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www.sundenergy.com
Impact of unconventional gas reserves on energy policies and prices in Europe
Flame Conference
Karen Sund
13 May 2011
www.sundenergy.com
Sund Energy helps navigate into the energy future…
Page 2
Energy
Economics
Environment
…by understanding the full picture of stakeholders
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Impact of unconventional gas reserves on Europe
Unconventional in Europe – a short intro to volumes● Shale revolution in US – much hype and attention
• Already impacting Europe prices and policies• Other unconventional, too
● Learning or comparisons from those ahead of us?● New logic – easier to replace oil (US and China)
Politics and role of gas – the starting point● Security of supply and other fears● Attractiveness of affordability
Prices and area of use – two scenarios● Relative environmentalism and economics● Two scenarios
• Unconventional takes off – with markets to match• Europe says no to unconventional, and perhaps nuclear…
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April 2011
www.sundenergy.com
Unconventional gas is growing rapidly in the world
Share of global gas production could double by 2050● Estimated at more than 300 bcm in 2010
US largest production, turning imports to exports ● Adding to global oversupply and low prices● Which again adds to comfort in markets
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World gas supply to 2035 and share of unconventional
Source: World Energy Outlook, 2010
Also: Methane Hydrates and UCG (underground coal gasification)
www.sundenergy.com Page 6
Globally significant shale giants
Top 10 global shale gas
resources*
Natural gas reserves*
(Tcm)
Importers ( ) /✔
Exporters( )✗
Shale gas Resources**
(Tcm)
Shale gas production by
2020***
China 3.03 ✔ 36.10 ✔
United States 7.71 ✔ 24.41 ✔
Argentina 0.38 ✔ 21.92 ✔
Mexico 0.34 ✔ 19.28 ✔
South Africa 0.01 ✔ 13.73 ✔
Australia 3.11 ✗ 11.21 ✔
Canada**** 1.75 ✗ 10.99 ?Libya 1.55 ✗ 8.21 ?Algeria 4.50 6.41 ?Brazil 0.36 ✔ 6.40 ✔
World 187.49 187.51Source: World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States, April 2011
* Technically recoverable shale gas resources** Proved conventional natural gas reserves*** Sund Energy estimates**** Canada: Producing today, but with strong resistance
www.sundenergy.com Page 7
Europe’s resources smaller but could still be play a vital role in energy mix !
Top 10 European shale gas
resources*
Natural gas reserves**
(Tcm)
Importers ( )/ ✔
Exporters( )✗
Shale gas resources*
(Tcm)
Shale gas production by
2020***
Poland 0.16 ✔ 5.30 ✔
France 0.01 ✔ 5.10 ✔
Norway 2.04 ✗ 2.35 ?Ukraine 1.10 ✔ 1.19 ✔
Sweden – ✔ 1.16 ?Denmark 0.06 ✗ 0.65 ✔
UK 0.25 ✔ 0.57 ✔
Netherlands 1.39 ✗ 0.48 ✔
Turkey 0.01 ✔ 0.42 ✔
Germany 0.17 ✔ 0.23 ✔
Others 0.54
Source: World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States, April 2011
* Technically recoverable shale gas resources** Proved conventional natural gas reserves*** Sund Energy estimates
www.sundenergy.com
Large investments in unconventional gas
Many years of small scale by small companies ● Lower investments and shorter lead
times ● Attention to detail and creativity
important
Suddenly large scale and entry of majors● Competitive advantage of global
technology?● Cheap way to increase ”oil equivalent’’
reserves
Lower costs: Easier to make a profit● Varying costs, but US around $4/mmbtu● Liquids (NGL, crude oil) help economics● Some flexible supplies could get higher
prices● Cash flow challenge for smaller players
at depressed prices
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Europe is behind many – that could add to learning
US: “Unconventional is becoming conventional – half of all gas”● Regulation is coming into place – less cowboys than earlier● Some bad reputation and negative stories – but contribution, too!● Economics with liquids – different focus● Gas has been kept down due to rising dependency on imported LNG● Now perhaps the easiest way to reduce climate emissions
China: Distributed production of energy – that can replace oil● Want to keep down oil prices and imports● Also focus on local emissions – sulphur, particulates etc. ● Using more gas fixes several problems – and is good for the economy!● Good at commercialisation - especially transportation sector
Others, too – impacting the global gas outlook!● Australia, Argentina, Ukraine, Russia, South Africa…
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Shale already impacts Europe: Less US imports
US has exported LNG to Asia from Alaska for decades● Not very large volumes, but better profits than ”exports” to own states
Imports were expected to grow significantly – then not at all…● Falling domestic production and growing demand● Imports from Canada, Mexico and global LNG
With unconventional gas at home: ● Demand may grow more...● Less LNG is needed ● Exports to Canada
LNG import turning around● First re-exporting cargoes ● Then own liquefaction
UK balancing global LNG● Lower prices already● At times 50% of demand!
