'Shale Gas: Time to Invest, or Bubble About to Burst?' by Peter O'Malley, Canaccord at Mines and Money Hong Kong 2013

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'Shale Gas: Time to Invest, or Bubble About to Burst?' by Peter O'Malley, Canaccord at Mines and Money Hong Kong 2013

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  • 1. Presented at:www.minesandmoney.com/hongkong
  • 2. PRIVATE & CONFIDENTIALShale Gas:The Unconventional Gas RevolutionMarch 2013
  • 3. What is shale gas?Page 3ShaleLaminatedLaminatedLaminatedLaminated, indurated consolidated source rock, indurated consolidated source rock, indurated consolidated source rock, indurated consolidated source rock~50% of all sedimentary rocks are shaleSome shale contains organic material (kerogen) – source of natural gasHigh permeability, low porositySource: American Geological Institute, Science Media Centre of CanadaShale gasMethaneMethaneMethaneMethane is the largest constituent of shale gasis the largest constituent of shale gasis the largest constituent of shale gasis the largest constituent of shale gasThermogenic formation, but shallow shale gas contains biogenic materialShale gas reservoirs and extractionShale gas is trapped in rock formations and carbon-rich organicmatterHydraulic fracturing is used to release and collect the trapped gasHydraulic fracturing is used to release and collect the trapped gasHydraulic fracturing is used to release and collect the trapped gasHydraulic fracturing is used to release and collect the trapped gasShale reservoirs are generally hundreds to thousands of feet belowaquifers
  • 4. Unlocking shale potentialSource: ForbesStage 1: horizontal drillingHorizontal drilling allows pipe setting for a mile or more horizontally throughHorizontal drilling allows pipe setting for a mile or more horizontally throughHorizontal drilling allows pipe setting for a mile or more horizontally throughHorizontal drilling allows pipe setting for a mile or more horizontally throughthe same rock formationthe same rock formationthe same rock formationthe same rock formation >>>>10101010,,,,000000000000 feetfeetfeetfeet undergroundundergroundundergroundundergroundSingleSingleSingleSingle horizontal well replaces the need to drill a dozen or more vertical wells,horizontal well replaces the need to drill a dozen or more vertical wells,horizontal well replaces the need to drill a dozen or more vertical wells,horizontal well replaces the need to drill a dozen or more vertical wells,which reduces emissions,which reduces emissions,which reduces emissions,which reduces emissions, waterwaterwaterwater usage and disposal needsusage and disposal needsusage and disposal needsusage and disposal needsStage 2: perfing and fraccingPerfing: an electrical current sent down via the perforating gun to set off acharge that shoots small holes through the casing and cementFraccingFraccingFraccingFraccing: concentrated hydraulic assaults that create long cracks, allowing: concentrated hydraulic assaults that create long cracks, allowing: concentrated hydraulic assaults that create long cracks, allowing: concentrated hydraulic assaults that create long cracks, allowingmore gas to flowmore gas to flowmore gas to flowmore gas to flow intointointointo the pipethe pipethe pipethe pipeFraccing is completed multiple times to cover the horizontal distance of thewellborePage 4
  • 5. Shale gas resources around the worldSource: EIAPage 5Region Resource (tcf)1 North America 1,3892222 ChinaChinaChinaChina 1,2751,2751,2751,2753 Latin America 1,2254 Africa 1,0425 Europe 6396 Australia 396
