North North American American Natural Natural Gas Gas and and Natural Natural Gas Gas Liquids Liquids Markets Markets
Society of Petroleum Engineers Canada November 22, 2011
Gerry Goobie Purvin & Gertz, Inc.
[email protected] Today’s Topics Introduction
IHS and Purvin & Gertz, Inc.
Outlook Dimensions
Oil/Gas Ratio Heavy Crude Discount
Western Canadian Natural Gas Outlook Western Canadian NGL Outlook North American Propane Supply and Exports
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Purvin & Gertz, Inc. Who we are...
Calgary
London
Independent energy consulting firm Founded in 1947 Owned by consultants Headquartered in Houston with offices Worldwide
Moscow
Houston Dubai
Some of what we do... Singapore
Energy Market Analysis Competitive Benchmarking Mergers and Acquisitions Refinery Economics and Planning/PIMS Project Evaluation Project Finance Assistance Strategic Planning
Buenos Aires
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has acquired
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IHS – Who We Are
We are 4,400 people, in 30 countries, speaking 50 languages – all working each day to: • Serve businesses and all levels of governments worldwide • Ranging from 80% of Global Fortune 500 to small businesses • Customers in 180 countries
• Provide comprehensive content, software and expert analysis and forecasts • Customers around the world use our products and services to make faster and more confident decisions.
Advancing Decisions that Advance the World
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IHS Capabilities IHS is the leading information company with comprehensive content, insight and expert analysis in key areas shaping today’s global business landscape, including:
Advancing Decisions that Advance the World
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Today’s Topics Introduction
IHS and Purvin & Gertz, Inc.
Outlook Dimensions
Oil/Gas Ratio Heavy Crude Discount
Western Canadian Natural Gas Outlook Western Canadian NGL Outlook North American Propane Supply and Exports
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Two Important Dimensions for Our Outlook Heavy Crude Discount (%)
Oil to Gas Price Ratio (MMBtu/bbl)
25
50%
Oil/Gas Ratio Heavy Crude Discount (%)
20
40%
15
30%
10
20%
5
10%
0
0%
1995
2000
2005
2010 8
2015
2020
Major Drivers for Energy Development in Alberta Low Oil/Gas
Narrow
Wide
High Oil/Gas
Expensive Gas Low Frac Spreads Bitumen production favoured Upgrading uneconomic High diluent demand Coke gasification for fuel
Cheap Gas High Frac Spreads Bitumen production favoured Upgrading uneconomic High diluent demand Natural gas for fuel/syngas
Low Frac Spreads Upgrading economic Offgas availability Pitch gasification for fuel Coker GO derivatives Bitumen to refined products
High Frac Spreads Upgrading economic Sweet, high quality SCO Offgas availability Natural gas for hydrogen High quality diesel
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Today’s Topics Introduction
IHS and Purvin & Gertz, Inc.
Outlook Dimensions
Oil/Gas Ratio Heavy Crude Discount
Western Canadian Natural Gas Outlook Western Canadian NGL Outlook North American Propane Supply and Exports
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Western Canadian Natural Gas Shale gas development is a game changer in North America Western Canadian natural gas supply is declining as a result of weak prices and a dramatic decline in gas directed drilling Western Canadian industrial demand (oil sands) is growing and exports are falling Infrastructure needs to be developed for new supplies but existing infrastructure still needs to be paid for Long term outlook is uncertain – is it “half full or half empty”? 11
North American Shale Gas Basins
Source: National Energy Board, Canada
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Natural Gas Price HENRY HUB TO ALBERTA AECO NIT BASIS Basis $10
$5
$9 $8
$4
$6
$3
$5 $4
$2
$3 $1
$2 $1 $0
$0 1990
1995
2000 Basis
2005
Henry Hub
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AECO NIT
2010
US$/MMBtu
US$/MMBtu
$7
Western Canadian Gas Well Completions CUMULATIVE GAS WELLS COMPLETED (Western Canada)
16000
2006 2004
2005
14000
2007 12000 2008 10000 8000 2010
6000
2009
4000 2011 2000 0 Jan
Feb
Mar
Apr
May
Jun
Jul
Source: CAODC
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Aug
Sep
Oct
Nov
Dec
AECO Differentials are Declining $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 -$0.50
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
AECO - Empress Dawn - AECO Linear (Henry Hub - AECO)
Jan-10
Jul-10
Jan-11
Jul-11
Henry Hub - AECO Linear (Dawn - AECO) Linear (AECO - Empress) 15
Western Canadian Gas Exports 20 Bcfd 18
Export Capacity
16 14
TransCanada 2011 Outlook
12 10 8 6 4
P&G Gas Export Outlook
2 0
2004
2006
2008
2010
2012 16
2014
2016
2018
2020
Western Canadian Natural Gas Outlook Prices and drilling are at very low levels but will recover eventually Well productivity has increased with horizontal technology improvements Large supply availability implies that long term gas price is set by drilling and production costs Unconventional gas supply growth will offset conventional gas declines
Considerable debate regarding future split of conventional/unconventional gas supplies
Many producers (if not all) are pursuing oil or “rich” gas plays in order to capture liquids uplift 17
Excess Pipeline & Processing Capacity WCSB gas prices have disconnected from traditional transportation cost discounts to markets
Implies that transportation capacity is not worth very much
Existing pipeline and processing infrastructure is seriously over capitalized
Many gas processing facilities are operating at well below capacity But processing margins are strong which is driving new infrastructure investment
Pipeline issues will consume industry attention
TCPL toll restructuring and NEXT Alliance post 2015
Is a period of rationalization inevitable? 18
Today’s Topics Introduction
IHS and Purvin & Gertz, Inc.
