Energy Market Upheaval: The Shale Revolution Benjamin Schlesinger and Associates, LLC Bethesda, Maryland New Energy Recovery Technologies: Midwest and Global Industry Impacts Federal Reserve Bank of Chicago, Detroit Branch Monday, April 8, 2013 1
Outline Introduction Gas supply: shale gas (and shale oil) Gas demand in crisis Coal substitution, other new markets Global gas markets Conclusions. 2
BSA 29 years of gas and energy advisory services. Expertise Major Assignments Economics, pipeline tariffs, contracting, price risks. Research & training Negotiation of gas contracts Due diligence Review for lenders in financing of LNG, power plants, gas storage Expert in courts & arbitrations, testified in 16 jurisdictions. 600+ assignments 27 countries. UNECE European pipelines GdF Suez, Repsol, BG Eastern Europe West African pipeline Sonatrach (Bechtel) Japan gas utilities Mitsubishi Philippine NPC Power generators Lenders Pipelines/traders LNG projects Regulators Expert testimony ients: Energy buyers & sellers, electricity and heating plants, gas and oil pipelines, banks, governments, universities. 3
Despite all the words and numbers, people still don t really grasp this. Estm. US Shale Gas Production, Bcf/day 30 Rest of US 25 Bakken Eagle Ford 20 Marcellus Haynesville 15 Woodford Fayetteville 10 Barnett Antrim 5 The ship arrives. Were it a country, US shale would be the world s 3 rd largest gas producer. Most US policy, economic, academic and environmental studies are totally outdated, e.g., from Internet/Google. Shale debate is lost on most people. 0 2000 2002 2004 2006 2008 2010 2012 Source: EIA 3/2013. 4
MBD, equivalent US has added 4.6 MBD equivalent of shale 12.0 gas production since 2001. 10.0 8.0 plus another 2 MBD rise in US shale oil production, so far. 6.0 4.0 Annual US shale gas production (just the growth) 11.2 2.0-4.1 4.3 2.5 2.7 1.1 1.7 Holland Norway Qatar EU, Total Venezuela Iran Saudi Gas Production, 2011 Oil Production, 2011 Source: BSA 2013, from BP Statistical Review 2012 & EIA (est. shale production). 5
$/MMBtu How long will North America s big hydrocarbons price gap persist? $20.00 $15.00 $10.00 $5.00 Henry Hub Acutals WTI Actuals Brent Actuals Henry Hub Futures WTI Futures Brent Futures $- Source: BSA 2013, from CME-NYMEX, March 15, 2013. 6
Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 High crude oil prices (relative to gas) mean drillers will continue to seek tight oil. Oil-to-Gas Ratio 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 - Price of crude / gas (actual) WTI/HH Actuals Oil Rigs/Gas Rigs Price of crude / gas (NYMEX futures) Rigs drilling for crude / gas WTI/HH Futures Past: Crude prices rose while gas prices fell, until crude prices averaged 6x gas price in 2012 drillers moved off to oily shales: Eagle Ford, Texas Bakken, North Dakota Utica, Ohio Today: $96 crude oil is 4x gas ($16.55/MMBtu versus $4.10). Outlook: Oil prices and oil drilling rigs both at 3-to-one over natural gas, until gas production falls and its price rises. Source: BSA 2013, from CME-NYMEX, futures at 3/28/13, Baker Hughes U.S. weekly rig count. 7
MBD US production of tight oil and NGLs is now rising as dramatically as natural gas did. 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2-2006 2007 2008 2009 2010 2011 2012 Austin Chalk Spraberry Niobrara-Codell Woodford Monterey Bonespring Granite Wash Bakken Eagle Ford Emerging shale plays are forcing new technologies: Multi-well/multi-stage Recycling of return waters New tech (dry fracking, CO 2 ). Major challenges: Low gas and NGL prices (tends to self-correct) Pipeline bottlenecks, both gas and oil (flaring) High cost of rail Environmental issues? Skilled labor shortages. Source (chart): Adam Sieminski, EIA.. 8
North Dakota s oil production will double Alaska s before 2020. 2,500 Production of Crude Oil by US State, thousands of b/d 2,000 1,500 Texas Alaska North Dakota California 1,000 500-2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: BSA 2013, from EIA. 9
The resulting NGL waterfall has driven down prices, esp. ethane. March 15, 2013 Prices Crude oil, $16.11 Ethane, $4.14 Natural gas, 3.87 Source: EIA, data from Bloomberg, update: BSA 2013, from CME-NYMEX. 10
EIA s US Gas Production to 2035 Source: EIA, AEO 2013 Early Release, Reference Case, December 5, 2012. 11
Most near-term surplus gas will be spent replacing coal in aging power plants. Coal-Fired Plants, MW Retiring Coal-Fired Plants Newer than 30 years, 12% 30-40 years, 27% 40-50 years, 33% 50 years or older, 28% - 20 40 60 Source: BSA 2012, coal plants in 20 Northeast and Mid-West states from EIA, plus Ontario; map from AEP. 12
