The ScottMadden Energy Industry Update (Natural Gas Edition)


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In this special edition of the Energy Industry Update, we focus on trends and issues in the natural gas industry featuring our thoughts and views on where the natural gas industry has been and is going. ScottMadden has assisted natural gas distributors, pipelines, and related product providers in business and strategic planning, process improvement, cost reduction, and other critical work, helping our clients succeed and thrive.

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The ScottMadden Energy Industry Update (Natural Gas Edition)

  1. 1. The Energy Industry Update(Natural Gas Edition)Highlights of Recent Significant Events and Emerging TrendsDecember 2012Copyright © 2012 by ScottMadden, Inc. All rights reserved.
  2. 2. Table of ContentsView from the Executive Suite 3 Executive Summary From the CEO to Shareholders: Some Quotes and Themes Utility and Energy Stock Prices: Are Electrics and Diversifieds Undervalued? Gas Delivery O&M Costs Dodd-Frank: Consternation for Gas Utilities?Natural Gas Demand 11 Power Sector Gas Consumption Is Off the Charts Sufficient Widening of the Oil-to-Gas Price Ratio Could Fundamentally Alter Gas Demand The Alignment of Gas and Power Infrastructure and Processes Will Be Increasingly Important Natural Gas Vehicles: Increasing Interest, Especially with Cheap Natural Gas Bulls and Bears Views on United States as the “Saudi Arabia of Natural Gas”Natural Gas Supply and Prices 18 All Estimates Show Abundant Gas Supply Shale Gas: Increasing Abundance in the Ground and Risks to Bullish View Natural Gas Prices: Low Near Term, but Extended Outlook Is Less Predictable U.S. Natural Gas Real Spot Prices (Henry Hub) – A History of Price Volatility Is a Supply Response to Low Gas Prices Taking Hold...and How Long Might It Last?Gas Pipelines and Storage 25 Historical Flow Patterns Are Changing Despite Excess Inventories, Low Gas Prices Have Tempered Interest in New Storage Capacity Pipeline Infrastructure Gas Pipeline Safety: A Priority2 Copyright © 2012 by ScottMadden, Inc. All rights reserved.
  3. 3. View from the Executive SuiteCopyright © 2012 by ScottMadden, Inc. All rights reserved.
  4. 4. Executive Summary Managing with Uncertainty Fatigue As the economy grows (slowly) and we assess the implications of the outcome of the 2012 election, many policies affecting the power and gas industries are in flux. From fracking regulation to power plant emissions to renewable incentives, litigation and political uncertainty about what prevailing policies might emerge in 2013 has put the timing and, in some cases, the scope of new rules in limbo. Despite this uncertainty, the energy industry is running out of time on some strategic actions and is moving to make investments (or retirements) in power supply, infrastructure expansion (or shoring up reliability “hotspots”), and new technologies. Knock-On  Low natural gas prices have affected the nation’s power supply, challenging the economics of proven solar and Effects of wind renewable technologies and altering the traditionally favorable dispatch position of coal-fired power Cheap Natural  As the gas-fired power generation grows, the linkages between natural gas and power operations become Gas increasingly important, and regulators and industry leaders are contemplating how to improve that coordination  Cheap gas-fired generation also appears to be impacting retail choice markets. Retailers’ commodity (energy) costs have declined with gas prices, helping them compete with utility provider-of-last-resort service  Low natural gas prices have also led to increasing interest in the use of natural gas as a transportation fuel, although fueling infrastructure, while growing, requires further expansion  Securing cost recovery for required infrastructure investments is easier than if commodity prices were high Environmental  EPA has finalized new regulations on SO2 and NOx emissions as well as mercury and air toxics, even as it Requirements proposes greenhouse gas regulations for new power sources that effectively ban new coal-fired power plants Becoming  Deadlines for compliance with EPA’s proposed regulations are fast approaching, delayed only by litigation. The Real electric industry is beginning to adjust its generation complement accordingly, as the shale gas boom makes gas- fired power compelling for new generation, at least for the moment Safety Front  More than a year after the Fukushima Daiichi nuclear event, the U.S. nuclear industry has begun working its “way and Center forward” to ensure the public that it is incorporating its key lessons  With aging pipes and after some high-profile incidents, gas pipeline and distribution operators have strengthened their safety programs as regulators use a carrot-and-stick approach to spur safety-related improvements Grid Policy  Smart metering has hit bumps in some jurisdictions, as both customers and regulators have concerns about cost Push and Pull and issues with personal privacy and security  Compliance filings with FERC’s Order 1000, intended to spur power transmission investment, are due in 2012. Sticky issues around cost allocation, planning, and rate incentives remain largely unresolved4 Copyright © 2012 by ScottMadden, Inc. All rights reserved.
