Hughes brussels may 14 2013 1

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Drawing on his 'Drill, Baby. Drill' report for the Post-Carbon Institute, J. David Hughes explains how shale gas production in the US has already peaked and how a further reliance on shale gas will lead to a drilling treadmill.

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Hughes brussels may 14 2013 1

  1. 1. The Shale Revolution in North America:Myths and RealitiesBeyond the Hype: Economics of Shale Gas in EuropeEU ParliamentBrussels, BelgiumMay 14, 2013J. David HughesPost Carbon Institute
  2. 2. Conventional Wisdom- The United States is on the verge of Energy Independence thanks tothe Shale “REVOLUTION”.- Shale Gas production will continue to grow for the foreseeable future(2040 at least) and prices will remain below $4.50/mcf for the next 10years and below $6.00/mcf for the next 20 years.- The way is clear for U.S. LNG exports to monetize the shale bounty.© Hughes GSR Inc, 2012- Tight Oil will allow U.S. production to exceed that of Saudi Arabiaand U.S. imports will shrink to zero.- The Shale “REVOLUTION” will provide Europe with a growingsupply cheap gas for the foreseeable future.- Shale Gas can replace very substantial amounts of oil for transportand coal for electricity generation.
  3. 3. 051015202530352010 2015 2020 2025 2030 2035 2040TrillionCubicFeetperYearYearLNG Imports Canada Imports Shale GasAlaska Coalbed Methane Tight GasAssociated Conventional OffshoreU.S. Natural Gas Supply Projection by Source, 2010-2040,EIA Reference Case 2013Shale GasCoalbed Methane50%of2040Production55% increase inproduction by 2040Tight GasConventionalOffshoreAssociatedAlaskaU.S. Domestic consumption(data from EIA Annual Energy Outlook 2013, Tables 13 and 14, http://www.eia.gov/forecasts/aeo/er/excel/yearbyyear.xlsx© Hughes GSR Inc, 2012
  4. 4. 051015202530350369121518211995 1999 2003 2007 2011 2015 2019 2023 2027 2031 2035 2039AnnualGasProduction(Trillioncubicfeet)GasPrice($US/mcf)YearRussian Gas PriceIndonesia LNG Gas Price in JapanU.S. Henry Hub Gas PriceEIA Forecast U.S. Gas Price ($2011)Actual U.S. Gas ProductionEIA Forecast U.S. Gas ProductionEIA Projections of Gas Price and U.S. ProductionCompared to History, 1995-2040© Hughes GSR Inc, 2012 (data from EIA Annual Energy Outlook 2013, EIA, 2012; International Monetary Fund)
  5. 5. 0510152025301998 2000 2002 2004 2006 2008 2010 2012TrillionCubicFeetperYearYearNet LNG ImportsNet Canadian ImportsDry Gas ProductionU.S. Gas Production and Imports, 1998-2012Dry Gas ProductionNet Canadian ImportsNet LNG Imports© Hughes GSR Inc, 2013 (data from EIA current to August, 2012)
  6. 6. 012345672000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012BillionCubicFeetperDayYearVerticalHorizontalBarnett Shale Production by Well Type, 2000-2012,Illustrating Impact of Horizontal Drilling Technology(data from DIdesktop, June, 2012, fitted with 5 month centered moving average including data up to March, 2012)93%ofProductionisfromHorizontalWellsHorizontal WellsVertical Wells© Hughes GSR Inc, 2012
  7. 7. 02468101214Haynesville Barnett Marcellus Fayetteville Woodford$US/mcfShale PlayMeanMedianP20P80(data from Jacoby et al., Economics of Energy and Environmental Policy, vol. 1, no.1, 2012)Breakeven Gas Price by Shale Play for a10% Rate of Return© Hughes GSR Inc, 2012
  8. 8. 0510152025302010 2011 2012 2013TrillionCubicFeetperYearYearU.S. Dry Gas Production, 2010-2013U.S. production plateau September 2012-February 2013(data from EIA Natural Gas Monthly, May, 2013)© Hughes GSR Inc, 2013
