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North American Gas: The New Big Picture
Jen SnyderNorth America Gas ResearchWood Mackenzie2010 Summer SeminarAugust 2, 2010
2© 2010 Electric Power Research Institute, Inc. All rights reserved.
Cost Advances Continue to Redraw the Big Picture
Improving Economics for Southwestern Energy
10
20
30
40
50
60
70
3.00 5.00 7.00 9.00
Gas Price
% IR
R
2009 Q12007 Q4
2006 Q4
0
2
4
6
8
10
2007 2008 2009 2010*
D&
C C
osts
($M
M)
0
200
400
600
800
1000
1200
Hor
izon
tal W
ells
Average D&C Costs Horizontal Wells
Source : Pennsylvania DEP, Operator Reports
Completion techniques
Pad DrillingMulti
Data acquisition Facilities
*Based on data from 9 operators
Marcellus Drilling and Completion Costs
3© 2010 Electric Power Research Institute, Inc. All rights reserved.
Core Shales Remain Toward the Bottom of the North American Cost Stack
Key North American Supply Sources (2015)
3
4
5
6
7
8
Marcellu
sPineda
leHayn
esville
Barnett Core
Bossier L
wEag
le Ford
Granite
Wash
HZFay
ettevil
le
Anadarko W
oodfordPicea
nce Vall
ey
Arkoma Woodford Core
Barnett Non
-core
Cotton Vall
ey
Arkoma Woodford Non-co
re
Piceance
Highlands
Dev
elop
men
t Bre
akev
en (U
S$/m
cf)
Source: Wood Mackenzie
4© 2010 Electric Power Research Institute, Inc. All rights reserved.
Shale Production Surges, and U.S. Gas Supply Follows
• U.S. total supply flat through 2012• Aggressive activity only in the
core shales in the near-to-mid term
• Marginal supplies such as Piceance Highlands and Utah’s Wasatch see little drilling activity
• Shale and tight gas development both contribute to 2013-2020 growth
• Resource is adequate to handle the added demand…
• …but prices reflect the markets new pull on supplies
0
10
20
30
40
50
60
70
80
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
bcfd
Conventional CBM Tight Shale
Source: Wood Mackenzie
U.S. Gas Production
5© 2010 Electric Power Research Institute, Inc. All rights reserved.
The Big Growth Shales; What to Watch
• Haynesville– Significant reduction in drilling times.
Future improvements from pad drilling– Well performance improvements– Upside from Bossier Shale
• Marcellus– Joint ventures accelerating development
in the play– More operators achieving near full scale
water recycling– Infrastructure bottlenecks still remain
• Eagle Ford– High liquids content improves economics– JVs expected in the shale later this year
Red R
iver
Lake o'the Pines
Wright Patman Lake
Caddo Lake
Sam Rayburn Reservoir
Toledo Bend
Reservoir
Lufkin
Longview
Alexan
Jacksonville
Shreveport
E
Trinity
Angelina
SanAugustine
Newton
Nacogdoches
Rusk
Gregg
Cherokee
Shelby
Panola
Upshur
Sabine
Franklin
Camp
Titus
Harrison
Cass
Morris
Marion
HoustonVernon
Rapides
Natchitoches
Grant
Caddo
Red River
Bossier
Sabine
LincolnBienvilleWebster
Claiborne
De Soto
Union
Arkansas
ArkLaTex BasinTexas
LouisianaHaynesvil le
Play
93°W
93°W
94°W
94°W
95°W
95°W
33°N
33°N
32°N
32°N
0 40 8020km
U.S.A.
MEXICO
CANADA
Source: Wood Mackenzie
Haynesville Horizontal Producing Wells
Peak Month greater/equal to 12 mmcfd
Peak Month 6 mmcfd to 12 mmcfd
Peak Month less than 6 mmcfd
Source: Wood Mackenzie NAGS and Upstream Service
Haynesville Shale
Marcellus Shale
TierOne
TierTwo
6© 2010 Electric Power Research Institute, Inc. All rights reserved.
