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![2012 Impairment Charges on U.S. Shale Assets
The 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 Exxon
Mobil] said "We're making no money. It's all in the red.“
(Wall Street Journal, June, 2012)](https://image.slidesharecdn.com/hughesbrusselsmay142013-1-130514031423-phpapp02/85/Hughes-brussels-may-14-2013-1-50-320.jpg)
Hughes brussels may 14 2013 1
- 1. The Shale Revolutionin North America: Myths and Realities Beyond the Hype: Economics of Shale Gas in Europe EU Parliament Brussels, Belgium May 14, 2013 J. David Hughes Post Carbon Institute
- 2. Conventional Wisdom - TheUnited States is on the verge of Energy Independence thanks to the 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 10 years and below $6.00/mcf for the next 20 years. - The way is clear for U.S. LNG exports to monetize the shale bounty. © Hughes GSR Inc, 2012 - Tight Oil will allow U.S. production to exceed that of Saudi Arabia and U.S. imports will shrink to zero. - The Shale “REVOLUTION” will provide Europe with a growing supply cheap gas for the foreseeable future. - Shale Gas can replace very substantial amounts of oil for transport and coal for electricity generation.
- 3. 0 5 10 15 20 25 30 35 2010 2015 20202025 2030 2035 2040 TrillionCubicFeetperYear Year LNG Imports Canada Imports Shale Gas Alaska Coalbed Methane Tight Gas Associated Conventional Offshore U.S. Natural Gas Supply Projection by Source, 2010-2040, EIA Reference Case 2013 Shale Gas Coalbed Methane 50%of2040Production 55% increase in production by 2040 Tight Gas Conventional Offshore Associated Alaska U.S. Domestic consumption (data from EIA Annual Energy Outlook 2013, Tables 13 and 14, http://www.eia.gov/forecasts/aeo/er/excel/yearbyyear.xlsx© Hughes GSR Inc, 2012
- 4. 0 5 10 15 20 25 30 35 0 3 6 9 12 15 18 21 1995 1999 20032007 2011 2015 2019 2023 2027 2031 2035 2039 AnnualGasProduction(Trillioncubicfeet) GasPrice($US/mcf) Year Russian Gas Price Indonesia LNG Gas Price in Japan U.S. Henry Hub Gas Price EIA Forecast U.S. Gas Price ($2011) Actual U.S. Gas Production EIA Forecast U.S. Gas Production EIA Projections of Gas Price and U.S. Production Compared to History, 1995-2040 © Hughes GSR Inc, 2012 (data from EIA Annual Energy Outlook 2013, EIA, 2012; International Monetary Fund)
- 5. 0 5 10 15 20 25 30 1998 2000 20022004 2006 2008 2010 2012 TrillionCubicFeetperYear Year Net LNG Imports Net Canadian Imports Dry Gas Production U.S. Gas Production and Imports, 1998-2012 Dry Gas Production Net Canadian Imports Net LNG Imports © Hughes GSR Inc, 2013 (data from EIA current to August, 2012)
- 7. 0 1 2 3 4 5 6 7 2000 2001 20022003 2004 2005 2006 2007 2008 2009 2010 2011 2012 BillionCubicFeetperDay Year Vertical Horizontal Barnett 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%ofProductionisfromHorizontalWells Horizontal Wells Vertical Wells © Hughes GSR Inc, 2012
- 9. 0 2 4 6 8 10 12 14 Haynesville Barnett MarcellusFayetteville Woodford $US/mcf Shale Play Mean Median P20 P80 (data from Jacoby et al., Economics of Energy and Environmental Policy, vol. 1, no.1, 2012) Breakeven Gas Price by Shale Play for a 10% Rate of Return © Hughes GSR Inc, 2012
- 11. 0 5 10 15 20 25 30 2010 2011 20122013 TrillionCubicFeetperYear Year U.S. Dry Gas Production, 2010-2013 U.S. production plateau September 2012-February 2013 (data from EIA Natural Gas Monthly, May, 2013)© Hughes GSR Inc, 2013
- 12. 0 5 10 15 20 25 2000 2001 20022003 2004 2005 2006 2007 2008 2009 2010 2011 2012 BillionCubicFeetperDay Year Other Austin Chalk Bone Spring Bossier Antrim Niobrara Bakken Woodford Eagle Ford Fayetteville Marcellus Barnett Haynesville Shale 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 Haynesville 40% of U.S. production © Hughes GSR Inc, 2012
- 13. 0 5 10 15 20 25 May-11 Jul-11 Sep-11Nov-11 Jan-12 Mar-12 May-12 BillionCubicFeetperDay Year Other Austin Chalk Bone Spring Bossier Antrim Niobrara Bakken Woodford Eagle Ford Fayetteville Marcellus Barnett Haynesville Shale Gas Production by Play, May 2011 – May 2012 Barnett Haynesville Marcellus Fayetteville Eagle Ford © Hughes GSR Inc, 2012 (data from DI Desktop, HPDI, September, 2012)
- 14. 0 1 2 3 4 5 6 7 BillionCubicFeetperDay Shale Play Shale GasProduction by Play (data from DI Desktop, September, 2012, for production in most cases through May-June, 2012) Top 3 Plays = 66% of Total Top 6 Plays = 88% of Total © Hughes GSR Inc, 2012
- 15. The Shale PlayLife Cycle - Discovery followed by leasing frenzy. - Drilling boom follows to meet “held-by-production” lease requirements. - Sweet spots identified, targeted and drilled off. © Hughes GSR Inc, 2012 - Gas production rises rapidly and is maintained for cash-flow despite uneconomic full-cycle costs. - Sweet spots become saturated and well quality and field production decline. - Plays like the Haynesville become middle aged after just five years.