  5. 5. From the CEO to Shareholders:Some Quotes and Themes Electric and Gas Local Combination Electric Distribution IPPs and Merchants Distribution Gas Utilities Pipelines Utilities Companies (LDCs) Mergers,  “Purchasing and/or  “Invested nearly  “Successfully  “Working  “Acquire and Acquisitions, constructing $900 million in integrating the innovatively…to develop energy Divestments, natural gas-fired transmission and companies and transport transportation and electric generation distribution achieving annual [customers’] assets” Retirements facilities” infrastructure” cost savings supplies to market  “Build or acquire targets” from logistics assets  “Analyzed the transportation- strategic to market investment in constrained areas” fundamentals” environmental  “Backlog of…shale  “Share capital controls required wells shut in and costs and risks for a number of our waiting for through JVs or facilities…expect development of alliances” to deactivate natural gas facilities” gathering and  “Leverage processing economies of scale infrastructure” from incremental acquisitions and expansions”  “Actively pursing projects to serve power generation load” Operations  “Developing our  “Facing higher  “Higher capacity  “Lower the  “Interstate and and Financial human capital and untracked pension factors...due to commodity price intrastate Issues and talent pool” expense” lower gas prices risk…through the transportation rate Initiatives improving off-peak use of swaps and challenges” economics for basic hedges” combined cycle  “Target a 12% over coal units” reduction in GHG  “New cost and emissions for performance every therm of gas improvement delivered…by initiative” 2015”  “Hedge a substantial portion of our coal-fired baseload generation”5 Copyright © 2012 by ScottMadden, Inc. All rights reserved. Sources: Company annual reports, web sites, and investment analyst presentations
  6. 6. From the CEO to Shareholders:Some Quotes and Themes (Cont’d) Electric and Gas Local Combination Electric Distribution IPPs and Merchants Distribution Gas Utilities Pipelines Utilities Companies (LDCs) Growth  “Established our  “Replace and  “Development of  “The catalysts for  “Optimizing liquids Initiatives and new transmission upgrade our the…first power the future are opportunities in Capital operations extensive electric, plant in the U.S. shale gas, utility western U.S. Projects segment” gas, and steam with a federal limit infrastructure business”  “Advanced our networks” on GHG development, and  “Further expand commercial  “Implementing first emissions” the markets our renewable fuel- transmission large-scale smart  “Higher market demand for low- handling business through grid project… prices to provide cost, efficient, and capabilities” formation of a joint sensors and adequate returns available energy sources”  “Enhance the venture” transmitters” on some stability of our cash  “Implementing  “Deployment of 1.3 investment in  “ projects flows by investing emission controls million smart environmental to accommodate in pipelines and and performance meters…by the controls necessary the growing NGL other fee-based upgrades” end of 2013” to meet… supplies” businesses” anticipated  “Execute  “Integrating requirements”  “Design and advanced grid expansion projects improve our gas technologies into to serve new gas- gathering existing electric fired power infrastructure” networks” generation growth”  “Implemented  “Remained some actions and committed to upgrades at our infrastructure nuclear facilities improvement and stemming from the pipeline Japan learnings” replacement” Customer-Side  “Develop and  “Launched a Initiatives implement special emergency efficiency and restoration demand response improvement programs” program”  “Businesses receive incentives to reduce energy use when demand is highest” Sources: Company annual reports, web sites, and investment analyst presentations6 Copyright © 2012 by ScottMadden, Inc. All rights reserved.
