Natural Gas Purchase Contracts - Drafting or Negotiating an Agreement for the Sale of Natural Gas Products

Transcription

1 Natural Gas Purchase Contracts - Drafting or Negotiating an Agreement for the Sale of Natural Gas Products Advanced Oil and Gas Short Course Sponsored by University of Houston Law Foundation Houston, TX Feb. 5-6, 2009 The Houston Club Dallas, TX Feb , 2009 Cityplace Conference Center Arthur J. Wright 1722 Routh Street, Suite 1500 Dallas, Texas Arthur.Wright@tklaw.com ( Dallas )

2 July 30, 2008 President Bush: Now it is up to the US Congress to make a decision as to whether or not you are going to continue to face high gasoline prices or send a clear signal to world that we are tired of being dependent on oil from overseas and we are going to find it here. 2

3 The Man - Andy Weissman Gas Market 09/07/06 to 09/07/08 IS GAS MARKET HEADED FOR PRICE CRASH? Absent a Monster Hurricane we had one LNG Imports Up Did not happen; US oversupplied in 2008 Storage will be at record levels Record storage and production Coldest Winter in 10/11 years Prices headed down 3

4 Raymond James 2006 Bullish move intact Oil & Gas supply not responding to rigs Gas near a bottom Ultra Shuts in 3 Bcf in 3 rd Qtr. Of 2008 profit up 227%; output up 35% 4

5 Fracs Time for the Fracs of Life US Petrochemical plants dying No consumer; Ethane rejected! Industrial demand bottomed Cheap oil cheap NGLs Frac spreads cause NGLs to go into gas 1-22 Bcfd additional supply ConocoPhillips and Peabody select site for coal-to to-gas $3 billion synthetic natural gas facility in Kentucky. 5

6 Canada Rigs near 900 staffing for 600 ZIFF: Canada gas producers facing escalating finding and development (F&D) costs as well as rising operating costs Falling oil prices frees up gas from oil sands Production Bcfd Bcfd 2014 with unconventional gas 16 Bcfd 6

7 Canada (cont d.) Canadian potential growth Coalbed trillion ft. Shale trillion ft. Tight trillion ft. Total all sources: - 2,150 trillion British Columbia, Horn River and Montreal Quebec shale may replace Alberta Horn River wells by end of 2010 Montreal (tight gas) wells by end of 2010 Issues Pipelines, gas volatility and people to man rigs 6/30/08 Horn River two wells produce 5 & 6 MMcfd day 7

8 Canada (cont d.) Nexen to spend $500-$700 $700 million Horn River Shale in BC CBM in Alberta Deep Panute field - development to begin Exxon Mobil Plans 3 wells through 2010 Decades of exploration and 3 fields Mackenzie pipeline: Planned to be on-line 2009 No approvals given Earliest date 2014 Needed? US market supply up! 8

9 Canada (cont d.) Muskwa Shale in NE British Columbia 775 miles Northwest of Calgary EOG says more profitable than Barnett Nexen, Devon, EnCana and Apache are also players Thicker, higher pressure, limited faulting Utica Shale (4,000 ft.) Talisman drilled well in QuebecLorraine shale below Utica Forrest testing wells also (269,000 acres) Triangle Petroleum: 516,000 acre shale play Nova Scotia 68,000 acre shale play New Brunswick 9

10 Marcellus 8/25 Range 100 wells drilled 25 horizontal US Shales last 4 wells 4.9 Mcft per day 850,000 acres reserves 15 Tcf to 22 Tcf Mark West - 3 projects to connect to interstates Water procurement and disposal a key New water regulation 2 years or longer moratorium in NY Atlas 2 stage vertical frac Doubles per well production Also drilling horizontal Atlas plans 100 horizontal wells in New Albany Shale through CNX - Marcellus horizontal well rate of 6.5 MMcfd 10