  • 6. Shale gas in North America (cont’d)Recoverable shale gas resource in North America is 1,389 tcf ; 862 tcf in the U.S. (compared to Qatar’s shale gas reserveof 899 tcf)U.S. natural gas consumption accounts for 20% of the global total, at 22 tcf /yearU.S. shale gas production accounted for ~2% of total natural gas production in 2000, but will reach 49% by 2035Current shale gas production volume is 22bcf/day, coming from main production areas such as Haynesville, Barnett,Fayetteville, and MarcellusUS domestic gas production25201510501990 1995 2000 2005 2010tcf/yearConventional Tight Gas CBM Shale GasPage 6Source: Wood Mackenzie, EIAMowry Gammon BakkenExcello/MulkyNew Albany86-160tcfAntrim35-76tcfHorton BluffUticaMarcellusHuronChattanoogaFloyd andConasauga/NealFayettevilleCaney and WoodfordHaynesville/BossierWoodfordPearsallBarnett25-252tcfBarnettand WoodfordPaloDuroPierreHovenweepLewis and Manos97tcfCaneCreekMcClureMontereyMancosBaxterGreenRiverNiobrara
  • 7. Exploration Appraisal Development ProductionConventional vs. unconventional lifecycleWellsWellsWellsWells experience significant declines in productivity over time.experience significant declines in productivity over time.experience significant declines in productivity over time.experience significant declines in productivity over time. Wells typically found in the Marcellus Shale experience aproduction decline rate of ~65-86% within the first 12 months with subsequent declines in production throughout theremaining life of the well− Low permeabilityLow permeabilityLow permeabilityLow permeability characteristics of shale deposits− Low concentrationLow concentrationLow concentrationLow concentration of gas, spread over large areasDecrease in production each year leads to reductionto reductionto reductionto reduction in annual revenuein annual revenuein annual revenuein annual revenue from the wells− Producers often enter into contracts with a set production quantitycontracts with a set production quantitycontracts with a set production quantitycontracts with a set production quantity for a set amount of time, which worsens the situation− As productivity of wells decline, producers need toneed toneed toneed to bring new wells onlinebring new wells onlinebring new wells onlinebring new wells online− Another option is to increase productivity via well stimulationincrease productivity via well stimulationincrease productivity via well stimulationincrease productivity via well stimulation (i.e. more hydraulic fracturing, but costly)Page 7Conventional asset lifecycleUnconventional asset lifecycleConcept Pilot Ramp-up Manufacture ExploitSource: Wood Mackenzie, CNBC251510500 5 10 15 20mmcfdYearGas production curveAverage cost per wellAverage cost per wellAverage cost per wellAverage cost per wellHigh: US$12mnLow: US$2.5mnMedium: US$7.25mn
  • 8. Economic opportunitiesPage 8Range of breakeven prices for probable new developments by resource themeSource: Wood Mackenzie• Low developmentLow developmentLow developmentLow development costcostcostcost turns positive cash flow early• Low cost/profitability comes down to stimulation and manufacturingstimulation and manufacturingstimulation and manufacturingstimulation and manufacturing− Development cost: ~US$5-10mn per well in the U.S.; breakeven cost: US$1.85-4.50/mcfe− Tight oil example: fixed costs at Bakken fell from US$35 in 2006 to about US$11 in mid-2009− Short time frame from acquiring a development to production, quick cash recovery0 10 20 30 40 50 60 70 80 90 100 110Oil Sands - IntegratedOil Sands - MiningOil Sands SAGDUltra-DeepwaterOffshoreNA tight OilOnshore - conventionalUS$ / bbl (Brent)US$ / bbl (Brent)US$ / bbl (Brent)US$ / bbl (Brent)
  • 9. Shale gas in China – will it become the next shale leader?China has the world’s largest shale gas resources with most of it untapped.China has the world’s largest shale gas resources with most of it untapped.China has the world’s largest shale gas resources with most of it untapped.China has the world’s largest shale gas resources with most of it untapped. Shale gas accounts for 66% of total resourcesDespite China’s slowing economy, Chinese gas demand is expected to grow by 40% over the next two yearsDomesticDomesticDomesticDomestic gas prices currently range from US$4/gas prices currently range from US$4/gas prices currently range from US$4/gas prices currently range from US$4/mcfmcfmcfmcf to US$6/to US$6/to US$6/to US$6/mcfmcfmcfmcf and PetroChina is leading further reforms to bring themcloser to international pricesPage 9Source: Bernstein research, Wood MackenzieKey focus regions for shale developmentUpper Yangtze and Yunnan,Guizhou, GuangxiTibet & QinghaiNorth WestMid/Lower Yangtze and South EastNorth and North EastRight ageRight shaleRight ageWrong shale?Wrong ageWrong shale?12345Shale gasShale gasShale gasShale gas842842842842 tcftcftcftcf66%66%66%66%ConventionalConventionalConventionalConventional230230230230 tcftcftcftcf18%18%18%18%CBMCBMCBMCBM204204204204 tcftcftcftcf16161616%%%%China’stotal gasresources
