The Role of Shale Gas in North American and Global Power Markets

GCPA Oct, 214 The Role of Shale Gas in North American and Global Power Markets Scott W. Tinker Bureau of Economic Geology The University of Texas at Austin, Austin

Framing Conundrum A majority of the educated public do not know how electricity is made nor do they really care. As a result, the public is free to not like everything. We need to take the energy conversation to a different place.

Outline Global Demand Shale Gas and Electricity Market Implications

Population (millions) Primary energy (quads) Global Population and Energy 8 7 6 1.8% Global Population Growth Rate 5 4 5 4 1.1% 3 3 2 2 1 1 198 1985 199 1995 2 25 21 Year Source: BP Statistical Review of World Energy, 212 http://www.eia.gov/iea/wecbtu.html Source: US Census Bureau Int l Database, June 211 QAe874

Global Population and Energy 12 Rest of World 1 8 Africa 6 4 Asia 2 195 197 199 21 23 25 27 21 Source: From the UN, as appeared in The Economist, August 23, 214

Population 215 ~1 billion people per color More people live inside the circle than outside

Energy Mix 191 99 267 156 57 27 517 88 468 117 975 1 5 82 3 24 1 371 376 78 289 64 16 98 167 1389 5 28 166 149 32 111 269 562 (MTOE)

5 28 166 149 16 32 3 98 111 24 1 167 371 1 5 376 Energy Demand 156 57 27 267 191 99 517 88 468 117 975 82 78 289 64 1389 269 562 (MTOE)

Outline Global Demand Shale Gas and Electricity Market Implications

Energy Flows Solar.9 Nuclear 8.45 Hydro 2.45 Wind.51 Geothermal.35 Natural gas 23.84.1 2.43.51.31 8.45 6.82 2.54 Electricity generation 39.97.8.1 Net electricity Imports 4.99.6 3.2 12.68.2.1.11 4.7 Residential 11.48 4.61 Commercial 8.58 3.35 9.18 6.86 Energy services 42.15 Coal 22.42 1.79 8.14 Industrial 23.94 19.15.2.67 Electricity Transportation 27.86 6.96 (28 US Quads) Source: Lawrence Livermore National Laboratory and U.S. DOE based on Annual Energy Review, 28 (EIA, 29) From National Academies Press, America s Energy Future, 29 QAd8174

BcF/Day Global Natural Gas Production 35. OECD Non-OECD 3. 25. 2. 15. 1. 5.. 197 1975 198 1985 199 1995 2 25 21 Source: BP Statistical Review 212

BCF/Day Global Natural Gas Production 35. 3. Total North America Total S. & Cent. America Total Europe & Eurasia Total Middle East Total Africa Total Asia Pacific 115 Tcfy 25. 2. 15. 1. 5.. 197 1975 198 1985 199 1995 2 25 21 Source: BP Statistical Review 212

Production cost (28 $/Mbtu) Produced Conventional Coal Bed Methane Arctic Deep Water 15 1 5 Tight Shale Sour 3, 6, 9, 12, 15, 18, 21, 24, 27, 3, Source: IEA World Energy Outlook (29) Global Natural Gas Resources v. Cost Resources (TcF) LNG QAe98

Marketed Production (Tcf) U.S. Natural Gas Production and Reserves 3 3 25 Annual U.S. Production 25 2 15 1 5 End-of-Year U.S. Proved Reserves 2 15 1 5 Proved Reserves (Tcf) Data: BP World Energy 212

U.S. Natural Gas Production (TcF) 25 23 TcF 2 15 1 5 199 1995 2 25 21 14 TcF 9 TcF Shale gas Coalbed methane Tight gas Non-associated offshore Alaska Associated with oil Non-associated onshore http://www.eia.gov/energy_in_brief/about_shale_gas.cfm

Annual Natural Gas Production (Bcf) 25 2 15 25, Total Natural Gas Conventional Gas Unconventional Gas U.S. Natural Gas Production (TcF) An Anticipated Evolution From a 24 Tinker Talk to the IPAA US Natural Gas 24 forecast 25 TcF 23 TcF 14 TcF Shale gas Coalbed methane 2, 1 15, 1, 5 5, 1949 1955 1961 1967 1973 1979 1985 1991 1997 23 29 215 15 TcF 1 TcF 199 1995 2 25 21 EIA (1949-199) and NPC (1991-215) 9 TcF Tight gas Non-associated offshore Alaska Associated with oil Non-associated onshore http://www.eia.gov/energy_in_brief/about_shale_gas.cfm