  7. 7. Utility and Energy Stock Prices:Are Electrics and Diversifieds Undervalued? Gas LDCs and MLPs have Outperformed the Dow Since Valuation Gap: Price-Earnings Ratios for Large Diversifieds Mid-2009, While Other Utility Indices Have Lagged Compared with Other Energy Sectors Selected Stock Index Values (Oct. 2009–Oct. 2012) Selected Month-End Index Price-Earnings Ratios (Oct. 30, 2009 = 100%) (Trailing 12 Months Earnings) (Dec. 2004–Jan. 2012) 250% DJ Industrial Avg. 30 SNL Energy Large Diversified SNL Energy Small Diversified S&P Gas Utilities 200% 25 S&P Electric Utilities SNL Merchant Generator Citigroup MLP 20 Price-Earnings Ratio DJ Utility Index 150% 15 100% 10 SNL Large Diversified Large diversified (electric & SNL Gas Utility 5 SNL Midstream Energy gas) valuation gap vs. selected 50% S&P 500 other indices 0 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Sep-11 Dec-11 Mar-11 Dec-04 Sep-05 Dec-05 Sep-06 Dec-06 Sep-07 Dec-07 Sep-08 Dec-08 Sep-09 Dec-09 Sep-10 Dec-10 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 0% Apr-10 Apr-11 Apr-12 Feb-10 Sep-10 Feb-11 Sep-11 Feb-12 Sep-12 Jun-10 Jun-11 Jul-10 Jul-11 Jun-12 Jul-12 Mar-11 Dec-09 Mar-10 Dec-10 Dec-11 Mar-12 Oct-09 Aug-10 Oct-10 Aug-11 Oct-11 Aug-12 Oct-12 Nov-09 Nov-10 Nov-11 Jan-10 Jan-11 Jan-12 May-10 May-11 May-12 “Positive on fundamentals…[D]espite the mild winter, most utilities Index Performance as of Late October 2012 should see above-average long-term EPS growth, generally Since Late Since Late Since Late driven by capex rather than economic growth.”—Macquarie Oct. 2007 Oct. 2009 Apr. 2011 DJ Industrial Avg. 94% 135% 102% “The [natural gas MLP] group is trading at a spread to the 10-year SNL Energy Large Diversified 90% 133% 113% Treasury of 372 basis points compared to its long-term average SNL Energy Small Diversified 117% 143% 105% of 300 basis points.”—Deutsche Bank S&P Gas Utilities 141% 187% 125% “Exceptionally mild weather conditions to drag on electric and gas S&P Electric Utilities 82% 124% 112% distribution businesses…We expect hybrid* utilities and IPPs to SNL Merchant Generator 46% 111% 106% generally experience a negative impact from lower year-over-year Citigroup MLP 124% 159% 105% commodity prices, though large hedge positions will likely offset DJ Utility Index 90% 132% 112% Index = 100% much of the potential downside.”—J.P. Morgan Note: *Part regulated, part unregulated7 Copyright © 2012 by ScottMadden, Inc. All rights reserved. Sources: SNL Financial; (S&P 500 monthly multiples); ScottMadden analysis
  8. 8. Gas Delivery O&M Costs Showing Improvement... Thirty Largest Gas Delivery Companies—Gas O&M per DTH and Gas O&M Cost Growth $16 Median: -7.3% $14 Gas O&M per Dekatherm Delivered ($) $12 $10 Median: $8.58 $8 $6 $4 $2 Size indicates relative scale by total DTH delivered $0 -20% -15% -10% -5% 0% 5% 10% 15% 20% Three-Year Compound Annual Growth Rate in Total Gas O&M Expense (%) Notes: Rankings based upon 2010 gas delivery volumes. Medians are medians for top 30, not all gas utilities8 Copyright © 2012 by ScottMadden, Inc. All rights reserved. Sources: SNL Financial (FERC Form 2 data); ScottMadden analysis
  9. 9. ...But Dispersion and Relative Improvement LevelsChange When Production Costs Are Excluded Thirty Largest Gas Delivery Companies—Gas O&M per DTH and Gas O&M Cost Growth (excluding Production Cost) $6 Median: 2.2% $5 Gas O&M per Dekatherm Delivered ($) $4 $3 Median: $2.15 $2 $1 Size indicates relative scale by total DTH delivered $0 -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% Three-Year Compound Annual Growth Rate in Total Gas O&M Expense (%) Notes: Rankings based upon 2010 gas delivery volumes. Medians are medians for top 30, not all gas utilities9 Copyright © 2012 by ScottMadden, Inc. All rights reserved. Sources: SNL Financial (FERC Form 2 data); ScottMadden analysis
