Natural Gas Pricing:
What Does the Future Hold?
Presentation to:
Denver Association of Lease and Title Analysts
Denver, CO
October 24, 2012
By:
John A. Harpole
1
EVOLUTION IN GAS WELL COMPLETION TECHNOLOGY
- THE KEY TO TODAY’S NATURAL GAS REVOLUTION
Source: America’s New Natural Gas, America’s Natural Gas Alliance
2
2
3
Ruby
1500 expansion
MMcf/d
REX West
1800 expansion
Bison
407 expansion
Kern River
266 expansion
100% LF
Kern River
145 expansion
Cheyenne Plains
170 expansion
Cheyenne Plains
560 expansion
Winter Peak Month
Summer Peak Month
85% LF
Supply Available for Export
Base Case
Source: George Wayne, Wyoming Gas Fair – Rockies Market Update – 9/15/2011 presentation
4
4
5
5
6
6
U.S. Liquids Plays Contributed 61% Of
Incremental Volumes In Q4 - 11
Quarter 4 - 2011 Versus Quarter 4 - 2010
Liquids Plays: 2.8 Bcfd
Lean Gas Plays: 1.7 Bcfd
Other Dry
Eagle
Ford
Anadarko Marcellus
Permian
Other
Wet
Fayette- Haynesville
ville
Source: Bentek Energy
7
Comparison of Dry Production
65
60
Pre-2010 US Production High
6.7 Bcfd
55
2010
2011
2012
50
45
Q-1
Q-2
Q-3
Q-4
1/1
1/15
1/29
2/12
2/26
3/11
3/25
4/8
4/22
5/6
5/20
6/3
6/17
7/1
7/15
7/29
8/12
8/26
9/9
9/23
10/7
10/…
11/4
11/…
12/2
12/…
12/…
Average Daily Production (Bcfd)
US Production Is Up Nearly
7 Bcfd from 2011
Jan
Apr
Data through February 8, 2012
Jul
Oct
8
Source: BENTEK Supply and Demand Report
Foreign Investment in U.S. Shale
$12.1 B
$5.4B
BHP Plans to Acquire Petrohawk
PetroChina/Encana
Reliance/Atlas
$1.7B
ITOCHU/MDU Resources
$.4B
Statoil/Chesapeake
$1.3B
$3.4B
CNOOC/Chesapeake
$1.0B
BG/EXCO
BHP/Chesapeake
$4.8B
Statoil/Talisman
Reliance/Pioneer
$1.3B
$1.3B
$1.3B
Source: Dr. Jim Duncan, ConocoPhillips,
Decoding the Relevance of Abundant
Supply, 2011 COGA Presentation
$2.1B
CNOOC/Chesapeake
BG/EXCO
$1.5B
KNOC/Anadarko
9
Global Shale Reserves
10
Recoverable Shale Reserves: 6622 Tcf
Africa
Asia
Australia
Europe
North America
South America
16%
30%
21%
18%
6%
9%
Source: EIA
11
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
12
Linear Calculations in a Very
Non-Linear World
13
The Crystal Ball for Demand
14
4 Significant Demand Factors to Consider
•
•
•
•
LNG Exports
Industrial Demand Growth
Coal to Gas Electric Generation Fuel Switching
CNG/Natural Gas Vehicles
15
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.
16
NYMEX Henry Hub Natural Gas Price*
1996 - 2015
Actual/Forecast**
$10.00
$9.00
$8.00
$6.00
$ per MMBtu
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
$ per MMBtu
$7.00
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
17
LNG Exports
18
U.S. LNG Export Projects
Jordan Cove
Cove Point
Freeport
Lake Charles
Corpus Christi
Gulf LNG
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

Cameron
Sabine Pass
*
*
* FERC Pre-Filing Process
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
Slide from U.S. LNG Exports & Unconventional Gas presentation, Charif Souki, Cheniere Energy, Inc.
19
20
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
21
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
22
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
23
Kitimat LNG
Issued license by NEB October 2011
Export Facility
24
Shipping Routes
Source: http://www.kitimatlngfacility.com/Markets/marketing.aspx
25
Industrial Demand Growth
26
Chemical Plant Growth
“Chemical Makers Ride Gas Boom”
- Wall Street Journal, April 19, 2012
•
•
•
•
•
•
Chevron Phillips Chemical
Shell
Dow Chemical
Formosa
Westlake
ExxonMobil
27
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
28
The Ammonia Story
• 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
29
30
Petrochemical End Use
Automobiles
Electronics
Appliances
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.
Source: Bill Bradley, Enterprise
Home electronics and appliance
products contain up to 40% or more
of plastics derived from
petrochemicals.
31
Coal to Gas Electric Generation
Fuel Switching
32
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
33
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
34
Increase in Utility Consumption of Natural Gas
Annual (TCF) and Daily (BCF) Average
Annual Average
Daily Average
•
•
•
•
U.S. Gas Consumption in 2010:
Increase due to Natural Gas Coal Plant Retirements:
Increase due to EPA Regulation of SO2 and Mercury:
Reduction Due to New Coal Plants:
22.1 TCF
0.3 TCF
1.7 TCF
(0.8 TCF)
60.50 BCF/D
0.82 BCF/D
4.65 BCF/D
(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
35
Range of Levelized Cost of New Generating
Technologies Due To Regional Cost Differences, 2016
Plant Type
Range for Total System Levelized Costs
(2009 ¢/megawatt hour)
Minimum
Conventional Coal
Average
Maximum
8.55
9.48
11.08
10.07
10.94
12.21
- Conventional Combined Cycle
6.00
6.61
7.41
- Advanced Combined Cycle
5.69
6.31
7.05
10.97
11.39
12.14
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
Advanced Coal
Natural Gas-fired
Advanced Nuclear
Wind
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
36
CNG/Natural Gas Vehicles
37
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
38
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
39
Demand Increase By 2015?
Low Case
High Case
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
LNG
40
Oil Production Drives Investment Decisions for Gas
• Liquids production from shale plays > 3 million b/d by 2020
• Associated natural gas > 7 Bcf/d of “costless” supply
Bcf/d
Annual Production from Unconventional Reservoirs
8
MMB/d
4.0
Includes Eagle Ford, W. Barnett, Bakken Shales;
Granite Wash, Piceance & Uinta Tight Sands
7
3.5
6
5
3.0
Liquids
Gas
2.5
4
2.0
3
1.5
2
1.0
1
0.5
0
0
2010
2011E
2012E
2013E
2014E
Source: Advanced Resource Intl presentation to Cheniere Board, March 2011; Cheniere Research
Slide from U.S. LNG Exports & Unconventional Gas presentation, Charif Souki, Cheniere Energy, Inc.
2015E
2020E
41
Conclusions
• A significant demand response won’t occur for at least 35 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
42
Citations for Report
All 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 Research
Office of Oil and Gas Global Security and Supply
Office of Fossil Energy
U.S. Department of Energy
U.S. Federal Energy Regulatory Commission
Institute for Energy Research (IER)
Energy Information Administration (EIA)
Bernstein Research
EnCana
Raymond James and Associates, Inc.
Western Energy Alliance
Bill Bradley, Enterprise
Sutherland LNG Blog
www.Kitimatlngfacility.com
43
Contact Information
John A. Harpole
President
Mercator Energy LLC
26 W. Dry Creek Circle, Suite 410
Littleton, CO 80120
harp@mercatorenergy.com
(303) 825-1100 (work)
(303) 478-3233 (cell)
44