Markets. Frank A. Verrastro Senior Vice President & CSIS Energy and James R. Schlesinger Chair for Energy & Geopolitics March 2013

Transcription

1 Unconventional Oil & Gas: Reshaping Energy Markets Frank A. Verrastro Senior Vice President & CSIS Energy and James R. Schlesinger Chair for Energy & Geopolitics March 2013

2 Landscape continues to change US perspective - US is 80% Energy Self-Sufficient But Still Part of a Global Market - Changing Demand Growth Centers - New Emerging Players but Old Institutions - Transformational Impact of Unconventionals - Difficult to Isolate Oil, Liquids, and Natural Gas Issues - Policies Based on Resource Scarcity and Rising US Demand Need to Be Revisited - Environmental Issues Still Loom Large - The Great Dilemma of How We Go Forward

3 Unconventional Natural Gas Resources

4 Source: USGS New technologies and practices drive production from shale deposits.

5 Multiple protective barriers of steel pipe and cement protect aquifers, which are located within 700 feet of the surface Fracturing occurs more than a mile below, and separated by thousands of feet of impenetrable rock, potential sources of water Hydraulic Fracturing

6 U.S. Shale Gas Resources Unconventional Gas

7 Unconventional Gas U.S. shale gas production from the major plays has increased dramatically

8 Unconventional Gas Projected Contribution of Shale Gas to Total US Supply U.S. dry gas production, trillion cubic feet per year History 2010 Projections 23% Shale gas 21% 9% 26% Non-associated onshore Non-associated offshore Tight gas 2% 9% 10% Coalbed methane Associated with oil Source: EIA, Annual Energy Outlook 2013 Early Release

9 Unconventional Gas Natural Gas Resources Have Potential to Supply the Market for Decades High demand, advanced technology, moderate development cost

10 Unconventional Gas Projections for natural gas prices have declined as understanding of resource base expands 12 natural gas spot price (Henry Hub) per million BTU History Projections 10 Updated AEO2009 AEO2010 AEO AEO (2011$) Sources: EIA, Annual Energy Outlook 2011; EIA, Annual Energy Outlook 2010; and EIA, An Updated Annual Energy Outlook 2009 Reference Case

11 Unconventional Gas Increased Production Allows U.S. to Transition from Net Importer to Net Exporter of Natural Gas Source: U.S. Energy Information Administration, Annual Energy Outlook 2012, June 25, 2012

12 Unconventional Gas Potential Gas Pathways Non-Associated gas Gas Pipeline Gas to Power/ Residential & Commercial Associated gas Liquefaction LNG for Export LNG for Transport Chemical Reaction Gas to Chemicals Syngas Gas To Liquids (GTL) Crude Oil Refined Oil Products Source: Royal Dutch Shell

13 Unconventional Gas But Major Policy Questions Remain Industry desire for demand pull to increase prices vs. gov t need to ensure development is done right Gas Utilization Options (power generation, transport, petrochem or refinery feedstocks, industrial use?) Export Policy and Volumes Compatibility with Industrial Policy, Energy Security and Environmental Goals Regulation at Federal or State/Local levels Funding for/pace of Infrastructure buildout

14 Unconventional Gas Realizing the full promise of shale resources is not a certainty and US domestic policy is important Technical/Economic Challenges All shales are not alike; application of drilling/reservoir fracturing technology & operational experience matters Steep decline rates require ongoing investment and drilling; and repeated fracturing Cost escalation and low commodity prices limit prospects Infrastructure build-out and refinery rationalization Environmental/Regulatory/Societal Challenges Well design and management of surface chemicals/materials are the best barriers to protecting water aquifers Disclosure of components of fracking Scale of water use, treatment & disposal are challenging Community Issues infrastructure, land use, population density, noise, haze, health issues, road congestion and repair need to be addressed Seismicity associated with wastewater injection Regulation and enforcement are essential

15 Tight/Unconventional Oil Resources

16 Unconventional Oil Resource Assessments Often Reflect One s Point of View - Resource Enthusiasts - Proven Reserve Skeptics - Production Pessimists - Capacity Scoffers - Demand Worry Warts/Cassandras - National Security Alarmists - Resource Nationalists - Economic Idealists - Technology Bulls - Climate Bears

