Natural Gas Supply Issues and Challenges Michigan State University, Institute of Public Utilities 2015 Grid School March 10, 2015

David E. Dismukes, Ph.D. Center for Energy Studies Louisiana State University

Reminder – The Way Things Were

© LSU Center for Energy Studies

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Historic Trends Long Term US Crude Oil Production Forecast (2006)

Relatively uninspiring U.S. crude oil production forecast. 6.0

Remember this number 5.0 MMBbls Million Barrels per day

5.5 5.0 4.5

4.0 3.5 3.0 2.5 2004

2008

2012 Onshore (Lower 48)

Source: USDOE/EIA, Annual Energy Outlook, 2006

2016

2020

2024

2028

Offshore (Lower 48) © LSU Center for Energy Studies

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Historic Trends Long Term US Natural Gas Production Forecast (2006)

Natural gas production forecasted to decrease starting in 2016. Remember this number 18.5 TCF

20.5 18.5

Trillion cubic feet

16.5

14.5 12.5 10.5 8.5 6.5 4.5 2.5 2004

2008

2012 Onshore (Lower 48)

Source: USDOE/EIA, Annual Energy Outlook, 2006

2016

2020

2024

2028

Offshore (Lower 48) © LSU Center for Energy Studies

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Historic Trends Historic Monthly Rig Counts and Gas Production (1997-2006)

The maturing nature of US basins reflected in drilling productivity. 2,000 1,800

68

4 percent decrease in production (Feb-04 to Aug-06)

3 percent increase in production (Aug-99 to Sep-01)

Number of Operating Rigs

1,600 66

1,400 1,200 1,000

158 percent increase in rigs (Apr-99 to Jul-01)

65 64

800 131 percent increase in rigs (Apr-02 to Aug-06)

600 400

63

12-Month Moving Average (Bcf/d)

67

62 200 0 Dec-96

61 Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Rig Count Source: Energy Information Administration, Department of Energy; and Baker-Hughes Inc.

Dec-03

Dec-04

Dec-05

Dec-06

Production © LSU Center for Energy Studies

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Historic Trends Resource Estimates: Restricted Areas (Percent Restricted)

Policy advocacy focused on restricted areas as a potential solution to the resource constraint problem.

ANWR = 3.5 TCF ANS = 35 TCF

Source: Natural Gas: Can We Produce Enough?” Independent Petroleum Association of America, website: http://www.ipaa.org/govtrelations/factsheets/NaturalGasProdEnough.asp.

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Historic Trends NPC Forecast North American Supply Disposition

LNG provides 14% of the U.S. supply of natural gas by 2025.

Source: National Petroleum Council

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Historic Trends Crude Oil and Natural Gas Prices

Prices reflected the state of, and outlook for, energy markets. $160

$16

Recession

$140 First energy price crisis

$12

$100

$10

$80

$8

$60

$6

$40

$4

$20

$2

$0 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Crude Oil (WTI) Source: Federal Reserve Bank

Natural Gas ($/Mcf)

Crude Oil ($/Bbl)

$120

$14

$0

Natural Gas (Henry Hub) © LSU Center for Energy Studies

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Unconventional Resources

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Overview Shale, Horizontal Drilling, and Fractionation

• Shale (unconventional) wells differ from “conventional” wells since they are drilled horizontally and not vertically.

• Horizontal segments are then “fractured” with higher pressure water, chemicals and silica to break up the formation. • The fractionation process releases/liberates the hydrocarbons.

• Some environmental and water use concerns expressed in some areas of the country on this drilling process. Source: Energy Tomorrow.

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Overview How the Hydrofracturing Process Works

Video Link: Horizontal Drilling: http://www.youtube.com/watch?v=AYQcSz27Xp8&feature=relmfu

Hydro-fracturing: http://www.youtube.com/watch?v=73mv-Wl5cgg

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Overview Domestic Shale Gas Basins and Plays Unlike conventional resources, shale plays (natural gas, liquids, and crudes) are located almost ubiquitously throughout the U.S. and are the primary reason for the decrease in overall and regional natural gas prices. Source: Energy Information Administration, U.S. Department of Energy

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Unconventional Natural Gas

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Natural Gas Changes in Reserves and Production Natural gas production and reserves are at levels not seen since the 1970s and both U.S. natural gas production and reserves are now at an all time recorded peak.

