north american natural gas exports and future u.s. supply ... · federal government, according to...

Labyrinth Consul4ng Services, Inc.

North American Natural Gas Exports and Future U.S. Supply: Sound and Fury

Arthur E. Berman Labyrinth Consulting Services, Inc.

Corpus Christi SIPES Corpus Christi, Texas August 26, 2014


The Future of North American Natural Gas Exports •  A global context is essen4al to understand the export future of both heavy oil and

natural gas. •  The U.S. and Canada are not natural gas super powers. •  The U.S. does not have 100 years of gas nor will LNG export become significant in

global markets or poli4cs. •  There is no shale gas revolu4on—it is a rally that has bought us another decade of

supply. •  Russia’s natural gas deals with China and Austria fundamentally alter the global

LNG market. •  North American LNG exports will be limited and will face increasing compe44on on

price and market-‐share. •  The U.S. will face increasing challenges to meet domes4c gas demand in the next

decade.


North American Natural Gas Exports: The Context

“It is a tale Told by an idiot, full of sound and fury, Signifying nothing. -‐-‐Macbeth Act 5, scene 5, 19–28

7/30/2014 John Hoeven and John McCain: Putting America's Energy Leverage to Use - WSJ

http://online.wsj.com/articles/john-hoeven-and-john-mccain-putting-americas-energy-leverage-to-use-1406590261#printMode 1/2

See a sample reprint in PDFformat.

Dow Jones Reprints: This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues,clients or customers, use the Order Reprints tool at the bottom of any article or visit www.djreprints.com

Order a reprint of this article now

OPINION

Putting America's Energy Leverage to UseUndermine Putin and help the U.S. economy by capitalizing on our natural-gasbonanza.

July 28, 2014 7:31 p.m. ET

The violence on the border of Ukraine and Russia reached a horrendous level on July 17, when Russian-backed separatists shot down Malaysia Airlines Flight 17, killing 298 innocent men, women and children.This horrific event brings even greater instability to the region five months after Russian President VladimirPutin invaded Crimea. Russia continues to intimidate and disrupt Ukraine's pro-Western government inKiev and U.S. allies in Europe.

Mr. Putin's Russia also continues to exploit Ukraine and Europe's dependence on Russian energy,undermining support within the European Union for the tougher sanctions needed to deter furtheraggression. Currently, 13 European nations rely on Russia for more than half of their natural gas and four—Lithuania, Estonia, Finland and Latvia—depend on Russia for 100%. One quarter of all natural gasconsumed in the EU is piped from Russia, much of it through Ukraine.

What can the U.S. do to help alleviate Europe's reliance on Russian natural gas? We can start by passingthe North Atlantic Energy Security Act, legislation we sponsored and introduced with Sens. LisaMurkowski (R., Alaska) and John Barrasso (R., Wyo.) that will deploy our own natural resources toweaken the Putin regime and strengthen our allies in Ukraine and Europe.

Today, the U.S. has the leverage to liberate our allies from Russia's stranglehold on the European natural-gas market. Thanks to new technologies such as hydraulic fracturing and horizontal drilling, America isproducing more than 30.2 trillion cubic feet of natural gas a year, but only using 26.6 trillion. Oil and gascompanies are forced to burn off natural gas that isn't used, as the U.S. lacks the pipeline infrastructureneeded to capture it. North Dakota alone flares 40% of all natural gas produced on lands managed by thefederal government, according to data from the North Dakota Industrial Commission, which overseas oiland gas development in the state. This benefits no one.

The U.S. should put that natural gas on the global market. Here's what our bill does:

First, it would streamline onshore production. It currently takes 180 to 270 days for the federal governmentto approve a drilling permit in North Dakota, according to the North Dakota Industrial Commission. Ourlegislation would remove government roadblocks and cut red tape that delays and sometimes preventsonshore American energy production. It would reform the leasing process for onshore oil and natural-gas

By JOHN HOEVEN And JOHN MCCAIN

“Today, the U.S. has the leverage to liberate our allies from Russia's stranglehold on the European natural gas market. Thanks to new technologies such as hydraulic fracturing and horizontal drilling, America is producing more than 30.2 trillion cubic feet of natural gas a year, but only using 26.6 trillion. Oil and gas companies are forced to burn off natural gas that isn't used…” -‐-‐John Hoeven and John McCain

•  Policy makers are ignorant about energy. •  Senators Hoeven and McCain subtract

consump4on from gross withdrawals and conclude that the difference is surplus supply.

