©BEG-CEE-UT, 1

Gürcan Gülen, Ph.D.

Plenty of Gas Resources; How About Deliverability and Demand?

Flevum Shale Gas Conference UtrechtNovember 12, 2013

©BEG-CEE-UT, 2

Gürcan Gülen, Ph.D.

Outline

• Historical perspective on predicting the future• Resources: TRR, ERR, Reserves

– BEG shale gas resource assessment– Breakeven economics & producer finances

• Difficulty of predicting demand– Power generation– Industrial use– Exports (LNG & pipeline)– Transportation sector 

©BEG-CEE-UT, 3

Gürcan Gülen, Ph.D.

Global LNG Flows – Expectations Few Years Back  

2000

EXPANDING FLOW TRENDS

2030

Source:  NPC 2007, consolidated forecasts

New terminals built in the US since 2000: Sabine Pass (LA), Freeport (TX), Cameron (LA), 

Golden Pass (TX)

©BEG-CEE-UT, 4

Gürcan Gülen, Ph.D.

Source: U.S. FERC and industry reports as compiled by CEE‐UT.

Today, Much Idle Capacity in NA

©BEG-CEE-UT, 5

Gürcan Gülen, Ph.D.

Thanks to Shale Gas Production

Source: EIA Annual Energy Outlook 2013 ©BEG-CEE-UT, 6

Gürcan Gülen, Ph.D.

©BEG-CEE-UT, 7

Gürcan Gülen, Ph.D.

Technically Recoverable Resource Estimates

Source: Based on a widely used chart produced by Gas Technology Institute (GTI).

©BEG-CEE-UT, 8

Gürcan Gülen, Ph.D.

Shale Gas Mostly Responsible for Increased Estimates but…

Source: McGlade C, Speirs J, Sorrell S (2013).  Unconventional gas – A review of regional and global resource estimates.  Energy. 

• Shale gas resource estimates cover a wide range• Some are for TRR; others are for ERR• Assumptions & approach not always transparent

©BEG-CEE-UT, 9

Gürcan Gülen, Ph.D.

www.beg.utexas.edu/sloan.php

Econometric Analysis:Validate Decline Curve;

Test Geologic and Other parameters;

Describe “typical well”

Well Economics:Attrition rate,

Breakeven prices,Representative well

profiles (by tier)

Production Outlook:

Pace of drilling and ultimate recovery

w.r.t. Prices, Technology,

and Time

Log and seismic data

Production history data

and directional

surveys

Geologic Analysis:Structure, porosity, net pay-zone maps

Decline Analysis:Production rate estimate, EURs

Spacing Study:Well Recovery,Drainage Areas,

Infill drilling locations (by

tier)=> Technically Recoverable Resources

BEG’s Integrated Approach: Barnett, Fayetteville, Haynesville, Marcellus 

Funded by Alfred P. Sloan Foundation ©BEG-CEE-UT, 10

Gürcan Gülen, Ph.D.

$-

$1

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$10

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1

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1995 2000 2005 2010 2015 2020 2025 2030

Hen

ry H

ub $

2010

Tcf p

er Y

ear

Tcf per Year (Base Case Sensitivity to Price)

Tcf @ $10 HH

Tcf @ $6 HH

Tcf @ $4 HH

Tcf @ $3 HH

Henry Hub$2010

Barnett Shale Resources

Base Case @ $4 HH45 Tcf Cumulative Production

©BEG-CEE-UT, 11

Gürcan Gülen, Ph.D.

At What Price Can the Producers Deliver?

Monitoring U.S./Global Oil and Gas: Upstream Attainment, Producer Challenges http://www.beg.utexas.edu/energyecon/thinkcorner/Think%20Corner%20‐%20Producers.pdf

NGL Uplift: how much, when & where?

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Gürcan Gülen, Ph.D.

Depends on Location

$0

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Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 Tier 6 Tier 7 Tier 8 Tier 9 Tier 10

Barnett Low Btu

Barnett High Btu

$4 Henry Hub

Breakeven Economics – 10% IRR

BEG analysis.

©BEG-CEE-UT, 13

Gürcan Gülen, Ph.D.

Price Expectations 

Foss et al, “Sharp Cycles Ahead” Oil & Gas Investor, September 2013©BEG-CEE-UT, 14

Gürcan Gülen, Ph.D.

How Much Demand?  At What Price?

• Power generation• Industrial demand• Exports (LNG and pipeline)• Transportation (LNG, CNG)

©BEG-CEE-UT, 15

Gürcan Gülen, Ph.D.

