plenty of resources; where is the demand? › publication › vwluassets › ey-americas...©cee-ut,...

©CEE-UT, 1

Gürcan Gülen, Ph.D.

Plenty of Resources; Where Is The Demand?

Americas Mining & Metals Forum 2013 September 12, 2013

©CEE-UT, 2


HOW IS THE ECONOMY DOING?

©CEE-UT, 3


It Was the Best of Times

• Unconventional resource boom

Cheap energy

Economic growth & jobs

Manufacturing renaissance

• Energy exports increase, imports decrease

improving current account balance

©CEE-UT, 4


It Was the Worst of Times

• Lack / shortage of human and supply chain resources

• Infrastructure bottlenecks

• Environmental & community concerns

• “Too” cheap energy – producers cannot make money

• Where is the demand?

©CEE-UT, 5


The Tale of Two (or more) Economies

• In the US, not everywhere is TX or ND

– Growth has been anemic and uneven

• Over time and across the states

• Labor force participation at historic lows

• ~2 million fewer jobs than early 2008

– Public discontent with and distrust of the political system

– Can the US reach a path of steady growth at 3%?

©CEE-UT, 6


How about our Partners in Trade?

• Europe’s crisis is long-term & can be contagious

• China is faltering (housing bubble?)

• Widespread public discontent with and distrust of the political systems

– Poverty remains a key driver

• Can they recover without structural (political and economic) reforms?

• Can the US recover at the desired rate if they do not?

©CEE-UT, 7


Infrastructure Upgrades are Necessary

• ASCE 2013 Report Card for U.S. Infrastructure:

– America’s infrastructure grade is D+

– $3.6 trillion of investment needed by 2020

• McKinsey Global Institute:

– The US must increase its annual infrastructure investment by $180 billion

– By 2020, up to 1.8 million jobs and up to $320 billion of additional annual GDP

• Long-term impact larger: $600 billion annually by 2030 http://www.mckinsey.com/insights/americas/us_game_changers?cid=game_changers-eml-alt-mgi-mck-oth-1307

http://www.infrastructurereportcard.org/

http://www.mckinsey.com/insights/americas/us_game_changers?cid=game_changers-eml-alt-mgi-mck-oth-1307

















©CEE-UT, 8


Education Quality has to Improve; Focus has to Change

• Need more STEM graduates

• Need more technicians of all kinds with special skills & training

– A college degree may not be necessary for a good job

• K-12 has to improve since it is the foundation

• McKinsey Global Institute:

– By 2020, up to $265 billion of additional annual GDP

• Long-term impact larger: $1,700 billion annually by 2030

©CEE-UT, 9


MUCH TO CHEER ABOUT IN THE ENERGY SECTOR BUT…

©CEE-UT, 10


Different Views of the World

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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 Industrial

IHS Industrial AEO Electricity IHS Electricity

Based on data from EIA AEO 2013 & IHS Global Insight

Avg y-y growth of 2.5%

©CEE-UT, 11


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)

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As late as 2008, More Import Terminals Were Proposed

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

Today, Much Idle Capacity in NA

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Thanks to Shale Gas Production

Source: EIA Annual Energy Outlook 2013

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Technically Recoverable Resource Estimates

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

Grown significantly over time.

©CEE-UT, 16


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

©CEE-UT, 17


Sources: IHS, DrillingInfo; USGS, TexasNRIS, Arkansas GS; Carrizo , ExxonMobil, Devon,

SWN, XTO, Chesapeake, MJ Systems, Cimarex.

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

©CEE-UT, 18


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Tcf @ $10 HH

Tcf @ $6 HH

Tcf @ $4 HH

Tcf @ $3 HH

Henry Hub$2010

Barnett Shale Resources Assumption Base case

- Henry Hub price for natural gas $4.00/MMBtu

- Partly drained acreage developable ceiling 80%

- Undrilled acreage developable ceiling 15%

- WTI price $80/bbl

- GPL/WTI price ratio 45%

- Annual technology improvement 0.39%

- Annual well-cost improvement 0.24%

- Economic limit for shutting-in a well (dry) 0.05 MMcf/d

- Economic limit for shutting-in a well (high Btu) 0.029 MMcf/d

- Minimum completions in a year (dry) 20 (Tiers 1–4) 2 (Tiers 5–10)

- Minimum completions in a year (high Btu) 25 (Tiers 2–5) 10 (Tiers 1, 6–10)

Base Case @ $4 HH 45 Tcf Cumulative Production

©CEE-UT, 19


Fayetteville Shale Resources

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HH $2010

Base Case @ $4 HH

18 Tcf Cumulative Production

©CEE-UT, 20


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

http://www.beg.utexas.edu/energyecon/thinkcorner/Think Corner - Producers.pdf





©CEE-UT, 21


Price Expectations

Foss et al, “Sharp Cycles Ahead” Oil & Gas Investor, September 2013

©CEE-UT, 22


Where is Demand? At What Price?

