January 2011 CERI Commodity Report – Natural Gas Relevant • Independent • Objective No Life Line in Sight for North American Natural Gas Prices The recent US economic downturn, which lasted 18 months, officially came to an end in June 2009. Since then, natural gas consumption in the four traditional demand sectors (residential, commercial, industrial, and electric power) has returned to pre- recession levels, with the electric power sector leading the way. However, this has had little impact on the price of natural gas in North America. The natural gas price at Henry Hub remains more than 50 percent below the average price in 2008, and is not expected to increase above the US$5/MCF level for quite some time. Abundant Domestic Supply The US natural gas supply picture appears drastically different today than it did five years ago. Strong US domestic natural gas production growth, led by shale gas development, has been the dominating factor affecting the price of natural gas over the past few years. In 2010, the US average annual marketed production of natural gas increased for the fifth consecutive year, since 2005, to 61.8 BCFPD, with 88 percent of the 2010 supply attributable to onshore production in the Lower-48 States. Between 2009 and 2010, natural gas production increased by an average of 4.4 percent, or 2.61 BCFPD. Year-over-year declines in natural gas production in Alaska, and the Federal Gulf of Mexico (GoM), were more than offset by the 3.2 BCFPD (6.1 percent) production increase observed in the US Lower-48 States. Monthly average marketed production is shown, by area, in Figure 1 below. Figure 1: Monthly Marketed Natural Gas Production in 2009 and 2010, BCFPD Source: CERI, US EIA Natural gas production in Alaska, the Federal GoM, New Mexico, Oklahoma, Texas, and Wyoming declined by a cumulative 34 percent during 2010. Over the past year, Louisiana’s annual marketed production growth outpaced that of any other natural gas producing state at 57.2 percent, or 2.4 BCFPD. According to the US EIA’s November 2010 report on US proved reserves in 2009, the development of the Haynesville shale resource in Louisiana was largely responsible for increasing the estimated proved reserves of wet gas 1 in that state by a net 77 percent, or 9.2 TCF, compared to the 2008 estimate. 2 Figure 2 illustrates the location of the Haynesville shale play. 0 10 20 30 40 50 60 70 80 Alaska New Mexico Oklahoma Wyoming Federal Waters GoM Louisiana Texas Other States BCFPD CERI COMMODITY REPORT - NATURAL GAS Editor-in-Chief: Mellisa Mei ([email protected]) CONTENTS FEATURED ARTICLE ...................................... 1 NATURAL GAS PRICES ................................. 5 WEATHER ..................................................... 7 CONSUMPTION AND PRODUCTION ............. 9 TRANSPORTATION ....................................... 11 STORAGE ...................................................... 13 LIQUEFIED NATURAL GAS ........................... 16 DRILLING ACTIVITY .................................... 18
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CERI Commodity Report – Natural Gas · CERI Commodity Report – Natural Gas Figure 2: Map of Haynesville Shale . Source: Oil and Gas Financial Journal, August 2009. Proved reserves
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January 2011
CERI Commodity Report – Natural Gas
Relevant • Independent • Objective
No Life Line in Sight for North American Natural Gas Prices The recent US economic downturn, which lasted 18 months, officially came to an end in June 2009. Since then, natural gas consumption in the four traditional demand sectors (residential, commercial, industrial, and electric power) has returned to pre-recession levels, with the electric power sector leading the way. However, this has had little impact on the price of natural gas in North America. The natural gas price at Henry Hub remains more than 50 percent below the average price in 2008, and is not expected to increase above the US$5/MCF level for quite some time. Abundant Domestic Supply The US natural gas supply picture appears drastically different today than it did five years ago. Strong US domestic natural gas production growth, led by shale gas development, has been the dominating factor affecting the price of natural gas over the past few years. In 2010, the US average annual marketed production of natural gas increased for the fifth consecutive year, since 2005, to 61.8 BCFPD, with 88 percent of the 2010 supply attributable to onshore production in the Lower-48 States.