The good news: Replacing old coal with new gas reduces CO 2 emissions by 63-72%. Average Age of Plants at Retirement No. of Plants Retired in Each Year Total Net Summer Capacity, GW CO2 Reduction Replacing Bituminous Coal with Gas 2009 50 12 0.5 67.7% 2010 54 35 1.5 69.4% 2011 62 31 2.5 63.3% 2012 56 57 8.9 63.9% 2013 55 14 2.1 71.7% 2014 57 34 4.7 64.4% 2015 57 61 9.9 63.1% GHG reduction due to: Chemical advantage: Gas burning emits 46% less CO 2 than coal. Efficiency advantage of new gas CCGTs versus old coal boilers: 55-60% vs. 31-33%. Carbon emissions savings from fuel cycle as well. Other criteria air emissions reduced/prevented, especially sulfur, particulates, oxidants. But the low-hanging fruit might all be picked by 2020. Source: BSA 2012, from EIA and Siemens data. 13
MW LNG is uniquely able to offset variable generation, e.g., Spanish CCCTs. LNG Regas in Spain Hourly Wind Production, MW 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 Source: Enagas, 2012; K. Forbes 2010, ERCOT data for 7/2009. 14
Other key new gas markets will take longer NGVs, petrochemicals, LNG exports. Source: Westport Innovations Inc., Vancouver, BC. 15
$/MMBtu Issue: Why doesn t America have 20 million NGVs by now? $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Natural Gas 87 Octane Henry Hub Mid & Marketing WGL Delivery Compression Road Tax Pump Price Favorable economics since 1980s! Natural gas is best used in large vehicles, high-mileage fleets: Municipal trucks, buses UPS, Dulles Flyer Forklifts, compressors Lower mileage personal vehicles headed toward electricity: $4 natural gas vs. $32 gasoline (per MMBtu) 61% efficient CCCTs vs. 26% efficient piston engines No wonder electricity = 79 c/gal! Source: BSA 2011, from NYMEX, EIA data. 16
In some regions, battery EVs are, in effect, just very high-efficiency NGVs. Production of methanol and gasoline from natural gas will also become options, as price differentials remains favorable. Source: Tesla Motors. 17
Bcf per day Global firms plan to spend $80 billion on new US gas-based industries. About 100 new manufacturing plants in development: Chemicals & petrochemicals Fertilizers Steel & aluminum Tires, plastics Gas to liquids Most sited near the Gulf Coast. If all proceed, added gas demand will reach 11 Bcf/day by 2035. Incremental gas demand 12 10 8 6 4 2 0 2018 2035 Source: Dow Chemical, 2012. 18
LNG Exports: Linking the US to Global Gas Markets 19
EU27 Gas Production, BCM European demand for gas imports is rising with supply & nuclear issues. Plunging European gas production is intensifying winter supply crises. In less than a decade, the UK has transformed from exporter to LNG importer on scale exceeding Spain. The high cost of marginal Russian gas supplies offers little relief, buyers seek LNG. European gas demand is flat. 300 250 200 150 100 50 0 1990 2000 2010 2020 2030 United Kingdom Netherlands Germany Hungary Romania Italy Poland Denmark Other Source: UNECE Sustainable Energy/Working Party on Gas LNG Report, 2012, from Gas Strategies, 2011. 20
Fukushima and economic growth have each strengthened Asian gas demand. Worst-case post- Fukushima Japan nuclear plant capacity availability actually took place. Source: Forecast by M. Toyoda, Institute of Energy Economics-Japan, October 2011. 21
Gas prices among markets differ greatly from one another. Source: UNECE WPG LNG report, Chapter 1, update courtesy Ken Medlock, James K. Baker III Institute, Rice Univ. 22
LNG exports from the US are sought after for strategic and economic reasons. Source: IEA World Energy Outlook 2012. 23
Global shale gas is unlikely to threaten US LNG exports for years. Potential Shale Gas, Tcm North America China Africa South America Europe (excl. Russia) Australia India and Pakistan 0 10 20 30 40 50 60 Total US Canada Mexico South Africa Other Africa Argentina Brazil Other So. America Poland France Other Europe Source: BSA 2011, from US EIA. Most foreign gas markets are dominated by long-term contracts tied to fuel oil. European, Asian and Russian shale gas resources may remain in place absent: Vibrant independent producing sector Technical expertise Institutional reform/tpa Education. 24
Benjamin Schlesinger and Associates, LLC The Bethesda Gateway 7201 Wisconsin Avenue, Suite 740 Bethesda, MD 20814 Phone: (301) 951-7266 Fax: (301) 951-3381 Visit us at www.bsaenergy.com 25