  10. 10. Internal Discussion DraftDodd-Frank: Consternation for Gas Utilities?  Dodd-Frank Act (D-F) was enacted in July 2010; took effect in Oct. 2012  Title VII of D-F puts energy-based swaps under U.S. Commodities Futures Trading Commission (CFTC) jurisdiction  D-F requires mandatory clearing and trade execution, mandatory position limits, record retention, and reporting — Characterization as “swap dealer” (SD) or “major swap participant” (MSP) carries additional capital, margin, and reporting requirements The Law — OTC swaps not centrally cleared are subject to higher capital requirements — Non-“swap dealers” and “major market participants” may still have record-keeping obligations (eff. Apr. 2013)  Important exemptions — End-user exception — Forward contract exclusion* — De minimis exception (<$8 billion notional amounts over 12 months or $25 million just with “special entities”)  CFTC lags in D-F rulemaking: As of October 2012, only 127 of 398 required rules had been finalized  Additional record-keeping requirements may require enhanced trading and risk management systems  Mandatory cleaning could limit customization, meaning greater mismatch between hedge and the risk being hedged Gas  Subjective regulatory determination of what is hedging vs. speculation (always challenging; shades of FAS 133) Industry  Need for Board authorization to elect end-user exemption Issues and  CFTC determination pending on some key industry questions about application of D-F Concerns — Whether gas storage and transportation contracts are swaps due to embedded volumetric optionality — Whether reservation charge and additional charge for use of service, common in gas storage and electricity tolling agreements, constitute swaps — Whether to modify threshold aggregation (for SD/MSP designation) (now entities sharing 10% common ownership) ICE North American Natural Gas OTC Contracts (2008–2011) Top Ten Hubs by Volume – ICE Day-Ahead Index (2011) 400 # Contracts Traded 1,000,000 1,500 Traded (MMBTU) Traded (Millions) Volume (000s of No. of Contracts No. of Volumes Volumes 1,000 MMBTU/day) 300 500 200 500,000 - 100 Citygate Henry Col Gas Citygates Border NGPL - Mainline Katy Dominion - TETCO - SoCal PG&E - Chicago TXOK TCO CG - South M3 - - 2008 2009 2010 2011 Note: *A contract may still be considered a forward contract exempt from D-F even if it includes optionality, is booked out (as defined in D-F), or is a physical exchange transaction Sources: Morgan Lewis, Dodd-Frank Act: Are You Ready? webinar (Sept. 13, 2012); MRV Associates, Living with Uncertainty: Energy Companies and Dodd-Frank (Oct. 9, 2012); Cornerstone Research,10 CopyrightCharacteristics of U.S. Natural Gas Transactions (May 15, 2012); ScottMadden analysis © 2012 by ScottMadden, Inc. All rights reserved.
  11. 11. Natural Gas DemandCopyright © 2012 by ScottMadden, Inc. All rights reserved.
  12. 12. Power Sector Gas ConsumptionIs Off the Charts in 2012... Daily U.S. Natural Gas Burn for Power Generation (2005–2011 and YTD 2012) Source: EIA, “Natural Gas Markets: Recent Changes and Key Drivers,” at LDC Gas Forum (Sept. 2012)12 Copyright © 2012 by ScottMadden, Inc. All rights reserved.