400

30

25

300 20

250 200

15

150

2012 reserve estimates mark the first decline in 14 years.

100 50 0

10 5

U.S. Natural Gas Marketed Production (Tcf)

U.S. Dry Natural Gas Proved Reserves (Tcf)

350

0 1970

1975

1980

1985

1990

Natural Gas Reserves Source: Energy Information Administration, U.S. Department of Energy.

1995

2000

2005

2010

Natural Gas Production © LSU Center for Energy Studies

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Natural Gas Annual Changes in U.S. Natural Gas Proved Reserves (Shale and Other) Expanded exploration and development of unconventional resources in increases in natural gas proved reserves in recent years. And, while net additions in shale outpaced the overall decrease in natural gas reserves from all other sources, reserve estimates fell in 2012 due to a 34 percent decrease in the average natural gas price. 40

Shale’s Share of Reserves 50% 40% 30% 20% 10% 0%

Annual Change (Tcf)

30 20

2007 2008 2009 2010 2011 2012

10 0 2007

2008

2009

2010

2011

2012

-10 -20 -30 Shale

Source: Energy Information Administration, U.S. Department of Energy.

Other © LSU Center for Energy Studies

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Natural Gas Annual Energy Outlook, Natural Gas Reserves

Unconventional resources are not a “flash in the pan” and are anticipated to continue to increase over the next two decades or more. 450

Reserves, Tcf

400

350

300

250

200 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

Source: Energy Information Administration, U.S. Department of Energy

© LSU Center for Energy Studies

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Natural Gas Forecast U.S. Natural Gas Production

Shale availability will drive U.S. natural gas supply. 30

25 Shale Gas Production

Tcf

20 15

Associated Gas Production 10 5 0 1990

1995

2000

Shale gas Alaska Non-associated onshore

2005

2010

2015

Tight gas Coalbed methane

Source: Energy Information Administration, U.S. Department of Energy

2020

2025

2030

2035

Non-associated offshore Associated with oil

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Recent Trends Changes in AEO Natural Gas Price Forecasts

Shale availability has significant impact on future price outlook. 16

Anticipated price outlook in 2009.

(2010 $/MMBTU)

14

12 10 8 6 4

Anticipated price outlook today.

2

0 1997

2002

2007

Actual Henry Hub AEO-2010

2012 AEO-2007 AEO-2011

Source: Energy Information Administration, U.S. Department of Energy

2017

2022

AEO-2008 AEO-2012

2027

2032

AEO-2009

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Recent Trends Changes in Well Costs and Productivity

Encana reports a reduction in well costs of 15-30% through use of multi-pad drilling, improved rig efficiencies, and lower hydraulic fracturing costs. The use of higher water volumes, increased frac stages, and enhanced pay selection have resulted in 100-150% increases IP rates. Well Cost (million $)

Well Performance (MMcfe/d)

$18

$25 15.6

$16

$20

$14 $12 $10

23.6 23.6

17.7

11.9 10.3 9.9

9.3

9.0

9.6

9.0

18.9 15.0

$15

$8 $10

8.0

$6

$4

10.5

9.5

$5

$2 $0

$0 2006 2007 2008 2009 2010

2008 2009 2010

2006 2007 2008 2009 2010

2008 2009 2010

East Texas Deep Bossier

Haynesville

East Texas Deep Bossier

Haynesville

Source: U.S. Natural Gas Resources and Productive Capacity: Mid-2012, Prepared for Cheniere Energy, Advanced Resources International, Inc. August 23, 2012.

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Unconventional Crude Oil Development

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Unconventional Development U.S. Natural Gas Rig Count and Henry Hub Price

1,800

$16

1,600

$14

1,400

$12

1,200

$10

1,000 $8 800 $6

600

400

$4

200

$2

0 Jan-97

Jan-99

Jan-01

Jan-03

Jan-05

Jan-07

Natural Gas Rigs

Source: Energy Information Administration, U.S. Department of Energy; and Baker Hughes.

