What s Going on With Energy? How Unconventional Oil & Gas Development is Impacting Renewables, Efficiency, Power Markets and All That Other Stuff Atlanta Economics Club Monthly Meeting December 10, 2012 Center for Energy Studies David E. Dismukes, Ph.D. Center for Energy Studies Louisiana State University
Introduction Summary and Take Away New natural gas supply availability is having considerable impacts on all energy markets today and on longer term, forward-looking basis. Energy-Related Carbon Dioxide 81.2% Shale revolution is now migrating into liquids and crude oil production. The expansion of this revolution is increasing liquids production as well as facilitating additional natural gas production despite low prices. Considerable economic development opportunities through lower energy costs. Developments will change energy market dynamics including those associated with such clean energy initiatives and renewables, nuclear power, carbon capture and storage, and energy efficiency it s just not sinking in yet.. 2
What Changed? The Way Things Are 3
Recent Trends Unconventional vs. Conventional Geological Formations 4
Recent Trends Shale, Horizontal Drilling, and Fractionation Shale (unconventional) wells differ from conventional wells since they are drilled horizontally and not vertically. Horizontal segments are then fractured with higher pressure water, chemicals and silica to break up the formation. The fractionation process releases/liberates the hydrocarbons. Some environmental and water use concerns expressed in some areas of the country on this drilling process. Source: Energy Tomorrow
Recent Trends Production from a Typical Well and Shale Well Illustrative production decline from a convention vs. shale producing well. As much as 80 percent of total production thought to occur in the first two to three years. 6
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 7
Game Changer 1: Natural Gas 8
Natural Gas Trends Natural Gas Price Variability The 2001 to 2009 market trend of higher average prices coupled with high volatility is reversing itself and post 2009 prices are significantly lower. $20 $18 $16 $14 $12 Average 1997 through 2000: $2.79 (standard deviation: $1.28) average for period 2000-2001 heating season through 2008: $6.24 (standard deviation: $2.39) since 2009: $4.11 (standard deviation: $0.70) $/Mcf $10 $8 $6 $4 $2 $0 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Source: Energy Information Administration, U.S. Department of Energy. 9
Natural Gas Trends Natural Gas Proved Reserves and Production Current U.S. natural gas reserves are approaching record levels not seen since 1970. Natural gas production is at levels that surpass historic peaks. 350 30 Dry Natural Gas Proved Reserves (Tcf) 300 250 200 150 100 50 0 Reserves Production 1970 1975 1980 1985 1990 1995 2000 2005 2010 25 20 15 10 5 - Marketed Production (Tcf) Source: Energy Information Administration, U.S. Department of Energy 1
Natural Gas 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. 320 300 Reserves - Tcf 280 260 240 220 200 2010 2015 2020 2025 2030 2035 Source: Energy Information Administration, U.S. Department of Energy 11
Natural Gas Trends Forecast U.S. natural gas production, 1990-2035 30 Shale availability will drive U.S. natural gas supply. 25 20 Shale Gas Production Tcf 15 10 Assc. Gas Production 5 0 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 Shale gas Tight gas Non-associated offshore Alaska Coalbed methane Associated with oil Non-associated onshore 12
Natural Gas Trends Choosing Most Current Natural Gas Price Forecasts: AEO-2007 to AEO-2012 Shale availability has significant impact on future price outlook. 16 14 Anticipated price outlook in 2009. (2010 $/MMBTU) 12 10 8 6 4 2 0 Anticipated price outlook today. 1997 2002 2007 2012 2017 2022 2027 2032 Actual Henry Hub AEO-2007 AEO-2008 AEO-2009 AEO-2010 AEO-2011 AEO-2012 Source: Energy Information Administration, U.S. Department of Energy 13
Game Changer 2: Crude and Liquids 1
Crude Oil Trends Crude Oil and Natural Gas Prices Two significant breaks (decoupling) of natural gas and crude oil prices. Crude Oil ($/Bbl) $160 $140 $120 $100 $80 $60 $40 First price decoupling: Gas Up, Crude Down Recession $16 $14 $12 $10 $8 $6 $4 Natural Gas ($/Mcf) $20 Second price decoupling: Crude $0 Up, Gas Down Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 $2 $0 Crude Oil (WTI) Natural Gas (Henry Hub) Source: Federal Reserve Bank 15
Crude Oil Trends Domestic Rig Count Crude Oil vs. Natural Gas 100% For the first time in 16 years, the number of oil rigs is equivalent to gas rigs. 90% Percent of Total Rigs 80% 70% 60% 50% 40% Gas Rigs 30% 20% Oil Rigs 10% 0% Jul-87 Jul-90 Jul-93 Jul-96 Jul-99 Jul-02 Jul-05 Jul-08 Jul-11 Source: Baker Hughes. 16
Crude Oil Trends Rig Count, North Louisiana (Haynesville) and Texas District 1 (Eagle Ford) Indexing the rig change from January 2009 highlights the basin preference. Rig Count (January 2009=100) 1,000 900 800 700 600 500 400 300 200 100 Haynesville is losing its competitive advantage due to the liquids preference associated with other shales. $90 $80 $70 $60 $50 $40 $30 $20 $10 $/BOE 0 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 $0 North Louisiana Texas - District 1 Spot Price Differential Source: Baker Hughes. Rig counts are indexed to the level of active drilling rigs in each reported area as of January 2009. 17
Crude Oil Trends Can you insert a slide that shows a 1
