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September 18, 2014
Dr. Loren C. Scott Loren C. Scott & Associates, Inc. www.lorencscottassociates.com
Energy Prices
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1990 1995 2000 2005 2010 2015
PGA PGAL PGAH
Figure 7: Price of Natural GasPe
r MM
BTU
2014 2015 2016PGA $4.50 $4.70 $4.80PGL $4.20 $4.10PGH $4.90 $5.20
0
20
40
60
80
100
120
140
1980 1985 1990 1995 2000 2005 2010 2015
POA POAL POAH
Fig. 6: Oil PricesPr
ice
per B
arre
l
2014 2015 2016Average $100 $95 $90Low $85 $85High $120 $120
35
40
45
50
55
60
65
70
76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
Watch (1) shale plays & (2) the Gulf
Oddity #1: Energy has gained allies
(Very important to Bakken)
North Dakota’s Bakken Field • 2003: 10,000 b/d produced • 2014: 1,100,000 b/d produced---110-fold increase • ND surpassed Alaska as 3rd largest source of
domestic oil in 3/12 • Large amounts of “associated” natural gas being
produced – Lack of pipelines and gas-gathering systems means
about 30% fared off – As of 6/14 every new well must have capture plan to
reduce flaring to 5% by 2020 – $4 bill being invested in gathering systems b/w now &
2017
Bakken Well Economics: Year 1
• Crude Oil………………….365,000 bbls • Oil @ $80……………….….$29,200,000 • Dry Gas @ $3/mcf………… 1,181,505 • NGLs @$10/mcf………….. 3,933,850 • Total 1st Year…………… $34,315,355 • Over production life of 45 years: 615,000 bbls • New productivity adding 486 b/d for average
well (542,000 b/year) (4/14)
Oddity # 2
Each shale play is different Technology not as easily
transferable (Bakken lucky on this score)
A new Competitor for Rigs Emerging
Wolfcamp Shale Play
Wolfcamp Shale Largest in U.S.?
• Wolfcamp 50 Billion boe • Eagle Ford 27 Billion boe • Bakken 13 Billion boe • Second only to Ghawar Field in Saudi
Arabia • Wolfcamp Shale 3,500-4,500’ thick • Eagle Ford 300’ thick
Breakeven Oil Prices by Play (Rodgers Oil & Gas Consulting)
• Monterey (CA) $36 • Eagle Ford (TX) $49 • Bakken (ND) $50 • Granite Wash (OK) $57 • Niobrara (CO) $66 • Tuscaloosa (MS) $69 • Tuscaloosa (LA) $92
Oddity #3: Dramatic Improvements in Oil Imports
• 2013: – U.S. Production: 8.5 mmb/d – U.S. Imports: 7.6 mmb/d (47%)
• 2008: – U.S. Production: 5.0 mmb/d – U.S. Imports: 9.8 mmb/d (66%)
HIS - Shale plays Responsible for:
• U.S. oil production up 70% since 2008---highest growth of any country in world over that period
• Balance of payments effect: – Production over last 5 years has reduced our oil
import bill by $70 billion & reduced trade deficit by 10%.
– Growth of shale gas will prevent spending $100 billion of import natural gas.
• Increase since 2008 in oil = 88% of Iran’s exports before sanctions imposed. Helped make sanctions work well.
Latest Ole Miss Story
“I lost my 710 cap.”
Oddity #4:
Weird Bakken Effect on Oil Prices
Oil Price Trends
Oddity #5: Desire to Export Oil
Very important issue to Bakken
Already an exporter of petroleum products
Oil Product Demand/Production
Diesel & jet fuel comprised more than 80% of exports
• More stringent EPA regulations on sulfur content of diesel fuels in 2016
• Some refineries do not want to make financial commitment (Phillips $800 mm; Marathon $2.5 billion!) to produce lower sulfur diesel to meet U.S. standards;
• Why not export it overseas? • Shipping rates really low due to glut of tankers
Oddity #6: Debate over what is a
“product”? Is a field-level $500K to $5mm
facility to strip off volatile propane and butane so
condensate can safely flow through pipelines make it a
“product”?
Odd Effects of Export Issue
• 8 companies have announced plans to build $360 mm condensate splitters to turn lighter ends of crude into exportable products like naptha; Valero building topping units at TX refineries to do same thing, as is BP
• Anticipating export boom – orders for new VLCCs gone from 3 in 2011 to 47 in 2013.; 18 ordered for 2014-I
Oddity #7: Product Demand Decline
Note Oil Product Demand Decline:
Sources of Demand Decline
• Fewer vehicle miles traveled due to recession
• Current Corporate Average Fuel Economy (CAFÉ) requirements – 2012-16: increase fuel economy by:
• 31% for automobiles • 14% for light trucks
Oddity #8: Quick Recovery in GOM
• Pre-Spill: 33 rigs • Post Spill: 11 rigs • 2013: 36 • Mid 2014: 40 • 2015: 53* • 2016: 60*
– *Penn Energy
Benefits of the Gulf?