  9. 9. 05101520252000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012BillionCubicFeetperDayYearOtherAustin ChalkBone SpringBossierAntrimNiobraraBakkenWoodfordEagle FordFayettevilleMarcellusBarnettHaynesvilleShale Gas Production by Play, 2000-2012(data from DIdesktop, September, 2012, fitted with 3 month centered moving average including data up to June, 2012)Barnett Haynesville40% of U.S. production© Hughes GSR Inc, 2012
  10. 10. 0510152025May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12BillionCubicFeetperDayYearOtherAustin ChalkBone SpringBossierAntrimNiobraraBakkenWoodfordEagle FordFayettevilleMarcellusBarnettHaynesvilleShale Gas Production by Play, May 2011 – May 2012BarnettHaynesvilleMarcellusFayettevilleEagle Ford© Hughes GSR Inc, 2012 (data from DI Desktop, HPDI, September, 2012)
  11. 11. 01234567BillionCubicFeetperDayShale PlayShale Gas Production by Play(data from DI Desktop, September, 2012, for production in most cases through May-June, 2012)Top 3 Plays = 66% of TotalTop 6 Plays = 88% of Total© Hughes GSR Inc, 2012
  12. 12. The Shale Play Life Cycle- Discovery followed by leasing frenzy.- Drilling boom follows to meet “held-by-production” leaserequirements.- Sweet spots identified, targeted and drilled off.© Hughes GSR Inc, 2012- Gas production rises rapidly and is maintained for cash-flowdespite uneconomic full-cycle costs.- Sweet spots become saturated and well quality and fieldproduction decline.- Plays like the Haynesville become middle aged after just five years.
  13. 13. Haynesville Well Quality - Top 20% with Highest OneMonth Production of >10989 mcf/day in black20 miles30 miles© Hughes GSR Inc, 2012
  14. 14. 0500100015002000250030003500400001234567892007 2008 2009 2010 2011 2012NumberofOperatingWellsGasProduction(Billioncubicfeetperday)YearGas ProductionNumber of WellsHaynesville Gas Production and Number of OperatingWells, 2007-2012© Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)
  15. 15. 0100020003000400050006000700080001 6 11 16 21 26 31 36 41 46GasProduction(ThousandcubicfeetperDay)Months on ProductionHaynesville Type Gas Well Decline Curve(data from DrillingInfo/HPDI, March, 2013)Yearly Declines:First year = 66%Second year = 49%Third year = 41%Fourth year = 49%© Hughes GSR Inc, 2013
  16. 16. 050010001500200025003000350040000123456782007 2008 2009 2010 2011 2012NumberofOperatingpre-2012WellsGasProduction(BillioncubicfeetperDay)YearProduction from pre-2012 WellsNumber of pre-2012 WellsOverall Field Decline for Haynesville Gas Productionbased on Production Decline from pre-2012 WellsOverall Field Decline = 47%© Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)
  17. 17. 0500100015002000250030003500050010001500200025003000350040002008 2009 2010 2011 2012NumberofWellsAverageProductionperWell(Thousandcubicfeetperday)YearAverage Production per WellNumber of WellsHaynesville Average Production per Well© Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)
  18. 18. 020040060080010001200-4000-3000-2000-10000100020003000400050002009 2010 2011 2012AnnualNumberofWellsAddedAnnualProductionAddedperWell(Thousandcubicfeetperday)YearYearly Production Added per WellYearly Wells AddedHaynesville Annual Production Added per New Well© Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)Need 680 wells per yearto keep production flat
