Seller Forum Unconventional Gas Competitive
Unconventional Gas Competitive Challenges in a North American Market
National Buyer/Seller Forum March 24, 2010
Kevin Heffernan, Vice President
Canadian Society for Unconventional Gas CSUG is a membership-based association, formed in 2002, to support the responsible exploration and development of unconventional gas in Canada
Mission “To facilitate the factual and collaborative exchange of unconventional gas knowledge and challenges among government, regulators, industry and public stakeholders for the exploration and production of the resource in an environmentally sensitive and economical manner”
March 24, 2010
Presentation Outline ¾ Size of the Prize – Alberta’s Undiscovered Potential ¾ Natural Gas from Coal ¾ Shale Gas ¾ Tight Gas Sands and Carbonates
¾ Alberta’s Challenges – Can We Be Competitive in North America ? ¾ Pipeline Tariffs and Distance to Market ¾ F&D Costs ¾ Regulatory Burden and Environmental Stewardship
¾ Possible Solutions ¾ Alternative Markets ¾ Government Incentives and Competitiveness ¾ Advances in Technology
March 24, 2010
Size of the Prize – Alberta Emerging Unconventional Gas Potential
Three main sources of Unconventional Gas in Alberta: ¾
Tight Gas Sands and Carbonates ¾ Currently producing ~ 1 Bcf/d ¾ Wide range of OGIP estimates from 50->500 Tcf depending on technology
¾ Natural Gas from Coal (or Coalbed Methane) ¾ Currently producing ~ 750 Mmcf/day ¾ AGS estimates ~ 500 Tcf Gas In Place
¾ Shale Gas ¾ Early stages of exploration ¾ New emerging plays like the deep Duvernay Formation ¾ GTI estimates > 860 Tcf resource in part of WCSB ¾ Some commercial production existing (3 Mmcf/d)
From Ziff Energy Group, 2006
March 24, 2010
Unconventional Resource Potential of Alberta
Alberta Unconventional Gas Opportunities Risk vs. Reward
Play Type
Typical Drilling
Typical Depth (m)
Average Cost ($ 000)
NGC
Shale Gas
Tight Gas
Shallow
Vertical with Co-mingled Production
650
250-350
Horseshoe Canyon Ardley
Colorado Group (W4M)
Medicine Hat Milk River Belly River
Deep
Horizontal with Staged Fracture Stimulations
900-2500
750 – 9,500
Mannville
Exshaw Nordegg Colorado Group Duvernay (W5M)
Fahler Cadomin Nikanassin Cardium Montney
Foothills and Mountains
Horizontal with Staged Fracture Stimulations
10003000
2,00012,000
Gates Mist Mountain
Exshaw Colorado Group Fernie
Cardium Cadomin Lower Mannville Upper Mannville
LOWER RISK SMALLER PRIZE
HIGH RISK BIG PRIZE
HIGH RISK BIG PRIZE
March 24, 2010
Natural Gas from Coal (NGC) Development
Edmonton
Horseshoe Canyon Formation Net coal thickness
Calgary
0-6 m 6-10 m 10-14 m > 14 m
About 19,000 wells drilled to date
6% Mannville
2% Ardley
92 % Horseshoe Canyon
March 24, 2010
Shale Gas Resource Potential of Alberta Bowser Basin Colorado Group Jurassic and Paleozoic Devonian Shales
Cordova Embayment Horn River Basin Montney “Hybrid” Trend Colorado “Thermogenic” Shale Basin Colorado “Biogenic” Shale Basin Utica and Lorraine Shale Basin “Quebec Lowlands”
Windsor Basin Nova Scotia
Elgin Formation New Brunswick
March 24, 2010
DEEP BASIN TIGHT GAS PLAYS ¾ Significant volume of natural gas already produced but conservative estimates indicate that as much as an additional 50 Tcf may be recoverable through existing technology ¾ Potential of more than 400 Tcf OGIP that has the potential to be developed with new and emerging technologies Uphole Conventional Reservoirs Deep Basin Attributes Large Basin Center Gas Accumulation Multi-zone Conventional Gas Potential (Upper – Lower Cretaceous) Tight Gas Resource Play (Cadomin - Nikanassin)
Cadotte Notikewin
Falher
Cadomin
Nikanassin
•Marine – estuarine origin •Exploratory / Development targets •Lateral – vertical discontinuity / heterogeneity •High impact – high deliverability
Downhole “Tight Gas” Resource Plays •Fluvial reservoir origin •Lower geologic / commercial development risk •Pervasive over a large area •Lateral and / or vertical continuity and homogeneity
From Moslow, 2009
March 24, 2010
Unconventional Resource Potential of Alberta Unconventional Gas Resources Western Onshore Canada (Tcf)
Tight GIP 560 Gas Hydrates >1500
Tight Gas Rec. 15 NGC GIP 645
Shale GIP 860
Shale Gas Rec. 50 Data from Ziff Energy
Areas of Unconventional Gas Exploration and Development in Alberta
NGC Rec. 35