  • 10. The long awaited 12121212thththth Five Year PlanFive Year PlanFive Year PlanFive Year Plan highlighted thegrowing importance of shale to ChinaAmbitious 2020 targetAmbitious 2020 targetAmbitious 2020 targetAmbitious 2020 target of 6-10bcf/d (delivering over thenext 10 years what the U.S. did over the last 10 years), butbutbutbutlimited vision on how to do itlimited vision on how to do itlimited vision on how to do itlimited vision on how to do itOf the 3 oil majors, PetroChinaPetroChinaPetroChinaPetroChina is the most leveragedis the most leveragedis the most leveragedis the most leveraged –already holds the acreage and controls infrastructurewhere shale gas is locatedMore levered exposure to shale gas likely to come fromsmaller service names such as rig manufactures andspecialist small cap service companiesChina’s current progressChina saving for the future? Challenges and issues0 0 1 2 3 6.511182948802010 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020EChina is targeting 60-100bcm of shale gasproduction/year by 2020 (bcm)65% CAGR from 2015-2020Source: Bernstein researchCompany Blocks ProvinceWellsdrilledSuccesswells OthersPetroChinaWeiyuan Sichuan 11 4Changning SichuanZhaotong YunnanFushun-YongchuanSichuanSinopecJiannan SichuanHuangping Guizhou 5 2Nanchuan SichuanCNOOC AnhuiEarlyexplorationYanchang Yan’an Shaanxi 3Non-marineshalesCUCBMShouyang ShanxiQinyuan ShanxiJincheng ShanxiPage 10
  • 11. Shale gas in Australia – a commercial reality?Shale gas in AustraliaAustralian shale gas resources: 396 tcfIIIInnnn OOOOccccttttoooobbbbeeeerrrr 2222000011112222,,,, SSSSaaaannnnttttoooossss aaaannnnnnnnoooouuuunnnncccceeeedddd tttthhhheeee ffffiiiirrrrsssstttt sssshhhhaaaalllleeee ggggaaaassssproductionproductionproductionproduction from Australia’s Cooper BasinToo early to declare true commercialityToo early to declare true commercialityToo early to declare true commercialityToo early to declare true commerciality, but a milestonefor shale prospectsIIIInnnniiiittttiiiiaaaallll pppprrrroooodddduuuuccccttttiiiioooonnnn tttteeeessssttttssss ffffrrrroooommmm tttthhhheeee ffffiiiirrrrsssstttt ffffeeeewwww wwwweeeellllllllssss eeeexxxxcccceeeeeeeeddddeeeeddddexpectationsexpectationsexpectationsexpectations and are comparable with plays in the U.S.>US$1.5>US$1.5>US$1.5>US$1.5 bnbnbnbn has now been committedhas now been committedhas now been committedhas now been committed to shale or tightgas exploration since 2010Much work to be done− Shale breakevenShale breakevenShale breakevenShale breakeven costs for early wellscosts for early wellscosts for early wellscosts for early wells areareareareUS$15.5/mcfUS$15.5/mcfUS$15.5/mcfUS$15.5/mcf----US$18.5/US$18.5/US$18.5/US$18.5/mcfmcfmcfmcf, far higher than, far higher than, far higher than, far higher thanprevailing gas priceprevailing gas priceprevailing gas priceprevailing gas price− Cost of extraction needs to be reduced considerablyto turn Australias shale resource into a commercialreality (i.e. Fairview coal seam)Page 110 1000kmSource: Wood Mackenzie
  • 12. The geopolitical environment of shale gasUSAEuropeChinaAustraliaJapanMalaysiaQatarSabine PassIndiaSouth AmericaAfricaCanadaPage 12Source: EIA
