Shale Production & Technology: Unconventionals

Reshape The US & Global Natural Gas Markets

Presented To:

Consumer Energy Alliance

Natural Gas Committee
Washington DC
March 10, 2011
 Presentation Outline

The Current
CurrentMarket:
Market:Demand
Demand& &Production AreAre
Production
Growing
Growing
Productivity Gains: Will They Continue?
Prices: Why Don’t Producers Stop Drilling?
Growing Production: Implications for Basis and
Flows
Forward Curve Projection
Conclusions

BENTEKENERGY.COM 2
 Major Active Oil and Gas Plays
Horn River

Montney
Western
Sedimentary
Basin

Williston/Bakken

Gr River/ PRB
Jonah-Pinedale
DJ/Niobrara Marcellus
Uinta
Piceance Woodford
San Juan
Fayetteville
Anadarko/
G Wash Haynesville
Barnett
Permian

Eagle Ford

www.bentekenergy.com 3
 US Production Is At Record Levels
Average Daily Consumption (Bcfd)

Comparison of Marketed Production

70.0
-2% 1% 5% TD 7%QTD
5%
65.0 Pre-2010 US Production High

60.0

55.0 2008
2009
2010
50.0
2011
Q-1 Q-2 Q-3 Q-4
45.0
1/1Jan2/1 3/1 4/1Apr5/1 6/1 7/1Jul8/1 9/1 10/1Oct11/1 12/1

BENTEKENERGY.COM Data through March 7, 2011 Source: BENTEK Supply and Demand Report
4
 So Far In 2011 Production Growth Is
Outstripping Demand Growth
2011 versus 2010*
(Bcf)
Dry CN Cum Mex Res/ Cum
Prod LNG Imports Supply Power Industrial Exports Com Demand

3.1

1.9 2.1
1.4
0.3

-0.3 -0.1
-0.9 -0.9

1.9 – 1.4 => 0.5 Bcfd More Into Storage On Average In 2011 YTD

*As of March 9, 2011

Source: BENTEK Supply Demand Report
BENTEKENERGY.COM 5
 Storage Inventories Are Still High
Storage Inventory Thru 2/25/2011 (Bcf)
4,500
Impact of Hot Weather
4,000 Impact of Cold Weather
3,500
3,000
Change In Inventory
2,500 ( 2010-2009)
200
2,000
100
1,500 0
1,000 -100
+8 On 2/25
500 -200
Oct Nov Dec Jan
0 7 6 4 7

2009 Inventory 2010 Inventory

BENTEKENERGY.COM 2011 Inventory Five Year Max 6
 Presentation Outline

The Current Market: Demand & Production Are

Growing
Productivity Gains: Will They Continue?
Prices: Why Don’t Producers Stop Drilling?
Growing Production: Implications for Basis and
Flows
Forward Curve Projection
Conclusions

BENTEKENERGY.COM 7
 Historic Relationship Between Rig
Count & Production No Longer Holds

3,000 Gross Production (wet) 80.0

Average Daily Production (Bcfd)

Active Rig Count 70.0
2,500
60.0
2,000
Active Rig Count

50.0
1,500 40.0
30.0
1,000
20.0
500
10.0
0 0.0
Jan-07

Jan-08

Jan-09

Jan-10
Apr-07
Jul-07
Oct-07

Apr-08
Jul-08
Oct-08

Apr-09
Jul-09
Oct-09

Apr-10
Jul-10
Oct-10
BENTEKENERGY.COM Data through December 31, 2010 Source: BENTEK, RigData
8
BENTEKENERGY.COM 9
 Longer Laterals & Increased
Fracing Drive Production Gains
Experience of Newfield Exploration Co in Woodford
7,500 7.0

Estimated Ultimate Recovery

Average Lateral Length (Ft)

