The New Superpower : Emerging Supplies of Gas Liquids from the United States Lucian Pugliaresi President Energy Policy Research Foundation, Inc. Washington, DC Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 1
The North American Petroleum Renaissance Take Aways Shale Gas Revolution and Its application to liquid plays is generating sustained and long-term large scale additions to NGL output. Capital requirements for gas processing are massive, persistent flaring a problem. Like crude oil distribution, output of NGLs is requiring major capital requirements for transportation infrastructure. Fixing chokepoints critical. Outlook for frac spreads remains high and markets are expanding While some modest ethane oversupply is possible before 2015, U.S. petrochemical industry will absorb the output through new plants. Propane and LPG exports will rise, and spiking opportunities will emerge for LNG exports with some diversion of propane into the LNG stream. U.S. is fast becoming the low cost petrochemical export platform. Wild card risk remains government policy. Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 2
North American Production Potential Source: EIA Data Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 3
Total Canadian Oil Production (NEB Reference Case) Source: Canada s Energy Future: Energy Supply and Demand Projections to 2035. Nov 2011. NEB Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 4
Cost of Oil Sands Production Source: Canada s Energy Future: Energy Supply and Demand Projections to 2035. Nov 2011. NEB Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 5
Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 6
tcf per year of LNG $/MMBTU 3.00 Projected Imports of LNG vs. Actual (or why forecasters should have humility) 10 9 2.50 8 2.00 1.50 7 6 5 Reference Case - Net U.S. imports of LNG (tcf) - 2008 EIA Annual Energy Outlook Actual US Net LNG Imports 1.00 4 3 Henry Hub Gulf Coast Natural Gas Spot Price ($/MMBTU) (right axis) 0.50 0.00 2 1 0 Prices at $2.50 to $2.80 in Feb 2012 Source : EIA data and forecasts Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 7
tcf of gas $ per MMBTU Disposition of US Natural Gas 30 10 9 25 8 20 15 10 7 6 5 4 3 U.S. Natural Gas Total Consumption (Red Area is Net Imports) U.S. Natural Gas Marketed Production Shale Production Henry Hub Natural Gas Spot Price ($/MMBTU) 5 2 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 0 Source: EIA data, Navigant data, EPRINC calculations Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 8
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 thousand barrels per day U.S. Natural Gas Liquids Field Production 2500 2000 1500 1000 500 0 U.S. Gas Plant Production of Isobutane-Isobutylene (Thousand Barrels per Day) U.S. Gas Plant Production of Normal Butane- Butylene (Thousand Barrels per Day) U.S. Gas Plant Production of Propane and Propylene (Thousand Barrels per Day) U.S. Gas Plant Production of Ethane-Ethylene (Thousand Barrels per Day) U.S. Gas Plant Production of Pentanes Plus (Thousand Barrels per Day) Source: EIA Data Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 9
U.S. natural gas production, 1990-2035 (trillion cubic feet) Source: EIA AEO 2012 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 10
Oil and Gas Permits Source: HPDI Feb 13, 2012 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 11
Rig Count and Permits Source: Photo Baker Hughes Interactive Rig Count Jan 25, 2012 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 12
Rich vs. Dry Gas Additions, 2010-2011 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org
Haynesville Case Study Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org
Estimated Ultimate Recovery Source: Brigham Exploration via World Oil Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 15
Technology Matters Overtime companies in the Bakken have improved their techniques Only a few years ago frac stages were minimal, but now they are 30 plus with some trying to go as high as 60 Typically, more fracturing means more production, but this also increases cost, usually more than paid for by the increased production Horizontal laterals now common in the Bakken and across the country were once around 4,000 ft and are now as long as 10-15,000 ft 40 fracture stimulations are now pushing ultimate recovery figures to well over 600,000 and 700,000 barrels of oil. (Oil Patch Hotline) Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 16
1/1/1995 11/1/1995 9/1/1996 7/1/1997 5/1/1998 3/1/1999 1/1/2000 11/1/2000 9/1/2001 7/1/2002 5/1/2003 3/1/2004 1/1/2005 11/1/2005 9/1/2006 7/1/2007 5/1/2008 3/1/2009 1/1/2010 11/1/2010 9/1/2011 7/1/2012 5/1/2013 3/1/2014 1/1/2015 11/1/2015 9/1/2016 7/1/2017 million barrels per day Unconventional Liquids 2011 to 2017 5 Raymond James 4.5 4 3.5 3 2.5 Eagle Ford Liquid Daily Average Bakken/Three Forks Liquid Daily Average Niobrara/Codell Liquids Daily Average 2 1.5 1 0.5 0 Source: EPRINC, Building Blocks of the NA Petroleum Renaissance Permian Basin Liquids Daily Average Note: Sustainable rates of NA upstream Liquids Growth now Likely at 500 kbbls/yr. 17
