Challenge Myrtle Beach, SC July 16, 2012 David Pruner Senior Vice President Delivering commercial insight

Transcription

1 U.S. Gas Markets: Coal vs Gas and the Growing Challenge NCCI Summer Trade Meeting Myrtle Beach, SC July 16, 212 David Pruner Senior Vice President

2 Wood Mackenzie Disclaimer This presentation has been prepared by Wood Mackenzie Limited for delivery to NCCI Summer Trade Meeting and its attendees. 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. Wood Mackenzie 2

3 North American gas and coal markets: mixed messages The opportunities The challenges More low-cost resource CAPP producers are squeezed out Liquids buoy returns Plans to capitalize on low-cost gas gain momentum Global energy and commodity prices remain relatively high $5.5/mmbtu gas plays: good assets eventually Not your father s supply area: Gulf Coast price premiums The low-cost resource base offers jobs and an improved trade balance drives down prices and returns but ILB is expanding is the ship sinking? plans won t translate into demand for years how much market for North American exports and China take a pause sidelined for now until premium markets develop distant supplies feature deep price discounts but global headwinds are strengthening Wood Mackenzie 3

4 Producers established additional low-cost resource potential More low-cost resource Shale gas and tight oil plays 212 $8 $7 Bossier Barnett- Woodford $/mmbtu $6 $5 $4 $3 $2 Arkoma Woodford Marcellus SW Haynesville Fayetteville Barnett Horn River Duvernay Ohio Utica Montney Anadarko Marcellus NE Woodford Bakken Eagle Ford gas EF oil Bone Spring Mississipian Avalon Monterey Wolfcamp Utica (Can.) Collingwood US shales 1 tcfe Canadian shales Tight oil 5 tcfe 1 tcfe Liquid-rich shales Year production > 25 mmcfd Sources: Wood Mackenzie (North America Gas Service, Unconventional Gas Service) Wood Mackenzie 4

5 US drilling declines have been severe but improved drilling efficiency, rising associated gas, and high-grading reduce impact Chesapeake and Haynesville drilling reductions have been most pronounced Short-term US Production by type US rig fleet gas productivity , ,2 1, Rigs Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Other Gulf of Mexico Dry gas shales Wet gas shales Associated gas Delayed Completions Shut-ins Without shut-ins s Source: Wood Mackenzie (North American Gas Service) 2 2 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Associated Eagle Ford Other rich-gas Marcellus SW Marcellus NE Haynesville Other lean-gas Gas rigs Oil rigs Source: Wood Mackenzie (North America Gas Service) Wood Mackenzie 5

6 And the rush to liquids plays continues Liquids buoy returns Devon rig counts US lower 48 capex outlook for 12 US drillers billions Jan. '8 Jul. '8 Jan. '9 Jul. '9 Jan. '1 Jul. '1 Jan. '11 Jul. '11 Jan. ' Gas NGL Oil Source: Wood Mackenzie (North America Gas Service) Gas Oil Liquids-Rich 1 - Companies included in analysis: Anadarko, Apache, BG, BHP, ENI, EXCO, Hess, Newfield, Noble, Range, Samson & Talisman Source: Wood Mackenzie Upstream Service Wood Mackenzie 6

7 Summer displacement levels will be high, but gas capacity will be sufficient with coal markets accommodating very high gas burn Year-over-year gas-fired generation growth Gas S-D balance and Henry Hub prices $/mmbtu Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar. 23 Apr. 6 Apr. 2 May. 4 May. 18 Jun. 1 Jun. 15 Displacement Weather Other Total Henry Hub Imbalance Imbalance lagged Sources: Wood Mackenzie (North America Power Service, North America Gas Service, Coal Market Service North America) Wood Mackenzie 7

8 Coal retirements add a significant increment of gas demand but rising prices unwind displacement, and load growth is limited Major coal export capacity expansions US coal exports and gas and coal generation Terminal Operator Basin Cap. Cost (million $) Start Date Gas displaces coal Gas prices rise Retirements, exports IC Rail Marine Expansion Foresight Energy ILB Existing Houston KM/Peabody Col Lambert's Point Norfolk Southern CAPP /12 IMT Marine KM/MEE CAPP Mobile WLT/Drummond SAPP Burnside Trafigura Various /13 Gateway Peabody PRB /15 Millennium Arch/Ambre Energy PRB /15 Baltimore CONSOL NAPP 8 Unspecified Ram Terminals Armstrong ILB 6 Unspecified Source: Wood Mackenzie (North America Gas Service, Coal Market Service) Wood Mackenzie 8

9 WTI and NGL prices drop and gas drilling recovers as markets develop What plays are at most risk to lower liquids values? Gas, Oil, and NGL commodity prices Drilling outlook $12 $ $/bbl $1 $8 $6 $4 $2 Indicative NGL barrel range (% of WTI): 6% 35% $16 $12 $8 $4 $/mmbtu Rigs $ $ Brent WTI NGL barrel Henry Hub Gas Tight oil Other oil Oil-gas ratio Source: Wood Mackenzie (North America Gas Service) Source: Wood Mackenzie (North America Gas Service) Wood Mackenzie 9

10 Oil prices and tight oil are supportive of increased gas volumes But the big driver is rich-gas and NGL support of growing shale gas volumes US associated gas forecast US shale production by gas richness Lean Rich Bakken Permian Mississippian Hz OIL Barnett OIL SHO Other tight oil Eagle Ford Oil Conventional oil Source: Wood Mackenzie (North America Gas Service) Ohio Utica Eagle Ford Anadarko Woodford Marcellus southwest Barnett Haynesville Marcellus northeast Marcellus Central Fayetteville Arkoma Woodford Other shales Associated Gas Source: Wood Mackenzie (North America Gas Service) Wood Mackenzie 1