  • 13. Issues U.S. China Proposal from 12th FYPIndustryIndustryIndustryIndustrystructurestructurestructurestructure• CompetitionCompetitionCompetitionCompetition between E&P’s andintegrated oil companies forforforforacreageacreageacreageacreage• Unrestrained accessUnrestrained accessUnrestrained accessUnrestrained access for foreignO&G companies to participate• PetroChinaPetroChinaPetroChinaPetroChina and Sinopec dominateand Sinopec dominateand Sinopec dominateand Sinopec dominateonshore O&G resources• Restricted foreign participationRestricted foreign participationRestricted foreign participationRestricted foreign participation andlimited competition from smallercompanies• Encourage qualified companies toparticipate, but blocks will be takenback if no satisfactory progress• Signed joint studies agreement withShell, Statoil, Conoco, BP, Chevron, etc.InfrastructureInfrastructureInfrastructureInfrastructure • 600,000km of open accessopen accessopen accessopen accesspipelinepipelinepipelinepipeline• Many conventional wells, widelydistributed tie-in points minimizingminimizingminimizingminimizingnew infrastructure spendingnew infrastructure spendingnew infrastructure spendingnew infrastructure spending• Gas infrastructure is generally lackingGas infrastructure is generally lackingGas infrastructure is generally lackingGas infrastructure is generally lacking• No open access systemNo open access systemNo open access systemNo open access system with mostcapacity controlled by PetroChina• Transmit shale gas in existing naturalgas pipelines; construct pipelinenetworks• Utilize small scale CNG, LNG technologyto allow for local utilizationLicensingLicensingLicensingLicensing • Transparent licensingTransparent licensingTransparent licensingTransparent licensingarrangementsarrangementsarrangementsarrangements which allowscompetitive bidding for shale gasassets• No mineral definition for shale gaswhich prohibits legal development ofshale gas resources• License round procedures are adLicense round procedures are adLicense round procedures are adLicense round procedures are ad----hochochochoc• Establish criteria for entry into shale gas• Development and raise minimuminvestment requiredFiscalFiscalFiscalFiscal • Clear, established fiscal structureClear, established fiscal structureClear, established fiscal structureClear, established fiscal structure • Cumbersome PSC contracts forCumbersome PSC contracts forCumbersome PSC contracts forCumbersome PSC contracts forforeign investorsforeign investorsforeign investorsforeign investors• No subsidy or clarity on pricingNo subsidy or clarity on pricingNo subsidy or clarity on pricingNo subsidy or clarity on pricing• Introduce subsidies, establish clear,transparent fiscal structureInvestmentInvestmentInvestmentInvestment • Total capex investment of>US$1.9tn over next 25 years• CurrentCurrentCurrentCurrent capexcapexcapexcapex of US$33bnof US$33bnof US$33bnof US$33bn (whichequals total China upstreamexpenditure)• Sinopec plans to spend US$100mnSinopec plans to spend US$100mnSinopec plans to spend US$100mnSinopec plans to spend US$100mnover 3 yearsover 3 yearsover 3 yearsover 3 years on unconventional O&G• Doesn’t come close to required capexfor large scale development even iftogether with PetroChina• Enact incentives to encourageinvestments and to increase spendingon shale gas resources survey andevaluationTopographyTopographyTopographyTopography • Largely flat and rolling plainsLargely flat and rolling plainsLargely flat and rolling plainsLargely flat and rolling plainswhich allows drilling andmovement of equipment/vehicles• Many shale basins are located inmountainous regionsmountainous regionsmountainous regionsmountainous regions• n/aWhy the U.S. vs… say China?Source: Bernstein researchPage 13
