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Natural Gas Pricing:What Does the Future Hold?
October 24, 2012By:
John A. Harpole
Presentation to:Denver Association of Lease and Title Analysts
Denver, CO
22Source: America’s New Natural Gas, America’s Natural Gas Alliance
EVOLUTION IN GAS WELL COMPLETION TECHNOLOGY
- THE KEY TO TODAY’S NATURAL GAS REVOLUTION
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4
100% LF
85% LF
Supply Available for ExportBase Case
Cheyenne Plains 170 expansion
Cheyenne Plains 560 expansion
REX West 1800 expansion
High Case
Ruby 1500 expansion
MMcf/d Bison 407 expansion
Kern River 145 expansion
Kern River 266 expansion
Winter Peak Month
Summer Peak Month
Source: George Wayne, Wyoming Gas Fair – Rockies Market Update – 9/15/2011 presentation 4
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66
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Liquids Plays: 2.8 Bcfd
Lean Gas Plays: 1.7 Bcfd
Quarter 4 - 2011 Versus Quarter 4 - 2010
Eagle Ford
PermianMarcellusAnadarko HaynesvilleFayette-ville
Other Wet
Other Dry
U.S. Liquids Plays Contributed 61% Of Incremental Volumes In Q4 - 11
Source: Bentek Energy
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US Production Is Up Nearly 7 Bcfd from
2011
Source: BENTEK Supply and Demand Report
Jan JulApr Oct
Ave
rag
e D
aily
Pro
du
ctio
n
(Bcf
d)
Data through February 8, 2012
Q-2Q-1 Q-3 Q-4
Pre-2010 US Production High
Comparison of Dry Production
6.7 Bcfd
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$3.4B
$1.3B
$1.7B
$1.3B
$1.0B
$1.3B
$5.4B
$2.1B
$1.5B
$4.8B
$.4B$1.3B
PetroChina/Encana
ITOCHU/MDU Resources
CNOOC/Chesapeake
CNOOC/Chesapeake
BHP/Chesapeake
KNOC/Anadarko
BG/EXCO
BG/EXCO
Reliance/Pioneer
Reliance/Atlas
Statoil/Chesapeake
Statoil/Talisman
$12.1 B
BHP Plans to Acquire Petrohawk
Foreign Investment in U.S. Shale
Source: Dr. Jim Duncan, ConocoPhillips, Decoding the Relevance of Abundant Supply, 2011 COGA Presentation
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Global Shale Reserves
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16%
21%
6%9%
18%
30%
Africa Asia Australia Europe North America South America
Recoverable Shale Reserves: 6622 Tcf
Source: EIA
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A Cautionary Note• Forecasts Count on Real-Business-Cycle
(RBC) Theories• RBC Theories/Models offer
“no closed-form solution due to the interaction of linear and nonlinear elements”1
• Solution clarity? Causality?• RBC studies presume perfect
information on data input
1 Loglinear approximate solutions to RBC models: An Illustration and some observations, Sau-Him Paul Lau and Philip Hoi-Tak Ng, University of Hong Kong, January 2004
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Linear Calculations in a Very Non-Linear World
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The Crystal Ball for Demand
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4 Significant Demand Factors to Consider
• LNG Exports• Industrial Demand Growth• Coal to Gas Electric Generation Fuel Switching• CNG/Natural Gas Vehicles
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No Immediate Relief
• It is difficult to foresee any demand response within the next three years (before 2015) that can significantly change the current natural gas price environment.
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$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
NYMEX Henry Hub Natural Gas Price* 1996 - 2015
Actual/Forecast**
Source: *Average of last three days of trading as published in the Platts Gas Daily Report
** Future forecasts based on NYMEX Henry Hub indices in Clearport Software as of 9/26/2012
$ p
er
MM
Btu
$ p
er M
MB
tu
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LNG Exports
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Cove Point Cove Point
Lake Charles Lake Charles
Sabine Pass Sabine Pass
CameronCameron
Export Terminals
Source: Office of Oil and Gas Global Security and Supply, Office of Fossil Energy, U.S. Department of Energy; U.S. Federal Energy Regulatory Commission
U.S. LNG Export Projects
Jordan CoveJordan Cove
Company Capacity(Bcf/d)
DOE Filing
FERC Filing
Sabine Pass Liquefaction
2.2 Corpus Christi Liquefaction
1.8 *Freeport LNG Expansion
2.8 *Lake Charles Exports
2.0 Dominion Cove Point
1.0 Jordan Cove Energy Project
1.2
Cameron LNG 1.7 Gulf Coast LNG Export
2.8
Freeport Freeport
Corpus Christi Corpus Christi
Gulf LNG Gulf LNG
* FERC Pre-Filing Process
Slide from U.S. LNG Exports & Unconventional Gas presentation, Charif Souki, Cheniere Energy, Inc.
