Energy Market Upheaval: The

Shale Revolution

Benjamin Schlesinger and Associates, LLC

Bethesda, Maryland

“New Energy Recovery Technologies: Midwest and Global Industry

Impacts”

Federal Reserve Bank of Chicago, Detroit Branch

Monday, April 8, 2013

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Outline

Introduction

Gas supply: shale gas (and shale oil)

Gas demand in crisis

Coal substitution, other new markets

Global gas markets

Conclusions.

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BSA – 29 years of gas and energy advisory

services.

Economics, pipeline tariffs,

contracting, price risks.

– Research & training

– Negotiation of gas contracts

– Due diligence – Review for lenders

in financing of LNG, power plants,

gas storage

– Expert in courts & arbitrations,

testified in 16 jurisdictions.

600+ assignments

27 countries.

ients: Energy buyers & sellers, electricity

and heating plants, gas and oil pipelines,

banks, governments, universities.

Expertise Major Assignments

Power generators

Lenders

Pipelines/traders

LNG projects

Regulators

Expert testimony

UNECE

European pipelines

GdF Suez, Repsol, BG

Eastern Europe

West African pipeline

Sonatrach (Bechtel)

Japan gas utilities

Mitsubishi

Philippine NPC

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Despite all the words and numbers, people

still don’t really grasp this.

The ship arrives.

Were it a country, US shale would

be the world’s 3rd largest gas

producer.

Most US policy, economic,

academic and environmental

studies are totally outdated, e.g.,

from Internet/Google.

Shale ‘debate’ is lost on most

people.

4

Estm. US Shale Gas Production, Bcf/day

0

5

10

15

20

25

30

2000 2002 2004 2006 2008 2010 2012

Rest of US

Bakken

Eagle Ford

Marcellus

Haynesville

Woodford

Fayetteville

Barnett

Antrim

Source: EIA 3/2013.

US has added 4.6 MBD equivalent of shale

gas production since 2001.

1.1 1.7 2.5

4.1 2.7

4.3

11.2

-

2.0

4.0

6.0

8.0

10.0

12.0

Holland Norway Qatar EU, Total Venezuela Iran Saudi

MB

D, e

qu

iva

len

t

Annual US shale gas production (just the growth)

Source: BSA 2013, from BP Statistical Review 2012 & EIA (est. shale production).

Gas Production, 2011 Oil Production, 2011

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…plus another 2 MBD rise in US shale

oil production, so far.

How long will North America’s big

hydrocarbons price gap persist?

$-

$5.00

$10.00

$15.00

$20.00

$/M

MB

tu Henry Hub Acutals

WTI Actuals

Brent Actuals

Henry Hub Futures

WTI Futures

Brent Futures

Source: BSA 2013, from CME-NYMEX, March 15, 2013. 6

High crude oil prices (relative to gas) mean

drillers will continue to seek tight oil.

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Ja

n-0

1

Ja

n-0

3

Ja

n-0

5

Ja

n-0

7

Ja

n-0

9

Ja

n-1

1

Ja

n-1

3

Ja

n-1

5

Ja

n-1

7

Ja

n-1

9

WTI/HH Actuals WTI/HH Futures

Oil Rigs/Gas Rigs

Past: Crude prices rose while gas

prices fell, until crude prices

averaged 6x gas price in 2012 –

drillers moved off to oily shales:

– Eagle Ford, Texas

– Bakken, North Dakota

– Utica, Ohio

Today: $96 crude oil is 4x gas

($16.55/MMBtu versus $4.10).

Outlook: Oil prices and oil drilling

rigs both at 3-to-one over natural

gas, until gas production falls and

its price rises.

7

Oil-to-Gas Ratio

Price of crude / gas

(actual)

Price of crude / gas

(NYMEX futures)

Rigs drilling for

crude / gas

Source: BSA 2013, from CME-NYMEX, futures at 3/28/13, Baker Hughes U.S. weekly rig count.

US production of tight oil and NGLs is now

rising as dramatically as natural gas did.

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2006 2007 2008 2009 2010 2011 2012

Austin Chalk Spraberry

Niobrara-Codell Woodford

Monterey Bonespring

Granite Wash Bakken

Eagle Ford

Emerging shale plays are forcing

new technologies:

– Multi-well/multi-stage

– Recycling of return waters

– New tech (dry fracking, CO2).

Major challenges:

– Low gas and NGL prices (tends to

self-correct)

– Pipeline bottlenecks, both gas and

oil (flaring)

– High cost of rail

– Environmental issues?

– Skilled labor shortages.

8

MB

D

Source (chart): Adam Sieminski, EIA..

North Dakota’s oil production will double

Alaska’s before 2020.

Source: BSA 2013, from EIA. 9

-

500

1,000

1,500

2,000

2,500

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Production of Crude Oil by US State, thousands of b/d

Texas North Dakota

Alaska California

The resulting NGL “waterfall” has driven

down prices, esp. ethane.

10 Source: EIA, data from Bloomberg, update: BSA 2013, from CME-NYMEX.

Crude oil, $16.11

Ethane, $4.14 Natural gas, 3.87

March 15, 2013

Prices

EIA’s US Gas Production to 2035

11 Source: EIA, AEO 2013 Early Release, Reference Case, December 5, 2012.

Most near-term surplus gas will be spent

replacing coal in aging power plants.

