Unconventional Oil & Gas: Reshaping Energy

Markets

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

for Energy & Geopolitics

March 2013

www.csis.org |

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

www.csis.org |

Unconventional Natural Gas

Resources

New technologies and practices drive production from shale deposits.

Source: USGS

www.csis.org |

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 Supply U.S. dry gas production, trillion cubic feet per year

Non-associated offshore

Projections History

Associated with oil

Coalbed methane

Non-associated onshore

Shale gas

2010

10%

9%

21%

23%

9%

Tight gas 26%

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

0

2

4

6

8

10

12

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

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28

20

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20

31

20

32

20

33

20

34

20

35

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

Projections History

Updated AEO2009

AEO2011

AEO2010

AEO2013 (20

11

$)

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

Ass

oci

ate

d g

as

Non-Associated gas

Liquefaction

Syngas Gas 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

www.csis.org |

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 Challenges Technical/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

www.csis.org |

“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

www.csis.org | 19

Key Onshore Crude Production Basins

Source: EIA STEO Supplement

Tight Oil Opportunities Span the Lower 48

Source: Wood Mackenzie, April 3, 2012

Unconventional Oil

www.csis.org |

Oil, Gas & NGL Price Comparison

0

5

10

15

20

25

30

0

5

10

15

20

25

30

$/M

MB

tu E

qu

ivale

nt

WTI $/MMBtu HH Gas $/MMBtu

MB NGL Ave. $/MMBtu

Unconventional Oil

Reorienting the US Rig Count

Unconventional Oil

0

200

400

600

800

1000

1200

1400

Ver Dir Hor

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 Basin Bakken 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

www.csis.org |

Historical U.S. Crude Oil Production

Source: EIA

U.S. Onshore

Crude Oil

Production on the

Rise

0

2000

4000

6000

8000

10000

12000

19

00

19

03

19

06

19

09

19

12

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15

19

18

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21

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24

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27

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30

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33

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36

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39

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48

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57

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63

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66

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19

72

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78

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81

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84

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87

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90

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96

19

99

20

02

20

05

20

08

20

11

Th

ou

sa

nd

s o

f b

arr

els

/day

Alaska Federal

Offshore Lower 48

Unconventional Oil

www.csis.org |

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1900

1905

1910

1915

1920

1925

1930

1935

1940

1945

19

50

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

20

05

2010

2015

‘000s b

/d

1900-2007 2008-2010 2011-2016

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)?

0

500

1000

1500

2000

2500

2005 2010 2015 2020

000 b/d Surging U.S. Shale Liquid Production (oil and NGL)

Woodford

Niobrara

Marcellus

Lower Monterey

Granite Wash

Eagle Ford

Barnett

Bakken

Avalon/ Leonard

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

LARGE UNCONVENTIONAL OIL RESOURCES

Unconventional Oil

www.csis.org |

PAD Districts and Refinery Locations

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

Unconventional Oil

Bakken

Niobrara

Anadarko

Permian

Eagle Ford

Canada

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

Source: EIA, Petroleum Project Tracker, Bentek, RFG, CSIS analysis Not All Projects Shown

Barge

Seaw

ay

Dock Terminal

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

Rail

www.csis.org |

0

100

200

300

400

500

600

700

800

900

1000

HOUSTON, TX

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)

0

100

200

300

400

500

600

700

PORT ARTHUR, TX

MB

/D

Light (32⁰+)

Intermediate (28-32⁰)

Heavy (28⁰-)

0

100

200

300

400

500

600

ST. JAMES, LA

MB

/D

Unconventional Oil

Source: EIA, Texas RRC, North Dakota DMR

US Production Already Backing Out Imports

Tho

usa

nd

Bar

rels

*Avg monthly production based on annual figures

0

5000

10000

15000

20000

25000

30000

35000

40000

Ap

r-2

01

0

May

-20

10

Jun

-20

10

Jul-

20

10

Au

g-2

01

0

Sep

-20

10

Oct

-20

10

No

v-2

01

0

De

c-2

01

0

Jan

-20

11

Feb

-20

11

Mar

-20

11

Ap

r-2

01

1

May

-20

11

Jun

-20

11

Jul-

20

11

Au

g-2

01

1

Sep

-20

11

Oct

-20

11

No

v-2

01

1

De

c-2

01

1

Jan

-20

12

Feb

-20

12

Mar

-20

12

Ap

r-2

01

2

May

-20

12

Jun

-20

12

Jul-

20

12

Au

g-2

01

2

Sep

-20

12

Oct

-20

12

Angola Crude and Products

Nigeria Crude and Products

Algeria Crude and Products

Bakken production

Eagle Ford Production

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Ap

r-2

01

0

May

-20

10

Jun

-20

10

Jul-

20

10

Au

g-2

01

0

Sep

-20

10

Oct

-20

10

No

v-2

01

0

De

c-2

01

0

Jan

-20

11

Feb

-20

11

Mar

-20

11

Ap

r-2

01

1

May

-20

11

Jun

-20

11

Jul-

20

11

Au

g-2

01

1

Sep

-20

11

Oct

-20

11

No

v-2

01

1

De

c-2

01

1

Jan

-20

12

Feb

-20

12

Mar

-20

12

Ap

r-2

01

2

May

-20

12

Jun

-20

12

Jul-

20

12

Au

g-2

01

2

Sep

-20

12

Oct

-20

12

Bakken production

Eagle Ford Production

Angola Crude and Products

Nigeria Crude and Products

Algeria Crude and Products

www.csis.org |

Source: EIA Annual Energy Outlook 2013 Early Release

Continued liquids growth and reduced demand means lower imports

US 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?

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

www.csis.org |

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

Extreme Weather

Risk of Irreversible or Abrupt Changes

Today

E3G, Adapted from Stern 2006

450 ppm

550 ppm

650 ppm

750 ppm

850 ppm

950 ppm

Climate Change Risks

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

Mountain glaciers disappear; Decreased water in some areas

Many more areas suffer from low water availability

Sea level rise threatens 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

42 42 Water 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 Policies Scenario

450 Scenario

New Policies Scenario

Non-OECD

OECD

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 Capture

In 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

www.csis.org |

A schematic overview of inter-relationships between adaptation,

mitigation and impacts.

Cost of Adaptation

All

Mitigation

No Action All Adaptation

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

Objectives Promotes/Supports

Sustainable Environment

Defensible Natural

Gas Oil

Energy Efficiency

Nuclear

Renewable Energy

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

0

5

10

15

20

25

2009 2012 2015 2018 2021 2024 2027 2030

Imports

Domestic Oil Supply

Liquid Fuels Demand

Mmb/d

Diversify

supplies

Maintain/

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