- 16. Haynesville Well Quality- Top 20% with Highest One Month Production of >10989 mcf/day in black 20 miles 30 miles © Hughes GSR Inc, 2012
- 17. 0 500 1000 1500 2000 2500 3000 3500 4000 0 1 2 3 4 5 6 7 8 9 2007 2008 20092010 2011 2012 NumberofOperatingWells GasProduction(Billioncubicfeetperday) Year Gas Production Number of Wells Haynesville Gas Production and Number of Operating Wells, 2007-2012 © Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)
- 18. 0 1000 2000 3000 4000 5000 6000 7000 8000 1 6 1116 21 26 31 36 41 46 GasProduction (ThousandcubicfeetperDay) Months on Production Haynesville 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
- 19. 0 500 1000 1500 2000 2500 3000 3500 4000 0 1 2 3 4 5 6 7 8 2007 2008 20092010 2011 2012 NumberofOperatingpre-2012Wells GasProduction(BillioncubicfeetperDay) Year Production from pre-2012 Wells Number of pre-2012 Wells Overall Field Decline for Haynesville Gas Production based on Production Decline from pre-2012 Wells Overall Field Decline = 47% © Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)
- 20. 0 500 1000 1500 2000 2500 3000 3500 0 500 1000 1500 2000 2500 3000 3500 4000 2008 2009 20102011 2012 NumberofWells AverageProductionperWell (Thousandcubicfeetperday) Year Average Production per Well Number of Wells Haynesville Average Production per Well © Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)
- 21. 0 200 400 600 800 1000 1200 -4000 -3000 -2000 -1000 0 1000 2000 3000 4000 5000 2009 2010 20112012 AnnualNumberofWellsAdded AnnualProductionAddedperWell (Thousandcubicfeetperday) Year Yearly Production Added per Well Yearly Wells Added Haynesville Annual Production Added per New Well © Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013) Need 680 wells per year to keep production flat
- 22. 0 10000 20000 30000 40000 50000 0 10 2030 40 50 60 70 80 90 100 HighestMonthlyProduction(Mcf/day) Percentage of Wells Haynesville Well Quality Highest One Month Gas Production from Individual Wells Median = 7954 mcf/day Mean = 8201 mcf/day © Hughes GSR Inc, 2012 (data from DI Desktop, HPDI, September, 2012)
- 23. Haynesville Operating Wellswith Sweet Spot (Red) 30 miles Sweet Spot 30 by 18 miles <20% of Field © Hughes GSR Inc, 2013
- 24. 0 1 2 3 4 5 6 7 8 9 2008 2009 20102011 2012 BillionCubicFeetperDay Year Sweet Spot Non-Sweet Spot Non-Sweet Spot = >80% of area Haynesville Production from Sweet Spot vs Non-Sweet Spot Areas Sweet Spot = <20% of area Sweet Spot comprises 29% of the total wells and produces 39% of the gas © Hughes GSR Inc, 2013
- 25. 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 1 6 1116 21 26 31 36 41 46 GasProduction (ThousandcubicfeetperDay) Months on Production Haynesville Type Gas Well Decline Curves Sweet Spot vs Areas outside Sweet Spot (data from DrillingInfo/HPDI, May, 2013) Sweet Spot First year = 64% Second year = 40% Third year = 32% Fourth year = 40% © Hughes GSR Inc, 2013 Outside Sweet Spot First year = 68% Second year = 54% Third year = 50% Fourth year = 32% Sweet Spot EUR=5.6 bcf Outside Sweet Spot EUR=2.9 bcf
- 26. 0 500 1000 1500 2000 2500 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 2007 2008 20092010 2011 2012 NumberofOperatingpre-2012Wells GasProduction(BillioncubicfeetperDay) Year Production from pre-2012 Sweet Spot Wells Production from pre-2012 Non-Sweet Spot Wells Pre-2012 Sweet Spot Wells Pre-2012 Non-Sweet Spot Wells Overall Field Decline for Haynesville Gas Production based on Production Decline from pre-2012 Wells Sweet Spot Field Decline = 41% Non-Sweet Spot Field Decline = 49% © Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)
- 27. 0 500 1000 1500 2000 2500 0 1000 2000 3000 4000 5000 6000 7000 8000 2008 2009 20102011 2012 NumberofWells AnnualProductionAddedperHorizontal Well(Barrelsperday) Year Average Production per Sweet Spot Well Average Production per Non-Sweet Spot Well Number of Sweet Spot Wells Number of Non-Sweet Spot Wells Haynesville Average Production per Well Comparing Sweet Spot to Non-Sweet Spot Wells © Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, May, 2013)