Between 2009 and 2010, natural gas production increased by an average of 4.4 percent, or 2.61 BCFPD. Year-over-year declines in natural gas production in Alaska, and the Federal Gulf of Mexico (GoM), were more than offset by the 3.2 BCFPD (6.1 percent) production increase observed in the US Lower-48 States. Monthly average marketed production is shown, by area, in Figure 1 below. Figure 1: Monthly Marketed Natural Gas Production in 2009 and 2010, BCFPD
Source: CERI, US EIA Natural gas production in Alaska, the Federal GoM, New Mexico, Oklahoma, Texas, and Wyoming declined by a cumulative 34 percent during 2010. Over the past year, Louisiana’s annual marketed production growth outpaced that of any other natural gas producing state at 57.2 percent, or 2.4 BCFPD. According to the US EIA’s November 2010 report on US proved reserves in 2009, the development of the Haynesville shale resource in Louisiana was largely responsible for increasing the estimated proved reserves of wet gas1 in that state by a net 77 percent, or 9.2 TCF, compared to the 2008 estimate.2 Figure 2 illustrates the location of the Haynesville shale play.
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CERI COMMODITY REPORT - NATURAL GAS Editor-in-Chief: Mellisa Mei ([email protected]) CONTENTS FEATURED ARTICLE ...................................... 1 NATURAL GAS PRICES ................................. 5 WEATHER ..................................................... 7 CONSUMPTION AND PRODUCTION ............. 9 TRANSPORTATION ....................................... 11 STORAGE ...................................................... 13 LIQUEFIED NATURAL GAS ........................... 16 DRILLING ACTIVITY .................................... 18
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CERI Commodity Report – Natural Gas
Figure 2: Map of Haynesville Shale
Source: Oil and Gas Financial Journal, August 2009. Proved reserves in major shale gas producing states (Louisiana, Arkansas, Pennsylvania, Texas, Oklahoma), contributed to the substantial annual increase in the EIA’s estimate of proved wet gas reserves. US proved reserves of wet natural gas have reached their highest level since 1971. At the end of 2009, US wet natural gas reserves were estimated at 283.9 TCF, up 11.3 percent, or 28.8 TCF, from the EIA’s 2008 estimate.3 Shale gas accounted for 21 percent of proved wet gas reserves at the end of 2009, and more than 90 percent of the net additions to proved wet gas reserves made in 2009.4 Figure 3 displays the estimated proved reserves from US shale gas plays in 2008 and 2009.
Figure 3: Proved Reserves in Principal Shale Gas Plays, TCF
Source: CERI, EIA According to the Reference Case in the EIA’s Annual Energy Outlook 2011 (AEO2011) Early Release, shale gas production in 2010 was 14 times greater than that in 2000, and is projected to account for 45 percent of total US natural gas production by 2035.5 Estimated technically recoverable, unproved shale gas reserves increased from 353 TCF in the EIA’s 2010 outlook, to 827 TCF (as of January 1, 2009) in the EIA’s AEO2011, and accounts for 34 percent of the 2,552 TCF of technically recoverable natural gas resources in the US.6 The abundance of domestic natural gas supplies that can be extracted at relatively low costs resulted in a revision of the EIA’s natural gas price estimation methodology, to depend less on the price of oil.7 Natural gas wellhead prices, according to the AEO2011, will remain below US$5/MCF through 2022.8 Low Henry Hub gas prices, relative to the price of oil, have deterred some producers from making further capital commitments to develop natural gas resources. The natural gas directed rotary rig count, as a percentage of total operating rigs, has declined from an average of 78 percent during January 2009, to 53 percent during January 2011 (see Total US Rig Activity chart on Page 19). Several natural gas producers have shifted drilling strategies from targeting dry gas plays to exploring oil and liquids rich plays, in order to take advantage of higher oil prices. Throughout 2010, there was a substantial increase in the volume of condensate and natural gas liquids (NGLs) produced in the US.