  13. 13. ...Going Back as Far as 2001 Monthly U.S. Natural Gas Burn for Power Generation (High-Low Range for 2001–2011 vs. YTD 2012) 1,200 1,000 Through June 2012 2001–2011 max-min range Gas Consumption (in BCF) 800 600 400 Previous monthly highs during this time period were 200 set in 2011 for Apr., May, July, Nov., and Dec. - Sources: EIA Form 923 data; ScottMadden analysis13 Copyright © 2012 by ScottMadden, Inc. All rights reserved.
  14. 14. Sufficient Widening of the Oil-to-Gas Price RatioCould Fundamentally Alter Gas Demand West Texas Intermediate Crude vs. Henry Hub Global Ethylene Cash Cost Curve Natural Gas Spot Price (Jan. 1997–Sept. 2012) ($/Metric Ton) as of Oct. 2011 $30 Henry Hub Spot Price… WTI Spot Price ($/MMBTU) $25 Oil-Gas Price Ratio (per MMBTU) $20 (1997-2012) $/MMBTU High 9.81 Source: Low 0.34 $15 Average 2.04 Median 1.48 Lazard (citing Dow Chemical Co.) At 9/11/12 5.93 $10 U.S. NGLs competitively $5 priced on chemical feedstock supply curve $0 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11  Low natural gas prices coupled with sustained $90 to $100/barrel oil prices have created an oil-gas BTU-equivalent ratio of nearly 6X  For chemical uses to be attractive, a rule of thumb is 7-to-1 ratio of $/barrel of oil vs. $/MMBTU of gas; at $100 oil and $3 gas, this ratio is significantly higher  If these ratios are sustained, substitution effects could lead to increased demand for natural gas for CNG vehicles, methanol for transportation (or as synthetic diesel), ethane for chemical feedstock (in lieu of naptha), as well as new natural gas technologies  For chemical applications, industry will have to invest in ethane cracking facilities—not built in the United States since 2001—close to end-users  However, producers of “wet” plays must maintain liquidity in the face of low prices until these additional demand streams grow Sources: EIA data; ScottMadden analysis; industry news; American Chemistry Council; Lazard; Dow Chemical14 Copyright © 2012 by ScottMadden, Inc. All rights reserved.
  15. 15. The Alignment of Gas and Power Infrastructureand Processes Will Be Increasingly Important Announced Coal Plant Retirements (2012–2021) (as of Aug. 2012) Interstate Natural Gas Pipelines (as of Year-End 2009) Source: SNL Financial  Gas-power interdependence is back on the front burner — EPA regulations, cheap shale gas, and increasing renewables penetration lead swings to gas Time for 500 MW Unit to Exhaust Line Pack generation (36” Line @ 800 PSI) — FERC had looked at this in the mid-2000s, as post- merchant, pre-Katrina bubble led to a significant 1,000 increase in the ratio of gas to total generation Pressure (PSI)  Recent weather events (Texas, Southwest) have refocused 500 Modern CT attention on increased year-round power-sector gas demand Older CT  Emerging pipeline adequacy and operation concerns 0 Steam Generator — Capacity constraints — Flow patterns 0 2 4 6 8 10 — Scheduling differences — Curtailment Hours — Pipeline pressure and line pack Sources: EIA; SNL Financial; NERC15 Copyright © 2012 by ScottMadden, Inc. All rights reserved.