11 Marcellus CHK says no rapid expansion as in Barnett due to regulatory, topographic, water and infrastructure issues How big? Too early 2009 Range expected to have 30 MMcfd Atlas Energy 580,000 acres US Shales (cont d.) mostly vertical wells, 60 MMcfd production Tristone is assuming $8.50 gas shale production to go from 6.8 Bcfd to 19 Bcfd by 2018 Short term Haynesville and Fayetteville will dominate Montney, Marcellus, Utica and Horn River thicker may require stacked horizontal well bores more gas per well bore 11

12 US Shales (cont d.) Haynesville 8 weeks production wells show no decline 8-11 Devon announces 73 Tcf under their 483,000 acres CHK Haynesville has 440,000 acres potential reserve 20 trillion cubic feet Barnett is 2 trillion Spent 2005 to evaluate data from 450 wells studied 5 pilot vertical wells Initial wells in southern Caddo Parish Now expanding Northern Caddo, DeSoto Sabine Parishes and Panola County, TX Petrohawk to test Shelby and Nacogdoches County 12

13 Shales One Commentator Haynesville to pass Barnett in 5 years Wells - $5 to $7 million depths 11,000 ft. to 13,000 ft. then laterals 3,000 to 6,000 feet 8 to 17 Mcfd initial rates whose acreage is the best? Shale plays most significant discovery in 50 years 21 Shale basins 12/08/08 - Haynesville Exco announces 23 Mcf well Petrohawk announces wells 23 to 30 Mcf 6/30/08 - CHK - Plains gets $30,000 an acre for Haynesville acreage 13

14 Woodford 9/22/08 Shales (cont d.) production 550 Mcft (Barnett 3.6 Bcft) Newfield 40% of production BP buys CHK acreage (25% billion) 4,100 ft. laterals Devon (6 rigs), Continental (5 rigs), XTO (5 rigs), Antero (4 rigs), BP (4 rigs) and Newfield (12 rigs) Woodford wells 7.1 MMcfd and 6.7 MMcfd North Louisiana has CBM at 2,500 ft. - 4,000 ft. that Equals to Powder River players Utah Geomet, EnerVest, Southwestern and Samson Drill Baby vs. Hug a tree 14

15 Fayetteville Shales (cont d.) Kinder Morgan and ET to combine on take-away away pipe 08/08/08 Southwest Energy 500MMcf/d (200 in 2007) 22 rigs running 80 acre spacing 619 wells 554 horizontal 10/27/08 - Petrohawk announces S. TX play in Eagle Ford Shale two wells 15 miles apart over 9.1 million cubic ft equivalent 12/03/08 - Energen chases Conasauga and Chattanooga shales without CHK 15

16 Shales (cont d.) Pearsall Shale in Maverick County Encana, TXCO, and Anadarko hold positions in Far West Texas Play Equitable developing Huron and Cleveland shales Shale production Bcfd Today 5 Bcfd Compounded rate over 20% 16

17 Shales (cont d.) Gothic Shale Colorado Bill Barrett Corp. Deutsche Bank-Study Shale initial 1 st year declines 65-75% Flattens out in 3 /4 year (10-15%) 15%) (MI) Bcfd in Antrum and Devonian Shales Appla - 84% of Shale Bcfd Plus Marcellus and Horn River will trump Barnett 17

18 Shales Technology Technology Horizontal Laterals Contact more shale longer laterals Better fracing - high frac rates and packers Fluids out of cracks and flow back Decrease drilling time use of coiled tubing Better control of pressure and tool placement Dissolve calcite in rocks with chemicals Williams Barnett using sequential and simultaneous fracs 2 wells one week job ExxonMobil 30 new technologies to extract oil from shale 18

19 Shales Technology (cont d.) 6/30/08 Encana Technology Bighorn well costs - down $2.4 Mcf per well Haliburton swellable packer reduces frac time and costs 2-33 days vs. 30 days fit for purpose rigs 20%-30% faster Multi-well pads cut cost 15% Barnett EOG recovery factor: 10-12% 12% in % in % in % 55% late 2007 XTO in Barnett: 28 days to drill well days to drill well wells permits per rig vs

20 Shales Technology (cont d.) Breakeven Marcellus - $3.17 Haynesville - $4.73 Fayetteville - $5.00 Barnett (Core) - $5.00 Plus $35 Billion to develop Haynesville Break even 10% pretax IRR Barnett Core $5.12; Non-Core $6.32 Fayetteville $5.07 Haynesville $4.73 Marcellus $3.17 Woodford $

