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Peter Goldscheider
Managing Partner
Prague, September 11, 2013
Shale gas – Prospects, Challenges, Reality and Hopes
EPIC – Financial Advisory House
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IN CENTRAL AND SOUTH EAST EUROPE, UKRAINE, RUSSIA, TURKEY AND UAE
Shale Gas Production History
With a very mature
mining industry and
following intense
investment into mining
technologies, the USA
is the only country
worldwide having real
experience with shale
gas production
The shale boom in the
USA has benefited
from favorable
regulations and
geology
WORLD SHALE GAS EXPERIENCE IS CONCENTRATED IN THE USA
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First gas production from shale formations already in 1821 (Fredonia, New York),
but large-scale development was technically and economically not feasible
Large-scale shale gas production started in the Barnett Shale, Texas in the 1980s,
while profitability was achieved only by 2006, thanks to advances in drilling
technologies* (development of which was supported by US government R&D
funding) and higher gas prices
Success in the Barnett Shale led to rapid expansion into other formations, including
the Haynesville, Marcellus, and
Fayetteville shales
Increased gas production and
falling gas price raised usage
of gas in transportation and
electricity generation with gas
substituting mainly coal
As a result, the US
experienced record coal
exports, mainly to Europe and
Asia
2012 first US shale gas exports
US Shale Gas Production by Play, 2000-2012
Source of chart data: DI Desktop/HPDI database, widely used in industry and government (as of May, 2012)
* Mainly of hydraulic fracturing combined with horizontal drilling of wells
Experience from the US
Since 2005 US gas
production has been
on the rise; in recent
years mainly due to
shale gas boom ,which
resulted in gas spot
prices falling below $2
per thousand cubic feet
(€ 55 per thousand
cubic meters) in early
2012
However, the US price
development following
the shale boom is not
likely to repeat
elsewhere
GAS AVAILABILITY PUSHED PRICES DOWN
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US Dry Natural Gas Production, 2001- May 2013 (Bcf)
US Natural Gas Prices ($ per ths cubic feet)
Residential price
Henry Hub spot price
Source: EIA, NYSE
1,200
1,400
1,600
1,800
2,000
2,200
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0
5
10
15
20
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
$1.95
Experience from the US – Production Characteristics
A large variability in
shale gas well
productivity has been
experienced in the US,
where the gas from
wells in ‘sweet spots’
far exceed the average
recovery from wells
across the play area
Currently, 36% of US
shale gas production
record declining well
quality and 34% of
sites show flat
production
NON-SWEET SPOTS > 80% OF THE AREA
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Discovery of shale gas was followed by
lease agreements frenzy
Lease agreements called for production
results » drilling boom
At first, sweet spots were looked for and
drilled, resulting in an initial rapid
production hike
After production moves to other than
sweet-spots areas, production weakens
dramatically and large capital inflows
(for drilling of new wells) are needed to
offset the decline
Production from new wells is much less
economical and soon may even become
loss making (depending on gas price)
Individual well decline rates are high,
ranging from 79%-95% after 36 months
Average well quality has fallen nearly 20%
in Haynesville (the most productive shale
gas play in the US); Haynesville became
middle aged after just 5 years
Haynesville Gas Production and Number of Operating Wells, 2007-2012
Haynesville Annual Production per New Wells
Chart data source: Drilling info published on DI Desktop/HPDI (March 2013)
Experience from the US – Our Lessons
The shale gas surge in
the US has had an
enormous economic
impact worldwide
The ecological impact
has largely been
ignored
THE SHALE GAS REVOLUTION IS NOT AS SIMPLE AS IT SEEMS
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Hydraulic fracturing technologies enabled extraction of formerly inaccessible
hydrocarbons
The drilling boom was partly motivated by:
“held-by-production” arrangements in 3 to 5 year lease agreements
requirements of joint venture arrangements
the need to book reserves to support share valuation on the stock
markets
‘ Shale gas bubble’ was created with worldwide impact
Ecological concerns connected with shale gas production:
Requirement of high water consumption (questions of water source,
treatment, disposal…)