Jan-09

Jan-11

Jan-13

Natural Gas Price ($/Mcf)

Number of Rigs

Natural gas rigs closely follow the natural gas spot price. Price decrease that started in 2007 has reduced gas drilling attractiveness.

$0 Jan-15

Henry Hub Price

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Unconventional Development U.S. Oil/Gas Rig Split Drilling emphasis over the past 20 years has almost exclusively concentrated on developing new natural gas wells. This has shifted to crude oil drilling emphasis over the past two years. 100%

90% Percent of Total (%)

80% 70% 60% 50% 40% 30% 20% 10% 0% 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Crude Oil Source: Baker Hughes

Natural Gas © LSU Center for Energy Studies

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Unconventional Development Changes in Crude Oil Reserves and Production

4.0

40

3.5

35

3.0

30

2.5

25 2.0 20 1.5

15

1.0

10

0.5

5 -

Millions

45

U.S. Crude Oil Production (Million Bbl/d)

U.S. Crude Oil Proved Reserves (Billion Bbl)

Crude oil production and reserves are climbing back to levels not seen since the 1980s.

0.0 1970

1975

1980

1985

Crude Oil Reserves Source: Energy Information Administration, U.S. Department of Energy.

1990

1995

2000

2005

2010

Crude Oil Production © LSU Center for Energy Studies

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Unconventional Development Annual Energy Outlook, Crude Oil Reserves

Crude oil reserves are expected to increase 15 percent by 2020. percent by 2016 and then gradually increase by another 12 percent another to 2040. 40

Reserves, Billion Barrels

35 30 25 20 15

10 5 0 2014

2016

2018

2020

2022

2024

Source: Energy Information Administration, U.S. Department of Energy

2026

2028

2030

2032

2034

2036

2038

2040

© LSU Center for Energy Studies

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Unconventional Development Forecast U.S. Crude Oil Production U.S. production of crude oil is expected to increase at an average annual rate of 6 percent through 2019, and decreases thereafter at a average annual rate of 1.2 percent through 2040. 12

Million Bbls per day

10

8

6

4

2

0 2011

2016

2021

Source: Energy Information Administration, U.S. Department of Energy

2026

2031

2036 © LSU Center for Energy Studies

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Unconventional Development Net Import Share of U.S. Petroleum and Liquid Fuels, 1990 – 2040 The share of U.S. net crude oil and product imports has been falling since 2005. The EIA expects the net import share to decrease to 26 percent in 2023. If however, high prices encourage U.S. development, the share of net imports could drop to zero by 2036. 70% 60%

Percent

50%

40% 30% 20% 10% 0% -10% 1990

1995

2000

2005

Reference High Oil and Gas Resource

2010

2015

2020

High Oil Price Low Oil and Gas Resource

Source: Energy Information Administration, U.S. Department of Energy.

2025

2030

2035

2040

Low Oil Price

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Natural Gas Supply Impacts From Unconventional Crude Drilling

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Natural Gas Supply Natural Gas Prices and Rigs

$12

1,800 1,600

$10

1,400 $8

1,200 1,000

$6 800 $4

600 400

$2 200 $0 Dec-04

0 Dec-05

Dec-06

Dec-07

Dec-08

Natural Gas Price

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Natural Gas Rigs (6-month Rolling Average)

Natural Gas Price (6-month Rolling Average)

Natural gas drilling rigs activity is very responsive to price, both of which started to decrease rapidly post-recession.

Dec-14

Number of Natural Gas Rigs

Source: Energy Information Administration, U.S. Department of Energy; Baker Hughes, Inc.

© LSU Center for Energy Studies

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Natural Gas Supply Natural Gas Prices and Rigs

50,000

1,800

45,000

1,600

40,000

1,400

35,000

1,200

30,000

1,000

25,000

800

20,000

600

15,000 10,000

400

5,000

200

0 Jan-07

Natural Gas Rigs (6-month Rolling Average)

Natural Gas Production (6-month Rolling Average)

Interestingly, natural gas production continued to rise in the face of rapid decreases in rig activity (pre-cursor/corollary for crude oil?)

0 Jan-08

Jan-09

Jan-10

Jan-11

Natural Gas Production

Source: Energy Information Administration, U.S. Department of Energy; Baker Hughes, Inc.