Outlook Dimensions
Oil/Gas Ratio Heavy Crude Discount
Western Canadian Natural Gas Outlook Western Canadian NGL Outlook North American Propane Supply and Exports
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Canadian Gas Processing Margins Alberta Straddle Plant Frac Spread Price - US Cents per Gallon
Margin - US Cents per Gallon
200 180 160
200 Op Cost
180
Straddle Weighted NGL Op Margin AECO Gas Price for Weighted NGL
160
Straddle Weighted NGL Price
140
140
120
120
100
100
80
80
60
60
40
40
20
20
0
0
Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 20
High Frac Spread Impacts A high crude/gas price ratio implies high frac spreads All available NGL (C3+) will be recovered Straddle plant economics will be under pressure
Likely shift from straddle to field recovery in Western Canada Declining export flows and shifting feed composition Recent sharp increase in extraction rights premiums
Uncertainty regarding ethane recovery
Higher cost for field extraction Increased intra-Alberta gas demand will shift flows Effectiveness of NGTL streaming is uncertain
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Today’s Topics Introduction
IHS and Purvin & Gertz, Inc.
Outlook Dimensions
Oil/Gas Ratio Heavy Crude Discount
Western Canadian Natural Gas Outlook Western Canadian NGL Outlook North American Propane Supply and Exports
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NGL Supply Drivers What Causes Production to Change? NGL is a BYPRODUCT
There are no NGL wells!
NGL is produced as a byproduct of:
Oil production (via the processing of associated gas) Gas production (via the processing of non-associated gas – including LNG) Refining
NGL production tends to change quickly when one or more of the above industries is changing quickly
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NGL Production by Gas Plants in the U.S. is Rising Rapidly 2,000
Thousand Barrels per Day
1,800
At the beginning of 2006, gas plants produced about 1.45 million barrels per day of NGLs
Butane (normal + iso) Propane Ethane
1,600 1,400
Current production is near 1.9 million barrels per day
1,200 1,000
The increase was caused by rising production of natural gas in the U.S. and very attractive processing margins
800 600 400 200 0 Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
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Jan-11
Recent History for Propane Supply Many Regions are “Have-Nots” A tight international market continues to cause high prices in Europe, Latin America and Asia Supply projects in the Middle East (mostly LNG) are coming on slower than once predicted, but most should be completed soon Algeria’s production is down due to gas pipeline maintenance Terminal maintenance in the North Sea during the summer in 2010 constrained volumes which haven’t completely recovered
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Most of North America is a “Have” Market Shale gas plays in many regions resulted in:
Rising production of natural gas Thus, weak prices for gas Thus, very strong gas processing margins Which all led to rising production of propane
More propane in the U.S. resulted in relatively weak prices, which created an arbitrage that supported U.S. exports
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U.S. Propane Exports Set Record Highs in 2010/11 The U.S. Has Been One of the Cheapest Sources of Propane in the World 120,000
Daily Average, Barrels per Day
100,000 80,000 60,000 40,000 20,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD 2011
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U.S. Propane Inventories Thousands of Barrels 100,000 5-Yr MIN-MAX Range
U.S. Inventories
Monthly 5-Yr Avg
90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Jan 09
Apr
Jul
Oct
Jan 10
Apr
Jul
28
Oct
Jan 11
Apr
Jul
Oct
Total Canadian Propane Stocks Are Adequate Canada Spec C3 Inventories
Thousand Barrels 100,000 90,000
5-Yr Min - Max Range
5-Yr Average
Canadian Inventories
80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Jan09
Apr
Jul
Oct
Jan10
Apr
Jul
29
Oct
Jan11
Apr
Jul
Oct
U.S. Propane Imports from Canada Have Been Declining Barrels Per Day
300,000
Monthly Imports Linear (Monthly
250,000
200,000
150,000
100,000
50,000
0 Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07 Jul-07
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Jan-08 Jul-08
Jan-09 Jul-09
Jan-10
Jul-10
Jan-11
Canadian Natural Gas Issues Summary Drilling continues to languish
Drilling focus has shifted to oil and liquids rich gas
Long-term impact must be lower production Rate of shale gas development is uncertain Domestic demand is increasing and exports are declining When will natural gas prices be high enough to encourage more drilling?
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NGL Issues Summary Frac spreads remain high
All available NGL will be recovered New infrastructure is required while existing infrastructure is underutilized
US propane inventories are very low going into next winter
Prices are expected to strengthen
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Conclusions Successful navigation through this period of uncertainty is critical to the future competitiveness of the Western Canadian natural gas and NGL businesses
Issues such as TCPL tolls, Alberta Hub concept, NGL ownership (Receipt Point Contracting or NEXT) and Incremental Ethane Extraction (IEEP) are extremely complex There is no obvious simple resolution to any of these issues
Cost must be removed from the system
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Disclaimer This presentation has been prepared for the sole benefit of the Client. Neither the presentation nor any part of the presentation shall be provided to third parties without the written consent of PGI. Any third party in possession of the presentation may not rely upon its conclusions without the consent of PGI. Possession of the presentation does not carry with it the right of publication. PGI conducted this analysis and prepared this presentation utilizing reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are based on information available at the time of review. Changes in factors upon which the review is based could affect the results. Forecasts are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen including the actions of government, individuals, third parties and competitors. NO IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY.
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Gerry Goobie, P.Eng.
[email protected] Phone: (403) 984-2205 35