• Elephant finds – Chevron St. Malo Field, lower tertiary: 13,000 bbl/d
• Straddles world’s biggest consumer • Politically stable area (Argentina alarm) • Cost of taxes, royalties, and regulations among
lowest in world • Lots of opportunities from small, low risk
prospects to giant targets in extreme conditions • Vast network of pipelines & refineries
Oddity #9:
Changes in Mexico’s Energy Sector
Pacto por Mexico • Ended the national monopoly on oil and
gas exploration and development of past 75 years
• Declared constitutional on December 18, 2013
Pacto por Mexico • Secondary laws and regulations to be
worked out – Rules & regs for contracts with Mexican
government • Production-sharing, profit-sharing, pure service
contracts – How much and what properties can Pemex
keep (9/15/14 decision by Ministry of Energy);
• Estimated – Pemex gets 75% v 25% to private cos;
• Latter likely in deep waters and prospective shale plays
Trans-Boundary Hydrocarbons Agreement
Oddity #10
Unusual Effect of Jones Act
Oddity #11:
How will those vessels (& other vehicles) be powered?
(Source of demand for Bakken gas)
The Chemical Side
• Waller Marine: $200 mm • Harvey Gulf International – Port
Fourchon : $400 mm offshore LNG fueling facility
• Michoud Facility – New Orleans – Lockheed Martin building LNG fuel tanks
• What’s going on here?
LNG for Water-Borne Vessels
• Driven by: • (1) more stringent EPA regulations on
sulfur content of diesel fuels in 2016 • (2) spread b/w diesel and LNG prices,
Cost by Vessel/Vehicle
• Water-borne vessels (not ocean-going) – Dual LNG/diesel vessels cost 20% more
than diesel-fired vessels---roughly $15 mm more; – LNG operational costs about 40% less ;
maintenance costs far lower – Takes up lot of storage space
• Duel-fuel police cars: +$10,000 • Freight Trucks:
– 40% higher (+$50,000): Feds reimburse ½
Oddity #12:
Major industrial rebound in U.S. Low natural gas prices plus… (Another source of demand for
Bakken gas)
Amazing Industrial Boom: Case of Louisiana
• Past: Good year = $5 billion • GRIMA Survey: $103.8 billion! • Highly concentrated by industry;
– Chemicals = $95.8 billion • Highly concentrated geographically
(chemicals only) – Baton Rouge to New Orleans: $20.2 billion – Lake Charles MSA: $73.4 billion
Nature of Expansions • General Chemicals
– Ethylene, methanol, ammonia, etc. • G-T-L plants
– Sasol: $14-$17 billion – G2X: $1.5 bill – Southern California Telephone & Energy:
$2.4 bill • LNG Export terminals:
– At least $40 billion
UT Center for Energy Economics 2014
• 144 gas-intensive industrial projects of $121 billion;
• 26 BCF/day of demand; 19-31% increase in gas demand
• Does not include natural gas-fired power plants under construction or # of natural gas-powered vehicles
3 Massive Bets
• Massive bet on price staying low • Massive bet on Europe remaining stupid • Massive bet on oil/natural gas price split
1
2
3
4
5
6
7
8
9
1990 1995 2000 2005 2010 2015
PGA PGAL PGAH
Figure 7: Price of Natural GasPe
r MM
BTU
2014 2015 2016PGA $4.50 $4.70 $4.80PGL $4.20 $4.10PGH $4.90 $5.20
0
20
40
60
80
100
120
140
1980 1985 1990 1995 2000 2005 2010 2015
POA POAL POAH
Fig. 6: Oil PricesPr
ice
per B
arre
l
2014 2015 2016Average $100 $95 $90Low $85 $85High $120 $120
Oddity # 13
Gross ignorance about energy companies
“Big Oil”
In list of top 20 holders of oil reserves in the world, where does
ExxonMobil rank?
Top 20 Oil Reserve Holders: 2011
• 1.Saudi Arabia Oil • 2. Petroleos de Venz • 3. Nat’l Iran Oil • 4. Iraq Nat’l Oil • 5. Kuwait Pet. Corp. • 6. Abu Dhabi Nat’l • 7. Libyai Nat’l Oil • 8. Nigerian Nat’l Oil • 9. Qatar Pet. Corp. • 10. OAO Rosnett
• 11. OAO Lukoil • 12. Sonatrach • 13. PetroChina • 14. Petroleo Brasileiro • 15. BP PLC • 16. Petrolos Mexicanos • 17. ExxonMobil • 18. Sonangol • 19. Petroleos del Ecuador • 20. Total SA
ExxonMobil
• World oil reserves: relative size (2011) – Saudi Arabian Oil: 264.5 billion barrels – Petroleos d Venezuela: 211.2 billion barrels – Nat’l Iranian Oil co.: 151.7 billion barrels – ExxonMobil: 10.1 billion barrels
• Produces only 1% of world oil output
145.9 TCF
11.7 Bbl
36.9 TCF 3.8 Bbl
12.3 TCF Alaska:
217.1 TCF 45.4 Bbl
Recoverable Natural Gas Moratorium Areas
18.2 TCF 10.5 Bbl
Reaction to speech?
Depends on your perspective…
September 18, 2014
Dr. Loren C. Scott Loren C. Scott & Associates, Inc. www.lorencscottassociates.com