- 28. Haynesville Sweet SpotWell Footprint 1 mile © Hughes GSR Inc, 2013
- 29. Haynesville Sweet SpotWell Footprint 1 mile © Hughes GSR Inc, 2013
- 30. Barnett Well Quality- Top 20% with Highest One Month Production of >2436 mcf/day in black 30 miles © Hughes GSR Inc, 2012
- 31. Barnett Well Quality- Top 20% with Highest One Month Production of >2436 mcf/day in black 5 miles © Hughes GSR Inc, 2012
- 32. 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 22000 0 1 2 3 4 5 6 7 2005 2006 20072008 2009 2010 2011 2012 NumberofOperatingWells GasProduction(Billioncubicfeetperday) Year Gas Production Number of Wells Barnett Gas Production and Number of Operating Wells, 2007-2012 © Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)
- 33. 0 200 400 600 800 1000 1200 1400 1600 1800 1 6 1116 21 26 31 36 41 46 GasProduction (ThousandcubicfeetperDay) Months on Production Barnett 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
- 34. 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 0 1 2 3 4 5 6 7 2007 2008 20092010 2011 2012 NumberofOperatingpre-2012Wells GasProduction(BillioncubicfeetperDay) Year Production from pre-2012 Wells Number of pre-2012 Wells Overall Field Decline for Barnett Gas Production based on Production Decline from pre-2012 Wells Overall Field Decline = 28% © Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)
- 35. 0 2000 4000 6000 8000 10000 12000 14000 16000 0 100 200 300 400 500 600 700 2005 2006 20072008 2009 2010 2011 2012 NumberofWells AverageProductionperWell (Thousandcubicfeetperday) Year Average Production per Well Number of Wells Barnett Average Production per Well © Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013)
- 36. University of TexasBarnett Study Heralded as a Good News Story of Long Term Growth by Wall Street Journal (Feb 2013) Peak 2012 60% Decline by 2030
- 37. Marcellus Well Quality- Top 20% with Highest One Month Production of >3603 mcf/day in black 100 miles © Hughes GSR Inc, 2013
- 38. 0 500 1000 1500 2000 2500 3000 3500 4000 4500 0 1 2 3 4 5 6 7 2005 2006 20072008 2009 2010 2011 2012 NumberofProducingWells Production(BillionCubicFeetperDay) Year Horizontal Production Vertical Production Total Production Horizontal Wells Vertical Wells Total Wells Pennsylvania Marcellus Production vs Well Type © Hughes GSR Inc, 2013
- 39. 0 500 1000 1500 2000 2500 3000 2007 2008 20092010 2011 2012 AverageDailyProductionperWell (ThousandCubicFeetperDay) Year Horizontal Average Production Vertical Average Production Total Average Production Pennsylvania Marcellus Daily Well Production by Well Type © Hughes GSR Inc, 2013
- 40. 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 Production(billioncubicfeetperday) County Pennsylvania Marcellus ProductionBy County © Hughes GSR Inc, 2013 Top 2 counties = 46% of production Top 4 counties = 68% of production Top 6 counties = 85% of production
- 41. 0 1 2 3 4 5 6 7 8 2009 2010 20112012 BillionCubicFeetperDay Year Remaining 27 counties (15%) Washington (9%) Tioga (9%) Greene (10%) Lycoming (12%) Susquehanna (22%) Bradford (24%) Pennsylvania Marcellus Production and Number of Horizontal Wells by County Production 0 500 1000 1500 2000 2500 3000 3500 2009 2010 2011 2012 NumberofOperatingWells Year Remaining 27 counties (20%) Washington (15%) Tioga (14%) Greene (9%) Lycoming (10%) Susquehanna (12%) Bradford (20%) Number of Wells Bradford Bradford Bradford and Susquehanna counties produce 46% of the gas with 32% of the wells © Hughes GSR Inc, 2013
- 42. 0 1000 2000 3000 4000 5000 6000 1 6 1116 21 26 31 36 GasProduction(McfperDay) Months on Production Bradford (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
- 43. 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 EstimatedUltimateRecovery(Bcf) County Remaining Well Life First3 years Estimated Ultimate Recovery for Pennsylvania Marcellus Horizontal Wells By County 62%-77% produced in first 3 years EIA EUR estimate of 1.56 bcf underestimates best Counties © Hughes GSR Inc, 2013
- 44. Top Tier Counties(Red=Horizontal; Black=Vertical) © Hughes GSR Inc, 2013