11 Stages6.0
6,000
9 Stages 5.0

(EUR) (Bcfe)
4,500 4.0
5 Stages 5 Stages

3,000 3.0

2.0
1,500
1.0

0 0.0
2006 2007 2008 2009

BENTEKENERGY.COM 10
 Concerns About Fracing Are Misplaced

Cement Casing

Water Aquifer

Several Thousand
Feet of
Impermeable
Rock

Frac

BENTEKENERGY.COM 11
 Early Wells Are Monitored
Marcellus Well Frac Monitor

BENTEKENERGY.COM Source Halliburton, 2010 12

 Geology Is Another Factor
Pinedale Production Heat Map
Average 36 Month Prod
> 2,500
1,650 – 2,500
1,430 – 1,650
1,100 – 1,430
< 1,100

BENTEKENERGY.COM 13
 Multi-Well Pad Drilling Reduces
Land Disruption

BENTEKENERGY.COM 14
 Haynesville Drilling Is Intended To
Hold Leases . . .

BENTEKENERGY.COM 15
 And, Creates A Smaller Impact Footprint

www.bentekenergy.com 16
 Technological Advances Enable Multi-Well
Pads & Increase Recovery Rates

Drilling Unit Boundary

Legal Activity Limit
17 Stage Frac

12 Stage Frac

5 Additional Frac Stages = 1.250 MMcf EUR / Well

@ $4.50 per Mcf = $5,625,000

www.bentekenergy.com 17
 Presentation Outline

The Current Market: Demand & Production Are

Growing
Productivity Gains: Will They Continue?
Prices: Why Don’t Producers Stop Drilling?
Growing Production: Implications for Basis and
Flows
Forward Curve Projection
Conclusions

BENTEKENERGY.COM 18
Why Is Production Growing With Low Prices?
$14

$12

$10 Avg. 2008 - $8.85

$/MMBTU

$8
Since 1/1/09 - $4.15
$6
Avg. 2007 - $6.94
$4

$2

$0

BENTEKENERGY.COM Source: ICE

19
Active Rig Additions Since Recent Low - May 2009
North-South
+114
“Liquids”
+2
Fairway
+22
Developing
+4
+2
+5
-3
+36 +102
+13 +9 +2

-1 +8

-7 +131 +11
+10 -3

+61
+26 +10 +4
+262
+9
+24 Gas-Prone
Oil-Prone +98
+3 +218
+723
Not all rigs/basins shown on map, total lower than 884

Source: RigData, BENTEK

20
 Distribution Of Value For Typical
Sprayberry Well In The Permian Basin

BENTEKENERGY.COM 21
 The Higher The Oil:Gas Ratio,
The Less Value Accrues To Natural Gas

BENTEKENERGY.COM 22
 Oil Will Drive Permian Gas Production
Actual & Projected Permian Production
5.50

5.25
May 2010 Forecast
5.00

4.75
Associated Gas 1.1 Bcf/d
Bcf/d

4.50

4.25

4.00
May 2009 Forecast
3.75

3.50

BENTEKENERGY.COM 23
 Comparative Rates Of Return
6%
IRR – Gas Wells @ $3.50
Horn River 10 Oil @ $80.00
%
Montney
100+% Bakken (O)

Pinedale
14 DJ (W)
% 27% Marcellus 17
Woodford %
Piceance 6%
G Wash (D)
Fayetteville
S Juan -2% 12 6%
% 8%
Permian (W) -18%
4% 8%
Bank or Lower Barnett Haynesville
Weak (8%-20%)
Good (> 20%) 1%
Eagle Ford (D)

Dec. 5, 2010
BENTEKENERGY.COM 24
 Comparative Rates Of Return
6%
IRR – Gas Wells @ $3.50
Horn River 10% Oil @ $80.00
Montney
100+% Bakken (O)