  19. 19. 010000200003000040000500000 10 20 30 40 50 60 70 80 90 100HighestMonthlyProduction(Mcf/day)Percentage of WellsHaynesville Well QualityHighest One Month Gas Production from Individual WellsMedian = 7954 mcf/dayMean = 8201 mcf/day© Hughes GSR Inc, 2012 (data from DI Desktop, HPDI, September, 2012)
  20. 20. Haynesville Operating Wells with Sweet Spot (Red)30 milesSweet Spot30 by 18 miles<20% of Field© Hughes GSR Inc, 2013
  21. 21. 01234567892008 2009 2010 2011 2012BillionCubicFeetperDayYearSweet SpotNon-Sweet SpotNon-Sweet Spot = >80% of areaHaynesville Production fromSweet Spot vs Non-Sweet Spot AreasSweet Spot = <20% of areaSweet Spot comprises 29% ofthe total wells and produces39% of the gas© Hughes GSR Inc, 2013
  22. 22. 0100020003000400050006000700080009000100001 6 11 16 21 26 31 36 41 46GasProduction(ThousandcubicfeetperDay)Months on ProductionHaynesville Type Gas Well Decline CurvesSweet Spot vs Areas outside Sweet Spot(data from DrillingInfo/HPDI, May, 2013)Sweet SpotFirst year = 64%Second year = 40%Third year = 32%Fourth year = 40%© Hughes GSR Inc, 2013Outside Sweet SpotFirst year = 68%Second year = 54%Third year = 50%Fourth year = 32%Sweet Spot EUR=5.6 bcfOutside Sweet Spot EUR=2.9 bcf
  23. 23. 0500100015002000250000.511.522.533.544.552007 2008 2009 2010 2011 2012NumberofOperatingpre-2012WellsGasProduction(BillioncubicfeetperDay)YearProduction from pre-2012 Sweet Spot WellsProduction from pre-2012 Non-Sweet Spot WellsPre-2012 Sweet Spot WellsPre-2012 Non-Sweet Spot WellsOverall Field Decline for Haynesville Gas Productionbased on Production Decline from pre-2012 WellsSweet Spot Field Decline = 41%Non-Sweet Spot Field Decline = 49%© Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)
  24. 24. 050010001500200025000100020003000400050006000700080002008 2009 2010 2011 2012NumberofWellsAnnualProductionAddedperHorizontalWell(Barrelsperday)YearAverage Production per Sweet Spot WellAverage Production per Non-Sweet Spot WellNumber of Sweet Spot WellsNumber of Non-Sweet Spot WellsHaynesville Average Production per Well ComparingSweet Spot to Non-Sweet Spot Wells© Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, May, 2013)
  25. 25. Haynesville Sweet Spot Well Footprint1 mile© Hughes GSR Inc, 2013
  26. 26. Haynesville Sweet Spot Well Footprint1 mile© Hughes GSR Inc, 2013
  27. 27. Barnett Well Quality - Top 20% with Highest One MonthProduction of >2436 mcf/day in black30 miles© Hughes GSR Inc, 2012
  28. 28. Barnett Well Quality - Top 20% with Highest One MonthProduction of >2436 mcf/day in black5 miles© Hughes GSR Inc, 2012
  29. 29. 0200040006000800010000120001400016000180002000022000012345672005 2006 2007 2008 2009 2010 2011 2012NumberofOperatingWellsGasProduction(Billioncubicfeetperday)YearGas ProductionNumber of WellsBarnett Gas Production and Number of Operating Wells,2007-2012© Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)
  30. 30. 0200400600800100012001400160018001 6 11 16 21 26 31 36 41 46GasProduction(ThousandcubicfeetperDay)Months on ProductionBarnett Type Gas Well Decline Curve(data from DrillingInfo/HPDI, March, 2013)Yearly Declines:First year = 58%Second year = 33%Third year = 26%Fourth year = 20%© Hughes GSR Inc, 2013
  31. 31. 02000400060008000100001200014000160001800020000012345672007 2008 2009 2010 2011 2012NumberofOperatingpre-2012WellsGasProduction(BillioncubicfeetperDay)YearProduction from pre-2012 WellsNumber of pre-2012 WellsOverall Field Decline for Barnett Gas Production based onProduction Decline from pre-2012 WellsOverall Field Decline = 28%© Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)
