Energy Prices and the Outlook for the Tuscaloosa Marine Shale Baton Rouge Rotary Club January 28, 2015 David E. Dismukes, Ph.D. Center for Energy Studies Louisiana State University
Overview Understanding Recent Changes Recent fall in crude oil prices should not come as a big surprise. However, speed and magnitude of the decrease is stunning. Factors destined to shift the market: (1) End of easy monetary policy (quantitative easing). (2) Markets are re-assessing crude oil demand outlook Continued U.S. structural change (increased efficiency/transportation fuel switching). Japanese/European economic contraction. BRIC (Brazil, Russia, India, China) slow-down/contraction. (3) Trader realization/rationalization of stability and continuity of U.S. unconventional supplies. (4) Saudi unwillingness to catch the falling knife. 2
Near Term/Longer Term TMS Impacts TMS Impacts TMS showing good success and moving a long way towards de-risking the emerging play. TMS was seeing considerable efficiency improvements likely to also go along way in making the play more economic. (faster drilling, higher initial production rates, longer laterals) Unfortunate timing: TMS is considered one of the highest cost unconventional plays and could be a likely early victim of low prices. However, the genie is out of the bottle, higher prices will reemerge and support future activity Challenge: can current operators in these marginal areas hang in there until prices recover? 3
Unconventional Crude Oil Development 4
Unconventional Development 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 5
Unconventional Development Changes in Crude Oil Reserves and Production Crude oil production and reserves are climbing back to levels not seen since the 1980s. U.S. Crude Oil Proved Reserves (Billion Bbl) 45 40 35 30 25 20 15 10 5 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 U.S. Crude Oil Production (Billion Bbls Crude Oil Reserves Crude Oil Production Source: Energy Information Administration, U.S. Department of Energy. 6
Unconventional Development Annual Energy Outlook, Crude Oil Reserves Crude oil reserves are expected to increase 15 percent by 2020. percent by 2016 and then gradually increase by another 12 percent another to 2040. 40 35 Reserves, Billion Barrels 30 25 20 15 10 5 0 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 Source: Energy Information Administration, U.S. Department of Energy 7
Annual Changes in U.S. Crude Oil Proved Reserves (Shale and Other) Crude reserve revisions (shale and other) are showing similar trends to natural gas (positive and growing). 6 Unconventional Development 5 Annual Change (Billion Bbl) 4 3 2 1 0 2014 2015 2016 2017 2018 2019 2020 Note: Includes crude oil and lease condensate. Source: Energy Information Administration, U.S. Department of Energy. 8
Recent Market Changes 9
Market Changes U.S. Crude Oil Rig Count and Spot Price Crude oil rigs have moved considerably faster to price run-ups post recession. Crude oil rigs starting to react to decreases in crude oil prices. 1,800 $160 1,600 $140 Number of Rigs 1,400 1,200 1,000 800 600 400 $120 $100 $80 $60 $40 Crude Oil Price ($/Bbl) 200 $20 0 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 $0 Crude Oil Rigs WTI Price Source: Energy Information Administration, U.S. Department of Energy; and Baker Hughes. 10
Market Changes Understanding Recent Changes Recent market changes not entirely unexpected: Changes in dollar valuations due to the anticipated end of U.S. monetary easing. Increasingly apparent global economic contraction, particularly in China. Increases in non-opec production, including U.S. unconventional activity. 11
Market Changes Dollar Value and Oil Prices Exchange rate adjusted value of crude oil starting to fall back to levels not seen since the financial crisis of 2008-2009. Price of Oil ($/Bbl) $160 $140 $120 $100 $80 $60 $40 $20 $0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Price of Crude Oil Adjusted Price of Crude Oil Differential $40 $35 $30 $25 $20 $15 $10 $5 $0 Differential ($/Bbl) Note: The adjusted price of crude oil is the nominal WTI adjusted by the Federal Reserve Bank s Broad Index. The Broad Index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners. Base year is 2002. Source: Federal Reserve Bank of St. Louis; and Energy Information Administration, U.S. Department of Energy. 12
Market Changes Changes in Chinese GDP Chinese economic growth slowing considerably from 2007 peaks. 16.0% 14.0% Projections Annual Percent Change, GDP 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: IMF 13
