perspectives on the impact of shale gas and tight oil ... · cost of production/import ($/bbl) eor...
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2014 RICE GLOBAL E&C ANNUAL FORUM
www.forum.rice.edu
Perspectives on the Impact of Shale Gas and Tight Oil Production on the Global
E&C Industry …and Vice Versa
September 23, 2014
Today’s objectives
•ReviewtheimpactofU.S.shalegasandtightoilontheglobalenergymarkets
•ExaminetheroleofE&Conthefutureevolutionoftheenergymarkets
•HighlightsomeofthechallengesandimplicationsforenergyplayersandE&Cserviceproviders
U.S. natural gas market has experienced a “supply shock” driven by shale gas
• ShalegasisnowtheleadingsourceofNGintheU.S.
• U.S.NGpriceshavedecoupledfromoilpriceproducingwidelydivergentglobalgaspricesbyregion
• LowerNGpriceshaveledtodomesticsubstitutionandopenedupinternationalarbitrageopportunities
0
20
40
60
80
100%
2000 2013
Shalegas
Conventional
Tightgas
CBM
Imports
U.S.naturalgassupplybytype(BCF/D)
4%
1%
-2%
30%
-4%
'00-'13CAGR
Source:EIAAEP2014
As a result of wet gas production, NGL volumes have surged
• LowerNGLpriceshavesignificantlybolsteredU.S.competitivenessandusheredinaU.S.petrochemicalsmanufacturingrenaissance
- Doublingofethanecrackingcapacity
- QuadruplingofLPGexports
- Doublingofdomesticmethanolproduction
- Resurgenceofdomesticammoniaproduction
Source: WellsFargoSecurities;EIA;ICFInternational;BainAnalysis
NGProcessing
Refinery
outputs
6%CAGR
A “supply shock” is also underway in U.S. tight oil and crude sources are changing rapidly
0
20
40
60
80
100%
2010 2013
Imports
Tightoil
Offshore
Otheronshore
U.S.crudesupplybytype(MBD)
AlaskaCO2EOR
0%
-6%
62%
-6%-4%0%
'10-'13CAGR
• Tightoilisfastestgrowingsourceofcrudeoilsupply
• U.S.priceindex(WTI)decoupledfromotherworldindices
• Lower-pricedU.S.tightoildisplacinglightimports
• U.S.hasbecomeanetexporterofrefinedproducts
Source:EIAAEO2014;DeutscheBank;Bentek;WoodMackenzie;CAPP;CalgaryHerald
0
100
200
$300B
U.S.Oil&GasExplorationandDevelopmentCapEx
2007
99
2008
116
2009
86
2010
114
2011
149
2012
184
2013
190
2014
198
2015
202
2016
OnshoreConv
Offshore
Tightoil
Shalegas
209
-4.1%
-8.2%
8.1%
4.6%
CAGR('13-'16)
2007-201311%CAGR
2013-20163%CAGR
Total U.S. oil & gas exploration and development capital expenditures beginning to slow
Source:BasedonRystad,July2014
Midstream companies are investing at historically high levels to capitalize on supply shifts
• Supermajors havehistoricallyhadhigherCapExlevelsgivenendof“easyoil”andneedtodevelophighercostreserves(e.g.,deepwater,oilsands,Arctic)
•MidstreamMaintenanceCycle(2004-2007)relativelylowlevelsofCAPEXdrivenprimarilybymaintenanceprojects
•MidstreamInfrastructureSupercycle seeingdramaticincreaseinCAPEXdrivenbymajorexpansionprojects
Source:Companyannualreportsandinvestorpresentations;Bainanalysis
U.S. chemical industry planning increased CapEx as a result of shale gas-induced competitiveness
0
5
10
15
$20B
U.S.energy-relatedchemicalsCapEx
2013
6
2014F
8
2015F
13
2016F
16 43%
CAGR('13-'16)
Source:IHS,“America’sNewEnergyFuture:TheUnconventionalOilandGasRevolutionandtheU.S.Economy”
As a result of surge in CapEx, E&C revenues are up even as backlog continues to grow
…ANDSUPPORTEDBYHEALTHYANDGROWINGBACKLOG(ALSOUP50%VS.2009)
E&CREVENUESININDUSTRIAL/PETROLEUMSEG.AREONTHERISE(UP50%VS.2009)…
*Oil&gas-relatedincludesupstream,midstream,downstreamandpetrochemicalsNote:CBIbacklogin2013scaled50%Engineering,ConstructionandMaintenance,75%Fabrication,100%technology,basedonrevenueallocationsfromanalystreports;assumesJECbacklog2008-2010is35%O&G-related,givenO&G-relatedshareofbacklogin2011
Source:ENR;CreditSuisse,2014Engineering&ConstructionOutlookandvariousanalystreports;Bainanalysis
10%CAGR
Audience Response Question
Giventhenumberofcapitalprojectsbeingbuiltandplannedacrosstheentireoilandgasvaluechain,
doestheindustryhavetheengineeringandconstructioncapacitytorespondtotheseplans?