Tight Gas Sands and Carbonates Natural Gas from Coal Shale Gas
Gas Hydrates
March 24, 2010
Alberta’s Challenges – Can We Be Competitive in North America ? ¾ The slower rate at which the EUR is captured in unconventional reservoirs extends the economic breakeven point, but the long-term ultimate recovery due to the size of the OGIP remains attractive compared to conventional reservoirs ¾ To achieve economic production of unconventional gas you need: high gas prices; preferably existing infrastructure, new and existing technologies that are available in sufficient quantity; and a competitive / incented environment in which to work
Life Cycle of an Unconventional Natural Gas Resource Development
From Shell E&P Technology, 2009
March 24, 2010
Alberta’s Challenges – Can We Be Competitive in North America ? Pipeline Tariffs, Proximity to Major Markets and US$$ Exchange Rate ¾ Pipeline tariffs place a financial burden on natural gas production exported to the major eastern markets in the United States ¾ Major shale producing basins in southern United States have or are developing significant take away capacity to alleviate current bottlenecking in the transportation networks ¾ The Marcellus shale gas development presents the greatest threat to natural gas exports to eastern United States due to proximity to market ¾ As a general rule, a $0.01 change in the Canadian Exchange Rate (holding Henry Hub and Basis Differential constant) results in a $0.065 change in the AECO Spot price. The relationship between these two factors is a negative correlation, meaning that if the Canadian Exchange Rate gains $0.01 against the U.S. Exchange Rate, the AECO natural gas price will decrease by $0.065.
March 24, 2010
Alberta’s Challenges – Can We Be Competitive in North America ? Major pipeline corridors in United States are being built to eliminate local bottlenecking in delivery of natural gas to the northeast Market
ANTRIM MARCELLUS
NEW ALBANY
BARNETT
FAYETTEVILLE WOODFORD HAYNESVILLE
March 24, 2010
Alberta’s Challenges – Can We Be Competitive in North America ? Finding and Development Costs Generally finding and development costs for new unconventional natural gas resources are higher than equivalent services in United States. Much of this can be attributed to seasonality of exploration and development as well additional costs associated with climate and winter environment
March 24, 2010
Alberta’s Challenges – Can We Be Competitive in North America ? Regulatory Burden and Environmental Stewardship ¾ Provincial governments must continue to recognize the competitive state that the North American natural gas market operates under ¾ Current regulatory and royalty burdens are being reviewed by Alberta government to determine the impact on competitiveness ¾ Natural gas industry one of the most heavily regulated jurisdictions in North America which adds additional costs to resource development ¾ Recognition by industry of the importance of environmental stewardship ¾ Alberta is a mature oil and gas region where there is a well established regulatory process that is designed to protect the environment and the surface landowners while still enabling companies to have access to the resources – this comes at a cost to industry
March 24, 2010
Impact of Changes to Royalty Program Comparison between royalty programs for Alberta and British Columbia
From Progress Resources, 2010
March 24, 2010
Alberta’s Challenges – Can We Be Competitive in North America ? Comparison of Marcellus to Montney “best case” well economics ( from corporate presentations ) Critical variables to economic return are:
Market price EUR per well F&D costs Royalties Montney Economics “Sweet Spot”
Mmcf/d
From ARC Resources, 2009
From Range Resources, 2009
months
March 24, 2010
Alberta’s Challenges – Can We Be Competitive in North America ? ¾ The fundamental issue is the competitiveness of Canadian natural gas at the new low price environment caused by emerging “shale gas” production depressing North American natural gas prices ¾ In the past 3 years, shale gas production has increased by 6 Bcf/day while in 2008/09, demand destruction due to economic recession has reduced demand by as much as 2 Bcf/day
Daily Production (Bcf/d)
9 8 7 6 5 4 3 2 1 0 Jan ‘04
Jul ‘04
Antrim
Jan ‘05
Jul ‘05
Barnett