•  They conclude that this surplus is flared because there is no infrastructure due to no demand.

•  This “surplus” is almost 10 Bcf/day! •  Apparently, they didn’t bother to look at

EIA’s Annual Energy Outlook 2014 where everything they don’t know is in a single spreadsheet.

0"

5"

10"

15"

20"

25"

30"

35"

2011" 2012" 2013" 2014" 2015" 2016" 2017" 2018" 2019" 2020"

Trillions(of(C

ubic(Feet(o

f(Gas(Per(Year(

U.S.(Natural(Gas(Produc:on(&(Consump:on(Dry"Gas"Produc7on" Consump7on"


A Global View of Natural Gas Proved Reserves

1,680&

1,168&

890&

305& 284& 265&215& 195& 180& 159& 147& 141& 112& 107& 85& 83& 77& 71& 65& 64& 61&

0&

200&

400&

600&

800&

1000&

1200&

1400&

1600&

1800&

Russia&

Iran&

Qatar&

United&States&

Saudi&Arabia&

Turkm

enistan&

UAE&

Venezuela&

Nigeria&

Algeria&

Europe&

Indonesia&

Iraq&

China&

Kazakhstan&

Malaysia&

Egypt&

Norway&

Uzbekistan&

Kuwait&

Canada&

Trillions(of(C

ubic(Feet(o

f(Gas(

Natural(Gas(Proved(Reserves(

The U.S. is a weak 4th (EIA) or 5th (BP) in world proven natural gas reserves and Canada is 21st (EIA) or 17th (BP).

Source: EIA

1,193%

1,104%

872%

617%

330%291%

215% 197% 179% 159%130% 127% 116% 103%

72% 71% 65% 63% 55% 54%

0%

200%

400%

600%

800%

1,000%

1,200%

1,400%

Iran%

Russia%

Qatar%

Turkm

enistan%

US%

Saudi%Arabia%

UAE%

Venezuela%

Nigeria%

Algeria%

Australia%

Iraq%

China%

Indonesia%

Norway%

Canada%

Egypt%

Kuwait%

Libya%

Kazakhstan%

Trillions(of(C

ubic(Feet(o

f(Gas(

Proved(Reserves(of(Natural(Gas(

Source: BP


A Global View of Natural Gas Proved Reserves


The Power Of Siberia Pipeline Changes Everything

•  Russia’s gas deal with China: 1.9 – 2.3 Tcf/year (5-‐6 Bcf/d) for 30 years. •  Sets a $10/MMBtu benchmark price for Asia without oil linkage. •  Gas agreement has far-‐reaching implica4ons for global LNG markets. •  Russia plans to be the leading supplier to Asian gas markets. •  Russia’s East Siberia proven reserves: 196 Tcf & 7 billion barrels of oil , 3-‐4mes

Canadian reserves and more than U.S. shale gas reserves. •  This is only the beginning: pipelines to Korea & Japan are planned.

Source: Gazprom


The South Stream Pipeline Changes Everything

•  Russia’s gas deal with Austria is poten4ally larger than the deal with China: 2.3 Tcf/year (6 Bcf/d).

•  Gas will pass through the Baumgarten Hub in Austria to Germany. •  Adds to 1.9 Tcf/year (5 Bcf/d) through North Stream Pipeline. •  Russia is the leading supplier to European gas markets and this will almost double its

supply.