Pinedale
14% DJ (W)
27% Marcellus 17%
Woodford
Piceance 6%
G Wash (W)
Fayetteville
S Juan -2% 100+% 6%
8%
Permian 100+%
100+%
Bank or Lower (Combo) 8%
Barnett Haynesville
Weak (8%-20%) Combo
Good (> 20%) 100+%
Eagle Ford
(Combo)
Dec. 5, 2010
BENTEKENERGY.COM 25
 Comparative Rates Of Return
9%
IRR – Gas Wells @ $4.00
Horn River 16% Oil @ $80.00
Montney
100+% Bakken (O)

Pinedale
22% DJ (W)
29% Marcellus 28%
13% Woodford
Piceance
G Wash (W)
S Juan 1% 100+% 12% Fayetteville
12%
Permian 100+%
100+%
Bank or Lower (Combo) 15%
Barnett Haynesville
Weak (8%-20%) Combo
Good (> 20%) 100+%
Eagle Ford
(Combo)
Dec. 5, 2010
BENTEKENERGY.COM 26
 Comparative Rates Of Return
19%
IRR – Gas Wells @ $5.00
Horn River 30% Oil @ $80.00
Montney
100+% Bakken (O)

Pinedale
43% DJ (W)
32% Marcellus 68%
30% Woodford
Piceance
G Wash (W)
Fayetteville
S Juan 7% 100+% 26%
21%
Permian 100+%
100+%
(Combo) 38%
Bank or Lower Barnett Haynesville
Weak (8%-20%) Combo
Good (> 20%)
100+%Eagle Ford
(Combo)
Dec. 5, 2010
BENTEKENERGY.COM 27
 Presentation Outline
The Current Market: Demand & Production Are
Growing
Productivity Gains: Will They Continue?
Prices: Why Don’t Producers Stop Drilling?
Growing Production: Implications for Basis and
Flows
Forward Curve Projection
Conclusions

BENTEKENERGY.COM 28
 In 2007 Price Signals Pulled Gas East
$(0.44)

$(0.11) $1.49
$.08
$(2.90)
$(0.05)
Go East! $0.27
$(0.81)
$(0.53)
$(0.45) $0.25
$(0.59)

$(0.32)
$6.94

www.bentekenergy.com 29
 As A Result, Many New Pipelines Were
Built Between 2007 & 2009

REX – 1.8 Bcf/d Positive Basis

(prices greater
than
Negative Basis
(prices less
6.4 Bcf/d Henry Hub)
Texas Gas
Than
Henry Hub)

www.bentekenergy.com 30
 Producers Now Have Options & Face
Intense Gas-on-Gas Competition
Average Daily Basis
$(0.15)
(August 1, 2009 – October 13, 2010)
$0.82
$(0.08)
$2.47 $0.09 $0.67
$0.15
$0.27 $(0.43)
$0.14
$(0.19) North $0.13
$(0.02)
WestGo East
$(0.11) ???
$0.02
$(0.12)

$(0.03) $4.26

www.bentekenergy.com 31
 BENTEK Appalachia Production Projections
8
7
6
5
Bcf

4
3
2
1
-

Kentucky New York Ohio Pennsylvania

Virginia West Virginia Q4 2009
Source: BENTEK
BENTEKENERGY.COM 32
 Market Implications of Production Trends
Canada

Marcellus
Rockies

Anadarko/
Permian SE Supply
Area

BENTEKENERGY.COM 33
 Presentation Outline
The Current Market: Demand & Production Are
Growing
Productivity Gains: Will They Continue?
Prices: Why Don’t Producers Stop Drilling?
Growing Production: Implications for Basis and
Flows
Forward Curve Projection
Conclusions

BENTEKENERGY.COM 34
 Production Will Continue To Grow
Lower 48 Dry Gas Production Forecast (Bcf)
67.0 4.3% Avg Daily Growth 9.1% Avg Daily Growth
64.0 + 2.4 Bcf/d + 5.2 Bcf/d
(Dec 10 – Dec 12) (Dec 10 – Dec 15)
61.0
58.0
55.0
SE/Gulf Unconventional
52.0 (Haynesville, Fayetteville,
Eagle Ford, Granite Wash)
49.0 +
Marcellus
46.0
43.0
40.0

