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North American Shale Gas, Russia and Europe:An Unexpected Intersection
Presentation to the Northeast B.C. Natural Gas Summit
September 30, 2009
Kenneth B Medlock IIIJames A Baker, III and Susan G Baker Fellow in Energy and Resource Economics,
James A Baker III Institute for Public PolicyAdjunct Professor, Department of Economics, Rice University
Haynesville
GECF
Global Gas Resources are Abundant
Composite of satellite photographs –Brighter red indicates larger endowment of gas resource;
Demand is where the lights are on.Connecting the two is a challenge intersecting both politics and economics
Major North American Shale Plays
Energy Security and Diversification:Supply growth in North America and Energy Security
in Europe
An Energy Security Framework
SLR
D
pw
pa a
bc
Price
QuantityQm
SLR
D
pw
pa a
bc
Price
QuantityQm
dpd
SSR
• There are gains from trade, given as abc. But, there are potential losses as well. – Consider the extreme case of a complete disruption. The welfare loss is bcd
• Since bcd > abc, why do we trade?– A disruption occurs with probability . We will trade as long as (1-)abc ≥ bcd + where is an
energy security premium, or the amount we are willing to pay to minimize either or bcd.– Note 0 implies abc ≥ meaning we would be willing to give up the gains to eliminate costs.
• This where policy plays a role… The energy security premium, for example, could be funds directed at R&D in efficiency and alternative energy sources (shift D in), policies supporting exploration such as royalty relief (shift S out), military presence in exporting regions (reduce ), and foreign policy that is preferential to key trading partners (reduce ). It could also encompass any costs of diversification.
An Energy Security Framework (cont.)
• Growth in indigenous supply in North America reduces the import requirement of the US.
• A lower import requirement for a large consumer effectively diversifies the global gas supply portfolio by increasing the available supply to the global market. In other words, supplies otherwise intended for North America can be re-directed.
• This reduces the risk of a major global disruption. – A production shortfall in Nigeria, for example, has a larger impact without North
American shale than it does with North American shale. – In a similar vein, BIPP modeling indicates that supply from Iran tends to increase the
most in the longer term when North American supplies are reduced.
• Benefits accrue to all importing countries as a result of new shale gas developments in the US and Canada. This occurs in the long term equilibrium sense, but also applies in a stronger sense of providing energy security. Namely, to the extent that supply growth comes from countries and regions with a history of instability, greater reliance on those sources increases the likelihood of a disruption. North American shale abates that reliance.
BIPP Modeling:The Rice World Gas Trade Model
Resources and Demand (revisited)
• Geography and geology put Russia in a prominent role in the global gas market• The Middle East is also large, but marketing opportunities are different, at least initially. • How will regions interact in a longer term view of a global gas market?
The RWGTM• The Rice World Gas Trade Model (RWGTM) has been developed to
examine potential futures for global natural gas, and to quantify the impacts of geopolitical influences on the development of a global natural gas market.
• The model predicts regional prices, regional supplies and demands and inter-regional flows.
• Regions are defined at the country and sub-country level, with extensive representation of transportation infrastructure
• The model is non-stochastic, but it allows analysis of many different scenarios. Geopolitical influences can alter otherwise economic outcomes
• The model is constructed using the MarketBuilder software from Altos– Dynamic spatial general equilibrium linked through time by Hotelling-type
optimization of resource extraction– Capacity expansion is determined by current and future prices along with
capital costs of expansion, operating and maintenance costs of new and existing capacity, and revenues resulting from future outputs and prices.
The RWGTM (cont.)• Demand
– Over 290 regions. • North America (Residential, Commercial, Industrial, Power Gen)• Rest of World (Power Gen, Direct Use, EOR)
– Population growth taken from the UN median case projection to 2050.– Economic growth is based on conditional convergence. – Energy intensity falls as income rises (see Medlock and Soligo, EJ 2001)– The natural gas share of total energy increases with income, reflecting natural
gas as a premium fuel, but declines with relative price increases.• Price elasticity is decreasing in the natural gas share of TPES. This captures rigidities
associated with capital deployment.
• Supply– Over 120 regions– Natural gas resources are represented in three categories
• proved reserves (updated 2006 Oil & Gas Journal estimates)• (GTK) growth in known reserves (P-50 USGS estimates and NPC estimates)• (YTF) undiscovered resource (P-50 USGS estimates and NPC estimates)
– Long run costs increase with depletion.