- 20 40 60

12 Source: BSA 2012, coal plants in 20 Northeast and Mid-West states from EIA, plus Ontario; map from AEP.

Newer than 30 years, 12%

30-40 years, 27%

40-50 years, 33%

50 years or older, 28%

Coal-Fired Plants, MW Retiring Coal-Fired Plants

The good news: Replacing old coal with

new gas reduces CO2 emissions by 63-72%.

Average

Age of

Plants

at

Retire-

ment

No. of

Plants

Retired

in Each

Year

Total Net

Summer

Capacity,

GW

CO2

Reduction

Replacing

Bituminous

Coal with

Gas

2009 50 12 0.5 67.7%

2010 54 35 1.5 69.4%

2011 62 31 2.5 63.3%

2012 56 57 8.9 63.9%

2013 55 14 2.1 71.7%

2014 57 34 4.7 64.4%

2015 57 61 9.9 63.1%

GHG reduction due to:

– Chemical advantage: Gas burning

emits 46% less CO2 than coal.

– Efficiency advantage of new gas

CCGTs versus old coal boilers: 55-

60% vs. 31-33%.

– Carbon emissions savings from fuel

cycle as well.

Other criteria air emissions

reduced/prevented, especially

sulfur, particulates, oxidants.

But the “low-hanging fruit”

might all be picked by 2020.

13 Source: BSA 2012, from EIA and Siemens data.

LNG is uniquely able to offset variable

generation, e.g., Spanish CCCTs.

14

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

MW

LNG Regas in Spain Hourly Wind Production, MW

Source: Enagas, 2012; K. Forbes 2010, ERCOT data for 7/2009.

Other key new gas markets will take longer

– NGVs, petrochemicals, LNG exports.

15 Source: Westport Innovations Inc., Vancouver, BC.

Issue: Why doesn’t America have 20

million NGVs by now?

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

Natural Gas 87 Octane

$/M

MB

tu

Henry Hub Mid & Marketing

WGL Delivery Compression

Road Tax Pump Price

Favorable economics since 1980s!

Natural gas is best used in large

vehicles, high-mileage fleets:

– Municipal trucks, buses

– UPS, Dulles Flyer

– Forklifts, compressors

Lower mileage personal vehicles

headed toward electricity:

– $4 natural gas vs. $32 gasoline

(per MMBtu)

– 61% efficient CCCTs vs. 26%

efficient piston engines

– No wonder electricity = 79 c/gal!

16 Source: BSA 2011, from NYMEX, EIA data.

In some regions, battery EVs are, in effect,

just very high-efficiency NGVs.

Production of methanol and gasoline from natural gas will also

become options, as price differentials remains favorable.

17 Source: Tesla Motors.

Global firms plan to spend $80 billion on

new US gas-based industries.

About 100 new manufacturing

plants in development:

– Chemicals & petrochemicals

– Fertilizers

– Steel & aluminum

– Tires, plastics

– Gas to liquids

Most sited near the Gulf Coast.

If all proceed, added gas

demand will reach 11 Bcf/day

by 2035.

18

0

2

4

6

8

10

12

2018 2035B

cf p

er d

ay

Incremental gas demand

Source: Dow Chemical, 2012.

19

LNG Exports: Linking the US

to Global Gas Markets

European demand for gas imports is rising

with supply & nuclear issues.

Plunging European gas

production is intensifying

winter supply crises.

In less than a decade, the UK

has transformed from exporter

to LNG importer on scale

exceeding Spain.

The high cost of marginal

Russian gas supplies offers

little relief, buyers seek LNG.

European gas demand is flat.

0

50

100

150

200

250

300

1990 2000 2010 2020 2030

EU

27

Ga

s P

rod

uct

ion

, B

CM

United Kingdom Netherlands

Germany Hungary

Romania Italy

Poland Denmark

Other

Source: UNECE Sustainable Energy/Working Party on Gas LNG Report, 2012, from Gas Strategies, 2011. 20

Fukushima and economic growth have

each strengthened Asian gas demand.

Worst-case post-

Fukushima Japan nuclear

plant capacity availability

actually took place.

Source: Forecast by M. Toyoda, Institute of Energy Economics-Japan, October 2011. 21

Gas prices among markets differ greatly

from one another.

22 Source: UNECE WPG LNG report, Chapter 1, update courtesy Ken Medlock, James K. Baker III Institute, Rice Univ .

Source: IEA World Energy Outlook 2012. 23

LNG exports from the US are sought after

for strategic and economic reasons.

Global shale gas is unlikely to threaten US

LNG exports for years.

0 10 20 30 40 50 60

India and Pakistan

Australia

Europe (excl. Russia)

South America

Africa

China

North America

Total US

Canada Mexico

South Africa Other Africa

Argentina Brazil

Other So. America Poland

France Other Europe

Most foreign gas markets are

dominated by long-term

contracts tied to fuel oil.

European, Asian and Russian

shale gas resources may

remain in place absent:

– Vibrant independent producing

sector

– Technical expertise

– Institutional reform/TPA

– Education.

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Potential Shale Gas, Tcm

Source: BSA 2011, from US EIA.

Benjamin Schlesinger and Associates, LLC The Bethesda Gateway

7201 Wisconsin Avenue, Suite 740

Bethesda, MD 20814

Phone: (301) 951-7266 Fax: (301) 951-3381

Visit us at www.BSAenergy.com

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