Crude Oil Trends Annual Production, Unconventional Resources Liquids production from shale plays > 3 million barrels per day by 2020 Associated natural gas > 7 Bcf/d of costless supply (or about 2.3 Bcf/d per every 1.0 MMBbls/d of shale-based liquids production). Bcf/d 8 7 6 5 4 3 2 1 0 Liquids Gas Includes Eagle Ford, W. Barnett, Bakken Shales; Granite Wash, Piceance & Uinta Tight Sands 2010 2011E 2012E 2013E 2014E 2015E 2020E MMBBl/d 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Source: Advanced Resource Intl; presentation to Cheniere Board, March 2011; Cheniere Research 19
Game Changer 3: Renewable Energy Markets 20
Renewable Energy RPS States Currently 37 states have RPS policies in place. Together these states account for over 72 percent of electricity sales in the U.S. OR: 25% by 2025 CA: 33% by 2020 WA: 15% by 2020 NV: 25% by 2025 UT: 20% by 2025 AZ: 15% by 2025 MT: 15% by 2015 CO: 30% by 2020 NM: 20% by 2020 ND: 10% by 2015 SD: 10% by 2015 KS: 20% by 2020 OK: 15% by 2015 MN: 25% by 2025 IA: 105 MW MO: 15% by 2021 WI: 10% by 2015 IL: 25% by 2025 MI: 10% +1,100 MW by 2015 IN: 10% by 2025 NH: 24.8% VT: by 2025 20% by 2017 NY: 29% by 2015 PA: 18% by 2020 OH: 12.5% by 2024 WV: 25% by 2025 VA: 15% by 2025 NC: 12.5% by 2021 ME 40% by 2017 MA: 22% by 2020 RI: 16% by 2020 CT: 27% by 2020 NJ: 20.4% by 2021 MD: 20% by 2022 DE: 25% by 2026 DC: 20% by 2020 State RPS State Goal HI: 40% by 2030 TX: 5,880 MW by 2015 Note: As of June 2012 Source: Database of State Incentives for Renewables and Efficiency. 21
Renewable Energy RPS Phase-In: Share of Total U.S. Retail Sales with RPS Requirements State RPS requirements have been increasing significantly since 2005 and the post-hurricane Katrina volatility in energy prices. 80% 70% Katrina 60% 50% 40% 30% 20% Deficit Remaining credits needed after allowances Allowance Allowances are issued for the allowed level of emissions. 10% 0% 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: Energy Information Administration, U.S. Department of Energy. 22
Renewable Energy Historic Wind Generation Capacity Development Wind capacity development has been considerable. The last several years has seen considerable over-development and the industry current has about 4 GW of excess manufacturing capacity even if the federal wind PTC is continued. The federal 1603 option created considerable speculative activity. 12,000 Pre-PTC and RPS Post-PTC / Pre-RPS Post-PTC /Post-RPS* 50 Annual Capacity (MW) 10,000 8,000 6,000 4,000 2,000 45 40 35 30 25 20 15 10 5 Cumulative Capacity (GW) 0 1980 1985 1990 1995 2000 2005 2010 0 Installations Cumulative Capacity 23
Renewable Energy Prices REC Prices and Wind Development REC prices in ERCOT have fallen considerably in large part due to the overdevelopment of wind capacity over the past several years. High correlation between the increase in wind generation and decrease in REC prices. 3,000 $7 Texas Wind Generation (MWh) 2,500 2,000 1,500 1,000 500 $6 $5 $4 $3 $2 $1 Average REC Price ($/MWh) 0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 $0 Texas Wind Generation Average Monthly REC Price 24
Renewable Energy Cost of Solar Renewable Energy Credits through PJM-GATS Solar energy costs (SRECs) have decreased considerably over the past year, even in high priced states such as New Jersey. $700 $600 $ per Solar-REC $500 $400 $300 $200 $100 $0 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Source: PJM-GATS Delaware District of Columbia Maryland New Jersey Ohio Pennsylvania Virgina 25
Renewable Energy Forecasted Renewable Capacity Growth Opportunities Renewable capacity opportunities likely to grow to close to 200 GW with wind likely dominating these growth opportunities. S&P estimates as much as $150 in capex over next decade alone (even with expiration of federal wind PTC). 250 200 RPS Capacity (GW) 150 100 Deficit Remaining credits needed after allowances 50 Allowance 0 Note: Based on assumed growth in electricity demand and continued state RPS targets. Source: Energy Information Administration (load growth). Allowances are issued for the allowed level of emissions. 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 26
Renewable Energy Renewable Energy Outlook Renewables at this time still have strong outlook and a guaranteed market opportunity for growth not afforded to other generation resources. Renewables will, however, be increasingly pressured by market forces and policy challenges. Energy-Related Carbon Dioxide 81.2% Market Forces Over-development Low natural gas prices Reduced electricity demand Cost & operating efficiencies International competition Policy Changes Reduction of overincentives Deficit Remaining Potential credits state-level needed after allowances recalibration of expectations Allowance Changing environmental priorities (i.e., carbon) (??) Allowances are issued for the allowed level of emissions. 27
Conclusions 2
Conclusions Conclusions U.S is entering a energy renaissance period. Reserve development, production, capital expenditures are all up to record levels. U.S. and North America generally one of the more/most attractive for new investment. Impacts spreading to manufacturing. Policy and perception continue to be things that plague continued industry development. It is, however, starting to temper: at least at the state level. Continued federal positions bear watching. Policy uncertainty is the biggest impediment to continued development. Significant short-term policy retrenchment on unconventional resources could lead to economic impacts that would pale in comparison to past financial and housing crisis. Renewables have a bright outlook (due to policy), and the economics have seen significant improvements. They will continue to see market and policy pressures which may not be a bad thing overall for the industry and consumers. 29
Conclusions Questions, Comments and Discussion dismukes@lsu.edu www.enrg.lsu.edu 30