Near Surface Water Proppant Hydraulic Fracturing Fracking Friction Reducers: always (polyacrylmide) Biocides: often (glutaraldehyde, chlorine) 3, to 1,+ feet Scale Inhibitors: sometimes (phosphonate) Surfactants: sometimes (soaps and cleaners) Shale 3, 1, feet 3 6 million gallons

Environmental Impact Not to Scale! After JP Nicot, Bureau of Economic Geology

Environmental Impact 1 s of Feet of Rock Drawn to Scale

Environmental Impact

Environmental Issues Regulatory Considerations 1. Mandatory baseline data 2. Cement all gas producing zones 3. Full disclosure of chemicals 4. Minimize fresh water use on the front end 5. Handle flowback and produced water 6. Manage potential induced seismicity 7. Minimize methane emissions and flaring 8. Minimize surface impact after Rao, 212

Unconventional Resource Plays Niobrara Fm Cody Heath Fm Mowry HilliardBaxterMancos-Niobrara Bakken Gammon Niobrara- Mowry Niobrara Fm Antrim Antrim Utica- Collingwood Antrim Utica Marcellus Utica Manning Canyon Mancos Kreyenhagen Hermosa Monterey- T emblor Gothic-Hovenweep Lewis Monterey Pierre- Niobrara W oodford New Albany Excello-Mulky Fayetteville Chattanooga Bend A valon-bone Spring W olfberry Cline W olfcamp (Delaware) Barnett- W oodford Barnett W olfcamp (Midland) Chattanooga W oodford-caney Conasauga Floyd-Neal Floyd-Chattanooga Haynesville T uscaloosa Pearsall Eagle Ford Cenozoic Miocene Mesozoic Cretaceous Paleozoic Permian Mississippian-Devonian T ight sands Miocene-Oligocene Eocene Jurassic T rassic Pennsylvanian Mississippian-Penn Mississippian Devonian Ordovician Cambrian Basins Modified from: EIA and National Geographic QAei2915

Unconventional Resource Plays Bakken Marcellus Fayetteville Permian Basin Barnett Haynesville Eagle Ford Cenozoic Miocene Mesozoic Cretaceous Paleozoic Permian Mississippian-Devonian T ight sands Miocene-Oligocene Eocene Jurassic T rassic Pennsylvanian Mississippian-Penn Mississippian Devonian Ordovician Cambrian Basins Modified from: EIA and National Geographic QAei2915

Middle Devonian Unconventional Resource Plays Bakken Laurentia & Baltica Marcellus Fayetteville Bakken Permian Basin Barnett Haynesville Eagle Ford From Blakey; http://cpgeosystems.com/paleomaps.html

Bureau of Economic Geology U.S. Shale Gas Study What is the total resource base in place? What portion is technically recoverable? What potion is economically recoverable? What is the long-term production outlook?

Relative Frequency Barnett Monte Carlo Production Distribution.5.45.4.35.3.25.2.15.1.5 35 Tcf OGIP 444 Tcf 56 Tcf. 29 34 39 44 49 55 6 65 7 Cumulative Production (Tcf) Browning, J. et al. 213. SPE Econ & Mgmt

Relative Frequency Fayetteville Monte Carlo Production Distribution.5 OGIP 8 Tcf.4.3.2 13 Tcf 23 Tcf.1 1 12 14 17 19 21 23 26 28 BEG Shale Reserves and Production Project Cumulative Production (Tcf)

Relative Frequency Haynesville Monte Carlo Production Distribution.55.5.45.4.35.3.25.2.15.1.5 24 Tcf OGIP 489 Tcf 62 Tcf 14 24 33 43 52 62 72 81 Cumulative Production (Tcf) BEG Shale Reserves and Production Project

Marcellus OGIP 1712 Tcf OGIP free FVille OGIP 8 Barnett OGIP 444 HVille OGIP 489 All Maps Shown with Common Distance Scale BEG Shale Reserves and Production Project

Shale Gas Forecast vs. Actual Model: Rice University, Medlock, 212 Actual Production M B H F

TCF Henry Hub Price ($212/MMBtu) Base Case ($4) Stacked Production 12 1 Marcellus Haynesville Fayetteville Barnett U.S. Consumption ~ 25 TcF/Year 12 1 8 HH $212 8 6 6 4 2 37 TcF 17 TcF 45 TcF 1995 2 25 21 215 22 225 23 BEG Shale Reserves and Production Project 4 2