Different Views of the World

0.0

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2010 2015 2020 2025 2030 2035 2040

Consumption of Natural Gas (Index, 2010 = 1)

AEO Real GDP IHS Real GDP AEO IndustrialIHS Industrial AEO Electricity IHS Electricity

Based on data from EIA AEO 2013 & IHS Global Insight

Avg y‐y growth of 2.5%

©BEG-CEE-UT, 16

Gürcan Gülen, Ph.D.

Gas Use in Generation Increased

15% 2% 19% 3% 52% 1998

31% 5% 19% 0% 37% 2012

Net generation by fuel, 1998‐2012

©BEG-CEE-UT, 17

Gürcan Gülen, Ph.D.

More Risk for Coal & Nuclear

• Pending EPA regulations on SO2/NOX, mercury, water, coal ash, GHG

• State‐level regulations• Up to 80 GW of coal capacity may retire by 2020 

– announced about 32 GW (2014‐2020)– 2.6 GW in 2011; 8 GW in 2012; 2 GW in 2013 YTD already retired (mostly older, smaller units)

• 4 recent nuclear retirement announcements; more on the way?

©BEG-CEE-UT, 18

Gürcan Gülen, Ph.D.

A Scenario on Gas Use in Power

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2030

Qua

ds

Nuclear shutdowns

Change in Gas Price Forecast

Coal risks

U.S. Gas‐Power Linkages: Building Future Views for details: http://www.beg.utexas.edu/energyecon/thinkcorner/Think%20Corner%20Gas‐

Power%20Linkages.pdf

1 Quad 1 tcf ~2.7 bcfd

©BEG-CEE-UT, 19

Gürcan Gülen, Ph.D.

Dampers on Gas Use in Power

• Currently, coal is competitive with gas at $4‐4.5/MMBtuof gas price (even at $3.5 in some locations)

• Renewables capacity has been growing– Better capacity factors for wind– Declining cost of PVs (thanks to Chinese subsidies)– Storage projects seem to be moving forward

• Smart grid and demand response• Energy efficiency and conservation (EIA AEO 2013 Reference Case: 0.9% annual demand growth; 0.2% in “best technology available” case)

©BEG-CEE-UT, 20

Gürcan Gülen, Ph.D.

Increased Industrial Competitiveness

HH WTI Ratio2005 $8.69 $56.64 6.52012 $2.75 $94.00 34.2

American Chemistry Council, Shale Gas Study (May 2013)

What happens if the WTI‐HH ratio declines?

©BEG-CEE-UT, 21

Gürcan Gülen, Ph.D.

Volatile Markets

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140%HH % of OilPropane % of OilNGL Composite % of OilFrac Spread ‐ PropaneFrac Spread ‐ NGL Composite

©BEG-CEE-UT, 22

Gürcan Gülen, Ph.D.

Risks for Industrial Demand

• Need to export petrochemical products– Domestic market seems saturated

• Tremendous petchem capacity additions globally• Ethane‐naphtha cost differential • Frac spread (ethane‐natural gas)• Infrastructure bottlenecks

– Tens of billions of dollars worth of pipeline & processing projects are planned or already under development

©BEG-CEE-UT, 23

Gürcan Gülen, Ph.D.

Industrial Gas Demand – A Growth Scenario based on Projects in Progress

CEE analysis ©BEG-CEE-UT, 24

Gürcan Gülen, Ph.D.

Increasing Gas Exports• Several terminals received permits to export LNG to non‐FTA countries  – Construction started on 2 liquefaction trains of the Sabine Pass terminal in August 2012

– The first exports are not expected until 2016  • EIA AEO: 4.4 bcfd by 2027 (1.6 tcf per year)• Others: 6‐8 bcfd by 2020 and 8‐10 bcfd by 2025 (3.6 tcf)

• Pipe exports to Mexico was 0.6 tcf in 2012– Expected to reach 2.4 tcf by 2040 (EIA AEO) or sooner (much sooner).

©BEG-CEE-UT, 25

Gürcan Gülen, Ph.D.

©BEG-CEE-UT, 26

Gürcan Gülen, Ph.D.

Is there Room for U.S. LNG Exports?

Source: Howard V. Rogers, Senior Research Fellow, The Oxford Institute for Energy Studies, and David Ledesma, South‐Court, LNG 17, Houston, 2013.

Non‐North American LNG Supply

2012 Consumption: 328 bcm

2012 Liquefaction capacity: 388 bcm

©BEG-CEE-UT, 27

Gürcan Gülen, Ph.D.

