Oran| 01-02 December 2014
The Impact of the Unconventional Gas Supply on the Link Between Oil
and Gas Prices in the US Market
Abderrezak Benyoucef
Sonatrach/Institut Algérien du Pétrole, IAP
Workshop sur les marchés gaziers
1st et 2nd December 2014
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Oran| 01-02 December 2014
Objective
Overview of the U.S. oil and gas supply/demand
Regional NG prices
US weekly WTI and Henry Hub Natural Gas spot prices
Econometric relationship between natural gas and WTI
spot prices
Impact of the Unconventional Gas Supply
Conclusion
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Outline
Oran| 01-02 December 2014
Until 2005, the U.S. Natural gas and WTI prices tended to move
together, with the market prices for oil (in dollars per barrel) and
natural gas (in dollars per million Btu) maintaining a relatively
stable ratio around 6:1
However, once oil prices began to rise in 2008, the spread
between oil and gas prices has widened dramatically
The aim of this study is to investigate the raisons of the apparent
decoupling of WTI and natural gas prices in the U.S. market
Certainly, the key question is whether this decoupling is
provisory or structural, i.e short-term or long term decoupling?
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Objective
Oran| 01-02 December 2014
Overview of the U.S. oil and gas supply/demand
Figure 4: U.S oil production and net imports Figure 5: Total U.S oil and gas proved reserves
Figure 6: U.S oil and gas consumption
The U.S oil consumption and importshave been decreased since 2008 (Fig 4)
However, oil and gas reserves havenotably increased (Fig 5)
Therefore, gas consumption has alsoincreased since 2008 (Fig 6)
.Source: BP statistical review of world energy 2014
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4,0
5,0
6,0
7,0
8,0
9,0
10,0
20,0
25,0
30,0
35,0
40,0
45,0
50,0
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
Tcm
Bill
ion
bar
rels
US oil Proved reserves Gb (LHS) US NG proved reserves Tcm (RHS)
5,00
10,00
15,00
20,00
25,00
400,0
500,0
600,0
700,0
800,0
900,0
1000,0
1100,0
1200,0
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
mb
/j
Bcm
US gas consumptionBcm (RHS) US oil consumption mb/j (RHS)
Oran| 01-02 December 2014
Regional natural gas prices
Figure 7: Natural Gas pricing mechanisms around the world
“Gas-on-gas” markets
Liberal markets with volatile prices generally not in ‘sync’ with other energy sources
Large number of suppliers and buyers.Ample storage and transport systems.Sophisticated markets with financial instruments.
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US, UK, Canada
Prices indexed to substitute energy
prices
Gas prices movements in proportion with other fuels (especially oil-base products and coal)
Limited number of suppliers, many buyers.Storage and transport controlled by few players.Some financial markets trading gas.
2
Continental Europe SE Asia
Oil-linked price markets
Gas prices linked directly to oil prices, Large proportion of Imported gas
Limited number of suppliers and buyers.Storage and transport controlled players.No significant financial markets trading gas.
3
Japan, Korea, Taiwan
Regulated markets
Controlled markets with government mandated prices
Usually, limited number of buyers and sellers.Most infrastructure controlled by state.No or limited influence of market forces. Pooled prices often used. Government takes price risks.
4
Middle East, Russia, China
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Oran| 01-02 December 2014
0
2
4
6
8
10
12
14
16
18
20
1996 2000 2004 2008 2012
Na
tura
l g
as
pri
ces
($/
mm
Btu
)
LNG Japan (cif)
Natural gas UK (Heren NBP Index)
US Henry Hub
Canada (Alberta)
Crude oil OECD countries (cif)
0
20
40
60
80
100
120
1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
$/b
bl
Dubai Brent West Texas Intermdiate
Regional natural gas prices vs. regional crude oil pricesFigure 8: Natural gas spot prices ($/mmBtu)
NG Markets: Regional markets
Prices and pricingmechanisms for natural gasvary dramatically aroundthe world (Fig. 8)
Oil Markets: Global market
Crude Benchmark for eachregion
Prices and pricing mechanismsare almost similar from region toan other (Fig 9)
Figure 9: oil spot prices ($/bbl)
Source: BP statistical review of world energy 2014
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Oran| 01-02 December 2014
US weekly WTI and Henry Hub Natural Gas spot prices (1/3)
Figure 10: US weekly WTI and Henry Hub Natural Gas spot prices (from Jan 10, 1997 to Nov 07, 2014) Figure 11: Annualized volatility of HH natural gas
and WTI spot prices
NT= 52
NG price volatility > oil pricevolatility, except 2008.