Page 11Source: EIA AEO 2007, 2009, 2011
Changing forecasts for US LNG imports
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Will the shale opposition spread successfully?
US protests: Active and successful● High level exposure, even mass media
• Gas Land and Vanity Fair examples
● Several court cases already• Partly for lack of clear regulations
What will be the result of US protests?● More focus on emissions, water, noise● More studies on how to do it better● 1 year moratorium in New York on horizontal
drilling and large production
What can we learn? ● Each country has different focus
• Poland, Germany, Australia, China…
Relative environmentalism?● Cost + impact of alternative energy
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HQ of Damascus Citizens for Sustainability, in Vanity Fair
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Will we beat the prejudices against us?
“Europe is not like Texas – there is not enough space”● Poland, France, Italy, Ukraine, even UK has open countryside
“Europe is full of environmentalists that would never accept it”● Compared to open-cast lignite mining, more nuclear, expensive wind…● Not all unconventional is as bad as some of the reputation of shale gas● Environmentalists do not agree – local,
national, global, fossil, nuclear● Accidents can be prevented with good
regulation
“Europe has no rigs”● The industry is global, there is onshore
drilling already● These rigs take 6 months to build…
“Europe has no entrepreneurs”● Really? No hungry business people in any country??
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Public opposition to shale drilling in France
Source: Berg & Coiron, March 2011
www.sundenergy.com
UK: Coal-bed methane can be quite popular
Coal-bed methane onshore● Often small, little visible impact● Small crews, horizontal drilling● Shallower than shale
Permitting and water important● Permits often under coal authorities● Water issues important
Government support could help● Not impossible in light of potential● Could get more energy than support to biogas, wind etc● Positive impact on domestic economy● Access, regulation, funding, feed-in tariffs relevant
Other aspects in the UK● “New” domestic gas could be preferred in economic turn-around● CBM, shale, UCG (underground coal gasification), and even biogas
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CBM field in Scotland, Source: Dart Energy
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In Poland, unconventional gas could outcompete CCS
Poland largely relies on coal for power...● Low cost domestic reserves● Reducing dependence on Russia
... but capacity needs replacing by 2030● Old, inefficient plant breach EU standards● Carbon costs rendering plant uncompetitive● EU target to reduce GHG emissions by 2020
Will Poland build new coal plant with CCS...● CCS costs estimated at €130 billion by 2030
...or use more unconventional gas?● Most active EU country in developing domestic
unconventional reserves● Potential to replace imported gas, some coal● In addition, longer term export potential:● Lithuania, Germany, and others
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Belchatow – largest coal plant in EU
Source: coalpowerplants.blogspot.com,
Source: Gazlupkowy.pl, March 2011
Poland – gas exploration licenses
www.sundenergy.com
ExxonMobil: Large German gas volumes!