Source: Gazprom


Resource Es4mates: The Myth of 100 Years of Natural Gas PGC Resource Assessments, 1990-2012

Data source: Potential Gas Committee (2013)

Total Potential Gas Resources (Mean Values)

•  There never was 100 years of total technically recoverable resources (TRR): only 92 years. •  28 years of “probable” TRR: the only meaningful category because plays have been tested. •  14 years of shale gas reserves assuming 50% of probable resources will become reserves at

some price much higher than today’s probable range. •  Shale resource assessments are only relevant as a factor in evalua4ng untested plays. They

are worthless once produc4on history is established. •  Resource es4mates create an inflated impression of play poten4al among poli4cians,

journalists and investors. •  Much of this gas is too deep, or in accumula4ons too small to ever be developed, or is

inaccessible.

Technically*Recoverable*Resources*(TRR) TcfProbable(including(CBM((existing(fields) 723Possible((new(fields) 1,001Speculative((frontier) 655Separately(Aggregated(Amount 6Total 2,384Years*of*Technically*Recoverable*Resources 92

Potential*Reserves TcfProved(Reserves 30550%(of(Probable(TRR 361Total&Potential&Reserves 666Years*of*Reserves*(Total*÷*2013*Consumption) 26

SUMMARY*OF*POTENTIAL*GAS*COMMITTEE*2012*REPORT


$0.17&$0.00&

$0.17&$0.36&

$0.55&

$1.48&

$0.54&

$0.69&$0.90&

$0.79&$0.64&

$0.64&

$0.00&

$0.00&

$0.35&

$0.79&$0.43& $0.35&

$0.35&

$0.76&

$0.87&

$0.13&

$0.38&

$0.15& $0.15&

$0.15&

$0.17&

$0.09&

$0.51&

$0.44&

$0.32&$0.52&

$0.52&

$0.32&

$0.24&

$0.00&

$0.50&

$1.00&

$1.50&

$2.00&

$2.50&

$3.00&

RRC& SM& Cabot& EXCO&TX& EXCO&Marc& CHK& SWN&

Expe

nse&De

ducts&from&Hen

ry&Hub

&Pric

e&$/Mcfe&

Expense&DeducNons&for&Shale&Gas&Companies&RelaNve&to&Henry&Hub&Based&on&3Q&2013&10UQ's&

G&A&Taxes&LOE&Gathering,&Trans.&&&Selling&Henry&Hub&U&Realized&Price&

Shale Gas $4.00 “Break-‐Even” Economics Exclude Important Costs

Source: Company 3Q 2013 10-‐Q Filings

•  No shale gas play is commercial at $4 gas prices (except ~3% of the Marcellus core). •  Many analysts do not include “fixed costs” in their break-‐even price. •  But these costs are part of the operator’s main business and not an incremental add-‐on. •  This is like evalua4ng Wal Mart on the basis of wholesale vs. retail price without the cost

of buildings, employees, distribu4on, adver4sing, etc. •  For shale gas, these costs average about $2.00/MMBtu.


Year%End)2013Cash)Flow 105,785Capex %120,615Debt 167,434Equity 326,991Capex/Cashflow 114%Debt/Equity 51%Capex/Cashflow)Deficit %14,830

Fourth)Quarter)2013Annualized)Cash)Flow 106,521Annualized)Capex %125,727Capex/Cashflow %118%Annualized)Deficit %19,206

Shale Plays Are Not Profitable At The Corporate Level With Current Gas Prices

Source: Google Finance, Yahoo Finance

•  50 E&Ps represent ~40% of U.S. gas produc4on.

•  Overall ~50% gas-‐weighted. •  E&P capex exceeds cash flow

by $37 billion annually. •  $400 billion debt load. •  Debt-‐to-‐Equity ra4o is 51%.


The Balance Sheets Are Worse For Gas-‐Weighted E&Ps

(Operators > 60% Gas-‐Weighted & Market Cap >$5 B)

Source: Google Finance

Company 2013 2012 2011 2010 4-Year1Total

Range1Resources Capex/Cash1Flow 174% 232% 192% 146% 188%Debt/Equity 130% 122% 83% 88% 106%

Encana Capex/Cash1Flow 118% 112% 117% 205% 134%Debt/Equity 150% 146% 95% 45% 87%

Chesapeake Capex/Cash1Flow 143% 408% 161% 264% 223%Debt/Equity 81% 82% 65% 83% 77%

Southwestern Capex/Cash1Flow 118% 127% 126% 126% 124%Debt/Equity 54% 55% 34% 37% 45%