  16. 16. Natural Gas Vehicles: Increasing Interest,Especially with Cheap Natural Gas Total U.S. NGV Fueling Stations vs. Retail Gasoline Price NGV Fueling Stations in the United States Growth Drivers, Expectations, and Barriers  Increased level of domestic gas reserves, concerns over Incentives and Policies Promoting NGVs dependency of oil, and initiatives and policies designed to NAT GAS Act Tax credit toward incremental purchase decrease greenhouse gas emissions have increased interest in of 2011 costs, fuel, and infrastructure alternative fuel vehicles  Limited refueling availability, higher costs, shorter driving ranges, Alternative Fuel Alternative fuels used in a manner that lack of infrastructure, and heavier fuel tanks have prevented the the IRS deems nontaxable are exempt Tax Exemption wide acceptance of NGVs over petroleum-fueled vehicles from federal fuel taxes  If the price differential between natural gas and gasoline is Improved DOE loan to eligible projects that reduce sustained, the number of NGV fueling stations is likely to Energy air pollution and promote early continue to increase. Use of natural gas as a transportation fuel Technology commercial use of advanced has been growing at a rate of 10%–12% since 2006 and is Loans technologies expected to grow 25% by 2016 Planned networks of refueling stations Regional  The federal government has renewed its focus on natural gas- located along key truck routes (i.e., major Corridors fueled transportation with incentives for fleet conversions and highways) NGV purchases and funding for research toward new NGV Other state funding, tax credits, and Other State technologies Incentives exemptions available in NY, GA, VA, OK,  However, some industry stakeholders oppose federal incentives, and CA arguing that the market should determine NGV options16 Copyright © 2012 by ScottMadden, Inc. All rights reserved. Sources: Industry news; ScottMadden research
  17. 17. Bulls and Bears Views on United States as the“Saudi Arabia of Natural Gas” The Bullish View The Bearish View  European gas production is dropping—the U.K., for example,  Soft economic conditions could contain gas demand growth, has become a net importer of LNG and Asian demand is uncertain  Spain’s gas is 80% LNG  Somewhere from 60%+ of European gas needs locked in with long-term contracts of unknown duration  Japan’s possible dismantling of its nuclear sector will put pressure on gas supply, already seen in its landed LNG prices;  Hard to develop LNG export capacity quickly, and it will require perhaps a similar situation emerging in Germany long-term contracts with anchor tenants to justify investment  Europe is highly dependent upon Russia, which has used  Plenty of competition: Canada, Qatar, Australia, and others resources as geopolitical levers, for gas supply now; possible rich shale resources in China, Russia, and Africa; Russia, as swing producer, could be a spoiler  Several U.S. LNG facilities are considering reversing trains for export, with Sabine Pass (LA) fully approved  Potential for political impediments at home to gas exports  Potential U.S. LNG will make global LNG supply curve more  Price relationships are influenced by currency exchange rate, elastic, limiting long-term increases in price which could change with different policy All-In U.S. LNG Cost at Gulf (Illustrative) Selected International LNG Price Trends vs. Japan and U.K. LNG Hub Prices (Various Locations) $14 Japan U.K. Source: K. Medlock (Rice U.) $12 Regas Tariff $10 Panama Canal $/MCF $8 Boiloff $6 Fuel $4 Vessel Charter $2 15% + $2.25 $0 Henry Hub - Jan 2015 Gulf to JCC Gulf to NBP Japan Forward U.K. Forward Henry Hub NBP JKM LNG-Crude Index Source: B. Schlesinger & Assocs. (citing Deutsche Bank) Notes: NBP is National Balancing Point (U.K.); JCC is Japan Customs-Cleared Crude; JKM is Japan/Korea Marker. All are market hubs used for LNG pricing Sources: EIA International Natural Gas Workshop (Aug. 13, 2012), presentations by Brattle Group; Benjamin17 Copyright © 2012 by ScottMadden, Inc. All rights reserved. Schlesinger and Associates, Kenneth Medlock (Rice Univ.), Howard Rogers (Oxford Institute for Energy Studies)
  18. 18. Natural Gas Supply and PricesCopyright © 2012 by ScottMadden, Inc. All rights reserved.
  19. 19. All Estimates Show Abundant Gas Supply Source: ANGA, “Natural Gas: Reshaping Energy,” NABE-USAEE Shale Gas Webinar (Mar. 13, 2012)19 Copyright © 2012 by ScottMadden, Inc. All rights reserved.