Economic Growth• Current economic and financial crisis is incorporated. We use the IMF June ‘09
outlook for growth through 2014 for all countries. Beyond 2014, growth is governed by a model of conditional convergence.
• Two examples: China and the US China
-2%
0%
2%
4%
6%
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16%
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
forecast
USA
-6%
-4%
-2%
0%
2%
4%
6%
8%
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
forecast
Long Run F&D Cost• The cost environment is critical to understanding what prices will be. F&D costs in
the 1990s yield long run prices in the $3-$4 range.• Index to oil price... we currently assume a long run oil price of $60, which puts the
cost environment slightly above the 30 year average.
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Real Well Cost KLEMS Real Oil Price
Index2000=100
Real cost going forward is roughly equal to costs in
1982, 2004/05, 2009
The RWGTM (cont.)• Required return on investment varies by region and type of project (using
ICRG and World Bank data) • Detailed transportation network
– Pipelines aggregated into corridors where appropriate. – Capital costs based on analysis of over 100 pipeline projects relating project cost
to various factors.– Tariffs based on posted data, where available, and rate-of-return recovery.– LNG is represented as a hub-and-spoke network, reflecting the assumption that
capacity swaps will occur when profitable.– LNG shipping rates based on lease rates and voyage time.
• For all capital investments in both the upstream and midstream, we allow for existing and potential pipeline links, then “let the model decide” optimal current and future capacity utilization.
• For detailed information please see Peter Hartley and Kenneth B Medlock III, “The Baker Institute World Gas Trade Model” in The Geopolitics of Natural Gas, ed. Jaffe, Amy, David Victor and Mark Hayes, Cambridge University Press (2006).
The RWGTM: Resources and Russia• Reserves are not the best indicator of a region’s supply potential – they are not even
an economic measure of potential. We focus on resource, because technicallyrecoverable resources may become economically recoverable as price rises.
• Global undiscovered technically recoverable resources– 5,336 tcf (YTF) + 3,660 tcf (GTK) = 8,996 tcf
• Unconventional data is limited– Some information about location of potential resources but less about size; – Detailed data available for North America and Australia; – Limited data available for China and India – focused mostly on CBM
• Russia has a prominent position in the current natural gas market– Russia has 27% of stated global gas reserves (1,680 tcf of 6,254 tcf)
• Russia should have a prominent position in the developing global gas market for the foreseeable future
– Russia has 17% (1,168 tcf (YTF) + 339 tcf (GTK)) of the mean estimate of technically recoverable undiscovered global natural gas resource.
• Russia’s influence will be directly related to its ability to develop new resources and profitably compete with alternative sources of supply
Results
Reference Case: Global Demand• Demand growth rates are strongest in Asia and the Middle East.• Alternatives emerge more quickly post-2030, especially in EU and North America• Demand in Russia grows to a max of 19.6 tcf in 2030 (about 0.8% p.a.)
2005 2010 2015 2020 2025 2030 2035 2040
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Tcf per year
Brazil, Argentina, Chile
Other Asia & PacificIndian sub-continent
China
Japan, South KoreaASEAN
Africa
Other Middle East
Saudi Arabia
Iran
Other Latin America
Canada
USA
Other Europe & FSU
Russia
EU15
Reference Case: Global Supply• Russia and the Middle East are largest suppliers.• Middle East growth is strongest, driven by internal demand and growing exports.
– Exports are initially LNG with pipeline options to Europe and India longer term
2005 2010 2015 2020 2025 2030 2035 2040
0
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160
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Tcf per year
Other Asia & Pacific
Australia
Other Middle East
Saudi Arabia
Iran
Other Latin America
Canada
USA
Russia
Other Europe & FSU
Venezuela
North Africa
ASEAN
East of Caspian
Norway
Qatar
Iraq
Other Africa
Reference Case: Global Trade• Asian imports grow most dramatically, driven primarily by China.• Exports grow strongly from Australia and the Middle East as LNG demand grows• Russia remains crucial to the global balance, but loses market share as new supplies
emerge with demand growth in non-traditional markets.