BENTEKENERGY.COM 35
Coal Switching May Add Significant Demand

West Midwest
(Bcfd) (Bcfd) Northeast
0.8 (Bcfd) 1.0
0.5 0.5 0.7
0.2 0.3 0.2 0.4
0.1 0
0.1

$5.00 $4.00 $3.00 $2.00 $5.00 $4.00 $3.00 $2.00

$5.00 $4.00 $3.00 $2.00

Southeast 1.7
Total US 4.0 1.3
(Bcfd)
(Bcfd)
2.7 0.9
1.7 0.5
0.7

$5.00 $4.00 $3.00 $2.00 $5.00 $4.00 $3.00 $2.00

36
 BENTEK Total N. Gas Demand
Forecast Through 4/1/2011

120

100

80
Bcf/d

60

40
2008 2009
20 2010 2010 Bal Forecast
2011 Forecast
0
1/1 2/1 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10/1 11/1 12/1

BENTEKENERGY.COM 37
 BENTEK Dry Gas Production
Forecast Through 4/1/2011

70

60
Bcf/d

50
2008 2009
2010 2010 Bal Forecast
2011 Forecast
40
1/1 2/1 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10/1 11/1 12/1

BENTEKENERGY.COM 38
 NA Should Be Long Next Summer
Canada
0.4
(0.4)
Short 0.8

Midcontinent
West 0.6
Rockies
0.0
(0.1) (0.1) Northeast
Short 0.6 0.8
0.0 (0.1)
Even 1.1
Long 0.1 Long 0.3

Total NA
Southeast
0.2 Demand - 1.8 Bcfd
1.4 Supply - 2.0 Bcfd
Long 1.2 Long 0.2 Bcfd

BENTEKENERGY.COM 39
 We Believe The Forward Curve Is Overstated

NYMEX Futures and BENTEK Forecast

$6.50
$6.00
$5.50
$5.00
$4.50
$4.00
$3.50 NYMEX Futures
$3.00 BENTEK Forward Curve

$2.50

BENTEKENERGY.COM 40
 What Keeps N. Gas Prices Off The Floor?
Improved ability of industry to market the benefits of gas
Increased power demand

EPA – criteria pollutants (SO2, NOX, Mercury)

Increasing pressure on wind/other renewables

Additional demand from feedstock consumers

Dow Chemical plans to increase its ethane cracking capacity 20
– 30% over next 2-3 years.
Increasing use in transportation market

Exports

Kitimat

Chenier MOU with Morgan Stanley

Chenier MOU with ENN (XinAo Gas)

Development of a global trading culture/market
BENTEKENERGY.COM 41
 Conclusions
Technology is radically transforming the natural gas and oil businesses.
Operational and development process efficiency will increasingly define
winners and losers.

The disparity between haves and have-nots will widen.

Global markets will ultimately be impacted.
The pipeline network functions as a national grid, shifting capacity in
response to market need. The value of FT is diminished.
Oil and liquids exploration will place a floor under gas production.
BENTEK believes the forward curve will continue to drop. QE and other
misguided government policy might arrest the fall (i.e. cause prices to rise).
Increased power gen, industrial, transport and export demand will hold
prices in the $4.00 to $4.50 range for years to come.
Finally, consumers should be the principle beneficiaries. Natural gas is
poised to provide a cost effective solution for our nation’s energy needs. It
is abundant, clean, cost effective and domestic.
If the market is allowed to prevail, natural gas will be the base of our energy
future for the foreseeable future.
BENTEKENERGY.COM 42
 Questions?

Porter Bennett
32045 Castle Court, Suite 200
Evergreen, CO 80439
Office: 303-988-1320
Toll Free: 888-251-1264
pbennett@bentekenergy.com

BENTEKENERGY.COM 43