Unconventional Oil & Gas: Reshaping Energy Markets

Frank A. VerrastroSenior Vice President & CSIS Energy and James R. Schlesinger Chair

for Energy & GeopoliticsMarch 2013

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Landscape continues to change …US perspective

- US is 80% Energy Self-Sufficient But Still Part of a Global Market

- Changing Demand Growth Centers- New Emerging Players but Old Institutions- Transformational Impact of Unconventionals- Difficult to Isolate Oil, Liquids, and Natural Gas

Issues- Policies Based on Resource Scarcity and Rising

US Demand Need to Be Revisited- Environmental Issues Still Loom Large- The “Great Dilemma” of How We Go Forward

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Unconventional Natural Gas

Resources

New technologies and practices drive production from shale deposits.

Source: USGS

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Hydraulic Fracturing

• Multiple protective barriers of steel pipe and cement protect aquifers, which are located within 700 feet of the surface

• Fracturing occurs more than a mile below, and separated by thousands of feet of impenetrable rock, potential sources of water

U.S. Shale Gas Resources

Unconventional Gas

U.S. shale gas production from the major plays has increased dramatically

Unconventional Gas

2%

Projected Contribution of Shale Gas to Total US SupplyU.S. dry gas production, trillion cubic feet per year

Non-associated offshore

ProjectionsHistory

Associated with oil

Coalbed methane

Non-associated onshore

Shale gas

2010

10%

9%

21%

23%

9%

Tight gas26%

Source: EIA, Annual Energy Outlook 2013 Early Release

Unconventional Gas

Natural Gas Resources Have Potential to Supply the Market for Decades

High demand, advanced technology, moderate development cost

Unconventional Gas

19901992

19941996

19982000

20022004

20062008

20102012

20142016

20182020

20222024

20262028

20302032

20340

2

4

6

8

10

12

Projections for natural gas prices have declined as understanding of resource base expands

natural gas spot price (Henry Hub) per million BTU

Sources: EIA, Annual Energy Outlook 2011; EIA, Annual Energy Outlook 2010; and EIA, An Updated Annual Energy Outlook 2009 Reference Case

ProjectionsHistory

Updated AEO2009

AEO2011

AEO2010

AEO2013(201

1$)

Unconventional Gas

Increased Production Allows U.S. to Transition from Net Importer to Net Exporter of Natural Gas

Source: U.S. Energy Information Administration, Annual Energy Outlook 2012, June 25, 2012

Unconventional Gas

Potential Gas Pathways

Gas

Crude Oil

Pipeline

Asso

ciat

ed g

as

Non-Associated gas

Liquefaction

SyngasGas To Liquids (GTL)

Refined Oil Products

Chemical Reaction

Gas to Power/ Residential & Commercial

LNG for Export

LNG for Transport

Gas to Chemicals

Source: Royal Dutch Shell

Unconventional Gas

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But…Major Policy Questions Remain

• Industry desire for “demand pull” to increase prices vs. gov’t need to ensure development is done right

• Gas Utilization Options (power generation, transport, petrochem or refinery feedstocks, industrial use?)

• Export Policy and Volumes• Compatibility with Industrial Policy, Energy Security and

Environmental Goals• Regulation at Federal or State/Local levels • Funding for/Pace of Infrastructure buildout

Unconventional Gas

Environmental/Regulatory/Societal Challenges

Realizing the full promise of shale resources is not a certainty and US domestic policy is important

• All shales are not alike; application of drilling/reservoir fracturing technology & operational experience matters

• Steep decline rates require ongoing investment and drilling; and repeated fracturing

• Cost escalation and low commodity prices limit prospects

• Infrastructure build-out and refinery rationalization

• Well design and management of surface chemicals/materials are the best barriers to protecting water aquifers

• Disclosure of components of fracking

• Scale of water use, treatment & disposal are challenging

• Community Issues – infrastructure, land use, population density, noise, haze, health issues, road congestion and repair need to be addressed