Bakken Production in Only Montanta Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 18
US Net Imports of Liquified Petroleum Gases Source: EIA Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 19
Thermoplastic Exports and Oil-to-Gas Ratio Source: American Chemistry Council Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 20
Ethane Prices Track Gas Prices Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 21
Jun-2003 Oct-2003 Feb-2004 Jun-2004 Oct-2004 Feb-2005 Jun-2005 Oct-2005 Feb-2006 Jun-2006 Oct-2006 Feb-2007 Jun-2007 Oct-2007 Feb-2008 Jun-2008 Oct-2008 Feb-2009 Jun-2009 Oct-2009 Feb-2010 Jun-2010 Oct-2010 Feb-2011 Jun-2011 Oct-2011 U.S. Propane and Gasoline Prices 4 3.5 3 2.5 Mont Belvieu, TX Propane Spot Price FOB (Dollars per Gallon) 2 1.5 1 Los Angeles Reformulated RBOB Regular Gasoline Spot Price (Dollars per Gallon) 0.5 0 Source: EIA Data Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 22
Natural Gas Flaring Source: NDPA Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 23
So, why so much flaring? Regulatory Issue? 1. Feasibility and economic viability of immediately getting gas to market. Most of these wells will in time will be hooked up to gas processing facilities; however, there are some wells in North Dakota that are decades old and so far from any other existing well or facility that it may never be feasible to capture the gas from that single well. 2. Severe weather limitations in North Dakota, housing shortages, manpower 3. Size and Maturity of the Play. New play with rapid development (partially because of leasing requirements) and spread across over 15,000 sq. miles continually seeing better well completion and higher production rates 4. Valuable associated natural gas that is high in NGLs, but low in pressure, must be processed and separated to remove the different components in the NGL stream. Much higher value than current Henry Hub prices 5. Over $3 billion is being invested by the industry for gathering and processing in the next few years. Significant gathering and processing growth has taken place over the past several years, but has simply been unable to keep up with such strong production growth...lag in gathering, compression, and processing infrastructure...older facilities were not built to handle current volumes Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 24
Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 25
NGLs and the Value of New Cryogenic Plants Source: BearTracker Energy, Presentation Bakken Product Markets and Take-Away Denver Jan 31-Feb 1 2012 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 26
Natural Gas Liquid Content The primary rise in production of NGLs has been in ethane and this is set to continue Ethane is cracked and used to make ethylene which is used as a petrochemical feedstock primarily to make plastics this will likely be used here in the U.S. or exported We will likely have incremental growth in propane, butane, and natural gasoline/pentanes+, but they probably won't be game changing. Source: EIA Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 27
NGLs, Infrastructure, and Ethylene Plants Source: Veresen, Presentation Bakken Product Markets and Take-Away Denver Jan 31-Feb 1 2012 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 28
Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 29
Near Term Constraints Surging NGL production has brought about major pipeline bottlenecks (although new transportation infrastructure projects are underway) 1. Conway to Mt. Belvieu Corridor 2. Rocky Mountain to Mt Belvieu or Conway 3. Bakken Shale to Conway 4. West Texas to Mt. Belvieu 5. S. Texas to Mt. Belvieu Needed: More ethane distribution capacity to Gulf Coast + propane plus distribution capacity is also required to NE and Midwest markets. Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 30
Explaining the Frac Spread A heavy drop in natural gas prices combined with stagnant natural gas liquid (NGL) prices helped to improve the frac spread margins for butane and C5+, along with Conway ethane from December 1 to January 17, 2012. While Conway ethane had the most improved frac spread margin of any NGL from the end of 2011 and the start of 2012 at 33%, it has flirted with becoming unprofitable and being rejected at the hub. Once an NGL hits a margin under 6 per gallon (/gal), it is by-and-large unprofitable because of the added expenses necessary to do business and produce it. Although Mont Belvieu ethane s margin fell 14% in the six-week period of this issue s frac spread, it is much more profitable than its Conway counterpart. The 38 /gal-differential between the two hubs is due to the strong market for ethane in the Gulf Coast because of large ethylene-cracking capacity. By comparison, the Conway market for ethane is nearly non-existent and there is limited transportation capacity out of the region, which is causing a bottleneck at the hub. Source: Midstream Business, Ethane Margins Face Pushback, Frank Nieto, Feb 1 2012 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 31