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Oran| 01-02 December 2014
US weekly WTI and Henry Hub Natural Gas spot prices (2/3)
Figure 12: WTI weekly spot prices reports
REPORT6 is:
(WTI weekly spot prices/6)
REPORT10 is: (WTI weekly
spot prices/10)
HHNGP is Henry Hub
Natural gas weekly spot
prices
WTIP is WTI weekly spot
prices
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Oran| 01-02 December 2014
US weekly WTI and Henry Hub Natural Gas spot prices (3/3)
Figure 13: Weekly and annual average report of WTI and Henry Hub NG spot prices
From the ratio of the energy content, itcan be argued that the price of a barrelof crude oil should equal six times theprice of an mmBtu of natural gas
Oil and gas have different costs ofproduction, transportation, processingand storage, and they serve differentportfolios of end uses etc.Perhaps for this reason, economistsproposed a variety of other rules-of-thumb, including the simple 10-to-1ratio
Since 2008, the annual average reportWTIP/HHNGP > 10. Energy content equivalence: 1 barrel of
WTI contains 5.825 mmBtu. Usually, theratio 6 to 1 is used (6-to-1)
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Oran| 01-02 December 2014
Econometric relationship between natural gas and WTI spot prices (1/2)
Figure 14 : Bai-Perron multiple breakpoint tests for the HH natural gas spot prices ($/mmBtu) and WTI spot prices ($/bbl)
multiple structural changes
are detected for both the
WTI spot prices and HH
natural gas price in
different periods
The cointegrating
relationship is not stable
over long periods of time.
10
0.0
2.5
5.0
7.5
10.0
12.5
15.0
0
25
50
75
100
125
150
1998 2000 2002 2004 2006 2008 2010 2012 2014
WTIPFITTED WTIP
HHNGPFITTED HHNGP
Oran| 01-02 December 2014
Econometric relationship between natural gas and WTI spot prices (1/2)
There is no cointegration relationship which could be deduced
from the Johanson test over the whole sample. However, several
structural changes are detected for both the WTI spot prices and
HH natural gas price using the Bai and Perron (1998, 2003) tests.
Hence, from the statistical side, there is no long run relationship
between Henry Hub natural gas spot price and WTI spot price, since
2008.
In addition to the econometric methods, further analysis is
required to check the raisons behind this decoupling.
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Oran| 01-02 December 2014
Impact of the Unconventional Gas Supply (1/4)
Figure 15: Lease condensate and natural gas plant liquids proved reserves, 2000- 2011
Proved reserves of lease condensate
and natural gas plant liquids have
increased significantly in recent years
The most important characteristic of a
shale well is its components
Shale gas actually contains a very large
percentage of liquids, whose prices are
highly linked to oil prices
Value of liquids
Value of dry gas
Value of shale gas
The value of shale gas depends more
on liquids than dry gas
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Oran| 01-02 December 2014
Breakeven Price of U.S. Shale Gas
The long term price of natural gas can only be as low as the breakeven
price for profitable extraction of natural gas from shale wells across the US
NGLs and crude oil prices are tied to global markets, they have significant
impact, because they often make shale wells profitable even when natural
gas prices are low
By selling these liquids at their high, stable prices, shale gas wells can profit
even in low gas price environment.
Impact of the Unconventional Gas Supply (2/4)
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Oran| 01-02 December 2014
In a recent study of Harvard university , “typical well” analysis was
performed for each individual shale fields in the U.S
Historic and projected NGL and oil prices assumptions are used in the
breakeven calculations, for instance the WTI price is assumed to be $90
in 2014 and $96 in 2016 and henceforth
The weighted average calculates the 10-year typical breakeven gas price
to be $4.04/mmBtu and $3.83/mmBtu for 30-year typical breakeven
In case of LNG export, with all cost constituents accounted (Wellhead
price, pipeline transportation, liquefaction overseas transport,
regasification), the minimum (breakeven) price for U.S. to export LNG to
Asia is $9.03/mmBbtu.
Breakeven Price of U.S. Shale Gas
Impact of the Unconventional Gas Supply (3/4)
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Oran| 01-02 December 2014
Shale gas perspectives Figure 16: Weekly rig count and WTI-to-natural-gas ratio
Still, less land rigs have continued to produce a
greater volume of gas
In part, crude and NGL output pay the rent,
It also is a reflection of advances in drilling
efficiency
However
Since crude oil prices rose faster than natural gas
prices, exploration and development activities
continued their trend toward liquids-focused drilling
The rig distribution began an appreciable shift in
the second half of 2009, with oil-directed rigs
comprising nearly sixty percent
Recently, because liquids-rich
from shale gas production have
increased, the NGLs market is
experiencing oversupply and
lower prices,
Source: Baker Hughes Inc. (rigs); Thomson Reuters (prices)
Impact of the Unconventional Gas Supply (4/4)
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Oran| 01-02 December 2014
Conclusion
Econometric methods show strong cointegration between Henry Hub
natural gas and WTI spot prices until 2008
But henceforth, it has noted an apparent decoupling between these two
prices, which is mainly due to the emergence of shale gas production
Hence, the recent trend of the natural gas price is reasonable since oil
and shale gas prices are currently in a complementarity phase ; the
higher the oil price the lower the gas price
Because, when the price of oil is high the NGLs from shale gas follow the
same trend and can easily cover the cost of shale gas exploration and
processing
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Oran| 01-02 December 2014
Conclusion
Nevertheless,
It has noted that the U.S. NGLs domestic market is experiencing
oversupply and NGLs prices are decreasing
Explorers are shifting increasingly toward liquids rather than natural
gas
If the United States begins exporting LNG, the NG breakeven price
should rise
Hence, In the long-term, or at least in the medium-term, international
arbitrage should be established and U.S gas prices should, most likely,
rise at least to achieve the breakeven of LNG export,
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Oran| 01-02 December 2014
Merci de votre attention
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