• Seismicity – associated with wastewater injection

• Regulation and enforcement are essential

Technical/Economic ChallengesTechnical/Economic Challenges

Unconventional Gas

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Tight/Unconventional Oil

Resources

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Resource Assessments Often Reflect One’s Point of View

- Resource Enthusiasts- Proven Reserve Skeptics- Production Pessimists- Capacity Scoffers- Demand Worry Warts/Cassandras- National Security Alarmists- Resource Nationalists- Economic Idealists- Technology Bulls- Climate Bears

Unconventional Oil

NPC Study Identifies Large Oil Potential as Well

Unconventional Oil

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“Change” is now the Constant :US technologic, economic, and policy environment continues to shift

- Rapidly rising production profiles from the Williston, Permian and Western Gulf basins

- Logistics, opportunities and challenges for oil, liquids, and natural gas

- Moving the bottleneck: timelines and sequencing – upstream, midstream and downstream investment & choices

- 40 years of policies based on resource scarcity and rising US demand need to be revisited

- Policy Dilemma: Reconciling fossil fuel abundance with climate objectives

- Federal, state & local/stakeholder issues

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Key Onshore Crude Production Basins

Source: EIA STEO Supplement

Tight Oil Opportunities Span the Lower 48

Source: Wood Mackenzie, April 3, 2012

Unconventional Oil

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Oil, Gas & NGL Price Comparison

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

0

5

10

15

20

25

30

0

5

10

15

20

25

30

WTI $/MMBtu HH Gas $/MMBtuMB NGL Ave. $/MMBtu

$/M

MB

tu E

qu

ival

ent

Unconventional Oil

Reorienting the US Rig Count

Unconventional Oil

Ver Dir Hor0

200400600800

100012001400

U.S. Active Rigs

Barnett Shale Gas Play

Marcellus Shale Gas Play

Fayetteville Shale Gas Play

Haynesville Shale Gas Play

Woodford Shale Gas Play

Pinedale/Jonah Tight Gas

Granite Wash, Cleveland, Miss.

Williston BasinBakken Shale (Oil Play)

Eagle Ford Shale Play

Permian Basin-Oil Targets

Niobrara Shale Play (Oil Play)

Source RigData and BENTEK: Lower 48 States, March 9, 2012

Uinta – Piceance

U.S. Active Rig Locations: Major Resource Plays Dominate

Unconventional Oil

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Historical U.S. Crude Oil Production

Source: EIA

U.S. Onshore Crude Oil

Production on the Rise

1900

1903

1906

1909

1912

1915

1918

1921

1924

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

0

2000

4000

6000

8000

10000

12000

Tho

usan

ds o

f b

arre

ls/d

ay

AlaskaFederal Offshore

Lower 48

Unconventional Oil

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1900190819161924193219401948195619641972198019881996200420120

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1900-2007 2008-2010 2011-2016

‘000

s b

/d

Forecast through 2016 shows Continued Growth

Source: EIA, Excludes NGLs and Other Liquids

1988

Tight oil production for selected plays approaching 2.0 million b/d

Can the Bakken Story be Replicated (Again and Again)?

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20200

500

1000

1500

2000

2500

Surging U.S. Shale Liquid Production (oil and NGL)

Woodford

Niobrara

Marcellus

Lower Monterey

Granite Wash

Eagle Ford

Barnett

Bakken

Avalon/ Leonard

000 b/d

Source: Energy Security Analysis, Inc. (ESAI) April 3, 2012

LARGE UNCONVENTIONAL OIL RESOURCES

Unconventional Oil

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PAD Districts and Refinery Locations

Source: EPRINC, Info. From CME Group and Purvin and Gertz Study

Unconventional Oil

Gateway

Bakken

Niobrara

Anadarko

Permian

Eagle Ford

Canada

Keystone XL

Basin

Enbridge

XL

Pony

Note: 2011 Average to 2016 Average (MB/d)