TCF Henry Hub Price ($212/MMBtu) EIA Price Case Stacked Production 12 Marcellus Haynesville U.S. Consumption ~ 25 TcF/Year 12 1 Fayetteville Barnett 1 8 HH $212 8 6 6 4 2 37 TcF 17 TcF 45 TcF 1995 2 25 21 215 22 225 23 BEG Shale Reserves and Production Project 4 2

TCF Henry Hub Price ($212/MMBtu) $6 Case Stacked Production 12 Marcellus Haynesville U.S. Consumption ~ 25 TcF/Year 12 1 Fayetteville Barnett 1 8 HH $212 8 6 6 4 2 37 TcF 17 TcF 45 TcF 1995 2 25 21 215 22 225 23 BEG Shale Reserves and Production Project 4 2

Forecast vs. Actual Model: Rice University, Medlock, 212 EIA BEG EIA price deck

Outline Global Demand Shale Gas Electricity Market Implications

Natural Gas Prices

Shale Drivers Private Ownership Supply Passionate Confusion Bus Craton! Business Demand Supply

Options to Natural Gas for Power I. Coal II. III. IV. o o o o o o o o Available, affordable to generate, reliable Dirty, expensive to build Nuclear Wind Solar V. Hydro VI. o o o o Efficient, no emissions, affordable generation Expensive to build, waste, safety Simple, affordable, no emissions Intermittent, land and visual, transmission Simple, no emissions, local Intermittent, land, transmission Efficient, affordable to generate, no emissions Water, land, drought Geothermal Affordable where concentrated, no emissions Geology

8 7 6 5 4 3 2 1 Tinker, 212 Global Investment in Clean Energy New investment*, $bn 21 11 12 13 14 Solar Wind Biofuels Other *Excludes corporate and government R&D Source: Bloomberg New Energy Finance, The Economist, April 26, 214 QAe2822

The Future Electricity Mix 12 North America Quadrillion BTUs Europe 12 12 Asia Pacific 1 8 1 Electricity Generation by Fuel 8 1 8 6 6 6 4 Renewables 4 4 Nuclear 2 Coal 2 2 Gas Oil 198 25 23 198 25 23 198 25 23 ExxonMobil Corporation, 21, The outlook for energy: a view to 23: ExxonMobil report, 53 p.

Thousand megawatt hours per day The Future Electricity Mix US Electricity Generation by Fuel, All Sectors 14, 12, 1, 8 49.8% 49.6% 49.% 48.5% 48.2% 44.5% 44.8% 42.2% Forecast 36.7% 36.8% Coal Natural gas Petroleum Nuclear Hydropower Renewables 6 4 17.9% 18.8% 2.1% 21.6% 21.4% 23.3% 23.9% 24.8% 3.8% 3.1% 2 24 25 26 27 28 29 21 211 212 213 Year Source: US EIA Short Term Energy Outlook 211.

Million metric tons The Future Electricity Mix 18 U.S. First Quarter Total Carbon Dioxide Emissions 16 14 12 1 8 6 4 2 1992 1994 1996 1998 2 22 24 26 28 21 212 QAe2823 Source: EIA

ETS carbon price (EUA) (Euro per tonne) Coal consumption OECD Europe (million tonnes) The Future Electricity Mix 5 5 4 4 3 3 2 2 1 1 28 29 21 211 212 Thomson Reuters; IEA

Thousand megawatt hours per day The Future Electricity Mix 14, Country/ area China India Russia Japan Canada UK 12, 1, 8 6 4 2 Germany Europe US US Electricity Generation by Fuel, All Sectors Energy-related carbon-dioxide emissions by geography, and net change since 25 211 emissions 8715 million metric tons 49.8% 49.6% 49.% 48.5% 48.2% 44.5% 44.8% 42.2% 1726 1788 1181 17.9% 18.8% 2.1% 21.6% 21.4% 23.3% 23.9% 24.8% 553 497 748 435-37 -61-71 -86-99 Forecast Net change in annual emissions from 25 to 211, million metric tons 21 544 36.7% 36.8% 3.8% 3.1% 24 25 26 27 28 29 21 211 212 213 5491-59 Year Coal Natural gas Petroleum Nuclear Hydropower Renewables 3252 Source: US EIA Short Term Energy Outlook 211. Sources: US DOE, The Wall Street Journal