  20. 20. Shale Gas: Increasing Abundance in the Ground 2012 Shale Resource Assessment: Texas Still Big Dry Gas Production: Rapid Acceleration, But Now?? U.S. Dry Natural Gas Production (Jan. 1973–July 2012) 2,200 2,000 BCF per Month 1,800 1,600 1,400 1,200 1,000 Jul-1984 Jul-2007 Jan-1973 Jun-1986 Jan-1996 Jun-2009 Dec-1974 Nov-1976 Sep-1980 Aug-1982 Sep-2003 Aug-2005 Oct-1978 Mar-1992 Feb-1994 Dec-1997 Nov-1999 Oct-2001 May-1988 Apr-1990 May-2011 For Some Plays, Wide Estimates of the Gas Resource  Industry and government agencies continue to see ample shale gas resources Estimated Technically Recoverable Shale Gas Resources  Production continues, although it leveled off when natural by Play (2011–2012 EIA, USGS, and PGC Estimates) gas prices were in the $2 to $3 per MMBTU range, and the dry rig count is now at its lowest level since 1999 Technically Shale Play Location Recoverable Gas (TCF)  Utica Shale remains a promising but largely unexploited play Barnett North Texas 43–53 — Initial estimates by USGS of 38 TCF technically recoverable, nearly the size of Eagle Ford Fayetteville Arkansas 13–110 — Only 144 horizontal wells in Ohio to date vs. 26,000 in Haynesville Louisiana and East Texas 66–110 Marcellus; USGS estimates that 110,000 wells needed Marcellus Northeast United States 84–227* to extract Utica gas Utica Northeast United States 38** Notes: *This estimate of the Marcellus also includes estimated shale gas from other nearby lands in the Appalachian area; but, according to an official for the estimating organization, the Woodford Oklahoma 43–53 Marcellus Shale is the predominant source of gas in the basin. **USGS estimate Sources: U.S. Geological Service; U.S Government Accountability Office; U.S. Energy Information Administration; “Natural Gas Production Levels Off with Price Decline,” at20 Copyright © 2012 by ScottMadden, Inc. All rights reserved. (June 18, 2012); industry publications
  21. 21. Shale Gas: Risks to Bullish View  Production curves (output yield from fields and wells) Selected Estimates of Breakeven by Shale Play vary within and across various shale plays ($/MMBTU) — Some skeptics point to rapid decline rates $7.00 $6.10 $6.24 $6.00 Median 2013 — No “one-size-fits-all” assessment of shale play $6.00 Henry Hub productivity; assessments still evolving Futures Price** $5.00 $4.00  Reserves and ultimate supply are smaller than $3.74 technically recoverable resources—a key question is $4.00 $3.20 how much at what price $3.00  Externalities—and responses thereto—could play a $2.00 role in slowing development — Stringent EPA regulation or local opposition, such $1.00 as New York’s ban on fracking, could make $0.00 availability of the shale resource moot Marcellus/ Other Fayetteville Barnett Haynesville Eagle Fayetteville Ford  Economics are brutal in the current environment UBS (June 2011) Baihly, et. al. (May 2011)* — Series of write-downs on North American shale stakes by BHP Billiton ($2.84B), BP ($2.1B), BG ($1.3B), and others as “land rush” meets $3 Average Freshwater Use per Shale Well (000s of Gallons) natural gas prices — While current gas prices offer breakeven for Drilling Hydraulic Fracturing some wet plays; most dry gas is not in the Barnett 4,600 money at $3 250  Water consumption remains a concern in some areas Eagle Ford 125 5,000 — Water usage rates in recently drought-prone Haynesville 600 5,000 areas like Texas are emerging as a point of concern Marcellus 85 5,600 — Industry proponents, however, point to the large percentage of water consumed by municipalities Niobrara 300 3,000 and irrigation Source: GAO Notes: *Based upon paper for Society of Petroleum Engineers and assuming EURs as of 2009 **Monthly futures prices as of Oct. 23, 2012 Sources: The American Oil & Gas Reporter (May 2011); World Oil (July 2012); UBS Investment Research,21 Copyright © 2012 by ScottMadden, Inc. All rights reserved. “NYT Shale Gas Allegations Seem Exaggerated” (June 27, 2011); industry publications
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