Bureau of Economic Geology, The University of Texas at Austin Natural Gas Trends LNG 17 NYC, June 28, 211 Balancing Our Energy Future What do we want? Safe, clean, affordable, (abundant) energy Reduced risk of disruptions, price volatility Secure, commercially successful operations How do we get there? Natural gas is a desirable alternative, but resource and infrastructure must be developed Portfolio including both supply diversity and price sensitive, demand-side response Domestic drilling, international trade subject to market and policy/regulatory constraints Best practice design at a price the market will bear. CEE-UT, 2 1
Natural Gas Can Bring Multiple Benefits Technologies developed and applied in the U.S. unlock vast, low-cost gas supplies. International trade provides balance and options. More competitive and flexible supply and delivery brings affordable reliability. Gas storage, transport and delivery systems are mostly in place. Expansions, improvements will add flexibility, market responsiveness. Positive economic and environmental impacts are created and distributed. CEE-UT, 3 How Does Unconventional Gas Fit In? The Story It s a factory business Have I got a shale deal to sell you We can make money at $4 and the Back Story Unknown unknowns in technology Shifting upstream business models Impact of oil directed drilling Is natural gas price volatility dead? Private lands event driven by historical price marker CEE-UT, 4 2
Glubbausage! $16 $14 $12 $1 $8 Searching for the bottom Henry Hub Monthly Average Spot Price ($/MMBtu) Avg Feb 89 Nov 99 ($1.98) Avg Dec 99 Jan 9 ($6.) Avg Feb 9 Apr 11 ($4.13) $6 $4 $2 $ CEE based on U.S. EIA, CME CEE-UT, 5 $4? A Tough Business, Anyway $12 $1 1% Return U.S. 1 Cash Exploration Costs $/MCFE U.S. 1 Cash Operating Costs $/MCFE $8 $6 U.S. All Source FD Costs 7 1 $/MCFE Henry Hub Spot Price $4/MCF Not all companies report current cash exploration costs Avg. $4 $2 $ 1 2 3 4 5 6 7 8 9 1 11 12 13 14 CEE-UT, 6 3
Cost reductions are real $2. Differences, 29 21 $1.5 U.S. 9 Cash Exploration Costs $/MCFE U.S. Cash Operating Costs $/MCFE $1. U.S. All Source FD Costs, $/MCFE $.5 Avg. $ 1 2 3 4 5 6 7 8 9 1 11 12 13 14 $(.5) $(1.) $(1.5) $(2.) $(2.5) $(3.) Impact of Wall Street technology but gainers, losers CEE-UT, 7 Living with Negative Margins 2, Production Phases 2% 1,8 15% 1,6 1,4 1% 1,2 Mar 6 Jan 7 Feb 7 Feb 11 5% 1, 8 6 Jan 86 Feb 6 % -5% 4 2 U.S. Dry Gas Production (Bcf) U.S. Dry Gas Production 12-MO MA (Bcf) Y-Y Chg Dry Gas Production (%), Jan 86-Feb 11-1% -15% CEE-UT, 8 4
Means Shifting Strategies Canadian and U.S. natural gas producers are responding to the U.S. oversupply by shifting away from drilling activity that focuses solely on natural gas. Instead, companies are targeting oil and natural gas containing NGLs to capitalize on the rise in oil prices. NEB-Canada May 211 CEE-UT, 9 3% 25% 2% 15% 1% Y Y Change Henry Hub Monthly Average Spot Price, % Y Y Change Total U.S. Supply (Dry Production + Net Imports), % Y Y Change U.S. Natural Gas Total Consumption, % Feb b9 May 11 Min/Max Supply: 8%, 11% Consumption: 15%, 2% 278% Price Change & Volatility Matter What are the demand side drivers? 5% 37% % 5% 39% 23% 1% 74% Relatively small changes in supply, demand can swing price 7% Compiled by CEE using EIA CEE-UT, 1 5