North-Rhine Westphalia could have 2100 bcm of shale gas and CBM gas reserves (second largest deposit in Europe)
● ExxonMobil has secured options on several areas to start exploration● Other companies also interested
6.5 bcm/yr could be produced as industry builds up capacity● Increasing Germany's self-sufficiency in gas to 25-30% ● Creating jobs and bringing royalties to the local municipalities
Exploration permits valid for 5 years● EUR 100 million in exploration costs for ExxonMobil alone● Production still uncertain – gas prices impact profitability● However, border prices perhaps less relevant…
Merkel: Easier to turn down nuclear with own gas?
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Gernot Kalkoffen, Head of Exxon Mobil Central EuropeSource: Handelsblatt, January 2011
www.sundenergy.com
France could see important gas production by 2020
A total of 500 bcm of shale gas could be produced in the Cévennes area ● Significant compared to current production of about 1 bcm/ year● Raising interest of GDF Suez, Total and others
Environmental concerns have lead to a temporary moratorium on drilling● Protests from local
communities and even politicians
• “Shale revolution” has taken many by surprise
• Some mistrust
● 2-3 years to map andbuild capacity and trust before industry can “take off”
Page 17Source: Frituremag, 2011
Map of shale gas licenses in (Southern) France
www.sundenergy.com
France: Nuclear means SOS, or…
Impact of Japanese disaster on France● Even the industry agrees that safety dose not comes with a guarantee● Socialist party has said no to nuclear● The Government feels the tremors but are there options…
Could unconventional gas be an alternative?● Government & industry seem to be interested● Government being criticized for being too permissive● Moratorium is now pushed from April to June 2011 ● How to change the French mindset?● Two government reports
commissioned due by mid-June
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www.sundenergy.com
Is it economic? That depends on who/ how you ask
Politicians look at alternatives, their costs, prices and timing● Renewables are taking time and costing more than was hoped for
• Even with monetary support to research, smart grids, feed-in...• Partly motivated by expected high cost imports of LNG
● Could we see support to local, flexible gas in the future?• Cheaper than offshore wind, Nabucco, and other SoS...
● How to sell the story – now that concerns are here?
Oil companies and other investors look at cost and price● Need to grow reserves – part of drive to buy acreage
• Fewer exciting prospects on the oil side than before• Buying shale acreage is cheaper in BOE than oil
● Margin better than many think• Expect better technology to reduce costs, now around $4.20/mmbtu in US• Income expected to be steady with more liquid markets and higher demand• Also additional income from liquids – with high prices: Oil, NGLs
● Believe in gas being the best solutions for the future energy mix!• Willing to offer at lower prices to avoid falling demand, it seems…
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www.sundenergy.com
Political right answers change – trying to please voters
Energy/security of supply – often emotional● Positive value, but often not quantified● Disguise for protectionism/economy? National resources get points here
Economy/trade balance important in energy policy● Even more so during recession?
• Typically reducing imported fossil fuels (especially oil from the Middle East)
In recession, employment matters, too, or so they say● Positive for new renewables - and perhaps even unconventional gas!
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Gas has been seen as a scarce expensive import
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Politicians perceived a growing vulnerability to gas supply… ● High prices – both oil-link contracts and spot markets during winter● Some bottlenecks and interruptions exacerbated the perception● Expectation of gas shortage, especially LNG
…showing strong interest in reducing the large import bills of gas● Large cash drain on economies + security of supply issues● Growing interest in domestic economy + green● EU, China and others adjusted policies
Recession at first confirmed need to reduce imports…● Peak oil-link prices hit the market at winter time in full-blown recession● Continued focus on domestic and renewable energy forms
Last few weeks’ nuclear outages did not give peak prices● Reduced oversupply ● This may give new confidence in gas markets – convenient?
www.sundenergy.com
High spending on imports is even less popular now
Strong focus earlier on oil, now on gas in EU, US and China● Falling in US with more domestic (unconventional) production● Driver for China and Europe, too
What if prices fall – how will that impact the energy mix?● Also, own reserves may reduce need to import
Cost of net imports of oil and gas (% of real GDP)
Source: World Energy Outlook, 2010
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www.sundenergy.com
…and result in different policies & stories
European Union: 20-20-20● SOS● Emissions● Reduced imports
United States: Energy independence● Employment● Economy● Climate?