  • 14. Why the U.S. vs… say China?Source: Bernstein researchIssues U.S. China Proposal from 12th FYPWaterWaterWaterWater • Per capital renewable waterrenewable waterrenewable waterrenewable waterresources 17,000mresources 17,000mresources 17,000mresources 17,000m3333 per yearper yearper yearper year,much higher than China• Significant issue inSignificant issue inSignificant issue inSignificant issue in TarimTarimTarimTarim basinbasinbasinbasin• Sichuan’s per capita water resource isper capita water resource isper capita water resource isper capita water resource islower than the USlower than the USlower than the USlower than the US• Recycled use of fraccing fluid to reducewater usageLand usageLand usageLand usageLand usage • NonNonNonNon----intensive farmingintensive farmingintensive farmingintensive farming and wellestablished rules of access• Sichuan is highly populatedhighly populatedhighly populatedhighly populated • Give priority to approving land use forshale gas developmentServiceServiceServiceServiceindustryindustryindustryindustry• Highly developed andHighly developed andHighly developed andHighly developed andsophisticatedsophisticatedsophisticatedsophisticated which can supportlarge scale development drilling• Will require land rigsWill require land rigsWill require land rigsWill require land rigs with capability forextended reach drilling plus fraccingextended reach drilling plus fraccingextended reach drilling plus fraccingextended reach drilling plus fraccingand pumping auxiliary servicesand pumping auxiliary servicesand pumping auxiliary servicesand pumping auxiliary services• Develop specialized domestic oil servicesand technology companiesTechnologyTechnologyTechnologyTechnology • AdvancedAdvancedAdvancedAdvanced in drilling rigs, multi-stage fraccing, propant fluids andlogging tools• Chinese majors relativelyinexperiencedinexperiencedinexperiencedinexperienced• Foreign participation will be keyForeign participation will be keyForeign participation will be keyForeign participation will be key totechnology transfer• Establish national research center ofshale gas• Provide tariff exemption for importing ofshale gas equipmentShaleShaleShaleShale depthdepthdepthdepth • ShallowShallowShallowShallow, paleozoic plays at 2-4km • Deeper in SichuanDeeper in SichuanDeeper in SichuanDeeper in Sichuan (4-4.5km)• Require deeper wells/more costly• n/aInert gasesInert gasesInert gasesInert gases • Fewer issues with H2S and CO2 • Sichuan basin has high composition ofH2S (>1%)• n/aLiquidsLiquidsLiquidsLiquidscontentcontentcontentcontent• Large number of liquid playsliquid playsliquid playsliquid plays suchas Eagle Ford, Barnett and GraniteWash which significantly enhancesenhancesenhancesenhanceseconomic value of gaseconomic value of gaseconomic value of gaseconomic value of gas• Limited info on shale liquidLimited info on shale liquidLimited info on shale liquidLimited info on shale liquid content • n/aStructuralStructuralStructuralStructuralcomplexitycomplexitycomplexitycomplexity• Low levels of structuralLow levels of structuralLow levels of structuralLow levels of structuraldeformationdeformationdeformationdeformation and complexity• More structurally deformedMore structurally deformedMore structurally deformedMore structurally deformed whichadds to development complexity• n/aPage 14
  • 15. Why the U.S. vs…say China?Source: EIAPipeline comparisonChinaU.S.Page 15
  • 16. FastestFastestFastestFastest growinggrowinggrowinggrowing naturalnaturalnaturalnatural gasgasgasgas marketmarketmarketmarket− Aggregate demand for natural gas in emerging or non-OECDAsia is ~400 bcm− Growth over the next decade is expected to be ~9%Limited growth in supplyLimited growth in supplyLimited growth in supplyLimited growth in supply– Indonesia, Malaysia, India and ThailandIndonesia, Malaysia, India and ThailandIndonesia, Malaysia, India and ThailandIndonesia, Malaysia, India and Thailand are all experiencinga slowslowslowslow----down in conventional gas productiondown in conventional gas productiondown in conventional gas productiondown in conventional gas production– Resulting in shift from being a net exporter of natural gas tobeing a net importer of gasIf unconventional gas resources left untapped, Asia will needAsia will needAsia will needAsia will needto dramatically increase importsto dramatically increase importsto dramatically increase importsto dramatically increase importsEstimated gas deficit of 300 bcm (30 bcf/d) by 2020Non-OECD Asia demand and supply gapWhy Asia needs an unconventional gas resolutionPage 16010020030040050060070080090010002000 