21 Prices WOOD MACKENZIE: mild winter would melt prices further; natural gas faces a prolonged period of significant weakness and will trade in a range of $5-$6/MMBtu $6/MMBtu through Market supplied without Marcellus or Horn River and LNG increase to avoid flooding lucrative Asian and European markets. Standard & Ross cuts forecasts to $7 for 2009 from $9; 2011 and beyond $6 21

22 Prices (cont d.) 1/10/08 Raymond James forecasts $6.50 for /19/08 Raymond James says prices to fall in summer 06/09/08 Raymond James up forecast for 2008 to 10 MMBtu vs. 8 MMBtu 08/31/08 EIA says shale production could reduce LNG demand in US 09/10/08 Raymond James drops price projection for 4 Qtr. $7.50 vs. $10 Wall Street consensus $11 plus 09/10/08 EIA If hurricane, onshore supply will prevent run-up up in prices 10/13/08 Raymond James $7 Mcf will be breached if rig rate stays up 10/15/08 50% Gulf Production shut in Future prices drop 50% from 7/ Bcf goes to pipe and storage pressure 22

23 Prices (cont d.) 09/16/08 Morningstar no supply glut due to pipeline bottlenecks, declines in non-shale production EIA Reserve largest gain since 1977 (year began review) 12/08/08 High yield bond at 18% equity risk premium 5% Required Project Return 23% 12/15/08 Raymond James no clue where oil prices going 12/22/08 EIA by 2030: Natural gas prices will allow production to equal 24 trillion Cft Electricity production to rise by 25% and natural gas to 22% of production Electric growth majority gas and renewables Hybrid vehicles 38% of market 23

24 Prices (cont d.) Goldman, Morgan Stanley and Barclay s poured hundreds of billions of dollars into commodities market Rex Maintenance Rockies gas below $1.00 (45 ) Third quarter worst for commodities since /02/08 48% of GOM gas shut in 58.8% of GOM oil shut in 24

25 Pipelines Carthage Houston Ship Channel Perryville Henry Hub Premium Southeast, Transco Z4, TETCO M1, FGT 23, Sonat, LA 25

26 Pipelines (cont d.) Energy analyst states: Pipelines cannot handle Rocky Mountain and shale growths Need long haul capacity Rocky Mountain discount $2.50-$5.50 $5.50 vs. HH; multiple pipelines proposed. Rex does not have enough capacity goes to Midwest and stops Barnett, Woodford and Fayetteville shales filling Gulf lines Alaskan Pipeline: In-fighting Conoco/BP vs. TransCanada (Palin authorizes license) Final application 2011 LNG? 26

27 Credit Crunch Hits Pipelines and MLPs Demands for new lines due to new production areas Rockies, North Texas, East Louisiana, etc. El Paso, Regency, Enterprise and others scale back projects CrossTex 10/10/08 Dividends safe 11/03/08 Cuts Dividends Pipelines (cont d.) Pipelines 27

28 MLPs need credit MLPs Pipelines (cont d.) Model - Cash flow to distribution Large capital needs debt or stock (dilution) Demand Strong for services Producers drilling new fields not HBP No Pipe in area Outspending Cash Flow 28

29 Pipelines (cont d.) Midstreams Cut backs coming Maturity of debt MLP s - yield 20%; debt 10% plus MLP s - who will build infrastructure?e&p spend drilling money on pipe? pay private equity for pipe? MLP s need capital - where? 29

30 Pipelines (cont d.) Ziff study Mackenzie and Alaska gas MacKenzie $33 Billion for 6 Bcfd Alaska $20 Billion for 1 Bcfd vs. LNG $10 Billion for 1 Bcfd What about $5.00 gas? 2007 Gas Plant Investment at record high 30