  32. 32. 020004000600080001000012000140001600001002003004005006007002005 2006 2007 2008 2009 2010 2011 2012NumberofWellsAverageProductionperWell(Thousandcubicfeetperday)YearAverage Production per WellNumber of WellsBarnett Average Production per Well© Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)
  33. 33. University of Texas Barnett Study Heralded as a Good NewsStory of Long Term Growth by Wall Street Journal (Feb 2013)Peak 201260% Decline by 2030
  34. 34. Marcellus Well Quality - Top 20% with Highest OneMonth Production of >3603 mcf/day in black100 miles© Hughes GSR Inc, 2013
  35. 35. 050010001500200025003000350040004500012345672005 2006 2007 2008 2009 2010 2011 2012NumberofProducingWellsProduction(BillionCubicFeetperDay)YearHorizontal ProductionVertical ProductionTotal ProductionHorizontal WellsVertical WellsTotal WellsPennsylvania Marcellus Production vs Well Type© Hughes GSR Inc, 2013
  36. 36. 0500100015002000250030002007 2008 2009 2010 2011 2012AverageDailyProductionperWell(ThousandCubicFeetperDay)YearHorizontal Average ProductionVertical Average ProductionTotal Average ProductionPennsylvania Marcellus Daily Well Production by Well Type© Hughes GSR Inc, 2013
  37. 37. 00.20.40.60.811.21.41.61.8Production(billioncubicfeetperday)CountyPennsylvania Marcellus Production By County© Hughes GSR Inc, 2013Top 2 counties = 46% of productionTop 4 counties = 68% of productionTop 6 counties = 85% of production
  38. 38. 0123456782009 2010 2011 2012BillionCubicFeetperDayYearRemaining 27 counties (15%)Washington (9%)Tioga (9%)Greene (10%)Lycoming (12%)Susquehanna (22%)Bradford (24%)Pennsylvania Marcellus Production and Number of HorizontalWells by CountyProduction05001000150020002500300035002009 2010 2011 2012NumberofOperatingWellsYearRemaining 27 counties (20%)Washington (15%)Tioga (14%)Greene (9%)Lycoming (10%)Susquehanna (12%)Bradford (20%)Number of WellsBradford BradfordBradford andSusquehannacountiesproduce 46%of the gaswith 32% ofthe wells© Hughes GSR Inc, 2013
  39. 39. 01000200030004000500060001 6 11 16 21 26 31 36GasProduction(McfperDay)Months on ProductionBradford (24%)Susquehanna (22%)Lycoming (12%)Greene (10%)Tioga (10%)Washington (9%)Remaining 27 Counties (15%)Type Decline Curves for Marcellus Horizontal Wells by County© Hughes GSR Inc, 2013
  40. 40. 00.511.522.533.544.55EstimatedUltimateRecovery(Bcf)CountyRemaining Well LifeFirst 3 yearsEstimated Ultimate Recovery for Pennsylvania MarcellusHorizontal Wells By County62%-77% produced in first 3 yearsEIA EUR estimate of 1.56 bcfunderestimates best Counties© Hughes GSR Inc, 2013
  41. 41. Top Tier Counties (Red=Horizontal; Black=Vertical)© Hughes GSR Inc, 2013
  42. 42. Well Footprint – Dimock, Susquehanna County, PA© Hughes GSR Inc, 20131 Mile
  43. 43. Well Footprint – Washington County, Pennsylvania© Hughes GSR Inc, 20130.25 Mile
  44. 44. 00.20.40.60.811.22008 2009 2010 2011 2012AverageIntialProductivityperWellIndexedto2010YearMarcellusHaynesvilleBarnettFayettevilleWoodfordMarcellus - YouthHorizontal Well Quality Trends – Top Five Shale Gas Plays© Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)Fayetteville – Early Middle AgeBarnett – Middle AgeHaynesville – Late Middle AgeWoodford – Early Old Age
  45. 45. Prognosis for Future Production based onLatest Rig Count© Hughes GSR Inc, 2012Field RankNumber ofWells neededannually tooffset declineWells Addedfor mostrecent YearOctober 2012Rig CountPrognosisHaynesville 1 774 810 20 DeclineBarnett 2 1507 1112 42 DeclineMarcellus 3 561 1244 110 GrowthFayetteville 4 707 679 15 DeclineEagle Ford 5 945 1983 274 GrowthWoodford 6 222 170 61 DeclineGranite Wash 7 239 205 N/A DeclineBakken 8 699 1500 186 GrowthNiobrara 9 1111 1178 ~60 Flat
