Global Energy Assessment: Shale Gas and Oil

Yonghun Jung

KEEISeptember, 2014

Shale Gas: a new source of energy

Shale gas deposits around the world vs. 2009 natural gas consumption (tcf)

Source: US DOE, MIT

China

1,2753.1

U.S.86222.8

Canada3883.0

Mexico6812.2

Brazil2260.7

Argentina7741.5

Australia3961.1

Libya2900.2

South Africa

4850.2

France1801.73

Algeria2311.02

Poland1870.6

Shale gas deposits

Source: U.S. Energy Information Administration

Map of basins with assessed shale oil and shale gas formations, as of May 2013

Source: United States basins from U.S. Energy Information Administration and United States Geological Survey; other basins from ARI based on data from various published studies.

Legend

Assessed basins with resource estimateAssessed basins without resource estimate

Top 10 countries with technically recoverable shale oil/gas resources

Rank Country Shale oil (billion barrels)

1. Russia 75

2. U.S. 1 58 (48)

3. China 32

4. Argentina 27

5. Libya 26

6. Australia 18

7. Venezuela 13

8. Mexico 13

9. Pakistan 9

10.Canada 9

World Total 345 (335) 1 EIA.

Rank Country Shale gas (trillion cubic feet)

1. China 1,115

2. Argentina 802

3. Algeria 707

4. U.S.1 665 (1,161)

5. Canada 573

6. Mexico 545

7. Australia 437

8. South Africa 390

9. Russia 285

10.Brazil 245

World Total 7,299 (7,795) 1 EIA.

Note: estimates used for ranking order. ARI estimates in parentheses

Source: U.S. Energy Information Administration

Shale gas development in the United States

From December 2010 to December 2011, US production increased 5.5 bcfdequivalent to 0.157 bcm/d• 17%of total 2011 global LNG demand

Cost reductions and high recoverable resource estimates benefit the US export potential for natural gas and oil.

Low prices of natural gas still persist, but projected to go up• As of May 1st, natural gas price was about $4.3/mmbtu

– $16~17/mmbtu in NE Asia, $9~10/mmbtu in Europe

A big shifts from Gas Rigs to Liquid Rigs: more oil!• Gas Rig counts dropped from 804 as of January 1, 2010 to 451 as of July 27, 2012

• Liquid Rig counts from 375 as of January 1, 2010 to 1409 as of July 27, 2012

U.S. Shale Plays Also Attract Foreign Investors

Source: U.S. Energy Information Administration

International joint venture investment in U.S. shale plays(2008-12)

billion dollars

Dramatic Rise of U.S. Shale Gas Production

Source: U.S. Energy Information Administration

8

6

4

2

0

Estimated annual U.S. dry shale natural gas production, 2000-2011

Trillion cubic feet per year

Why only in the US?

• Good geology with abundant water resources

• Technology availability

• Well-developed infrastructure: roads, gas treatment, gas transportation

• Well-developed and functionally sound oil and natural gas

• Predictable and transparent regulatory, fiscal, and legal systems.

• High gas and oil prices

• Less likely that other countries would emulate the US case.

A perfect storm?

Impact of shale gas development in the US on NE Asia

Downward pressure on LNG contract prices in NE Asia (as well as on coal)

• But in the long run, the impact could become insignificant

Deepening discontent over currently rigid LNG contracts: hub-based pricing, no destination clause

A critical review of energy policies regarding energy mix in view of shale gas: what to do with coal? Regional diversification?

Petrochemical industries at the crossroads

• Backbone industry in NE Asia

Federal Energy Regulatory Commission / Market Oversight / www.ferc.gov/oversightNatural Gas Overview: World LNG Prices

World LNG Estimated June 2013 Landed Prices

Belgium $9.77Belgium $9.77

Altamira $17.20Altamira $17.20

Lake Charles $3.56Lake Charles $3.56

Bahia Blanca $16.21Bahia Blanca $16.21

Rio de Janeiro $15.16Rio de Janeiro $15.16

Cove Point $3.90Cove Point $3.90

UK $9.49

Spain 10.05Spain 10.05

Korea $14.10Korea $14.10

Japan $14.10Japan $14.10

China $13.70China $13.70

India $13.65India $13.65

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Source: Waterbome Energy, Inc Data in SUS/MMBtu

KOGAS has signed an SPA with Cheniere

A Schematic View of Petrochemical Processing

Polyethylene Plastic

Ethylene glycol Fiber, ClotheGas Field

Oil Field

Gas/Fluid

Oil Refinery

NGLNGL

Separation Process

C2(Ethane)

C3 LPGC4 LPGGasoline

Ethane cracker

Naphtha cracker

Condensate

Ethylene(C2)

Propylene(C3)

Butadiene(C4)

BTX

LPG, Gasoline, Jet Fuel, Kerosene, Diesel, Fuel Oil, etc.