Jan ‘06
Jul ‘06
Fayetteville
Jan ‘07
Jul ‘07
Woodford
Jan ‘08
Jul ‘08
Haynesville
Jan ‘09
Marcellus
From Southwest Energy, 2009
March 24, 2010
Possible Solutions - or - Initiatives That Will Help Growth of the North American Market or Alternative Markets ¾ Economic Recovery within United States and Canada leading to growth of natural gas demand coupled with continued decline of conventional supplies
¾ Exports of natural gas outside of North America market ¾ Kitimat LNG
Government Incentives and Competitiveness ¾ Critical importance of the Government Competitiveness Review Study ¾ Royalty Review and Recognition of the Competitive nature of the natural gas market in North America ¾ Elimination of regulatory practices that are hindering development or placing additional financial burdens on natural gas projects
Advances in Technology ¾ Development of new technologies that will allow the undeveloped natural gas potential of Alberta to be realized in a competitive environment ¾ Investment by industry and government collaboratively into R&D to develop and deploy technologies that will be applicable to the “unique” unconventional resource base that Alberta holds
March 24, 2010
Possible Solutions - or - Initiatives That Will Help Projected Supplies of Natural Gas in United States ¾ United States conventional production continues to decline from 5 Tcf/yr to < 3 Tcf/yr by 2030 ¾ Continued decline of imports from primarily Canada ¾ Projected growth of unconventional gas to fill the gap ¾ Moderate to slow growth of overall natural gas demand until after 2020 30
History
TCF/year
25
Projections
20 Unconventional 15 10
Non-associated offshore Alaska
Associated-dissolved Net imports
5 Non-associated conventional
0 1990
1995
2000
2005
2010
2015
2020
2025
2030 modified from EIA, 2009
March 24, 2010
Possible Solutions - or - Initiatives That Will Help The success of resource play developments hinges upon the ability of the developing company to optimize productivity while lowering full cycle development costs through economy of scale and synergies in a geographic region that is economically attractive for resource development investment
Unconventional Gas Supply Costs 600 Tcf (risked recoverable)
How do we move the supply cost downwards and still ensure that we can optimally develop the large natural gas resource base in the province?
Conventional
500 400 Utica Woodford Barnett Horn River
300 Fayetteville Haynesville Marcellus (8 bcf/well) Montney
200 100
Haynesville (12 bcf/well)
0 2.50
3.50
?
?
Alberta’s Unconventional Potential
4.50 5.50 6.50 Supply Cost ($/mmBtu)
7.50
8.50 Modified from Tristone, 2009
March 24, 2010
Thank You for Your Attention!
Kevin Heffernan, Vice President
National Buyer/Seller Forum March 24, 2010
Kevin Heffernan, Vice President
Canadian Society for Unconventional Gas CSUG is a membership-based association, formed in 2002, to support the responsible exploration and development of unconventional gas in Canada
Mission “To facilitate the factual and collaborative exchange of unconventional gas knowledge and challenges among government, regulators, industry and public stakeholders for the exploration and production of the resource in an environmentally sensitive and economical manner”
March 24, 2010
Presentation Outline ¾ Size of the Prize – Alberta’s Undiscovered Potential ¾ Natural Gas from Coal ¾ Shale Gas ¾ Tight Gas Sands and Carbonates
¾ Alberta’s Challenges – Can We Be Competitive in North America ? ¾ Pipeline Tariffs and Distance to Market ¾ F&D Costs ¾ Regulatory Burden and Environmental Stewardship
¾ Possible Solutions ¾ Alternative Markets ¾ Government Incentives and Competitiveness ¾ Advances in Technology
March 24, 2010
Size of the Prize – Alberta Emerging Unconventional Gas Potential
Three main sources of Unconventional Gas in Alberta: ¾
Tight Gas Sands and Carbonates ¾ Currently producing ~ 1 Bcf/d ¾ Wide range of OGIP estimates from 50->500 Tcf depending on technology
¾ Natural Gas from Coal (or Coalbed Methane) ¾ Currently producing ~ 750 Mmcf/day ¾ AGS estimates ~ 500 Tcf Gas In Place
¾ Shale Gas ¾ Early stages of exploration ¾ New emerging plays like the deep Duvernay Formation ¾ GTI estimates > 860 Tcf resource in part of WCSB ¾ Some commercial production existing (3 Mmcf/d)
From Ziff Energy Group, 2006