17 NPC Study Identifies Large Oil Potential as Well Unconventional Oil

18 Change is now the Constant : US technologic, economic, and policy environment continues to shift - Rapidly rising production profiles from the Williston, Permian and Western Gulf basins - Logistics, opportunities and challenges for oil, liquids, and natural gas - Moving the bottleneck: timelines and sequencing upstream, midstream and downstream investment & choices - 40 years of policies based on resource scarcity and rising US demand need to be revisited - Policy Dilemma: Reconciling fossil fuel abundance with climate objectives - Federal, state & local/stakeholder issues

19 Key Onshore Crude Production Basins 19 Source: EIA STEO Supplement

20 Unconventional Oil Tight Oil Opportunities Span the Lower 48 Source: Wood Mackenzie, April 3, 2012

21 Unconventional Oil Oil, Gas & NGL Price Comparison $/MMBtu Eq quivalent 30,0 25,0 20,0 15,0 10,0 5,0,0 30,0 25,0 20,0 15,0 10,0 5,0,0 WTI $/MMBtu MB NGL Ave. $/MMBtu HH Gas $/MMBtu

22 Reorienting the US Rig Count Unconventional Oil

23 Unconventional Oil U.S. Active Rig Locations: Major Resource Plays Dominate Williston Basin Bakken Shale (Oil Play) Pinedale/Jonah Tight Gas Niobrara Shale Play (Oil Play) Uinta Piceance Woodford Shale Gas Play Marcellus Shale Gas Play Granite Wash, Cleveland, Miss. Fayetteville Shale Gas Play Barnett Shale Gas Play Permian Basin-Oil Targets Eagle Ford Shale Play Haynesville Shale Gas Play U.S. Active Rigs Ver Dir Hor Source RigData and BENTEK: Lower 48 States, March 9, 2012

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25 Historical U.S. Crude Oil Production Alaska Lower 48 U.S. Onshore Crude Oil Production on the Rise Federal Offshore Unconventional Oil Thousands of barrels/day 0 Source: EIA

26 9000, ,0 8000,0 7000,0 6000,0 5000,0 4000,0 3000,0 2000,0 1000,0,0 Forecast through 2016 shows Continued Growth s b/d Source: EIA, Excludes NGLs and Other Liquids

27 Tight oil production for selected plays approaching 2.0 million b/d

28 Can the Bakken Story be Replicated (Again and Again)? 000 b/d Surging U.S. Shale Liquid Production (oil and NGL) 2500 Woodford 2000 Niobrara Marcellus 1500 Lower Monterey 1000 Granite Wash Eagle Ford 500 Barnett Bakken Avalon/ Leonard Source: Energy Security Analysis, Inc. (ESAI) April 3, 2012

29 LARGE UNCONVENTIONAL OIL RESOURCES Unconventional Oil

30 Unconventional Oil PAD Districts and Refinery Locations Source: EPRINC, Info. From CME Group and Purvin and Gertz Study

31 New Pipeline Projects Delivering to Cushing ( ): 815,000 bbl/d New Pipeline Projects Delivering to Cushing ( ): 1,225,000 bbl/d New Pipeline Projects from Cushing Delivering to Gulf Coast ( ): 1,400,000 bbl/d Canada Bakken Niobrara Anadarko Permian Seaway Source: EIA, Petroleum Project Tracker, Bentek, RFG, CSIS analysis Not All Projects Shown Note: 2011 Average to 2016 Average (MB/d) Eagle Ford Rail Barge Dock Terminal

32 Unconventional Oil MB/D Where Does All this Light Crude Go?? What Can PADD III Absorb? What Gets Displaced/Changed? HOUSTON, TX MB/D PORT ARTHUR, TX Light (32⁰+) Intermediate (28-32⁰) Heavy (28⁰-) MB/D ST. JAMES, LA Note: 2011 Average Imports (Jan-Dec 2011)

33 40000,0 US Production Already Backing Out Imports Bakken production 35000,0 Eagle Ford Production Angola Crude and Products 30000,0 Nigeria Crude and Products Algeria Crude and Products 25000, , , ,0 Thousand Barrels 5000,0,0 apr- mag- giu- lug- ago- set- ott- nov- dic- gen- feb- mar- apr- mag- giu- lug- ago- set- ott- nov- dic- gen- feb- mar- apr- mag- giu- lug- ago- set- ott- Source: EIA, Texas RRC, North Dakota DMR *Avg monthly production based on annual figures

34 Continued liquids growth and reduced demand means lower imports US Liquid fuels supply, Million b/d Source: EIA Annual Energy Outlook 2013 Early Release

35 Potential Implications & Unconventional Wisdom New supply growth (quality and volume) will shape the market; crude slate for US refineries will get lighter; growth in liquid supplies will back out (selectively) medium and heavier crudes Higher refinery utilization in will encourage refined product exports New rail and pipe infrastructure will move domestic crudes east and west as well as south Economics/price spreads (and policies?) will determine how refineries make crude choices Micro decisions may drive Macro picture There will be surprises, unintended consequences and sub-optimal outcomes Regulatory Policy in time of change needs to be flexible, adaptive. responsible, effective and collaborative

36 Global Implications Some obvious near term winners and losers, But global impacts are more nuanced, less clear and time sensitive Strength of US refining sector could swamp new construction in Latin America Expansion of global shalescould increase volume, reduce prices & improve environment New supply sources could impact global trade flows, but for how long?