2005 2010 2015 2020 2025 2030 2035 2040-60
-45
-30
-15
0
15
30
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60
Tcf per year
Exports
ImportsOther Asia & PacificOther & Transit loss
Australia, PNG
China
Japan, South Korea
ASEAN
North Africa
Iran
North America
Other Europe
Russia
EU15
Other Africa
Iraq
Qatar
Henry Hub Natural Gas Price• Globally, increased trade leads to price differentials that reflect transport
differentials– NBP over HH by about 30 cents… (a result of shale)
• Long term prices at Henry Hub (averages)– 2010-2020: $ 6.98 2021-2030: $ 7.79
Henry Hub
$-$1.00
$2.00$3.00
$4.00$5.00
$6.00$7.00
$8.00$9.00
$10.00
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US and Canada Production• Shale production is the primary driver of production growth.
– US: Strong increases from Haynesville and Marcellus, Barnett maintains strength– Canada: Shale maintains Canadian export capability in face of declines in other basins
0.0
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Shale
OCS
Other US
Rockies
Alaska
tcf US Production
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Canada Shale
Other Canada
tcf Canada Production
North American Shale Gas• Resource assessment is large. Cost curves
assume about 85% of the resource is available at the associated “break-even”price.
• However, short run pressures can push cost in any given period higher.
• Costs have been falling, and may yet continue. Recent estimates from the PGC exceed current estimates in the model.
Mean Technically Recoverable
Resource Breakeven Price
Antrim 13.2 6.50$ Devonian/Ohio 169.6
Utica 5.4 7.00$ Marcellus 134.2
Marcellus T1 47.0 5.75$ Marcellus T2 42.9 6.50$ Marcellus T3 44.3 7.00$
NW Ohio 2.7 7.25$ Devonian Siltstone and Shale 1.3 7.25$ Catskill Sandstones 11.7 7.25$ Berea Sandstones 6.8 7.25$ Big Sandy (Huron) 6.3 6.50$ Nora/Haysi (Huron) 1.2 7.25$
New Albany 3.8 7.25$ Floyd/Chatanooga 2.1 6.50$ Haynesville 90.0
Haynesville T1 36.0 4.75$ Haynesville T2 31.5 5.75$ Haynesville T3 22.5 6.75$
Fayetteville 36.0 5.25$ Woodford Arkoma 8.0 6.00$ Woodford Ardmore 4.2 6.00$ Barnett 54.0
Barnett T1 32.2 4.50$ Barnett T2 21.8 6.00$
Barnett and Woodford 35.4 7.00$ Palo Duro 4.7 7.00$ Lewis 10.2 7.25$ Bakken 1.8 7.50$ Niobrara (incl. Wattenburg) 1.3 7.25$ Hilliard/Baxter/Mancos 11.8 7.25$ Lewis 13.5 7.25$ Mowry 8.5 7.25$
Montney 30.0 6.00$ Horn River 50.0 5.25$ Utica 10.0 7.00$
Total US Shale 468.0Total Canadian Shale 90.0Total North America 558.0
North American Shale Gas (cont.)• Shale plays in Canada are also
being developed.• Most active areas are in the Horn
River and Montney plays in BC and Alberta.
• Supply potential in BC, in particular, has pushed the idea of LNG exports targeting the Asian market
– Asia is a premium market.– Competing projects include
pipelines from Russia and the Caspian States, as well as LNG from other locales.
• BC is a basis disadvantaged market, but selling to Asia could provide much more value to developers.
• Utica Shale in Quebec has been compared to the Barnett in Texas, and price is even more favorable.
Horn River
Montney
US Shale Production• Strongest shale production is in Barnett.• There is strong growth in the Marcellus, Fayetteville, and Haynesville shales in
particular, with modest growth in several others.
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BakkenLewis & MancosHilliard, Baxter & MowryNiobraraBarnett and WoodfordPalo DuroWoodfordFayettevilleAntrimNew AlbanyBarnettHaynesvilleFloyd & ChatanoogaBig Sandy, Huron & MarcellusNora HaysiMarcellus & BereaNW Ohio & MarcellusUtica
Tcf
Canada Shale Production• Strongest shale growth is in Horn River.
– Horn River reaches about 3 bcf/d by 2030 and accounts for about 60% of shale production in Canada.
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Utica
Horn River
Montney
tcf Canada Shale Production
LNG Imports to the US
• Growth out of 2008 but stagnant from 2011-early 2020s. Low annual load factors on LNG regas facilities.
USA LNG Imports
-
1,000
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mmcfd
South TXSoCalSeattleSabine PassPascagoulaNoCalNew YorkLake CharlesHublineGoM EBGolden PassFreeportBahamasEverettElba IslandDelaware BayCove PointCameron
Global Gas Trade: LNG vs. Pipeline• LNG growth is strong, reaching about 50% of total international natural gas trade
by the late 2020s.– This date moves under different scenarios, but the pace of growth in LNG is generally
stronger than pipeline trade.