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LNG in the Headlines• Boosting the Economy Through Natural Gas
Exports– Washington Post Editorial Board, March 14, 2012
• “BG Group’s CEO Frank Chapman, suggested that U.S. LNG exports could reach 5.8 BCF/day by 2020”
– Sutherland LNGLawBlog.com, February 10, 2012
• BG is looking at an LNG export project on the West Coast of Canada at Prince Rupert
– Sutherland LNGLawBlog.com, February 10, 2012
• “The United States would probably only export a trickle of gas over the next five years, it could be exporting 4 BCF by 2022 and 15 BCF by 2027.”
– The New York Times Green Blog, April 18, 2012
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LNG in the Headlines• Cheniere receives FERC approval for Sabine Pass
LNG Export Terminal– Edward McAllister and Ayesha Rascoe, Reuters, April 17, 2012
• Sempra Energy Unit Signs Commercial Development Agreements with Mitsubishi Corporation, Mitsui & Co., Ltd. to Develop $6 Billion Louisiana Liquefaction Facility
– Sempra Energy PRNewswire, April 17, 2012
• Energy Transfer Equity LP has filed for federal permission to build an export facility at its import terminal at Lake Charles
– The Associated Press, April 17, 2012
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LNG in the Headlines• Royal Dutch Shell plc, Mitsubishi Corporation, China
National Petroleum Corporation and Korea Gas Corporation are expected to reach an agreement soon to build a $12.35 billion LNG terminal near Kitimat, British Columbia
– Sutherland LNGLawBlog.com, April 12, 2012
• Cheniere to Submit Resource Reports Soon for Corpus Christi LNG Export Project
– Sutherland LNGLawBlog.com, April 19, 2012
• DOE delays LNG export study– Reuters.com, September 17, 2012
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Kitimat LNGIssued license by NEB October 2011
Export Facility
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Shipping Routes
Source: http://www.kitimatlngfacility.com/Markets/marketing.aspx
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Industrial Demand Growth
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Chemical Plant Growth
• Chevron Phillips Chemical• Shell• Dow Chemical• Formosa• Westlake• ExxonMobil
“Chemical Makers Ride Gas Boom”- Wall Street Journal, April 19, 2012
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The Ammonia Story• Current economics
– Ammonia worth $590 per ton in world market– Can be produced for $180 per ton at current U.S NYMEX
natural gas price strip
• 14 Ammonia plants closed in the U.S. between 1998 and 2006 thanks in part to high natural gas prices
• Top 5 world producers would like to build new facilities in the U.S.
• 1 ammonia plant can consume as much as 100,000 MMBtu per day
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• What it could mean to demand for natural gas:• North America imports approximately
12,500,000 tons of nitrogen per year (22% from Canada, 78% from overseas)
• 37 MMBtu is roughly equal to 1 ton of nitrogen• If all overseas imports were eliminated by
domestic production, natural gas demand would increase by approximately 1 BCF per day or 3.6 TCF per year
The Ammonia Story
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Petrochemical End Use
AutomobilesAutomobiles
About 600 pounds of petrochemical-derived plastics, composites, rubber, coating and textile products are used in the average vehicle accounting for about 15% of the total vehicle
weight.
ElectronicsElectronics
Home electronics and appliance products contain up to 40% or more
of plastics derived from petrochemicals.
AppliancesAppliances
Source: Bill Bradley, Enterprise
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Coal to Gas Electric Generation Fuel Switching
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Impact of Mercury and Air Toxics Standards (MATS) and Cross-State Air Pollution Rule (CSAPR)
• “We estimate that by 2015 some 54 GW of coal fired capacity will cease operations rather than incur the cost of compliance with CSAPR and MATS, while 74 GW will be upgraded.”
• “A further 12 GW of coal fired capacity is likely to be retired as these units reach 60 years of age.”
Source: Bernstein Research, U.S. Utilities: The EPA Finalizes Its Mercury and Air Toxics Standards; What Will Be the Impact? December 22, 2011
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Natural Gas vs Coal• “The collapse in the price of natural gas since 2008,
combined with recent increases in the cost of Appalachian coal, have caused the variable cost of operation of the average power plant burning Appalachian coal to converge with that of the average combined cycle gas turbine generator.”