Source: EIA, Petroleum Project Tracker, Bentek, RFG, CSIS analysisNot All Projects Shown

Barge

Lakehead

Flanagan

Seaw

ay

WTG & Longhorn

TMX 2;3

Dock Terminal

Tesoro

New Pipeline Projects Delivering to Cushing (2010-2012): 815,000 bbl/dNew Pipeline Projects Delivering to Cushing (2013-2014): 1,225,000 bbl/dNew Pipeline Projects from Cushing Delivering to Gulf Coast (2013-2014): 1,400,000 bbl/d

Rail

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HOUSTON, TX0

100200300400500600700800900

1000

MB

/D

Where Does All this Light Crude Go?? What Can PADD III Absorb? What Gets Displaced/Changed?

Note: 2011 Average Imports (Jan-Dec 2011)

PORT ARTHUR, TX0

100

200

300

400

500

600

700

Light (32 +)⁰

Intermediate (28-32 )⁰

Heavy (28 -)⁰

MB

/D

ST. JAMES, LA0

100

200

300

400

500

600

MB

/D

Unconventional Oil

Source: EIA, Texas RRC, North Dakota DMR

US Production Already Backing Out Imports

Thou

sand

Bar

rels

*Avg monthly production based on annual figures

Apr-2010

May-2010

May-2010

Jun-2010

Jul-2010

Aug-2010

Aug-2010

Sep-2010

Oct-2010

Oct-2010

Nov-2010

Dec-2010

Jan-2011

Jan-2011

Feb-2011

Mar-2011

Apr-2011

Apr-2011

May-2011

Jun-2011

Jun-2011

Jul-2011

Aug-2011

Sep-2011

Sep-2011

Oct-2011

Nov-2011

Nov-2011

Dec-2011

Jan-2012

Feb-2012

Feb-2012

Mar-2012

Apr-2012

May-2012

May-2012

Jun-2012

Jul-2012

Jul-2012

Aug-2012

Sep-2012

Oct-2012

Oct-2012

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Bakken production

Eagle Ford Production

Angola Crude and Products

Nigeria Crude and Products

Algeria Crude and Products

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Source: EIA Annual Energy Outlook 2013 Early Release

Continued liquids growth and reduced demand means lower importsUS Liquid fuels supply, 1970-2040

Mill

ion

b/d

Potential Implications & “Unconventional” Wisdom

• New supply growth (quality and volume) will shape the market; crude slate for US refineries will get lighter; growth in liquid supplies will back out (selectively) medium and heavier crudes

• Higher refinery utilization in will encourage refined product exports • New rail and pipe infrastructure will move domestic crudes east and

west as well as south• Economics/price spreads (and policies?) will determine how refineries

make crude choices• Micro decisions may drive Macro picture• There will be surprises, unintended consequences and sub-optimal

outcomes • Regulatory Policy in time of change needs to be flexible, adaptive.

responsible, effective and collaborative

Global Implications

• Some “obvious near term” winners and losers,• But … global impacts are more nuanced, less clear and time

sensitive• Strength of US refining sector could swamp new

construction in Latin America• Expansion of global shales could increase volume, reduce

prices & improve environment• New supply sources could impact global trade flows, but for

how long?

Energy imbalances improve in the Americas

Trade Balances May See Significant Change Due to Resources and Demand Growth – Creating A New Energy Security Paradigm?

Source: BP Energy Outlook 2030

Call on OPEC and Spare Capacity

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What Could Change the Storyline?

• Resource Over/Under Performance?

