Strategic Issues Facing the Natural Gas Industry

Transcription

1 FINANCE COMMITTEE MEETING Denver, Colorado March 15, 2016 Strategic Issues Facing the Natural Gas Industry Thomas A. Petrie, CFA Chairman, Petrie Partners

2 Topics Oil Price Recovery Prospects / Implications The Role of LNG Exports Regulatory Challenges Thorny Geopolitics of Energy North American Gas Interconnectivity Concluding Observations 1

3 Oil Price Recovery Prospects / Implications World Events & Oil Pricing ( YTD) $160 $160 $140 $140 Fiscal Cliff fallout concerns Syrian civil war escalates ISIS on rise $120 $120 $100 $100 $80 $80 $60 $60 $40 $40 Iran-Iraq War Saudis abandon begins; swing producer role; oil prices peak oil prices collapse Iranian Revolution Shah deposed Gulf War ends Iranian oil in production precipitates the decline Prices spike on Iraq war, rapid demand increases, constrained OPEC capacity, low inventories, etc. Prices rise sharply on OPEC cutbacks, increased demand Back from the abyss Russia challenges Ukraine Saudis decline to play a swing producer role again Saudis considering partial sale of Saudi Aramco? $20 $20 OPEC agrees to quotas 1973 Arab Oil Embargo Iraq invades Kuwait Prices fall sharply on 9/11 attacks, economy weakness Fear of global economic meltdown $ Source: EIA. 2

4 Oil Price Recovery Prospects / Implications Two Takes On Oil Break Evens $120 $90 Price ($) $60 $65 $61 $49 $46 $30 $39 $32 Brent 12-Month Strip: $43.33 $7 $13 $0 USA Canada China Saudi Arabia Russia Iraq Source: Citigroup Global Commodities Research. Prices per Bloomberg 3

5 Oil Price Recovery Prospects / Implications Two Takes On Oil Break Evens $120 $114 $105 $90 $89 Price ($) $60 $65 $61 $49 $46 $30 $39 $32 Brent 12-Month Strip: $43.33 $7 $13 $0 USA Canada China Saudi Arabia Russia Iraq Source: Citigroup Global Commodities Research. Prices per Bloomberg 4

6 Oil Price Recovery Prospects / Implications Item Value Current Surplus MMBopd Declining Mature Global Production (3.7) (4.7) MMBopd Potential Expansion of Iranian Production MMBopd New Deepwater and Other Projects MMBopd Arithmetic Result (0.9) (0.5) MMBopd 5

7 Oil Price Recovery Prospects / Implications Top Three World Oil Producers 12.0 National Production (MMBopd) Russia Saudi Arabia U.S.A Source: EIA. Russia production includes crude oil and other liquids. 6

8 Oil Price Recovery Prospects / Implications Oil Supply Overhang in Perspective Global Oil Demand / Supply (MMBopd) Global Supply Global Demand Demand is Greater than Supply Supply is Greater than Demand Historical Projected Source: EIA. 7

9 The Role of LNG Exports U.S. to Become the Third Largest LNG Supplier LNG demand expected to nearly double from 2015 to 2030 Supply demand gap projected to open shortly after 2020 as trade grows and existing production declines in certain regions ~42 LNG trains need to take FID by 2025 to meet forecasted demand through 2030 Source: Cheniere Energy investor presentations and Wood Mackenzie estimates. 8

10 The Role of LNG Exports LNG Imports to 2030: Growing and Evolving Market Place Pacific Basin Forecast Future growth from newer markets as traditional import markets mature Strong regional growth through 2030, a 4% CAGR Region accounts for 75% of imports Atlantic Basin Forecast LNG will play a growing role in Europe as domestic production declines and buyers seek supply diversity Growing role for LNG in maritime transport in the region post 2020 based on marine ECAs Source: Cheniere Energy investor presentations and Wood Mackenzie estimates. 9

11 The Role of LNG Exports U.S. to Be One of Top Three LNG Suppliers Projected Liquefaction Capacity Source: Cheniere Energy investor presentations and Wood Mackenzie estimates. 10

12 Regulatory Challenges The Ongoing Fracking Debate Environmental Constraints Replumbing North America 11

13 Regulatory Challenges The Ongoing Fracking Debate U.S. Natural Gas Production vs. Prices ( ) 35.0 $ US Natural Gas Production $ Natural Gas Prices $8.00 Trillion Cubic Feet per Year $7.00 $6.00 $5.00 $4.00 $3.00 Natural Gas Price ($ per Mcf) 19.0 Horizontal Drilling and Hydraulic Fracturing Included 17.0 $ $2.00 Source: EIA. 12

14 Regulatory Challenges The Ongoing Fracking Debate 2011 Injection Triggered Seismicity Becomes an Issue Source: M.D. Zoback, Managing the seismic risk of wastewater disposal, EARTH, April, 2012, (2012). 13

15 Regulatory Challenges Environmental Constraints Production Emissions Millions metric tons of CO 2 equivalent Natural Cas Production (Bcfpd Source: EPA and EIA. 14

16 Regulatory Challenges Replumbing North America 15

17 Thorny Geopolitics of Energy Key Country Policies / Strategies And Issues Country Policy / Strategy Issues China Transition from export-driven to greater consumer-driven economy One party rule vs. adequate economic growth? Russia Reasserting broad regional hegemony Sanctions are severely limiting capex reinvestment Iran Awkwardly seeking a return to global respectability Doubtful supporter of OPEC Saudi (et al.) Coping with multiple serious security challenges in an alien environment Saudi Aramco production capabilities? Europe Struggling with adverse demographics and ineffective economic policy Very limited economic growth immigration burdens United States Attempting to redefine more tightly its superpower status Election outcome, multi-region security needs 16

18 Thorny Geopolitics of Energy Overlapping Energy Power Triangles Russia Historical view: To US and West Turkey Saudi Arabia Iran New view to east India? China Conclusion: Like 2015, 2016 is proving to be another year of living dangerously 17

19 Thorny Geopolitics of Energy The Arab Spring Has Morphed Into Winter Tunisia Iraq Iran Western Sahara Algeria Libya Egypt Kuwait UAE Saudi Arabia Mauritania Mali Niger Chad Sudan A virtual Cold War condition now exists between Saudi Arabia and Iran 18

20 North American Gas Interconnectivity The Obama Administration s rejection of the Keystone XL Pipeline was an impediment to progress on US Canadian cooperation on energy interconnectivity A series of tactical cross border transactions involving Canada, Mexico and the U.S. are paving the way for a broader strategic dialog on energy connectivity Recent elections in both Canada and Mexico have set the stage for diplomatic initiatives to resume efforts to advance cross border energy cooperation for all three countries Mexico s constitutional changes regarding PEMEX represent a historical inflection point for the country s energy policy making The possibility of taxing carbon emissions is receiving operator attention in both Canada and Mexico and may exert pressure on the U.S. after the outcome of this year s U.S. election 19

21 Concluding Observations Following Oil Lessons That are Time and Cycle Tested Oil prices have entered a bottoming process; however recovery to a new normal range of $65 $85 per barrel beneficial to the natural gas outlook could require another two plus years Growing LNG exports represent a critical pressure relief value for U.S. gas producers; it will also afford noteworthy geopolitical benefits in a chaotic world Yet to be resolved environmental constraints continue to pose serious challenges to optimal North American natural gas development Given today s chaotic geopolitical landscape, pursuit of an effectively interconnected North American natural gas market is a strategic priority 20