Total NGLs Extracted From Gas Processing Source: EIA, Baker Hughes, and En*Vantage Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 32
NGLs Extracted from the Gas Stream Source: EIA and EnVantage Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 33
Petrochemical Cost Curve, By Country 2010 Source: American Chemistry Council Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 34
North American NGL, LPG, HVL Pipelines Source: GeoWeb Portal Rextag Hart Energy Mapping Service Feb 13 2012 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 35
NGL, LPG, HVL Pipelines and Nat Gas Processing Plants Source: GeoWeb Portal Rextag Hart Energy Mapping Service Feb 13 2012 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 36
North American Natural Gas Pipelines Source: GeoWeb Portal Rextag Hart Energy Mapping Service Feb 13 2012 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 37
NGL Value in $/MMBtu Source: Midstream Business, Ethane Margins Face Pushback, Frank Nieto, Feb 1 2012 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 38
The Frac Spread The frac spread is the value one gets for the sale of natural gas liquids minus the cost of natural gas used to extract the natural gas liquids Source: Midstream Business, Ethane Margins Face Pushback, Frank Nieto, Feb 1 2012 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 39
Explaining the Frac Spread A heavy drop in natural gas prices combined with stagnant natural gas liquid (NGL) prices helped to improve the frac spread margins for butane and C5+, along with Conway ethane from December 1 to January 17, 2012. While Conway ethane had the most improved frac spread margin of any NGL from the end of 2011 and the start of 2012 at 33%, it has flirted with becoming unprofitable and being rejected at the hub. Once an NGL hits a margin under 6 per gallon (/gal), it is by-and-large unprofitable because of the added expenses necessary to do business and produce it. Although Mont Belvieu ethane s margin fell 14% in the six-week period of this issue s frac spread, it is much more profitable than its Conway counterpart. The 38 /gal-differential between the two hubs is due to the strong market for ethane in the Gulf Coast because of large ethylene-cracking capacity. By comparison, the Conway market for ethane is nearly non-existent and there is limited transportation capacity out of the region, which is causing a bottleneck at the hub. Source: Midstream Business, Ethane Margins Face Pushback, Frank Nieto, Feb 1 2012 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 40
LNG Btu Requirements Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 41
LNG Energy Content Japan has among the world s highest requirements for LNG energy content The US shale boom both liquid and gas plays is providing ever growing supplies of ethane and propane Key spiking ingredients are available in quantity At depressed prices Ethane supplies attracting new petrochemical plant projects Widely available in the Gulf Coast Ethane supply growth has outpaced all other NGLs (natural gas liquids) LPI Consulting, Inc. 1031 31st St, NW Washington, DC 20007 202.944.5082 42
Thousand barrels per day NGL Production Outlook to 2020 3500 3000 2500 2000 1500 U.S. Gas Plant Production of NGLs Forecast NGL Production Ethane Share 1000 500 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Source: EIA Data, EPRINC forecast. Assumes ethane continues to incrementally increase its share of the NGL pool. Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 43
Some Final Observations Over the long-term, we are likely to have a balanced NGL market as long as the gas-to-crude ratio stays low. Petrochemical industry poised to crack more ethane. Export markets and dehydrogenation will be key in keeping the C3+ part of the NGL barrel balanced. NGL imbalances are possible, but unlikely to be chronic. Major risk is a spike in natural gas prices (but this is unlikely) Lots of projects underway, so risk of NGL infrastructure capacity (y- grade pipes and fractionators) could be overbuilt in the next 5 years Government remains a risk Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 44
Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org