2005 2010 2015 2020bcmbcmbcmbcmNatural gas production Natural gas consumptionNon-OECD Asia gas demandsurpassed gas productionin 2011Supply gap of over 300bcm expected in 2010Source: Bernstein research-350-300-250-200-150-100-500501002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20202012 2013 2014 2015 2016 2017 2018 2019 2020NonNonNonNon----OECD Asia exported gas for three decadesOECD Asia exported gas for three decadesOECD Asia exported gas for three decadesOECD Asia exported gas for three decadesSupply gap requires over 300Supply gap requires over 300Supply gap requires over 300Supply gap requires over 300 bcmbcmbcmbcm net imports in 2020net imports in 2020net imports in 2020net imports in 2020
  • 17. Market based gas pricing in AsiaKey requirement for unconventional gas to workDevelopment of a market based gas pricingmarket based gas pricingmarket based gas pricingmarket based gas pricing system is one ofsystem is one ofsystem is one ofsystem is one ofthe most significant challengesthe most significant challengesthe most significant challengesthe most significant challenges− In the U.S., high gas prices in the last decade were a keyincentive to the development of unconventional gas supply− In Asia, one of the key challenges is regulated domestic gaspricingIn most Asian countries, price of domestic gas is set by theIn most Asian countries, price of domestic gas is set by theIn most Asian countries, price of domestic gas is set by theIn most Asian countries, price of domestic gas is set by thegovernmentgovernmentgovernmentgovernment− As a result, gas prices stayed at sufficiently low levels todiscourage the development of unconventional gas− Easier toEasier toEasier toEasier to import expensive LNG than raise domestic gasimport expensive LNG than raise domestic gasimport expensive LNG than raise domestic gasimport expensive LNG than raise domestic gasprices and produce shale gasprices and produce shale gasprices and produce shale gasprices and produce shale gasOver the past 10 years, domestic gas prices in Asia increasedfrom around US$2/mscf to US$5/mscfPricePricePricePrice reformreformreformreform policies are underpolicies are underpolicies are underpolicies are under proposalproposalproposalproposal in China, India, andIndonesia, which should result in significant increase in gasprices (from US$5/mscf to US$8-10/mscf)Even in Eastern Australia where gas prices are market driven,Even in Eastern Australia where gas prices are market driven,Even in Eastern Australia where gas prices are market driven,Even in Eastern Australia where gas prices are market driven,prices have risen to US$7prices have risen to US$7prices have risen to US$7prices have risen to US$7----8/8/8/8/mscfmscfmscfmscf as markets start to tightenas markets start to tightenas markets start to tightenas markets start to tightenhead of the start up of LNG export projectshead of the start up of LNG export projectshead of the start up of LNG export projectshead of the start up of LNG export projectsHistorical long-term gas price trend in AsiaPage 17CountryUS$/mscfold priceUS$/mscfnew price MechanismChina 3-4 8-10 FO & LPGAustralia 3-4 7-8 Gas on gas competitionIndonesia 3-4 8-9 RegulatedThailand 5 6-8 Inflation, US PPI, FOJapan 12 16-20 JCC linkedKorea 12 16-20 JCC linkedIndia 4 6-12 RegulatedIncreasing gas prices encourage unconventionalgas solutions643210US$/mscfRange Average1999 2001 2003 2005 2007 2009 20115Source: Bernstein research