• Technology Advancements, including Disruptive Technologies in

Competing Areas

• Commerciality/Economics/Energy Prices & Costs

• Investment Climate for Participants

• Timing/Expense of Infrastructure Buildout

• Public Sentiment – License to Operate (upstream & downstream)

• Geopolitical and/or Catastrophic Events/Accidents

• Policy & Regulations

• Climate Change & the Transformation to Low Carbon Energy

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Climate Change

Food

Water

Ecosystems

ExtremeWeather

Risk of Irreversibleor Abrupt Changes

Today

E3G, Adapted from Stern 2006

450ppm

550ppm

650ppm

750ppm

850ppm

950ppm

Climate Change Risks

Falling crop yields in developing regions first, then developed regions later

Mountain glaciersdisappear; Decreasedwater in some areas

Many more areas sufferfrom low water availability

Sea level risethreatens major cities

Rising numbers of species extinctions Extensive damage to coral reefs

Rising intensity of storms, wildfires, droughts, floods, heatwaves

Rising risk of dangerous positive feedbacks,Rapid SLR and collapse of Atlantic conveyor

Warming

4242Water Scarcity Demography Crop Decline Hunger Coastal Risks

Climate Change as Threat Multiplier

43

65%

33%

71%

28%

15 Gt

7 Gt

20

25

30

35

40

45

1990 2000 2010 2020 2030 2035

Gt

Current PoliciesScenario

450 Scenario

New PoliciesScenario

Non-OECDOECD

GHG Reductions Required to Meet 2 Degree Goal

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Build 130 new (1GW) nuclear power plants in lieu of

new coal-fired power plants without CO2 capture and

storage

CO2 CaptureIn Forestry

Nuclear

Coal-Fired Generation

Improved Efficiency

Double fuel efficiency; Deploy 290 million new cars at

40mpg rather than 20mpg

Build 320 new zero-emission 500MW coal-fired power

plants in lieu of coal-fired plants without CO2 capture

and storage (none exist now)

Convert 100 million acres of barren area to new forest

(equiv of Spain, 2.5 times the size of Washington

state)

Technology Each option would save one gigatonne of CO2 per year

Source: DOE Climate Change Technology Program, http://www.climatetechnology.gov/stratplan/final/index.htm 44

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A schematic overview of inter-relationships between adaptation, mitigation and impacts.

Cost of M

itigation

Cos

t of I

mpa

cts

Cost of Adaptation

AllMitigation

No Action All Adaptationmor

e

more

less

less

less

more

What is Optimal?

There Will Be Costs

The Questions: How We Choose to Pay, Who Will Pay, How will the $ be spent?

Choices Must Be Made in Context of Balancing “E3” Goals of

• Energy Security• Economy• Environment

Source: Holdridge, M.L. Parry

Balancing Costs of Impacts, Mitigation, and Adaptation

Security & Foreign Policy

ObjectivesPromotes/Supports

Sustainable Environment

DefensibleNatural

GasOil

Energy Efficiency

Nuclear

RenewableEnergy

Coal

Economic Objectives

Environmental Objectives

POLICY MODEL

Affordable/Accessible

Supports Economic Growth &

Employment

Environmentally Benign

Low/no emissions

Reliable and Secure

Carbon Capture and

Storage

20092010

20112012

20132014

20152016

20172018

20192020

20212022

20232024

20252026

20272028

20292030

0

5

10

15

20

25

Imports

Domestic Oil Supply

Liquid Fuels Demand

Mmb/d

Diversify suppliesMaintain/expand domestic oil output

Moderate demand

Source: EIA Reference Case / NPC Global Oil and Gas study survey.

Strategies to Enhance Oil U.S. Security

…Becoming a Reality

Energy Security Leadership Council, “The New American Oil Boom, Implications for Energy Security,” 2012

What Could a 21st Century Energy Network Look Like?

Market Price

Demand

Inventory Levels

Capacity Utilization

Refining Configuration and Product slates

Crude Quality

Supply

Market Momentum

Financial Markets

Geopolitics

Demand Growth/Macroeconomics

Supply Growth

Investment $

Infrastructure Availability

Weather

Interest Rates, Foreign Exchange, Asset Markets

The “NEW” Fundamentals FUTURE EXPECTATIONS