37 Trade Balances May See Significant Change Due to Resources and Demand Growth Creating A New Energy Security Paradigm?

38 Source: BP Energy Outlook 2030 Call on OPEC and Spare Capacity

39 What Could Change the Storyline? Resource Over/Under Performance? Technology Advancements, including Disruptive Technologies in Competing Areas Commerciality/Economics/Energy Prices & Costs Investment Climate for Participants Timing/Expense of Infrastructure Buildout Public Sentiment License to Operate (upstream & downstream) Geopolitical and/or Catastrophic Events/Accidents Policy & Regulations Climate Change & the Transformation to Low Carbon Energy

40 Climate Change

41 Climate Change Risks Warming Food Falling crop yields in developing regions first, then developed regions later Water Ecosystems Mountain glaciers disappear; Decreased water in some areas Extensive damage to coral reefs Many more areas suffer from low water availability Sea level rise threatens major cities Rising numbers of species extinctions Extreme Weather Risk of Irreversible or Abrupt Changes Rising intensity of storms, wildfires, droughts, floods, heatwaves Rising risk of dangerous positive feedbacks, Rapid SLR and collapse of Atlantic conveyor Today E3G, Adapted from Stern ppm 550 ppm 650 ppm 750 ppm 850 ppm ppm 950

42 Climate Change as Threat Multiplier 42 Water Scarcity Demography Crop Decline Hunger Coastal Risks

43 GHG Reductions Required to Meet 2 Degree Goal Gt OECD Non-OECD Current Policies Scenario 28% 71% 7 Gt New Policies Scenario 33% 15 Gt Scenario 65%

44 Technology Nuclear Coal-Fired Generation CO2 Capture In Forestry Improved Efficiency Each option would save one gigatonne of CO2 per year Build 130 new (1GW) nuclear power plants in lieu of new coal-fired power plants without CO2 capture and storage Build 320 new zero-emission 500MW coal-fired power plants in lieu of coal-fired plants without CO2 capture and storage (none exist now) Convert 100 million acres of barren area to new forest (equiv of Spain, 2.5 times the size of Washington state) Double fuel efficiency; Deploy 290 million new cars at 40mpg rather than 20mpg Source: DOE Climate Change Technology Program, 44

45 Balancing Costs of Impacts, Mitigation, and Adaptation All Mitigation There Will Be Costs The Questions: How We Choose to Pay, Who Will Pay, How will the $ be spent? Choices Must Be Made in Context of Balancing E3 Goals of Energy Security Economy Environment less No Action All Adaptation Cost of Adaptation more What is Optimal? A schematic overview of inter-relationships between adaptation, mitigation and impacts. Source: Holdridge, M.L. Parry

46 POLICY MODEL Economic Objectives Affordable/Accessible Reliable and Secure Supports Economic Growth & Employment Natural Gas Oil Defensible Nuclear Energy Efficiency Coal Environmentally Benign Carbon Capture and Storage Renewable Energy Environmental Objectives Low/no emissions Promotes/Supports Sustainable Environment Security & Foreign Policy Objectives

47 Mmb/d Strategies to Enhance Oil U.S. Security Liquid Fuels Demand Moderate demand Imports Domestic Oil Supply Diversify supplies Maintain/ expand domestic oil output Source: EIA Reference Case / NPC Global Oil and Gas study survey.

48 Energy Security Leadership Council, The New American Oil Boom, Implications for Energy Security, 2012 Becoming a Reality

49 What Could a 21 st Century Energy Network Look Like?

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51 The NEW Fundamentals Supply Demand Inventory Levels Capacity Utilization Refining Configuration and Product slates Crude Quality Market Momentum Market Price FUTURE EXPECTATIONS Weather Geopolitics Demand Growth/ Macroeconomics Supply Growth Investment $ Infrastructure Availability Financial Markets Interest Rates, Foreign Exchange, Asset Markets