Source: Bernstein Research, U.S. Utilities: The EPA Finalizes Its Mercury and Air Toxics Standards; What Will Be the Impact? December 22, 2011
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Increase in Utility Consumption of Natural Gas Annual (TCF) and Daily (BCF) Average
• U.S. Gas Consumption in 2010: 22.1 TCF 60.50 BCF/D• Increase due to Natural Gas Coal Plant Retirements: 0.3 TCF 0.82 BCF/D• Increase due to EPA Regulation of SO2 and Mercury: 1.7 TCF 4.65 BCF/D• Reduction Due to New Coal Plants: (0.8 TCF) (2.19 BCF/D)
• U.S. Expected Gas Consumption in 2015E: 23.3 TCF 63.01 BCF/D
Source: Bernstein Research, U.S. Utilities: The EPA Finalizes Its Mercury and Air Toxics Standards; What Will Be the Impact? December 22, 2011
Annual Average Daily Average
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Range of Levelized Cost of New Generating Technologies Due To Regional Cost Differences, 2016
Source: Institute for Energy Research, Levelized Cost of New Electricity Generating Technologies, Updated February 1, 2011; Energy Information Administration, Annual Energy Outlook 2011, http://www.eia.doe.gov/oiaf/aeo/electricity_generation.html
Plant Type
Range for Total System Levelized Costs (2009 ¢/megawatt hour)
Minimum Average Maximum
Conventional Coal 8.55 9.48 11.08
Advanced Coal 10.07 10.94 12.21
Natural Gas-fired
- Conventional Combined Cycle 6.00 6.61 7.41
- Advanced Combined Cycle 5.69 6.31 7.05
Advanced Nuclear 10.97 11.39 12.14
Wind 8.19 9.70 11.50
Wind - Offshore 18.67 24.32 34.94
Solar PV 15.87 21.07 32.39
Solar Thermal 19.17 31.18 64.16
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CNG/Natural Gas Vehicles
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How many NGVs to get to 1 BCF per day of Demand?
• “The U.S. currently has about 110,000 NGVs on the road (less than 0.1% of total U.S. vehicles), mostly owned by fleets.”
• “To get to 1 BCF per day would mean a roughly ten-fold increase in the number of U.S. NGVs.”
• It will take the right incentives and plenty of time.
Source: Raymond James & Associates, Inc., Weekly Energy Report 6-13-11
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Natural Gas to Power Pickups
• Tuesday, March 6, 2012
• Chevrolet, GMC introduce bi-fuel pickups for 2013 model year
Source: Platts Gas Daily publication, Rodney White
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Demand Increase By 2015?
Low Case High Case
LNG 0 BCF/day 2.0 BCF/day
Industrial Demand Growth 1.0 BCF/day 2.0 BCF/day
Coal to Gas 2.0 BCF/day 2.5 BCF/day
CNG/Natural Gas Vehicles 0.3 BCF/day 0.5 BCF/day
Total 3.3 BCF/day 7.0 BCF/day
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Oil Production Drives Investment Decisions for Gas
Source: Advanced Resource Intl presentation to Cheniere Board, March 2011; Cheniere Research
• Liquids production from shale plays > 3 million b/d by 2020
• Associated natural gas > 7 Bcf/d of “costless” supply
Bcf/d MMB/d
0
1
2
3
4
5
6
7
8
2010 2011E 2012E 2013E 2014E 2015E 2020E0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Includes Eagle Ford, W. Barnett, Bakken Shales; Granite Wash, Piceance & Uinta Tight Sands
Includes Eagle Ford, W. Barnett, Bakken Shales; Granite Wash, Piceance & Uinta Tight Sands
Liquids
Gas
Annual Production from Unconventional Reservoirs
Slide from U.S. LNG Exports & Unconventional Gas presentation, Charif Souki, Cheniere Energy, Inc.
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Conclusions• A significant demand response won’t occur for at least 3-
5 years • Infrastructure investment in the 4 areas of potential new
demand (LNG export facilities, industrial (steel/chemical/ammonia/nitrogen), new gas fired electric generation, NGV) could take 5-8 years to be meaningful
• Marginal cost of gas is moving lower• Natural gas liquids will be the driving force in drilling• BTU value disparity between natural gas and crude oil
will continue for many years• Demand will increase but too slowly• Don’t forget the “tuition” slide
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Citations for ReportAll of the information utilized for this report is a compilation of information pulled from the following data sources: Bentek Energy Charif Souki, Cheniere Energy Inc.; Cheniere ResearchOffice of Oil and Gas Global Security and SupplyOffice of Fossil EnergyU.S. Department of EnergyU.S. Federal Energy Regulatory CommissionInstitute for Energy Research (IER) Energy Information Administration (EIA)Bernstein ResearchEnCanaRaymond James and Associates, Inc.Western Energy AllianceBill Bradley, EnterpriseSutherland LNG Blogwww.Kitimatlngfacility.com
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John A. HarpolePresident
Mercator Energy LLC26 W. Dry Creek Circle, Suite 410
Littleton, CO [email protected]
(303) 825-1100 (work)(303) 478-3233 (cell)
Contact Information