5, U.S. Net Generation by Energy Source 4, 1996 Total Net Generation = 3.4 Billion Megawatthours 21 Total Net Generation = 3.9 Billion Megawatthours Net Difference = 56 Million Megawatthours 3, Thousand Megawatthours 2, 1, 1, 2, Natural Gas Nuclear Other Petroleum Other gases renewables coke and other fuels Coal Petroleum Hydro All in %: Change in shares of net generation, 1996-21 (total net generation, 21) 1 (23) 1 (2) 2 (4) () () -8 (44) -1 (1) -3 (7) Compiled by CEE; U.S. EIA CEE-UT, 11 Does Renewable Energy Create Volatility? 4 3 2 1 1 2 3 4 MCPE ($/MWh) April 19, 29 Example 1: 2: 3: 4: 5: Houston North South 6: 7: 8: 9: 1: 11: 12: 13: 14: 15: 16: 17: 18: 19: 2: 21: 22: 23: ERCOT Negative price intervals (15 min) 26 76 27 338 28 4,894 29 3,69 West 21 4,445 (Nov) Compiled by CEE using ERCOT data CEE-UT, 12 6
SG s orderly nuclear exit for OECD outside of North America Approx. 3.7 TCF by 22; roughly 7% of current total OECD demand Bros/SG, used with permission, May 3, 211 CEE-UT, 13 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % Industrial Renaissance? 22 = 6.3 TCF 26 = 5.7 TCF A robust supply of natural gas that is affordable and reliable would give the industrial sector, especially energy intensive industries, a global advantage creating investment and jobs in the United States. NPC NARD Industrial Committee; U.S. EIA MECS CEE-UT, 14 7
Environment Discontents Cleanest burning fossil fuel but Hydraulic fracturing Solutions??? Water use, disposal, contamination State frac (chemicals disclosure and laws methane) FracFocus Seismicity STRONGER Air emissions Drilling operations Fugitive GHG; combustion GHG (power, industrial boilers) Infrastructure siting Is natural gas too cheap? CEE-UT, 15 Sendout Capacity, Bcf/d 25 2 15 1 How does LNG fit in? Mexico Canada US Operating Terminals, Including Expansions USEIA - US Import Forecast, 211, (Bcf/d, 411) USEIA - US Import Forecast, 25 (Bcf/d) USEIA - US Actual Net Imports (Bcf/d) CEE-UT US/North America LNG Import Capacity Assessment Based on agency pre-filings, filings, approvals and industry information. As of: May 211 NOTE: Includes both onshore and offshore. 5 23 24 25 26 27 28 29 21 211 212 213 214 215 22 225 Compiled by CEE based on industry data CEE-UT, 16 8
CEE-UT US/North America LNG Import Capacity 25 Assessment Mexico Based on agency pre-filings, filings, approvals and industry Crucial information. As of: May 211 NOTE: Includes both onshore Canada swing capacity to balance supply, and offshore. Sendout Capacity, Bcf/d 2 demand 1 How does LNG fit in? US Operating Terminals, Including Expansions USEIA - US Import Forecast, 211, (Bcf/d, 411) How do players manage optionality? USEIA - US Import Forecast, 25 (Bcf/d) USEIA - US Actual Net Imports (Bcf/d) 15 Perceptions of the U.S. as a closed system, self supplied LNG at what cost when we need it? Capacity expansions did not alter 5 fundamental HH transportation basis Head room for shale gas? 23 24 25 26 27 28 29 21 211 212 213 214 215 22 225 Compiled by CEE based on industry data CEE-UT, 17 Carpe Diem 3 25 Actual Ratio, Crude Oil (WTI, Bbl):Gas (HH, Mcf) Prices Rough 6:1 Oil:Nat Gas Ratio MMBtu Ratio, Oil:Gas 5. 4.5 4. 2 15 3.5 3. 2.5 1 2. 1.5 5 1..5. Compiled by CEE based on CME, EIA CEE-UT, 18 9
3 25 2 15 1 5 Carpe Diem Actual Ratio, Crude Oil (WTI, Bbl):Gas (HH, Mcf) Prices Rough 6:1 Oil:Nat Gas Ratio MMBtu Ratio, Oil:Gas How can we optimize natural gas utilization given its deep discount to petroleum products? Will gas indexing and gas-gas competition take hold outside of North America? Do we need relatively high oil prices to pursue shale gas? 5. 4.5 4. 3.5 3. 2.5 2. 1.5 1..5. Compiled by CEE based on CME, EIA CEE-UT, 19 1