China: 5-year plan● Gas to replace more oil● Actively using buying power
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www.sundenergy.com
Will Obama be the first to reduce US oil dependency?
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Extreme oil prices of 2008 gave reduced oil demand● First time ever!● Good for emission reductions, too● Bad for economy and added to recession and vulnerability
Unconventional gas will help!● Less imported LNG – more gas to power and transportation● Less oil imports + less emissions – even possible exports
www.sundenergy.com
For a while, nuclear became the answer – oops…
From gradually coming into favour…● Moratoriums cancelled, new plant planned● Life extended - less replacement needed● Emission free image – better than fossil● Domestic, cheap, etc
To sudden change after disaster in Japan● 7 plants down for checks already in Germany
Domestic gas could have similar story● Less expensive imports, good for economy● Safer, secure & cleaner than alternatives?● Best quick replacement for nuclear?
• Spare capacity, lower prices than before• Long term potential reserves
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Biblis plant, Germany – among 7 tested
Over 200,000 protest over nuclear power
Source: ARY News, 26 March 2011
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What is good gas price – for buyers and sellers?
NBP spikes moreoften down than up
● Oversupply, sometimes from Norway and LNG
Higher prices in early winter due to very cold weather
● But back again below oil-link now
● Previous peaks from bottlenecks on import
● Current troughs from bottlenecks on export
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Data: National Grid and BAFA, May 2011
German border and UK spot prices for gas (comparison of oil-link and spot gas prices)
Apr
02,
200
7M
ay 2
5, 2
007
Jul 1
7, 2
007
Sep
05,
200
7O
ct 2
5, 2
007
Dec
14,
200
7Fe
b 07
, 200
8A
pr 0
1, 2
008
May
21,
200
8Ju
l 10,
200
8S
ep 0
1, 2
008
Oct
21,
200
8D
ec 1
0, 2
008
Feb
03, 2
009
Mar
26,
200
9M
ay 2
7, 2
009
Jul 1
6, 2
009
Sep
04,
200
9O
ct 2
6, 2
009
Dec
15,
200
9Fe
b 08
, 201
0M
ar 3
0, 2
010
May
24,
201
0Ju
l 14,
201
0S
ep 0
2, 2
010
Oct
22,
201
0D
ec 0
9, 2
010
Jan
20, 2
011
Mar
03,
201
1A
pr 1
4, 2
011
0
5
10
15
20
25
30
35
NBP Day-Ahead
BAFA
EU
R/
MW
h
www.sundenergy.com
Gas prices differ in type and in the value chain
Wholesale prices most discussed● German border price
• Quite stable due to oil link
● Spot prices are more volatile ● LNG prices – oil link or spot
But gas is transported and stored● Modulated, factory gate gas is
therefore normally at a much higher price
● Perhaps this is the most relevant price to compare with cost of unconventional?
Local gas may get high feed-in● Some countries are planning
high entry prices for biogas into the gas system – even higher!
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2007 2007 2008 2008 2009 2009 2010 2010H1 H2 H1 H2 H1 H2 H1 H2
0
5
10
15
20
25
30
35
40
45
50
Border priceBorder priceBorder price
Border priceBorder price
Border priceBorder priceBorder price
Storage, distribution and margin
Storage, distribution and margin
Storage, distribution and margin
Storage, distribution and margin
Storage, distribution and margin
Storage, distribution and margin
Storage, distribution and margin
Storage, distribution and margin
Tax
Tax
Tax
Tax
Tax
TaxTax
Tax
Build-up of German gas prices to indus-try - illustrative
€/M
Wh
Day-ahead NCG price at 1 December 2009 and 1 December 2010
Day-ahead NCG price at 9 May 2011
www.sundenergy.com
Transportation – the next gas frontier with unconventional?