Yes
No
Notsure
Survey of ECC Plenary session attendees
Giventhenumberofcapitalprojectsbeingbuiltandplannedacrosstheentireoilandgasvaluechain,
doestheindustryhavetheengineeringandconstructioncapacitytorespondtotheseplans?
Yes
No
Notsure
22%
66%
12%
Source:SurveyofECCPlenarysessionattendees,Sep2014,N=800+
Think about the following question
Whataretheconsequencesofnotdeliveringthesemajorprojects(roughly)ontimeandonbudget?
Source:SurveyofECCPlenarysessionattendees,Sep2014,N=800+
Long-term forecasts vary widely
FORECASTSVARYONIFANDWHENOILPRODUCTIONWILLPEAK
Actual
OPEC
IEA
IHSCERA
EIA(’14basecase)
EIA(’14highcase)
EIA(’14lowcase)
Forecastrange
ALLFORECASTSEXPECTGASPRODUCTIONTOINCREASE
Forecastrange
Actual
Bentek
IEA
IHSCERA
EIA(’14basecase)
EIA(’14highcase)
EIA(’14lowcase)
RaymondJames
2010
2015
2020
2025
2030
0
20
40
60
80
100
110
2010
2015
2020
2025
2030
U.S.drynaturalgasproduction(BCFD)
Note:EIAhighandlowcasesbasedonthehighandlowresourcescenarios;Crudeoilproductionfiguresincludeleasecondensatebutexcludenaturalgasliquids;drynaturalgasproductionfiguresexcludenaturalgasliquids;IHSCERAforecastexcludespotentialimpactofAlaskaLNGexportsandassumesinfrastructureconstraintsdon’tholdbackproduction;IEAcrudeoilestimatesbasedonexcludingEIANGLproductionforecastfromIEAU.S.totalliquidsproductionforecastSource:EIA2014AEO;IEA2013WEO;OPEC10/13article;IHSCERA;Bentek;RaymondJames
Nearly all variability in these forecasts is driven by shale gas and tight oil
SHALEGASDRIVES~85%OFEIAFORECASTDIFFERENCEIN2030
TIGHTOILDRIVES~90%OFEIA FORECASTDIFFERENCEIN2030
0.0
20.0
40.0
60.0
80.0
100.0
120.0
USnaturalgasproduction(BCFD)
2030EIALow
79.4
DifferenceLowtoHigh
31.3
-3.7
2030EIAHigh
Shalegas
Tightgas
Assoc
Nonassoc
CBM
107.0 Alaska
Tightoil
Shalegas
Source:EIA2014AEO,HighandLowO&Gresourcecases
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
NGL prices have decoupled from oil but still support attractive well economics
0
2
4
$6/MCF
Drygas
3.80
Wetgas
Methane
Naturalgasoline
Isobutane
Normalbutane
Propane
Ethane
5.87
Wetgaseconomics(forward12-monthstrip)
Historically,NGLpricescloselyfollowedoil
Since~2010,NGLpriceshaveseparatedfromoil
Source:Bloomberg;EIA;EnterpriseProductsPartners,L.P.;EPDFundamentalsandNYMEX,asofSeptember2013
NGLPRICESDECOUPLEDFROMOILIN~2010NGL PRICESSTILLSUPPORTMOREATTRACTIVEWELLECONOMICS
10
20
50
$100
0.1 0.2 0.5 1 2 5 10 20 50 100
2011
2010
R²=0.87Slope=86%
Cumulativeproductionfromshalegasplays(BOE)
Totalcostofshalegasproduction(perBOE)
2030
2025
2020
2015
20142013
2012
2009
20082007
2006
2005
Both shale oil and shale gas production are following steep learning curves (industry experience curves)
10
20
50
100
200
500
$1,000
0.001
0.002
0.010.02
0.050.1 0.2 0.5 1 2 5 10
2012
2011
R²=0.75
Slope=87%
Cumulativeproductionfromtightoilplays(BOE)
0.005
Totalcostoftightoilproduction(perBOE)
2013
2010
2009
2008
2007
20062005
TIGHTOILINDUSTRYEXPERIENCECURVE
SHALEGASINDUSTRYEXPERIENCECURVE
Note:EstimatedbasedonRystad forecastsofunconventionalshaleoilandshalegasproductionandexpendituresSource:Rystad;Bainanalysis
Low and high cases for U.S. shale gas production result in structurally different NG supply curves
NAgasproductionandU.Sdemand(BCF/day)
50 100 150 2000
6
8
10
0
U.S.Demand=~70BCF/D
Associated
Shalegas
CANnon-assoc
U.S.non-assoc
Coalbedmethane
4
2
12
Imports
Costofproduction/import($/MMBtu)
2030LowShaleGasProductionScenario
Tightgas
NAgasproductionandU.Sdemand(BCF/day)
50 100 150 2000
6
8
10
0
Associated
4
2