  • 18. Unconventional resources are the key theme in global M&ASource: Wood MackenzieNote: Companies highlighted are Majors, International Large Caps and other notable players, at point of entry. Chort shows only acquisitions, and does not account for “grass roots” leasing. Excludes ExxonMobil/XTO and ConocoPhillips/Burlington dealsUnconventionalUnconventionalUnconventionalUnconventional resources represent US$131bn, or 33%resources represent US$131bn, or 33%resources represent US$131bn, or 33%resources represent US$131bn, or 33% ofofofof total upstream global M&A spendtotal upstream global M&A spendtotal upstream global M&A spendtotal upstream global M&A spend in thein thein thein the past threepast threepast threepast three yearsyearsyearsyearsNorth America represents 34% of the total upstream global M&A spend in the past three yearsAcquisitive NOC’s/10C’s: Petronas, KNOC, PTTEP, Total, PetroChina, CNPC, CNOOC, Sinopec, Sinochem, KPCIn 2012, Asian NOC’s spent US$47In 2012, Asian NOC’s spent US$47In 2012, Asian NOC’s spent US$47In 2012, Asian NOC’s spent US$47 bnbnbnbn on M&A; Chinese NOCs were the largest spenderon M&A; Chinese NOCs were the largest spenderon M&A; Chinese NOCs were the largest spenderon M&A; Chinese NOCs were the largest spender− SinochemSinochemSinochemSinochem/Pioneer Natural Resources (horizontal/Pioneer Natural Resources (horizontal/Pioneer Natural Resources (horizontal/Pioneer Natural Resources (horizontal WolfcampWolfcampWolfcampWolfcamp shale),shale),shale),shale), US$1.7bnUS$1.7bnUS$1.7bnUS$1.7bn− Sinopec/Chesapeake Energy (half of the Mississippi Lime oil and gas properties), US$1.0bnSinopec/Chesapeake Energy (half of the Mississippi Lime oil and gas properties), US$1.0bnSinopec/Chesapeake Energy (half of the Mississippi Lime oil and gas properties), US$1.0bnSinopec/Chesapeake Energy (half of the Mississippi Lime oil and gas properties), US$1.0bnCumulative acquisition spend, shale gas vs. tight oil focused deals0Cumulativeacquisitionspend(US$million)2004 2005 2006 2007 2008 2009 2010 2011 201220406080100120Page 18
  • 19. NOC’s – overseas M&A climbing; North America a key targetSource: Wood MackenzieOverseas M&A spend, by NOC origin Overseas M&A spend, by deal geographyPage 19
  • 20. North America accounts for ~50% of global M&A spendRegional M&A 2012Global M&APage 20Source: Wood Mackenzie
  • 21. Outside of North America, M&A in 2012 has been relatively subduedSource: Wood MackenziePage 21
  • 22. Chinese NOC’s – competitive buyers; demand drivers remain in placeSource: Wood MackenzieNote: Overseas equity production PetroChina/CNPC, CNOOC, Sinochem and Sinopec (entitlement basis)Chinese NOC’s vs. global average China oil supply/demand balancePage 22
  • 23. Shale gas APAC M&A since 2010Australia is accounted for >30% of the natural gas transactions in Asia,which makes it the biggest M&A target in the regionPage 23Target country Deal countTransaction value(US$m)AustraliaAustraliaAustraliaAustralia 30303030 13,47413,47413,47413,474Kazakhstan 17 9,185Indonesia 13 2,617China 10 1,766India 4 16,103Thailand 4 280Caspian Sea 3 1,501Malaysia 3 757Vietnam 2 1,195Singapore 2 224New Zealand 2 84Philippines 2 69Papua new guinea 1 42Pakistan 1 775Hong Kong 1 77Japan 1 73Indonesia14%Australia31%China10%Kazakhstan18%New Zealand2%Malaysia3%Singapore2%CaspianSea3%Papua Newguinea1%Philippines2%Thailand4% India4%Vietnam2%Hong Kong1%Japan1%Pakistan1%Source Capital IQNatural gas M&A in APAC (deal volume)
  • 24. Australia is driving the M&A trend>US$1>US$1>US$1>US$1 bnbnbnbn has been committedhas been committedhas been committedhas been committed to shale or tight hydrocarbon exploration in 10 farm-in deals with Australia since mid-2010The leading Cooper BasinThe leading Cooper BasinThe leading Cooper BasinThe leading Cooper Basin players (CBJVplayers (CBJVplayers (CBJVplayers (CBJV, Beach Energy and, Beach Energy and, Beach Energy and, Beach Energy and SenexSenexSenexSenex Energy) haveEnergy) haveEnergy) haveEnergy) have dedicated around US$500mn todedicated around US$500mn todedicated around US$500mn todedicated around US$500mn toexploration programs over the nextexploration programs over the nextexploration programs over the nextexploration programs over the next twotwotwotwo yearsyearsyearsyearsIn contrast to CSG, where billions of dollars were spent on M&A, the majors and larger independents make far earlier entries to Australian shale playsBuyers avoid costly future acquisitions and give expertise and financial support to sellers with limited industry knowledge and small balance sheetsKey shale and/or tight gas farm-in deals since 