Gas Supply Patterns Follow Power Development
• In the near term, new coal plants and the reversal of ’09/’10 coal displacement limit demand growth
• Pace of demand growth accelerates starting in 2013
• Annual growth 1-1.5 bcfd 2013-2020 as coal plants retire
• Moderate carbon price (<$20/metric tonne) around 2015
• But just as much pressure from EPA
101214
1618202224
262830
2009 2011 2013 2015 2017 2019
bcfd
Pre-recession Dec '09Waxman Current View
Source: Wood Mackenzie
Power Sector Gas Demand
7© 2010 Electric Power Research Institute, Inc. All rights reserved.
Price Levels are Driven by Domestic Supply—Competitive Prices Facilitate Growth
• Low demand profile limits price through 2012, although modest recovery reverses some displacement
– Core shales sufficient to meet demand
– Gas-related drilling holds low– Cost pressure nonetheless with
tight oil activity– LNG could limit domestic drilling;
some increase is likely, level is hard to call
• Upward shift in price expected by 2013– Higher activity levels, rig rates and
service company margins– Increased unconventional and
shale drilling required 2012-2018– Industrial demand grows steadily
• Oil gap is not easily bridged, but the dash for liquids does support gas, even if demand responses are limited
Source: Wood Mackenzie
Price Outlook
0
2
46
8
10
1214
16
18
2005
2007
2009
2011
2013
2015
2017
2019
2009
$/m
mbt
u
Henry Hub NBP Adjusted CAPP WTI
8© 2010 Electric Power Research Institute, Inc. All rights reserved.
By 2015, Higher Cost Supplies Have Been Pulled Into the Mix, and the Costs of Developing All Supplies is Higher
• The cost of developing supplies is higher by 2015
• Non-core and tier 2 areas of plays are required to meet demand
• Areas such as the Rockies, with several marginal plays again attract capital
• Vertical drilling recovers, in addition to the shale focus
0
1
2
3
4
5
6
7
8
9
10
0 1 2 3 4 5 6 7 8 9 10
Production from New Wells (bcfd)
2009
$/m
mbt
u
2010 2015
US L48 Supply Stack—New Wells
Source: Wood Mackenzie
Total 2010 L48 Production 54.6 bcfdTotal 2015 L48 Production 60.6 bcfd
Cotton Valley (0.1 bcfd)
Barnett Non-core (0 bcfd)
Haynesville (0.93 bcfd)Marcellus (0.43 bcfd)
Haynesville (0.85 bcfd)
Marcellus (0.76 bcfd)
Barnett Non-core (0.01 bcfd)
Cotton Valley (0.56 bcfd)
9© 2010 Electric Power Research Institute, Inc. All rights reserved.
Tim
e H
oriz
onSh
ort
Res/Com
IndustrialNGVs
Coal retirements
Carbon bill
Circle size reflects demand potential
LNG exports
Capital Investment Required
Long
Significant Minimal
Plug-in hybrids
Could the Long-term Price Outlook—and the Gap With Oil—Fuel Additional Market Opportunity?
Source: Wood Mackenzie
10© 2010 Electric Power Research Institute, Inc. All rights reserved.
Aggressive Multi-Pollutant Regulation Could Push Significant Coal Retirements Even in the Absence of Federal Carbon Legislation
Gas Demand Associated with Coal Retirements
-1
0
1
2
3
4
5
2010 2012 2014 2016 2018 2020
bcfd
Business as Usual Moderate Carbon PricePreliminary stringent EPA
• Several forces, other than federal carbon legislation, pushing aggressive coal retirements– Multi-pollutant (SO2,
NOx, mercury) regulation from the EPA
– Hazardous Air Pollutants regulation
– State and utility initiatives
• Primary force for higher gas demand?– Retirements could reach
nearly 50 GW by 2020
11© 2010 Electric Power Research Institute, Inc. All rights reserved.
Wood Mackenzie Disclaimer
• This presentation has been prepared by Wood Mackenzie Limited for delivery at the 2010 EPRI Summer Seminar. It has not been prepared for the benefit of any particular attendee and may not be relied upon by any attendee or other third party. If, notwithstanding the foregoing, this presentation is relied upon by any person, Wood Mackenzie Limited does not accept, and disclaims, all liability for loss and damage suffered as a result.
• The information contained in these slides may be retained by attendees. However, these slides and the contents of this presentation may not be disclosed to any other person or published by any means without Wood Mackenzie Limited’s prior written permission.
12© 2010 Electric Power Research Institute, Inc. All rights reserved.
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