March 24, 2010
Unconventional Resource Potential of Alberta
Alberta Unconventional Gas Opportunities Risk vs. Reward
Play Type
Typical Drilling
Typical Depth (m)
Average Cost ($ 000)
NGC
Shale Gas
Tight Gas
Shallow
Vertical with Co-mingled Production
650
250-350
Horseshoe Canyon Ardley
Colorado Group (W4M)
Medicine Hat Milk River Belly River
Deep
Horizontal with Staged Fracture Stimulations
900-2500
750 – 9,500
Mannville
Exshaw Nordegg Colorado Group Duvernay (W5M)
Fahler Cadomin Nikanassin Cardium Montney
Foothills and Mountains
Horizontal with Staged Fracture Stimulations
10003000
2,00012,000
Gates Mist Mountain
Exshaw Colorado Group Fernie
Cardium Cadomin Lower Mannville Upper Mannville
LOWER RISK SMALLER PRIZE
HIGH RISK BIG PRIZE
HIGH RISK BIG PRIZE
March 24, 2010
Natural Gas from Coal (NGC) Development
Edmonton
Horseshoe Canyon Formation Net coal thickness
Calgary
0-6 m 6-10 m 10-14 m > 14 m
About 19,000 wells drilled to date
6% Mannville
2% Ardley
92 % Horseshoe Canyon
March 24, 2010
Shale Gas Resource Potential of Alberta Bowser Basin Colorado Group Jurassic and Paleozoic Devonian Shales
Cordova Embayment Horn River Basin Montney “Hybrid” Trend Colorado “Thermogenic” Shale Basin Colorado “Biogenic” Shale Basin Utica and Lorraine Shale Basin “Quebec Lowlands”
Windsor Basin Nova Scotia
Elgin Formation New Brunswick
March 24, 2010
DEEP BASIN TIGHT GAS PLAYS ¾ Significant volume of natural gas already produced but conservative estimates indicate that as much as an additional 50 Tcf may be recoverable through existing technology ¾ Potential of more than 400 Tcf OGIP that has the potential to be developed with new and emerging technologies Uphole Conventional Reservoirs Deep Basin Attributes Large Basin Center Gas Accumulation Multi-zone Conventional Gas Potential (Upper – Lower Cretaceous) Tight Gas Resource Play (Cadomin - Nikanassin)
Cadotte Notikewin
Falher
Cadomin
Nikanassin
•Marine – estuarine origin •Exploratory / Development targets •Lateral – vertical discontinuity / heterogeneity •High impact – high deliverability
Downhole “Tight Gas” Resource Plays •Fluvial reservoir origin •Lower geologic / commercial development risk •Pervasive over a large area •Lateral and / or vertical continuity and homogeneity
From Moslow, 2009
March 24, 2010
Unconventional Resource Potential of Alberta Unconventional Gas Resources Western Onshore Canada (Tcf)
Tight GIP 560 Gas Hydrates >1500
Tight Gas Rec. 15 NGC GIP 645
Shale GIP 860
Shale Gas Rec. 50 Data from Ziff Energy
Areas of Unconventional Gas Exploration and Development in Alberta
NGC Rec. 35
Tight Gas Sands and Carbonates Natural Gas from Coal Shale Gas
Gas Hydrates
March 24, 2010
Alberta’s Challenges – Can We Be Competitive in North America ? ¾ The slower rate at which the EUR is captured in unconventional reservoirs extends the economic breakeven point, but the long-term ultimate recovery due to the size of the OGIP remains attractive compared to conventional reservoirs ¾ To achieve economic production of unconventional gas you need: high gas prices; preferably existing infrastructure, new and existing technologies that are available in sufficient quantity; and a competitive / incented environment in which to work
Life Cycle of an Unconventional Natural Gas Resource Development
From Shell E&P Technology, 2009
March 24, 2010
Alberta’s Challenges – Can We Be Competitive in North America ? Pipeline Tariffs, Proximity to Major Markets and US$$ Exchange Rate ¾ Pipeline tariffs place a financial burden on natural gas production exported to the major eastern markets in the United States ¾ Major shale producing basins in southern United States have or are developing significant take away capacity to alleviate current bottlenecking in the transportation networks ¾ The Marcellus shale gas development presents the greatest threat to natural gas exports to eastern United States due to proximity to market ¾ As a general rule, a $0.01 change in the Canadian Exchange Rate (holding Henry Hub and Basis Differential constant) results in a $0.065 change in the AECO Spot price. The relationship between these two factors is a negative correlation, meaning that if the Canadian Exchange Rate gains $0.01 against the U.S. Exchange Rate, the AECO natural gas price will decrease by $0.065.
