ModelingtheEconomicsoftheShaleRevolution:WhatHaveWeLearned?

HillardHuntingtonEnergyModelingForumStanfordUniversity

NGIAnnualAffiliatesMeetingandResearchReviewStanfordUniversity,Stanford,CA

8&9November2017

AncientNaturalGasMyths

• FPCChairmanpredictsrunningoutofnaturalgas• Keypolicyissue:deregulationofinterstatewellheadprices• Curtailments:gastoovaluableforpowersector• Naturalgaswouldsellat10%premiumabovedistillateoil

WhyUseModels?

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“Thepurposeofcomputingisinsight,notnumbers.”- R.W.Hamming

“Allmodelsarewrong,butsomeareuseful.”- GeorgeE.P.Box

ConditionalStatements

Forecasts

ShaleGasasaGameChanger?

• Re-industrializetheUSeconomy• Panaceaforglobalclimatechangedamages• ShiftgeopoliticalpowertotheUSA• Transformenergymarkets

NaturalGas,FuelDiversityandNorthAmericanEnergyMarkets

• WorkinggroupfirstmetinJanuary2002.• 2020pricescouldrangebetween58%and118%ofJune2003level.• Investmentsinresources/technologiesplayacriticalrole.• Fuel-substitutionopportunitiesprovideamorestablelong-runpricepath.

TheNew‘Normal’forNaturalGasPrices

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Citygatenaturalgasprice($/mcf)

APolicyFrameworkforEvaluatingNorthAmericanNaturalGasExports• Global framework evaluates major market risks• US LNG exports face increasing world competition• Policymakers should expect considerable export uncertainty

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PIorresearch

Engagingandinformativegraphicorimageabout

research• Apply to US strategies for cleaner power• Link:https://web.stanford.edu/group/emf-

research/docs/exports.pdf• Improves policy decisions by empha-

sizing uncertainty in market outcomes

Engagingandinformativegraphicorimageaboutresearch

‘IrrationalExuberance'DéjàVu?

Bcf/d %TotalLong-termNon-FTAapplicationsreceived 51.59 70.6%Long-termNon-FTAapplicationsapproved 21.35 29.2%TotalAnnualU.S.DryProduction 73.05

Source:DOE,OfficeofFossilFuel;EIA

• Notallprojectsareunderconstructionorwillbebuilttolicensedcapacity.• DemandforUSLNGexportscangrowfromcurrentlevels.

North American Energy Trade and Integration Prospectus Energy Modeling Forum, August 2017

Stanford EMF will be coordinating an effort to support trilateral discussion and sharing of energy information initiated by the Energy Secretaries and Minister from Canada, Mexico, and the United States for the North American region. This team effort will focus upon understanding:· the availability of existing data, · the opportunities for developing new metrics meeting investors’ and

policymakers’ needs, and · the sharing of market insights that flow from numerous analytical models and

frameworks.

Background information about the agreement can be found at http://www.nacei.org/en/.

Thankyou

ReportsandOtherMaterialareavailableat

https://emf.stanford.edu/

orcontactHillHuntingtonathillh@Stanford.edu

AdditionalSlides

Prices/TradeinGlobalizingMarket

• WorkinggroupfirstmetinDecember2004ØNoshalegas/NoGreatRecessiononthehorizon

• WesternEuropeØStable/decliningproductionØGrowingconsumptionandtrade

• UnitedStatesØExpandingproduction/consumption/trade

GasTradeExpandsinEurope

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EuropeanGasMarkets(BcfperYear)

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Imports

Exports

NorthAmericanTradeShareRemainsSmall

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NorthAmericanGasMarkets(BcfperYear)

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Exports

SeveralOtherInsights

• Transitionfromcontractstoarbitrage• Marketresiliency:changeingasuserelativetopricechange• Somemodelsshow4xtheresiliencyofothermodels

ChangingtheGame?• ReturnedtothetopicwithourNorthAmerican“ChangingtheGame?”study,beginninginNovember2011.

• Broadenergymarketimpacts:displacecoal,slowdownnuclearandrenewableexpansion.ØFailedtoanticipaterenewablecostrevolution.

• BoostsGDPby$70billionannuallyoverthenextseveraldecades,butthatisonly0.46%ofthetotaleconomy.

• Modestimpactsonemissions:lesscoalbutalsonuclearandsomerenewableandenergyefficiency(lowerprices).

• Whichpricepath?

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AverageU.S.WellheadGasPrice(2010$/Mcf),2010-2050

Reference

HighShale

SupplyassessmentscalibratedtoEIA.EIAshowshigher-costproduction.

currentprice

NorthAmericanTransition

• ContinuedwithanewstudybeguninOctober2013.• SufficientflexibilityforCleanPowerPlanwithoutchangingpricesornetU.S.gasexports.

• USexportsfromnewLNGfacilitiesmustbecompetitivewiththecostsfromotherregions.

DiminishingRegionalDifferences

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NaturalGasPrices($/mmBtu)Source:IMF/WorldBank

German Japan Europe USA

TheEvaluationFramework

• GAMSmodelsolvesformarketbalances(equilibria)in13differentworldregions.

• Five-yearintervalsthrough2040.• Intertemporaloptimization.• USsupplyregioncompetesagainstallotherregionstoprovidegastoalldemandcenters.

• BothpipelinesandLNGfacilitiesprovidetransportationbetweenregions.

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PercentthatNew USExportsin2025WillReachatLeastSomeLevel(HorizontalAxis)

NetExports

NetImports