Market Changes Global Liquids Fuels Demand Contraction Change in liquids fuel growth slowing considerably, particularly since 2010. 3.000 2.500 Projections Million Barrels per Day (MMBbls/d) 2.000 1.500 1.000 0.500 0.000-0.500 2008 2009 2010 2011 2012 2013 2014 2015 2016-1.000-1.500 Other U.S. China -2.000 Source: Energy Information Administration, U.S. Department of Energy; and Baker Hughes. 14
Market Changes Increased Excess Production Capacity Most media and market pundits suggesting growing excess capacity responsible for the big crude oil price contraction. Change in Consumption/Production (MMBbll/d) Surplus Capacity (MMBbl/d) 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016-0.5 World Oil Consumption Non-OPEC Production 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Source: Energy Information Administration, U.S. Department of Energy. Projections Projections 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 15
Tuscaloosa Marine Shale (TMS) 16
TMS Upstream Opportunities in the Tuscaloosa Marine Shale 1998 LGS Study primary publicly-available source of information on the formation. Lies between sands of the upper and lower Tuscaloosa. Approximately 2.7 MM acres. Varies in thickness from 500 feet (MS) to around 800 feet (LA). - Shallowest opportunity around 10,000 feet mostly between 11,000 to 12,000 some areas as deep as 16,000 (EBR). Estimated potential resource of 7 BBbls (LGS). Other estimates (Amelia Resources) have Original oil in place estimated at 153 BBls, potential at 9 BBbls. Source: Map from Oil and Gas Journal 17
TMS TMS Development Statistics TMS activity, while growing, is still relatively small, and concentrated in the more shallow depths in southwestern Mississippi. MS well depths around 11,500-12,000 feet. LA wells around 13,000 to 15,000 60 50 Current Wells: 70 50 Acreage Holdings 40 Halcon: 307,000 Goodrich: 300,000 Encana: 200,000 EOG: 180,000 Source: Amelia Resources. Sanchez: 80,000 Comstock: 80,000 Helis: 55,000 Contango: 45,000 30 20 10 0 13 Drilling 1 3 3 Frac in Progress Post-Frac Pre-Frac Producing 18
TMS TMS Developer Share Price Changes Share prices for publicly traded TMS operators have fallen considerably. Share Price ($) 35 140 30 120 25 100 20 80 15 60 10 40 5 20 0 0 Jan-12 Jan-13 Jan-14 Jan-15 Comstock Encana Goodrich Halcon EOG Resources Contango Share Price, EOG Resources and Contango ($) 19
TMS TMS Efficiency Improvements There have been numerous impressive developments in the play over the past several years that bode well for the future. 50 completions to date still producing. Increasing lateral lengths: originally around 4,500 feet, now increasing, on average, to 6,000 feet; maximum around 8,900 feet. Reduced drilling time from 42 days to 27 days. Increasing frac stages from 22 to max of 32 Increasing initial production rates from around 800/bpd to over 1,000 bpd. Range now 1,000 bpd to 1,540 bpd Source: Amelia Resources. 20
Market Impacts Unconventional Drilling by Major Basin TMS drilling activity is still in its infancy relative to other maturing unconventional crude oil basins. Tuscaloosa Maine Wells Permian Wells Eagle Ford Wells Bakken Wells 21
Market Impacts U.S. Unconventional Production Costs by Basin TMS is estimated to have the highest development costs of the major unconventional basins. Eagle Ford Oil Tier 1 Bakken Tier 1 Eagle Ford Oil Tier 2 Bakken Tier 2 Niobrara Tuer 2 MS Lime Tier 1 Bakken Tier 3 CTM Tier 1 PRB Tier 2 CTM Tier 2 East Texas Eagle Ford Uinta Oil Eagle Ford Tier 3 TMS $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 Breakeven WTI Price ($/Bbl) 22
Market Changes Crude Oil Futures Settlements (January 27, 2015) Market outlook for prices is continued sub-$100/bbl well into next decade. $/BBl $80 $75 $70 $65 $60 Sub $60/Bbl Sub $65/Bbl Sub $70/Bbl Brent WTI $55 $50 $45 $40 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Source: CME Group 23
Conclusions 24
Conclusions Conclusions Crude oil price correction likely to last throughout 2015. Some analysts arguing for even longer recovery period. Current prices are very low and likely too low to sustain new activity in emerging unconventional crude oil basins like TMS. Some TMS developers have seen impressive successes and efficiencies improvements and there may be some opportunities for continued activity, however, that activity is likely to be very restricted, assuming it can be sustained. TMS has been proven up in many ways and has promising opportunities provided enough price support materializes. 25
Questions, Comments and Discussion dismukes@lsu.edu www.enrg.lsu.edu 26