2004 ENERGY FINANCE CONFERENCE The Uncertainties of Natural Gas Supply

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2004 ENERGY FINANCE CONFERENCE The Uncertainties
of Natural Gas Supply DemandFuture Potential
of LNG University of Texas, Austin February
20, 2004

• Vincent Kaminski
• Rice University

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Hubbert Peak

• Marion King Hubbert, a geophysicist, predicted in
  1956 that oil production in the US would peak
  around 1970
• His predictions had been widely dismissed by the
  industry at the time but were eventually proved
  correct
• Hubbert Peak had profound economic and
  geopolitical consequences for the US
• Are we approaching Hubberts peak for the lower
  48 states with respect to natural gas supplies?

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Resources (1)

• Volume of natural gas that is technically
  recoverable without regard to price or cost. The
  numbers below illustrate the order of magnitude,
  not the precise levels.
• Unites States 1,500 tcf ( 180 proved)
• Canada 400 tcf
• Mexico 100 tcf
• North America 2,000 tcf
• 2,000 tcf can grow to 2,500 tcf due to technical
  progress by 2025
• Future supplies of natural gas will come from
  existing proved reserves, growth of proved
  reserves, undiscovered conventional and
  undiscovered non-conventional sources
• Non-conventional reserves include tight gas,
  coal-bed gas, shale gas
• Range of uncertainty, -30, 30

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Resources (2)

• Economically viable supplies depend on the price
  level
• Lower 48 states estimates
• 3/MMBTU - 600 tcf
• 4/MMBTU - 800 tcf
• 5/MMBTU - 850 tcf
• Higher prices of natural gas are inevitable

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Supply Slowdown

• North American natural gas production grew under
  2 p.a. between 1990 and 2002 and the growth
  visibly slowed down after 1996
• Growth takes place in the Rockies, deepwater GOM,
  East Texas/North Louisiana
• Drastic slowdown in the Canadian growth
• Increase in non-conventional production
• EUR (estimated ultimate recovery) dropping
  dramatically as more marginal wells are drilled
• IPRs (initial production rates) increased
  significantly in recent years
• Fluctuations in weather dependent demand can mask
  the problems related to the maturing US supply
  base of natural gas
• High price volatility is to be expected as the US
  natural gas demand approaches periodically the
  supply limits

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Recovery per Gas Connection
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US Wellhead Natural Gas Price
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Lower 48 Natural Gas Production Vs. Capacity
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Supply Challenge

• Traditional sources of North American natural
  gas supply are likely to cover about 75 of
  demand through 2025
• The balance will come from LNG and Arctic gas
• LNG will grow from 1 of US consumption to 14-17
  by 2025
• Massive investment are needed in exploration and
  production activities, as well as transportation
  and distribution infrastructure
• The recovery of merchant energy business and
  long-term energy markets is critical to produce
  correct price signals for investors
• Major geopolitical consequence of growing US
  reliance on energy imports

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LNG Impact on Energy Markets

• LNG has been traditionally distributed under long
  term contracts with prices indexed to crude oil
• It is estimated that about 8 of LNG volume
  worldwide is distributed under merchant
  arrangements short-term (less than 12 months)
  flexible contracts
• Growing importance of LNG may result in the
  development of North Atlantic natural gas market,
  with Henry Hub and Zeebrugge in Europe serving as
  market hubs
• In most reports, the price of 3.5/MMBTU is
  quoted as the necessary support level for LNG
  imports
• The potential for netback based solutions

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LNG Value Chain
Source Lukens Energy Group