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Despite weak natural gas prices, cash strapped companies are finding clever ways to finance new drilling operations. The average natural gas rotary rig count increased by nearly 18 percent between 2009 and 2010, but remained well below the 1,491 rigs operating in 2008. Joint venture agreements offer an effective solution to the challenge of accelerating production growth under capital spending constraints. In 2010, International Oil Companies (IOCs) and National Oil Companies (NOCs), such as Reliance Industries Limited (India), Chinese National Offshore Oil Corporation (China), Mitsui (Japan), and BG Group (United Kingdom), eagerly seized joint venture opportunities in prime shale gas plays. In several agreements, the IOCs or NOCs agreed to finance more than half of the development costs (typically 75 percent) in exchange for less than half of the assets. For example, CNOOC International Limited’s (CNOOC) approximately US$11,000 per net acre joint venture deal with Chesapeake Energy allowed CNOOC to acquire a 33.3 percent interest in Chesapeake’s liquids rich 600,000 net acre Eagle Ford asset, in exchange for US$1.08 million in upfront cash, an additional US$40 million payment adjustment at closing, and 75 percent of Chesapeake’s share of drilling and completion costs, paid for by CNOOC, up to a maximum of US$1.08 billion.9 In February 2011, PetroChina International Investment Company Limited agreed to purchase a 50 percent stake in Encana Corporation’s Cutbank Ridge shale gas assets, located in British Columbia and Alberta, for C$5.4 billion (C$8,504 per acre) in cash.10 Upstream merger and acquisition (M&A) activity in US shale gas plays returned to pre-recession levels in 2010, and was valued at US$39 billion.11 It is expected that 2011 will be an active year for M&As, as both IOCs and NOCs seek to gain a stronger foothold in the US shale gas industry. Declining Net US Imports The growth in US natural gas production has led to declining net imports of natural gas over the last three years. Between 2007 and 2010, the US has seen a nearly 14 percent decrease in natural gas imports from Canada (-1.41 BCFPD), and a 40 percent decrease in natural gas imports from Mexico (-0.06 BCFPD). The EIA estimates that an average of 9.08 BCFPD of natural gas was imported by pipeline during 2010. Additionally, with depressed
North American natural gas prices, US liquefied natural gas (LNG) imports experienced a decline from a peak of 2.11 BCFPD in 2007, to 1.18 BCFPD in 2010 (see Figure 4), as LNG cargoes have been diverted to higher paying European and Asian markets. It is likely that only the minimum LNG contract volumes are being shipped to LNG re-gasification facilities located in the US. Further declines in US LNG imports may occur if long-term supply contracts with Trinidad and Tobago, the largest supplier of LNG to the US, are restructured to include destination flexibility clauses.12
Figure 4: US LNG Imports, BCFPD
Source: CERI, US DOE Conversely, gross US natural gas exports (pipeline and LNG) have increased by 32 percent, since 2007, to an average of 2.96 BCFPD in 2010. Declining exports from Alaska’s Kenai LNG facility were offset by increased pipeline exports, as well as re-exports of foreign sourced LNG. A total of 37.22 BCF (or an average of 0.09 BCFPD) of foreign sourced LNG has been re-exported to 7 countries13 from the Sabine Pass and Freeport LNG terminals since December 2009. LNG re-exports are likely to increase in 2011, as the Sempra Energy’s Cameron LNG Terminal, located in Cameron Parish, Louisiana, was recently granted authorization from the US Department of Energy to re-export up to 250 BCF of previously imported LNG over a two year period, beginning in February 2011.14
Although natural gas liquefaction facilities do not currently exist in the US Lower-48 States, this could soon change. In September 2010, the US Department of Energy authorized Sabine Pass Liquefaction LLC (subsidiary of Cheniere Energy) to export approximately 2.2 BCFPD of US natural gas, over a 30 year period, beginning on or before