31 LNG 4 New US facilities in 2009 to receive gas most without supply Freeport opens no supply one tanker scheduled 08/09 Cheniere for sale no dedicated supply 19 New trains at 12 plants to produce LNG Winter world LNG prices MMBtu Algeria outage in LNG plant Freeport LNG set to EXPORT! US LNG not needed until 2012 or beyond Wood Mackenzie says LNG could be 14% of US supply after 2012 and 20% in

32 LNG (cont d.) LNG counties import 29 importers US has storage Tankers usually 8 built per year 57 in 2008 and 42 in 2009 and 40% larger Generation is the market Sonatrack to partially supply Cove Point Multiple terminals proposed and cancelled New Exxon QMax QMax Technology increases ship capacity 80% - decrease energy consumption 40% per unit Japan nuclear plant back on 10/20/08 32

33 Production/Reserves Reserves Negative reserve revisions based on December 31 commodity prices (for 2007, this was $96/BBL and $6.80 MMBtu); for end of $44.60 BBL and $6.41 MMBtu Negative gas revisions more likely stem from deferring PUDs 12/08 Price Decks Bank Survey 2008 Oil - $70.39 Gas HH - $ Oil - $68.10 Gas HH - $6.61 May receive a pass at year-end end 2008 if PUDs will be drilled in the next ~3 to 5 years Reserves are what can be produced economically Inventory of Reserves is critical 33

34 Production/Reserves (cont d.) Borrowing Bases cut 20%-30%? Pay Back / less drilling Shut in wells royalty banks? EIA reports: Tcf record high reserve additions doubled 19.5 Tcf produced; highest 31 years 13% increase over 2006 reserves 2007 Shale - 9% of US reserves: 50% increase year to year TX - 17% gain Tcf Rockies - 26% gain Tcf 34

35 Production/Reserves (cont d.) 2006 plus 2.1 Bcf/d + 4.7% 2007 plus 2.5 Bcf/d + 5.3% 2008 plus 3.5 Bcf/d + 7% (TX ½ - Barnett) Last drop Bcf/d 3.8% fewer rigs US has 2,247 Tcf of gas 118 years at 2007 demand Every EIA projection exceeded by actual production 114 producers control 90% NA production Democrats - why drill OCS? 35

36 Onshore Supply Growth! Tudor Pickering Holt & Co. 36

37 Production and Drilling 13 of 29 large E&P announce budget cuts of 37% in 2009 Tudor Pickering Holt - Rigs Earnings decline potential 80% Perhaps rig drop 400 gas 27% oil 43% Canada - expect 20% drop 12/10/08 Raymond James predicts a 41% cut or 850 rigs Patterson domestic rig count drops with prices international takes 6 months to drop 12/1/ new rigs scheduled delivery for

38 World Turned Upside Down August, 2008 Oil & Gas Investor predicts shortages and much higher day rates for rigs Forecast 2009 Wood Mackenzie prices $ MMBtu Enbridge announces dividend boost and higher earnings Canadian Gas Exports revenues to US jumps 33% Tudor Pickering Holt - China and India, not US, will drive energy markets Japan within 10 years have 100 year supply of gas from methane hydrate in Canada and US in artic tundra and Japan deep water and ice 38

39 World Turned Upside Down (cont d.) US Federal Waters 100s of Tcf of gas in Methane Hydrates North slope 85.4 Tcf in Methane Hydrates LNG 4 built in 90 s and 80 s Everett, MA; Cove Point, Maryland; Elba Island, GA and Lake Charles, LA Two idle; two little activity US surplus supply / low prices Freeport and Cheniere permits to export US gas 39

40 World Turned Upside Down (cont d.) 10/08/ Schlumberger Chairman optimistic about long-term global outlook 5 year of up cycle in E&P Development absent a recession by 2012, 44 new drill ships let us pause on this one! Horizontal rigs Companies will spend within cash flow due to credit crunch, so budgets are headed much lower 35% 50% 50% 40

41 World Turned Upside Down (cont d.) 1/2 gas consumed in US is 1 st half of 2008 was from wells drilled in last 40 months In 2006, was 48 months US unconventional gas 10 times recoverable volume conventional gas Worldwide translate US shale lessons? Short term 25% decline in drilling activity = 1% volume in production 41