- 45. Well Footprint –Dimock, Susquehanna County, PA © Hughes GSR Inc, 2013 1 Mile
- 46. Well Footprint –Washington County, Pennsylvania © Hughes GSR Inc, 2013 0.25 Mile
- 47. 0 0.2 0.4 0.6 0.8 1 1.2 2008 2009 20102011 2012 AverageIntialProductivityperWell Indexedto2010 Year Marcellus Haynesville Barnett Fayetteville Woodford Marcellus - Youth Horizontal Well Quality Trends – Top Five Shale Gas Plays © Hughes GSR Inc, 2013 (data from DrillingInfo/HPDI, March, 2013) Fayetteville – Early Middle Age Barnett – Middle Age Haynesville – Late Middle Age Woodford – Early Old Age
- 48. Prognosis for FutureProduction based on Latest Rig Count © Hughes GSR Inc, 2012 Field Rank Number of Wells needed annually to offset decline Wells Added for most recent Year October 2012 Rig Count Prognosis Haynesville 1 774 810 20 Decline Barnett 2 1507 1112 42 Decline Marcellus 3 561 1244 110 Growth Fayetteville 4 707 679 15 Decline Eagle Ford 5 945 1983 274 Growth Woodford 6 222 170 61 Decline Granite Wash 7 239 205 N/A Decline Bakken 8 699 1500 186 Growth Niobrara 9 1111 1178 ~60 Flat
- 49. (well cost datafrom various sources and is approximate) Annual Capex Required to Offset Overall Annual Decline by Shale Play © Hughes GSR Inc, 2012 Field Rank Number of Wells needed annually to offset decline Approximate Well Cost (million $US) Annual Well Cost to Offset Decline (million $US) Haynesville 1 774 9.0 6966 Barnett 2 1507 3.5 5275 Marcellus 3 561 4.5 2525 Fayetteville 4 707 2.8 1980 Eagle Ford 5 945 8.0 7558 Woodford 6 222 8.0 1776 Granite Wash 7 239 6.0 1434 Bakken 8 699 10.0 6990 Niobrara 9 1111 4.0 4444 Antrim 10 ~400 0.5 200 Bossier 11 21 9.0 189 Bone Spring 12 206 3.7 762 Austin Chalk 13 127 7.0 889 Permian Delaware Midland 14 122 6.9 842 Total 7641 41829
- 50. 2012 Impairment Chargeson U.S. Shale Assets The 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 Exxon Mobil] said "We're making no money. It's all in the red.“ (Wall Street Journal, June, 2012)
- 51. And there isno such thing as a FREE LUNCH There has been a great deal of pushback by many in the general public and in State and National governments to environmental issues surrounding hydraulic fracturing
- 52. - Methane contaminationof groundwater - Disposal of produced fracture fluid potentially contaminating groundwater and inducing earthquakes -Industrial footprint – truck traffic, air emissions etc. -Full cycle greenhouse gas emissions which may be worse than coal - High levels of water consumption
- 53. • High fielddecline rates require a drilling treadmill to maintain production – 30-50% of production must be replaced each year with more drilling. • High quality shale plays are not ubiquitous - 88% of shale gas production comes from 6 of 30 plays; 81% of tight oil production comes from 2 of 21 plays. • The drilling treadmill will accelerate as sweet spots are drilled off and well quality declines as drilling moves into more marginal areas. • Over-hyped in terms of long term supply especially at low forecast prices. • Collateral environmental impacts associated with fracking have already, and will continue to create public opposition to unfettered access to drill sites which are mandatory to maintain supply. The Shale “REVOLUTION”
- 54. • US “EnergyIndependence” with the forecast energy trajectory is highly 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, will take much longer in Europe, if ever. There is no reason to expect that the geology will be much different – the greatest potential will lie in a few plays and parts thereof. Higher population densities will make surface access for the large number of drilling locations required much more difficult. Due to high population densities the collateral environmental impacts of fracking are likely to be even more apparent – and opposed – than they are in the U.S. • The “Shale Revolution” has been a “game-changer” in that it has temporarily reversed a terminal decline in supplies from conventional sources. Long term sustainability is highly questionable and environmental impacts are a major concern.