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September 7, 2020.15 LNG exports from Sabine Pass are expected to begin in 2015, with an initial capacity of 1.2 BCFPD. Kitimat LNG (British Columbia), Freeport LNG (Texas), and Dominion Resources Inc. (Maryland) are also planning to export domestically sourced natural gas, in the form of LNG, by 2015. Relieving Downward Price Pressures With US natural gas supplies expected to exceed demand from traditional sectors (residential, commercial, industrial, and electric power) for many years to come, and working gas storage levels at near record highs, it is highly unlikely that natural gas prices will return to 2008 peak levels any time soon. Several factors, however, could relieve some of the downward pressure on natural gas prices. The first potential factor is a slowdown in natural gas production due to increasing regulatory costs placed on the industry (hydraulic fracturing regulations, post-Mocondo offshore drilling regulations). Second, if all four of the planned natural gas liquefaction facilities (Kitimat, Sabine Pass, Freeport, and Cove Point) are constructed on schedule, exports of surplus North American natural gas could begin as early as 2015. Finally, federal environmental regulations, or regional climate change programs, are likely to act as stimulants for natural gas demand growth, particularly in the electric power sector. Furthermore, if such regulations lead to policies that support the use of alternative transportation fuels, natural gas consumption in this unconventional demand sector could accelerate. Endnotes 1Wet natural gas proved reserves includes natural gas plant liquids. 2Summary: U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Proved Reserves 2009, U.S. Energy Information Administration, Office of Oil, Gas, and Coal Supply Statistics, U.S. Department of Energy, November 2010, http://www.eia.gov/pub/oil_gas/natural_gas/data_publications/crude_oil_natural_gas_reserves/current/pdf/arrsummary.pdf, Accessed on February 5, 2011. 3Ibid. 4Ibid.
5Newell, Richard, Annual Energy Outlook 2011 Reference Case, Presentation to the Paul H. Nitze School of Advanced International Studies, U.S. Energy Information Administration, December 16, 2010. 6Ibid. 7AEO2011 Early Release Overview, U.S. Energy Information Administration, December 16, 2010, http://www.eia.gov/forecasts/aeo/pdf/0383er%282011%29.pdf, Accessed on February 5, 2011. 8Ibid. 9Chesapeake Energy Corporation and CNOOC Limited Announce Closing of Eagle Ford Shale Project Cooperation Agreement, Chesapeake Energy Corporation, News Release, November 15, 2010, http://www.chk.com/News/Articles/Pages/1496754.aspx, Accessed on February 6, 2011. 10Encana to establish joint venture with PetroChina through sale of 50 percent interest in Cutbank Ridge business assets for C$5.4 billion, News Release, Encana Corporation, February 9, 2011, http://www.encana.com/news/newsreleases/2011/0209-petrochina-jointventure.html, Accessed on February 10, 2011. 11Dittrick, Paula, WoodMac: Strong upstream M&A activity forecast in 2011, Oil and Gas Journal February 7, 2011, http://www.ogj.com/index/article-display.articles.oil-gas-journal.volume-109.issue-6.general-interest.woodmac-strong-upstream-m-a-activity.html, Accessed on February 8, 2011. 12T&T plans review of LNG sales to US, Upstream Online, February 7, 2011, http://www.upstreamonline.com/live/article243831.ece, Accessed on February 8, 2011. 13South Korea, Spain, Japan, Brazil, United Kingdom, Belgium, and India. 14DOE Authorizes Sempra to Re-Export LNG, DownstreamToday Staff, December 8, 2011, http://www.downstreamtoday.com/News/ArticlePrint.aspx?aid=24965, Accessed on February 8, 2011. 15True, Warren R., DOE approves LNG export from Sabine Pass terminal, Oil and Gas Journal, September 14, 2010, http://www.ogj.com/index/article-display/9890159905/articles/oil-gas-journal/transportation-2/lng/2010/09/doe-approves_lng_ export.html, Accessed on February 8, 2011.