11 Core areas of existing plays are likely to be sufficient to meet demand growth until 218 returns improve later Sub-$4./mmbtu gas plays are core gas assets Production from low-cost plays Strong growth in low-cost plays: from 13.4 this year to 22.1 in 218 Production falls as well locations exhausted breakeven $3.59 $3.5 $3.37 $2.49 $2.5 $2. Production from more marginal areas of these plays Falls from 8.88 in 212 to 5.8 in 214; at 212 levels in 218 Ramps to 14.8 in 225 Total in more marginal areas breakeven $5.18 $4.65 $4.64 $4.31 $4.26 $4.5 Utica wet Marcellus core Eagle Ford wet Barnett core H'ville premium Montney Source: Wood Mackenzie (North America Gas Service) Marc. non-core Utica dry H'ville Tier 1 Horn River Barnett non-core Eagle Ford dry Source: Wood Mackenzie (North America Gas Service) Wood Mackenzie 11

12 Major demand-side investments are underway but concentrated in the second half of the decade Annual gas demand growth (US & Canada) Cumul. demand growth (vs. 21) 1 Spectra NY-NJ NJ pipe Res/com conv. ChevronPhillips, Dow, Formosa, Shell, Sasol petchem 25 2 Other NGVs Industrial Coal retirements Nucor Various DRI ethylene exp. Mercury & Air Toxics Stds LNG exports Sabine Pass Freeport BC Cameron 5 Oil sands GTL Source: Wood Mackenzie North America Gas Service Source: Wood Mackenzie (North America Gas Service) Wood Mackenzie 12

13 Coal retirements add a significant increment of gas demand but rising prices unwind displacement, and load growth is limited Plans to capitalize on gas gain momentum, but plans don t translate into demand for years West North Central Coal retirements and gas impact East North Central Mid Atlantic Gas burn 1 Retirements Power sector demand growth 5 GW East West South South Coal retirements Coal displacement South Central Atlantic Central Other power Total Sources: Wood Mackenzie (Coal Market Service, North America Power Service) -4 Wood Mackenzie 13

14 The market for North American LNG within the Pacific is limited and projects that can get to market quickly are advantaged Pacific/ME Uncontracted Demand-Supply Need for b 5.3 of flng from Portfolio Players or Qatar Portfolio players can supply <3.33 Qatar needs to supply on top of that already contracted in US LNG exports Market conditions depend upon pace of development Canada LNG exports Onstream Possible Under Construction Speculative Atlantic/ME Portfolio (excl Qatar) H1 12 Uncontracted demand Source: Wood Mackenzie Global Gas Service H1 12, LNG Tool Wood Mackenzie 14

15 Not all North American LNG projects even brownfield ones are created equal Kitimat Project Greenfield Brownfield Export economics Shell-CNPC Proposed size WoodMac size Project hurdles Environmental Commercial Sabine Pass Freeport Lake Charles DoE filing order Jordan Cove Oregon LNG Technical Cove Point Freeport exp. Cove Point Cameron Gulf Coast LNG Sabine Pass Jordan Cove Freeport Cameron Corpus Christi Kitimat Shell-CNPC Elba Island Corpus Christi FLNG Lake Charles Gulf LNG $/mmbtu Plant & opex Pipe Shipping Source: Wood Mackenzie Note: AECO discount included in Plant & opex figures Gulf Coast LNG Wood Mackenzie 15

16 A significant portion of North American LNG will likely be routed to Atlantic markets, primarily Europe North America LNG Capacity North America LNG Flows Alaska US Canada to Pacific markets to Atlantic markets Source: Wood Mackenzie Global Gas Service H1 12 Wood Mackenzie 16

17 Industrial announcements accelerate Industrial capacity expansions Industrial capacity TBD Ammonia Methanol Ethylene Steel 1 mmcfd Essar Shell Global market million tons % Nucor Phase II 15 PetroLogistics Sasol Dow restart Koch (various) 1 Orascom Potash Lyondell 58% ChevronPhillips 5 Exxon Incitec Mobil Formosa Methanex Ethylene Ammonia Methanol Lyondell Dow Nucor Phase I 38% Planned expansions Current capacity Source: Wood Mackenzie North America Gas Service Wood Mackenzie 17

18 After the 213 rebound, limited upside in gas demand or pricing Low-cost resource creates opportunity, but with questions Limited market growth holds down gas and capex through 215 Drilling, price and returns step starting in 216 Capital projects are completed and increase markets 211$/mmb btu Price outlook $2 $12 $18 $16 $14 $12 $1 Well locations in productive Haynesville and $8 Marcellus cores are limited $6 Watch for: Sensitivity to oil prices could liquids drilling step back and support dry gas capex? Productivity improvements, higher EUR Leverage to global economy Can the resource-rich US bolster global growth? $4 $2 $ Henry Hub UK NBP CAPP coal ILB coal WTI Brent $1 $8 $6 $4 $2 $ l 211$/bbl Source: Wood Mackenzie (North America Gas Service, Coal Market Service North America, Global Gas Service) Wood Mackenzie 18

19 Key Takeaways Low-cost resource creates opportunity, but with questions Limited market growth holds down gas and capex through 215 Drilling, price and returns step starting in 216 Capital projects are completed - and increase markets Well locations in productive Haynesville and Marcellus cores are limited Watch for: Sensitivity to oil prices could liquids drilling step back and support dry gas capex? Productivity improvements, higher EUR Leverage to global economy mtoe ' 4 2 (2) (4) (6) (8) Can the resource-rich US bolster global growth? (1,) US energy balance Coal Gas Oil Total Source: Wood Mackenzie Wood Mackenzie 19

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