12
Costofproduction/import($/MMBtu)
U.S.Demand=~95BCF/D
Shalegas
Availableforexport
2030HighShaleGasProductionScenario
Source:EIA;IEA;Bainanalysis
Global proposed LNG capacity additions have rated costs from $4 to $14 pre MMBtu
~56BCF/D
~43BCF/D
Note:SupplycurvefromDeutscheBank,estimatesforincrementaldemandthrough2025takenfromMacquarieResearch;ME=MiddleEast,AB=Alberta;PB= PapuaBarat(Tangguh LNGinIndonesia).1BCF/D=7.82MTPA
Source:WoodMackenziedata;DeutscheBank;MacquarieResearch;Bainanalysis
UNDERCONSTRUCTION;INENGINEERING;
PLANNED/APPROVED
Increased LNG exports from the U.S. could significantly flatten out the supply curve
~56BCF/D
PLANNED&SPECULATIVE
Note:1BCF/D=7.82MTPASource:WoodMackenziedata;DeutscheBank;MacquarieResearch;Bainanalysis
Substantial uncertainty exists around how much LNG the U.S. will ultimately export
FERC HASAPPROVEDLESSTHAN15%OFPROPOSEDLNG EXPORTCAPACITY
0
10
20
30
40
50
FERC&DOEApproved
5.7
DOEApproved
12.2
Otherproposed
23.0
TotalPotential
40.9
U.S.lower48LNGproposedexportcapacity(BCFD)
SOURCESOFUNCERTAINTY
• GlobalLNGdemand
- Demandgrowthestimatesnearlydoubletotaldemandby2025…
- …thesedemandprojectionsareedgingupwards
• CompetitiveLNGsupplies
- 50+LNGfacilitiesbeingbuiltorplanned;manywithratedlowerlandedcostvs.U.S.
- Highvariabilityofon-time,-budgetthreatenscompetitivenessofmanyoftheseprojects
• Globalshaleboom
- Basedonreservesalone,shalehasthepotentialtotransformtheenergymarketsinmanycountries
- Everymajornon-NorthAmericanshaleresourceholderhassignificantbarrierstoovercome(geology,infrastructure,regulation)
- Wedonotexpecta“globalshalerevolution”innext~10years
Note:Onlyliquefactionfacilitiesareconsidered,approvedfacilitieshavebeengrantedconditional/finalapprovalbyU.S.DOEbutnotnecessarilybyFERCSources:BP,BG,DepartmentofEnergy,Bloomberg,Platts
Low and high cases for U.S. tight oil production result in structurally different crude oil supply curves
Source:EIA;IEA;Bainanalysis
2030LowTightOilProductionScenario 2030HighTightOilProductionScenario
4 8 12 160
Costofproduction/import($/BBL)
EOR
Arctic
Imports
CANhvy
Tightoil
Deepwtr
Conventional
Dom.hvy
NAcrudeproductionandimportsintotheU.S.(MBD)
U.S.Demand=~12MBD
0
100
20
40
60
80
120
U.S.Demand=~13.5MBD
4 8 12 160
Costofproduction/import($/BBL)
EOR
CANhvy
Deepwtr
Conventional
Dom.hvy
NAcrudeproductionandimportsintotheU.S.(MBD)
Tightoil
0
100
20
40
60
80
120
High U.S. tight oil production scenario could significantly alter global clearing price
Note:CrudedemandforecastdoesnotincludecondensatesandliquidsSource:Rystad;IEA;AdvancedResourcesInt’l;BPEnergyOutlook2030;Bainanalysis
-2
-1
0
1
2
3
4MBD
-2
-1
0
1
2
3
4MBD
3.4
1.7
3.4
0.7
2.6
0.7
0.3
-0.8-0.5
-1.4
3% 1% 1% -1% -2%Changeindemand(%)
-57% -42% -27% -31% -69%Changeinprice(%)
7% 6% 4% 0% -1%Changeinproduction(%)
Historically, over-supply situations have led to price declines between 30% and 70%
1986 1991 1998 2001 2008
Changeinproduction
Changeinconsumption
Source:EIA;IEA
Strategy in an environment of high uncertainty requires a scenario-based approach
Unprecedentedlevelofuncertainty
Developandadjustplans
Quantifyrisksanddevelop
mitigationstrategies
BuildIntegrated
view
Define/updatescenarios
WINWHICHEVERSCENARIO
MATERILIZES
• Competitionbetweenmuchmorediverseenergysources
• SpeedofexpansionofshalegasandtightoilinsideandoutsideofNA
• Speedandcostofinfrastructurebuildout
• Changeindomesticandinternationalflows
• Speedanddegreeofdemandsubstitution
Defineandtrackleading
indicators