• Power generation

• Industrial demand

• Exports (LNG and pipeline)

• Transportation (LNG, CNG)

©CEE-UT, 23


Gas Use in Generation Increased

15% 2% 19% 3% 52% 1998

31% 5% 19% 0% 37% 2012

Net generation by fuel, 1998-2012

©CEE-UT, 24


More Risk for Coal & Nuclear

• Pending EPA regulations on SO2/NOX, mercury, water

– CSAPR stayed by federal court; can go to Supreme Court

• State-level regulations, including GHG

– New Obama climate change plan

• Up to 80 GW of coal capacity may retire by 2020; announced more than 30 GW; 8 GW retired in 2012

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

©CEE-UT, 25


A Scenario on Gas Use in Power

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Qu

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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

http://www.beg.utexas.edu/energyecon/thinkcorner/Think Corner Gas-Power Linkages.pdf





©CEE-UT, 26


Dampers on Gas Use in Power

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

• Renewables capacity has been growing

– Better capacity factors for wind

– Low 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)

©CEE-UT, 27


Increased Industrial Competitiveness

HH WTI Ratio 2005 $8.69 $56.64 6.5 2012 $2.75 $94.00 34.2

American Chemistry Council, Shale Gas Study (May 2013)

What happens if the WTI-HH ratio

declines?

©CEE-UT, 28


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

©CEE-UT, 29


Processing Capacity

http://www.eia.gov/todayinenergy/detail.cfm?id=8530

517 facilities; 66 bcfd capacity by EIA v 72 bcfd

by Bentek/Platts

12-15 bcfd of new capacity by 2015 – 47 new

plants + 41 expansions

(Bentek/Platts)

Mt. Belvieu

©CEE-UT, 30


NGL Pipelines & Fractionation

• Pipeline capacity expected to increase to 3.9 mbd by end of 2014 from 2.4 mbd

– ~1.1 mbd of this increase targeting Mont Belvieu

• Fractionation capacity expected to increase by ~1.4 mbd nationwide

– ~0.8 mbd of this increase targeting Mont Belvieu

• Short-term risk of overbuilding pipe capacity relative to capacity expansion in Mont Belvieu

©CEE-UT, 31


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

CEE analysis

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bcf

d

Chlor-Alkali

Methanol/Ammonia/Urea

Polypropylene

Polyethylene

Ethylene

Base Demand

©CEE-UT, 32


Increasing Gas Exports

• Three terminals in the Gulf Coast received permits to export LNG to non-FTA countries

– Construction started on the first two 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)

• Pipeline exports to Mexico increased to 1.4 bcfd (0.5 tcf per year); expected to reach 6.6 bcfd (2.4 tcf per year) by 2040 (EIA AEO).

©CEE-UT, 33


©CEE-UT, 34


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

©CEE-UT, 35


Global LNG Demand Risks

• Japan re-opening nuclear plants

• Increased pipeline trade

• Russia “flooding” the market

• Shale gas production picking up globally

• Increased & more effective use of renewables

©CEE-UT, 36


Changing World LNG Trade – Exporters Mix

Indonesia36%

Malaysia15%

Australia11%

Brunei9%

United States (export)

2%

Abu Dhabi8%

Algeria19%

Libya2%

LNG Exporters 1995

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

©CEE-UT, 37


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High CostPacific

$/M

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Regasification

Shipping

Liquefaction

Henry Hub

Is U.S. LNG Competitive?

$9/MMBtu Current European floor

CEE analysis

©CEE-UT, 38


NG Use in Transportation Encouraged by Diesel-NG Price Differential

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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

©CEE-UT, 39


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.

©CEE-UT, 40


LNG Filling Stations

http://www.afdc.energy.gov/locator/stations/

Existing Public

Existing & Planned (Public & Private)




©CEE-UT, 41


Expectations

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

• EIA: less than 0.3 bcfd by 2020.

• Current use is about 0.1-0.2 bcfd.

American Clean Skies Foundation (2013)

©CEE-UT, 42


Additional Markets

• Marine use is the second largest potential market after trucking – emissions restrictions in ports could encourage faster transition

• Railways have been evaluating LNG and may be next in line to switch

• Drilling operations

• Substitute for propane in remote locations

• Boilers, power generation

©CEE-UT, 43


LNG Exports & Use to Remain Low

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U.S. Natural Gas Disposition

Transportation

GTL

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Pipeline Fuel

Lease & Plant Fuel

Electric Power

Industrial

Commercial

Residential

LNG Net Imports

Pipeline Net Imports

EIA Annual Energy Outlook (2013)

©CEE-UT, 44


What to Remember • The U.S. economy is doing better than most partially

thanks to unconventional resource development

– Created jobs along a wide-ranging supply chain

– Use of advanced technology is probably fueling more R&D

– Supplied affordable energy

• But, domestic and external risk factors remain

– The US needs export markets to sustain production

– Environmental concerns can curtail development

• Energy efficiency and conservation may dampen the growth of electricity and fuel demand

©CEE-UT, 45


We Welcome Participation & Feedback


Senior Energy Economist Center for Energy Economics Bureau of Economic Geology

Jackson School of Geosciences The University of Texas at Austin

713-654-5404 (o) [email protected]

www.beg.utexas.edu/energyecon

mailto:[email protected]

http://www.beg.utexas.edu/energyecon

plenty of resources; where is the demand? › publication › vwluassets › ey-americas...©cee-ut,...

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