March 24, 2010
Alberta’s Challenges – Can We Be Competitive in North America ? Major pipeline corridors in United States are being built to eliminate local bottlenecking in delivery of natural gas to the northeast Market
ANTRIM MARCELLUS
NEW ALBANY
BARNETT
FAYETTEVILLE WOODFORD HAYNESVILLE
March 24, 2010
Alberta’s Challenges – Can We Be Competitive in North America ? Finding and Development Costs Generally finding and development costs for new unconventional natural gas resources are higher than equivalent services in United States. Much of this can be attributed to seasonality of exploration and development as well additional costs associated with climate and winter environment
March 24, 2010
Alberta’s Challenges – Can We Be Competitive in North America ? Regulatory Burden and Environmental Stewardship ¾ Provincial governments must continue to recognize the competitive state that the North American natural gas market operates under ¾ Current regulatory and royalty burdens are being reviewed by Alberta government to determine the impact on competitiveness ¾ Natural gas industry one of the most heavily regulated jurisdictions in North America which adds additional costs to resource development ¾ Recognition by industry of the importance of environmental stewardship ¾ Alberta is a mature oil and gas region where there is a well established regulatory process that is designed to protect the environment and the surface landowners while still enabling companies to have access to the resources – this comes at a cost to industry
March 24, 2010
Impact of Changes to Royalty Program Comparison between royalty programs for Alberta and British Columbia
From Progress Resources, 2010
March 24, 2010
Alberta’s Challenges – Can We Be Competitive in North America ? Comparison of Marcellus to Montney “best case” well economics ( from corporate presentations ) Critical variables to economic return are:
Market price EUR per well F&D costs Royalties Montney Economics “Sweet Spot”
Mmcf/d
From ARC Resources, 2009
From Range Resources, 2009
months
March 24, 2010
Alberta’s Challenges – Can We Be Competitive in North America ? ¾ The fundamental issue is the competitiveness of Canadian natural gas at the new low price environment caused by emerging “shale gas” production depressing North American natural gas prices ¾ In the past 3 years, shale gas production has increased by 6 Bcf/day while in 2008/09, demand destruction due to economic recession has reduced demand by as much as 2 Bcf/day
Daily Production (Bcf/d)
9 8 7 6 5 4 3 2 1 0 Jan ‘04
Jul ‘04
Antrim
Jan ‘05
Jul ‘05
Barnett
Jan ‘06
Jul ‘06
Fayetteville
Jan ‘07
Jul ‘07
Woodford
Jan ‘08
Jul ‘08
Haynesville
Jan ‘09
Marcellus
From Southwest Energy, 2009
March 24, 2010
Possible Solutions - or - Initiatives That Will Help Growth of the North American Market or Alternative Markets ¾ Economic Recovery within United States and Canada leading to growth of natural gas demand coupled with continued decline of conventional supplies
¾ Exports of natural gas outside of North America market ¾ Kitimat LNG
Government Incentives and Competitiveness ¾ Critical importance of the Government Competitiveness Review Study ¾ Royalty Review and Recognition of the Competitive nature of the natural gas market in North America ¾ Elimination of regulatory practices that are hindering development or placing additional financial burdens on natural gas projects
Advances in Technology ¾ Development of new technologies that will allow the undeveloped natural gas potential of Alberta to be realized in a competitive environment ¾ Investment by industry and government collaboratively into R&D to develop and deploy technologies that will be applicable to the “unique” unconventional resource base that Alberta holds
March 24, 2010
Possible Solutions - or - Initiatives That Will Help Projected Supplies of Natural Gas in United States ¾ United States conventional production continues to decline from 5 Tcf/yr to < 3 Tcf/yr by 2030 ¾ Continued decline of imports from primarily Canada ¾ Projected growth of unconventional gas to fill the gap ¾ Moderate to slow growth of overall natural gas demand until after 2020 30
History
TCF/year
25
Projections
20 Unconventional 15 10
Non-associated offshore Alaska
Associated-dissolved Net imports
5 Non-associated conventional
0 1990
1995
2000
2005
2010
2015
2020
2025
2030 modified from EIA, 2009
March 24, 2010
Possible Solutions - or - Initiatives That Will Help The success of resource play developments hinges upon the ability of the developing company to optimize productivity while lowering full cycle development costs through economy of scale and synergies in a geographic region that is economically attractive for resource development investment
Unconventional Gas Supply Costs 600 Tcf (risked recoverable)
How do we move the supply cost downwards and still ensure that we can optimally develop the large natural gas resource base in the province?
Conventional
500 400 Utica Woodford Barnett Horn River
300 Fayetteville Haynesville Marcellus (8 bcf/well) Montney
200 100
Haynesville (12 bcf/well)
0 2.50
3.50
?
?
Alberta’s Unconventional Potential
4.50 5.50 6.50 Supply Cost ($/mmBtu)
7.50
8.50 Modified from Tristone, 2009
March 24, 2010
Thank You for Your Attention!
Kevin Heffernan, Vice President