Jan-12

Jan-13

Jan-14

Active Natural Gas Rigs © LSU Center for Energy Studies

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Natural Gas Supply Shale Oil and Gas Production (7 Major Plays)

Considerable amount of “free” natural gas (“associated gas”) coming from unconventional crude oil production. Helps to explain (in part) the continued strength in natural gas production in the face of rapid rig count decreases. 50 45 5

40 35

4

30 3

25 20

2

15 10

1

5 0 Jan-07

Jan-08

Jan-09

Jan-10

Crude Oil

Jan-11

Jan-12

Jan-13

Jan-14

Natural Gas Production, Bcf per day

Crude Oil Production, MMBbl per day

6

0 Jan-15

Natural Gas © LSU Center for Energy Studies

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Natural Gas Supply Relationship of Shale Oil and Gas Production

Growth in “free gas” has already started to slow, once crude oil rig, and then production activity slows.. It could have implications for natural gas markets. 16 14

Bcf / MMBbl

12 10 8

6 4 2 0 Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

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Challenges with Unconventional Development

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Unconventional Challenges Energy & Environmental Issues with Unconventional Drilling/Production

• Number of challenges with unconventional activities: • Decline curve characteristics • Well integrity/migration issues (chemicals/methane) • Water Use issues • Seismic issues • Land Use/Infrastructure

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Unconventional Challenges Decline curves – Conventional v. Unconventional

Unconventional declines are much faster in early years – what happens in the “tails” is not yet clear.

Unconventional Conventional

????

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Unconventional Challenges Decline curves – AEO Outlook by Shale Play

AEO suggests “fat” tails.

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Unconventional Challenges Production from a Typical Well and Shale Well Illustrative production decline from a convention vs. shale producing well. As much as 80 percent of total production thought to occur in the first two to three years.

Q Unconventional Shale Well

Conventional Well

0

T © LSU Center for Energy Studies

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Unconventional Challenges Well integrity issues – typical well configuration

Industry argues considerable protection from well integrity failures.

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Unconventional Challenges Well integrity issues – typical well configuration

Concerns about multiple pathways to ground and surface water.

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Unconventional Challenges Well Integrity Issues – Chemical Components in Fluids

Fluids are overwhelmingly water (input), but there are small amounts of serious chemical components. Output from process and disposal is challenge.

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Unconventional Challenges Well Integrity Issues – Methane

Now that’s a fire!!!

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Unconventional Challenges Well Integrity Issues – More Methane

I’m cooking burgers in the sink tonight.

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Unconventional Challenges Well Integrity Issues – Seismic

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Unconventional Challenges Water Use Issues

Increasing water use per well across shale plays.

Shale Barnett Marcellus Haynesville Eagle Ford Source: Cooley & Donnelly (2012) estimates

Average Water Use (million gallons per well) 2.6 5.4 5.5 – 6.0 6.0 - 6.5 © LSU Center for Energy Studies

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Unconventional Challenges Water Use Issues – Haynesville Shale

Most water used for fracturing comes from surface water sources, not ground water.

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Unconventional Challenges Water Use Issues – Estimated Haynesville Totals

Several billion gallons worth of water are estimated to have been used each year for fracturing in the Haynesville share area (Louisiana only).

Year

Reported Wells (FracFocus)

Cumulative New Active Wells Wells in Drilled HS

Average Reported Water Use Wells as per Well Share of (Gallons) New Wells 433 0.6 4,444,262

Estimated Total Annual Water Use (Gallons) 1,924,365,446

2009

2

333

2010

24

672

1105

4

5,386,897

3,619,994,784

2011

494

784

1889

63

5,691,966

4,462,501,344

2012

364

373

2262

97

5,941,717

2,216,260,441

© LSU Center for Energy Studies

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Unconventional Challenges Relative Water Use

However, fracturing is only a small part of total large-scale water use. This use does, however, differ since most water used in the hydraulic fracturing process cannot (generally) be reused or re-injected into aquifers.

Paper Products, 3% Chemicals, 26% Irrigation, 4% Power Generation. 62% Aquaculture, 5% Hydraulic Fracturing *Frac Focus,