Thousand megawatt hours per day ETS carbon price (EUA) (Euro per tonne) Coal consumption OECD Europe (million tonnes) 5 4 5 Data: average prices from 211 converted at mean exchange rate for that year 14, Country/ area 3 China India 2 Russia Japan 1 Canada UK 12, 1, 8 6 4 2 Germany Europe US 8 India 4 211 emissions 38715 million metric tons 21788 553 1 497 The Future Electricity Mix 748-99 435-37 28 29 21 211 212 Thomson Reuters; IEA 5 US Electricity Generation by Fuel, All Sectors 8 China Average national electricity prices (in 211 US cents/kwh) Energy-related carbon-dioxide emissions by geography, and net change since 25 49.8% 49.6% 49.% 48.5% 48.2% 44.5% 44.8% 42.2% 1726 1181 1-61 17.9% 18.8% 2.1% 21.6% 21.4% 23.3% 23.9% 24.8% Mexico 1 Canada 1 S. Africa 11 Russia -71-86 12 USA Forecast 36.7% 36.8% 3.8% 3.1% 24 25 26 27 28 29 21 211 212 213 5491-59 Year 4 Net change in annual emissions from 25 to 211, million metric tons 28 29 3 17 21 Brazil 18 Nigeria Sources: IEA, EIA, national electricity boards, OANDA, shrinkthatfootprint.com 544 19 France 2 UK 26 Japan Italy 2 1 Australia 3 Coal Natural gas 35 Petroleum Nuclear Hydropower Renewables Spain Source: US EIA Short Term Energy Outlook 211. Germany 41 3252 Denmark Sources: US DOE, The Wall Street Journal

Energy Security Affordable Available Reliable Sustainable Cost Price Volatility: stable or fluctuating Infrastructure: Cost to build the plant Access: substantial resources Intermittent: source consistent or variable Safe: natural/human causes Clean: air and atmospheric emissions Dense: land footprint Dry: fresh water use/risk

Energy Security Affordable Available Reliable Sustainable Cost Economy Price Volatility: stable or fluctuating Infrastructure: Cost to build the plant The Three Es Access: substantial resources Intermittent: source consistent or variable Safe: natural/human causes Environment Clean: air and atmospheric emissions Dense: land footprint Dry: fresh water use/risk

The 4 th E Environment Efficiency Energy Economy

Efficiency Benefits Save energy Lower emissions Less water Less infrastructure Less land Save $ Challenges Incentivize producers to produce less Expensive to install Requires a cultural change

The 5E Waltz Environment Education Efficiency Energy Economy

The Radical Middle Academia/NGO Government The Radical Middle Industry

TPER per capita Energy and the Economy 9, 8, 7, 6, 5, TPER = Total Primary Energy Requirement. Energy needed to facilitate Total Final Consumption (TFC does not include conversion and transmission losses). Australia United States 4, 3, 2, 1, World China Korea Brazil India After: Rice World Gas Trade Model Medlock, 212 5, 1, 15, 2, 25, 3, 35, 4, 45, GDP per capita Japan QAe963

TPER per capita Energy and the Economy 9, 8, 7, 6, 5, TPER = Total Primary Energy Requirement. Energy needed to facilitate Total Final Consumption (TFC does not include conversion and transmission losses). Australia United States 4, 3, 2, 1, World ~3 billion people China Korea Brazil India After: Rice World Gas Trade Model Medlock, 212 5, 1, 15, 2, 25, 3, 35, 4, 45, GDP per capita Japan QAe963

TPER per capita 9, 8, 7, 6, 5, 4, 3, 2, 1, World Energy and the Economy A Global Challenge TPER = Total Primary Energy Requirement. Energy needed to facilitate Total Final Consumption (TFC does not include conversion and transmission losses). Developing Nations Food Housing Clothing Education Healthcare Electricity Korea Brazil India After: Rice World Gas Trade Model Medlock, 212 GDP per capita Developed Nations Balance of Trade Exports Imports Japan Australia Regulation and Planning Infrastructure Resources Permitting United States Emissions, Climate, Environment Energy Security 5, 1, 15, 2, 25, 3, 35, 4, 45, QAe963

Tinker s Top Ten 1. Governments, industry and academe must work together; we all play a role in objective, balanced energy education. 2. The scale of energy demand is difficult to comprehend; energy transitions take many, many decades. 3. Energy security affordable, available, reliable, sustainable drives the energy mix and should be the goal of energy policy. 4. Energy efficiency is underappreciated; individuals matter! 5. Diverse energy portfolios are inevitable and healthy. 6. Renewables are growing but will remain regional supplements until major advances are made in energy storage. 7. Shale will play a global role in the energy future; above ground challenges are as important as below ground. 8. Natural gas and nuclear are the new foundational energies. 9. Oil and coal are abundant at the right price, and difficult to replace as transportation and electricity fuels. 1. Energy, the economy and the environment are linked.