Not having own gas has kept consumption down in many markets● With unconventional gas, availability has improved ● Less clean electricity may be available than expected● Expensive oil imports for transportation sector with
emissions
Natural gas could fuel land and sea transportation…● Cheapest option to reduce GHG (as well as NOx, SOx and
particulate) emissions in transportation?• Also fewer hurdles compared to hybrid and electric vehicles
● …increasingly in combination with “bio-methane”
Local unconventional gas could speed up the transition● Domestic and affordable CNG/ LNG
instead of expensive oil imports
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Source: Mongabay
CNG CarsLNG Ships
Heavy vehiclesTrainsPlanes??
Vo
lum
e
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Unconventional gas sources are large in China...
Domestic gas production is growing...● Especially coal-bed methane
• First commercial project in 2005
● Plans for rapid scale-up by Chinese majors• Petrochina, Sinopec and more
● Private players also active in the market• Green Dragon Gas, Far East Energy,
Fortune Oil, Enviro Energy
...but imports may also increase● Petrochina already imports pipeline gas
from Central Asia● More capacity is planned, both by pipeline
and as LNG● Slower growth in imports after boost of own
production, but still significant!
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2
25
37
31
10
China's gas reserves by type
ConventionalYTF conventionalCBMShale gasTight gas
Data: Bernstein Research, 2010
www.sundenergy.com
… could China be an inspiration for Europe?
Full value chain possible● From CBM directly to CNG for transportation – at a profit:
• $ 9.1/mmbtu to wholesale/ large industry• $14.6/mmbtu on average to cars at own and partner retail gas stations (sold
0.31 bcm in 2010, with large expansion planned in 2011)
Great value of distributed energy in large countries like China● Unconventional gas, wind, other
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Source: Green Dragon Gas, 2011
www.sundenergy.com
So, let’s consider two scenarios
Unconventional gas takes off● Technology works● Preferred environmentally● Removes some SoS fears● Could reduce oil dependency
Total emissions fall…● Especially from transportation:
Ships, heavy vehicles and cars● Next step could be biogas and
power
…without ruining economy● Reducing other imports● Possibility for export?● LNG becomes backup
Page 31
Europe says no to shale gas● Technology does not work● Reservoirs too deep● Very much cheaper in other places● Strong public opposition ● Less opposition to CCS and wind● Not enough to remove SoS fears?● Gas still considered fossil and oil
linked in pricing● Less focus on climate● OR nuclear OK again
● OR other restrictions on demand: Less heating, cooling, driving…
www.sundenergy.com
How can we predict the future with so much bias?
Energy policy and best mix is a very complex and changing● Politicians try to understand voters’ wishes● Often missing picture, cost levels, system impacts, alternatives etc
Private investors go for what they think will be economic ● Perhaps more prudent than some politicians had hoped● Different view of cost and risk – more realistic or overly careful?● Politicians often do not see that they add to perceived risk by wavering
Long term investments are impacted by the short term ● Nuclear in Europe now seems more negative than several years ago
• Even if they are not in areas prone to earthquakes and tsunamis
● Offshore wind and CCS are being delayed with low spot gas prices
So, in addition to complexity, there is much bias!● Perceptions and favourites, impacted by hype and setting
• Legends “truths” very different from industry science (often quiet)
● Even industry people want simple binary (yes/no) answers
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www.sundenergy.com
We are happy to discuss further!
Selected recent work by Sund Energy that may be of interest● Impact of Japan on LNG prices – why the market
expected too much● Gas for transportation (road + sea) – market impacts● Unconventional gas – impact on European markets● Security of supply – values and possible solutions● CCS – rethinking solutions for attractiveness● LNG – new areas of use and infrastructure
We also offer strategic and commercial advice● Producers, TSOs, traders, large buyers, governments● Gas, electricity, CCS and more
Karen@sundenergy.com, +47 917 86 928Sund Energy AS, Meltzersgate 4, N-0257
Oslo, Norway
Karen@sundenergy.com
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