2010Buyer Seller Date State/territory Basin Primary targetEstimated spending(US$m)Statoil Petrofrontier Jun-12 NT Georgina Oil 230Total Central Petroleum Nov-12 NT/QLD Georgina Gas 190Santos Central Petroleum Oct-12 NT Amadeus Gas 150HESS Falcon Oil and Gas May-11 NT Georgina Oil 140BG Drillsearch Energy Jul-11 QLD Cooper Gas 130ConcocoPhilips New Standard Energy Jul-11 WA Canning Gas 110Mitsubishi Buru Energy Jun-10 WA Canning Gas 80CNOOC Exoma Dec-10 QLD Galilee Oil 50Beach Energy Territory Oil and Gas Oct-11 NT Bonaparte Oil 36Senex Energy Planet Gas Aug-11 SA Cooper Gas 30TotalTotalTotalTotal 1111,,,,111144446666Source: Wood MackenziePage 24
  • 25. The future of shale gasHow the U.S. shale gas boom could impact emerging marketsThe unlocking ofThe unlocking ofThe unlocking ofThe unlocking of shaleshaleshaleshale gasgasgasgas resourcesresourcesresourcesresources via hydraulic fraccing is spurring economic activity and aaaaddddddddiiiinnnngggg aaaa ccccoooommmmppppeeeettttiiiittttiiiivvvveeee eeeeddddggggeeee ttttoooothe industry with less expensive gas and electricity pricesthe industry with less expensive gas and electricity pricesthe industry with less expensive gas and electricity pricesthe industry with less expensive gas and electricity pricesWith cheap energy,With cheap energy,With cheap energy,With cheap energy, U.S.U.S.U.S.U.S. manufacturing will pick up and move down the ladder to capturing the production of lessmanufacturing will pick up and move down the ladder to capturing the production of lessmanufacturing will pick up and move down the ladder to capturing the production of lessmanufacturing will pick up and move down the ladder to capturing the production of lesssophisticated goodssophisticated goodssophisticated goodssophisticated goods (i.e. computers, fabricated metals and automobiles) currently manufactured in emerging markets− As a result, the U.S.U.S.U.S.U.S. will likely compete with emerging marketswill likely compete with emerging marketswill likely compete with emerging marketswill likely compete with emerging markets for market share rather than being a consumer− Increases the need of emerging markets to improve manufacturing sophistication/technologyBNSF Railway to test switch to natural gasBNSF RailwayBNSF RailwayBNSF RailwayBNSF Railway, the second biggest U.S. consumer of diesel fuel, plansplansplansplans totototo test using natural gas to powertest using natural gas to powertest using natural gas to powertest using natural gas to power its locomotivesits locomotivesits locomotivesits locomotivesA gallon of diesel fuel costs US$3.97diesel fuel costs US$3.97diesel fuel costs US$3.97diesel fuel costs US$3.97 in 2012 on average, where as the equivalent natural gas costs US$0.48natural gas costs US$0.48natural gas costs US$0.48natural gas costs US$0.48− Weaken oil’s dominance as a transportation fuel in North America− The surplus spurred by new technologies has sent natural-gas prices plummeting, which prompted industries fromelectric utilities to tugboat operators to switch to gasCompaniesCompaniesCompaniesCompanies and government agencies increasingly are looking at using gasand government agencies increasingly are looking at using gasand government agencies increasingly are looking at using gasand government agencies increasingly are looking at using gas to power fleet vehicles, such as garbage trucksGas is also making inroads in marine vesselsGas is also making inroads in marine vesselsGas is also making inroads in marine vesselsGas is also making inroads in marine vessels− Wartsila Oyj last year signed contracts to send China the world’s first tugboats operating on diesel-LNG engines− Shell signed a MOU with Edison Chouest Offshore (ECO) to supply LNG fuel to marine vessels in the Gulf of MexicoUkraine reduces dependency on Russian gas importsUkraine’s state company Nadra Yuzivska and Shell signed a US$10bn to extract Ukraine’s shale gas resources, sharing a50-year production termPage 25Source: CNBC
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