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Tcf per year
LNG
Pipeline
LNG surpasses 50% of global international trade in natural gas
European LNG Penetration
Terminal Location Country
Current Capacity (Bcm/yr)
Current Capacity
(bcf/d)Initial Start-
upFluxys LNG Zeebrugge Belgium 9.1 0.8805 1987Fos Sur Mer Fos sur Mer, Marseille France 4.5 0.4354 1972
Montoir De Bretagne Montoir-de-Bretagne, Nantes France 10 0.9675 1982Revithoussa Revithoussa, Athens Greece 4.5 0.4354 2000GNL Italia Panigaglia Italy 3.5 0.3386 1971Sines LNG Sines Portugal 5.2 0.5031 2003Barcelona Barcelona Spain 14.45 1.3981 1969
Bilbao Bilbao Spain 8 0.7740 2003Cartegena Cartagena Spain 10.5 1.0159 1989
El Ferrol LNG Murgados Spain 3.6 0.3483 2007Huelva Huelva Spain 11.83 1.1446 1988Saggas Sagunto, Valencia Spain 6.57 0.6357 2006Aliaga Aliaga Turkey 6 0.5805 2006
Marmara Ereglesi Marmara Ereglisi Turkey 5.2 0.5031 1992Grain LNG Isle of Grain, Kent UK 13 1.2578 2005
Teeside Gasport Teesside UK 4.13 0.4000 2006Total 120.08 11.62
Fos Cavou Fos Cavaou France 8.25 0.7982 2009OLT Offshore LNG Toscana Offshore Port of Livorno Italy 4.7 0.4547 2011
Terminale LNG Adriatico Offshore Rovigo Italy 8 0.7740 2009Dutch Gate Terminal Rotterdam Netherlands 12 1.1610 2011
Dragon LNG Waterston, Milford Haven, Wales UK 6 0.5805 2009South Hook LNG South Hook, Milford Haven, Wales UK 10.5 1.0159 2009
Total 49.45 4.78
Existing
Under Construction
• Capacity in 2009 will be 28% of annual demand, and it could be as high as 40% of annual demand by 2011.
• There is an additional 180 bcmof import capacity that has received approval or is in the approval process.
• LNG will be relatively cheap in the short term due to high supply, low demand, and new shale resources in the US.
Comments on Scenarios examining factors that impact Russian developments
Key Conclusions of Russian Scenario Analysis
• Russian gas remains important to Europe and Asia, but regional dependencies are sensitive to the scenario being considered.
• General point #1: Gas supplies in the Middle East are of critical importance. Iraqi gas developments, in particular, due to the size and location (geology and geography) of the resource, are important to watch, although this is a longer term development.
– Large Middle East Resources• Iraq: 111 tcf (proved) + 112 tcf (GTK) + 65 tcf (YTF) = 288 tcf• Iran: 991 tcf (proved) + 140 tcf (GTK) + 298 tcf (YTF) = 1,429 tcf• Saudi Arabia: 258 tcf (proved) + 297 tcf (GTK) + 640 tcf (YTF) = 1,195 tcf
– Varied (but growing) Middle East Demand • Iraq: 0.064 tcf/yr• Iran: 3.948 tcf/yr• Saudi Arabia: 2.680 tcf/yr
– Iraq resources are geographically advantaged, being located in north and west rather than in the south.
• General point #2: Developments in North American shale renders demand for LNG low. These developments are indigenous to the largest consuming market in the world. Furthermore, it leaves large quantities of LNG in the Atlantic basin available to Europe.
Key Conclusions of Scenario Analysis (cont.)
• General point #3: Timing is important. Many of the resources in play will have similar costs at the burner-tip. So, first-mover advantage is crucial.
• General point #4: Europe diversifies sources of supply in almost all cases.
– Diversification is a natural progression as demand grows and the capacity of soviet era infrastructures to capture that market is eroded.
– Actions by Russia can accelerate the trend.• General point #5: A cartel, if limited to the “Troika” nations, has little
ability to earn monopoly rents. Demand is elastic and the supply curve for alternative sources is fairly elastic. This latter point is reinforced by the emergence of shale gas in North America.
• General point #6: Climate change policies could drive an increase in demand and a decrease in the ability to substitute.
Comments/Questions