Electricity generationHeating

Naphtha

B. T. X (Aromatic)

Methanol

Methane

NG

Recent trends in petrochemical industry

New added capacity in the Middle East and China

• Ethylene production surpass demand by 23million ton in 2011 with the total production 150 million ton

• The market share of China and the Middle East combined rose from 11.1% in 2000, 16% in 2005 and to 28% in

2010

Shale-gas-based Ethylene production capacity is anticipated to increase rapidly for the next decade in the US

• From 22 million ton in 2010 to 32 million ton 2020

• Ethylene Production cost 500 ~600 $/ton in the US, while 1000~1100 $/ton in Korea

• However Naphtha based ethylene production is projected to decline sharply.

• All in all in 2020 ethylene production in the US will be 5 ~ 8 million ton higher than in 2010.

Petrochemical cost curve by country/region, 2010

Source: American Chemistry Council (2011)

Cumulative Supply Quantity (Billion Pounds)

Low

High

Low

Cash Costs($/Pound)

Canada

China

Middle East

Western Europe

Japan

Other NortheastAsia

United States

High

Expansion of the US petrochemical Industry

Dow chemical: a series of petrochemical projects in the Gulf coast

• Eagle Ford shale

• 2.3 million ton + PE

Shell

• Signed a land option agreement in Pennsylvania. Would use ethane from Marcellus

• 1.2 million ton

Chevron Phillips Chemical

• 1.5 million ton plus 1 million ton PE

Formosa Plastics

Westlake Chemicals:

Many more including BASF, NOVAchem, SASOL ……

Turpan-Hami(Tuha)Basin

Turpan-Hami(Tuha)Basin

Tarim BasinTarim Basin

Junggar BasinJunggar Basin

Ordos BasinOrdos Basin

Sichuan BasinSichuan Basin

North ChinaBasin

North ChinaBasin

Bohai BasinBohai Basin

Songliao BasinSongliao Basin

ShanghaiShanghai

BeijingBeijing

Legend

Prospective BasinOther BasinGas Pipeline

★★

Shale gas deposits in China

Shale gas in China

Hugh reserve • 25.1 tcm of exploitable shale gas (approximately 17.5 billion ton)

• 13th Five-Year plan (2016-2020)

• 6.5 bcm production by 2015 (4.5 million ton)- a subsidy of 0.4 yuan ($6.3 cents) will be offered for every cubic meter of shale gas developed by enterprises during the 2012-2015 period.

Natural gas pipeline belongs to “prohibited area” on the investment catalogue

But deeper wells and inaccessible areas• Drilling cost in China ranges between 6.5 ~ 13 million US$ per a single well while that of US, between about

3~4 million US$ on average

• So far only 63 wells have been completed (20,000 wells by 2020)

• Subsidy of

Water issue

• Except in Sichuan, water is a big issue

Pre-requisites for large-scale shale development

Resource availability• Favorable geology

Availability of technologies: foreign or domestic• Labor and capital equipments

Infrastructure availability• Access to pipeline

• Gas treatment facilities

• Market

Regulatory certainty• Investment conditions

• Transparent and non-discriminatory regulation

• Enforceable legal institutions

Big questions for the future

How much oil and gas will be produced in the US, China and Eastern Siberia? At what cost?

Large-scale additional natural gas demand in the US: Transport, Power generation

Will there be significant inter-fuel substitution from coal to natural gas?

Will there be lifting of the BIS ban on oil export in the US?

How much investment will be made on petrochemical industries in the US?

Conclusion

• Downward pressure on LNG, impacting the current contractual practices: fluid and liquid LNG market expected!

- Increasing spot trade with time and

• Downward pressure on oil prices or at least helping stabilize the global oil price

• Regional specialization of ethane-based chemical industries in North America and Naphta-based, BTX-concentrated industries in Northeast Asia