Danger of groundwater contamination – by fracturing fluids or released
gases
Greenhouse gas emissions – caused by methane leaks from wells,
emissions from the diesel- or natural gas-powered equipment
(compressors, drilling rigs, pumps etc.), transportation of necessary
water volume for hydraulic fracturing (if done by truck)
Risk of induced seismicity
Experience from the US
It seems that Wall
Street investment
bankers helped to
create natural gas
oversupply resulting in
record low US gas spot
prices
SHALE BOOM SHOWS STRONG SIMILARITIES TO THE MORTGAGE BUBBLE
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US shale production is connected with huge amounts of debts
The need to meet production targets for share appreciation and to provide cash
flow to support operators’ debt exposure caused severe overproduction and
subsequently drove gas prices to historic lows in 2011, diminishing the already
very low margins
As a reaction, larger players in the industry began to spin of their troubled shale
assets leading shortly thereafter to massive write-downs in shale assets
Besides recommending shale gas securities, investment bankers were
instrumental in creating complex financial products such as VPP's (volumetric
production payments) sold to investors such as pension funds. Further, leases
were bundled to unproved shale reserves (similarly as mortgage-backed securities had
been bundled and sold on questionable underlying mortgage assets prior to the economic
downturn of 2007)*
History of shale M&A bubble: the number of shale M&A deals began to explode in
2009 with many foreign investors such as Chinese, Korean, French and
Norwegian companies interested in the U.S. shale assets. By Q2-Q3 2012, serious
shale asset write-downs began and foreign companies started pulling out
Recently, the USA started exporting shale gas – thanks to a very lucrative price
spread, export is seen as the best way to recovering production losses
In October 2011, the first shale gas export permit was issued to Cheniere Energy. A year
later, the number of permits had grown to 18 and the percentage of shale gas committed for
export had grown significantly, accounting for approximately 60% of current US consumption
* For more details see: http://shalebubble.org/wp-content/uploads/2013/02/SWS-report-FINAL.pdf
Global Trends and Estimated Development
Gas prices have been
very volatile in the past
and the difference
between American,
European and Asian
prices has further
widened
NATURAL GAS PRICES STRONGLY INFLUENCE VARIOUS MARKETS‘ DEVELOPMENT
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0
5
10
15
20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Indonesian Liquefied Natural Gas in Japan
Russian Natural Gas border price in Germany
Natural Gas spot price at the Henry Hub terminal, US
Natural Gas Prices Comparison, Jan 2000 - July 2013 ($ / MMBtu)
291 € / ths m3
385 € / ths m3
Source: IMF
Will Shale Gas Mean Revolution in Europe?
European shale gas
is not likely to be
exploited in a short-
term horizon since
too many parameters
are still unclear .
Thus, the economic
impact cannot be
projected yet .
CONCLUSION
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“Natural gas from shale has the potential to transform the [...] energy market and boost
the economy, create thousands of jobs, generate significant tax revenues and reduce
our reliance on imported gas,” declared the CEO of a major gas company. Can this
become true for Europe? The answer is “most likely NO”. Why?
Europe’s shale gas industry is in its infancy – with no production testing (only few
exploratory wells drilled) and thus no reliable indicators of potential productivity
Europeans are more environmentally sensitive, many countries banned hydraulic
fracturing for that reason (France and Germany)
The sparsely populated wilds of North Dakota used to drilling for nearly centuries
simply don’t exist in the EU. Drilling tens of thousands of shale gas wells in any of
the EU country might be a different challenge than it is in the US
Existence of an alternative in renewables industry being proven and real and on its
way to being a cheaper way to generate grid power than the fossil-fueled
alternatives by the end of this decade
Economic parameters – connected with extreme initial (geological survey, test
drillings), production and ecological (low in the US due to benevolent legislation)
costs, but provides for profitable production for only a few years
Thank you for your attention!
September 11, 2013 ▪ www.epicinvest.com
EPIC Financial Consulting
Headquarters Vienna
Plösslgasse 8
1040 Vienna, Austria
Tel: +43 1 501 19 0
Fax: +43 1 501 19 9
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