  46. 46. (well cost data from various sources and is approximate)Annual Capex Required to Offset Overall AnnualDecline by Shale Play© Hughes GSR Inc, 2012Field RankNumber ofWells neededannually tooffset declineApproximateWell Cost(million $US)Annual WellCost to OffsetDecline(million $US)Haynesville 1 774 9.0 6966Barnett 2 1507 3.5 5275Marcellus 3 561 4.5 2525Fayetteville 4 707 2.8 1980Eagle Ford 5 945 8.0 7558Woodford 6 222 8.0 1776Granite Wash 7 239 6.0 1434Bakken 8 699 10.0 6990Niobrara 9 1111 4.0 4444Antrim 10 ~400 0.5 200Bossier 11 21 9.0 189Bone Spring 12 206 3.7 762Austin Chalk 13 127 7.0 889Permian Delaware Midland 14 122 6.9 842Total 7641 41829
  47. 47. 2012 Impairment Charges on U.S. Shale AssetsThe Reality Check- Chesapeake - $2.02 Billion- BP - $2.11 Billion- BG Group - $1.3 Billion- BHP - $2.84 Billion© Hughes GSR Inc, 2013"We are all losing our shirts today." Rex Tillerson [CEO of ExxonMobil] said "Were making no money. Its all in the red.“(Wall Street Journal, June, 2012)
  48. 48. And there is no such thingas a FREE LUNCHThere has been a great deal ofpushback by many in thegeneral public and in State andNational governments toenvironmental issues surroundinghydraulic fracturing
  49. 49. - Methane contamination of groundwater- Disposal of produced fracture fluidpotentially contaminating groundwaterand inducing earthquakes-Industrial footprint – truck traffic, airemissions etc.-Full cycle greenhouse gas emissionswhich may be worse than coal- High levels of water consumption
  50. 50. • High field decline rates require a drilling treadmill to maintainproduction – 30-50% of production must be replaced each yearwith more drilling.• High quality shale plays are not ubiquitous - 88% of shale gasproduction comes from 6 of 30 plays; 81% of tight oilproduction comes from 2 of 21 plays.• The drilling treadmill will accelerate as sweet spots are drilled offand well quality declines as drilling moves into moremarginal areas.• Over-hyped in terms of long term supply especially at low forecastprices.• Collateral environmental impacts associated with fracking havealready, and will continue to create public opposition tounfettered access to drill sites which are mandatory tomaintain supply.The Shale “REVOLUTION”
  51. 51. • US “Energy Independence” with the forecast energy trajectory ishighly unlikely, barring a radical reduction in consumption.• Almost all eggs are in the shale basket as a hope in meeting U.S.energy supply growth projections from oil and gas.Implications• Replicating the “Shale Revolution”, to the extent it exists, willtake much longer in Europe, if ever. There is no reason to expectthat the geology will be much different – the greatest potential willlie in a few plays and parts thereof. Higher population densitieswill make surface access for the large number of drilling locationsrequired much more difficult. Due to high population densitiesthe collateral environmental impacts of fracking are likely to beeven more apparent – and opposed – than they are in the U.S.• The “Shale Revolution” has been a “game-changer” in that it hastemporarily reversed a terminal decline in supplies fromconventional sources. Long term sustainability is highlyquestionable and environmental impacts are a major concern.

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