Cabot Capex/Cash1Flow 117% 142% 178% 177% 145%Debt/Equity 52% 51% 45% 52% 50%

Talisman Capex/Cash1Flow 139% 151% 179% 156% 158%Debt/Equity 65% 46% 50% 47% 52%

Devon Capex/Cash1Flow 124% 131% 149% 192% 136%Debt/Equity 59% 49% 51% 62% 55%

TOTAL Capex/Cash1Flow 131% 186% 151% 203% 165%Debt/Equity 76% 69% 60% 59% 87%


EIA Forecast for Endless Produc4on Growth at Low Gas Prices

•  EIA forecast shows gas produc4on exceeding 80 Bcf/d in 2020, 90 Bcf/d in 2026 and 100 Bcf/d in 2036.

•  The number of new producing wells will increase to almost 40,000 per year before gas prices reach $5/MMBtu in 2024 (~29,500 wells had first produc4on in 2013).

•  This is only possible if wells are profitable at less than $5 gas price, or if outside capital con4nues to be available to cover another 10 years of unprofitable drilling.

•  Coal plant closures will require addi4onal 5 Bcf/d by 2016. •  Mexico pipeline exports will exceed 4 Bcf/d by 2016. •  EIA model assumes a nearly infinite poten4al supply and con4nued unprofitable drilling and

produc4on for 25 more years.

Source: EIA

$0.00$

$1.00$

$2.00$

$3.00$

$4.00$

$5.00$

$6.00$

$7.00$

$8.00$

0$

5,000$

10,000$

15,000$

20,000$

25,000$

30,000$

35,000$

40,000$

45,000$

50,000$

2013$

2014$

2015$

2016$

2017$

2018$

2019$

2020$

2021$

2022$

2023$

2024$

2025$

2026$

2027$

2028$

2029$

2030$

2031$

2032$

2033$

2034$

2035$

2036$

2037$

2038$

2039$

Constant'2012'He

nry'Hu

b'Price'

Num

ber'o

f'New

'Produ

cing'W

ells'Per'Year'

Number'of'New'Producing'Wells'&'Henry'Hub'Gas'Price'New$Prod$Wells$ Constant$HH$Price$

0"

20"

40"

60"

80"

100"

120"

0"

5,000"

10,000"

15,000"

20,000"

25,000"

30,000"

35,000"

40,000"

45,000"

50,000"

2014"

2015"

2016"

2017"

2018"

2019"

2020"

2021"

2022"

2023"

2024"

2025"

2026"

2027"

2028"

2029"

2030"

2031"

2032"

2033"

2034"

2035"

2036"

2037"

2038"

2039"

Billion

s'of'C

ubic'Feet'o

f'Gas'Per'Day'

New

'Produ

cing'W

ells'Per'Year'

Gas'Produc<on'Base'&'Number'of'New'Producing'Wells'Number"of"New"Producing"Wells" Produc?on"Base"

Source: EIA


Conclusions: •  The fairy tale of shale gas boundless abundance is based on belief in unrealis4c forecasts

and failure of due diligence—the plays are not commercial below at least $6 gas prices. •  Over-‐produc4on was possible because of a global capital bubble created by low interest

rates and lack of a beker or safer yield than U.S. shale gas investment. •  Now producers want permission to export gas to higher-‐cost markets because they fear

that the capital may stop with high debt and nega4ve cash flow. •  Russia has fundamentally changed the pricing structure for LNG—it is impossible for LNG

to complete with conven4onal gas moved by pipeline. •  Once Iran regains acceptable trading status, even more pipeline gas will be available. •  North American LNG export will proceed but will probably stall when the truth of supply

causes domes4c prices to increase. •  At higher prices, shale gas will buy an North America an addi4onal decade of supply. •  By the mid-‐2020s there will be supply issues for both oil and gas in North America and,

perhaps, the world.

“It is a tale Told by an idiot, full of sound and fury, Signifying nothing. -‐-‐Macbeth Act 5, scene 5, 19–28

north american natural gas exports and future u.s. supply ... · federal government, according to...

Documents