Global LNG Market Risks• Slow economic recovery / growth

– Continental European demand fell 6+ million tons (or ~9 bcm) between 2012 and 2013

• Japan re‐opening nuclear plants• Increased pipeline trade• Russia “flooding” the market; non‐Gazprom exports?

• Global shale gas production (longer term)• Increased & more effective use of renewables; energy efficiency & conservation

©BEG-CEE-UT, 28

Gürcan Gülen, Ph.D.

Changing World LNG Trade –Exporters Mix

Indonesia36%

Malaysia15%

Australia11%

Brunei9%

United States (export)

2%

Abu Dhabi8%

Algeria19%

Libya2%

Source: CEE calculations based on petroleum‐economist.com and BP Statistical Review of World Energy

Small group dominated by Asian suppliers (1995)

Much more diversified, emerging Middle East suppliers led by Qatar

©BEG-CEE-UT, 29

Gürcan Gülen, Ph.D.

0123456789

10111213141516

Low Cost High HH High CostEurope

High CostPacific

$/M

MB

tu

RegasificationShippingLiquefactionHenry Hub

Is U.S. LNG Competitive?

$9/MMBtu European floor

CEE analysis

$10/MMBtu NBP

$15‐16/MMBtu Asia spot

$11/MMBtu Japan 2010

©BEG-CEE-UT, 30

Gürcan Gülen, Ph.D.

NG Use in Transportation Encouraged by Diesel‐NG Price Differential

 $‐ $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00

Jan‐1997

Mar‐1998

May‐1999

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000

Sep‐2001

Nov

‐2002

Jan‐2004

Mar‐2005

May‐2006

Jul‐2

007

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Nov

‐2009

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Mar‐2012

Diesel and Natural Gas Spot Prices (1997‐2013)

Henry Hub Gulf CoastNatural Gas Spot Price($/DGE)U.S. No 2 Diesel RetailPrices (Dollars per Gallon)

LNG $/DGE Estimate

LNG trucks are ~30% more expensive than diesel trucks with emission systems

CEE analysis

©BEG-CEE-UT, 31

Gürcan Gülen, Ph.D.

Infrastructure Challenge

• Only 32 public LNG fueling stations in operation, with about a third of them located in California; 41 private LNG filling stations; and 72 planned stations.  

• 587 CNG stations available to the public; 639 private filling stations; and 87 planned stations. 

• In comparison, there are 4,000 truck stops that sell diesel fuel.

©BEG-CEE-UT, 32

Gürcan Gülen, Ph.D.

Expectations

• The most aggressive scenarios: 1‐3 bcfd of incremental use by 2020 (1 tcf per year).

• EIA: less than 0.3 bcfdby 2020. 

• Current use is about 0.1‐0.2 bcfd.

American Clean Skies Foundation (2013)

©BEG-CEE-UT, 33

Gürcan Gülen, Ph.D.

Putting All Together

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2012 2015 2018 2021 2024 2027 2030

TCF

Transportation EIA ref

LNG exports EIA ref

Pipeline exports EIA ref

Power generation EIA ref

Industrial EIA ref

Other EIA ref

Dry gas prod EIA ref

Imports EIA ref

Total supply EIA ref

Total demand CEE High

Total supply EIA High OGR

©BEG-CEE-UT, 34

Gürcan Gülen, Ph.D.

CEE “What If” Scenario

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2012 2015 2018 2021 2024 2027 2030

TCF

LNG exports CEE

Pipeline exports CEE

Power generation CEE

Industrial CEE

Other CEE (EIA ref Other &Transportation)

©BEG-CEE-UT, 35

Gürcan Gülen, Ph.D.

What to Remember

• Shale gas resources are significant but– Costs for many locations are higher than $3‐3.5– Infrastructure bottlenecks and environmental regulations can delay development

– Conventional production has been declining– NGL revenues help

• Demand side puzzles– Export markets are needed, at least for liquids & petrochemical products

– The largest growth potential for gas use remains power generation, which depends on many uncertain factors

©BEG-CEE-UT, 36

Gürcan Gülen, Ph.D.

We Welcome Participation & Feedback

Gürcan Gülen, Ph.D.Senior Energy Economist

Center for Energy EconomicsBureau of Economic GeologyJackson School of GeosciencesThe University of Texas at Austin

713‐654‐5404 (o)gurcan.gulen@beg.utexas.edu

www.beg.utexas.edu/energyecon